The Changing Landscape of TV: Is Payback Advantage Under Threat?
TV ads' rising costs and declining viewership question its payback advantage over other channels, prompting brands to consider changing their advertising strategies Market forces and broadcasters' decisions, along with the emergence of online video, create new opportunities for brands
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They say change happens gradually and then all at once. For TV advertising, the “all at once” is now.
The topic of conversation for years has been the "gradual" aspect, which includes underlying trends, Netflix, the declining viewership of those aged 16 to 34, and the decreasing effectiveness of TV advertising in terms of generating fame. However, the new focus is on the "sudden" aspect, specifically related to prices.
In recent years, the cost of TV ads has increased at a much faster rate compared to other channels. According to ECI data, the price of a thousand views of a TV ad has gone up by 50% since 2019. On the other hand, other channels have experienced only modest price increases, and some have not seen any increase in price at all.
TV has retained its crucial position in the annual plan for many major brands despite the gradual, long-term change in its value. However, with a 50% increase in cost, the return on investment decreases by the same percentage, thereby shifting the optimal mix for most businesses significantly.
TV’s payback advantage over other channels has gone
The optimal distribution of funds among media channels relies on their individual abilities to generate sales and profits in comparison to other available options. It is a straightforward approach. To maximize returns, it is advisable to allocate a larger portion of the budget to channels that yield higher returns for every £1 spent.
In recent years, the calculation has undergone a transformation.
In the chart below, the old story is depicted by the grey bars. Prior to Covid, TV outperformed the average profit ROI by 40%. However, when considering media inflation since 2019, indicated by the pink line, TV's payback advantage has vanished. Its profit ROI now underperforms compared to other channels, by nearly 20%.
Of course, measurable sales and profit are not the sole reasons why companies air advertisements. According to Our Website's Language of Effectiveness survey, the second most important objective of marketing is to "communicate a desirable brand image" in order to generate long-term sales.
Many marketers believe that TV holds a unique influence in their marketing strategies. They argue that the medium itself conveys a message, suggesting that advertising on TV signifies a company's size, power, and popularity, leading to the assumption that many others must also purchase from them.
However, the issue lies in the fact that broadcast TV no longer reaches everyone. In an average week in 2022, over 20% of the population did not watch TV at all. Furthermore, the availability of "national TV moments" has decreased. The number of programs that attracted over 4 million viewers has decreased by 50% since 2014, resulting in only 48 such programs in 2022. This information has been reported by Ofcom.
Market forces vs. broadcasters’ decisions
This raises a question: In what way can the cost of TV advertising continue to rise despite its diminishing ability to provide advertisers with the essential elements they desire, such as extensive audience, popularity, and memorable moments?
One possible explanation is that the rising costs of everything in today's economy have resulted in increased prices across all media channels due to the impact of general inflation. Alternatively, broadcasters may have chosen to raise their prices as they undergo costly transitions towards offering connected TV services, likely driven by concerns about their financial performance.
Perhaps it's a matter of supply and demand. The supply is dwindling, leading broadcasters to charge advertisers a premium due to the scarcity. It is only logical that the small amount of money shifting from TV to online video will eventually become a significant influx.
The broadcasters may not realize it, but if they continue to have control over TV inflation without considering the long-term consequences, their actions may prove to be shortsighted. According to a survey conducted by Our Website, senior leaders in advertising companies consider return on investment as the most crucial measure of campaign success. This implies that as TV prices rise and the gap in ROI widens further, marketers may be compelled by their superiors to shift their focus from TV to alternative channels.
An opening for online video
Moving forward, one of the key considerations for 2024 planning revolves around a significant question. Given that television may no longer yield the same level of profitability as in the past, what alternative can assume its role as a substantial media investment for prominent advertisers' marketing strategies?
Connected TV has not yet proven itself as a practical replacement. Despite its ability to build brand awareness over time, it is complex, fragmented, and filled with confusing acronyms. Additionally, it does not address the issue of cost, as it tends to be more expensive per view than traditional linear TV.
On the other hand, online video presents a much more feasible alternative. According to data from multiple sources including Magic Numbers, D2D, Ekimetrics, Circana, OMG, and VCCP media via IPA ARC, its impact on sales lasts for an average of 4.6 months after airing, only slightly less than the 6.5 months seen with TV.
Moreover, online video platforms offer an abundance of eyes and ears. According to Ofcom, a staggering 90% of UK adults watched ads on YouTube in 2022. Additionally, TikTok saw a significant number of visitors, with 45% of all UK internet users engaging with the platform.
In recent history, major advertisers have recognized the effectiveness of online video and have gradually increased their investments in this medium.
CMOs, confronted with the new payback situation, will need to decide on their course of action. However, if relative prices remain unchanged, the gradual shift of funds from TV to online video should logically transform into a significant surge. Grace Kite, the creator of Magic Numbers, a platform that offers marketers accessible analytics and practical training, emphasizes the importance of this shift.
