ScreenPlays – We’ve been tracking for some time the evolution of what was connected TV into Smart TV and some of the strategies of the manufacturers. Very early on there was a lot of talk of recurring revenues coming out of this, something that was going to build. Now we’re seeing significant penetration of connected TVs, although there’s still a question of how many people are using that functionality. But, be that as it may, I’m wondering from your perspective what is happening with this idea of bringing advertisers in? Have you reached a threshold yet where it’s of interest to advertisers?
Sam Chang – I think smart TV as a product has been popularized over the last six to 12 months. LG along with other C-makers has been shipping product for about 12 months. And I think we’re getting to the point where we can actually have some data that we can demonstrate to advertisers what kind of engagement and activation we’re doing.
In terms of activation, it depends on the countries and models, but we’re getting between 60 and 90 percent. And about five months ago we actually did a pilot. We worked with a company called YuMe in Silicon Valley. We ran a smart TV advertising campaign with Toyota and Best Buy as the advertisers. And we’re expanding the partnership.
We also found out one of our competitors, Samsung, has also selected YuMe as a partner for them. So even though we compete seriously with Samsung for product leadership and consumers’ mind share, when it comes to advertising I think having a consistent, non-fragmented ecosystem for advertisers where they can do a single ad buy and run in multiple devices of branded OEMs is very critical.
So going back to your question, I think we’re in relatively early days, but being able to do a lot better targeting. And really the ability to exploit the benefit of TV, which is really a very big social screen that’s immersive, is going to be beneficial for a lot of brand advertisers.
SP – Very different from traditional Internet advertising.
Chang – Right. I was talking to a CE analyst at one of the large older companies, and he mentioned to me that he knows a majority of consumers purchase their cars every five to seven years, but by the time they get into that 90-day window when they’ve decided to purchase the car, they’re already down to about two to three brands that they’re interested in buying. When that consumer searches for a certain car brand in Google, 80 or 90 percent of the battle is already won or lost by that point. So as good as the Internet is, it doesn’t have a good way of reaching that consumer before he made that purchase intention.
The flip side is the current TV medium, which is great and can reach a lot of consumers. In the case of Toyota, for example, they can go with a single ad buy and reach 110 million households. But they don’t have the ability to do additional targeted advertising like they can on the Internet – to be able, for example, to run Prius advertising in New England and Tundra advertising in Texas. So I think the smart TV with its immersive experience and targeting can actually deliver that experience.
SP – The targeting piece of this, how is that accomplished at this point? Is it strictly geographical or are there demographics going into it as well? And does YuMe handle that part?
Chang – We’re crawling before we walk and run. So we’re doing a lot of geo-targeting to begin with. But over time we can see where based on your consumption patterns – and if a customer opts in they can share what kind of demographics they’re in – you can do a lot better targeting. For example, if we know you’re consuming Netflix kids’ content, we know there’s a kid in the household, and maybe we’ll tell the advertising to fit into that.
SP – You can build a profile of your viewers based on what they’re watching and start to get a feel for what their tastes are. It’s not necessarily knowing at the outset who these people are or tapping into information they share with Best Buy or something.
Chang – Right. And also if you’re a content developer or programmer developing applications for enabling pre-roll and mid-roll and buying knowing what content you’re watching at time of day and location, we can do much better targeting than what’s traditionally possible on a broadcast medium.
SP – What is the kind of programming that this advertising is going into where you have the freedom to do those pre-rolls and mid-rolls?
Chang – We’re enabling pre-options, traditional banner display ad which is available on our portal. Number two, you can do click to video or pre-roll and mid-roll. But you can also develop applications.
For example, Toyota is doing that. It’s building interactive applications that the consumer can click on that banner or video ad and get into a very immersive experience of being able to customize and find a little more about specific features that interest them. If you’re an enthusiast about engines, you can find out about the new engine or the transmission on that Toyota Camry, or if you care about the safety features, you can click into that to find out a little more.
SP – So a lot of the advertising is becoming part of the content that isn’t necessarily tied to a specific program. But coming back to the pre- and mid-rolls, what sort of programming do you have access to for placing that kind of advertising?
Chang – We’re in discussions with a variety of over-the-top kinds of players today. I think sometime next year that discussion will expand to some of the linear programming as well.
SP – Which brings us to the obvious topic of how the programming is flowing at this point. The connected TV is now penetrating a large share of the marketplace. People are getting it. When you said 60 to 90 percent activation, did you mean activation online?
Chang – People purchase a TV, they take it home and plug it into the Internet and use the service whether its a Netflix or an app store.
