As online video gains viewers, cable TV’s losses mount. While 60% of US internet users surveyed told AYTM Market Research that they still had a cable TV subscription in May 2013, another 23% said they had a subscription in the past, but not any longer.
Consumers’ inclination to watch cable and network TV as it airs is declining fast, while consuming video on non-TV devices and watching over-the-top (OTT) content are increasingly becoming regular activities.
In a March 2013 survey, Leichtman Research Group found that 27% of US adults watched videos on non-TV devices every day and more than half of respondents did so on a weekly basis.
Online video and streaming is also bumping up the connected TV and OTT market. The Leichtman study found that in 2013, 44% of US households had at least one TV set connected to the internet, up from 38% in 2012. And as more TVs are connected digitally, online video viewing is rising quickly. This year, one-third of US adults surveyed reported watching OTT content daily (nearly double what it was 2 years ago) and 59% said they did so weekly.
YouTube and Netflix are big drivers of the movement to digital and OTT viewing. AYTM found that 29% of US internet users surveyed watched YouTube videos at least daily in May, and more than half of respondents did so more than once a week. Netflix has also seen a big bump in its subscriptions and use. In 2013, according to Leichtman, 22% of US consumers surveyed said they streamed Netflix weekly—more than five times as many as watched content via Netflix in 2010.
These trends are all pointing in the same direction: Traditional TV viewing is on the wane, and online video is rising fast. But this does not mean that TV’s role in the media ecosystem is totally diminished. As TV manufacturers and networks offer more dynamic viewing options, the nature of how and what US consumers watch on TV will continue to change.
AYTM additionally found that that over half of cable TV viewers said they watched less than half of the channels available via their subscription, and an overwhelming 74% said they would prefer to choose individual channels rather than paying for a whole bundle. As cable and network TV providers strategize how to keep consumers tuned in, all options are on the table.
This week, advertisers will sit down with the broadcast TV networks and hash out their “upfront” ad buying deals for the year.
The talks are one of advertising’s huge, dramatic set-pieces. As Ad Age describes it, “possibly as few as 40 people from the networks, agencies and brands will go into backrooms and decide how $9 billion of the $62 billion U.S. TV ad market will be spent next year.”
Networks are expecting, again, to see TV ad spending rise. CBS chief Les Moonves is bullish, and analysts expect the network may get 7-9% price increases. Some believe more than $10 billion will get spent.
Oddly, the networks want those increases even as the viewing audience itself dwindles. Goldman Sachs estimates that 17% of the 18-to-49-year-old demographic simply stopped watching broadcast TV in winter 2012-2013, the New York Times notes.
On its face, this doesn’t make sense: Why would advertisers pay more to get less?
The usual explanation is to do with supply and demand. Although TV’s numbers may be dwindling, it still has a massive audience. And with the fragmentation of the audience across thousands of different online and digital venues, there remain very few vehicles who can reliably deliver eyeballs in the millions, night after night. The supply of big audiences is getting smaller, in other words, and thus prices increase.
But there are signs that this won’t last, and that broadcast TV may be facing a crisis. The Times said:
“The networks are getting picked at from every direction,” said Jessica Reif Cohen, the senior media analysts at Bank of America Merrill Lynch. “This year was the tipping point,” she said, “when the television ratings really fell apart.”
Put that together with competition from Aereo, which reroutes free, over-the-air broadcast signals onto computers and iPads where people can watch TV without paying for cable. News Corp. has already said it will stop broadcasting Fox TV, and go cable-only, if it cannot extract transmission fees from Aereo. (Most people watch “broadcast” TV on cable or satellite, where stations get fees from subscribers.)
It’s not just Aereo of course. It’s Hulu and YouTube and Netflix and a hundred other alternatives to watching TV.
Think about that: The model is so broken that a major broadcaster has threatened to stop broadcasting in order to save itself.
It begs the question: With declining audiences, and dozens of new ways to watch shows without paying for cable, how long with these $10 billion meetings last?
The price of television advertising continues to skyrocket, even though audiences have dwindled as viewers have moved onto alternative, web-based video platforms.
There are up to 17% fewer TV watchers in some demographics this year, compared to previous seasons.
How, you ask, is this even possible?
The prices stay high because the TV networks act like a cartel and create the illusion of scarcity.
Imagine this scenario: Every year, a few dozen of the world’s top oil buyers and their clients — five major petroleum suppliers — gather in Midtown New York, enter a room that’s closed to the public, and agree on the aggregate price of oil for much of the rest of the year.
They don’t really know how much oil will be needed, but they can make a good guess. At least 15% of the U.S. oil supply gets priced in for the rest of the year in a series of gigantic contracts worth billions of dollars. Each buyer represents millions of American customers. The prices at which each buyer is getting his oil aren’t disclosed. And sometimes the suppliers aren’t even sure they can deliver enough oil to fulfill their part of the bargain.
If you were told that this is how oil gets bought and sold — through an opaque cartel that meets in secret — you’d be angry, and for good reason. There would be Congressional inquiries, antitrust prosecutions. Executives might even go to prison.
