(Corrects third paragraph of story published yesterday to clarify talks aren’t limited to Cognitive software.)
Televisions reaching consumers this year will be able to tell what audiences are watching and relay the information to marketers over the Web, opening the door to new ad revenue as well as privacy concerns.
Coming Web-connected units from LG Electronics Inc. (066570) and other manufacturers contain digital sleuthing technology that tracks live and recorded programs as they’re shown on-screen. Sets being demonstrated by Seoul-based LG in Berlin this week at IFA, Europe’s largest consumer electronics show, will use software from San Francisco-based Cognitive Networks Inc.
Major players including Samsung Electronics Co. (005930) and Vizio Inc. are discussing using such software in their sets, Cognitive Chief Executive Officer Michael Collette said in an interview. Manufacturers are trying to carve a slice of a worldwide TV advertising market forecast to total $196.5 billion this year by researcher Magna Global. Any ad revenue could help TV makers improve profit margins, which have suffered amid slowing demand and price competition.
“Our job is to produce recurring revenue for TV guys who are lucky if they can produce margins of 5 percent on their hardware,” Collette said. “The 4 bucks they make on a set, they can at least double with the $5 they may make a year from the new recurring revenue.”
Cognitive pumps viewing information back to a database through the Internet, allowing marketers to tailor messages in real time, according to an Aug. 28 statement announcing the deal with LG. Viewers who opt-in to the service gain access to advanced interactive features. While LG is demonstrating 2014 models at IFA, sets sold this year and next will have the technology, according to Cognitive.
Sony Corp. (6758)’s Gracenote unit, a competitor to Cognitive, is also in talks to put its content-recognition software in TVs. Gracenote is “finalizing contracts with TV manufacturers and broadcasters for fall launch,” according to Sunok Pak, a spokeswoman for the Emeryville, California-based division.
Gracenote acquired Bulldog United’s video fingerprinting technology in June 2012 to identify which movies, TV shows and commercials people are watching, whether the source is a set-top box, Blu-ray player or streaming device.
SungIn Cho, a spokeswoman with Suwon, South Korea-based Samsung, had no immediate comment. Jim Noyd, a spokesman for Irvine, California-based Vizio, didn’t respond to a request for comment.
The manufacturers are trying to break into a market that has proved resistant to change, with incumbent pay-TV services that will be difficult to unseat. To build an audience of interest to advertisers, they’ll need to have at least 10 million units that use the fingerprinting technology, according to Cognitive’s Collette.
There’s also the question of perception. Companies that tackle the advertising market from an engineering perspective lack experience interacting directly with consumers, and risk pushing the boundaries of privacy, said Warren Schlichting, senior vice president of media sales and analytics with Dish Network Corp. (DISH:US), the No. 2 U.S. satellite TV broadcaster.
“We’re primarily in the pay-TV business,” Schlichting said. “While my advertising business is flourishing, we’re not going to risk the creepy factor or pushing the envelope for the sake of doing better in something that’s not core to our customer focus.”
As an example, Schlichting cited a backlash from consumers that caused Microsoft Corp. (MSFT:US) to withdraw its original plan to require users of its Xbox One to log into the Internet at least once every 24 hours, and a requirement that its Kinect camera, which watches for consumer movements, be plugged in.
Executives at both Cognitive and Gracenote said their technology is similar to software that tracks websites consumers visit using computers and Apple Inc. (AAPL:US)’s iPads.
After users agree to initial setup of the television, advertisers and programmers gain access to the video information and a device ID number to determine when and where to place their content, Gracenote President Stephen White said.
“It’s important to be upfront with consumers about how you’re going to use their data,” White said. “If you’re doing things that create a better experience for them and give them things they’re going to care about, we believe they’re going to opt in.”
Twenty nine percent of Internet-capable TVs were connected to the Web, including those routed through other devices, while only 15 percent had a direct link to online services such as Netflix Inc. (NFLX:US), researcher NPD Group said December. Shipments of so-called smart TVs are projected to reach 141 million units, or 55 percent of the global television market, by 2015, IHS Screen Digest predicted in February.
Gracenote can download its software to any smart TV purchased since late 2011, according to Pak.
The technology from both Cognitive and Gracenote scans pixels on connected screens almost continuously to determine, for example, what a viewer is watching and where in the program they are.
A pizza chain could theoretically ask for an ad insertion at a commercial break to offer 10 percent off to viewers near its shops, and LG could tie in Skype calling so the person never leaves the couch. Proceeds, after the networks’ share, would be divided between the software companies and TV makers.
Because so-called dynamic advertising can be better targeted to the individual, some advertisers are willing to pay a premium of as much as 25 percent above traditional television advertising, according to Ooyala, a Mountain View, California-based company that analyzes video data.
While the technology could threaten traditional ads, companies that pursue a multiple-device approach and seek to coexist with existing ad systems have the best chance of success, Gracenote’s White said.
“When you have content and context-aware devices, the reality is you can do a lot more to hyper-target consumers and give them information they care about,” White said.
To contact the reporter on this story: Cliff Edwards in San Francisco at firstname.lastname@example.org
To contact the editor responsible for this story: Anthony Palazzo at email@example.com