Sky UK – written evidence (ADV0029)

Response to the house of lords Communications committee inquiry into the future of the UK’s advertising industry

Sky welcomes the opportunity to respond to the House of Lords Communications Committee inquiry. Sky has a unique perspective for the inquiry: as the second largest television advertising sales house in the UK, Sky Media, and as one of the UK’s largest advertisers, we sit on both the buy side and the sell side of the UK’s advertising value chain.

The following evidence addresses primarily the digital elements of the Committee’s questions. We have seen the Advertising Association’s response and in relation to the first ten questions, as the industry’s trade body, we share their views on the skills, research, clusters, entrepreneurship and international issues.

As a summary we would note the following points:

1. Television advertising remains a vital and flourishing part of the advertising ecosystem. Not least because television advertising funds the production of high quality content.  Television advertising is digital advertising and one of the challenges the TV advertising industry faces is being talked down as ‘old world’. TV has well-recognised brand building strengths which combined with shorter term targeted advertising such as Sky AdSmart makes it more powerful for advertisers than it has ever been.

2. Innovation has helped to extend TV advertising to small and medium enterprises (SMEs) allowing them to take advantage of the returns offered by TV for the first time. Sky is very supportive of the Advertising Association’s work to build local advertising advice hubs and their call for this to be matched by a fiscal incentive from Government.

3. Television advertising is best practice when it comes to regulation and responsibility. There are highly prescriptive, detailed rules protecting minors that are monitored and enforced, particularly around health, well-being, body image, racial stereotypes, offensive content, pornography and many more categories. There is a complete prohibition in the UK on political advertising and very strict parameters around product placement and sponsorship. Every single advertisement that appears on broadcast television is pre-cleared for compliance with regulation prior to being aired. There is rigorous evidence that the rules work and that TV is the safest ad environment for children.

4. Online content, by contrast, is almost wholly unregulated and even though online advertising copy is regulated in the UK there are few rules and even less transparency around the placement of advertising (for example there is no concept of the 9 pm watershed online).  In contrast to broadcast, there is a significant amount of political advertising but with no transparency about the executions or amount of spend. Given these asymmetries it is surprising there is often a focus by pressure groups on already strict TV rules and a lack of understanding about the impact of digital media and the dangers of a world where the vast majority of video content is unregulated. The Government should look to address those asymmetries and hold online content and advertising to the same standards as television.

5. There are a number of problems and inefficiencies with online advertising that lead to poor outcomes for advertisers, media platforms and society in general. At its worse online advertising can inadvertently fund illegal and unacceptable content such as terrorism and hate speech. Online advertising should be held to the same high standards of transparency, safety and measurability as television advertising.

6. The Government has an important role in encouraging industry best practice for online advertising, but as part of the digital charter process should be prepared to take legislative action if safety, fraud and transparency problems are not resolved.

Section 1:   television and adapting to digital media advertising

Question 11: How is the UK advertising industry adapting to the shift to digital media advertising? How does this compare to other countries and other industries?

Question 12: What is the future of television, print, radio, out of home and other forms of non-digital advertising?

Question 8: What role do entrepreneurs, start-ups and Small and Medium Enterprises (SMEs) play in the UK’s advertising market? 

TV advertising remains as powerful and effective as it has ever been

1.1            Television remains a fundamental part of consumers’ media consumption in the UK. While the distribution mechanisms have expanded from purely broadcast channels to video on demand, linear TV remains very important to people’s lives. 86 per cent of standard viewing is live, which equates to around 3 hours and 32 minutes each day.[1]

Thinkbox: Television viewing as a proportion of all video viewing

1.2            Many of the media buyers, analysts, policy makers and journalists who consider the future of television and digital media are based in big cities, are often time poor and consequently watch much less television than the average UK person. There is a danger that these influential people try and second guess the future of video and in the case of media buyers choose where to spend advertising budgets based on their own media consumption. Thinkbox is the TV sales houses’ marketing body set up to promote television advertising and debunk some of the myths that describe TV as a declining advertising model in the face of new online media platforms.