SP – So you’re getting great usage rates online. At that level, then, the question becomes how long can the linear content suppliers avoid taking advantage of this direct connection into the audience? And, of course, we know about all the considerations that go into protecting their legacy markets and that sort of thing. Where do you see that crack happening? Will they start supplying content that they’re not broadcasting live that’s good fresh content and maybe differentiate that way? Or will it be all second day stuff?
Chang – There’s a lot of discussion about cord cutting. I think what most people can agree to is that the majority of the consumers in the market, probably 80-90 percent, they’re currently taking pay TV. If you watch five to six hours of TV a day, it’s a great value. And for a programmer or TV broadcaster who has a revenue stream of carriage fee and advertising, that’s very valuable. And so near term I would say they’re going to provide a lot of what I call catch up or adjacent content that’s not in direct competition with the current programming. And we’ll experiment with it, and it depends on how it goes.
SP – There’s a lot of that stuff?
Chang – There’s a lot.
SP – Content that isn’t getting aired because it’s either very niche or it just doesn’t make the cut on whatever they’re trying to do for a particular program theme.
Chang – Exactly. I think with the most premium channel of all, ESPN, there are thousands of hours of programming that’s not right now riding the cable channels. If you have the ability to create complementary content or specific niche or narrowcasting, I think that’s the benefit the smart TV ecosystem brings to the programmers.
SP – That brings the question to the idea of partnering with some of the cable operators or telephone companies to where their subscribers don’t have to get a set-top, they can be subscribers on your television set.
Chang – We announced a partnership with Verizon FiOS TV at the 2012 CES where they’re going to develop applications. Also Comcast’s Sam Schwartz spoke on a panel about the discussion we’re having about porting their application into a smart TV. I think it really benefits everyone involved.
From our perspective the consumer gets to use our smart TV more frequently. From an MSO or MVP perspective, they can reduce their cap ex and op ex. And from a consumer perspective, they really expect a high-quality navigation experience that maybe their set-top from five or ten years ago could never deliver on. So today as we speak we’re shipping TVs with a dual-core CPU and quad-core graphics – I know in Silicon Valley those are common terminologies…
SP – Fairly potent images.
Chang – Right. I think consumers are very used to the high graphic quality of navigation experience they get on iPad and iPhone. And they expect the same thing on their TV. And with smart TV MSOs and MVPs can do that without expending tons of money on hardware.
SP – In your partnerships like with Verizon does that lead to creating a universal navigation that incorporates what you’re offering from your content side and what they’re offering through FiOS? Or are those two separate windows, and is it their navigation system the subscriber goes to versus navigating on your content?
Chang – What I can disclose today is the Verizon demo and the discussion is around enabling application where the Verizon navigation happens within the application. But if you go back let’s say a year ago, we had a model where you go through Vudu, the VOD service, and you navigated within that, and you navigated with the Amazon movie service. A year later what we’re actually doing is enabling unified search and recommendation. So from a consumer perspective they can actually without going into the specific Vudu, Amazon or YouTube, be able to do a unified holistic search and recommendation.
SP – So it’s doable.
Chang – For Verizon I can also see that being a great experience of the consumer, and I think it’s also a great experience for MVPDs because you’re demonstrating that when the consumer searches for content, Verizon or the MSO can say, hey, you’re already paying me, you don’t have to go to Vudu and purchase that, because you’re already subscribing through us with HBO or some other source.
SP – And you as a service provider are escaping that old fashion way of navigation altogether.
Chang – Exactly.
SP – You mentioned banner ads. Within that universal navigation system I would think there’s a tremendous advertising opportunity that’s distinct from everything else just because that environment is the starting point for everybody’s experience. It seems like that would be some pretty prime real estate. Are you selling into that idea yet?
Chang – The reason we got into advertising, and we’re not an advertising company, we got into it to enable a richer and more diverse content. The way to do that was enabling the link in advertising. I think as more traffic happens, this advertising can help the ecosystem to bring additional content and richer content into the consumer’s front door.
SP – When do you think that all of this will translate into that holy grail of recurring revenues on top of the basic hardware sales at the frontend?
Chang – At the end of the day, we’re still device makers. Even in the case of Apple, as much business as they on iTunes, the majority of their revenues come from device sales. We’d love to make recurring revenue, but we’re really more focused on how we enable a great experience at the device level, and how do we sell more devices.
SP – So you’re saying actually that the transformation of this user experience becomes the driver to selling more of your devices. Whatever you’re doing with advertising isn’t core to what you’re expecting out of this whole thing, even in the long term.
Chang – It is not today.
SP – It’s been great to hear how things are progressing. Thanks for taking the time to discuss this.
Chang – Thank you.