The Simply Complex Economics of TV Advertising

There’s a reason TV advertising isn’t the go-to example for Econ 101 classes–it would surely confuse the whole class.

I don’t mean to say that the TV ad market doesn’t work, because it certainly does. But how it works is the most complex application of economics I know of. Consider some of these questions that don’t have simple answers:

What constitutes supply and demand in the TV ad world? Is it the supply of content, or the supply of ads, or something entirely different? Who determines when supply meets demand? Is it the broadcaster, the advertiser (based on sales), or is it viewership? Who or what controls the price? Is it the local market? The national one? Some other determinant? What about competition? Who’s competing against who in the TV ad market?

In a typical economics class you would probably use an ice cream shop or a simple retail store as your model for learning the basics. Someone starts an ice cream shop; people like it; the demand for ice cream goes up; the ice cream shopkeeper makes more ice cream to meet the demand; she gets competitors; she might change the price to take advantage of demand, or lower the price to spur more demand.

It’s all very straight forward. You know exactly how many ice cream cones get sold, who the competitors are, and the value of the ice cream cones to the consumer is very clear.

TV advertising is a near-unsolvable maze in comparison to the simple ice cream shop. The following sections explore some of the basics of the complex TV advertising market.

Who are the consumers and producers in TV advertising?

An important first step when getting to know any market is to identify its consumers and producers. In the ice cream shop model, the consumer is the ice cream eater and the producer is the ice cream shopkeeper. Splendidly simple.

But even this first step gets complex in the case of TV advertising. At first thought, I want to say that TV viewers are the consumers and the advertiser is the producer. After all, the advertiser produces the ad and the viewers consume it, potentially purchasing whatever gets advertised. That sounds like production and consumption to me.

But herein lies one of the complexities of it all. Because in fact, advertisers, not viewers, are the consumers.

Yes. Viewers “consume” the ad in that they watch it. And they might even go on to consume the good or service that gets advertised. But that’s a whole separate market, distinct from the one we’re talking about here.

In the TV advertising market, the advertiser does the consuming. The advertisers demand and the broadcasters/networks (content owners) supply. The advertisers pay the content owners–they make the purchase. And the broadcast station does the producing. Which brings up the next piece of complexity: what gets produced/consumed in the TV ad market?

What is the product in the TV ad market?

If broadcasters do the producing and advertisers do the consuming, what is the actual product? Again, I’m tempted to say that the ads are the product, because that’s something getting produced. But again, I would be wrong. The quickest way to identify the product is to find out what gets exchanged between content owners and advertisers in a transaction.

When an advertiser strikes a deal with a broadcast station, the station sells an ad spot during its programming. That’s the product–a little piece of time somewhere in a channel’s schedule. It’s intangible, and for years, the process of measuring the value of these spots has been no more than an educated guess.

(By now you can see why a beginning econ class would stick to ice cream shops.)

How does price get determined?

So what does the educated guessing process look like? How do you price a piece of time on a TV program?

Part of the understanding of the sale of this chunk of time is that the ad will be seen by a certain number of people.

An elaborate process of determining how many households view a program has ruled the TV ad market for half a century. Developed by Nielsen, this process monitors a sampling of households’ viewing habits. Using a complicated modeling approach, Nielsen makes an estimate of how many viewers might be watching a channel during a given program at a specific time of day.

Stations then buy this data and use it to determine a price for their ad slots.

An important fact to note is that the TV ad pricing process has begun to change recently. New technologies now offer more granular and immediate data than the Nielsen method.

These alternative technologies take out the guessing historically needed in determining viewership. In the case of the Spark Analytics Suite, the data is so rich that stations can break down viewership beyond simple demographics and compare their channel’s viewer volume with competitors. This richer data gives content owners pricing power previously unavailable to them.

Another important pricing element is that content owners have a limited amount of product to sell. There are only 24 hours in a day for programming, only one primetime, only one 10p news. Thus, supply will always be limited. If the ice cream shop wants to make more money, they can either sell more ice cream cones or make ice cream cones that consumers are willing to spend more money on. Content owners can’t just increase supply to make more revenue, so they’re forced to make their product more valuable to advertisers. The two factors content owners can change to improve their product is (1) find a way to promise more viewers and (2) offer more targeted advertising options. Both of these options rely entirely on data–accurate viewing data and audience demographic data.

Who competes in the TV ad market?

Speaking of competitors, who are the key competitors in the TV advertising space? If we compare the TV ad market to the ice cream market then ad slots are to ice cream cones, as broadcast stations and networks are to ice cream shops. Which means that broadcast stations are competitors. It sounds simple enough, but it has a few layers of complexity.

First, because of the demand for both local and national content (think local/national news, sports, lifestyle programming), the broadcast world continues to air at a local level, even though cable and satellite technologies have the capability to only show national content. This means that stations in one region compete against each other, but not against every station in a country. These regions are referred to as DMAs (designated market areas).

And what do they compete for? Eyes. Viewers. The station with the most eyes gets to demand a higher price for their ad spots (their product). And it’s a sum-zero market. Each market has a limited number of eyes to attract to a channel. Which means stations live in a perpetual battle with the other stations in their DMA.

TV ads aren’t ice cream cones

The TV ad market is a curious and complex beast. And to some degree, it has to be that way. But the data associated with TV advertising doesn’t have to be as complex as it has been historically. With technologies like Sorenson Media, the economics of the TV ad market will become simpler and better for content owners and advertisers alike.

Sam Petersen
Sam Petersen
Content Marketing Manager
Sam is a conflicted marketer. He loves being creative, but also thrives on numbers and analytics. Sam has worked in several messaging-focused roles during his career, including journalism, PR, product marketing, and now, content marketing. When he's not stewing over his conflictual identity, he heads to the mountains to hike, ski, run, etc.