Toledo, Ohio, is a long way from the huge ad agencies in New York that disburse billions of dollars to the media each year, and you don't need to consult an atlas to learn that Anchorage, Alaska, is even a little farther away. Yet somehow both are home to cable systems with a thriving local advertising business and annual cash flow running in the millions of dollars. Not bad for two systems that total fewer than 200,000 subscribers in two small cities ? and very nice cities, we're happy to inform you ? that most big advertisers wouldn't give a spit for. The two systems, owned by Buckeye Cable and GCI respectively, have grown this business without ratings, the lingua franca of the national ad world, or complex billing systems or intricate traffic operations that direct spot rotations with the flip of a switch or press of a button. They've done it without getting their calls returned from media honchos at some big East Coast-based agency, or without being part of some major MSO sales organization, such as Comcast or Rainbow.

Q1 LOCAL CABLE AD SALES DEFY AD DOWNTURN (BY Q1 '02 AD REVENUE)

	ad rev.
mso	q1 '01	q1 '02	% chg.
AOL Time Warner *	$116.0	$187.0	60.9%
AT&T Broadband	125.0	139.0	11.2
Cablevision Systems Corp.	15.0	17.0	13.0
Charter Communications @	60.5	59.5	(1.7)
Comcast Corp.	71.4	81.1	13.6
Cox Communications	69.7	79.5	14.0
Insight Communications	9.6	11.5	19.8
Mediacom Communications @	7.6	8.2	7.8
Total/Avg.	$474.8	$582.8	22.7%
$ IN MIL. * ADVERTISING AND ?COMMERCE.? @ PRO FORMA. ADELPHIA IS RESTATING FINANCIAL RESULTS AND IS NOT EXPECTED TO REPORT Q1 '02 DATA FOR SOME TIME. SOURCE: KAGAN WORLD MEDIA FROM MBD MEDIA GROUP ANALYSIS OF COMPANY REPORTS.

Steve Piller is Buckeye's director of ad sales, and it would be too convenient to say he's one of the new breed of savvy hard-driving local cable ad salesmen. Convenient but not entirely correct: An industry veteran, perhaps Piller's strongest suit is pragmatism. He knows that agencies are biased against local cable and that local cable ratings are still nonexistent. He knows that it's difficult, if not impossible, for a sophisticated advertiser to post its buy, which is a fundamental chore in TV buying departments. Piller also knows that ?an agency can spend $100,000 in five minutes and buy the top four networks, but to facilitate a hundred thousand dollar buy on cable operators is a nightmare ? a stewardship nightmare ? because you're buying so many units.?

Piller's counterpart in faraway Anchorage is Tom Egen, another cable veteran who exhibits a healthy streak of pragmatism. ?Yeah,? he says, ?we've got agencies up here that are using [only] ratings, and they want to do apples to apples [comparisons] with us. But we have to steer the conversation toward value and not eyeballs.?

There are 9,924 cable systems across the country, and many ? or at least those offering a basic package of 40 networks ? have four thirties (30-second spots) per hour to sell, which translates into about 1.4 million units a year per cable system. By any standard under the sun, moon and stars, that's a lot of commercials. And to sell these many millions of commercial units without the benefit of basic research, systems like those in Toledo and Anchorage sell ?value.? This means ?zoning? spots into ZIP codes where the advertiser might do most of his business, or running spots on rotation ? or a so-called ROS plan ? which means popping the same commercials across numerous dayparts to build cume, or audience. Some of these networks or dayparts might not be seen by the target consumer, but ? hey! ? an eyeball is an eyeball, right? It may not be the most sophisticated form of TV advertising, and it has given the local cable sales industry a reputation for being a hayseed and the country bumpkin of the vast TV advertising biz.

Reputations ? fair or unfair ? can be hard to shake, and as the cable industry heads into the 21st century on the back of whiz-bang new technologies, local sales still seem stuck somewhere in the 1950s. ?I can remember when we sold one of our first schedules to a New England retailer,? says Andrew Ward, executive vice president and director of sales for National Cable Communications (NCC), the New York-based national sales rep owned by AOL Time Warner, Comcast, Cox, AT&T and Katz Television that commands virtually the entire cable national spot business. ?They were running four thirties a night, and we were in equal rotation throughout the night; [but] when we got the affidavit, all four thirties were in the same two-minute pods. We called the system and said, ?What in the world happened?? And he said, ?Jesus, we had a terrible snowstorm and I wasn't going to snowmobile up to the head-end more than once a night.?

