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STRATEGY

The Biggest TV Network You've Never Heard Of

Michael Stern started PRN with this insight: If most people make their buying decisions inside the store, why not show them commercials inside the store? Because Stern didn't let his ego get in the way of a great idea, he's now got 180 million people watching -- and buying.
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The more you learn about the PRN television network, the more improbable and impressive its success seems. Although PRN's studios, which share an unremarkable San Francisco office block with a country music station known as "The Bear," are a far cry from the glitzy studios of, say, the Today show in Manhattan, PRN is anything but bush league. In fact, it charges a who's who of advertisers the same rates that cable channels charge for prime time, and it claims more than 180 million monthly viewers, making it the fifth largest network in the U.S. -- lagging only Fox and the big three.

Oddly enough, it manages to attract all of those viewers even though it doesn't play on any residential cable systems and even though compared with broadcast TV -- with its 18 minutes of ads each hour -- it feels like an interminable chain of shill. Put simply, although PRN's CEO describes one of his network's programs as "our equivalent of Desperate Housewives," its shows have no sex appeal (or plots) and certainly would never be called "appointment TV."

But PRN is the biggest television network you've never heard of because of these traits, not in spite of them. Its name stands for Premier Retail Networks, and it is the in-store ESPN of consumer products. In industry argot, PRN is by far the largest network in the domestic "narrowcasting" niche, the business of sharply targeted "out-of-home" networks that was born of the fragmentation of traditional television audiences. PRN responded to the fragmented media landscape with a question elegant in its simplicity: Considering that about 70% of brand-buying decisions -- Charmin or Cottonelle? -- are made inside the store, why not try to get relevant ads in front of shoppers at the moment of decision? "Where else," asks Jim Wiatt, CEO of William Morris and a PRN board member, "can advertisers get the message out better?"

Today, PRN can be seen in more than 6,000 stores. Its biggest channel is Wal-Mart TV, but its clients include Sears, Best Buy, Circuit City, SAM's Club, Costco, Ralphs, Pathmark, ShopRite, and Albertson's. Each month, according to the market research firm MRI, 81% of U.S. adults shop in a store with a PRN network. As a result, the company has been able to raise $77 million in venture capital, file with the SEC for an $89.5 million IPO, and, yes, turn a profit, taking home $10 million in 2003 (the most recent full-year profit data it will release) on revenue of $112.1 million.

And the industry is just coming into its own. Norman McLeod of InfoTrends/CAP Ventures, a Weymouth, Mass., consulting and research firm, expects the domestic narrowcasting business to grow from $613 million in 2004 to $2 billion in 2009. But PRN still faces challenges. It is adamant, for example, that it be evaluated (and paid) according to traditional Nielsen measures such as audience size and brand recall -- even though new technologies like Arbitron's Portable People Meters are helping companies measure more exactly how well (if at all) advertising really works and some competitors, analysts, and advertisers are asking why in-store networks shouldn't be judged on how much they juice sales rather than on how many people watch the screen. On top of that, PRN is heavily dependent on one customer: Wal-Mart, which last year accounted for 87% of its revenue. And as PRN entered the new year, it faced this daunting reality: Its Wal-Mart contract was set to expire in March.

PRN was the brainchild of Michael Stern, a tall, laid-back New York City native. After graduating from Dartmouth's Amos Tuck School of Business, Stern spent just enough time working at Clorox to realize that in the world of packaged-goods marketing he was "a square peg in a round hole." So he engineered an extreme career shift by founding Sourdough Puffs, a (pre-Atkins) restaurant chain that sold sourdough pastries topped with strawberries and whipped cream and other decadent things. After the chain grew to about a dozen locations, he sold it.

Like many entrepreneurial endeavors, Stern's next Big Idea arrived in "Why not?" regalia. For centuries, the in-store marketing side of retail had been, in Stern's words, "just stacking products on the shelves and hoping that people take them before you have to dust them again." He figured there had to be a way to talk to consumers inside the store. So in 1992 he took a several-hundred-thousand-dollar mortgage on his family's Mill Valley, Calif., house. "It was stressful," says Stern's wife, Denise, who worked a steady job as a director of investor relations at Pacific Telesis Group (now part of SBC Communications) while Stern and two partners founded PRN. "But we didn't have options because we didn't have cash to put up." The technology that Stern developed took the form of kiosks designed to sell CDs. Housed in each seven-foot-tall box was an interactive laser disk station that let shoppers sample about 100 music clips.

