Decision time on product placements: what now?

The Department of Culture, Media and Sport (DCMS) has issued a consultation document, asking us all whether product placement should remain banned in the U.K. This follows the E.U.'s decision to lift its blanket ban, and allow member countries to make up their own minds. The wheels of government turn slowly, so whatever decision is eventually made will probably not take effect until December 2009. But the decision will have a substantial effect on online video as well as on TV. I'll declare an interest. I work for a company that offers a digital version of product placement, known as embedded advertising. We believe that product placement should be legalised in the U.K., thus bringing the U.K. in line with developed economies everywhere outside the E.U. We believe that this should happen because there are substantial advantages to legalising product placement, and the objections to it are unfounded. The advantages
The advantages of legalising product placement are: (1) that it will generate much-needed revenues for the U.K. production and broadcast industries and (2) it will stimulate the economy by helping advertisers convey their messages to audiences. Let us look at these advantages in turn. In a later article, we'll look at the arguments often advanced against legalising product placement. 1. Legalising product placement will generate much-needed revenues for the U.K. production and broadcast industries. These industries are under severe financial pressure, with revenues threatened by the fragmentation of media outlets, the changes wrought by digitisation, the increased penetration of digital video recorders (DVRs or PVRs), etc. The creative industries are one of Britain's key industries for the future, and it would be wrong to hobble them unnecessarily. In response to this, it has been observed that in 2005, Ofcom forecast that legalising product placement would generate a 'modest' £25-50m revenue for U.K. broadcasters. We believe this forecast now looks low, for a number of reasons:

1. A key assumption in this calculation was the penetration of placement in the U.S. ad market, which Ofcom believed to be around 3.3 per cent. But placement underwent a compound annual growth rate (CAGR) of over 40 per cent from 2002 to 2007, and in 2007's declining overall TV ad market, it still grew at 33 per cent to reach $3.5bn.
2. One of the reasons for the growth in placement in U.S. broadcasting is the increased penetration of DVRs like TiVo. So far, with penetration around 25 per cent, DVRs do not appear to have significantly eroded the impact of the 30-second spot. Households with DVRs watch more TV than non-DVR households, and most of their viewing continues to be in real time (i.e., not pre-recorded). But only the most optimistic TV executives expect there to be no deleterious impact on the 30-second spot as the penetration rate rises (as it is forecast to do) to 50 per cent and beyond. Placement is one of the techniques that U.S. TV executives are turning to with enthusiasm in the face of this threat to their core income.
3. Since Ofcom's 2005 forecast was drawn up, a new form of product placement has arrived -- digital placement or embedding. Product placement is growing fast in the U.S. and other markets because it is powerful, and also because it helps avoid ad avoidance. But traditional placement is hard to execute. It has to be negotiated before shooting commences, and sometimes before scripting commences. It involves obtaining the active cooperation of many different parties with widely varying agendas -- producers, scriptwriters, directors, actors, cameramen, etc, etc. Digital placement avoids these complications by allowing the content owner (the producer or the broadcaster) to insert the brand imagery after the footage has been shot. This makes placement simple, and makes it scaleable. We have yet to see the impact of this approach in the U.S. market, but executives there believe it will be significant.
4. TV executives in the U.S. have learned a great deal about how to do -- and how not to do -- placement in the last few years. For instance, it is worth noting that placement does a very different job than the 30-second slot. Placement does not allow an advertiser to tell a story.  Instead, it enables the advertiser to associate their brand with premium, sought-after content in a way that the 30-second slot does not. It turns out that placement works best in synergy with the 30-second slot, not in competition with it. This is one reason to believe that much of the revenue generated by placement would be 'new money' for the production companies and broadcasters, and would not simply cannibalise the 30-second slot revenues.

It is also worth noting that there is a significant difference between product integration, and what can be termed 'brand placement'. In integrated placements, actors will interact with a product, or some representation of a product or service. In brand placements, the image is a passive component of the scene. The advertising industry is internationally consolidated, and people in the TV production and broadcast industries are internationally mobile. These and other insights and learnings about product placement are available to production companies and broadcasters in the U.K. today.
   
These considerations lead us to believe that Ofcom's 2005 forecast is now substantially on the low side. Conservatively, we estimate that within five years, placement could account for 6 to 7 per cent of TV ad revenues. This may not make the difference between financial survival and failure for our leading production companies and broadcasters, but it could make the difference between rude health and financial enfeeblement.

Critically, if the U.K. retains the ban on placement while other territories permit it, our industries will suffer noticeable competitive disadvantage. The creative industries are generally believed to be an area where U.K. plc excels. It would surely be foolish to hobble one of our strongest and most promising industries unless there is an exceedingly good reason to do so. 2. Legalising product placement will stimulate the economy by helping advertisers convey their messages to audiences. Advertising is a critical lubricant in the engine of modern-day capitalism. It allows product and service providers to build valuable brands which create value for their shareholders by first creating value for their customers. If the wealth creators in our national economy believe they can be more effective by using a particular tool, there should be very good reasons for forbidding it. Next week: the arguments against product placement examined   Calum Chase is vice president of business development, MirriAd.