1.3            Media consumption has undoubtedly changed significantly in the past decade with online video now accounting for a significant minority of people’s media attention. However, TV advertising remains the most effective advertising medium, especially for successful mass marketing. It still commands the vast majority of the time people spend watching video advertising, as the chart below shows.

Thinkbox: Proportion of viewing to video advertising per day

1.4            A recent IPA study – ‘Marketing Effectiveness in the Digital Era: Media in Focus’ (2017) – shows that TV is the most effective form of advertising and is getting more so.               TV increases effectiveness by 40%, more than any other medium. During 1980–1996, adding TV gave an average 12% increase in business effects, which increased to 40% during 2008–2016. The report explained that TV is best for generating top-line growth that drives profit.

Television advertising funds investment in original content

1.5            There is a virtuous circle of content investment where advertising revenue drives investment in programming and original content, which in turn drives increased viewing figures generating more advertising revenue.

1.6            Advertising revenue is one of the most important revenue streams for the creative industries. It enables investment in content, particularly original programming. If advertising restrictions resulted in a proportional loss in revenue, this would have an impact on the whole of the commercial television industry.

Background on Sky Media

1.7            Sky broadcasts a number of commercial television channels in the UK.  Our advertising sales house, Sky Media, represents all of Sky’s television channels and sells on behalf of a range of broadcasters and channels including Channel 5, Discovery, National Geographic, HISTORY, MTV, FOX, Universal, and Comedy Central. Sky Media represents over 130 channels reaching 80% of the UK population each week.

1.8            Sky Media is one of Europe’s largest advertising businesses with revenues around £1.2bn p.a. We have a 33 per cent share of the UK’s television advertising market, in comparison to ITV, which has a 34 per cent share and Channel 4, 28 per cent.

1.9            Sky Media’s advertising business is built on video advertising with television advertising as the lynchpin. We sell a range of advertising formats including linear television spots, out of home spots (in pubs), sponsorship credits, online display, programmatic advertising, advertising around on demand content, targeted television advertising (AdSmart), and display and video advertising in apps.

1.10        Sky Media has embraced digital and online advertising, innovating in a number of formats, types of inventory and measurement. We see the strengths of our business based around scale ‘traditional’ television advertising across a range of broadcasters, combined with data-driven targeting and a focus on measurement, transparency and trust.

1.11        Sky has invested in market leading data capability in order to create targeted and measurable television advertising. We manage one of the most granular viewing panels in the world with second by second viewing data across a panel of over half a million customers.

1.12        Sky Media’s digital portfolio includes a range of premium websites and apps which reach 22.2 million monthly unique users and 44% of the UK’s digital population. These include Sky Sports, Sky News and Viacom websites and apps.

Sky AdSmart and addressable TV advertising

1.13        Innovation is key to the future of television advertising and enables broadcast sales houses such as Sky Media to compete with global players. The core of our advertising offering is premium content, and we have combined this with new technology and sophisticated data analysis to introduce targeted television advertising in live television. Sky AdSmart allows different ads to be shown to different Sky households watching the same programme. This means brands and businesses can advertise against popular content, but only to the precise audience they want to target.

1.14        The control and precision offered by Sky AdSmart is making TV advertising more accessible and more effective for brands, and over 70% of the advertisers using Sky AdSmart are new to TV or new to Sky. The technology has opened up television advertising to a broader market of niche brands, small and medium businesses (SMEs) and location specific advertisers. Historically many advertisers have not deemed TV to be part of their marketing mix due to its mass approach and cost. Making a TV ad is seen as expensive, but low cost video production combined with Sky’s targeting capability has made it a viable option.