Early on, Stern realized he would need more money and an executive with more operating experience. Through a broker, he met Jeffrey M. Cohen, the founder of Washington, D.C.'s upscale Sutton Place Gourmet (now Balducci's), who bought the company for an amount he won't disclose and took over as CEO. "There wasn't a real business there when I came in," says Cohen. "I hired Michael back because he was the biggest asset. He needed some help scaling it and operating it, but he was really good at what he did and had a great technology."

Many founders rail against losing the chief's role, but the 53-year-old Stern says he wasn't bothered at all: "It would be stupid of me to think, 'I started this. It's my company.' Bull -- -- . I've never had an issue with not being CEO. My wife tells me that's why I'm going to live to be 100." Stern is now executive vice president of business development.

Stern and Cohen convinced Kmart and Wal-Mart to put their music kiosks in several hundred stores -- where it turned out they made little impact. "You have to stand in line to use it," says Stern. "You spend two minutes playing with it, and if we're lucky there's someone waiting in line behind you."

But he and Cohen had noticed something: "There are tens of millions of dollars of TVs hanging in every Best Buy, Sears, and Wal-Mart playing the stupidest stuff," Stern says. So they used money from early investors such as the State of Michigan and the Ethos Fund, which put in $10 million together, to buy two tiny start-ups that had nascent networks in electronics departments. In 1996 they bought AdVenture Media, which provided in-store media to Sears, and in 1997 they got Stopwatch Entertainment Network, which did the same for Best Buy and Circuit City.

"I was in a Wal-Mart the other day, at the TV wall, and I saw a Sears ad playing on Channel 7. How do you guys feel about advertising sears in your stores?"

Then Stern went after the biggest fish. He spotted Wal-Mart's H. Lee Scott Jr. -- then head of merchandising, now CEO -- at an industry event in December 1996 and waited in line to shake hands and deliver his elevator spiel: He could offer Scott a controlled way to communicate with all of Wal-Mart's customers every time they come into a store. Scott asked him what he was doing in two weeks. It was at that meeting that Stern used his best line: "I was in a Wal-Mart the other day, at the TV wall, and I saw a Sears ad playing on Channel 7. How do you guys feel about advertising Sears in your stores?"

Wal-Mart signed.

PRN came along at an almost perfect moment in media history. With the number of TV channels proliferating at an absurd rate, consumers were becoming almost impossible to reach in a mass way. In 1960, a typical U.S. household had fewer than six channels and 37.3% of viewers watched the top show, Gunsmoke. By 2003, average households had more than 100 channels and the top show, ER, managed to grab only an 11.5% share. At the same time, people's ability to recall advertised products had dropped from 35% in 1965 to 10% in 2000. Add to that the ad-skipping capacities of TiVo-like devices, which Forrester Research expects to be in 45% of all homes by 2009, and it looked to some as if the 30-second spot might be over.

It was in this turbulent atmosphere that investors and advertisers truly began to notice PRN (which has also been known as PICS and Qorvis Media Group). General Electric's GE Capital and well-known media investors Allen & Co. led an investment round of $14.5 million in 1999 (they now own 12.5% and 8.3%, respectively) to help the company install the network in hundreds of stores; PRN's revenue hit $30.2 million that year. Most important, Wal-Mart and PRN began to develop what is PRN's mainstay to this day: a Wal-Mart TV network shown throughout the retail giant's stores.

First rolled out in late 1999, the full-store network consisted of about a dozen 27-inch TVs hung about eight feet above the ground in high-traffic areas. But it faced a predictable problem: advertiser skepticism. At first, says PRN's executive vice president of sales, Mark Mitchell, media buyers and corporate ad departments didn't get it.

What PRN needed, Cohen decided, was an exec who knew how to build and market a network. In early 2000 he brought in Charlie Nooney, the EVP of affiliate sales and marketing at Disney/ABC Cable Networks, as president. After 18 months of grooming, Cohen, who still owns 10.9% of the company and sits on the board, turned over his CEO job to Nooney, a Birmingham, Ala., native with mischievously arched eyebrows and a mild southern accent. Nooney came to PRN with a reputation for being notably unpretentious (he repairs old loafers by taping loose soles and using a Magic Marker to cover scuffs) and trustworthy (Geraldine Laybourne, the Oxygen Media CEO who founded Nickelodeon, says the trusted Nooney wins negotiations that aggressive tactics cannot).

Nooney's arrival sped PRN's development. His professional relationships got the network into meetings with more senior management at advertisers like DirectTV, where PRN went from pitching mid-level managers to pitching decision makers. He also brought in experienced ad sales execs from Disney, including Mitchell, and his name helped attract cash: In August 2001 the Shamrock Capital Growth fund, which is financed with Disney family money, led a $35 million investment round (it now owns 15.3% of PRN). In three years, annual revenue more than doubled, from $47.2 million in 2000 to $112.1 million in 2003.

