Sorenson buy preps Nielsen for assault on addressable ads

Nielsen’s $11.25 million swoop for Dynamic Ad Insertion (DAI) technology vendor Sorenson at first sight looks like one wounded beast engorging a smaller one and has surprised financial analysts.

Nielsen has been engulfed by takeover rumors for the past six months, with various equity groups hovering, while Sorenson, also once high flying, filed for Chapter 11 in October 2018 to extricate itself from an ill-conceived contract with the Sinclair Broadcast Group that would have bankrupted the company after turning sour.

Nielsen has acquired the Sorenson DAI technology more cheaply than it would have due to the financial stress it is going through. It can now claim it has all the components to overcome barriers imposed by the US TV ecosystem to ad targeting on a one to one basis, with what it calls an AI-optimized platform. That turns out to be a bit of stretch at this stage, because there is work to do assembling these components and proving that they can work together, especially after the wheels came off for Sorenson at Sinclair. Nielsen’s ambition to solve the addressable advertising conundrum for US networks, even if that is just to increase its price to equity predators, is closely related to the Sinclair case.

Sinclair, like other major US networks, wanted to exploit addressable advertising to increase the aggregate value of its audience, by delivering multiple ads at a given time to different segments. For a broadcasting network the benefit is that addressable ads have a higher CPM (Cost Per Million impressions) than traditional spots. For the brand the potential advantage is that although the actual CPM cost is higher the effective CPM (eCPM) cost is lower, because it only pays for the relevant segment and not the whole audience for the associated program.

If a brand is paying $10 per CPM for a national spot ad, but it is only relevant for 5% of the audience, the effective cost, or eCPM is $200. If the CPM charged for an alternative addressable ad targeting just that 5% is less than $200, that is a good deal for the brand as well. The network gains because it can split the audience into a number of segments and sell each one at a higher CPM than it could for a blanket spot because the ad is reaching relevant people and aggregate these together across its whole audience.

The problem is that in the US it is the pay TV operators (MPVDs) as they are known, and virtual MPVDs for streaming services, which have the relationship with viewers. Only they have the first party data, such as email and IP addresses, on their viewers, and only they can connect advertisers to the national audience, or regional ones in the case of cable companies.

So broadcasters, until recently, have only had the means to address ads via their fledgling OTT apps, or by working with the MPVDs. They often have a difficult relationship with the latter and the cooperation needed to address ads is elusive or expensive.

Sorenson came up with a solution by exploiting the growing base of smart TVs which can obtain data using ACR (automatic content recognition) technology. Sorenson’s idea was to insert addressable ads as overlays via the smart TVs, on top of local inventory. This does not seem to have worked properly in the Sinclair case, although details are sketchy.

What is clear from the Chapter 11 filings is that Sorenson’s contract with the broadcaster involved both provision of data for insertion of addressable TV ads on Sinclair stations and also crucially selling ad impressions directly at the local level.

The latter is where Sorenson came unstuck, because in exchange for selling Sinclair impressions through its addressable ad platform, the firm had to make minimum guaranteed payments to Sinclair. It was acting as a broker but with a commitment to pay the supplier irrespective of how much it made and it turned out the impressions sold only made a fraction of the revenue needed to meet those minimum payments. The deficit would have exceeded $100 million over the lifetime of the Sinclair Agreement, according to the Chapter 11 filing.

This has not deterred Nielsen, presumably in part because it already owns proven ACR technology through its February 2017 acquisition of Gracenote. That technology has already been incorporated into millions of smart TVs, including more recent models from LG, with which Gracenote has a contract. Nielsen is probably looking to integrate Gracenote’s ACR with Sorenson’s local DAI technology to fix the problems that wrecked the Sinclair contract.

Nielsen will have to convince potential customers that it has overcome the problems which led to Sorenson’s Chapter 11 filing. This comes at a time when Nielsen itself has fallen from its former grace as its base has been increasingly eroded by rivals, especially ComScore. As we reported last month, Nielsen’s long-term audience measurement contract with CBS expired on January 1 2019 and talks to renew it have stalled. Nielsen stands to lose $100 million as a result and at least in the interim CBS turned to ComScore to fill the breach.

As we also pointed out, CBS was not the only US TV network to question the reliability of Nielsen’s audience measurement capabilities across connected devices, particularly for audiences viewing their programming on streaming services, so it was not just about money.

Without a contract with Nielsen, CBS does not have direct access to current or past audience data, but can obtain alternative data from ComScore provided via return paths from several satellite cable operators including AT&T/DirecTV, Dish, Cox and Charter. Furthermore, nearly all ad agencies are themselves ComScore clients. As a result, several station groups now use ComScore as the currency of negotiations with advertisers, highlighting the threat posed to Nielsen’s once dominant position in audience measurement.

The Sorenson acquisition can also be seen in the light of Nielsen’s courting of private equity firms for a takeover and it now looks inevitable at least some of its assets will be sold. Nielsen had seen how long-established IT software giants such as Oracle and Adobe had gained value through digital addressable advertising before edging into TV. The success of LiveRamp, by focusing on identity resolution, will also not have been lost on Nielsen as it wrestles with addressable advertising, as this technology is a key part of the equation.

This is leading Nielsen into a possible conflict of interest of the sort that Facebook and YouTube have been accused of by starting to sell addressable spots to advertisers itself. It would first define the segments, then place the ads and finally report back to the brands how well those ads performed. It would be marking its own card, which may not go down well with large brands. For that reason, one possible scenario is that Nielsen sells off its data division for which it has become famous and become an addressable advertising platform company. The Sorenson acquisition certainly fits with those twin objectives.