SAN FRANCISCO (Business 2.0 Magazine) -- Nielsen's famous TV ratings are getting a serious shakeup - one that people in the advertising industry say is long overdue.

While Nielsen has already made partial moves to the electronic measurement of TV audiences in the largest television markets, in smaller cities - which make up more than half of the U.S. population - it still depends on household-survey participants to fill in handwritten diaries. But that old system is finally on its way out, thanks to challengers in the TV-ratings business and the threat that the TV-advertising industry faces from online ads.

"It's incredible that one company has so much power," says Derek Robson, co-managing director of advertising agency Goodby, Silverstein & Partners. "Nielsen's ratings system has been viewed with a bit of skepticism for a long time, and there hasn't been anything out there to compete with it."

The competitors now vying to provide alternative ratings include San Mateo, Calif.-based Integrated Media Measurement and Media Audit, a unit of Houston's International Demographics.

And then there's the whole world of online advertising, which offers advertisers the kind of perfectly measurable pay-per-click advertising that television can't. Online ad spending increased 30 percent last year to a record $12.5 billion, according to a report by advertising trade group Interactive Advertising Bureau and the audit firm PricewaterhouseCoopers. Network-television ad spending for the year dropped slightly last year to $22.5 billion, according to TNS Media Intelligence.

But Nielsen has devised an ambitious solution that could restore faith not just in its ratings business but in television advertising. The company recently unveiled an "Anytime Anywhere Media Measurement" initiative to measure more precisely how many people are viewing programs - and ads - on televisions inside and outside the home, as well as on the Internet and mobile devices.

If Nielsen's plans come to fruition, media buyers and sellers will have an immense knowledge of where and how viewers watch TV, and networks will be able to determine how many folks actually watch programs away from home.

To capture television viewing in places like bars, gyms, or hotel rooms, survey participants will wear cell-phone-like devices that record short sound clips every 30 seconds, and then transmit the data to Nielsen. (Nielsen will conduct tests of two different kinds of personal meters this fall.)

The idea is that recording actual media consumption will prove more accurate than relying on survey participants' memory of what they watched, the way the paper diaries do.

The research firm will also install and test software meters, including its patented metering technology, on the personal computers and laptops owned by the survey participants currently using electronic TV-measuring devices. It plans to fully deploy the technology during the 2007-2008 television season.

Additionally, Nielsen is working on tools to track TV watching on iPods and cell phones, which is expected to be in place for testing purposes next year.

"Nielsen has to do this to remain credible," says Goodby's Robson. "If they don't make an attempt to understand the changing industry, then they'll become irrelevant."

This new technology should resolve the persistent complaint from the networks that Nielsen is missing viewers who are watching TV away from home. Indeed, the networks seemed to have a point. In one study, for instance, 25 percent of Houston-area television watchers watched a July 2005 launch of the Space Shuttle outside of home. And anyone in an office filled with soccer fans knows that there's a lot of World Cup watching that's taking place far away from living-room couches.

But the possibilities of these new metering devices go beyond just improving the accuracy of Nielsen's ratings. Nielsen will, in theory, gain the ability to listen in on media consumption the way Google (Charts) tracks Web searches. Access to that kind of data about the effectiveness of TV ads could stem the flow of ad dollars away from TV and to the Internet.

It's possible that Hollywood television and movie studios, which are big spenders on advertising, could actually track the effectiveness of in-house television promos and movie-trailer ads. NBC could determine how many people watched a promotion for "My Name Is Earl" and later tuned into the show or downloaded it on their iPods. Sony (Charts) could likewise track what percentage of survey participants saw a trailer for "Spider-Man 3" and then watched it in theaters, since the devices would record sound clips in the theater, too.

But we're years away from this rolling out into the mainstream. In the meantime, Nielsen is also going to expand its Local People Meter service - which is the firm's most sophisticated electronic-measurement service - beyond the 10 largest local TV markets to the next 15 largest markets, beginning in October 2007 in Houston, Seattle and Tampa.

Nielsen has to prove that its technology can work, of course. But the promise is there, and the payoff for television advertising could be big. According to PricewaterhouseCoopers, the global advertising industry is set to grow from $383 billion in 2005 to $521 billion by 2010. The trouble is, online advertising is currently expected to account for much of that growth. Nielsen's move to make TV more measurable could help that industry capture more of the rapidly expanding market.

And if Nielsen stumbles? It's got a host of rivals waiting to step in.