Because viewing habits are so different among shoppers and home viewers, PRN had to invent a new genre of programming. "You can spend $10 million on a gorgeous spot for a national network, and it just doesn't work in an in-store environment," says Nooney. "This isn't about putting media in retail; this is about creating retail media."

For the TV walls, where shoppers contemplate buying flat-screen TV sets that can cost $7,000, commercials are usually longer, more "educational" than brand-oriented, and they feature more star power (an average TV shopper will watch for about nine minutes). A typical segment would feature, say, Frasier star Kelsey Grammer using clips of his show to explain why the different screen shape and resolution of flat-screen TVs are worth the investment; this educates the consumer about the products and the show, helping both the retailer and NBC. These segments are usually about 90 seconds and feature long-duration shots. "You're looking at this monitor, then that monitor," says Tom Sebastian, PRN's head of programming, "and you want to compare them."

At the other extreme are product ads on the over-aisle screens, which run as short as 10 seconds. Quick and simple with large graphics, they're designed for mobile shoppers pushing their carts down the aisle. A typical 10-second spot for Lay's potato chips shows the bag of chips above a banner of the Lay's logo, explains the ingredients ("real cheddar and a hint of sour cream"), tells you to buy it (known as a "call to action"), and says where it can be found (the "salty snacks aisle").

A third channel plays on music-section kiosks, which advertise product while letting shoppers sample CDs. Here, after you swipe a CD across a scanner, the screen plays a short ad for, say, Bounty paper towels, then a clip of the song you want above a Bounty banner ad, and then if you wish, a complete video. This gets the shopper to pick up the CD (a big step in any sale), plays the desired song to anyone within earshot, and advertises another product. According to Mark Mitchell, Wal-Mart generates more than one million song scans each day.

The programming loops, downloaded each week via a satellite hookup, vary in length depending on where they play. So as not to be overly repetitive (or drive store clerks insane), they're usually double the length of time a typical customer spends in an area; in a Wal-Mart, where shoppers usually spend 50 to 55 minutes per visit, the main product loop is two hours long. A 30-second ad that runs five times an hour on the PRN grocery checkout line network in just the Los Angeles market goes for $27,000 (for four weeks), while a storewide ad package on the national Wal-Mart TV network -- which includes more than a minute of commercial time each hour -- runs $245,000 for 28 days.

PRN had Nielsen Media Research assess the network using the standards other networks live by -- reach, brand recall, viewer attitude, and viewing duration. The study, combined with store data, found that in 2004 Wal-Mart TV had 180 million monthly viewers who watched for about seven minutes each visit (up 44% from 2002) and had a brand recall of advertised products of 65% (about three times the number for broadcast TV).

Using these numbers to set rates, Nooney says PRN charges a CPM -- the cost per 1,000 viewers -- that runs from the mid single digits to low double digits, depending on audience demographic. PRN then splits the ad revenue with the retailer. InfoTrends analyst McLeod estimates the retailer's cut to be between 15% and 45%; Nooney will only say that it could be "slightly bigger or smaller" than that.

There is some irony in the fact that a network that is cutting edge in many ways demands to be judged by the traditional -- and, some say, empty -- Nielsen measures of awareness and reach. And it is here that PRN finds itself at the center of an industry argument. The issue is simple: Considering that these networks are located inside stores, why aren't commercial prices set according to how well they boost sales? As retail consultant George Whalin caustically notes: "Sales lift is the only thing that counts. The rest is irrelevant."

Some PRN competitors agree. In December 2004, CompUSA announced that in a test of the CompUSA TV Network, sales of seven advertised brands grew 29% more in stores where ads were shown than in stores where they were not. PRN's largest competitor, RMS Networks, is paid based on the added sales its networks create -- CEO Jason Kates says clients attributed more than $200 million in added sales to RMS in 2004. Other competitors don't even believe in selling third-party ads: EDR Media and Creative Realities, for example, design custom in-store content paid for by the stores, not the brands. "When retailers are looking for another revenue stream -- advertising and maybe some sales lift -- that's what PRN markets," says EDR CEO Peter Vrettas. "We work with retailers who are more interested in using in-store media to build customer relationships."

"If you advertise a blender in a store, why would you be satisfied with awareness? You want people to buy the blender."

