A British broadcaster is experimenting with technology from a Californian start-up company to overlay advertising automatically in empty spaces in video. ITV is currently testing the technology from Keystream in news coverage on its web site.

Keystream, based in Mountain View, California, launched their concept at the end of August, backed by investment from Voyager Capital in Seattle. It claims that existing forms of online advertising are interruptive or intrusive. Instead, Keystream automatically places advertisements in empty spaces in the video, which it says will not disrupt the viewing experience.

The company was co-founded by Schuyler Cullen and Ed Ratner, who both have PhDs from Stanford and have a track record of research and development in video analysis and compression.

ITV is testing the technology online with advertisers including Freesat, the satellite service in which it is a shareholder.

“There’s a lot of potential,” Simon Fell, head of future technology at ITV told The Times newspaper. “It looks at moments in the video where it finds segments that are big enough to get a non-moving logo in. Rather than an editor sitting through it and finding space, and all the effort that takes, this does it all automatically.”

The reaction of readers of The Times was predictably hostile, suggesting that it would be a way to lose audiences and alienate people.

The legal position in Europe is also unclear. Separation of programmes and advertising is a central principle of broadcasting regulations. Subliminal advertising and product placement are illegal, although sponsor graphics have been keyed into sports coverage for some time.

While the automatic insertion of adverts in images may currently be acceptable online, neither the communications regulator Ofcom nor the Advertising Standards Authority were able to say how it would work with current broadcasting regulations. These are likely to be extended to the online services of broadcasters under European law.

ITV is clearly facing a considerable commercial challenge that will only be increased by the current economic climate. The broadcaster is planning to cut 1,000 staff in the next six months, including over 400 jobs in regional news.

The ITV share price is down nearly 60% on the year and the company has dropped out of the list of FTSE 100 companies. In the last six months it reported a tax loss of over £1.5 billion, after writing down the value of the goodwill in its broadcasting licences as a result of reduced advertising market forecasts.

The broadcaster had hoped to raise £150 million a year in online earnings by 2010, a small fraction of its total turnover, but has put this target back to 2012, having raised only £7 million online in the last six months.

It seems that the last thing that ITV needs now is to turn off more viewers.