James Bond (Pierce Brosnan) leans up against his Z8 convertible in The World is Not Enough (1999). Copyrights: MGM Studios; BMW.

Everyone knows James Bond’s drink of choice is a martini, shaken and not stirred. But for the right price, 007 will sip anything you put in front of him. He doesn’t always drink beer, for example, but when he does, he prefers Heineken.

That’s because Heineken has been supplying the secret agent with pale lager as part of a 15-year, multi-picture deal, one of the longest running and most expensive of its kind in movie history. Most recently, Heineken’s US division paid a reported $45 million for a product placement in 2012’s Skyfall. The deal included a 30-second commercial starring Daniel Craig as James Bond, a branded web game featuring Craig and co-star Bérénice Marlohe, and a scene in the movie in which Craig turns down his signature cocktail for a bottle of Dutch beer.

Some fans of the franchise found the placement in poor taste. Brands have been unsubtly influencing Bond’s choices in apparel, motor vehicles, watches, and laptops for decades – but surely messing with the shaken martini is a step too far. That’s the equivalent of swapping out Superman’s “S” for a Penzoil logo, or replacing the Batmobile with a more sensible Hyundai Elantra. Is Her Majesty’s most iconic spy really so hard up for cash?

Skyfall, however, wasn’t the first time Mr. Bond switched his tipple. Way back in 1962’s Dr. No, Sean Connery reached for a Red Stripe beer. Ever since, Bond’s been ambivalent about his martini, switching between Smirnoff, Absolut, and Stolichnaya vodkas. At one point he favored gin in the mix. Gordon’s, that is. We know because Daniel Craig made sure to enunciate the brand name when ordering a drink in Casino Royale. (To be fair, the line was delivered as originally written in Ian Fleming’s 1953 novel of the same name: “Three measures of Gordon’s, one of vodka, half a measure of Kina Lillet.” Even the novels were highly brand conscious.)

Product placements are big business for the Bond franchise which, throughout its 50 year history, has been a trailblazer in the field. Film studio MGM broke advertising records by selling $100 million worth of placements in 1999’s The World is Not Enough to such brands as BMW, Bollinger, Turnbull & Asser, Smirnoff, Omega, Motorola, Electronic Arts, Microsoft, Caterpillar, and, of course, Heineken. It matched that take once again in 2008’s Quantum of Solace, earning over $100 million from many of the aforementioned advertisers, in addition to Ford, Virgin Atlantic, and Sony. (MacBooks may be beautiful, but saving the world from rogue generals, megalomaniacal scientists and corrupt double agents requires a Vaio laptop running Windows XP.)

The Bond films are chock full of sponsored product – perhaps even comically so – but they’re no longer outliers. They’re the shape of entertainment to come. The Journal of Management and Marketing Research (JMMR) estimates that total spending on product placements in entertainment reached about $7.55 billion in 2010, having compounded annually at 27.9% over the preceding five years. Meanwhile, the estimated value of those placements, in terms of audience reach, was nearly $14 billion, having grown at 18.4% on average.

No medium is safe. Movies account for a relatively small slice of the product placement market. Television attracts close to 71.4% of all paid placements, and about 75% of all broadcast-network shows feature placements of some kind. Collectively, the top 10 TV shows of 2008 featured 29,823 product placements. Placement in video games was a $1 billion market in 2010. And brands spent over $3.6 billion inserting product shout-outs into pop music in 2009. Artistic integrity be damned; if Miracle Whip is going to pay Lady Gaga to appear in her new video, she’ll take a bite.

When considered out of context, these placements seem absurd. But placements are all about context. When products are inserted into storylines, they can be more effective than traditional ads. They’re better at grabbing attention. They can be more cost efficient. They can’t be muted or skipped over the way typical ads can be. And yes, research shows that they’re highly influential – particularly when used to generate positive impressions of a brand or to change consumers’ perceptions about a product.

Product placements represent a shift in the world of advertising, away from the calculated certainty of media buying and commercial rotations, and toward a model with much higher risk and much greater reward. Advertisers aren’t taking those risks for sport; they appear to have little choice. As we’ll see, the $64 billion market for TV advertising only reaches 30% of its intended audience. Unskippable, unmistakable, unforgettable product placements are the brand marketer’s best answer to the collapse of traditional advertising.

