The Cable Guys

Nick Grouf and David Waxman are using the Internet to overhaul the TV ad business. Advertisers are ecstatic. Ad shops? Not so much.

Nick Grouf and David Waxman are not your garden-variety Internet geeks. For starters, they're both musicians: Grouf, the more outgoing of the two and the CEO in their business adventures, played with Lisa Loeb at CBGB (before she got famous). He describes Waxman, a computer musician and the perennial special-projects guy, as "bright, direct, and passionate," a statement that makes the latter blush.

The two met on an airplane. Both then found themselves in Cambridge, Massachusetts, in the mid-1990s; soon they'd formed their first company, Firefly, using a "collaborative filtering" technology they developed to do things such as recommend music to customers based on what they'd already enjoyed. The duo's second startup, PeoplePC, provided new low-cost computers and Internet access to those who needed it. They sold both companies, to Microsoft and EarthLink, respectively, and the underlying ideas are still in use.

Grouf and Waxman, each 37, reunited in the late summer of 2003 to give John Kerry's Internet operation a Howard Dean-style makeover. Inevitably, they started batting around new business ideas (one reject had something to do with nail salons), but it was the $80 million that Kerry raised online—and how it got spent—that reinforced their next big idea. Most of that money went to local TV ads in swing states, or more specifically, swing counties in swing states. The duo had already been intrigued by targeted do-it-yourself advertising networks like Google AdWords, which let businesses pick their own keywords to reach the customers they want. "And TV was a market no one was paying attention to," says Grouf. The idea kept gaining momentum as people in the cable-TV business told them how many ad slots go unsold, and as they watched what was happening online.

The end result was Spot Runner, their most ambitious venture yet. The service lets businesses buy a canned TV ad, customize it with a bit of voiceover and a logo, say, then set a budget and a target market. But instead of charging the average cost of producing a TV ad—about $300,000—Spot Runner will sell one of theirs for $499. Shockingly cheap local cable rates mean that anyone can advertise for well under $100 a spot in most places, and Spot Runner helps plan your ad schedule by using an algorithm that recommends where to place commercials for maximum effectiveness—targeted down to the neighborhood. All of it is done via a Web interface, and takes only a couple of weeks.

In other words, the pair wedded the democratic spirit that underpinned PeoplePC to a variation on the recommendation engine that powered Firefly. Call it Google AdWords for TV. And while Grouf and Waxman would be quick to tell you that their mission is to make TV advertising affordable to everyone, in delivering this level of efficiency, transparency, and control to the messy old-school world of TV ads, they may actually be onto something much bigger. If you thought the ad world was under siege already, just wait until you see the havoc these geeks may wreak.

Between bites of the transcendent short ribs at Lucques in West Hollywood, Waxman explains the key to Internet success in a single sentence: "If you aggregate all of the little guys, you'll find that they're worth a lot of money." Skype, eBay, and Google all started with smaller companies as customers, and only after they succeeded did larger ones sign on. Spot Runner is turbocharging the otherwise slow aggregation of hair stylists, surf shops, doctor's offices, and the like by proceeding straight to big businesses with a large local presence. Spot Runner hadn't been live a month (it launched in mid-January) before it announced a major deal with Cendant's real estate division which, in effect, created a pop-up advertising agency for the 9,000 real estate offices that operate under the Cendant banner. Now, any of the 260,000 Coldwell Banker, Century 21, ERA, and other real estate agents can pick from hundreds of ads Spot Runner created just for them.

"We're going to strongly suggest that our affiliates use it," says Richard A. Smith, chairman and CEO of Cendant Real Estate Services Division, "and we'll mandate use for the 1,000 outlets that we own." Realtors now spend almost $4.7 billion a year on print advertising, and Smith believes that money will shift toward outlets like local TV. "Any large company that's an umbrella over thousands of small affiliates has an immense opportunity with Spot Runner," he says. "TV is a more efficient way to market."

