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The Great Divide

Why is the CPM gap widening if cable keeps grabbing viewers from broadcast? 3/28/2004 07:00:00 PM Eastern

You're addicted to Dick Wolf shows, so you don't miss Law & Order: SVU on NBC. Then, you can spend the next hour catching reruns on USA Network. But hit cable, and you're worth a whole lot less. NBC sells L&O fans to advertisers for an estimated $25-$30 per thousand. On USA, an advertiser can buy you for half that much.

That's an example of the gap between broadcast and cable, and that chasm is driving cable networks crazy. CPMs (cost per thousand viewers) are the currency of the ad business. Most often, ad buyers won't pay as much to reach a thousand cable viewers versus a thousand broadcast viewers.

"I can't begin to understand it," says Greg D'Alba, CNN executive vice president of sales and marketing. He has watched broadcast viewership shrink 4%-11% so far this season, depending on the demo. Advertisers get burned by networks that miss their ratings guarantees. As basic cable programming gets stronger and steals more viewers from broadcast networks, the CPM gap grows even wider.

Conversely, while ad-supported cable draws almost 50% of all prime time TV viewing and sometimes more, basic networks collect just 29% of the total dollars spent on network television. Data collected by ad research firm SQAD show that, three years ago, general-entertainment cable networks like TNT, USA Network, and FX sold many of their prime time spots at a fat 54% CPM discount to broadcast fare. This season, that gap is even fatter: 66%. And in the demo that advertisers chase most, adults 18-49, cable's discount for shows like FX's The Shield widened from 54% to 60% today.

Similarly, cable news networks were selling at a 44% discount to broadcast news shows. Now that's widened to 47%. For networks that target teens and young adults, the story is a little better. Networks like Comedy Central and MTV can sell Chapelle's Show or Newlyweds at a 35% discount. Still, that's wider than the 31% gap two years ago. Admittedly, ad executives quibble with some of SQAD's figures—which are based on regular surveys of buyers—they note there's little or no gap on certain programs, including ESPN's NFL games, Nickelodeon's cartoons, and CNN's Lou Dobbs.

Cable channels drawing upscale homes (Discover and A&E, for example) operate at a small discount, or none at all, in some demos. Cable, ironically, is a victim of its own success. As it steals audience from networks, advertisers have fewer opportunities to reach millions of broadcast viewers at once. That scarcity gives NBC, CBS, and the other established networks the leverage to jack up prices for their big-reach shows, those drawing 10 million-20 million viewers. This despite the fact that, in the days before the onslaught of cable, those same broadcast networks shows enjoyed audiences twice as big. "We believe that CPMs will increase simply by virtue of the fact that ratings are down," ABC President and COO Robert Iger explained to an analyst last year.

In other words, Iger was saying, you can win for losing. By comparison, advertisers are less impressed by the average reach of even a top-10 cable network, which attracts between 1.2 million and 2.6 million viewers.

Cable's cheap prices let advertisers air a commercial frequently, but it's harder to reach viewers who haven't seen the ad before. One buyer estimates it can take two weeks of repeating a spot to reach the number of unduplicated viewers an advertiser can get on broadcast in one night. "Cable is efficient in many ways," says Carat USA's David Verklin, "but some clients need the big reach."

From the network's vantage point, cable's whining ignores the reality of basic economics. "It is a supply-and-demand business," says ABC President of Sales and Marketing Mike Shaw. "The demand against the cable inventory isn't as strong as the demand against the broadcast inventory." And, of course, the supply of cable inventory is much larger. There are 57 basic networks rated by Nielsen and perhaps an additional 40 digital services that aren't. Each cable network start-up dumps another 140,000 spots a year onto the market.

Big supply means cable networks don't completely sell out their inventory, so they have less pricing leverage. "Demand is at the networks," says Larry Fried, SQAD's chief revenue officer, national TV. "Until cable networks can start to sell out, it's hard to match the CPM increases."

Not that cable networks are suffering badly. Prices and revenues are still increasing along with audiences. But the most promising path to strong financial growth is narrowing the CPM gap, not watching it widen.

For their part, broadcasters push other buttons to try to keep dollars away from their cable competitors. ABC, for example, has a special presentation emphasizing broadcast networks' programming quality. The ad- sales staff at another broadcast network has a list of questions it uses to defuse ad buyers when they start touting the low cost of cable. How many of the spots a cable network is offering are actually in prime time and how many are in less desirable fringe hours? Can the buyer break out the CPM for just the prime time spots? Is it really as cheap as the whole package? How many homes actually see the network?

Even top-10 networks fail to reach the 11 million-15 million homes that don't subscribe to cable or satellite services. Those are generally lower-income households. That may not matter to Mercedes-Benz, but it does to McDonald's.

Kaki Hinton, vice president of ad services for Pfizer consumer group, is looking for an even distribution of reach across heavy, medium, and light viewers. The drug company's ad mix includes a healthy dose of cable, but "you're going to reach the heavy viewers no matter what you do," she says. "If you need light viewers, you're talking prime time broadcast."

If you believe the posturing of ad buyers this year, cable's frustration may be eased. Buyers express annoyance at last year's upfront, in which high prices pushed broadcast's take to $9.2 billion. (Cable took home $5.5 billion, around half its annual ad sales.) Now, agencies vow to shift $1 billion-$1.3 billion of broadcast spending to cable to counter broadcasters' price demands.

Discovery Networks Ad Sales President Joe Abruzzese notes that broadcast's big CPM gains are offset by ratings shortfalls and cancellations. Broadcast networks sold 90% of their inventory in last year's upfront market, booking average 15% CPM hikes. But according to the Broadcast Cable Financial Management Association, their revenues grew just 3% in the fourth quarter.

What is the "tipping point?" for the CPM gap? Abruzzese says, "It erodes gradually. The CPM gap will only get closed with more pressure from ad buyers."

The Gap Grows
Cable ad rates continue to lag broadcast, adults 18-49
Average CPM Cable's discount
2001-2 2002-3 2003-4 2003-4
General cable = TNT, TBS, USA Network, Lifetime, ABC Family
Young cable = MTV, Comedy Central, E!, Sci Fi networks
Upscale cable = A&E, Discovery, History
SOURCE: SQAD Netcost reports
PRIME
Broadcast $19.71 $21.07 $24.47
General cable $9.04 $8.94 $9.63 61%
Young cable $14.17 $15.34 $18.14 26%
Upscale cable $20.19 $21.04 $23.80 3%
DAYTIME
Broadcast $7.33 $7.40 $8.20
General cable $2.61 $2.55 $2.76 66%
Youth cable $5.11 $5.42 $6.09 26%
Upscale cable $7.12 $7.20 $8.01 2%
NEWS
Broadcast $13.53 $13.70 $15.03
Cable $9.27 $9.08 $9.78 35%

 

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