The Idea (and Decline) of Traditional Advertising

Before we dive into the workings of product placements, we need to understand the mechanics of a typical ad campaign. On a strategic level, the goal of an advertisement is to encourage viewers to develop or change a perception, or to take an action (ideally, to purchase a product). More tactically, advertisements are measured on their reach, their efficiency, their residual effects on consumers’ brand awareness, and their effectiveness at achieving a desired business objective.

Reach is a measure of how many people are exposed at least once to a given advertisement. Essentially, it’s the total (and theoretical) size of the audience. Frequency is the number of times an average viewer is expected to be exposed to the same advertisement over the course of a campaign. Too little frequency, and most viewers will miss an ad. Too much frequency, and they’ll get annoyed. The “just right” frequency is known as the Effective Frequency. It’s an estimate of how many times a typical person needs to be exposed to a given ad before registering it and taking an action. Awareness is a measurement of how many people in a given population know about a specific brand or its messaging. Recall measures how memorable a given commercial or campaign may be among people who’ve been exposed to it.

The problem? As more ads become skippable, mutable, or avoidable by other means, net reach plummets, advertisers have to ramp up their frequency, and finding an effective frequency is increasingly difficult. As a result, brand awareness is more expensive to build and maintain.

David Kiley of Businessweek finds that up to 66% of all TV viewers mute, skip, or otherwise “tune out” during the commercial segments. Over 90% of consumers with DVRs and other digital recording devices skip commercials outright, according to the International Journal of Business and Management. Viewers with DVRs are also 38% less likely to recall brands shown in TV ads, whether or not they’ve skipped them.

As a result, JMMR notes that average brand recall across all commercial campaigns has dropped to 30%. And marketers are taking heed. A recent survey by the Association of National Advertisers (ANA) showed that 78% of marketers believe the effectiveness of TV advertising is in sharp decline.

Those numbers are frightening to advertisers. Consider that they spend nearly $64 billion on TV every year, $16 billion on radio, $700 million on films, and $800 million on video games. Now consider that only 30% of those dollars are going to hit their mark.

That’s a lot of money down the drain. Credit: Marketingcharts.com. Source: PricewaterhouseCoopers.

What’s to be done? Enter product placements. If research is to be believed – and plenty of marketers and advertisers are starting to believe it – it’s capable of trouncing standard-issue commercials and display ads. It’s the advertising industry’s latest, greatest attempt to reverse the 30/70 split on hit and miss. It’s a gamble, but for marketers whose playbook doesn’t seem to be working, it’s a gamble they’ll take.

In Your Movie, In Your Face: The Rise of Integration

Stephen Colbert shows off his iPad at the Grammys. Apple is unique among major brands in that it never pays for product placements; instead, studios and networks come to Apple for permission. In 2011 alone, Apple products featured in 40% of major motion pictures and appeared 891 times on TV shows.

“Embedded marketing,” as the industry calls it, can take many forms. Placements can be visual (the sight of Tony Stark in an Audi R8), aural (Forrest Gump’s repeated mentioning of Dr. Pepper), or both (the Reese’s Pieces shown, and talked about, in E.T.). Not all placements are paid for – Bond author Ian Fleming’s choice of Gordon’s gin was his own – but the vast majority are. At the very least, the usage of recognizable brands in film or television requires some form of consent from the manufacturer or rights holder.

In terms of their subtlety, placements run the gamut from the vaguely subliminal to the obvious and unavoidable. (Fun fact: the product placement parody in Wayne’s World was an actual, paid placement by the brands referenced in the bit.)

Graceful or otherwise, those placements can produce outsized results, especially when stacked against typical ads. Even better, they can complement the performance of ads running adjacent to the integration. JMMR estimates that “57.5% of [television] viewers recognized a brand in a placement when the brand also was advertised during the show.” (Recall the 30% figure without the adjacent product placement.) Nielsen reports that placements in TV shows can increase brand awareness by up to 20%, and NextMedium claims that number can climb to 43% when the placements are integrated into “emotionally engaging programs.” By associating a brand with an engaging show, likable character, or cool celebrity, product placements can benefit from the halo effect – or positive association – of that context.

Consumers not only exhibit stronger recall and higher awareness of brands through product placements; they’re also more receptive to the messaging. Here, again, JMMR indicates that 31.2% of consumers who view product placements show interest in purchasing the products, and that interest can translate into cold, hard cash. Take the example of Dairy Queen’s placement into an episode of The Apprentice:

“The contestants needed to create a promotional campaign for the Blizzard [a Dairy Queen signature milkshake]. During the week of the broadcast, Blizzard sales were up more than 30%. Website hits also were up significantly on the corporate and Blizzard Fan Club sites as well as the Blizzard promotional site.”