Executives insist that these kinds of screwups are a thing of the past. Moreover, systems like those in Toledo and Anchorage have thrived because they are, in fact, run by smart salesmen who know their markets and their customers and know that if cable brings customers into the local mattress store, then the mattress store owner is one happy guy.

The key issue, however, is this: To sell all those avails at higher prices, cable operators need to tap into the huge national spot revenue stream. And to do that, they need to get sophisticated ? and fast.

Yet there remains that nagging sense that local cable ad sales remain firmly embedded in the stone age, and as subscriber bases level off and other ways of generating revenue remain under pressure in a lackluster economy, that's not the best place to be. Local cable advertising is a gold mine, say industry executives, but local cable effectively lacks the tools ? and, in some instances, the will ? to exploit this mine.

Meanwhile, the value of this hidden treasure will only increase, say observers, as industry consolidation continues, cross-ownership rules dissolve and as advertisers increasingly look to create multiplatform buys across various media. With its ability to target specific demographics and specific neighborhoods, local cable could be used as an effective way to fine-tune these vast multimillion dollar buys, they say.

Sounds good, but, as the saying goes, you have to learn to walk before you run. Where to take your first step? The problems are deep and begin with the advertising agencies themselves, whence most money comes. Based on guesstimates, the Cabletelevision Advertising Bureau says advertisers spent $3.7 billion on local avails last year ? though much of that figure is ascribed to interconnect sales and the NCC ($500 million in gross sales last year). Kagan World Media has pegged a somewhat lower figure ? $3.4 billion in 2001. The actual figure could be higher or lower; no one knows for certain because Competitive Media Reporting does not measure local cable sales. Nevertheless, no one disputes the fact that it is dwarfed by expenditures elsewhere. Advertisers spent $14.1 billion on local television, and the newspaper industry clocked nearly $40 billion in sales from retail and classified ads in 1999 (the most recent available figures).

Arbitron recently completed a survey of 60 ad agencies across the country, and ?over 80% looked positively at local cable [for] its ability to target demographically,? says Kevin Smith, senior vice president of cable and personal people meter (PPM) business development for ARB. ?But media people would like to see better research from local cable ? more ratings, better ratings.? Smith admits the study will be used as a sales tool when Arbitron finally rolls out its PPM, which is expected to capture elusive viewer data on local cable. Arbitron may be on to something, even if that happens to be one of the biggest open secrets in local cable advertising.

Industry executives say agency bias remains, and agency executives do not dispute that. They describe a ?cultural divide? that separates the cable industry from the agency industry. ?You're talking about 10,000 cable systems, and I'd hate to brand the whole group on a couple of unsophisticated players who are working out of their garage,? says Bonita LeFlore, executive vice president of local broadcast for Zenith Media, the nation's dominant player in local TV, which spends more than $1 billion annually. ?I would say it runs the gamut from being as sophisticated as a regular broadcast entity to being very simple. One of the biggest issues is getting an invoice [for an order], which seems bizarre, but that's been a problem. There has been some improvement in back-room issues, and a lot of that stems from NCC's efforts.?

National spot and regional spot have made less-than-spectacular gains on local systems for another key reason. Agencies are paid to be hard bargainers, and when they bulk-buy inventory on a cable system, they expect a price break. Cable operators have a different perspective, though. ?Because we are so underreported, they use that to grind our rates down,? says Buckeye's Steve Piller. ?If you're getting $100 [per spot] locally and they want to pay you 20 bucks nationally and they want to buy a boatload of your prime time at 20 bucks [per thirty], then it just doesn't work.?

LeFlore says, ?This blows my mind, but apparently [advertising] is not top of mind for a lot of them because they're getting revenue from other sources. Remember, spots on small systems go for $3 or $4 or $10, but they're getting $80 for a subscription, so we're coming from two different mind-sets. The local cable operator is generating most of his revenue from subscribers, and the local broadcast buyer is really looking for the same kind of accountability and stewardship process they get from regular broadcast vehicles. And once you get beyond the interconnects, you really do not have a clear picture of what the local ratings are, [which makes it] difficult to be accountable to clients.?

As a result, she adds, ?there is one degree of separation.?

