Cheaper by the thousand
No matter what the cable networks do, they can't close the CPM gap with broadcast nets. Here's why
By John M. Higgins and Allison Romano -- Broadcasting & Cable, 2/3/2002 7:00:00 PM
When a 35-year-old man flops down on the couch, pets the dog and tunes in to watch The Agency on CBS Tuesday nights, he has a certain value. CBS will sell his eyeballs and those of other men 18-49 for about $43 a thousand (a thousand pair, of course).
If he picks up a remote control, though, and surfs over to USA Network to watch Keanu Reeves save the bus passengers again in theatrical movie Speed, his value drops dramatically. Even though USA will be selling the same eyeballs in the head of the very same 35-year-old to perhaps even the same advertiser, the network probably won't command even half what CBS did minutes earlier. General-entertainment cable networks like USA sell 18-49 men for around $19 per thousand, a 56% discount from what CBS and other broadcast networks command.
It's not just men. Research into ad pricing shows that cable networks like Lifetime get about 40% less for women 18-49 in prime time than NBC can. TNT is selling older adults for about 55% less than ABC.
It's one of the most maddening issues for cable-network executives: the CPM gap.
Despite all the praise cable networks get for some of their programs and their increasing share of the television audience, they don't get full respect from advertisers, which are willing to pay up for broadcast nets. When it comes to the most common benchmark in the advertising business, to put it bluntly, cable doesn't match up.
This is not new; it has been the case for years. What's surprising is the progress that cable networks have made in the past few years toward closing that gap: virtually none.
Indeed, data from ad research firm SQAD shows that, in general, cable's discount to broadcast CPMs is actually two to four percentage points wider than it was in 1997.
CABLE'S 'IRON CURTAIN'
Cable networks that tend to draw better-educated and -paid viewers (for example, Discovery and A&E) do better. For most ad buyers, a broadcast viewer is worth more than a cable viewers.
"It's still painful," said Joe Ostrow, president of the Cabletelevision Advertising Bureau, which holds its annual advertising conference at New York's Marriott Marquis Hotel on Tuesday. It's Ostrow's job to promote cable programmers' case on Madison Avenue, and he knows more than many others that ad buyers' perception of cable and broadcast is, as he calls it "an Iron Curtain that's hard to penetrate."
Noting that CPM data for various networks are estimates and difficult to obtain, Turner Broadcasting research chief Barry Fisher said he believes the CPM gap hasn't widened that much, but acknowledged that it hasn't shrunk, either. "There seems to be equilibrium."
He acknowledged that the disparity is frustrating, particularly given the audience defections from broadcast to cable. "How much longer can people spend more for less?"
Said OMD Director of National TV Chris Geraci, "There's a cyclical relationship between broadcast networks' ratings, talent and revenue that is hard to break once you've established it."
The bottom line is that advertisers put a premium price on reach; they want to cast as wide a net as possible. And the biggest broadcast networks average 7 million to 10 million households and 5 million to 10 million adults 18-49 at one time. The biggest cable networks capture 800,000 to 1 million homes, 300,000 to 400,000 adults.
Arithmetically, the price of a 30-second cable spot should be lower, but the cost per thousand shouldn't. When MGM opens Rollerball in theaters this Friday, that film studio wants to have advertised to the widest group of viewers possible. So be assured that the action drama will have been heavily promoted on the broadcast nets' Thursday-night lineups. Broadcast networks, particularly NBC's Thursday-night schedule, feast on Friday-night movie openings.
LIVE BY NICHE, DIE BY NICHE
Advertisers also like targeting, which is why certain young networks like MTV and Comedy Central actually can close the gap with broadcast nets and sometimes out-price them. But niche networks—by definition—aren't where the big audiences and big ad spending are.
Perhaps worst of all for cable networks is the enormous amount of supply. Each network startup increases the number of mouths to feed on the cable side of the ad budget. It's one thing to cut a deal for ESPN, but, when a sales executive also has to make deals for ESPN2, ESPNews and ESPN Classic, it dilutes the leverage.
"It's all about ratings size," said Lawrence Fried, chief revenue officer/network TV for Tarrytown, N.Y.-based SQAD. "How do you accumulate reach and [attract] different viewers? As low as the broadcast networks have fallen, they're going to be six to seven times higher than the cable networks.
Or, as one broadcast network executive put it: "7,000 spots on Oxygen don't really equal one on All My Children."
Even for repurposed shows like Fox/FX's 24 or NBC/USA's Law & Order: Special Victims Unit, the cable run gets a lower CPM (partly because the shows don't run in prime time on cable).