1.15        Media cost and ad creative development costs are regularly raised as a barrier when we discuss AdSmart sales with SMEs. In response Sky set up an ad creative fund and advice service that enables brands to get over the initial hurdles of advertising on television.[2] Sky Media has also produced advertising templates that new to TV advertisers can drop their video content into and adjust to suit their brand. This removes some of the creative costs that makes TV seem less accessible to local and regional advertisers.

1.16        Sky AdSmart works by using the household data stored on the Sky+ HD box.  Relevant ads for that household are sent to the box via satellite. When a Sky AdSmart opportunity is identified during an ad break, the box will choose the most relevant stored ad to play based on the household data held by the box. The ad is then seamlessly inserted into the ad break.

1.17        This year we signed up Viacom to Sky AdSmart and Channel 5 became the first PSB to use the service. We also entered a targeted advertising partnership with Virgin Media in the UK and Ireland, which will enable Sky AdSmart to launch on the Virgin Media platform next year.

1.18        Targeting and data is key to the future of television advertising. Sky AdSmart enables us to segment households by 900 categories and use other data sets to make sure the advertising served is as relevant to the customer as possible.

1.19        Sky AdSmart is also a responsible platform with regards to targeting. We deliberately don’t advertise to segments smaller than 5000 households, to protect our customers from intrusive advertising and breaking their trust when it comes to using their data.

Case Study: Local advertising on AdSmart

Richardson’s Garden Centre is a family run business based in the North East and have always used local radio and Newspapers at key times to promote the business. Sky AdSmart gave them the opportunity to create more complex and targeted local advertising campaigns.

They have a relatively small budget and because of this it is important that they see a return on any marketing strategy. George Richardson, Owner commented, “We were introduced to Sky AdSmart by the Sky AdSmart North East representative who has managed our Christmas and Easter Campaigns whilst working with HT Media who produced our adverts.  What is great is that the whole campaign for the year has cost us under £10k and Christmas has seen a 17% increase in sales”.[3]

Television is best practice when it comes to responsibility

1.20        TV advertising is held to a much higher standard of responsibility and safety than other forms of advertising. The Communications Act 2003 sets out a regulatory framework for television advertising where it is the broadcaster’s responsibility to make sure all advertising is compliant. This aligns with the strict regulation of television content set out in Ofcom’s Broadcasting Code. This contrasts with online media where the platform has no responsibility it is the advertiser’s responsibility to ensure they are compliant with the self-regulatory UK Code of Non-broadcast Advertising and content and context is largely unregulated.[4]

1.21        Sky and other broadcasters are proud of this higher standard, which gives brands that advertise on TV a stamp of quality and credibility. We recognise the power of television advertising and our responsibility to exercise that power with care.

1.22        The BCAP code only legally applies to linear television content, but Sky Media voluntarily ensures that our non-linear advertising and placement complies with the code and the spirit of the provisions. We ensure that potentially problematic clashes of advertising are avoided so that, for example, car advertising is not placed next to alcohol advertising.

1.23        TV advertising is also virtually immune from fraud. BARB appoints reputable and robust third-party research agencies who provide a statistically robust establishment survey on which viewing panels are based. The problems associated with the long tail of internet publishers and automated ad trading described below are not evident in highly scrutinised and regulated businesses such as the TV broadcasters.

Television content and television advertising is highly regulated when compared to online advertising

1.24        Television advertising is far more heavily regulated than any other advertising medium and although it is already covered by robust existing legislation, when advertising restrictions are mooted it is often TV advertising that is put in the frame first despite its already high standard of responsibility.

1.25        As the table below shows there are very detailed and highly prescriptive rules around television advertising.

High level comparison of regulatory frameworks for television and online advertising

1.26        Recent Ofcom research found that parents are more likely to be concerned about the time their child spends online or using their mobile than watching TV and watching TV is increasingly seen as a family activity and not as ‘screen time’ that needs to be limited and controlled.[5] Parents are also more likely to say they are concerned about online content than they are about TV content. Given the regulatory difference in protection this is not surprising.  But as the research also shows that YouTube is often a preferred content destination for children - the lack of regulation and the free availability of harmful content should be a high priority for policy makers and addressed in the Government’s Digital Charter process.

