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The Real Deal on TV Ad Pricing

Jan 5, 2004  •  Post A Comment

Virtually since the inception of the upfront network TV advertising sales process, Madison Avenue has been complaining about it, but beginning this year a few agencies may finally be able to do something about it.
The usual upfront complaint is that the networks force the marketplace, bullying buyers into making long-term advertising buys before they have any real sense of what their advertising budgets are. It’s a strategy that’s worked magnificently for the networks, enabling them to drive disproportionate price increases in all but the most slackening of advertising demand years.
That’s the main complaint. But the real problem isn’t so much the timing of the marketplace, something that advertisers and media buyers theoretically could have some control over. Rather, it has been a decided imbalance in real market intelligence that has enabled the networks to exploit the uncertainties surrounding the early timing of the upfront marketplace.
Pricing Dynamics
While most agencies do their best to plan for an upfront, few have any real grasp of the supply-and-demand dynamics that ultimately will set market prices. In fact, the entire way Madison Avenue buys the upfront historically has made it impossible for them to know.
Because of the way network TV is bought and sold, agencies do not actually know the cost of ads in the shows they buy during the upfront. They learn that way after the fact-after their upfront buys have been processed through the networks’ inventory management systems and unit prices are assigned to those shows based on the cost per thousand averages the agency negotiated with the network. I learned this firsthand when I compiled the annual prime-time pricing survey for TelevisionWeek’s sister magazine Advertising Age. The ad agencies in the Advertising Age sample-and they were many of the biggest ones-said they actually did not know the average unit costs of the shows they bought until just before the start of the new TV season, when the broadcast networks gave it to them.
The reason for this is partly because of the way agencies plan and buy the upfront. But it is also because of the fact that agencies generally have no idea what the real supply of network inventory is, or what it actually costs.
“For a media buyer, the network upfront is a little like walking into a casino. All the odds are stacked in favor of the house before you even walk in the door. In the end, media buyers never know if they’re getting a good deal or not,” said Larry Fried, a longtime network sales executive who is working with some of the largest network advertisers and agencies to turn the tables on that process.
Mr. Fried, who was one of the top sales executives for ABC most of his career, is now chief revenue officer, national TV, at SQAD, a syndicated research company best known for its spot advertising cost reports for local radio and TV station markets. For much of the past year, Mr. Fried has been developing a new system called NetCosts that could substantially level the network advertising playing field.
Real Rates
The system, which is currently being beta tested by several major advertisers and agencies, compiles real network advertising prices directly from the financial systems (Donovan, Datatech, Encoda) used by Madison Avenue to manage its network TV buys. By aggregating the data across enough advertiser and agencies, Mr. Fried believes NetCosts will generate something that no source has ever had before: an open market source for real advertising rates for all network TV programs.
In fact, Mr. Fried said, that data is better than what an individual network has. While each network knows exactly what their supply of ad units are and how much they charged for each one, they must estimate how their competitors are doing in the marketplace.
While SQAD ultimately expects the networks to sign up for NetCosts, the primary market is advertisers and agencies themselves, who for the first time will have real data on the supply and cost of network ad units before and while they are negotiating an upfront, as well as during the year-round scatter markets. Such information could fundamentally change the way advertisers buy network TV.
In fact, that is the case in the U.K., where media auditors have created similar data that enable British marketers and agencies to negotiate with their TV outlets on a level playing field.
In its current beta form, the NetCosts database is based on approximately $5 billion in network TV ad buys, but SQAD has commitments from advertisers and agencies covering $6.5 billion in network TV ad billings. Mr. Fried said that when the service is launched at the end of the first quarter, its data will be based on $10.2 billion, or about 40 percent of the total network TV ad marketplace.
Armed with that data, he said, agencies could begin approaching the 2004-05 upfront in a very different way. Historically, he said, agencies have had little foresight going into an upfront marketplace and simply relied on the supply and demand dynamics of the market itself. If it was strong, they would accept higher price increases. If it was weak, they would seek lower ones or price cuts. But in all those cases, Mr. Fried said, the agencies were not actually negotiating the price of specific network TV ad units, but merely the “percent increase or decrease” of their upfront CPMs. By that he means the agencies were simply looking to beat the market average CPM change.
“Everybody thinks they’ve beaten the market,” says Mr. Fried. “You’ve got 70 percent of the market saying they’re beating the market by X percent. People tell their clients that they paid plus 12 percent and the market went up 14 percent. The problem is, they don’t really know if the market went up 14 percent.”
Because buyers have had so little information about the overall marketplace, Mr. Fried said it has been relatively easy for the networks to play around with each advertiser’s schedule, adjusting the mix of programs to make it seem as though their agency was beating the market average CPMs. Additionally, he said, nobody actually knows what the market average CPM is. Each network knows what its average is and individual agencies know what they paid, but everyone has had to guess about the rest of the marketplace.
Historical Database
While NetCosts subscribers won’t necessarily be able to predict future advertising costs-though the systems does have a forecasting module-they will have the best-ever historical database of real network advertising costs. The system houses five years of data. By analyzing that data, buyers can deduce the strongest and weakest spots in a network’s schedule, and they will also be able to see how they’ve treated others that have bought comparable schedules on a network. “Take a six-unit plan on CBS. You can look and compare it to what other people bought for the same six units on CBS,” noted Fried, adding, “It doesn’t say you can do better, but if you have all this knowledge, you can be smarter about how you handle yourself.”
NetCosts does not report detailed client, agency or brand data detail, just aggregates, but it does provide detailed breakdowns of specific schedules and TV shows and shows the ranges of prices paid by anonymous buyers.