When Turner Broadcasting Chairman Jamie Kellner put a second run of Charmed on TNT's schedule last fall, he expressed hope that TNT and The WB would get the same CPM for the show. Sure, one ad agency executive joked in response: Sell Charmed on both networks at the low, low TNT price.
(One thing has changed: A decade ago, broadcast sales executives openly bashed cable's audience delivery to explain their CPMs. But now that ABC, NBC, CBS and Fox have huge investments in cable, the diatribes have stopped.)
Buyers place a marquee value on the broadcast airing and its higher ratings. "You're paying for the first time to any eyeball whatsoever. There's no prospect of duplication," says Kris Magel, manager of national broadcast for Optimedia International. Charmed is a bit out of place, a young, female-skewing show on a network otherwise crafted for adults 25-54. "TNT is not specifically targeted as the place to find Charmed . You're not getting the same 12-34 and 18-34 [-year-old] eyeballs."
Indeed cable pricing is up. SQAD estimates that cable CPMs have increased 12% to 20% in prime time since 1997, with its group of young-skewing and upscale networks showing the best growth. It's just that broadcast networks' growth is higher, with CPMs up 25% in prime.
Broadcast is simply stronger. Investment banker Morgan Stanley estimated that advertisers spent $20.9 billion on network advertising last year. The recession cut broadcast nets' sales 6.6% on average, to $13.5 billion.
But cable networks fell harder, losing 11.5% and falling to $7.5 billion. Both sectors should fall another 5% this year.
Morgan Stanley advertising-services analyst Michael Russel estimates that broadcast networks' audience CPMs average $16, local TV stations' $23, magazines' $6, newspapers' $19. Online banner ads get just $3.50.
"Daily newspapers generate high CPMs due to their targeting ability, " Russel said in a recent report. Prime time broadcast television is high "due to its broad reach. Eventually, we believe, the Internet will likely be able to combine very good targeting and very broad reach and thus generate a CPM above its current level."
The problem with Internet ads is the enormous supply. Any 14-year-old running a Britney Spears Web site on Geocities is contributing to the vast pool of cyberflotsam.
The CPM-gap fight wasn't supposed to go this way. In the mid 1990s, cable executives were gleeful about the prospect of narrowing—if not eliminating—the gap. First, as cable's distribution and programming improved, broadcast nets' share of the audience dropped like a stone, sliding 10 percentage points in just three TV seasons, from 52.4% in the 1993-94 season to 42% in 1996-97. It had taken a decade for cable to grind the previous 10 points out of broadcast, chipping down from 62% share in 1984 to 52% in 1994.
THE OPTIMIZER EFFECT
Cable was also getting much-better-quality programming. The traditional broadcast-network window for big theatrical movies suddenly became the basic-cable window as the Turner networks and USA started paying up to get them first. More recently, cable networks have started to get runs of off-network series almost immediately after they appear on one broadcast. And cable's original series simply got good, like Lifetime's Any Day Now.
A less obvious trend was the arrival at U.S. ad agencies of "optimizers," elaborate modeling software to help media buyers buy. Optimizers furiously sift pricing and Nielsen ratings data as never before. Cable sales executives contended that optimizers would lead ad buyers through the back roads of cable networks to efficiently piece together the big audiences that ad clients sought, but at much lower cost than on the wide toll roads of broadcast networks.
In theory, optimizers would lower advertising costs by churning out the most efficient buying plan. The process was sure to benefit cable because of the industry's discounted pricing.
When the computers crunched the numbers, though, buyers became leery. Optimizers recommended that most of a media buy, sometimes 60% to 80%, go into cable, which had seen maybe 30% before.
"If you use it raw, it will always take all your money to cable. It would be a drastic change in the way buys are made," said Lifetime's Tim Brooks. "Agencies weren't comfortable making such a change overnight."
Buyers say optimizers are now a mostly back-office tool. "It has kind of left the vocabulary during negotiations," says Lifetime Executive Vice President of Ad Sales Lynn Picard.
Cable programmers may have no one to blame for the CPM gap except themselves. Cable's growing supply of networks—with ad space to fill—has diluted the demand in the market.
"With so many cable networks rapping to get on the buy, cable's tsunami of inventory has undercut its ability to raise CPMs," said Brooks.
Without axing networks, the best way to raise CPMs is with strong programming that rivals that on broadcast. Media buyers will pay premium rates for sterling cable programming.
Industry sources say Lifetime's highly rated Sunday-night dramas command CPMs only 20% below what average broadcast CPMs draw. A media buy for The Division or Strong Medicine is likely higher than CPMs for low-end broadcast products, buyers said.
