How the TV Advertising Industry Works

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 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.

According to the American Time Use Survey Summary, individuals 15-years old and up spend approximately 2.8 hours per day watching TV. In general, during the first month that a television ad airs, companies can look for a 5% uptick in sales. Each channel has certain time constraints when it comes to the length of ads they can show, as well as constraints regarding subject matter. So during a morning kids' show, you likely won’t see ads for beer, and some cable channels can get away with racier ads than a more conservative network.

For small businesses with a limited ad budget, it's especially important to choose the right time at the right price at which to air their ad. It’s not just about how often the ad is shown—it’s about getting as many eyeballs on the ad as possible each time it airs. Brands and media companies also work to match the demographics of the viewers of each show to the market of the product being sold. 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.

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 2015, NBC charged around $4.5 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 programming like the Super Bowl, the Olympics or a show like Saturday Night Live’s 40^th anniversary celebration is still robust. 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 is much different than it once was.

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 will suddenly start having special guests or huge must-see events (think, 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.

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 start to 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 the golden ticket.

According to "Variety," companies, "tend to commit between $8 billion and $9 billion to broadcast primetime TV advertising," and another $9 billion to $10 billion every year as part of the upfronts. 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.

The TV advertising model changed drastically with the advent of DVRs and TiVo. Suddenly viewers could choose whether or not they wanted to watch an ad, and millions of people started fast-forwarding. In 2014, Time Warner Inc. (TWX) said that domestic advertising revenue at its Turner Broadcasting cable networks (CNN, TBS and TNT) was disappointing. In the first quarter of 2015, Discovery Communications Inc. (DISCA) said that advertising revenue grew just 1%, and its ratings in the period were lower. These numbers could be due to many factors, but the move to digital is definitely changing the game.

In addition, Insurer Allstate Corp. (ALL) said that from 2013 to 2015 it will shift approximately 20% of its TV advertising dollars to digital. Many brands are also moving portions of their budget to online video to target younger audiences who are more likely to get their entertainment online. 

Advertisers spent between $8.17 billion and $8.94 billion for the 2014-2015 primetime slate on broadcast, according to “Variety.” Compare that to between $8.6 billion and $9.2 billion in 2013. They set aside "$9.6 billion in advance advertising commitments for cable," which was "down about 6%, or about $577 million, from the $10.2 billion" the previous year.

In another major move, NBCUniversal’s CNBC announced that beginning in the fourth quarter of 2015, it will no longer rely on Nielsen data for its daytime business-news programming, according to Adweek. In other words, when it comes to TV advertising, a new business model is in the process of taking shape. Companies like Netflix don’t even rely on ad dollars, and so traditional networks and advertisers are trying to find new and better ways to reach their target audience.

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 things like DVRs, online streaming and younger audiences who get their entertainment online or on their phones rather than on TV. Still, traditions like the upfronts and sweeps weeks remain, and TV ads are an important part of any company’s marketing plan.