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April 30, 2019

Inside AT&T’s Effort to Revolutionize TV Advertising

Apr 26, 2019 6:32 AM PDT — The Information

AT&T CEO Randall Stephenson hopes to transform the telecom giant into a media powerhouse with the help of a new targeted advertising business. But he’s run into a major snag: Rival TV networks and major cable operators, which he needs to support the new business, don’t want to play along. Some, like Comcast and a separate consortium of TV networks, are pursuing their own, competing efforts.

Friction between executives at AT&T and within its newly acquired Time Warner—now called WarnerMedia—made it difficult for AT&T to tap Time Warner’s expertise in TV advertising, at least initially. The new advertising unit, named Xandr after Alexander Graham Bell, was meant to create a counterweight to the advertising muscle of Facebook and Google. But AT&T’s struggles demonstrate how hard it will be for the telecom giant to squeeze growth from the media businesses it has acquired, Time Warner and DirecTV, which are being hurt by cord-cutting in the pay TV industry.


• Comcast rejected AT&T proposal on ad joint venture

• TV networks resistant to Xandr’s push to sell their ads

• Turner’s Levy was critical of AppNexus purchase

And the dissension between AT&T and other big media companies threatens the TV industry’s ability to build wide acceptance of targeted advertising. That’s a problem for an industry where ad revenues have flatlined in the past few years as marketers shift their buys to digital formats—sold mostly by Facebook and Google—that offer better results.

“The days when television outlets only competed with other television outlets are long over and now the competition is Facebook and Google,” said Craig Moffett, an analyst with MoffettNathanson. “If you don’t evolve the television product, everyone’s fear is that they are going to lose to the much better targeting that the digital providers can offer.”

A person close to AT&T disputes the idea that TV networks aren’t interested in working with Xandr. AT&T expects to announce a television network partner when it unveils more details of its advertising plans during the annual “upfront” TV presentations to advertisers in May, the person said.

Canoe Aground

Television executives for years have tried, and failed, to develop so-called “addressable advertising”—a type of targeted TV commercial that is so individualized it is almost “addressed” to a specific household. Most notably, in 2008 six cable operators including Time Warner Cable, Comcast and Cox formed Canoe Ventures, a consortium to create addressable advertising. However, the companies couldn’t agree on strategy and the cable set-top boxes weren’t advanced enough to transmit the ads, according to people familiar with the situation.

The technology has advanced since then and several media companies, including Comcast and AT&T’s DirecTV, now offer marketers addressable ads. DirecTV introduced its version of the ads in 2011, before it was acquired by the phone company. But since being absorbed into AT&T in 2015, it has offered marketers the ability to refine their campaigns with the help of location data from AT&T phone customers. DirecTV has run more than 3,000 addressable advertising campaigns since it was acquired by AT&T, an AT&T spokesman said.

And it claims results. DirecTV recently ran a two-month ad campaign for a national retailer that targeted viewers between the ages of 28 and 59 with income of more than $125,000. Using AT&T’s mobile data, Xandr found that viewers of the ad visited the retailer’s stores 3.5% more than people who didn’t see it, according to Xandr.

Still, neither Comcast nor AT&T has yet turned this kind of advertising into a significant business. A major hurdle is scale. DirecTV is a national service, but it has only about 22 million subscribers and its addressable ads can only be delivered to around 15 million of them because not all DirecTV set-top boxes are advanced enough. Comcast has a similar problem. Google and Facebook, meanwhile, reach billions.

For advertisers wanting to target specific people across the country, the very limited scale of TV ads undermines their effectiveness. “If it’s only within AT&T’s footprint, advertisers will wonder if it’s worth the price,” said Brian Wieser, global president of business intelligence at GroupM, the media buying arm of advertising conglomerate WPP.

For the business to reach critical mass, AT&T needs to get TV networks onside—both to get more of an audience and because the networks control most of the commercial time available during TV shows. Pay TV services like DirecTV and Comcast sell only two to three minutes of ad time per hour, compared to around 16 minutes an hour for the networks. That means Xandr has to persuade other networks and cable operators to work with it.

Grandiose Speech

Xandr had its coming-out party last year in Santa Barbara, where around 200 marketing executives gathered at the Ritz-Carlton to find out how AT&T planned to change TV advertising. But a presentation by Xandr CEO Brian Lesser left many ad executives who saw it without a clear idea of how AT&T would pull off the transformation. Mr. Lesser gave a “big grandiose speech about the future of advertising and how he envisioned it, but it didn’t look like they were anywhere close to that,” said one attendee.

