Does Price Correlate with Quality?

In a totally efficient market, product price should correlate with product quality. Premium gas should be more expensive than regular gas. However, in reality, in most product categories, price doesn’t correlate with quality. I’d like to understand which factors contribute to this gap and how we can close this gap as much as possible.

Price Doesn’t Always Correlate With Quality

For 100 years, many researchers have sought to understand the relationship between price and quality (Chase & Schlink, 1927). Researchers use consumer reports as a proxy of product quality. Then they look into more than 200 products to determine the correlation. The evidence reported in the literature indicates that, in the United States, particularly frequently purchased consumer packaged goods display a weak and often negative relationship between price and “objective” quality. Some other studies (Faulds & Lonial, 2001) look into similar data in Europe; the lack of a strong price-quality relationship appears to be an international phenomenon.

This was shocking, at least to me. Why doesn’t the price correlate with quality at all? Do consumers make the purchase choice randomly? Is it normal or are some factors preventing the market from behaving more efficiently?

Some Product Categories Have Stronger Correlation Than Others

Product categories have strong correlation than others should help us to understand what is the key factor drives correlation

In general, more expensive, durable products have stronger correlation than other, non-durable products. This makes sense, as consumers will spend more time looking into details and comparing them against other alternatives. However, this doesn’t solve the issue for CPG companies that sell only low-price, non-durable products.

Perceived Price-Quality Rating Has a Much Stronger Correlation

Another way to increase the correlation is to take a look at the correlation between Perceived (Subjective) quality and price. As we can see in the chart below, both durable and non-durable products have a very strong correlation for Perceived Price-Quality.

This means that consumers want to pay more for a high-quality product. They just don’t quite know the objective product quality. When consumers are given enough information, they should be able to make logical choices, which will improve the price-quality correlation

Additional Information on Product Quality Can Close the Gap Between Perceived Quality and Objective Quality

I found three case studies that show how additional information on product quality can improve the correlation between price and quality.

Apartment (Harano & Seshita, 2014)

An apartment certainly belongs to the expensive, durable product category. Most of the product attributes (e.g., Size, Equipment, Location) have a strong correlation with price. However, if the apartment is developed by a small developer, these correlations don’t quite work. Typically, small developers cannot enjoy the same price range as other developers.

When small developers decided to ask a third party to evaluate the quality of an apartment and attach a report to the product, they found that the correlation improved from -0.07 to 0.01. If developers are willing to guarantee the quality for 10 years, this will improve the correlation from -0.07 to 0.11. It’s the same product, but this additional information helps consumers make better decisions.

Wine

In the wine industry, quality ratings are provided by (among others) the Wine Spectator, the Wine Advocate, and the Wine Enthusiast. Because quality matters to consumers and because the opinions of these experts are deemed credible, a wine’s price should be a positive function of how well it is rated by the critics. Many researchers have found a strong and unwavering relationship between published quality ratings and product prices.

Interestingly, in the many blind tasting experiments, even the experts cannot really tell the difference among wines. Although wine has the most established rating system, it might be the most difficult product for which to get an objective evaluation.

Limited Information on Quality Destroys the Value of the Entire Market

On the other hand, if we artificially remove the critical quality information, it will destroy the value of the entire market. It will diminish the return of sellers, buyers, and the platform.

eBay

eBay is a great marketplace for researchers to study because it has a relatively efficient market and all the information is available on the website. The reputation mechanism is the most important product feature of eBay enabling buyers to distinguish good sellers from bad sellers. The results show that removing the reputation mechanism increases low-quality sellers’ market share, lowers prices, and, consequently, reduces sellers’ profits by 66% and consumer surplus by 35% (Saeedi, 2018).

Absent any reputation mechanism, the model becomes a static model with adverse selection. As a result, higher-quality sellers face lower prices and, therefore, lower market shares. In contrast, the market share of low-quality sellers increases. This decline in average quality in the market leads to a further decrease in prices and, consequently, a shrinkage of the market and its unraveling. In a normal situation, powersellers and stores can enjoy up to 7% of the price premium.

