It’s not that television advertising is nearing extinction, but the TV ad business model is in a time of transition. Yes, we all still gather around to watch ads during the Super Bowl, but things have definitely changed since the advertising heyday portrayed in the show Mad Men, when one TV commercial could change the world—or at least turn around a company’s sales numbers.
TV advertising is still one of the most effective ways to create awareness about a product or brand, but ad spending is moving to the digital realm and media companies are working to find solutions. Here’s a rundown of how TV advertising works, and how it’s changing.
- TV advertising remains one of the most effective ways to create product or brand awareness, but some ad spending has gone digital.
- Over the years, the TV advertising model has been forced to change repeatedly with the advent of DVRs, TiVo, on-demand, and streaming services.
- According to estimates, networks like NBC, ABC, Fox, CBS, and CW will earn between $8 billion and $10 billion in ad revenue for primetime viewing in 2021-2022.
- Streaming and on-demand companies like Netflix and Hulu, which insert few or no commercials, represent real competition for the networks.
Timing Is (Almost) Everything
According to the U.S. Bureau of Labor Statistics, Americans overall spent an average of 3.05 hours per day watching TV in 2020. That's actually up a bit, from 2.74 in 2019.
Of course, today's advertisers do not have a one-in-three shot of capturing the attention of each of those viewers, as they did when three major networks ruled the airwaves. Today's cable-connected viewers may have 1,000 channels to choose from, including pay channels that are commercial-free.
In the U.S., TV advertising consistently delivers companies the highest rate of investment of all media advertisements. Each channel has certain time constraints regarding the length of ads they can show and additional constraints regarding the subject matter. For example, during a morning kids' show, viewers won't see ads for beer.
For businesses with a limited ad budget, it's important to choose the right time at the right price to air the ad. A successful advertising campaign results from many correct decisions, including how often the ad is shown, how many people are watching the ad each time it airs, and the level of engagement that the ad produces.
For example, many TV advertisers are turning to second-screen advertising. The aim of these ads is to drive viewers to their mobile devices (those "second screens") to engage with the company on its website during the live program.
Brands and media companies also work to match the demographics of the viewers—such as their age and gender—to each show to market their product to these specific audiences. The popularity of the program and the number of times the advertiser agrees to air the ad all have an impact on the total cost of running the ad.
Because it’s one of the most-watched events of the year in the United States, for the most part, the priciest ads are shown during the Super Bowl. In 2020, Fox charged around $5.6 million for a 30-second spot.
Even though the TV ad model is in flux due to the shift to online programming and streaming services like Netflix Inc. (NFLX) and Hulu, advertising during live event programmings like the Super Bowl, the Olympics, or a show like Saturday Night Live’s 40th-anniversary celebration is still robust.
Meanwhile, streaming services like Netflix need to take out TV ads to drive customers to their service.
If it’s a show that people want to watch in real-time, advertising real estate is competitive. The term "primetime” used to mean the peak times of day when viewership was at its height, but with binge-watching, DVRs, and streaming, that has changed.
Upfronts and Sweeps
If you’ve read about the television industry, you’ve likely heard about the upfront season. It’s the advance-selling season in the spring when marketers can buy television commercial airtime (and digital ads) several months before the fall season begins.
The first upfront presentation took place in 1962, and every year since the major networks have unveiled their upcoming shows in hopes of booking the ad space.
There’s also the TV “sweeps” periods, which happen at set times during the year when shows have special guests or must-see events (such as Cam and Mitchell's wedding on the ABC sitcom, Modern Family or the much-hyped death of a major character on the drama, The Good Wife).
In turn, Nielsen Holdings N.V. (NLSN) data and ratings from that period are used to determine advertising rates for local stations.
The Cost and Pricing of TV Ads
For years, advertisers and networks have used Nielsen ratings and the pricing metric CPM (or cost-per-thousand, a barometer of the cost of reaching 1,000 viewers). These days, that measurement is becoming less important as technology changes how and when people watch programs.
If advertisers focus on targeting very select types of audiences, they can stop focusing on the exact time a show airs. It’s about finding the right audience rather than assuming a certain time period is a golden ticket.
According to Variety, networks like NBC, ABC, Fox, CBS, and CW are estimated to have secured between $8 billion and $10 billion in advertising revenue for their primetime viewing for 2021-2022.
For decades, shows that aired between 8 p.m. and 11 p.m. were the prime targets. It’s still a coveted time slot, but the push to digital is making it a little less desirable.
Over the years, the TV advertising model has changed with the advent of DVRs, TiVo, on-demand, and streaming services. Suddenly viewers can choose whether or not they want to watch an ad, while millions of people fast-forward through commercials and binge-watch their favorite programs with limited or no commercial interruptions.
Total TV ad spending in the U.S. shrunk 4% to $60.575 billion in 2021 from $63.4 billion in 2020. On the other hand, digital advertising is expected to grow by 19% in 2021, and to increase its share of total ad spend to 58%, up from 48% in 2019 and 54% in 2020.
Impact of Digital
It can be difficult to determine how much money in ad revenue has migrated away from primetime networks in favor of the increasingly popular digital and streaming services.
Also, the COVID-19 pandemic in 2020 and its continued after-effects in 2021 forced networks to change their scheduling, affecting advertising revenue in those years. For example, the Tokyo Olympics, which was scheduled for the summer of 2020, was postponed to the summer of 2021.
Undoubtedly, the influx of streaming services that are ad-supported offers advertisers more options for investing their money, creating competition for primetime networks. These streaming services include Peacock, Hulu, Paramount Plus, and HBO Max.
On-Demand and Streaming
Netflix is a leader in on-demand streaming services offering TV shows, movies, and original content. It offers zero commercials for a monthly fee, depending on the package.
Amazon Prime Video is another streaming service designed for customers who have an Amazon Prime account.
Hulu is the third major on-demand streaming service, which is owned by Disney, offering TV shows, movies, on-demand, and live TV.
Since many streaming services like Netflix don’t rely on advertising dollars, companies and traditional networks are trying to find new and better ways to reach their target audiences.
However, some of the networks are part of multimedia giants, which also offer streaming services. For example, Disney owns the ABC network, meaning it earns revenue from its streaming services with Hulu, Disney's movie business, and ad revenue from ABC's primetime network.
As a result of the consolidation within the media industry, it's not always clear how the migration of ad revenue from primetime networks hurts the networks if both are owned by the same media conglomerate.
The Bottom Line
Television advertising is not the money-making it once was but it's still a lucrative business.
While event shows like the Super Bowl remain lucrative, companies are battling DVRs, on-demand, and streaming services for viewers, and for the ad dollars that pursue them.
Advertisers will continue to look for ways to capture younger audiences who are increasingly watching their entertainment online or on their phones rather than on TV.
Still, traditions like the upfronts and sweeps weeks remain important since TV advertising generates billions of dollars in revenue for the networks.
Due to industry consolidation, many of the major media companies have fingers in both pies, digital and broadcasting.