The Network TV Advantage: Advertisers Pay More for Less

2014 is the 30th anniversary of landmark cable industry legislation that helped pave the way for the proliferation of newly available cable channels. Since then, we’ve also seen a sharp decline in prime-time network television audiences.

You’d think these trends would lead to a decline in media costs to reach people: As prime-time eyeballs disappeared, that should have reduced the cost an advertiser would pay for them.

However, the exact opposite has happened. With reduced audience levels, ad rates (measured in “CPM,” or cost per thousand impressions) have actually gone up.

As the chart below shows, the number of households watching prime-time TV has clearly fallen, while ad rates per person have gone up.

Why is that? Consider the basic economics of supply and demand. In this case, the economic good available to purchase is eyeballs. The supply of eyeballs (prime-time viewing audience) has certainly gone down, but the demand (what advertisers want) has stayed constant. Advertiser demand for those few remaining eyeballs is unchanged—as we have seen from previous research around static ad spending going back a century.

Same demand, combined with less supply = price inflation.

Dan Goldstein, chief strategy officer at DB5 Research, points out, “It is in effect more expensive to reach fewer people on TV.” In 1965, when shows such as The Dick Van Dyke Show and Bewitched dominated, a 30-second prime-time spot would have cost you $146,000 in today’s dollars. In 1983, the big shows were Dynasty and Dallas, and the average prime-time rate was about $190,000 in inflation-adjusted terms. Now, with shows like the Big Bang Theory on top, the average prime-time commercial is only $110,000.

While actual costs have decreased, the cost per person has almost doubled. With more fragmentation and more mobile screens robbing TV of viewers, the television business finds itself living a charmed life: The medium underdelivers when it comes to audiences, but overdelivers profits to shareholders.

That suggests a lot of network TV naysayers may be wrong. As long as prime-time TV can still bring in a “big enough” audience (or at least bigger than online or print), then advertisers will be willing to pay for the privilege of reaching a big chunk of consumers. Goldstein says “a big audience is a rare thing, and advertisers are willing to pay a premium to reach them.”

While companies such as Netflix and Amazon can deliver viewers individually tailored programming, they are so far unable to match the big ad rates networks command because their business model splits audiences into small groups.

Carisa Bianchi, president of ad firm TBWA\Chiat\Day agrees. She points out that “it’s really hard to get big audiences together” and “despite the scarcity of large audiences and dwindling TV ratings, it’s still bigger than the alternatives.” Her firm represents major clients like Nissan and Gatorade. “TV provides a better showcase for how they want to present themselves,” Bianchi says.

She describes the “cultural phenomenon that creates more engagement and more conversation” in the example of a new product launch. These brands would much rather “do it all at once in front of a large audience, rather than in smaller drips and drabs.”

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