Financial Market

The financial market is generally believed to be much more efficient than other markets involved in any physical object. Financial market participants absorb a large amount of news, or signals, every day. Processing a signal involves quality judgments: News from a reliable source should lead to more portfolio rebalancing than news from an obscure source.

When ambiguity-averse investors process news of uncertain quality, they act as if they take a worst-case assessment of quality. As a result, they react more strongly to bad news than to good news. Moreover, shocks to information quality can have persistent negative effects on prices even if fundamentals do not change.

This phenomenon is a bit similar to the famous lemon problem. If a buyer doesn’t have enough information to make a decision, the buyer tends to believe the worst and treat the item as a bad product. As a result, the bad product will push out the good product, which is devastating to the entire market

Ending Words

I believe that attention is one of the important elements of media quality. This information was not available even 5-10 years ago. Currently, there is almost no correlation between the CPM (i.e., price) and attention (i.e., quality). Based on the research and analysis above, more quality information should make the correlation between quality and price positive. It should be a very healthy development for the whole industry.

BAT (Baidu, Alibaba, Tencent) + ByteDance – Tech Giants in China (Part 2)

ByteDance – APP Factory

Early this year, 7 out of 10 Top 10 iOS apps in China were from ByteDance. As an app factory, ByteDance has mastered the method of quickly launching, measuring, A/B testing, and monetizing a new app.

Principles for mass manufacturing apps

One big difference compared to other social network companies is that all tech stack, including the recommendation engine, is shared across all ByteDance apps in all countries. This ensures that all apps will benefit from its strong tech and product team. It also significantly reduces the cost and time to launch a new app. The product manager just needs to focus on the product feature itself.

ByteDance has broken its team into three segments:

  • Tech/Engineering: Retention
  • User Growth: User Acquisition
  • Commercialization: Monetization

Similar to Facebook, ByteDance relies heavily on A/B testing for its decision-making. Once an app proves that it has the strongest retention rate, the company can focus all its resources on promoting it. On the other hand, if an app shows an early sign of decline, the company will shut it down quickly. Recently, ByteDance shut down Vigo Video, which was a very popular app in 2018-2019.

ByteDance started in 2012. Globally, it’s famous for TikTok, which is an app that pushed into the mainstream only in 2016. ByteDance’s core product was Doutiao, a curated news app. Zhang Yiming believes that all social networks come and go. The key to success is to constantly test new apps and catch social trends.

Recommendation vs search

One key product feature for all ByteDance apps is the recommendation engine. The app quickly learns a user’s preference, then optimizes its recommendation engine to encourage the user to spend as much time within the app as possible. Essentially, it makes each app very addictive without any effort from the user side.

This is a very different product philosophy compared to other apps. Typically, media apps expect a user to input a search term and watch specific content. ByteDance flips it around. Whether it’s a news app or a video app, there are almost no user types in a search term for a video. Just like Tinder, a user can swipe one video to another, easily spending a few hours on it.

Globalization

ByteDance is the most successful Chinese tech start-up in terms of globalization. Before ByteDance, most global Chinese tech start-ups were hardware start-ups. ByteDance’s domain is mobile apps, especially social networks, which require lots of local expertise.

In May, TikTok hired Kevin Mayer to be its new CEO. Since the beginning of its globalization, ByteDance has put a lot of effort into localizing its management team in each country. Compared to other Chinese tech start-ups, ByteDance’s culture is more similar to that of a typical Silicon Valley company: very flat organization, OKR, All Hands, Ask me anything session with CEO, etc. It certainly helped ByteDance expand its global footprint.

At this point, China accounts for only about 30% of TikTok’s downloads. This shows how successful TikTok’s globalization has been compared to others. About 90% of WeChat users are from China. Similar to Facebook, India is the biggest market for TikTok. 

Future growth

ByteDance has raised only $7Bn to date to become the most valuable private start-up in the world. This is significantly lower than Uber ($25Bn), Didi ($21Bn), and other unicorns. If ByteDance wishes to do so, I’m sure it could secure a massive amount of capital for its growth. ByteDance has been profitable since 2015. In the last financing round in 2018, ByteDance raised $3Bn at $75Bn.

