In Case of Emergency, Break Rules

Funny things can happen when you break the rules. Just ask the likes of HBO.

Rule Breaking, the investment concept pioneered by Fool co-founder David Gardner in the Rule Breakers newsletter, goes something like this: Every once in a while, a new company emerges, sees how everyone else is doing business, and finds little chance of beating the others at their own game. So it changes the rules instead.

Chess becomes checkers as the upstart begins hopping madly around the board, periodically shouting "King me!" to the opponent's chagrin. And all the while, rooks, bishops, and pawns fall to the new kid's circular kings. Basketball season gives way to baseball, and freakishly tall men cry "foul."

And in business, broadcast television yields to the age of TiVo (Nasdaq: TIVO  ) .

Change is strange
The thing is, though, that once you show that rules are malleable, the idea can become contagious. New changes unforeseen and unforeseeable begin to spin off. Take the TiVo example. When the company set up shop and empowered television viewers to "pause live TV" and skip merrily past commercials, cable and broadcast TV faced a quandary. A new form of entertainment had been born.

Aside from the limiting factor of needing to wait for a program to be released, TV viewers could now watch their favorite shows whenever they wanted. This played havoc with the best-laid plans of mice and marketing men. No longer could ABC know for certain that introducing a new show in a time slot adjacent a hit like Lost would boost the new program's numbers. TiVo users who programmed their machines to record Lost but not the new offering might never know the new show had even aired.

But more important than TiVo's effect on network scheduling was its effect on the networks' bread and butter: advertising. TiVo threw the advertising world a curveball when it enabled viewers to avoid watching commercials altogether.

This space for rent
And so we entered the brave new world of product placement. Toyota (NYSE: TM  ) nabbed a full episode of The West Wing devoted almost entirely to praise of the Prius. Cisco Systems (Nasdaq: CSCO  ) fought terrorists on 24.

Both of those moves were predictable, to an extent. Product makers must advertise their products -- otherwise, how would we poor consumers know what to buy? Once we stopped watching their 30-second commercial interruptions, they had to build the ads into the programming itself.

Plenty of people predicted that this would happen on the advertising-supported broadcast and cable networks. My Foolish colleague Alyce Lomax called the trend correctly more than two years ago. But up until very recently, in-your-face product placement was limited to the realm of advertising-driven "free" TV and basic cable.

One realm of television, meanwhile, remained blessedly product-placement-free. On "premium" cable channels, viewers pay a monthly subscription fee that's supposed to finance the programming, thus making advertising revenue unnecessary.

Unnecessary doesn't mean "unwanted"
Oh, sure. You occasionally saw products inserted into the pay programming as well. But nothing like what's been going on this year. It seems that HBO, the premium television arm of Time Warner (NYSE: TWX  ) , has decided to go whole hog (or, if you prefer the parlance of the trade, to "jump the shark") this year.

To further populate this metaphorical zoo, the guinea pig in HBO's experiment is the new polygamist drama Big Love. As David Spade on The Showbiz Show put it a couple weeks ago: "Try to get through HBO's Big Love without buying something."

Here's a sampling of just a few of the companies that appear to have been padding Time Warner's bottom line at the expense of an audience that thought it had already paid for admission:

  • Primedia: hawking subscriptions to teeny-bopper rags Bop and Tiger Beat.
  • Gap: promoting shopping as therapy.
  • Gap rival Sears Holdings: promoting its new Land's End brand.
  • Timberland: boots.
  • Bayer: maker of Midol.
  • Apple: hoping to move its ubiquitous iPod a little further toward actual omnipresence.
  • Unilever: maker of the peanut butter polygamists prefer -- Skippy.

Say it ain't so, Joe
I suppose it's possible that HBO incorporated all of these name-brand products into its programming for free and out of the goodness of its corporate heart -- but I suspect the contrary. And if it's true that HBO is now placing commercial pitches in its programming for hire, then TiVo isn't the only company breaking rules in the television advertising world.

For the record, I contacted HBO before writing this column and invited the company to reiterate or retract its position (registration required to view), stated in response to a Chicago Tribune question regarding The Sopranos, that "We absolutely do not take product placement." As of this writing, HBO had not replied either way.

The HBO strategy is not without risks. By requiring its subscribers to pay twice for its programming -- first in cash, then in annoyance -- HBO could alienate viewers and/or generate the kind of negative press that makes corporate PR flacks suffer migraines. But breaking rules is all about risk ... and reward.

Adding paid product placements to its paid-subscription business model will add advertising revenue to HBO's subscription revenue stream and significantly increase its value to Time Warner. And that's worth breaking a rule or two for, don't you think?

If you're the type of investor who enjoys breaking the rules every now and then and finding investments that do the same, try a free 30-day guest pass toMotley Fool Rule Breakers. The average Rule Breakers pick is beating the market by more than 21%.

Gap, Time Warner, and TiVo are recommendations ofMotley Fool Stock Advisor, and Unilever is a recommendation ofMotley Fool Income Investor.

Fool contributorRich Smithdoes not own any of the companies named above -- none of which amounts to a product placement. They're disclosures, made to avoid even the appearance of a conflict of interest.

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Rich Smith

As a defense writer for The Motley Fool, I focus on defense and aerospace stocks. My job? Every day of the week, I'm monitoring the news, figuring out the winners and losers, and tracking down the promising companies for you to invest in. Follow me on Twitter or Facebook for the most important developments in defense & aerospace, and other great stories.

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