T AT&T Inc

By Mike Shields and Suzanne Vranica 

AT&T Inc.'s $85.4 billion acquisition of Time Warner Inc. does more than create a behemoth in media content creation and distribution. Executives have said the deal also promises innovation in advertising.

While ad industry executives love hearing such talk, it is unclear exactly what it will mean.

The combination of AT&T and Time Warner brings together huge amounts of viewing data with content, which could serve as a catalyst to make TV advertising a lot more targeted to individuals like digital advertising.

In addition, AT&T's vast pool of data from its 90 million wireless subscribers as well as DirecTV households could be leveraged to target people with ads across devices, including TVs, laptops and mobile phones, some ad executives speculate.

Both approaches are potentially powerful for marketers but not without hurdles, including privacy concerns.

Cable and satellite TV operators have long promised a world where marketers would be able to target TV commercials to individual homes. Addressable, or targeted, advertising uses set-top boxes to route commercials to specific households or neighborhoods based on data about income, ethnicity, gender or other characteristics. For example, families with children could be shown minivan TV ads while a single person in the same town could be shown a TV spot for a sports car.

"Addressable advertising has been two or three years away for at least 10 years now," said analyst Craig Moffett at MoffettNathanson.

The tactic has historically been very manual to implement and patchwork, limited to small pools of ad space in specific areas of the country.

"It's been at the kids' table," said Tim Hanlon, a former ad-agency executive and founder and CEO the Vertere Group, which consults with ad and media companies. "It's been very difficult to scale in a sizable way."

But AT&T Chief Executive Randall Stephenson said the merger with Time Warner could change that, highlighting addressable TV ads as a key opportunity offered by the deal.

"When you combine Time Warner's content with our scale and distribution -- we have 100 million-plus TV, mobile, and broadband subscribers -- you put that with our customer insights and the addressable advertising opportunities that flow from that, we think we build something here that's really special," Mr. Stephenson said on a call with investors Monday. "It creates significant strategic, as well as financial, benefits."

Currently, companies like AT&T are limited to running addressable TV ads within the two minutes per hour of local commercial time in cable programming sold by the pay-TV provider.

If the deal goes through, AT&T could expand this to all of the ad space on Turner networks like CNN -- albeit only in the AT&T households with the capability.

It would give "addressable TV a significant increase in inventory that advertisers can now buy," said Tracey Scheppach, an executive vice president at Publicis Media, an ad-buying firm owned by Publicis Groupe.

If that happens, ad executives said the deal could encourage other cable giants to make addressable TV advertising more of a priority.

"This deal could spark a break-wide-open moment for addressable advertising," said Mr. Hanlon.

The dream is that addressable TV ads become more national in nature, making them attractive to more advertisers.

That is a big "if." Major broadcast and cable networks control their own national ad space and have been inclined to sell expensive ads designed to reach large swaths of the country.

Brian Wieser, a senior research analyst at Pivotal Research Group, said he is skeptical that there is a "meaningful opportunity for addressable advertising at this time."

"Turner's advertisers generally need to buy their video/TV ads cost-effectively, and need units that reach all parts of the country, not only those who are AT&T subscribers," he wrote in a note. "This means that enhanced ad units that AT&T may offer when ads are delivered on its platform are of limited use if those enhanced ad units are not available through other distributors."

Although addressable TV advertising is growing rapidly -- it is expected to more than double this year -- it is still a small piece of the overall TV ad business. Advertisers are expected to spend almost $1 billion, about 1.3% of TV ad spending, on addressable TV ads in the U.S. this year, according to eMarketer.

A more national addressable TV ad footprint could be kick-started by DirecTV's direct-to-consumer streaming offering that is launching later this year, as well as other services aimed at cord-cutters. Unlike the traditional pay-TV landscape, where addressable TV ads are funneled through set-top boxes, TV delivered over the internet allows for more weblike ad delivery that isn't limited by region.

The other big potential advertising synergy to exploit is the use of data to target consumers across screens, which would help the company to more directly compete with Facebook and Google.

AT&T already delivers video ads on thousands of mobile apps on 285 million devices through a partnership with mobile ad browser giant Opera Mediaworks, for example.

"Targeting people from device to device is one of the most vexing challenges in the marketing ecosystem today, and this alignment would be a meaningful step in that direction," said David Cohen, president of North America at ad-buying firm Magna Global.

Theoretically, AT&T could take data on its wireless customers, such as where they go and what apps they use, and couple that with data from DirecTV households, such as where they live and whether they have children. That information could be used to target ads on Turner's websites and networks on TV and mobile devices.

However, that won't be easy technically, and the combined company would need to carefully explain to consumers why granting permission to such tracking is to their benefit, said Mr. Cohen.

Write to Mike Shields at mike.shields@wsj.com and Suzanne Vranica at suzanne.vranica@wsj.com

(END) Dow Jones Newswires

October 24, 2016 16:13 ET (20:13 GMT)

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