TV: The Worst Form of Advertising Except All Those Others That Have Been Tried

Categories: TV Advertising

Written By

April 20th, 2012

The fact that broadcast TV advertising has maintained its pricing margin (per ratings point) over cable TV has puzzled me for awhile. I've always chalked it up to inertia, it's that way because it's *always* been that way.

However, below is an explanation of the situation from Brian Wieser, Senior Research Analyst at Pivotal Research Group that is a far more detailed. Plus, I loved the title.

Enjoy.

TV: The Worst Form of Advertising Except All Those Others That Have Been Tried

Network TV’s Advantages Remain Durable; Benefits Accrue To Strong Programmers, Namely CBS

We’ve written regularly about expectations for national TV, where in a flat-volume Upfront we expect 8% price increases for the volume leader (CBS in 2012), with other networks below this level. Complaints echoed in feedback we receive from buyers on this matter are widespread – as they have been for decades – about price increases being too high. The problem is that advertising on television satisfies most large marketers’ goals better than alternatives, and its advantages hold as more consumers watch more TV more often than any other medium. Winston Churchill once described democracy as “the worst form of government except for all those others that have been tried.” TV and advertising maintain a similar relationship. For as long as there is growth in products which differentiate themselves vs. their competition on the basis of brand-attribute awareness, and as long as TV is viewed as the primary driver of brand awareness, TV will grow its revenue base.

Despite this reliance, the pricing outcomes in our models can be altered. Pricing is a function of the industry’s structure and the preferences of marketers, and if those preferences change, so will pricing. To review our characterization of the market, we have in network television:

  • A small, tacitly collusive group of sellers which most efficiently enable advertisers to buy packages of reach, frequency and gross ratings points in a similar way (operations associated with campaign execution) with similar means of assessment. No cable network can compete with broadcast networks in terms of the reach because virtually everyone watches some broadcast TV. All cable networks rolled up could not reach much more than 90% of audiences.
  • Sellers who are mostly indifferent as to which advertisers buy inventory, while marketers exhibit strong preferences for specific programs on specific networks, and sometimes seek to prevent a competitor from advertising on those programs.
  • Each seller knows 100% of the demand for its specific programs; no buyer (via their agency) knows all of the demand for specific program, and typically knows much less.

    Under these circumstances, prices can rise well ahead of inflation regardless of ratings changes. Advertisers pay up because doing so is better than alternatives, given marketers’ preferences. However, pricing outcomes could be improved for marketers if they made decisions differently. To illustrate how they could do this, consider a matrix with one continuum ranging from scarce to plentiful, and the other from strategic to non-strategic. Network TV fits in a strategic quadrant because of programming quality and its ability to rapidly accumulate reach; it would be scarce because of declining ratings.

    Buyers can only reclaim pricing power by reducing scarcity. They can do this by assessing more stringently whether or not specific programs matter in driving business outcomes (chances are few programs would ever be expected to have the business effects that American Idol has for A&T or Coca- Cola, or that The Biggest Loser has for Weight Watchers) and become increasingly indifferent to which inventory they receive, as long as they secure the reach and frequency they require. All of a sudden, the negotiating dynamic can change.

    However, for many marketers, much of network TV is, in fact, strategic and difficult to replicate in terms of outcomes. Consequently, one strategy is to secure inventory through even longer-term contracts (with lower-than-otherwise-expected price increases for marketers in exchange for reduced risk for the programmer) than those which already exist. To some degree brands reliant on sports properties already do this; arguably more of this sort of activity could occur in the future.

    Creating alternatives – and a “credible ability to walk away” – is the only way to reduce pricing. For now, neither cable TV nor online video, nor other media yet provides sufficient credibility to accomplish this goal for the largest brands, even as incremental shares of marketers’ budgets shift to new platforms. Network TV remains a fixed starting point for TV plans, and will continue to serve this purpose for as long as it satisfies goals better than any alternative that may be tried.

 
  • Liz

    *Liz attempts to conjure up memories of high school economics class and fails. Brain melts.*

  • Common Anomaly

    I thought Pan Am’s sky-writing ad campaign was quite successful.

  • Tommy Mickens

    The article was interesting.

    So, if I’m interpreting it correctly, it’s saying that, even with the same demo, buyers prefer network to cable because they buy “packages of reach” and network has more reach. So, in other words, they buy packages which means their commercials go on different programs on a network, and different programs on a network would reach a larger audience than different programs on a cable station, even if the ratings were similar, since they’re assuming more of the same people would watch the equally rated programs on a cable network. Yes or no?

    If that’s right, then I suppose that does make sense. I thought buyers could buy commercials on a single show though? If that’s the case, then I don’t see how it’d make any difference between a cable show and a network show with the same ratings. But if they buy in packages, yeah, it seems safe to assume a wider variety watches various shows on a network than on a cable channel.

    Now let a post come along explaining how I got it all wrong…lol

  • Holly

    @Tommy Mickens,

    I thought buyers could buy commercials on a single show though?