ByteDance doesn’t hide its ambition to expand its territory beyond media. It is already testing the waters in the gaming and commerce category to monetize its growing traffic and app downloads.

With ByteDance’s low cost to access capital and strong ability to produce many apps at the same time globally, it can create a serious threat to Facebook, Snap, and other social network companies.

MasterClass Review – How to monetize knowledge-based web traffic

For folks who don’t know, MasterClass is a media start-up that offers online classes from the world’s best in each category. It has raised $136M so far and was founded in 2012 by Aaron Rasmussen and David Rogier. Neither of them really had any media or education background. I’m not sure whether they had any special connections to these best talents.

MasterClass Online Classes

Given the WFH situation, I guess they are seeing a huge uptick in their new sign-ups. I clicked on ads from my Facebook timeline and decided to sign up.

It’s fairly expensive: $180 for an annual membership. For a limited time only, they offer “buy one share one free” campaign (so, the actual price is $90 per account). That’s still $7.50 per month. It’s more expensive than Disney+ and Hulu Basic. The key question is whether MasterClass is worth the money.

MasterClass has significantly less content than other SVOD services. Currently, MasterClass offers 85 classes, each of which runs for about two to three hours. So, the total amount of content is about 212.5 hours. Hulu has 85,000 TV episodes, or roughly 68,000 hours, which is 320 times the offering of MasterClass. Disney+ has 7,000 TV episodes, which is still 26 times the offering of MasterClass.

MasterClass’s production cost is much lower than that of a typical TV series. It’s very impressive that MasterClass has been able to attract top talents such as Gordon Ramsay, Stephen Curry, and Serena Williams. However, I don’t think its fee is higher than the top Hollywood talents. MasterClass does offer very high-quality video production but, compared to most TV series, it’s still amateur.

You might argue that it’s unfair to compare a class to a TV series. Unlike other online education platforms, MasterClass offers only video series (with maybe one PDF per class). There is no TA, no interactive quiz, and no community for students. So, it’s really more of a media company.

If MasterClass’s key value really lies in the instructors it can attract, I’m not exactly sure why it invests a huge amount of effort into producing these videos by itself. This increases the lead time and limits the size of its catalog. Why not make it an audio platform for top talents to upload their own content?

Let me introduce another platform, called “Dedao,” from China. It offers subscription content from top talents in China. It has both video and audio but most of it is self-produced by the talents. The platform has close to 200 classes and more than 2,000 audiobooks. Based on the few classes to which I subscribed, I estimate that each class generates an annual revenue of about $1-1.5M for the platform. Assuming the platform takes a 30% fee, Dedao’s net revenue should be around $100M. This must be much higher than MasterClass’s revenue—and Dedao’s COGS is much lower.

App Insights: 得到-知识就在得到| Apptopia

If you are still interested in subscribing to MasterClass, here are some classes I enjoyed.


Gordon Ramsay

David Axelrod and Karl Rove

Jeff Goodby and Rich Silverstein

Are we going to have more new shows each year?

We live in an era of information explosion. At our current pace, 2.5 quintillion bytes of data are being created each day—and that pace is only accelerating with the growth of the Internet of Things (IoT). According to Forbes, 90 percent of the data in the world was generated in the last two years alone.

The media industry is no exception. Over the last 10 years, the number of new original shows has been increasing at a rapid pace (2.5X in 10 years). One big driver of this explosion is the emergence of OTT apps. At this point, at least 200 OTT apps are offering various streaming services. Will this trend continue or we will see a decline in the number of new original shows? This is the key question I will try to answer.

An interesting thing is that the audience is not necessarily watching more shows. Although the number of available titles has significantly increased, the average number of channels that each person watches actually decreased from 17.3 in 2008 to 12.7 in 2018. Also, the total video time spent per day per person (including OTT) has been very stable since 2012. The Average Time Spent per Day with Major Media per person in the US is around 12 hours. Given that there are only 24 hours in a day, and that we need to spend seven to eight of those hours sleeping, I think it’s very unlikely that we can spend more time with media beyond the current level.

