Last week Steve Jobs presented a new version of the Apple TV device and announced that it would stream only rented content and that TV episodes would be available at a lower price point of $0.99. With these changes Apple addressed weak points in its video strategy, which had caused lackluster sales. However, while consumers may be pleased it seems that the lower price ponit is a point of contention with the television networks. So far only ABC and FOX have signed on to Apple TV, and many speculate that ABC did so since since Steve Jobs is on the board of directors for Disney while in FOX got the OK since Rupert Murdoch is interested in working with Apple on iPad projects that support Newscorp’s publishing business.

Ignoring political alliances, I wondered just what the floor price should be for an Apple TV rental. The blog TVByTheNumbers had a provocative post, hyposthesizing that on average broadcast networks make $0.80 in advertising per viewer during a one-hour broadcast show.

CPM of $25 = $0.03 per view x 32 spots = $0.80 per viewer per episode

I considered this $0.80 should be the benchmark by which a substitution view should be judged. I then set out to estimate the revnues other platforms created on a per viewer basis and compare. The revenue models accounted for the following factors:

• Revenue stream (advertising or user payment)
• Advertisements per episode stream (applicable only to Broadcast TV, Hulu and Hulus Plus)
• Viewers per episode stream (dependent upon the delivery screen)
• Viewings (greater than 1 if the episode has been purchased)

I decided to ignore advertising commissions and distribution fees, which could be a major factor for networks to estimate the benefit, or lack thereof, in distributing their shows via iTunes and Apple TV. At the end of this post are all the calculations for each of the platforms. The following graph summarizes the results:

Even with the higher CPM prices (cited in the Appendix) it seems that Hulu offers the lowest revenue per user. However, Hulu Plus’ dual revenue stream (similar to cable TV), which accounts for a $9.99 monthly fee as well as advertising, jumps the gap and manages to post the highest revenue per user, clearly the winning model. The per-episode purchase models of Amazon and iTunes also pose a decent revenue of $0.66 per viewer while Apple TV’s rental model comes in at a lower $0.50 per customer, which might be too low for certain networks.

As I mentioned before this price doesn’t reflect any distribution fees that Apple might take so the comparison for iTunes and Apple TV might not be accurate. I might also be ignoring other factors. For example, episode purchases through Amazon might have more viewers per episode than Apple iTunes since the Amazon service has more streaming options to televisions.

Another thing to consider is that although broadcast television may take in around an average of $0.80 per viewer during every hour of primetime, these viewers are also likely to continue watching the same channel, contributing to further revenue on the channel during the next show. They are also going to be exposed to TV spots promoting the network’s other content. These are benefits that would might be incurred towards a limited extent with Hulu (which does promote a network and its other content), but would be completely absent with Amazon and Apple. Therefore, there is a much larger set of intangible benefits to a viewer watching a show on a network, that can’t be simply accounted for in the subscriber, rental or advertising revenue of alternate platforms.

I want to also highlight that DVDs are sold after a television show ends, so this aggregate revenue stream doesn’t directly compete with a broadcast audience like Hulu, Amazon or Apple’s services, so it has a different set objectives of to fulfill; not so much to compensate for an audience which is not watching the show on television as helping pay for the production costs- typically a broadcast production only covers 50% to 75% of its costs through broadcast distribution; the rest has to be recouped through syndication and other sources like DVD sales.

Even though I do think these models are inherently limited in their ability to compare the platforms, I still believe the comparison illustrates well some of the factors that are involved in the pricing and negotiation of these deals, and indicate why the new Apple TV rental model is not currently accepted by CBS, NBC and other networks.

Appendix

For Hulu, I calculated the advertising based on a CPM of $63 since according to Wired their rates run about two to three times that of broadcast television. This sounds a bit high to me but it’s possible since the Hulu has better targeting, higher valued demos, and lower commercial skipping/avoidance than broadcast TV.

Hulu: CPM of $63 x 6 spots = $0.38 per viewer per episode

In the case of Hulu Plus I added the $9.99 monthly fee, divided by 18.8 episodes per month (this was estimated by taking the average monthly minutes per Hulu viewer by 47, 44 minutes of content plus six 15-second spots).

Hulu Plus: $9.99 monthly fee / 18.8 episodes = $0.53 in fees per episode + $0.38 in ad revenues = $0.91 per viewer per episode

Since Amazon, iTunes and Apple TV are strictly purchased or rented models, advertising was not part of equation. For Apple TV I assumed that an average of two viewers would watch each rented episode since it streamed to a television. In the case of Amazon and iTunes I assumed an average of only 1.5 viewers since their models could stream to computers that inhibited group viewing. I also assumed that content purchased via Amazon and iTuens would be viewed more than once.

Amazon: $1.99 purchase fee / 1.5 viewers / 2 viewings = $0.66 per viewer per episode
iTunes: $1.99 purchase fee / 1.5 viewers / 2 viewings = $0.66 per viewer per episode
Apple TV: $1.99 purchase fee / 2 viewers / 1 viewing = $0.50 per viewer per episode

The model for DVDs was similar to iTunes and Amazon, only substituting a $2.50 price per episode based on the retail price of $60 for a DVD set with 24 episodes.

DVD: $2.50 purchase fee / 2.0 viewers / 2 viewings = $0.63 per viewer per episode

I recently attended Advertising Week in New York City and had a lot to hear from some very eloquent speakers. Here are the top 10 moments that I found to be inspiring, provocative or at least original.

(10) Changing Roles: It seemed to me that change was a prevalent theme at the conference and that all participants expressed a willingness to reconsider what roles their companies should be playing.

