Network TV Defies Economic Logic

With the new TV season about four weeks old, the media is putting together reports about trends. In brief, against the key 18-49 demographic NBC is leading with CBS and ABC down and Fox down sharply. The NBC gain comes off a terrible fall 2011 for the network that should be pleasing to their new majority owner, Comcast. Some say that the Fox commitment to the baseball playoffs dragged them down a bit.

Every year at this time, I always seem to get several e-mails or phone calls from people asking is this going to be the last year of a network TV upfront marketplace (the “upfront” is when larger network TV advertisers join a veritable cavalry charge of fellow big time marketers and place perhaps 85% of network TV dollars)?  If you asked me 5-7 years ago when the upfront would dissolve, I am quite sure that I would have say by now. Today, I make no forecast as the upfront and network billing stubbornly hangs on.

What is interesting is that for many years network advertisers bid up the price of network inventory despite a decline in average audience and sometimes absolute audience as well. This seems to defy economic logic. We do not usually in our business or personal lives pay more to get less. In economic theory, there is an arcane concept called a giffen-good where you buy more of something when the price goes up. Economists are hard pressed to come up with many examples of a giffen-good.  And the Nielsen numbers do not even begin to take into account the loss of attentiveness due to the steady growth of commercial avoidance.

Why does network TV keep rolling along despite cable alternatives, Netflix, Hulu, and thousands of digital and social media alternatives? It is impossible to quantify but it seems that people do not seem to know where else to put the money. The big players appear to use network TV as a security blanket. They often trot out the horror story of Pepsi a few years back, which dramatically shifted monies from conventional advertising to digital and saw their sales get clobbered.  Very quickly, they righted the ship with a normal dollop of conventional media.

Most players tweak their media mix each year but, even then, network TV’s share of ad dollars sometimes increases. When will a few major players blink and not spend as much? It is hard to say. Package goods have made wholesales moves in to promotion for the last decade. Yet, the networks have done a superb job of bringing new categories in to the mix, which has propped up revenues. But the outstanding value that network TV once represented is no longer there. With DVR penetration in the 40+ percent range and people hitting the remote during breaks, even sports attentiveness is suspect.

The forecasters all say that the network TV model is broken and not long for this world. Every year their case gets stronger on paper and every year, the networks watch as advertisers bid up the price of their inventory despite weakening delivery.  Over time, pricing becomes rational in almost any market. This one seems a bit overdue.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com