Media: Why media needs a transparent trading model

John Billett says the changing nature of audiences may have financial implications for advertisers that are charging too little.

Parliament is not alone in adopting indulgent practices over financial transactions that deny value for money to the paymaster. Advertising media trading has developed practices that inadvertently do the same for advertisers.

Our investigation of the raw data identifies nearly £200 million gross ad revenue per annum being picked up by media owners that consistently over-charge for the goods delivered and so money is denied to other media owners delivering better value for money.

Sellers, buyers and auditors have fallen into the trap of serving advertisers with relative pricing and discounts versus norms. The result is that ad budgets destined for good value media are diverted to subsidise less cost-effective competitors.

This has to change. The applications to the media business of the economic proposition of Delivering Scarcity allows us to identify the causes and the solution.

There are two standard and accepted advertising media pricing co-efficients. First, advertisers will pay premium prices for scarce, large, quickly delivered and in demand audiences. Second, advertisers and media agencies use media metrics of cost related to size, shape and nature of audience delivered.

Consider scarce media such as ITV versus the likes of ids, and Cromwell Road versus Old Kent Road. By delivering large audiences for major target audiences, they demand and get a cost premium.

Consider media delivering unique audiences unavailable elsewhere such as Champions League versus FA Cup highlights. The premium price is there and valid.

But it's not always like that. Some media have charged advertisers premium prices that can no longer be justified. Other media have allowed advertisers to pay lower prices than are now merited.

Two major media demonstrate this media madness in action - UK national newspapers and UK commercial TV.

National Newspapers

While the prime trading metric is cost related to audience, this is not so for newspapers. They trade the production metric of cost per single column centimetre reflecting the cost of the paper, not the value of the readers.

The result is nonsense. Titles with the fastest-falling circulations charge premium prices. Smaller titles charge more for their readers than larger titles. Unique audiences are not valued.

And the advertisers lose out.

The Sun delivers the largest and increasingly absolute and unique circulation/readership across the daily popular/mid-market. The gap to the next largest title widens. Examine the actual costs paid by advertisers for the audiences delivered. Express Group and Mirror Group cost per thousand for their audiences are almost always higher than the CPT charged by News International.

Yet NI delivers a more sustained, large and unique audience than is provided by either competitor. This nonsense exists across the newspaper market. Whether it's popular/mid-market dailies or Sundays; whether quality dailies or Sundays, the established Delivering Scarcity model has somehow got left behind as a pricing metric in UK national newspapers. Substitute the current cost per square column centimetre newspaper trading model for the Delivering Scarcity model. Note the massive financial implications that give advertisers better value. Using 2008 revenue figures, NI gross ad revenue will increase by £27 million and Daily Mail and General Trust by £17 million. Only the Telegraph Group is unchanged. Mirror and Express Groups each lose £18 million with The Guardian and Independent down £9 million.

Commercial Television

TV has operated the Delivering Scarcity pricing model since the first UK ad aired more than 50 years ago in September 1955. Cost is always related to something being delivered: audience size, composition, etc.

Premium prices are charged by Channel 4 and ITV1. Across 2008, their adult CPT premia, for all airtime, were up 41 per cent and 26 per cent respectively. Across all their channels, the total ITV premium was up 16 per cent and Channel 4 climbed 24 per cent.

Seems like Delivering Scarcity is alive in UK TV. The newspaper nonsense has been avoided. But, even here, the absolute price of advertising has paled in significance to relative pricing. This convention is being overtaken by new realities.

Multichannel TV dominates. Massive competition, both on- and off-screen, brings pressure on content and obligations. Consumption of TV increases but channel loyalty declines. Revenue streams are diversified and falling. TV scarcity has been replaced by ubiquity. Delivering Scarcity is under massive attack, especially for ITV1.

The consistent fall in ITV1 audience size and commercial impacts share over recent years is well documented. The Office of Fair Trading records that: "ITV argues it no longer has an advantage in terms of the quality of its commercial impacts due to a higher level of viewers' attachment and engagement linked to its programming."

ITV's viewer profile has lost much of its scarcity. Peak audiences, light viewer content, youth viewers - especially men under 34 - are all reduced. The ITV1 audience is increasingly available elsewhere. Advertisers can enjoy similar reach without ITV. Indeed, advertisers enjoyed greater reach without ITV in 2007 than with ITV in 2002 at the same cost. Advertisers can buy an equivalent audience more cheaply due to the lower price of other channels. The OFT confirms that ITV agrees. "Most demographics (ex-housewives) were substitutable even for super peak ... ITV evidence supports the view that ITV1's airtime is substitutable in practical terms," it says.

ITV1 no longer delivers much that is scarce yet the channel charges a large premium. Britain's Got Talent, I'm A Celebrity and The X Factor deliver scarcity and justify premium prices. But these premium programmes do not a premium channel make. Based on 2008 spot revenue, with annual buying of scarcity, ITV ad revenue share would fall four points to 42.5 per cent, representing a loss of £152 million, to be reinvested elsewhere on TV for better value.

Media that deliver scarcity, with discount prices, deserve increased ad revenue share. Media that don't deliver scarcity can no longer sustain premium prices and warrant reduced ad revenue share.

There was £200 million of advertisers' gross display ad revenue misspent in 2008 based on unsound trading metrics and misplaced notions of audience value. That is not the protection advertisers merit.

Media auditors will embrace Delivering Scarcity and absolute value for money and turn from not only misleading metrics but also relative pricing models. To protect advertisers' interests, buyers and sellers should drop relative pricing and misleading discounts in agency deals, and turn to a cash price focus where scarcity is valued.

That would show Parliament that a more transparent open ad media trading environment is a model they would do well to follow.

- John Billett is the chief executive of Johnbillett.com

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