1.27        The code on the scheduling of television advertising sets out the rules that broadcasters must comply with when carrying advertising.[6] For example it sets out that TV advertising must be readily recognisable and distinguishable from editorial content, that the integrity of a programme must be preserved when scheduling breaks and that only a certain number of breaks are allowed. These highly detailed rules are not replicated anywhere online. While some of these rules are overly prescriptive, they do provide protection for viewers and a guarantee of a safe and responsible environment.

1.28        To highlight the contrast, recent Ofcom research shows that recognition of advertising online is poor among children: despite ads being distinguished on Google by a box with the word ‘Ad’ in it, only a minority of 8-11s (24%) and 12-15s (38%) who use search engines correctly identified sponsored links on Google as advertising.[7] There is also a false sense of trust among children about content found online with many children assuming that if content is found on search engines and social media it can be trusted. Broadcasters and regulators ensure that all television content is accurate and not misleading. There is enforcement and sanctions to make sure TV is viewer and therefore brand safe.

1.29        Imposing additional regulation on television, without due evidence of harm, could erode the long-term competitiveness of television as an advertising medium and is likely to drive advertisers to less regulated areas online or to below the line marketing such as offers. Policy makers need to be wary that the TV advertising market is already under significant pressure as a result of economic pressures; TV market revenues are set to be down 3.5% in 2017 and 2018 revenues are likely to remain flat.  The risk of further regulation and unnecessary regulatory reviews creates uncertainty for those investing in television advertising and may mean they take the path of least resistance and shift spend online.

Political advertising

1.30        The Committee might want to look more at the example of political advertising. There has been extensive coverage in the US about the transparency of political advertising online and on social media. A Bill has been introduced to the US House of Representatives called the Honest Ads Act to increase the transparency of political ads published online. The contrast between TV and online regulation in the UK is particularly stark.

1.31        On UK television political advertising is prohibited by the Communications Act 2003. The BCAP code sets out that “The term "political" is used in the Code in a wider sense than "party political". The prohibition includes, for example, campaigning for the purposes of influencing legislation or executive action by local or national (including foreign) governments.”[8] This means that charities are also excluded from campaigning advertising. Importantly the responsibility remains with Ofcom rather than given to BCAP as the co-regulator.

1.32        Not only are political ads allowed online in the UK, there is no regulation on transparency. There is no way of knowing who may have paid for a political ad or how much investment they have made and therefore what reach the ad may have. In fact the CAP code even says that political ads are exempt from the requirements of the code including prohibiting misleading claims.[9]

Section 2:   Digital media Markets

2.1            Taken as a whole, the digital advertising market is not fair and open. Much of this comes down to a lack of transparency in a highly complex value chain and a historical poor level of standards around responsibility. While there are a number of positive industry initiatives such as JICWEBS[10] and the IAB Gold Standard launched in October 2017[11] there is a long way to go before online advertising meets the high, regulated standard that TV is held to.

2.2            We would highlight three main areas that need to be addressed by both industry, regulators and policy makers:

(a)        Brand safety and online advertising as a funding model for illegal content

(b)        Transparency

(c)         Advertising fraud

2.3            As one of the UK’s largest advertisers Sky would like to see media platforms and online vendors of advertising be required by Government to rectify the problems described. When Sky negotiates new advertising deals and partnerships, the degree to which platforms address these issues conditions our investment. We expect platforms in particular to abide by high standards, something they are only beginning to demonstrate.

2.4            There are several ways these issues might be addressed:

(a)             Recognition and public debate: Issues such as brand safety and ad fraud needs to be more prominent in both industry discussions and within Government. The links to cybercrime and cybersecurity need to be directly drawn out by the Government and policy makers. Greater public profile will mean more investment in prevention by the bigger players and faster adoption of technical standards.