Smith expects Spot Runner to be a likely sell for everyone from his compadres in Cendant's hotel group to professional associations and restaurant groups—anyone, really, with a significant local footprint. But Smith's experiment with Spot Runner may ultimately affect the way corporate parents like Cendant roll out and place larger brand-awareness campaigns. Currently, Cendant spends tens of millions of dollars just to hype its Century 21, ERA, and Coldwell Banker brands. If Smith's real estate agents have success with Spot Runner, he says, "we'll do it, too."

All of which makes the old-guard advertising industry a wee bit tetchy. "They take every cliché of every category and put stock photography on them," says Scott Kaplan, a creative director at BBDO, after reviewing some of Spot Runner's ads. "The ads aren't actually engaging," says Jonathan Schoenberg, creative director of TDA Advertising in Boulder, Colorado, who insists he loves the idea of Spot Runner. And whatever they think about the ads themselves, don't even get ad people started on the algorithm driving the placement process. Judging by their reactions, you'd think that silly little piece of code represented a threat to their very existence: "This is the kind of idea likely to appeal to a fairly small, unsophisticated business," says Bennett Griffin of Griffin Media Research, which creates custom reports to help TV ad-sales teams. "It looks very official, but you'll get sounder advice talking to a rep from your local cable company."

"I'm a million times smarter than that computer!" insists one media buyer. "You can't replace gut instinct. That comes from experience."

Then there's Andrea Gallo, VP, regional spot, Carat Americas: "This doesn't scare me in the least," she insists after reviewing Spot Runner's media-buying engine. "This excludes everything that a major advertiser looks for in a schedule. I'd put a big neon sign on Spot Runner saying, buyer beware." Besides, she adds: "I'm a million times smarter than that… that—computer. You can't replace gut instinct. That comes from experience."

Mmmhmm. Tell that to the people fighting Google's robotic, unsophisticated ad machinery. Cheap, targeted TV ads do seem rather sensible, actually, especially in an age that doesn't necessarily need its ads wrapped in high-toned Saatchi-grade packaging. What's more, Grouf and Waxman's algorithms (which use techniques similar to the ones they pioneered at Firefly) actually get smarter: When thousands of Cendant real estate agents begin using the system to calculate an ad schedule, their own successes and failures will be factored in, making them more-effective media buyers. Knowledge, in other words, isn't trapped in the individual. Soulless? Sure. But it does have a certain ring of inevitability to it. Greg Sterling, an analyst at the boutique research firm Kelsey Group, sees the future thusly: "Eventually, everything will be run by a dashboard on the Internet."

In what amounts to a vote of confidence for Spot Runner, Google, which has already begun expanding into print and radio advertising, is also likely to be offering a TV ad service by the time you read this. Like Spot Runner, Google aims to force order on an ad market fractured into thousands of micromarkets. When Google does enter the market, its search engine will give it a tremendous advantage in finally bringing accountability to the business. For example, Patrick Keane, who heads Google's advertising sales strategy, tells a story about seeing a new detergent's name picked up as a search term after P&G ran a series of TV spots. "It's hard to get the loop of the performance of an ad," admits Keane, "but we can get instant feedback." Google could provide an advertiser with data about when its TV ads aired coupled with any resulting Web activity, transforming TV into a lead generator that can be quantified and tracked.

It will be hard for Spot Runner to compete on that scale; indeed, it may have to be part of a larger entity to reach its full potential. "I don't see Spot Runner as a stand-alone company for more than two years," says Sterling. But that doesn't mean it doesn't have a big future. Some observers wonder whether the obscure spot-advertising market isn't just a Trojan horse into a larger opportunity. "Spot Runner and Google are addressing existing market needs now, but they want to be in place to make the transition one day to be the advertising platform to sell ads for mobile TV, TV on the Web, and IPTV," says Allen Weiner, a Gartner analyst. Waxman, while stressing Spot Runner's focus on cable, says, "Ideally, we'll be medium agnostic. As people get more digital, there will be more fragmenting of the audience and therefore more need for a tool like ours."

In other words, Weiner's right. Beats aggregating manicurists.


David Lidsky (dlidsky@fastcompany.com) is Fast Company's senior editor.

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