Cable, explains NCC's Ward, ?started with a utility business model. Operators saw?their job to sign up as many homes and municipalities as they could. But ultimately that mind-set was really not the same as the national or local ad sales model, which is based on supply and demand.? He says systems began to embrace advertising in the mid-'90s, but before then ?ad sales was sort of an asterisk in the overall picture. It wasn't until there was a recognition that it required a separate focus and required its own level of accountability with the organization that that cultural shift took place.? And the shift, he adds, was expedited by industry consolidation ? doubtless because heavily indebted MSOs began to scratch hard for new sources of revenue.

Kathy Crawford, executive vice president of local broadcast for Initiative Media in Los Angeles, another giant spender, explains that a decade or so ago, the average cable operator ?was having a nice life, and why in the world would this guy want to go out there and beat the bushes [for ad revenue] when he's got plenty of money and doesn't have me screaming at him because his invoices are coming in three weeks late. Then AT&T comes along and buys him, and I pick up the phone and call an AT&T muckety-muck and say, ?Listen, I don't want anything to do with the system because it never cared about my business and didn't run traffic reports when I needed them to. They're living in a different world, and their world just isn't the same as mine.? All of a sudden, you-know-what hits the fan, and they are now starting to improve.?

Yes, many local cable operators have spent lavishly on commercial technology, like automated traffic systems, electronic billing and invoicing. Many have had to do this because they are part of a huge corporate interconnect, like AOL Time Warner or AT&T. ?Our traffic insertion system enables any agency to send us one piece of copy and distribute it into over 32 different systems,? says Mike Wach, executive vice president of sales for Rainbow Advertising Sales Corp. A few years ago, he said, an agency would have to send out ?32 different tapes.?

But all the high-tech in the world won't solve local cable's leading problem: ratings. Viewing of local cable in most markets remains a vast blank spot. No one knows who's watching or when. Diary surveys take place only four months a year, but even those do not tabulate cable viewing. So-called zero cells in ratings reports do determine that some cable viewing is going on, but for which networks? No one has a clue, which is why they're called zero cells. Meanwhile, ongoing people meter trials ? like the ambitious joint test between Nielsen and Arbitron in Philadelphia, which is trying to capture specifics on both radio and cable viewership ? are still far from market-to-market rollout.

Larry Fischer, president of AOL Time Warner Cable Advertising Sales, says results from these studies ?are quite interesting. What [they're] showing is that the top-tiered networks are not showing any significant spike, but the more niche networks are showing much more significant audience.?

CABLE AD BILLINGS COULD TRIPLE BY 2012

year	cable network*	local cable spot*	regional sports cable*	total cable*
1999	$8,849	$2,667	$364	$11,880
2000	10,673	3,240	424	14,337
2001	10,494	3,240	442	14,176
2002	10,881	3,337	455	14,674
2003	12,085	3,604	510	16,199
2004	13,647	4,091	571	18,308
2005	15,456	4,704	634	20,795
2006	17,647	5,363	710	23,720
2007	19,764	6,060	788	26,612
2008	22,136	6,787	875	29,798
2009	24,350	7,534	953	32,837
2010	26,785	8,287	1,039	36,111
2011	28,927	9,115	1,122	39,165
2012	31,242	10,027	1,212	42,480
SOURCE: KAGAN BROADBAND ADVERTISING, JUNE 7, 2002 *IN MILLIONS

Right now, though, that won't help local operators much. Changes, however, are coming. ?Cable will pass broadcast on a national basis next year, but when you look at local audience, it disappears from view and you say to yourself, ?Somebody's nuts,?? says Joe Ostrow, president of the CAB. But in a key development, Ostrow says the CAB has forged an agreement with Nielsen in which the ratings service will adjust its ?hurdle rate? next year. One reason cable has gone unmeasured, he says, is that it had to cume from 15% to 40% of the total audience in one week, while broadcast's ?hurdle? was only an 8% or 9% cume. But cable will now have the same hurdle rate, and beginning in the middle of next year, cable ?will start to see numbers you never saw before.?

Meanwhile, local cable systems will continue to do what they've always been doing, at least when they have a mind to. ?The local advertiser will always rely on his or cash register more than anything else,? says Ostrow. ?They're very much like the direct response advertiser. They'll try anything once. If it works, they'll come back. If it doesn't they'll move on to something else.?

Fine for cable operators like those in Toledo and Anchorage. Imagine, though, how much bigger this business could get. Or, phrased a different way, how much could advertising sales contribute to the retirement of all that debt that is keeping MSO stocks in the cellar?

This channel is worth watching.

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