(b)            Industry action: Participation in industry groups such as the Digital Trading Standards Group needs to be mandatory for all players in the UK online advertising chain (even foreign-based organisations). Brands such as Sky will highlight the problems and ensure that players in their advertising value chain take sufficient action to increase transparency and prevent fraud – but a degree of public pressure is also key.

(c)             A coordinated approach: Efforts to tackle ad fraud have been isolated and piecemeal to date. A coordinated approach is necessary. The Government should convene roundtables with all sides of the industry to encourage more progress.

(d)            Enforcement: The police and the courts need to be prepared to take action to discover and prevent fraud where it occurs. Industry groups will need to be prepared to support law enforcement with technical expertise and analysis.

The ASA system

2.5            Sky is very supportive of the Advertising Standards Authority system of advertising based on self and co- regulation. The system does its best to align the regulation of advertising content so that similar rules apply to broadcast and non-broadcast advertising. The system has also adapted to take account of online advertising in the UK. Nevertheless, the regulation of television advertising operates under a very different framework than non-broadcast advertising. Importantly, the responsibility for broadcast advertising ultimately resides with the broadcast licence holder and if advertising is not compliant it is the broadcaster who risks their licence to operate. There is no equivalent for online advertising where sanctions and enforcement are not applicable to online platforms.

2.6            The ASA system is funded by the Advertising Standards Board of Finance and the Broadcast Advertising Board of finance which collects a small levy from advertisers. [12] Advertisers are increasingly spending money directly with online platforms rather than through agencies, so it is important that the funding model evolves. Given the dominance of a few online platforms in online advertising in the UK it is important they have systems in place to encourage and easily allow advertisers to pay the voluntary levy. It is right to question whether the balance of funding and the principles on which the funding of a strong self-regulatory is still working.

Brand safety and online advertising funding illegal content

2.7            The online advertising value chain is highly complex with ads often bought in an automated way and placed across a number of sites. This results in a risk of ad misplacement, where ads are placed against content that may be inappropriate for the advertiser for commercial reasons (e.g. irrelevant audiences for a particular brand) or more seriously inappropriate in a broader societal context (e.g. against illegal, harmful or offensive material).

2.8            Sky and other large advertisers have been vocal about the problems of brand safety, which have come to light in the press in the past year. In February 2017, the Times found a Sky advert running against a YouTube video uploaded by David Duke, a white extremist. There was extensive press coverage and in response YouTube took a number of steps to mitigate advertising being placed against unsuitable content.[13] This includes strengthening installing additional controls around sensitive subjects and updated machine learning models.

2.9            The press coverage around brand safety drew attention to a problem that has been present for as long as online advertising has existed. This has not only damaged the reputation of brands for over a decade, but has also meant that online advertising has been a viable funding model for illegal content such as terrorism material and copyright infringement and other unacceptable content such as fake news.

2.10        While media platforms, agencies and ad networks aim to target specific audiences the volume of content online, the automated nature of placement and benign neglect has allowed ad misplacement to continue. The fact that steps have been taken to address brand safety when it has been subject to increased scrutiny shows that increased investment in tackling the problem can mitigate some of the harms. But that this investment is only forthcoming when there is sufficient jeopardy for the ‘value chain.’

2.11        Sky has its own brand guidelines which we provide to advertising partners. Our ambition is that all the media platforms and vendors we work with should be able to demonstrate that they have established pre-vetting procedures and policies in place before placement of Sky advertising.

2.12        Worryingly, while commercial pressure and press attention has made media platforms address brand safety this has often only meant that brands’ ads are not shown against the content, not that the content itself is removed or even that it is not monetised (blank ads are often placed that still pay out to the content owner).

