Why Returning $10 Million to Advertisers Isn't as Bad as It Sounds

NBC's Decision Frees Up Inventory That Now Will Command Higher Prices

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NEW YORK (AdAge.com) -- On its face, NBC's decision to give about $10 million in cash back to advertisers seems like a disaster. Networks don't want to return ad dollars, and a marketer's acceptance of the money means the company didn't feel it would be able to reach the audience it wanted on NBC's air by the end of the fourth quarter. Failing to deliver for your customers is bad business, right? For broadcast TV networks, not necessarily.

There are sound economic reasons behind NBC's maneuver, which boil down to the simple law of supply and demand. Buyers note that NBC, freed from having to deliver "make-good" advertising to marketers who locked in prices during the upfront, now can turn around and sell that same ad inventory to other marketers for a much higher price as "scatter," or advertising sold much closer to the time it airs. From a network's point of view, it makes more sense to buy its way out of upfront commitments that valued its time at a much lower rate when it has a long line of other marketers now willing to pay much higher prices for their 30-second spots.

"They are trying to get the audience deficiency units off the books and get back into the cash marketplace," said Steve Kalb, senior VP-director of broadcast at Interpublic Group's Mullen.

NBC's ability to give money back to advertisers and still have the potential to make money for itself points to power broadcast networks continue to have in the ad business, no matter how much turmoil is rolling over the TV industry. Live audiences are eroding. Advertisers now are paying based on how many people watch the commercial breaks, a number that is about 5% lower than it is during the programs those ads interrupt. All of this makes it more difficult for a broadcast network to deliver the ratings weight it guaranteed back in May when marketers were putting money down in the upfront market.

Sellers' market
The trouble is TV's gradual erosion of viewership. These declines mean it takes more showings of a single ad to reach the same number of people via a TV commercial than it might have 10, five or even just one year ago. Networks also made the problem of lower ratings worse when they decided to carry forward some of their make-good time from the 2006-2007 programming season. That means even more of their inventory is promised to marketers who paid for the time way back in May 2006. All those make-goods and lower ratings have led to a scatter market that is very tight. High demand and low supply conspire to force prices up -- in some cases this year, more than 30% over prices paid for ad time during the upfront. That's great for networks and tough for marketers.

So why do marketers still want to do business with the networks considering their track records? Broadcast networks remain the single best way to reach mass audiences at once, a crucial quality for retailers, movie studios, pharmaceutical companies, fast-food marketers and consumer-package-goods concerns.

Networks can make money by managing ad inventory carefully, but they shouldn't laugh all the way to the bank. Some marketers may feel jilted, knowing executives at their TV venue of choice were more interested in profit than in satisfying an agreement struck back in May.

"No one should take cash back when the value of that investment is greater to the network than it is to the advertiser. That's my own personal feeling," said Jason Kanefsky, senior VP-group account director at Havas' MPG.
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