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CBS Misstates Opportunity by Over One Hundred Million Dollars

Back in the golden days of television, the only way to watch a show was live. TV ratings measured the live viewing audience which in turn affected ad revenue. The networks’ ad revenue was a function of the size of the audience multiplied by the ad rate for that audience. (Not every viewer is worth the same amount to an advertiser.) Later, viewers started to record shows on their VCRs and DVRs for delayed viewing. After that, we got video on demand options. All of a sudden, measuring the size of the viewing audience became much more complicated.

Broadcasters were frustrated by having the part of their viewing audience who recorded shows not counted in the ratings. They always assumed that you can’t get paid for what you don’t measure, and in 2007, broadcasters succeeded in getting C3 ratings measurement. This meant that ratings would now include shows that viewers watched within 3 days of the original broadcast. So, if you recorded a show on Monday and watched it on Wednesday, you would be counted in the ratings under the C3 measurement system.

Earlier this week, there was an announcement that some new ad deals would be done using a C7 measurement scheme. C7 simply means that people who watch a show up to 7 days after the original air date will be counted in the ratings. Because the delayed viewing ratings are added to the live viewing ratings, C7 always means counting a higher number of viewers. CBS (and other broadcasters) has drawn the seemingly reasonable conclusion that these “higher” ratings will lead to increased ad revenues. This past Tuesday, CBS’ COO, Joe Ianniello, declared that going from C3 ratings to C7 represented a “nine-figure” revenue opportunity.

On the surface, Mr. Ianniello’s comment is supported by simple math (counting more viewers = higher ratings = higher ad revenue), and his logic is simple to follow. We also think that he’s wrong. Here are three reasons why:

Reduced Commercial Viewing During Delayed Playback:
Live viewing has always had the highest rate of commercial watching. Sure, you can always visit the kitchen or the bathroom during the commercials, and in TV is Next, we noted that 73% of viewers aged 18-24 used their cell phones to distract themselves during commercials. Still, the best bet to get someone to watch a commercial is during a live broadcast. When viewers watch recorded television, they skip about half the commercials. We have always found this number to be surprisingly low and have speculated that half the audience skips all the commercials, and the other half hasn’t figured out that they can fast forward through the commercials while watching on their DVR.

The point here is that the additional viewers added in the ratings under the C7 measurement scheme are skipping at least half the commercials. Advertisers are aware of this and aren’t going to pay full price for those viewers.

Commercials Are Often Time-Sensitive:
Let’s say you own a used car lot, and want to advertise a big holiday weekend sales event. You might want to do considerable advertising during prime time on the Wednesday and Thursday before your event. Alternatively, let’s say you’re trying to sell tickets to a traveling ice show or monster truck rally. You’d want to advertise heavily in the few days before the show. In the first case, C7 viewers may see your commercial after the sales event, and would be worth little to your business. In the second case, C7 viewers may see your commercial after the show, and would be worth nothing to your business.

Even if a broadcaster can get a viewer to watch an ad, that doesn’t mean that all ad viewing has the same (or any) value.

It’s worth noting that at some point, depending on the device used to record on-demand viewing, it will be possible to insert new ads into older shows. Hulu does this, but when it comes to DVR viewing, we’re not there yet.

Broadcasters Sell One Thing. Advertisers Buy Something Else:
Broadcasters sell the opportunity to make an impression on a certain number of people with predictable demographic characteristics. Advertisers buy the opportunity to increase their sales. While these are correlated, they are not exactly the same thing.

If Kraft spends $50,000 advertising macaroni and cheese on a particular prime time show, it can track the change in product sales versus the previous week or the same week the previous year. While Kraft does look at the ratings of the shows where it buys ads, what Kraft really cares about is selling more macaroni and cheese. We suspect Kraft has a pretty good idea of what it spends on ads relative to its sales levels.

C7 allows the networks to tell Kraft its getting more commercial views, but C7 doesn’t change the actual value that CBS (or any network) delivers. The number of viewers and commercial impressions that the network counts may go up, but the actual number of commercial impressions the networks deliver to the advertiser is completely unchanged.

The value of what CBS is delivering is unchanged:
Mr. Ianniello believes that advertisers will spend more than an additional $100MM while CBS delivers the exact same value to them…because CBS has changed the way it does its counting. We’re skeptical.

A Request to Advertisers and Marketers:
One of the great advantages of writing often in the media space is that people often come to us with valuable information on what they’re seeing in the media and broadcasting industry. That two-way flow of information and the ensuing discussions have helped us stay on top of events in a rapidly-changing industry.

If you’re reading this and have contacts in the advertising and marketing space who can confirm or refute our analysis on the switch to C7 we’d like to hear from you/them. If there’s enough interest, we’ll post a follow-up piece with updated thoughts on the topic

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