Prime-Time Peddling

When the creators of a new sitcom called The Loop pitched their show to executives at the Fox television network, the broadcast moneymen liked the idea of a sitcom about young guys living in Chicago. But what they loved was the fact that products on the set wouldn't be an afterthought brought in by a prop master. Instead, viewers would see the same products every week, cleverly woven into the plot throughout the season, and characters would discuss the brands—a bit like a 13-week ad campaign. Sure enough, the network picked up the show. Co-creator Will Gluck says he wanted to capture the way guys really talk, discussing cool gadgets and brands in everyday life. Loading up on product placement was a "happy by-product."

Gluck's product-infused formula is rapidly becoming a model for network TV's survival. Thanks in part to technologies like TiVo—which growing numbers of folks are using to blitz past commercials and watch TV on their own schedule—the ad-driven prime-time business model that has existed for decades is under assault as never before. In New York City last week, broadcast execs showcased their best hopes for luring viewers back this fall, unveiling dozens of new dramas, sitcoms and reality shows. If history is any guide, most of them will flop, with shows aimed at young guys facing tough competition from video games, and cable channels eroding ever more of the networks' share. As advertisers increasingly chase audiences through nontraditional outlets as well, the major networks may be in for a lousy year. A recent report by Goldman Sachs concluded that the networks will generate $9 billion in up-front ad revenues for the 2005-06 season, the first decline in absolute dollars in five years. And that assumes the networks can raise ad prices 5% despite losing 3% of their audience to cable this season.

While the gloomy financial picture may have something to do with a lack of must-see TV, it's hard to overestimate the challenges posed by ad skipping. At least 6.4 million households now have digital video recorders (DVRs) like TiVo. Cable and satellite providers are pushing the technology hard—40% of households are expected to have DVRs by 2009—while the cable guys are also pitching video on demand (VOD), another technology consumers use to watch content on their own schedule. "VOD is the ultimate worry for us," says Jon Mandel, chairman of the ad-buying firm MediaCom US. "If 25% of people watch TV totally randomly, it becomes much harder to buy, sell and target ads."

No wonder some advertisers are turning off the tube. American Express has slashed the TV share of its ad budget from 80% a decade ago to less than 35%, replacing commercials, in part, with online mini-films. Pepsi recently relaunched Pepsi One without any TV advertising, which execs at the firm say wouldn't have been the case five years ago. Reebok has also shifted marketing dollars to new media, partly at the expense of the TV budget. "If you look at youth and how they consume media, TV is still an important part of the mix, but especially for young males it's becoming a smaller part," says Brian Povinelli, vice president of integrated marketing for Reebok.