All the data suggest that the demand from the audience reached its peak a few years ago. The audience cannot consume more media or video. The only reason we have more original shows each year is because of competition on the supply side. As the streaming war heats up, programming expenses increase quickly.

The production cost for high-quality content is very high. I will do a deep-dive in another blog post. At this high level, the costs are $200K-$300K per minute. The funding of production costs comes from ad revenue, subscription revenue, or cable subscription revenue. None of these revenues is growing at a rapid pace. For these reasons, we have to believe that, at some point, the number of new original shows per year will start to decrease. Right now, major media companies are maximizing their financial leverage to compete with each other, but this situation is not sustainable.

Maybe we can learn from the app industry, which heated up a few years before the OTT industry did. The number of new apps and games released (iOS only) peaked in 2016. After that, it started to decrease.

Interestingly, 2016 was the year when the smartphone market pretty much stopped its growth.

Based on research from Google/Ipsos, the average number of apps installed on a phone is 35 in the US. We use only nine apps per day. I guess most of those nine apps are very similar across all of us.

After the iPhone was launched in 2007, Apple experienced massive growth (more devices and more demand for apps). This led many app developers to tap into the space and compete with each other. However, as the growth of the market slowed down, only the strongest players could survive. As a result, the total number of new apps released is decreasing.

So, most likely, what happened in the app industry will happen in the video industry. 2019 might be the year that saw the highest number of new original shows. Because the audience demand peaked a couple of years ago, I believe we will see more consolidation in the industry in the next few years and that the number of new original shows will return to the 300-400 range.

Quibi’s future – Premium Video is expensive to produce

Quibi launched in the US a few weeks ago. They plan to bring premium video production quality to a small vertical screen. The concept is very interesting. Unfortunately, due to the current COVID-19 situation, more people might prefer to watch it on the TV screen.

Quibi is right. There is a huge gap in the production cost depending on the quality of video. I did an analysis to compare the different formats. The data are not super accurate but should tell a good story directionally.

The data show that $100K per minute is the low end of the premium video production cost. However, $100K is still 100 times higher than the YouTube product cost. Plus, the video production cost is significantly higher than that for other media formats. If we assume that it takes longer than one hour to read a book or magazine, then, on a per-minute basis, the gap is even bigger.

The only exception might be games. The average game development cost is getting close to $100M. This number is very similar to that of a typical blockbuster movie made in Hollywood. Of course, the average gamer spends a much longer time per game title as compared to movies.

As technology (e.g., VR, AR, 4K, etc.) continues to evolve, I believe that the premium video production cost will only increase. I also predict that, to reduce the risk to the media business, the price of popular IP will continue to increase as well. As a result, the production cost for premium video will get even higher. It will eliminate many small players and accelerate industry consolidation.

To stay in the business, each player must invest tons of cash. Interestingly, each major player in the video space relies on a very different source of revenue. Netflix is mainly subscription-based. Hulu is advertising plus subscription. YouTube is pretty much advertising. AT&T and Comcast also have telecom businesses. Google (YouTube) clearly has the deepest pocket but their investment into original content is very limited.

Oligopoly in the Media

We have antitrust laws because, usually, oligopoly is bad for the industry and society in general. During the last financial crisis, so many banks were too big to fail. Now, most likely, Boeing will be saved by tax money, even though we have not seen any real innovation from Boeing or Airbus for a very long time.

I’d like to take a look at the media concentration for the two biggest forms of media: TV and Digital, and OTT, which is booming at this moment.

Top 100 Websites in the US by Monthly Traffic
Top 100 TV Networks in the US by Viewership

It’s no surprise that digital media has a much higher concentration toward a very small number of players compared to TV networks. Most of the top websites use Google or Facebook to monetize their web traffic. In terms of the share of U.S. digital advertising revenue by company, Google + Facebook accounts for 60% of the total market ($130Bn in 2019).

