The Improbable Economics Of Linear TV Addressability

randy-cookeOn TV And Video” is a column exploring opportunities and challenges in programmatic TV and video.

Today’s column is written by Randy Cooke, vice president of programmatic TV at SpotX.

It’s not uncommon to hear conference panelists wax quixotic about how linear TV addressability will imminently become the standard of campaign fulfillment in the United States.

Until now, addressability within the QAM (quadrature amplitude modulation) format of TV content transmission has been a feature exclusive to multichannel video programming distributors (MVPDs), with proprietary set-top boxes used as virtual ad servers.

The NAB conference earlier this year was abuzz with the promise of ATSC 3.0, the next-generation transmission standards that will implicitly extend similar capabilities to over-the-air broadcasters using third-party hardware, such as broadband-enabled antennas or “unlocked” set-top boxes.

Many frequently point to the success of hybrid broadband television and IPTV protocols in Europe as rationale for pursuing broad-scale addressability in the US, but are these use cases applicable to the TV industry in the US?

Audience economics suggest not.

The differences between EMEA and US TV marketplaces are striking. First, across much of Europe, supply exists within singular pools of audience, managed directly by the largest broadcasters across the continent. This supply is largely in balance with demand, yielding relatively high sell-through rates of inventory.

SKY TV’s AdSmart platform notwithstanding, cable operators are monetizing very little inventory within cable programming. And the absence of localized ad inventory – spot TV – within linear broadcasts do not lead to concentric TV marketplaces introducing channel conflict across the TV industry – a key challenge in the US.

In comparison, there is a glut of linear TV ad time in the US, which is why household addressability will unlikely scale to become the predominant tack of campaign audience fulfillment.

In the US, TV inventory is nested, with advertisers able to reach audiences at a programmer level, through syndication, spot TV and local zone cable. On average, there’s about 14 minutes per programming hour of commercial ad time across US linear TV.

With the sell-side value proposition of addressability achieving higher CPMs than a typical 30-second avail, we have to assume that addressable campaigns must exceed the CPMs realized within the spot TV marketplace. Otherwise, what’s the point?

In Q1 2016, the market intelligence firm SQAD projected the adult 18-49 high-average prime-time CPM across all 210 designated market areas was $82. In that same quarter, Nielsen demonstrated in its Total Audience Report that 276 million adults 18 to 49 years old in the US spent an average of about 54 hours watching live and time-shifted linear TV each month.

If we assume that at least 65% of that time – 35 hours – was spent consuming ad-supported TV programming, the average 18- to 49-year-old saw the equivalent of 982 30-second ads a month (14 minutes x 35 hours) during the first quarter of 2016. Annualized, that’s nearly 12,000 ads per person; when multiplied against a cumulative tuning audience of 276 million people in demo, the linear TV audience capacity for US adults 18 to 49 years old stands at roughly 3 trillion impressions.

The problem is that 3 trillion impressions sold at a spot TV CPM target rate of $82 would command $246 billion in revenue, more than three times today’s $72 billion of TV demand. That’s improbable given eMarketer’s projection that spending on TV and all of digital will grow to only $234 billion by the end of the decade.

This doesn’t even begin to address TV streams in OTT, SVOD, direct-to-consumer and TV Everywhere apps, which are inherently addressable channels. Again, if the value proposition of addressable executions to media owners is an increase over current CPMs, IPTV streams in their various forms could absorb the entirety of TV demand at spot TV’s current CPMs, with only a fraction of today’s linear TV audience ($72 billion / $82 CPM= 878 billion impressions).

Thus, audience economics suggest the future of addressable TV in the US does not sustainably live within a QAM-cable television platform, but within budding IP platforms.

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