    (As I understand it, and I’m open to correction…)

    They can, but they often don’t. Or they’ll do a combination. Say an advertiser really wants to advertize on American Idol. They may buy ads just on that show. They may buy an overall package on FOX that contractually includes a given ad-reach on Idol. Or they may buy an overall package on FOX knowing that some of the ads will end up during Idol.

  • http://tvbythenumbers.com Bill Gorman

    @Tommy Mickens, “So, if I’m interpreting it correctly, it’s saying that, even with the same demo, buyers prefer network to cable because they buy “packages of reach” and network has more reach. So, in other words, they buy packages which means their commercials go on different programs on a network, and different programs on a network would reach a larger audience than different programs on a cable station, even if the ratings were similar, since they’re assuming more of the same people would watch the equally rated programs on a cable network. Yes or no?”

    Yes. That jibes with what I have been told, but have never seen any data backup for, which is that broadcast primetime reaches some people that are *unreachable* on cable TV, but cable TV generally reaches people who are heavy TV viewers of both broadcast and cable are are easier (and therefore cheaper) to reach. Which makes sense, if the data backs it up.

  • Kyle7

    So, the takeaway from this is that it’s Nielsen’s fault my favorite show is being canceled? ;)

    In seriousness, that was an interesting and informative piece.

  • iggy

    Broadcast rates are like gas prices.

  • craigcuk

    Perhaps one of the most interesting inferences in the piece was that some marketeers buy ad spots to stop a competitor getting them.

    It’s been said before that most Marketing Directors would state they know they’re wasting 50% of their advertising budget, they just don’t know which 50%. In the next 20 years as we move to more intelligence in broadcast TV (either through being watched on computer/tablet/phone devices or more intelligence in the TV set itself) there’s a neccessity for the broadcast networks to provide better feedback to the advertisers, I’ve yet to meet anyone who say’s they’re happy with the way the current ratings are collected so the model is ripe for change.

  • One

    So basically, I count less than some random jackoff who just happened to be channel-flipping and stopped on NCIS that night, all because I strive to have three hours of primetime viewing on my schedule across six days of the week? Bull. ;)

  • One

    Nice article overall, though. I wonder if this is why cable’s number one show (The Walking Dead) got its budget cut in spite of the fact that it was all but guaranteed to grow from season one to season two…

  • danielcw

    [quote]So basically, I count less than some random jackoff who just happened to be channel-flipping and stopped on NCIS that night, all because I strive to have three hours of primetime viewing on my schedule across six days of the week?[/quote]

    I don’t see how you get to this conclusion from the article. Could you explain it, please?

  • One @ danielcw

    There’s a bit of facetiousness in there, and I also didn’t get it from the article. I retrieved it from Bill’s comment above. To wit:

    broadcast primetime reaches some people that are *unreachable* on cable TV, but cable TV generally reaches people who are heavy TV viewers of both broadcast and cable are are easier (and therefore cheaper) to reach.

  • _JC

    I wonder how much more broadcast-to-cable erosion would have to take place for the economics to change. This site always talks about network TV steadily losing 5% or so every year, but if that continues to hold up, in another decade, that’s NBC-type numbers, and I can’t believe cable networks would still tolerate the same gap in ad rates then.

  • http://tvbythenumbers.com Bill Gorman

    “I wonder how much more broadcast-to-cable erosion would have to take place for the economics to change. This site always talks about network TV steadily losing 5% or so every year, but if that continues to hold up, in another decade, that’s NBC-type numbers, and I can’t believe cable networks would still tolerate the same gap in ad rates then.”

    It’s not relative ratings that’s keeping broadcast ad pricing higher than cable’s.

    The CW’s adults 18-49 primetime ratings are beaten by 5-10 cable networks a week, and that’s comparing a 10 hour primetime for the CW with a 21 hour primetime for those cable networks. Still, I’m sure that the CW’s ad rates / rating point are much higher than cables.

    And it’s not cable “tolerating” those lower ad rates, it’s advertisers being convinced to pay more for cable, and they don’t seem to be moving in that direction as far as I know.

  • Doug

    @ Bill – It’s kind of like convincing advertisers to pay more for Hulu ads. They haven’t in the past, so why would they want to now? I’ve been noticing an increasing amount of ads on Hulu though – we watched the last Revenge before the hiatus and there were about 14 minutes of commercials.

    @ One – I think TWD budget cut came out of needing to pay more for Mad Men (after it crossed into that magic 5 season mark) and having a limited budget with which to do it. TWD budget issue looked to be a huge misstep by AMC, but since ratings increased, they came out of it pretty well. This will be the first instance where you have a cable drama in the top 15 (I believe) on all of television, so I’d love to see what happens to the ad rates. AMC *should* be able to pull at least 200,000K for a 30 second spot, and perhaps higher. Assuming 30 spots per episode, that’s at least 6 million in revenue that they don’t have to share with affiliates. That will pay for a lot of development for them.

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