• Given the freedom of digital distribution, marketers are beginning to produce their own content.
• Given commercial skipping and other market pressures, media companies are beginning to integrate marketing messages into their programming.
• Given the economic demands and their talented personnel, agencies are beginning to develop their own products or services, similar to “private labels” at department stores.

Everywhere the status quo is being questioned and resources are being redirected. Still, the norm is established for a reason and as Rob Norman CEO of GroupM put it, agencies exist for the creation, distribution and measurement of brands and messages across various media, and it seems to me that this is value that marketers will need for some time to come.

(9) Ad Spending: Subsequently, despite the economic downturn and cuts in certain media overall ad spending can still be expected to grow roughly along with the GDP at 1 to 2% per year. Ad spending will fragment however among more media platforms and channels, and this increased competition will yield a greater “purchasing power” for advertisers; a “bigger bang for their buck” in other words.

(8) Compensation options: A related subject to ad spending was how new compensation options were being considered, including performance-based compensation options and even equity stakes by the agencies in the projects they were involved with. All of these options sounded like they were still works in progress.

(7) Attention Deficit: At the Betawave panel a dynamic video showed how much marketing messages have flooded people’s lives while they’ve become more busy resulting in an “attention crisis.” “Is an impression an impression when the viewer doesn’t see it?” And if traditional reach is no longer a valid currency to trade, “why can’t clients buy attention?” It was a provocative presentation but it seems to me that the industry has yet to supply a satisfactory answer.

(6) Measurement Issues: This problem with attention ties into the dissatisfaction with media measurement. More than once I heard the term “archaic” used in reference to the current standards for media measurement which don’t take into account new media viewing. Carol Kruse of Coca-Cola also said that traditional demos are “not so useful” for the targeting that marketers now practice. The Advertising Research Foundation (ARF) opened up their conference with a presentation by NBC President of Research Alan Wurtzel of the Coalition for Innovation in Media Measurement (CIMM), whose name pretty much explains its objective. As Alan Wurtzel succintly said, “We cannot not do this.” While instigating progress, CIMM is aiming neither to challenge or supplants Nielsen’s services. For their part, Nielsen has stated that online viewing will be added to their television measurement within a year, with mobile viewing to follow by around 2011.

(5) Forget measurement, let’s predict!: Another presentation at the ARF by Damon Ragusa, CEO of ThinkVine seemed to pique a lot of interest even among other panelists. The company offers a marketing simulation model called “The Emerging Marketplaces” that predicts customer transactions as a result of a product’s media marketing mix. The presentation cited an 8-9% M.A.P.E. between its predictions and actual transactions. The model could also account for short-term or quarterly changes in strategy, as well as for word of mouth and social media marketing. Impressive stuff.

(4) How much is that little show in the window?: At a panel titled “To Pay or Not to Pay?” with participants from MLB, the YES Network and FiOS an opening argument was presented that 1) the music industry failed since it “did nothing” and decided not to offer consumers its content via online channels, that 2) the newspaper industry made the opposite mistake by offering its content for free, and that 3) the television industry needed to find a middle path with a viable monetization strategy. Certain criticisms were levied against Hulu models that could end up cannibalizing television viewership and transforming FiOS and cable MSO’s into an industry of “dumb pipes.” At the core of this debate is how much to charge for content online, whether it’s through advertising or a direct audience fee.

(3) “Big” Opportunities: Marc Cuban also created a slight ruckus at MediaPost’s “The Future of Media” panel when he commented about how he attended a football game at the new Dallas Cowboys $1.2 billion stadium and the only thing people kept commenting about was the seven story tall screen. Given this attention, the current capacity or captive audience of 80,000 and the probable drop in the screen’s $40 million price, Marc Cuban declared that this was a ginormous media opportunity that the industry should probably think big instead of focusing on small screens, meaning mobile and laptops.

(2) The Three i’s: At the same panel Marc Cuban mentioned how any industry was populated by the “three i’s: innovators, imitators and idiots” and how participants should be honest about which role they were following, in order to neither decieve their customers nor themselves. This type of honesty is about being “authentic” company or brand…

(1) Authenticity: This buzzword was probably the most important one I heard, driven by how much the ad industry landscape has change as a result of social media’s effects. Advertising is no longer just about the message or the medium, it is also about the actual product, and how it has to deliver on its proposal to the consumer. If it’s not authentic, it will create a consumer backlash that will echo in social media and be too strong to control via any traditional means or channels. Consequently a lot of panel speakers recommended that companies bring in their PR departments under marketing, and that they also consider how agencies should be involved in their product development to help connect the good to the message.

As disparate as this list may seem, this last point actually ties back to the initial one of  how roles are changing and demonstrates how all of the issues affecting the industry are related.

Last week Nielsen announced the number of Hispanic TV households had increased by 2.3% to a current total of 12.95 million. Among the top 10 Designated Market Areas (DMAs) the average growth was 1.7%. The big standout was the Dallas-Fort Worth market (#5 Hispanic  and overall DMA) which grew an incredible 3.7% to 506,020 households.

The Hispanic segment is the fastest growing segment in the Nielsen report, growing 2.3% over last year and an average of 3.8% per year since 2007. In comparison total U.S. homes grew only 0.3% last year and 1.0% per year since 2007. These latest figures give Hispanic households an 11.3% share of the national total.

As a result of this growth, Hispanic media outlets may be able to attract a greater portion of local and national advertising (Hispanic shares of media budgets normally trail the segment’s share of the market). Paradoxically it might also create an incentive for advertisers to maintain existing media budgets since their GRP objectives would be more easily attainable.