Despite recent M&A activities, TV networks remain very fragmented. This is affecting their ability to unite and fight against digital media. OpenAP is a good initiative to bring together all TV networks. However, lots of uncertainty surround it.

OTT is a fairly new market. With all of the new apps coming to the market, I thought that it was very fragmented. I was shocked to learn that it is actually much more consolidated already.

Top 100 OTT Apps in the US by User Time Spent

The top 10 OTT apps account for about 80% of total time spent. This is almost two times higher than that of TV networks.

Share of Top 10 destinations by Media

Why is the OTT landscape not more fragmented? Early on, most of Netflix’s shows were syndicated. As a result, there should not have been a barrier to entry from a content point of view. I guess there are some barriers in terms of technology. However, I don’t think there is a noticeable difference in terms of the user experience among all major OTT apps.

One thing to notice is that most of the top OTT players (Netflix, YouTube, and Amazon) have other cash-flow-positive businesses (e.g., DVD and Search Ads) to support their tech and content development. Other TV networks had a good portfolio of content but treated Netflix like a distribution partner. Their investment in their own OTT platform was too little and too late.

I don’t need to emphasize the many advantages that monopoly companies enjoy. All digital advertising technology companies suffer from the duopoly of digital media. I predict that the media concentration will continue to increase in the next 5-10 years unless there are new regulations. This isn’t going to help a third-party measurement company.

Current antitrust law doesn’t count the global presence of these powerful companies. Many of them also form a strong product portfolio (e.g., Google) or build vertical integration (e.g., AT&T and Comcast). As long as their market share is not very high in one category, they are not going to be prosecuted for violating antitrust laws. 

I hope my prediction is wrong. However, the industry might need a paradigm shift (e.g., AR and VR) to regain its competitiveness.

Should Time Spent Equal Ad Spending by Media?

Queen of the Internet Mary Meeker publishes a Time Spent vs Ad Spending chart every year.

I believe that it’s a very insightful analysis and says a lot about how the industry is moving ahead.

In my opinion, three factors contribute to the gap between Time Spent and Ad Spending.

  1. Ad effectiveness: Clearly, the effectiveness of advertising is different by media. It might be different according to the type of advertiser as well. Digital media clearly took advantage of the recent ad-tech boom and significantly increased ad effectiveness via better measurement, targeting, and attribution solutions.
  2. Media owner concentration: If the number of media owners is small, they tend to control the price. Google and Facebook have much higher market shares in the digital media space than TV networks do in traditional media. I will write about this topic in my next blog post.
  3. Rapid change in time spent in recent years: Typically, ad spending changes after time spent shifts. There is some time lag, as the entire industry has to catch up to the trend. If the change in time spent happens very quickly, it creates a bigger gap between time spent and ad spending.
% of Time Spent vs. % of Ad Spending (2008-2020)

I have carried out the same analysis using eMarketer’s data. I’m not sure why the ad spending number is very different from Mary Meeker’s analysis. Based on my analysis, both TV and digital had very low ad spending back in 2008. In the last 10 years, both of them were able to reach their fair amount of ad spending. Other media outlets (e.g., newspaper, OOH, magazine) are quickly losing their shares.

If we focus just on TV, the trend looks quite interesting. Until 2015, while time spent decreased quite a bit, ad spending increased significantly. My hypothesis is that this was driven mainly by the improvement of the ad effectiveness of TV commercials. However, after 2016, the learning curve started to saturate. Ad spending decreased at the same pace as time spent. Based on this analysis, most likely TV’s ad spending % will continue to shrink at the same pace as the time spent %.

TV Time Spent vs. Ad Spending (2008-2020)

Although digital’s ad spending and time spent are pretty much the same, when we look within digital, we see a very different picture. Mobile’s ad spending % is actually much higher than time spent %. The time spent of other connected devices (e.g., Roku, Chromecast) is much higher than ad spending. Logically, mobile ad spending growth should slow down quite a bit. The ad spending of other connected devices should grow much faster. The time spent of desktop will gradually shrink to the level that matches the ad spending of desktop.

