AT&T (NYSE:T) is jumping in feet first with its advertising plans after closing its acquisition of Time Warner. It had an ad tech unit that's mostly laid dormant while awaiting the acquisition, but now it's quickly ramping up operations. AT&T bolted onto its advertising business with the acquisition of AppNexus, which specializes in artificial intelligence (AI) for advertising and video.
As people spend less time watching television and more time streaming digital media, AT&T and the rest of the television industry face a significant challenge in maximizing the value of the ads people actually watch on television. The industry is at a huge disadvantage compared to digital advertising players like Facebook (NASDAQ:FB) and Alphabet subsidiary (NASDAQ:GOOG) (NASDAQ:GOOGL) Google.
And marketers have noticed. Take a look at this chart that shows historical and projected U.S. ad spend on television and digital channels.
As the largest pay-TV distributor and one of the largest cable television networks, AT&T has a lot at stake. That growing gap between digital and television is both a challenge and an opportunity for AT&T. In solving its own problem, it could find itself taking a piece of every distributor and network's advertising business.
Taking TV into the digital age
Digital advertisers have something most television advertisers don't: data. The best digital advertisers, like Facebook and Google, have both lots of data and lots of ad inventory. Furthermore, with intimate knowledge of the targeting data and ad inventory, Facebook and Google are able to produce very high returns on marketers' ad spending.
AT&T wants to combine its data from its 170 million customer relationships with Turner's ad inventory to create a new kind of platform for buying television ads. Instead of using a sales team to sell ads directly, AT&T will enable marketers to buy ads in a similar way to how they buy ads on Facebook or Google.
That should lead to an improved return on investment (ROI) for advertisements bought on AT&T's forthcoming ad platform. A better ROI for marketers ought to lead to an increase in ad spend. It should also increase the profits AT&T sees from advertising since it will have less overhead.
There's a massive opportunity for AT&T. TV marketing budgets have fallen flat in recent years, but that's not entirely due to cord-cutting. It's because television ads are often an inferior product to digital advertising. They're harder to measure and test, and there's a significant barrier to entry. As a result, digital is accounting for all of the growth in global ad spend.
But marketers will spend money wherever they get the best return on investment. And with total advertising spend still growing rapidly, they've shown a willingness to spend on the right product.
It works better when everyone's on board
Google's AdWords product is excellent tool for reaching consumers all over the web. Last quarter, Google's Network Members brought in a total of $4.6 billion in revenue. The company paid out a hefty revenue share to the owners of the websites it advertised on, but it still netted over $1 billion after paying out to its Network Members.
The reason AdWords is so popular is because of the network. Google is acting as the middleman bringing to together web publishers and web marketers. AT&T wants to eventually play a similar role, but for television networks and distributors. A network that reaches beyond AT&T's properties could produce even better pricing as marketers flock to the platform to buy ads in a single place. Facebook, for example, was able to quickly grow active advertisers and total ad revenue on Instagram thanks to using a single tool to buy both Facebook and Instagram ads. If AT&T can provide a single tool to buy ads across the entire spectrum of television networks, it won't take long for it to reach a critical mass.
Of course, getting media companies on board is easier said than done. AT&T must negotiate with those companies for affiliate fees all the time. Those companies are already tying a large part of their company to AT&T -- why would they want to partner with AT&T on the rest of their business?
AT&T is now also a competitor in the space. Other networks and distributors aren't likely to support AT&T's products.
While getting other companies on board will be a major challenge, it's by no means a roadblock. There's still a massive opportunity to make television advertising become more like digital, and AT&T is in the best position to do just that.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Alphabet (C shares) and Facebook. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Facebook. The Motley Fool has a disclosure policy.