The challenge is in persuading rival TV networks to work with Xandr, particularly as AT&T wants the networks to let Xandr sell their ad time—a request that network executives are rejecting. “They want a bunch of third-party inventory to help them realize their vision, but it’s not necessary for us to help them,” said one executive who has met with Mr. Lesser.

Some advertisers are hopeful. “We are definitely actively engaged with them and trying to be part of it,” said Michael Law, executive vice president of U.S. media investment at Dentsu Aegis Network. “We aren’t quite there yet, but the promise of what this marketplace could be with AT&T’s data and infrastructure puts them in the best position to do this.”

Some in the industry think AT&T and Comcast need to join forces to gain enough scale to be viable. Comcast would be an important partner because it controls NCC Media, a company it owns with Charter Communications and Cox, that sells ad time on behalf of cable operators covering 45 million households nationally. Last year Comcast moved its addressable ad efforts for national campaigns into NCC.

AT&T earlier this year approached Comcast about partnering on the advertising effort. But talks broke down because the telecom provider wanted it to run within its platform and under Mr. Lesser’s control, said three people close to the situation. AT&T also wanted Comcast’s stake in NCC to be part of any joint venture, one of the people said.

“We are always open to meeting and partnering with any parties that help drive the value of TV as a platform in a collaborative manner that benefits the entire television ecosystem,” said Marcien Jenckes, president of Comcast Advertising. AT&T declined to comment.

Meanwhile, Mr. Lesser has ruffled some feathers in how he has approached potential partners. For example, late last summer he invited some members of OpenAP, an industry consortium focused on creating addressable ads, to Xandr’s offices in New York City to discuss how they could work together.

OpenAP was formed two years ago by networks owned by Time Warner’s Turner, Viacom, Fox and Comcast’s NBCUniversal to establish standards for the delivery and format of targeted advertising. But there was also an element of competition with Xandr. The group was quietly developing an automated market for digital and TV ads, including addressable commercials, said people familiar with its plans.

After describing Xandr’s planned platform, Mr. Lesser told the executives, “we are going to do this with or without you,” according to two people familiar with the discussions. Some saw the comments as high-handed, though one person familiar with the meeting said Mr. Lesser was trying to get everyone on board, not threaten potential partners.

The two sides kept talking about Xandr and OpenAP working together. But discussions appear to have broken down: Last week AT&T said WarnerMedia was withdrawing from the group. On Thursday, OpenAP confirmed its plans for a marketplace competing with Xandr.

Recently, AT&T has tried to pressure rival media companies to work with Xandr by bringing up the issue when its DirecTV satellite service is negotiating terms to carry their cable channels. In recent negotiations with Viacom, for example, AT&T tried to get the owner of MTV and Nickelodeon to allocate it some TV ad inventory to sell through Xandr. Viacom agreed to allow Xandr to include some banner ad inventory in its marketplace, with the possibility of digital video ads down the road, according to two people familiar with the situation.

Xandr has signed deals with small cable operators Altice and Frontier Communications, which between them reach around 3 million households, to sell addressable television ads on their behalf. And earlier this year, Xandr joined a group of TV networks, including those owned by CBS, Discovery and Disney, along with smart TV manufacturer Vizio, to create standards for linear TV addressable advertising.

“If it’s only within AT&T’s footprint, advertisers will wonder if it’s worth the price.”

AT&T hopes to use WarnerMedia to prove to advertisers and other television networks how effective its targeted advertising can be. In January, WarnerMedia ad sales representatives started using the customer data from AT&T’s cellular service and DirecTV set-top boxes to sell targeted ads that would run during shows on WarnerMedia’s cable channels, which include TBS, TNT and CNN. These ads are not addressable to individual households, but the AT&T cellular data allows marketers to get a better sense of whether the ads are effective, say people familiar with the situation.

Xandr plans to share some results from how these targeted ads work at an upcoming programming presentation for marketers in May, according to a company spokesman.

Building Xandr

One group that could have helped Xandr navigate its expansion in television was WarnerMedia’s Turner unit, which owns major ad-supported TV channels CNN, TNT and TBS. But the two businesses have been kept very separate.

To help build the engineering resources for Xandr, AT&T last August acquired ad tech firm AppNexus, which runs an automated platform for buying and selling digital ads. AT&T plans to use AppNexus to build out its proposed national marketplace for digital and video advertising.

But AT&T didn’t consult with Turner executives before buying AppNexus, say people familiar with the situation. An AT&T spokesman said that regulatory restrictions meant that AT&T couldn’t discuss the deal with Time Warner employees before the Time Warner acquisition was completed on June 14 of last year. (AT&T, however, didn’t announce the AppNexus deal until June 25 and didn’t complete the purchase until August.)

