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Plenty of Nothing

As broadcasters lose more viewers, they make more bucks 6/01/2003 08:00:00 PM Eastern

It happened again. Even the R&B stylings of Ruben Studdard and the continuing madcap adventures of Jennifer Aniston couldn't stop it. In the TV season just ended, the seven broadcast networks lost another million or so viewers to that swarm of ad-supported cable networks that stretch from TNT to something called Fuse.

So that's bad news for the broadcast nets, right? Fewer viewers mean less advertising dollars because that's what the nets sell: viewers.

No.

In a bizarre kind of TV-advertising way, the broadcast nets' declining viewership is a good thing. When the supply of broadcast viewers goes down in the face of continuing strong demand, prices go up. My high school economics teacher, Mr. Grabenstein, taught me that. And the just completed broadcast upfront proves it.

What got me thinking about all this is a Disney earnings call I sat in on early last month. Fulcrum Global's Rich Greenfield asked Robert Iger, the company's president and COO, to handicap the upcoming upfront selling.

"Rich," he responded, "we believe, obviously, that CPMs will increase simply by virtue of the fact that ratings are down, at least across the entire segment, although ABC's ratings are not down versus last year. They are actually up."

There it is—what we will now call the Iger Paradox. Disney and, needless to say, the other network owners were anticipating a big broadcast upfront at least in part because the supply of what the industry calls gross ratings points went down. With reduced supply, they could jack up the prices, which they did, as much as 15%.
It contributed to their record $9.4 billion prime time upfront.

Of course, what each broadcast network really wants to see is its own ratings grow while everybody else's fall so that it has a bigger share of a dwindling supply. That is upfront nirvana. And that was, as Iger noted, where ABC was, going into the upfront, although its viewership gains were not all that big.

Advertising guru Erwin Ephron confirms the Iger Paradox but warns that the networks had better not base their future on it. "You can't keep charging more for less. It's short-sighted, and it's not a business model."

Behind the paradox is the fact that advertisers do not consider other media—cable, radio, billboards, TV syndication, you name it—an adequate substitute for broadcast prime time. If they do nothing else, the marketers of cars, toothpaste and the Purple Pill feel they have to buy big hunks of broadcast prime time. They just have to and will pay the steep price increases the networks ask, although they may grumble as they cut the deals.

In the middle of the upfront selling, Karen Soots, national media manager for Red Lobster, appeared on a New York panel complaining about rising broadcast prices (she figured on 8% hikes and ended up paying 13%). I asked her why not hang up on the broadcasters and take her millions to cable, where the seemingly endless supply of GRPs tends to suppress prices.

Competition, she answered, in a word. If Appleby's is basing its marketing on broadcast network TV, so must Red Lobster. I suspect the same is true for every other ad category.

Broadcast TV does have unique and appealing qualities that may justify the premium prices. Not only do the major broadcast networks reach every one of the 106.7 million homes with TV, but they reach every TV set within those homes. A mass advertiser seeking to reach the largest possible audience quickly and efficiently still needs broadcast. Even Turner, which is working as hard as anybody to close the widening gap between broadcast and cable prices, concedes that.

And then there are those broadcast intangibles. It has tradition, it generates buzz, it creates full-blown celebrities overnight (ask Mr. Studdard). What marketer wouldn't want to be a part of it?

Ephron is right. At some point, the broadcast audience shrinks to a point where it loses its mass-market magic. But my guess is that the Iger Paradox holds up as long as broadcast networks can deliver audiences five or six times the audience of the largest cable networks. ABC is a middle-of-the-pack broadcast network. Yet its average audience is five times greater than the best cable network and 10-20 times greater than most cable networks.

Red Lobster had better start putting money aside now for the broadcast upfront in May 2004 . Have you seen the new shows? The networks may have a really, really bad year.

Jessell may be reached at hjessell@reedbusiness.com

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