On the film side, CNBC reports on the solid business results of some of the most iconic integrations in movie history.

Tom Cruise rocks Ray-Ban Wayfarers in Risky Business (1983). The movie made Cruise a bona fide movie star – and sold 360,000 pairs of the advertiser’s once-flailing sunglasses line. Photo source: CNBC. Copyright: Warner Brothers Pictures.

Risky Business (1983): Tom Cruise sported Ray-Ban Wayfarers, a line once slated for cancellation by the sunglasses manufacturer. Sales of the Wayfarers increased dramatically during the run of the film, which catapulted both its star and his shades to pop culture stardom. The sale of over 360,000 pairs of Wayfarers were attributed to this product placement.

E.T. (1982): Hershey, maker of Reese’s Pieces, saw its profits increase by 65% during the run of Steven Spielberg’s landmark children’s film (at the time, the largest box office smash in history). M&M manufacturer Mars, Inc. was Spielberg’s first choice to appear in the movie; they turned him down.

Top Gun (1986): Once again, a partnership between Ray-Ban and a Tom Cruise flick paid off handsomely. Sales of the company’s Aviator sunglasses rose by 40% as a result of their use in the movie.

The Firm (1993): Tom Cruise worked his product-placement mojo once again, driving up sales of Red Stripe beer by 50% in the US in 30 days through a very blatant placement in the movie.

Sideways(2004): The Paul Giamatti comedy caused a 150% sales increase for sponsor Blackstone Winery’s pinot noir (and a 2% drop in US sales of merlot, which Giamatti bashes in the film).

Given that kind of upside, we’d expect the costs to be high. But in comparison to TV, print, radio, and other media advertisements, they’re surprisingly inexpensive. Hershey spent only $1 million on its iconic E.T. placement. BMW spent a reported $3 million integrating its Z3 into the 1995 Bond film Goldeneye – then saw a $240 million lift in sales of the model as a direct result of the placement. These days, the stakes are much higher; integrations into multiple episodes of primetime TV series can run $3 to $10 million, and full-series deals can exceed $50 million. Brands are increasingly dropping tens of millions on movie integrations.

While nominally high, these figures look cheap in comparison to a 30-second spot on a hit show, especially when accounting for skipping, tune-out, and low recall. A typical TV spot will cost $350,000 on average to shoot, and tens of millions to run for a few small flights – most of which will be skipped or will fail to register for one reason or another. Hollywood trade paper Daily Variety estimates that the average cost of a single commercial on The Big Bang Theory is $317,160. The cost on AMC’s The Walking Dead is $326,000. The average cost of a single spot on NBC’s Sunday Night Football is $628,000. ESPN’s Monday Night Football, for its part, averages $408,000 per commercial.

Commercials, however, aren’t going extinct anytime soon. Even if they’re less effective than some integrations, and more expensive on a pound for pound basis, they’re steadier and more predictable advertising vehicles. They’re also a well-worn and mature market, less susceptible to fads, speculative pricing, booms and busts. Brand integrations can mitigate a lot of the weaknesses inherent to commercial campaigns, but they’re also a lot riskier. They carry bigger potential upside, but they require a lot of faith in factors beyond the advertiser’s control.

Risky Business

As lucrative as some of the better-known product placements have been, hundreds of others fail or never get off the ground. If a standard-issue TV commercial fails, it tends to fail on its own terms; either it’s an effective spot or it’s not. But a product placement can fail through dozens of factors outside the advertiser’s control. Some of the more notable risks involve production and scheduling of shows and movies:

Timing: Buying commercial airtime on TV allows for careful control over media flights, and hence, windows of exposure to a given message. But integrating into a movie or TV show means taking on the risk that the content will be launched early, delayed, or even canceled. In retrospect, BMW’s placement of the Z3 into Goldeneye seems quite risky. Had the movie been pushed back half a year (not an uncommon practice in Hollywood), BMW might have been stuck advertising its previous year’s model in a new movie.

Creative Control: By definition, integrating into someone else’s content means playing by someone else’s rules. Brands don’t exert much control over the parts of the movie or show they don’t integrate into, or influence the entire script, shoot, casting, and so forth.

Brand Association: For better or worse, the talent involved in movies, music, and other forms of entertainment carries a lot of baggage. Walmart, a fairly conservative and family-friendly brand, partnered with Miley Cyrus on an integrated commercial campaign in 2010. Back then, she was a wholesome ‘tween role model. Today, she’s the kind of person who twerks in a skintight bodysuit next to a 10-foot-tall metaphor . The transition from good girl to wrecking ball can happen virtually overnight. Any brand partnering with, or integrating into, a star-driven medium bears this risk.

