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.
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.