The New Demand-Side Economics of Media

February 8, 2009 at 7:32 pm Leave a comment

(This article, which I wrote with my favorite German, Michael Fassnacht, the Chief Consumer Intelligence Officer of Draft FCB, was originally published in the November 3, 2008 edition of MediaWeek with the title: “Time to Switch Channels? The Price of TV versus internet ads is more out of whack than ever.”)

After the Olympics multimedia extravaganza, marketing trade publications were filled with triumphant accounts of how television ad revenue dwarfed online ad revenue. At first glance, the storyline seemed obvious: TV generated about $1 billion for NBC, online just $5 million.

However, to view this as a victory for television over new media is, to borrow a phrase from Wilde, to know the price of everything but the value of nothing.

What happens when one looks at the numbers from the standpoint of an economist rather than from the standpoint of a marketer? One of the most puzzling marketing phenomena is that companies, without rational explanation, will pay vastly different amounts for exposure and interaction opportunities with the same viewer depending on the media channel.

Though it’s difficult to get final and consistent numbers, it appears that NBC had close to 220 million TV viewers and almost 35 million online viewers for its Olympics coverage. Given that NBC got $1 billion in TV advertising revenue but only a little over $5 million in online revenue, this means NBC received almost $5 per TV viewer while it received only $0.30 per online viewer. This is a 30:1 value ratio. Or from a brand perspective, a brand (let’s call it “Yellow”) was willing to pay 30 times more for a TV impression than an online impression.

Granted, the Olympics are unique. The dynamic is different for regularly scheduled programs. A consumer—let’s call her “Jamie Smith”—watches a 30-second TV spot on Desperate Housewives on a Sunday evening. Yellow, the show’s sponsor, pays $0.025 to get this spot in front of Jamie ($425,000 price per spot divided by 17.3 million average viewers). After the program is over, Jamie goes to espn.com to see how her favorite college football team has fared. Now, Yellow is willing to pay $0.018 to put the online banner in front of her and $1.50 for Jamie’s click behavior when she wants to see more information about a particular sports product that her favorite football star is supposedly using.

Both scenarios raise questions. Why is Yellow paying significantly different amounts for a consumer interaction with its brand, when each offers similar exposure over a few seconds, just in a different medium? And why are the prices, especially for TV, so much different from viewing event to viewing event?

We believe there are several reasons for the wide variety of viewer valuations. First, there is a distinct economic balance between demand and supply in each medium. TV has much less supply, especially for popular programs and attractive live sporting events, while the Web has significantly more supply (for all practical purposes, it’s infinite, as there is no “program schedule” and no need to deliver the same ad to every consumer) and less demand. Second, TV is perceived as more powerful and influential than other media. This long-held belief in the media community has been challenged in a number of recent consumer-engagement studies, but it has not been categorically disproved. Therefore, it continues to live as a happy prejudice (in the literal sense of the word: a prejudgment). Third, most marketers still haven’t figured out the true value of TV viewers versus online viewers, so the majority stick with what they are used to. And that is TV.

The unfounded valuation of television viewers is clearly not based on a well-researched and proven ROI story. Rather, it’s a story of traditional buying behavior that has over the long term created a certain demand-behavior among advertisers. This means there is now an opportunity for smart marketers to invest their dollars away from overpriced media moments into more efficient media moments. Marketers need to take a number of steps to exploit the different (and mostly illogical) viewer valuations:

• Understand and calculate the value of particular moments to best intersect with your customers and prospects. The moment (e.g., Wednesday, from 7-8 p.m.) can be understood without immediately linking it with a particular medium.

• Understand and define the continuum of different engagement intensities and their associated values that are relevant for your brand. It should start with the lowest engagement level (e.g., 15-second TV spot) and reach to the most intense engagement level (e.g., interactive computer game with your brand) and all the various engagement points in between.

• Compute a value for a channel-specific viewer engagement based on your marketing goals, budget constraints and reach goals. In short, you need to calculate and define how much you are willing to pay to be in front of and engaged with a singular viewer at a certain point of time.

• Understand that supply of ad inventory should have limited relevance to value in a new media world where the potential inventory of advertising is infinite. The critical thing to understand today is total demand across all media.

Developing an understanding of the different value scenarios will enable a brand to better allocate its marketing budget independent of what are quite often illogical viewer valuations set by networks across all channels. Prices based on the supply of inventory in a single medium make no sense. It’s time to demand a change.

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