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TV Lures Ads as Audiences Scatter

Here's a business riddle: More people are turning off their televisions. So why are advertisers spending ever-larger sums—at ever-steeper rates—to advertise on TV?

In many ways, the very fragmentation of modern media has made television all the more valuable.

An explosion in ways for consumers to entertain themselves across channels and screens is reducing the supply of ad space that can reach millions of viewers at once; that's driving up demand for TV spots, with advertisers saying there is still no substitute for its reach.

Advertisers are willing to pay between $30 to $40 to reach 1,000 people between 18 and 49 years old on a broadcast network in prime-time, sums that are up more than 10% from last year for some ads, buyers say.

About 96.7% of U.S. households own a TV that receives at least one channel, down from 98.9% a year earlier, according to Nielsen Holdings NV. The number of adults under 50 years old watching TV at any given moment has declined for two consecutive seasons.

"High ratings are scarce and broadcasters and cable [networks] are in an elite group that can still deliver [ratings]," says Alex Feldman, a manager of global forecasting for Magnaglobal, a unit of Interpublic Group of Cos. "Advertisers are paying more for lower ratings; still it is the best thing out there."

TV ads will comprise 34.4% of the $174 billion expected to be spent in the U.S. on ads in 2011, up from a 33.8% share in 2010, according to Magnaglobal. It is expected to rise to 35.9% in 2012, the research firm said.

Shifts in media consumption are affecting the media business in unusual ways. For example, consumers are spending more time online yet some Internet giants, like Yahoo Inc. and AOL Inc., are struggling. People are spending as much time on their mobile phones as reading newspapers and magazines combined, yet the mobile-ad industry is a fraction of the print-ad market.

The trends can be explained by the laws of supply and demand. As consumers' attention remains a moving target, advertisers are demanding more of the media they find effective, but prices are fluctuating based on available supply of ad space.

Those laws are increasingly pulling ad dollars towards two poles, TV and the Internet. (Radio ad spending is basically flat and advertising in newspapers and magazines continue to decline.)

Internet companies have long desired TV dollars but, while ravaging sectors like newspapers, the Internet hasn't taken much from TV. That's because marketers believe that Internet and television ads are good at different things.

The Internet, they say, excels at taking your order once you know what you want, such as helping you hunt for and book a vacation. TV, on the other hand, is good at getting you to want something, like a new car, and to remember to buy it, they added.

Demand for both is rising for different reasons. Internet advertising has increased as consumers spend more time and money online. But growth has slowed over time as the market has matured.

A glut of available Internet space to sell ads for display, or graphical, advertisements has also stymied growth in some parts of the business. As more websites sell advertising, the value of any particular ad is reduced and it is harder for sites to command premiums for exclusive audiences.

Still, the U.S. online-ad market is forecast to grow faster this year than last year, rising 15.6% to $30 billion in 2011, according to Magnaglobal.

That's in part because the biggest slice of the online-ad business—the search ads that appear next to search results—escapes the problem of an abundance of inventory. For any given Web search, the amount of attractive space to show ads is still scarce since advertisers want to be in the first few ad slots at the top of the page when a user conducts a search.

At nearly twice the size, the U.S. TV ad market isn't growing as fast, and is forecast to increase only 3% this year and 9.4% next year, according to Magnaglobal. But that growth stands out because fewer homes have televisions, and fewer younger viewers are watching on those they have.

At the big broadcast TV networks, the number of 18-to-49-year-olds watching commercials last season was 17% below the number that watched on the four biggest networks for the 2007-2008 TV season. That reduces the available inventory of ad impressions to sell and has helped drive up the price per viewer on broadcast TV.

Marketers, in large part, say they keep buying because there are few other ways for them to reach millions of people in a very short period of time.

Inertia also plays a role. Ad agencies are built to buy television, advertisers say, allocating dollars based on the number of "gross ratings points" they need. The metric refers to the number of commercials aired multiplied by the number of people watching during the commercial breaks. Efforts to translate the concept to the Web, where ads are sold based on how times the ad appears or is clicked on, haven't taken off.

"Part of it has to do with a comfort level. Advertisers feel comfortable with broadcast TV," said Brad Adgate, senior vice president of research at ad-sales shop Horizon Media. "Over time, that could change."

Pricing is working in TV's favor. Despite the gloss of a TV spot, TV prices are relatively low.

The average cost per thousand households for a TV spot at any time of day on network television during the last TV season was $14.50, according to media forecasting company SQAD Inc. For cable, it was $6.

Advertisers generally buy viewings of their ads by counting only particular demographics, such as adults between 18 and 49 years old, for which they pay higher prices.

Both averages were around 17% higher from the previous season and far higher than the prices for banner ads on some websites. But they are still lower than prices for some highly sought after Internet properties. The average cost per thousand times a display ad was served on a finance-related site during the first half of the year was $19 and was $17.50 for automotive sites, according to SQAD.

TV's biggest tailwind is cable television, which is increasing its dollar share because its supply of viewers to sell to advertisers is growing.

How durable the TV dynamic is remains unclear. For TV to continue to grow its share of the ad market, ratings must hold up enough that advertisers still want to be on TV, says Magnaglobal's Mr. Feldman.


Jessica E. Vascellaro and Sam Schechner, The Wall Street Journal. September 21, 2011

Copyright © 2011 Dow Jones & Company, Inc.. All rights reserved.