TOO MUCH TO CHOOSE
Sanford Bernstein & Co. media analyst Tom Wolzien paints a frightening picture for cable networks. Distribution growth means that formerly mid-size networks are now large networks.
Forget the digital startup nets. He calculates that networks passing the 60 million-subscriber mark—good potential reach by cable standards—have increased commercial inventory 30% in the past three years. In the next few years, he sees enough networks coming on strong enough to balloon that inventory another 70%.
"The consumer's plethora of choice can be the provider's excess," Wolzien said, "with resulting loss of pricing power for all but the most unique products."
A fortunate few cable nets command CPMs that rival those on broadcast networks. "Anytime you're dealing with an under-served demo, those distributors are able to charge a premium," says Optimum Media CEO Steve Grubbs. MTV's hard-to-find teens and ESPN's loyal male sports fans are among the most desirable cable audiences.
ESPN's flagship news show SportsCenter or its Sunday-night National Football League telecasts can attract CPMs between $18 and $20, rates that sources say are right up there with CPMs for sports on broadcast networks.
But niches, even good-size ones, can be volatile. Through early 2001, CNBC was considered one of cable's hottest properties, with daytime programming attracting very high rates. "Demand for their time drove their prices through the roof," Grubbs recalls. When the stock market turned downward, though, so did CNBC's CPMs.
Buyers say these networks prove that cable is a better medium for targeting specific consumers, not the masses. The Food Network is a good buy for food products; Nickelodeon is the first for new toys.
"If it's niche and hitting hard-to-reach target, you might pay a premium, regardless of the rating," said Horizon Media's Brad Adgate.
Broadcast networks work better for advertisers that want to hit more viewers in a concentrated period. "Movie companies have a two-week window to build as much reach as they can," so they'll go to broadcast, said Grubbs. Retailers, fast-food companies or anyone running a promotion also wants broadcast time, he added.
In the 1980s, fledgling cable networks offered advertisers deep discounts just to get on media buys. They've been trying to claw upwards ever since, and the competition has multiplied. With more digital networks coming on, the glut will only get bigger. Some specialized networks will get higher CPMs, but most will only cannibalize themselves.
Said Kagan Media cable analyst Bill Marchetti, "It's something they'll have to live with forever."
| Shop & Compare | ||
|---|---|---|
| Spot cost per thousand households, according to SQAD | ||
| Cable | '97-'98 | '01-'02 |
| *Prime time mass: USA, TBS, TNT, ABC Family and Lifetime; Upscale: A&T, Discover, History; Youth: MTV, VH1, E!, Comedy Central, Sci Fi, Nick at Nite Source: SQAD, Netcosts |
||
| Daytime | $1.80 | $1.83 |
| Early fringe | $4.00 | $4.39 |
| Prime youth* | $8.20 | $9.58 |
| Prime mass* | $5.25 | $5.90 |
| Prime upscale* | $8.75 | $10.41 |
| Late fringe | $4.00 | $4.41 |
| ABC/CBS/NBC | '97-'98 | '01-'02 |
| Daytime | $4.25 | $4.19 |
| Prime | $11.85 | $14.86 |
| Late fringe | $9.60 | $12.25 |
| Syndication | '97-'98 | '01-'02 |
| Daytime | $3.35 | $3.25 |
| Early fringe | $6.30 | $7.30 |
| Prime | $8.75 | $11.58 |
| Late fringe | $7.00 | $7.76 |
| Spot | '97-'98 | '01-'02 |
| Daytime | $4.90 | $6.85 |
| Early fringe | $6.70 | $8.39 |
| Prime | $14.95 | $27.93 |
| Late fringe | $8.55 | $11.63 |
| Growing wider | ||
|---|---|---|
| The cable CPM discount (shown here in percentages) is greater today than it was four seasons ago, according to SQAD | ||
| Daypart | '97-'98 | '01-'02 |
| Source: SQAD, Netcosts |
||
| Early fringe | 37% | 40% |
| Prime mass | 56% | 60% |
| Prime upscale | 26% | 30% |
| Late fringe | 58% | 64% |
| Bargain bin | |
|---|---|
| Selected cable networks | |
| (2000, all dayparts) | |
| Network | CPM |
| Source: Kagan World Media |
|
| CNBC | $8.87 |
| Discovery | $8.10 |
| VH1 | $8.10 |
| MTV | $7.90 |
| TNT | $6.50 |
| Lifetime | $5.40 |
| USA | $4.90 |
| History Channel | $2.79 |
| Cartoon Network | $1.58 |
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