It wouldn't be television without advertisements, and they wouldn't be advertisements without a solid money-making plan behind them

IPTV is often cast into the role of cable's awkward, younger brother — following its lead to get into the TV world, but ultimately staying in its shadow. As the service struggles to come into its own, IPTV is now following cable from a business model based primarily on subscriptions to one based in large part on advertising. The nature of the ads, however, will be the key differentiator. The IPTV market is moving to a model based in part on local ad inserts and eventually to one funded primarily by dynamic, targeted ads — though the process will be decidedly slow.

“Now [service providers] are approaching advertising as gravy if they get it,” said Bernie Arnason, managing partner for Pivot Media. “It is great to have, but they are not necessarily going to build their model around it — at least not yet.”

There is a distinction between large and small service providers, however. Operators such as AT&T and Verizon, with more sophisticated business models, may rely more on ad revenues than smaller providers going forward, Arnason said. While both AT&T and Verizon declined to comment on their business plans, technology vendors and analysts agreed that it's not a question of if service providers will introduce ads into their IPTV platforms, but when.

“Clearly, since TV is an ad-supported medium, our plans are to embrace a full experience in interactive advertising ranging from traditional TV advertising to new forms of interactive advertising,” said Terri Richardson, group marketing manager for Microsoft TV, which is on pace to reach 1 million homes in the first quarter of this year.

Jeff Heynen, directing analyst for broadband and IPTV at Infonetics Research, said that as service providers adopt advertising platforms, ad revenues will become increasingly important to them, just as they did to cable providers such as Comcast, which generates between $400 million and $450 million in ad revenue each quarter. The business model for telcos, however, will not shift from a subscription-based model to an ad-supported model until the subscriber base grows significantly.

“[Advertising] is obviously a huge dollar amount that could potentially add on and justify the cost associated with deploying and signing up subscribers to IPTV services,” Heynen said. “It is going to be a while before they can even come close to those type of numbers just because the subscribers aren't there. … We are still a long ways away from moving away from that traditional method, but I think that targeting by the type of viewer and the history of viewed programs is going to be the norm at some point.”

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