How TV Is Killing Itself by Accident

The major TV networks may be running backward to the Internet as a distribution platform, but, boy, are they running hard. They see the Internet as potential salvation and recognize they could achieve their ultimate goal of one-to-one content distribution if they could only find the right model.

Problem is, they aren’t basing their decisions about how to use the Internet on how consumers use it or on how the Internet is evolving. Instead, they’re trying hard to leverage old models. That’s going to kill them if they don’t figure it out, fast.

Linear broadcast TV ads are sold by time slot. A media buyer picks a piece of content that’s locked to a schedule and competes with other content running in the same slot. Buyers select content to associate with their brand based on a prediction of how many people will watch the show when it airs. This formula is called gross rating points (GRPs). GRPs are based on audience size, reach, and frequency. TV buyers are used to making decisions like, “Should I buy ‘Prison Break,’ ‘Deal or No Deal,’ ‘Wife Swap,’ or ‘7th Heaven’ tonight if I need to hit X GRPs?”

It’s like blackjack , a gamble with understood risks. The whole TV industry is based on a locked linear time schedule. Because there’s so much risk, the networks are happy to give media buyers upfront pricing for media blocks, and buyers are very accustomed to big bundles of inventory.

The networks compete based on audience scarcity. The new superhero show on NBC, “Heroes,” goes up against FOX’s new mystery show, “Vanished.” Meanwhile, CBS runs a new episode of a proven comedy, “Two and a Half Men,” and ABC reruns an episode of blockbuster “Lost.” It’s carefully planned based on the idea the audience simply can’t watch more than one show at a time. Networks try to pit the right kind of content against a competitor’s in hopes of getting the biggest audience.

This is all based on a historical world view that’s rapidly becoming out of synch with the way people consume media. Consumers can watch TV any time they want online. They’ve been doing it illegally for years; now they’re doing it via legal streaming and downloaded content provided directly by the networks. What the networks are missing is a way to monetize and distribute this content.

ABC Television Group president Anne Sweeney announced last week ads will be sold with flat-rate pricing rather than CPM (define) pricing, as has worked so far on the Internet. The company will also bundle ad buys on its network with ads in broadband-delivered content. It sweetens the primetime pot by throwing in “less valuable” Web inventory.

Bad idea. ABC is much better off selling impressions in a world where audience scarcity doesn’t exist. The old strategy of capturing audience by having the best content in a time slot simply isn’t necessary when planners buy Internet-delivered TV content. Smart planners get this — and won’t let on. But they will buy to their advantage. The networks don’t understand a key concept of this new medium: yield.

The Critical Concept: Yield

Online publishers implicitly understand yield. In a world where the audience decides what and when to consume, all a publisher can control is the way it distributes advertising across that content. A smart publisher places ads into content by always running the ad that gives the publisher the highest return. Inventory efficiency — the amount of ROI for (define) the publisher (not the advertiser) — is the yield. The more efficient the publisher is at placing its highest return ads in the ad calls, the more money it makes.

This is a new concept for most TV executives, used to linear control of yield. You can’t do that online. You must optimize yield using technology, and you want to sell inventory in blocks of impressions so you can make yield decisions. In a world where targeting and optimization are standard practice, you can really optimize yield when you have lots of advertisers buying lots of impressions across inventory on which the network can control ad delivery.

I’m an Internet ad guy. I understand very well how the business works, how it’s evolving and what consumers are driving online. I’ve been studying TV intensely for a few years. Ad strategy is my day job, which involves lots of financial modeling and trying to understand the effect of changing the various assumptions that make the model work. I’ve modeled TV’s transition from linear to dynamic delivery and the advertising implications. I’ve modeled the yield on inventory if sold at a flat rate and sold by impression. Selling by impression has much higher yield for the same inventory in a nonlinear world. But I’ll let the networks model that for themselves.

Another time, we’ll discuss distribution and why the evolved genetic traits of TV network executives are telling them they need to control distribution in a world where the consumer’s in control. Clearly, this is a losing strategy, but that isn’t intuitive in the world they come from.