Commercials are the fuel for today’s broadcasters. They pay for the great car races and golfing events and public broadcasts of box office hits, cult television classics, and original programming.

Television networks aren’t in the not-for-profit business, and other than PBS, they all depend on advertising revenue to support the airwaves. “Free,” over-the-air television was never actually free. Consumers pay for it indirectly in the advertising that supports free TV. They pay in two forms. They are exposed to the ads that run during the delivery of programming. The costs of those ads are included in the cost of the goods advertised.

Advertising supported programming was generally felt to be relatively benign from the consumer point of view. The individual consumer did not have to watch the ad or buy the product. In the aggregate, however, advertising had to be effective enough in selling products for the companies who were paying for it to keep on doing so.

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Advertising will be transformed in the digital age. In order to generate more revenue to programmers, advertisers must be convinced that their advertising will produce more sales. Current thinking is that the best way to improve the effectiveness of advertising is to target it better.

Interactive digital networks create the possibility of generating the information necessary to identify individual preferences and tailor the message – either by delivering it selectively to a higher probability audience or by making it more appealing. Not only can advertising be targeted better, but also interactivity makes it easier to buy the advertised product. In a sense, a new advertising industry may be born in the transition to digital TV.

The only way in which a dramatic increase in advertising can be accomplished is through a fundamental change in the nature of the activity. Advertising revenues are driven by the ability to sell, and digital TV changes the business of selling through television. The huge transformation of advertising is driven by two characteristics of the new advertising medium – the immediacy of the purchase and the targeting of the message.

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A service by ACTV called “Individualised Television” creates interactive and instantly customised television content and advertising in response to viewer remote control entries or stored demographic information. The service appeals to advertisers, because it promises to let consumers pick their ads in an effort to appeal to a viewer’s intellect. This will further target their ads.

One key factor in increasing the likelihood that advertisers will sell their products is the ability of the viewer to purchase instantaneously or to otherwise establish an immediate connection with the advertiser.

Instead of having to dial a number or write a letter, the consumer is only one click away from the purchase. The connection can be made immediately from the device on which the advertisement is being viewed and without ever leaving the context of the advertisement. Internet links can offer excellent commercial opportunities. When the World Cup finals finishes imagine the potential of an onscreen advert selling the official ball of the tournament. It could be bought at the touch of a few buttons. Or the potential of going directly to the website of the official World Cup computer game.

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In the second stage, I expect that digital television technology will rapidly alter the direct marketing sub-component of the television advertising market. The digital cable television set-top boxes that are now beginning to be deployed will all have an ability to provide an interactive platform. To a lesser extent most satellite television set-tops can create a limited version of interactivity through a telephone modem connection. The ability to respond with a remote control rather than having to dial an 800 number is forecast to drive the direct marketing industry.

The second key characteristic that transforms advertising is the ability to use information about the consumer to target messages. Advertising can be embedded and tailored not only to the specific type of programme being watched, but it can be correlated with information about the viewer that has been gathered over the course of previous viewing sessions and interactions.

In the world of direct mail, a response rate of just one per cent can be quite profitable. Imagine an electronic “direct mail on steroids,” where advertising is matched so precisely to the profiles of likely purchasers that response rates could routinely exceed 20 per cent. That’s the potential of advertising messages automatically directed to demographic groups of cable subscribers. Technically, more capabilities exist today; in fact, many digital interactive systems already deployed have enabling capabilities for targeted advertising.

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* Kiran Karunakaran, The author works for BuyAsOne.com and is an alumni of the ICFAI Business School, Bangalore.