Assessing TV Networks: Reaching For The Right Metrics
By Brian Wieser, CFA, Senior Research Analyst, Pivotal Research Group

12-14-12

Brian Wieser, CFA While ratings remain an important metric for media industry observers to monitor, they are only one variable involved in determining how valuable a TV network is to advertisers. As ratings converge between broadcast and cable networks in particular, the insights that ratings provide on the health of a network will also diminish. By contrast, reach – and a network’s incremental reach in context of the rest of a marketer’s plans – has become more important in recent years, because it becomes harder to cost-effectively aggregate reach. To the extent that fragmentation continues, the importance of reach will only grow into the future.

The focus on TV ratings by media industry participants, both direct (i.e. marketers, agency employees and media owners) and indirect (press and analysts) is understandable. They have long since formed the basis on which buyers and sellers establish the prices for the advertising units they trade on. Further, outsiders who follow the industry have always needed some kind of scorecard with which to monitor the business. While more ratings will always be better than fewer ratings, all else equal, fragmentation has increasingly diminished the usefulness of ratings as a standalone measure to this latter group.

By contrast, reach should be considered as an increasingly important metric, as it becomes an increasingly important variable which dictates where spending will go. The reason is that media agency planners working on behalf of brand-centric advertisers (vs. those with a direct-response orientation) typically seek to optimize marketers’ budgets on the basis of reach and frequency. Of those two metrics, reach has always been the more challenging one to come by. As audiences fragment across scores of channels, reach becomes even harder to achieve without substantial audience duplication, such that a high rating may only be useful if it brings an incremental audience to an advertiser’s schedule.

To illustrate, if an advertiser buys one unit of inventory from a network, the rating in percentage terms will equal reach. But if a second unit of advertising includes any audience exposed during the first unit, there has been duplication, and reach will be lower than the aggregated number of ratings points, or gross ratings points (GRPs) purchased. Duplication becomes a bigger problem when the number of units involved in a campaign is substantial, a typical situation given the scale at which large brands must operate. Network TV is less impacted by this problem despite falling ratings because 1) Network TV necessarily reaches more of the population in the course of a day, a week, a month, or a year (every TV household has access to network TV, and almost everyone watches some of it because of the breadth of appeal of the programming – literally there is something for everyone) and 2) the rating for a typical network TV show included in a package of inventory from a broadcast network is still higher than the rating for a typical cable show. The reach differential largely explains why broadcast networks can continue to command substantially higher CPMs than can cable networks, even as average ratings converge.

But the same advantage of reach can hold true within cable. For example, a network with limited reach will find the GRPs it sells are concentrated among a relatively small segment of the population, resulting in significant duplication. By contrast, inventory sold by a broader reaching network can provide a given number of GRPs among more people, meaning less duplication will occur.

Consider Fox News, MSNBC and CNN. Fox and MSNBC could each have an average hypothetical 1.0 rating, compared with 0.5 for CNN. However, if CNN reached 40% of the population in a month when Fox and MSNBC reached only 20% (implying that the average Fox News or MSNBC viewer watched four times as much of each respective network as a CNN viewer watched CNN), CNN could remain the more valuable marketing tool to an individual marketer, at least on a stand-alone basis, if only because an identical quantity of GRPs will accomplish broader reach. Of course, any given network is better off having higher ratings – and thus more GRPs available for sale – but when considering that the typical cable network is unable to monetize a substantial portion of inventory to higher paying large brands (as much is sold to typically lower paying direct response marketers), when reach is taken into account, revenue gaps will be nowhere near as substantial as the ratings gap between the networks.

This issue is also highlighted with Spanish-language programming. Both Univision and Telemundo have the greatest gap between average ratings and monthly reach among ad-supported networks. The reason is simple: viewers of these networks concentrate much of their viewing with these two networks. Consequently, advertisers looking for a significant number of GRPs and who buy those networks will end up with significant duplication.

Discovery Communications’ Investigation Discovery is a good example of a network facing this challenge, and making strides to overcome it. During November of this year, its ratings placed it as the 32nd most popular network. But by reach the network ranked #55. Any network with such a gap will face some challenges in generating incremental revenues from large brands on the basis of ratings alone. But ID is faring well in narrowing this gap, as one year earlier (during November 2011) it was the 47th most popular by average viewing and 73rd most popular by reach. Into the future, improvements in reach will probably have as much of a positive impact on ID as will ratings improvements.

The importance of reach – and ratings, too – is very different in a world where advertisers can buy individual impressions, as increasingly occurs on the web with real-time-bidding (RTB), although such technologies and business models are many years if not decades away from television. Many years after the concept was conceived, the technology and business practices are widely in place to enable such buying, which pair with frequency caps to enable advertisers to efficiently satisfy their reach and frequency goals on the basis of audiences rather than the media owners’ individual audience levels. But the bulk of advertisers on the web don’t prioritize reach and frequency (e-commerce-centric / endemic advertisers are focused on conversions; small and medium sized advertisers wouldn’t likely make such assessments either). And at any rate, reach on the web is limited to the ~70% of the population who accesses it. TV advertisers, by contrast, tend to use TV both because they want to reach everyone to drive awareness of their products’ attributes: to that end, TV advertisers’ marketing strategies are often dependent upon reach. For that reason alone, reach is a metric that observers should increasingly be aware of in assessing the health of the medium and of specific TV network owners.

Brian Wieser, CFA
Senior Research Analyst
Pivotal Research Group
brian@pvtl.com


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