Cable Takes A Ratings Hit

It will suffer under Nielsen's new system, which counts who's watching the ads

By Burt Helm

When advertisers demanded earlier this year that television networks charge for ads based not on how many viewers watch a given show but on how many watch the commercials, no one resisted the change more than the cable guys.

It's not hard to see why. Because of some demographic quirks--including younger viewers prone to channel-surfing during the commercials--the cable companies knew they'd get hammered in the ratings. That in turn would mean lower ad revenues. With the support of the big broadcast networks, advertisers pushed through the new Nielsen Co. commercial ratings anyway. Now, with the system taking effect this fall, the likes of MTV, AMC, and TBS are scrambling to adjust to a scary new world.

The switch to the new ratings system reflects a frustration that advertisers have long had with TV: Every time a show went to a commercial break, a chunk of viewers would click away to another channel. Since shows were rated based on how many people tuned in, advertisers had to pay for what often amounted to phantom eyeballs. Knowing that the changes roiling the media world had put more power in their hands, advertisers played rough this year. "We made it clear," says Rino Scanzoni, who, as chief investment officer for media agency GroupM, spearheaded the move. "We were not going to be negotiating on anything but commercial ratings."

Despite their woes, the major broadcast networks remain formidable players. They wanted to be compensated somehow for the potential loss of revenue, so media buyers agreed to a compromise. To make up for the ratings shortfall, advertisers would pay for DVR viewers who watched the ads within three days of airing. (Slightly less than half of viewers don't actually fast-forward through the ads, according to Nielsen.) The result? "It basically equaled the old ratings," says Mike Shaw, president for advertising sales at ABC (DIS ).

But the new ratings weren't so nice for many cable networks. While broadcast networks typically see 6% to 7% of the audience leave during commercials, channels like MTV with younger, more impatient viewers can see a channel-surfing dropoff of as much as 16%. News networks also suffered. Meanwhile, far fewer viewers TiVo cable shows because many of the offerings are reruns, news, and old movies. That's why the extra three days of eyeballs is cold comfort. In May, a test of the new Nielsen ratings left MTV 15% below where it would have been. All told, Viacom's channels, which include MTV and VH1, would have seen a 9% drop in that month. (The company has negotiated with most advertisers to wait until the first quarter of 2008 to begin using commercial ratings.) One analyst, Sanford C. Bernstein's Michael Nathanson, lowered his 2008 Viacom earnings projection by 5 cents a share based on the rating change.

Cable channels are hiking ad rates to offset revenue declines, but that's not sustainable. The key will be getting more people to watch the ads. That's why they are creating more short breaks and putting ads deeper in a show when viewers are more engaged. They're also testing more novel techniques. For instance, spots that run with AMC's hit show Mad Men include a short setup about the advertiser's history. On Everybody Loves Raymond reruns, TBS reserves the first commercial break for funny ads only. The company says viewership holds steady.

Helm is marketing editor for BusinessWeek in New York

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