2020 Digital Media Ad spending vs Time Spent

Why is the gap for mobile so big? The peak of mobile time spent growth happened around 2013. After that, the growth rate of mobile slowed down quite a bit, though ad spending has been growing at a very high pace. In addition, mobile ads are controlled by a few tech giants that are capable of artificially increasing the price point.

Mobile Time Spent per Day and Growth Rate

Other connected devices are in the completely opposite situation. The growth of time spent has been accelerating. However, most of the brands are still only doing the pilots. Ad spending is significantly lagging behind time spent. The supply-side market is much more fragmented as well.

Other Connected Devices Time Spent per Day and Growth Rate

Based on this analysis, I predict the growth of mobile ad spent will plateau very soon.  It also gives me reason to believe the golden age of OTT/CTV is coming.

What you can measure isn’t the same thing as what you should measure

I was in London the other day for an event (pre COVID-19, now feels like it’s ages ago). Later, I had lunch with Orlando Wood at System 1, who gave a great presentation at the event. This is the link to his book: https://www.amazon.com/Lemon-advertising-brain-turned-sour/dp/0852941471

If we block the left or right side of a person’s brain, it will completely change the way this person thinks and behaves. The left brain is able to draw only a very symbolic and conceptual flower. Meanwhile, the right brain can draw the outline of the flower, but it lacks details. To be fully functional, we need both sides of the brain.

He also presented his research to show that, in the last 10 years, more creatives in our industry have been driven by the left brain (i.e., flatness and abstraction). As a result, ads are becoming less effective.

Orlando told me that one of the key symptoms of left-brain-driven thinking is that it is 100% data-driven. Everything needs to be explained by data … and data is the only source of truth.

Lots of companies are starting to offer a TV attribution solution. Traditionally, it hasn’t been very easy to understand the ROI of TV campaigns, though now it’s getting lots of traction. I do believe that TV attribution creates lots of value for marketers and that it’s better for the industry to keep measuring it. However, this doesn’t mean that TV attribution is the only thing you should measure.

I have a degree in operations research. It’s tempting to make everything data-driven. However, we are far from able to fully understand the marketing effectiveness in an accurate manner. This means that all data products available in our space provide only part of the answer. There are many important questions to which we have not found good answers, such as the long-term value of TV and other long-form content.

We cannot blindly choose what we can measure as our KPI to track. In my opinion, TV attribution cannot really measure the strength and impact of brand equity. It also doesn’t factor in the long-term effect of TV, especially around brand-building. If TV starts to use CPA as the only KPI to compare against digital media, then TV budgets will quickly shrink to zero. Brand marketers must believe in what they think is really important and continue pushing it forward, even if it cannot be fully backed by data. I know that this is not easy in this day and age. However, the strong conviction and courage to execute are key success factors in transforming the industry.

Brand Marketing vs. Performance Marketing

The battle between brand marketing and performance marketing has been going on for quite some time and there is no indication that it will end anytime soon.

To ensure that we are all on the same page, let me share my definition of both brand marketing and performance marketing. Brand marketing aims to build brand equity among its target audience. Typical KPIs are brand awareness, brand attractiveness, purchase intention, etc. Meanwhile, the goal of performance marketing is to drive certain actions among consumers. Actions can include purchasing, signing up, website visits, searching, and others.

I’d like to think that brand equity is the stock of brand value. For example, Coke, as a brand, is believed to worth $70 Bn. Every marketing initiative will increase or decrease brand equity. To drive better performance and lower CPA, I believe that a brand must achieve a certain level of brand equity. The required level of brand equity can vary based on the category or stage of a brand.

If a brand focuses only on performance marketing without building any brand, the ROI of the performance will start to saturate at some point. This phenomenon is currently taking place at many DTC brands. Initially, they gained momentum via Facebook CPA-based ads. However, to grow into mainstream players, they all started spending money on TV ads and building brick and mortar stores.

Vice versa, if a brand has a huge amount of brand equity but is not spending any money on performance marketing, it’s not fully unleashing its potentials. That’s why P&G spends a huge amount of money on in-store promotion.