Transparency

2.13        There are a number of structural problems in the online advertising market that means that, according to some estimates as little as 40p in each pound spent by advertisers reaches the publisher whose content the advertising is served against.[14] There are a large number of tech platforms, agencies and exchanges that are involved in any online advertising transaction, but several studies have demonstrated it is very difficult for advertisers and publishers to understand the true value they’re selling or buying with programmatic advertising. A report by US and Canadian advertisers associations published in May 2017 concluded that

Based on the range of transparency roadblocks encountered, advertisers may find it difficult to manage measure, and audit their programmatic media investments with the same rigour as they manage traditional media investments. If left unchecked, this could lead to substantial economic consequences for advertisers[15]

2.14        Viewability is another industry issue inspired by a lack of transparency. Viewability is an online advertising metric that aims to determine whether an ad impression had the opportunity to be seen or not.[16] Advertisers need to know whether any person had the opportunity to see their ads. The IAB defines viewability for video advertising as 50% of the ad in view for two consecutive seconds. On the buy side Sky does not want to pay for any ad impression that is not human and not viewable.

2.15        Television advertising does not have a viewability problem because of a transparent measurement framework. While it is never possible to guarantee someone has paid attention to any ad, television is held to a high standard. For example, advertisers and agencies will not be charged for ads that are fast-forwarded through on Sky+ and SkyQ boxes.

2.16        There is also not a clear industry understanding and currency on measurement of online advertising. Unlike in TV where BARB sets an open and transparent measurement framework, there is no shared measurement currency for online video, which means advertisers are not always clear on the product they’re buying and how comparable they are. We fully support ISBA and the IPA in their efforts to establish an industry agreed, objective and independently audited cross-digital audience measurement currency.

2.17        The same reports referenced above concluded that when allowances are made for whether an ad is viewed by a human and not a bot, is viewable to a reasonable level and is served in a brand safe environment, the value of the advertising to the advertiser could be reduced by a further 80%. This means that for every pound invested in online advertising advertisers and brands could be getting as little as 10p of value.[17]

Advertising fraud

2.18        Advertising fraud is a global problem and very prevalent in the digital ecosystem. There are four broad forms of advertising fraud, the first three of which lead to financial harm for advertisers and the last deprives publishers of revenue:

(a)             Invalid Traffic: traffic or clicks on ads from non-human entities or ‘bots’ on the web

(b)             Malware: whereby fraud software is unwittingly installed on users’ computers or mobile devices to replicate or repeat clicks and views

(c)              Inventory fraud: where advertising inventory is sold against publishers or ad exchanges that don’t carry that inventory. E.g. if Sky News inventory was listed for sale when the seller had no Sky News inventory

(d)             Infringed content: content lifted from legitimate publishers and served with advertising space on a fraudulent site

2.19        It is very difficult to estimate the amount of ad fraud globally, and even more difficult to calculate how much of this affects or can be attributed to the UK. Estimates range from 2% of all global ad traffic to 90% on some platforms.[18] Measurement is difficult because the online advertising value chain is highly complex and fraud can be carried out by a variety of different technical measures with fraudsters skilled in working around prevention methods.

2.20        Given this measurement problem, the amount by which estimates of ad fraud vary by is often determined by the interest the reporting body has in tackling ad fraud. Nevertheless, we are confident that a significant amount of ad traffic is fraudulent and that the impact on the UK advertising industry is in the tens of millions of pounds each year.

2.21        The costs of ad fraud are borne directly by brands and advertisers who do not get the reach, views and clicks they pay for or publishers being deprived of advertising revenue which may be going to fraudsters instead. However, the direct cost is not visible as the cost is contained within the quality of digital advertising. Ad fraud means brands are not getting the quality of advertising they are paying for, which translates into lower sales and less productivity in the digital economy.

2.22        Ad fraud is a serious cybercrime, and it is unlikely to be carried out in isolation from other kinds of organised crime given its profitability. Businesses of all sizes use online advertising to grow their businesses. Ad fraud and the other problems with online programmatic advertising are creating a check on digital growth.

October 2017

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