PRN is having none of these models. Mitchell says PRN "would never even entertain" a pay-for-performance model. Suppliers might make bad commercials, for one thing, or their products could just stink; all PRN can promise is an audience. Still, while there is evidence that retail ad networks do juice sales -- a study by Instrumental Media Group, a U.K. media strategy company, found that such networks increase overall sales by 1.5% -- there's little doubt advertisers would rather pay just for the sales they get. Andy Jung, senior director of advertising and media services at Kellogg, which has launched new products like Cheez-It Twisterz on Wal-Mart TV, puts it diplomatically: "Pay-per-performance is a big issue beyond Wal-Mart TV. It's an issue that the industry is struggling with." In the end, advertisers may get the upper hand, says Bill Collins, executive editor of the industry journal AKA.TV. "I just can't believe over the long term brands aren't going to want to see sales uplift," he says. "If you advertise a blender in a store, why would you be satisfied with awareness? You want people to buy the blender."

The debate does not seem to be of great concern to PRN's biggest client, Wal-Mart -- perhaps because it splits the ad revenue with PRN and therefore benefits as much from the advertising's quantity as its effectiveness. "For Wal-Mart, it's a profit center," says Phil Lempert, the editor of Xtreme Retail23, a retail technology magazine. "It doesn't matter if anyone's watching."

Each fall, the retail giant runs an ad sales event at its Bentonville, Ark., headquarters where, alongside PRN representatives, Wal-Mart execs like Michael T. Duke, president of the Wal-Mart stores division, present the network to advertisers eager to please the retailing behemoth. "Wal-Mart has a unique position in its ability to insist, or strongly encourage, the advertisers to participate," says Virginia Cargill, CEO of SignStorey, an in-store network that sometimes works with PRN. A typical advertiser is Nintendo, which spends more than $1 million a year on Wal-Mart TV in part to keep Wal-Mart happy. "They're very positive on the network," says John Moore, director of channel marketing at Nintendo. "And we're very positive about the amount of business we're doing with them."

Though he cannot point to a major supplier that does not advertise, Troy Steiner, Wal-Mart's senior director of media, denies that Wal-Mart coerces advertisers. Wal-Mart's policy, he says, is, "if they want to participate, great; if they don't, it's up to them." He also says that Wal-Mart's split of the ad revenue is poured back into expanding the network.

In March, PRN's contract with Wal-mart expired. In April, after much negotiating, they quietly inked a new deal. As this story went to press, PRN would only confirm that it had signed; Wal-Mart would not allow it to say more. Nor would Wal-Mart's Steiner comment on PRN's new agreement with his famously hard-bargaining employer except to say there were "no big changes" from the previous deal. With Wal-Mart continuing to add stores, PRN's dependence on its largest client is likely to remain high. But in Nooney's view, this is a good problem: "If we didn't have them, you'd be asking, 'How will you get Wal-Mart as a customer?"

Today, PRN, with more than 210 employees, is by far the largest player in an industry where building a competitor from scratch would be prohibitively expensive. Nooney says the company is still considering an IPO but that the market has been poor and, being profitable, the company does not need the cash to survive. (The overwhelming dependence on Wal-Mart could also give investors pause.) Besides, as of recently, the company professed to have plenty of money for near-term expansion.

Noting that every store has checkout lines, Nooney paid $2.4 million in 2003 to buy Impli, a company that had screens up in the checkout lines of 100 Ralphs supermarkets around Los Angeles. PRN has since added Pathmark, ShopRite, and Albertson's to the channel, which is designed to lower the "perceived wait time" by amusing customers. It has the added bonus of letting PRN and the retailers sell local and regional ads for products outside the store, such as mobile phones, real estate, and automobiles.

PRN is also building its ability to "microtarget" its ads and offer up-to-the-minute programming. It's upgrading Wal-Mart TV by replacing the old CRT TVs with 42-inch flat-screens and adding eye-level sets in high-traffic "dwell" areas such as the banana table in Wal-Mart Superstores. And there are now seven different channels in Wal-Mart, including a pharmacy channel that weaves ads with health tips from the Discovery Health channel; the ads can be aimed at specific regions, stores, and beyond. "We can sell you snow shovels in Minnesota while we're selling you raincoats in Tampa and suntan lotion in Hawaii," Nooney says. "We can actually program a single screen in a single store.

"This reminds me of the cable business in the early days," he continues, "where we were building an industry where there was skepticism and it continued to grow until we reached a tipping point. We're entering a different world, where advertising isn't confined to sitting on your couch or the radio in your car. Advertising will become more contextual in your everyday life. Everything's in play."

Ian Mount wrote about David Steinberg and InPhonic in the March issue.




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