Due to the strong pressure to drive ROI, more and more brands are starting to focus on performance marketing instead of brand marketing. In my opinion, this is short-sighted and will damage the long-term success of the business (of course, it’s less relevant if you have a new CMO every three years).

TV is a passive medium. As a result, it is good at building a strong brand and reaching lots of people at the same time. Most digital media offer lots of interactive experience. In addition, a brand can run hyper-targeted ads on digital media. This makes digital media perfect for performance marketing. For this reason, I think that every established brand needs to have a healthy balance between its TV and Digital budgets.

Credit Suisse predicts that, in 2030, most of the brand-building ads will still be on TV. Most of the digital ads are for calls to action.

https://plus.credit-suisse.com/rpc4/ravDocView?docid=V6BqP32AF-WErKbi

A brand marketer once told me that his brand was not growing at the pace he wanted (2-3% per year). Based on the attribution report from CPA-based digital media, the ROI of each campaign looked great, so they kept adding more of their budget to digital media. However, revenue did not grow at a faster pace. Then he started to cut the digital budget and reinvest in TV and other traditional media. He tested in two DMAs, and it worked. Then, he expanded to the entire US. As a result, the revenue grew by double digits that year without a change in the total marketing budget. In this case, the company had been under-invested in brand building. Simply by boosting brand equity to the right level, they were able to make their performance marketing much more effective.

Pressure for a Better Marketing ROI- TV Networks/OTT Platforms

As the pressure for ROI becomes more intense for CMO, it’s trickling down to media owners (e.g., TV networks, OTT platforms) as well.

First of all, brands pay for the entire ad economy. That is why, in theory, demands from the brands will eventually be accepted by every part of the media value chain (brands to agencies to media owners and all other ad-tech/mar-tech companies). Of course, there are a few exceptions.

Nielsen has been the only shop selling TV ratings for the last 30 years in the US. And its revenue doesn’t rely on brands at all. On the other hand, we have at least 500 brands participate Upfront every year and 1,000 brands spend over $10M annually on TV. Another example is that Google/Facebook own significant chunks of digital media … and they are growing faster than the rest of the open web. That is clearly one reason why they are reluctant to accept some requests from brands and why people call them “A Walled Garden”.

Unfortunately, these exceptions don’t apply to TV networks. Despite recent M&A efforts, the TV industry has much less concentration as compared to the digital industry. In addition, the TV industry has been taking a huge hit from the digital industry for years. The TV industry has no choice but to change itself.

Figure 1 US Ad Spending % (TV+Digital) – eMarketer

As we can see, ad spending on traditional TV is decreasing rapidly. More interestingly, if we look at Time Spent by TV and Digital, TV’s share was only 28%. Meanwhile, the share of Ad Spending dropped 43%. So, it’s not only that people are watching less TV. In addition, brands want to pay less $$$ per minute for TV ads. Why is that?

Because brands demand ROI but TV cannot prove ROI at all. Traditionally, GRP has been the only KPI for which TV networks are responsible. On the other hand, digital media platforms are held accountable by various metrics (e.g., viewability, CPA, CPI, % of target audience). As the pressure for ROI grows, brands have decided to shift their budgets to digital media, which can help them prove ROI.

To flight back, TV networks started to invest in OTT platforms (e.g., Hulu, HBO Max) to increase the time spent on TV sets. In addition, they have started working on new measurement and pricing metrics. The most aggressive initiative is the outcome-based guarantee, especially the sales guarantee. Since 2018, a few TV networks have decided to guarantee the sales lift when they sell TV inventory. I think it’s a great idea to measure sales lift for TV campaigns; however, it’s too risky and unfair for TV networks to guarantee sales. TV is only one of many inputs of the marketing channel, and marketing is just one of many factors to influence. Certainly, brands can ask TV networks to measure sales lift but it’s not fair to use it to hold them accountable.

In the following post, I will explore the right metrics for a TV network to use in tracking its ROI: brand marketing vs. performance marketing.