Advertisers to Pay for Digital Signage Infrastructure Swap-out, Says US Capital’s Mass Transit System

2008 May 5

by Chris Connery, Vice President, PC and Large Format Commercial Displays

As digital signage efforts continue to grow both locally and worldwide, more and more major out-of-home initiatives are being implemented. In what may be one of the most aggressive examples of expectations set by the digital signage industry, the Washington DC metro system has recently issued a “zero dollar” bid for a wholesale infrastructure swap-out of its printed advertising to digital signage. Officially dubbed The Metro Channel (TMC), the Washington Metropolitan Area Transit Authority (Metro) has issued an official (and public) RFP for a no-cost contract to support the following components of a digital signage installation for the nation’s second largest transit system:

Financing
Design / Build
Operate, Maintain, Create Content and Sell content

Figure 1 Mockups of Washington DC’s Metro System “The Metro Channel” Digital Signage “zero cost” initiative

The project is guaranteed for 10-30 years and will take over the current contract (currently for printed signage only) from incumbent CBS Outdoor (whose contract ends in June of 2010). WMATA (the Washington Metropolitan Area Transit Authority) believes that offerors or teams of offerors can accomplish all three tasks of the project.

Most display manufacturers surveyed by DisplaySearch regarding this effort were aware of it, but approaching it with a skeptical eye, fearing that the primary contractors for such business would eventually lean on them to help subsidize such an implementation. FPD producers simply do not currently have the business model that allows them to think in terms of 10-30 year contracts with ad revenue streams supporting an initial CAPEX expenditure. Indeed on the supply side, most large-size FDP vendors (LCD and PDP alike) feel that their CAPEX is already spent in terms of the money already invested in their latest Gen X LCD fab of latest PDP fab. They are now looking for a more immediate return on this investment with such longer term “revenue sharing” initiatives not built into their business plans at all.

While a good majority of the infrastructure CAPEX spending will center around the cost of the displays (which will initially be 46”-50” FPDs to replace current 1-Sheet, 2-Sheet and 3-Sheet posters) the bidders for the project read more like a list of general contractors and out-of-home (OOH) advertising agencies. Publicly known bidders as of April include the likes of:

CBS Outdoor
JCDecaux
Booz-Allen
CNN Airport
Forbes
GE Transportation
IBM
Cisco
Transit TV
Turner Private Networks
Washington Post
Siemens
NBC Universal
Northrop-Grumman

As a “zero cost” bid, the WMATA expects to pay no money for these installations, maintenance and content management, with the winner of the bid keeping all revenues associated with advertising. Based upon past history of revenues generated from prior contracts, this contract is expected to yield revenues in excess of $35M annually but require a CAPEX spending of an estimated $50M with $2.5M to be paid upfront to the WMATA and no revenue contributions available until July 10, 2010 (the date when the current CBS outdoor contract expires).

While the aggressive bid references the eventual inclusion of in-car digital signage within its 1,508 buses and its 1,128 rail cars, initial roll-out of the digital signage network is focused on installing more traditional large-size FPD displays at each of the WMATA’s 86 stations, each with approximately 11 screens. As of March 2008, DisplaySearch’s Monthly Large Format Commercial Displays Sell Through Report shows that the weighted average of 46” LCD based commercial grade displays were $2,335-$2,600 (depending upon resolution). If TV-grade LCD displays are specified, then the price for the displays alone drops to $1,170-$1,615 in March 2008 dollars. Assuming that for such out-of-home environments that commercial grade displays will be used, with additional modifications necessary to ruggedize these displays for semi-outdoor use, protection against vandalism, etc. then, to err on the side of caution, the cost of the 946 46” displays alone would be between $2.3M - $2.6M.

While the FPD industry and the OOH advertising industries still struggle with cost-effective partnerships which fit the very different go-to-market strategies of each of these industries, the DC Metro system seems to feel that the timing is right to have these organizations get together, or to have a third-party general contractor facilitate such an endeavor but is this a reality or wishful thinking? The concept seems like a simple one; have advertisers subsidize a wholesale change-out of the communication system of the DC metro system from printed advertising to digital signs which not only allow for advertising, but will also be used for transit information (such as train/bus schedules), emergency warning systems, etc. Is it naïve of the WMATA to expect that the CAPEX expenditure will be borne upfront by one entity, or is it just too much up-front cost with questionable returns on the back-end at this time? Keep in mind that the winner of the contract is responsible for not only advertising content but also porting over several other data sources and splitting their screens between information displays and digital advertising. Can/will any one entity step-up to the rigorous up-front demands? If so, this will indeed continue to help set a precedent in regards to “who pays” for the digital signage infrastructure swap out.

It should be noted that similar initiatives have been announced across the US with the Chicago Transit Authority – CTA, which also claims to be the second largest public transit system in the United States, signing a 10-year contract with its out-of-home advertising agency, Titan Worldwide, to overhaul its transit system in a similar way. This initiative is more of a revenue sharing initiative between Titan and the city, in that all advertising revenues will not go to the city but will be split between the public and private sectors.

Figure 2 Chicago’s Transit Authority’s Revenue Sharing Venture with Titan Worldwide

So while on the surface such a project seems enticing (at least to the bidders listed above), there are still many questions regarding digital signage which cannot be answered by anyone in any industry at this moment. Most of the questions are around the lack of standards for how much advertisers will pay for placement on “digital poster boards.” There are industry-established metrics for other types of media such as radio, television, newspaper, magazine, poster-board out-of-home static media, etc. (usually classified by CPMs or Cost-Per-Thousands of views). But for digital content, which can be dynamic and thus sold in increments of the day (such as one ad in the morning, one in the noon hour and one at night), CPMs for this brave new world of digital advertising are just unknowns at this early stage. Many compare dynamic digital advertising to the early days of banner advertising on the web in that no one knew what to charge, how to quantify (cost per hit, cost per impression, cost per click-through, etc.), with many companies building business models which attracted people to their sites by selling product below cost, assuming that they would make up the difference by subsidized advertising.

While many of these “dot.bombs” learned the hard way that this model was not sustainable, others survived and this market has now matured. The complication for the digital signage industry is that there is now significant capital expenditure which also comes along with this subsidized advertising. This requires someone to make an up-front investment and has been a key barrier to seeing this market explode. With the exception of a few pilot programs, no one entity has thus far stepped up to take this subsidization risk and the question “who pays for the digital signage infrastructure swap out” remains. If the viewpoint of the District of Columbia is any indication, then they believe that someone will take this risk; by not having FPD producers bidding as prime contractors for this business, it seems that, at least in their opinion, it is not the FPD industry which will bear this up-front cost.