Oil isn’t sold like this, of course. Oil is traded on exchanges, and buyers and sellers can see the price of oil per barrel moving up and down in a fairly transparent manner.
But television advertising is, pretty much, traded like this, in what the industry calls the “upfronts.”
The upfront compresses what ought to be a yearlong buying season into just a few days. Advertisers are told “Buy now!” or face a severe disadvantage later in the season when all the good airtime is gone. All the networks agree to use the same week to make their pitch, even though they compete.
How upfronts work
Right now, ABC, CBS, NBC, Fox, and some of the major cable channels, are holding their “upfront” buying events in Midtown New York. They do this every year: The networks put on crazy shows, featuring their big stars, trying to build as much buzz as possible.
The shows are for ad-buyers, not the public. Last year, Jimmy Kimmel did a set for ABC in which he mocked the NBC show “Animal Practice,” which featured a monkey. “This is the first time that NBC has had a star that throws its own feces since Gary Busey on ‘Celebrity Apprentice,'” he said. Then he added, “We know that you have 9 billion to spend this week, so don’t get all cheap-o, Secret Service on us” (a reference to the scandal in which a presidential security officer short-changed a prostitute).
Once the shows are over, the buyers and the networks literally enter a secret room, or at least a room that no one else is allowed into, and do their deals. About $10 billion will get spent this month. Ad Age describes it this way:
This is the time of year when the most powerful ad execs in the nation stand in line — line! — to get into Carnegie Hall and Lincoln Center to hear the pitch, see the clips and laugh along with the stars.
… after these big parties are over, possibly as few as 40 people from the networks, agencies and brands will go into backrooms and decide how $9 billion of the $62 billion U.S. TV ad market will be spent next year.
This is madness. No other billion-dollar commodity exchanges hands with this lack of transparency.
“Clients do not share their rates, and if they found out an agency was sharing their rates, that would be it,” said one ad agency CEO.
TV airtime is sold in chunks of 30-second units. At base, it’s a commodity. Some of it is more valuable, due to shows with larger audiences, or skewed demographics. But 30 seconds inside “Two And A Half Men” is mostly the same as 30 seconds inside “Big Bang Theory.”
Yet advertisers never really know the “true” price of any 30-second slot. Via their media-buying agencies, they must cut their deals with networks without knowing what other advertisers are paying. The system hurts new advertisers with smaller budgets. Big clients like Ford and McDonald’s have been advertising for decades and know all the tricks. They can build in long-term discounts. New advertisers lack that leverage, and don’t know how deep the discounts are that other buyers are getting on the same airtime.
Levi’s once had the boldness to ask what prices other clients represented by its own ad agency were paying — and people freaked out:
“That kind of thing is not done, and it’s because of the cloak-and-dagger nature of how rates are decided in this industry,” one agency CEO told Ad Age. “Clients do not share their rates, and if they found out an agency was sharing their rates, that would be it.”
Imagine trying to buy stocks, or flights, or concert tickets on the same basis — the vendor would tell you the price you can buy stock at, but not what price everyone else was paying.
The networks have actively resisted reform
And they’ve been successful doing it:
- In August 2012, Google’s TV Ads experiment, an online exchange for airtime, was closed. None of the networks gave Google any significant inventory to sell.
- NBC offered Google only its worst niche inventory, on obscure channels like Sleuth and Chiller.
- A company called Spot Runner died after failing to sign a single client or network to its online TV marketplace, and Microsoft gave up on its attempt to do the same thing.
- The cable networks also resisted an attempt by Wal-mart to form an online TV ad exchange with eBay — and Wal-mart is one of the biggest buyers of TV in the U.S.
It’s not that Google and Wal-mart were defeated by superior competition from NBC et al. This is a business where as late as 2009, Tracey Scheppach of Starcom Media Group (one of the larger ad buyers) complained that some TV deals were still conducted by fax. MediaPost noted that “hundreds of millions of dollars can get spent literally over a lunch and with no more contractual requirement than a handshake.”
The inefficiencies are built in for a reason. Networks aren’t about to make their own market more efficient if that would mean lower prices for buyers.
And the buyers themselves have a conflict, too. The big media agencies pool billions of dollars of their clients’ money to cut upfront deals, in hopes of driving down the aggregate price through sheer volume. If that job was done instead via an online trading exchange, someone might ask the awkward question of why media agencies exist at all.
Clients are trapped because TV buying is genuinely complicated, and companies need specialists to do it for them. It’s almost a classic rent-seeking scenario from economics.
I’ll give the last word to MediaPost’s Joe Mandese, who compares the upfront to a Vegas casino where the odds are structured in favor of the house:
… it could well be the only marketplace where the sellers ask the buyers to “register their budgets” with them beforehand so that they can price their inventory most efficiently. The networks say they do this, and media buyers comply with the request, under the auspices that it is the only way to ensure that all the advertisers and agencies will get all the commercial time in the shows they want. Not because it is a method for the networks to “count the house,” model demand, and optimize their yield based on it — as observers in most any other market might conclude from such practices.