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It’s not that television advertising is nearing extinction, but the TV ad business model is in a time of major 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 ad 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.

Key Takeaways

  • 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 changed 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 offer few-to-no ads, represent competition for the networks.

Timing Is (Almost) Everything

According to the U.S. Bureau of Labor Statistics, individuals 15-years old and up spend approximately 3.1 hours per day watching TV in 2020.

In the United States, 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 constraints regarding the subject matter. For example, during a morning kids’ show, viewers won’t likely see ads for beer.

Effective Advertising

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 factors, 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 to drive viewers to their mobile devices—or 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.

Event Advertising

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. Also, 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, the definition of primetime has changed.

Upfronts and Sweeps

If you’ve read about the television industry, you’ve likely heard all 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 now each year, major networks reveal their upcoming shows and hope the ad space sells.

There’s also the TV “sweeps” periods, which happen during 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.

Going Digital

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-to-no commercial interruptions.

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 coronavirus pandemic in 2020 and its continued after-effects in 2021 forced networks to change the scheduling, affecting advertising revenue in those years. For example, the Tokyo Olympics, which was scheduled for the summer of 2020, was pushed out and broadcast in the summer of 2021.

Undoubtedly, the influx of streaming services that are ad-supported offer 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. Netflix 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

These days, it’s not quite like it was in the show “Mad Men,” where television advertising was the prime real estate for brands trying to spread the word about their product. While event shows like the Super Bowl remain lucrative, companies are battling DVRs, on-demand, and streaming services.

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 and remains a key component to a company’s marketing plan.

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