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Welcome to the Outernet
A little known billboard advertising giant plots its digital future.
(Fortune) -- Kevin Reilly Jr. chuckled when I described my ineptitude while recently trying to transfer photos onto a digital picture frame, which is supposed to display hundreds of rotating images. Let's just say that getting the digital frame to work is easier said than done, and I mentioned this to Reilly because he is attempting something similar on a vastly grander scale.
Reilly is the CEO of Lamar Advertising (LAMR), whose $3.5 billion market value is more than New York Times Company. But his company doesn't get a lot of ink, mostly because it operates in the least sexy quarter of the media whirl: billboards. While its two bigger rivals - Clear Channel (CCU, Fortune 500) and CBS Outdoor (CBS, Fortune 500) - are each linked to radio empires and tend to dominate big cities, Lamar has stuck to its original business and acquired more than 150,000 static billboards. It also puts posters on the sides of buses in the United States, Puerto Rico and Canada.
A few years ago, Reilly and his colleagues had an epiphany: Unlike other forms of media, the basic business of building walls on stilts and selling ads on them wasn't under direct threat from the Internet. If anything, technology could help billboard operators like Lamar save money. By using digital technology and broadband connections, Lamar could stitch together a network in which a single ad could be displayed at multiple locations. And as prices for next-generation screens fell, Reilly figured, any billboard could be turned into a veritable Jumbotron: like my digital picture frame, multiple images can be rotated across the screen.
I'm not talking about turning billboards into televisions - with full-motion video or animation. Though there are examples of this around of this around, lawmakers are almost universally opposed to them because of the potential distraction to drivers. Indeed, even just moving to the digital format Lamar is using now, where six ads rotate across the billboard every six or 10 seconds, is controversial. But, for now, regulators are letting the plans move ahead, partly because the utility of these signs for such public service uses as weather warnings and missing persons alerts are undeniable.
And if Reilly is correct, there is gold in them pixels. According to PriceWaterhouseCoopers, so-called out-of-home advertising - of which billboards are a big component - is expected to grow by more than 8% a year until 2011, the fastest-growing category next to the Internet. This year, billboard ads are expected to top $8 billion out of a total U.S. advertising market of $201 billion.
If their digital conversion proves successful, billboards will undergo a radical change in their business model - and this is where my own tiny experience with a digital picture frame pales next to the challenges Reilly and his peers are wrestling with. Rather than a business of months-long contracts and time-consuming ad installations, billboards would become real-time competitors to local newspaper advertising (as if newspapers needed yet another headache). Instead of alerting drivers to a Denny's restaurant three exits away, billboards could advertise a nearby open house scheduled for that day or a sale at a local supermarket or a public service announcement. Reilly notes that the Cincinnati Reds used digital billboards to announce its starting pitcher for a same-day game. (Interestingly, some of the unexpected uses for digital billboards are not that dissimilar to status updates on Facebook or Twitter, the popular text messaging application. Maybe one way to glitz up the billboard business is to give a techy new name - how about the Outernet?)
There's more to this plan than just cramming multiple ads into a single slot - although that's certainly part of it. Billboard advertising commands some of the lowest rates in the industry, largely because marketers can't yet track the effectiveness of billboard ads as well as other forms of media. But Reilly says advertisers are paying triple the standard rate for digital billboards because they can update their ads at no additional cost. (For instance, a price reduction or a "sold" sign can be quickly added to an open house ad.) So far, Lamar has 720 digital "faces" in 120 markets, which is a small fraction of the company's overall reach but more than the 200 billboards installed so far by industry giant Clear Channel. Lamar plans to invest $100 million a year or so over the next five or six years to install up to 6,000 more digital billboards.
Reilly says Lamar's biggest hurdle is creating an online interface so local and national advertisers can access the network easily and seamlessly - a wrinkle on what Google (GOOG, Fortune 500) has been proposing to do for radio and other forms of media. In the meantime, Lamar's stock has been "tagged" (as Reilly puts it) by the company's warning that the billboard ad business is feeling some effects from the slowing economy. Lamar has lost half its market value in the past year.
But even though some investors are not believers and there are plenty of challenges to overcome, Reilly is convinced that he has seen the billboard of the future. "[Digital billboards] are coming to a neighborhood near you," he says, sounding like a man who has come across a slogan or two in his travels. 
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