Commercial Failure: Product placements in movies, shows, and songs are to commercials what options are to equities. Paying a few million dollars to integrate into a movie that becomes a billion-dollar box office smash looks like a fantastic deal. Paying a few million to integrate into a bomb, on the other hand, is embarrassing for all concerned. When marketers make high-priced integration deals with content creators, they are exposing themselves to the risk and downside of the content’s commercial lifespan and cultural relevance. Verizon’s FiOS placement in Iron Man 3, this summer’s highest-grossing movie, paid off handsomely. Nike’s integration into White House Down, one of the summer’s biggest flops, probably didn’t. When brands get into the hits-prediction business, they take a big risk on the ultimate reach of their messaging.

Consumer Burnout: As brand integrations become more commonplace – recall that about 75% of shows in primetime on broadcast TV now feature product placements – their omnipresence might piss off consumers, damaging brand equity. On the other hand, viewers could become desensitized to product placements, resulting in a sort of “blindness” to them. Either scenario is bad for advertisers.

Gail Tom, professor of marketing at California State University, tells LiveScience that the low-hanging fruit in the product-placement market has been plucked. Hershey struck gold with E.T. because large-scale placements were new and unexpected in the early ‘80s. These days, consumers are more cynical.

Tom also notes that correlation does not imply causation:

“To state that the advertisement(s) caused the change in sales, you have to prove that the increase in sales is not due to countless other factors like seasonal variation, competitors’ activities, the general economy, other concomitant promotional events, changes in social value, current pop culture, and so on. To nullify these other competing explanations [can be] very difficult or impossible.”

It’s a strong point, and it raises another risk: the risk of false attribution. To some extent, however, the same risk holds true in traditional TV and movie advertising. It exists in any advertising channel that cannot be measured and analyzed. But the risk is greater in product placements because timing and reach are variable; in TV commercials, they’re constant.

Conclusion

As we’ve established, traditional advertising is becoming less and less effective. But it’s still the largest line item on the ad budgets of the world’s biggest consumer products brands. Mass-market brands need to reach mass markets. While many of them are becoming savvier about social and digital advertising, they don’t view those tactics as full-fledged replacements for TV, radio, and film.

Product placements could become the heavy munitions of the brand manager’s arsenal. They’ll be used to complement other advertising with big, loud, attention-grabbing bursts. In a world where consumers are desensitized to a battery of high-frequency, small-scale placements, going big and bold will be the only way to stand out. And if consumers become sick of placements altogether, then searching for organic, non-intrusive fit between products and content will be more challenging. But it will reward the players in the market with the ad dollars to make huge, meaningful bets on content.

In other words, expect a comeback of whole-cloth, brand-sponsored entertainment. In the early days of television, Procter & Gamble funded soap operas. These days, it’s dusting off the old playbook. In 2012, it allocated a significant portion of its total advertising budget to a massive bet on the London Olympics: a deal that included dozens of commercials, category-exclusive rights to household products, and a massive integration into the Games themselves. Its “Thank You Mom” campaign included the construction of a “Family Home” on the Olympic grounds, which was used to let Team USA athletes meet up with their families during the games.

The precise cost of P&G’s deal is unknown, but it’s not uncommon for category-exclusive Olympics deals to meet or exceed $100 million. Marc Pritchard, the firm’s Global Brand-Building Officer, made the investment by calculating a $500 million return in sales lift. As Pritchard told Reuters, “This is the largest and most ambitious campaign that we have ever done and it’s one of the highest returns on investment campaigns that we have ever done.”

Brands in P&G’s weight class are looking to match its “large” and “ambitious” campaign by sponsoring their own content across any number of media. Brand-funded shows might even show up in your Netflix queue. Peter Tortorici, CEO of GroupM Entertainment and former President of CBS and Telemundo, notes that Netflix and Amazon make particularly attractive channels for branded content. These outlets have fewer broadcast and redistribution partners to deal with for any given show, and accordingly, they make compelling one-stop destinations for brands looking to fund content.

As viewers, we may not like product placements. But we’re going to have to live with them. If it’s any consolation, those placements are going to have to get better. The increasingly challenging advertising landscape demands it.

This post was written by contributor Jon Nathanson. Follow him on Twitter here. To get occasional notifications when we write blog posts, sign up for our email list.