Turner’s then president, veteran ad salesman David Levy, was critical of the AppNexus purchase. Mr. Levy felt Xandr should work closely with OpenAP, according to two people familiar with the situation. Mr. Lesser, in contrast, was a proponent of the AppNexus deal. He knew AppNexus well—he had been a director of it.

The differences center on AppNexus’ business. Turner employees note that AppNexus specializes in banner ads, which is a very different business than TV ads.

And even when it comes to banner ads, salespeople within Turner thought AppNexus fell short. Just a few months before, Turner’s sales force had decided to cut AppNexus from the list of ad exchanges it sold digital ads through, because it wasn’t used by as many advertisers as other ad exchanges such as Google, said two people close to WarnerMedia. That meant prices for ads sold through AppNexus tended to be a bit lower, they said.

But the tensions went deeper. Some Turner ad salespeople questioned whether Mr. Lesser was the right person to run Xandr, because he lacked experience in television. A seasoned digital advertising executive, Mr. Lesser joined AT&T in the fall of 2017, after the Time Warner deal was announced but before it closed. Mr. Stephenson tapped him to run the telecom firm’s ad analytics unit, which shortly afterward was renamed Xandr. After the Time Warner deal, he was given oversight of the broader addressable ad effort.

Mr. Levy ended up leaving Turner in February, as AT&T consolidated its control over WarnerMedia’s divisions. And there are signs that relations between Xandr and the Turner ad salespeople have improved since then. Under pressure from AT&T, Turner continued using AppNexus. The results have gotten better, said one of the people.

But even now, Xandr and the TV ad sales unit within what is now called WarnerMedia are run separately. Under a new management structure unveiled in February, Turner’s ad sales team reports to Gerhard Zeiler, chief revenue officer, who reports to John Stankey, the head of WarnerMedia. Xandr is a separate unit, whose boss Mr. Lesser reports to Mr. Stephenson.

The division between Xandr and Mr. Zeiler’s group could cause confusion among advertisers about the company’s strategy, people said. “You need one person to make decisions on all ad sales,” said one of the people. “It doesn’t work because now everyone has separate profit and loss statements.”

As for Xandr, its advertising revenues rose 26.4% to $426 million in the first quarter, with the growth mostly due to the AppNexus acquisition.

Keeping Data Safe

In talks with potential partners, AT&T has insisted on controlling the ad sales venture, which has emerged as a major point of contention. The telecom firm takes that view because it sees that as the best way to ensure viewer data is kept secure, said one person familiar with AT&T’s thinking.

Even so, AT&T’s use of its consumer data to sell targeted ads is likely to spark growing questions, given the increased sensitivity about how tech firms use customer data. The Federal Trade Commission in March issued orders to seven U.S. broadband providers, including AT&T, seeking information about how they collect and use data about their consumers. An AT&T spokesman referred to the company’s response to the FTC order, in which AT&T said “Our customers’ privacy is important to us.” The company noted that it supports “comprehensive federal legislation to protect consumers’ data throughout the internet ecosystem.”

Verizon pulled back from an effort to build a media business, through its combined AOL-Yahoo unit, after internal differences over the use of Verizon customer data in the sale of advertising. AOL’s former CEO Tim Armstrong, who oversaw the Verizon media business after AOL and Yahoo were put together, wanted to combine data on Verizon’s cellular subscribers—such as what apps they used and which shopping websites they visited—with the media unit’s advertising technology so that marketers could target users.

But as The Information previously reported, Verizon’s cellular operation wouldn’t give the media team access to as much customer data as it said it needed. Like AT&T, Verizon requires customers to opt in to share their data with the telecommunications provider, and many didn’t, or there were delays in getting the data they needed. It is unclear how much data AT&T is giving Xandr and whether it will have to pull back if there are new laws about what they can collect.

AT&T leadership is much more committed to building an addressable advertising business than Verizon’s, according to people close to AT&T. “For Verizon it was a little bit of a bet to see if there was something there, but for AT&T it feels more like a bet-the-company move,” said one person.

Mr. Stephenson often discusses the importance of Mr. Lesser’s mission in emails to employees and in meetings, according to employees. Ensuring WarnerMedia coordinates with Xandr is one of the top priorities outlined in AT&T’s annual report. Publicly, Mr. Stephenson has been vocal about the important role of Xandr in AT&T’s quest to become a modern media company.

Mr. Stephenson promised during the company’s fourth quarter earnings call that Xandr would contribute to AT&T’s bottom line in a meaningful way next year. “2020 is when those results will play out,” he said, adding that he expects the company’s success will drive more partnerships with other programmers. “The more success we have, the more we see more people come to us,” he said.