Final report for Ofcom An econometric analysis of the TV advertising market: final report 11 March 2010 Ref: 15880-275 Contents 0 Executive summary 1 1 Introduction 9 1.1 Background to the study 9 1.2 The UK TV advertising market 10 1.3 Objectives of the study 12 1.4 Structure of this report 12 2 Literature review 14 3 Data availability and channel groupings 16 3.1 Data used 16 3.2 Modelling period 25 3.3 Channel groupings 26 4 Approach to modelling the UK TV advertising market 28 4.1 The advertising demand model 28 4.2 The viewing demand model 39 4.3 Summary of approach 43 5 Results of the econometric analysis 45 5.1 Results from the advertising demand model 45 5.2 Results from the viewing demand model 55 5.3 Results from the robustness assessment 58 5.4 Summary of results 61 6 Conclusion 62 Annex A: Data sources used Annex B: List of channels Annex C: Further comparison between flexibilities and elasticities Annex D: Outputs from the econometric analysis Annex E: Analysis of policy options Annex F: Additional analyses Annex G: Robustness assessment Ref: 15880-275 An econometric analysis of the TV advertising market: final report Authors Dr Mike Grant (Partner, Analysys Mason) Mark Colville (Manager, Analysys Mason) Marc Eschenburg (Consultant, Analysys Mason) Sally Dickerson (Global Metrics Director, OmnicomMediaGroup, Global Managing Director, BrandScience) Paul Sturgeon (Technical Director, BrandScience) Neil Mortensen (Research Director, Omnicom Media Group) Prof. Gregory Crawford (Professor, University of Warwick. Former Chief Economist at the FCC) The authors would like to acknowledge the help and support of the Ofcom team. In case of any queries on the contents of this report please contact either: Mike Grant, Partner Mark Colville, Manager Analysys Mason Limited Analysys Mason Limited Bush House, North West Wing St Giles Court Aldwych 24 Castle Street London WC2B 4PJ Cambridge CB3 0AJ UK UK Tel: +44 (0)20 7395 9000 Tel: +44 (0)1223 460600 Fax: +44 (0)20 7395 9001 Fax: +44 (0)1223 460866 [email protected] [email protected] www.analysysmason.com Registered in England No. 5177472 Confidentiality Notice: This document and the information contained herein are strictly private and confidential, and are solely for the use of Ofcom Copyright © 2010. The information contained herein is the property of Analysys Mason Limited and its partners and is provided on condition that it will not be reproduced, copied, lent or disclosed, directly or indirectly, nor used for any purpose other than that for which it was specifically furnished. Ref: 15880-275 An econometric analysis of the TV advertising market: final report | 1 0 Executive summary This is the final report for Ofcom on the econometric modelling of the demand for TV advertising carried out by Analysys Mason, BrandScience and Professor Gregory Crawford. The report describes the methodology used, presents the results of our econometric analysis, and sets out the main conclusions from our work. We also provide analysis of several policy evaluation scenarios in the annexes. This study provides an analysis of the UK TV advertising market. Its aim is to conduct an econometric analysis which can be used by Ofcom as a tool in its regulatory decision- making process with respect to a change in the COSTA rules which define the maximum amount of advertising minutes allowed for public service broadcasters (PSBs) and non-PSBs. One of the most distinguishing features of the TV advertising market is its two-sided nature (see Figure 0.1). On the one side, advertisers are buying airtime from broadcasters. On the other side, TV viewers are watching the programmes broadcast by the TV channels. In this market, advertising can be viewed as an implicit ‘price’ which viewers have to pay for consuming the content provided, and they will react to changes in the amount of advertising either by continuing to watch the same programme, switching to another channel, or switching off their TV. Market 1: Advertising Market 2: Viewing Ofcom (COSTA rules) Direct impact on Direct impact on supply of commercial “price” paid by impacts viewers Demand and supply Demand and supply Advertisers Broadcasters Viewers of commercial impacts of programming Figure 0.1: The two-sided nature of the UK TV advertising market We have reflected this double aspect of the market by developing two models: • Advertising demand model: This looks at the demand and supply for advertising by advertisers and broadcasters. Given the dynamics of the TV advertising market, we have used an inverse demand framework to understand key dependencies between the price of Ref: 15880-275 An econometric analysis of the TV advertising market: final report | 2 advertising and variables such as the quantity of impacts supplied, the share of commercial impacts (SOCI) of a channel, or external factors such as the prevalence of Internet advertising. • Viewing demand model: Changing the COSTA rules implies new rules on the maximum number of advertising minutes broadcast. Advertising is seen as an implicit price paid by audiences to watch TV content, and so changes to the COSTA rules will impact the number of people watching a specific programme, and should be taken into account when evaluating the impact of regulatory changes. Our viewing demand model therefore estimates the reaction of viewers to a change in advertising minutes as a consequence of changes in the advertising rules. Given the size and importance of advertising in the economy, there is a relatively low volume of academic work covering the topic. A primary reason for this scarcity is the difficulty in obtaining the data necessary to estimate advertising demand. Viewership, advertising minutes and advertising prices (as well as ancillary information about programming characteristics, viewer demographics and advertiser characteristics) are all needed in order to accurately model advertising demand. However, although viewership and advertising minutes are typically available from TV ratings organisations such as Nielsen in the USA and BARB in the UK, the prices paid by advertisers (or their ad agencies or media buyers) are typically commercially sensitive, and only some information is available on quarterly pricing for some of the major advertising sales houses. Our study attempts to address some of these difficulties and thereby contribute to an improved understanding of the TV advertising market. Our model is broadly based on the approach taken by Wilbur (2008), but additionally uses more detailed data. With regard to the improvements in the data available to us: • We have gained access to proprietary information from the Omnicom Media Group (OMG), and in particular can draw on monthly advertising pricing data on a channel-by-channel level. Given the seasonality of TV viewing (and hence advertising prices), this increased granularity of the data (compared to quarterly data on an industry level available in the public domain) constitutes a significant improvement over previous studies and allows us to address one of the major gaps in the academic literature. • In addition, our use of extensive UK databases of viewership and advertising minutes (a combination of data available through BARB and in-house data from OMG) has allowed for very detailed viewing analyses, and provide a further improvement over previously available datasets. Given the differentiation in COSTA rules between PSBs and non-PSBs on the one hand, and the significant differences between PSB channels on the other hand, we have defined a total of seven channel groupings which we have incorporated into our modelling framework.1 1 ITV1, C4, Five, Non-PSBs/Rest of the market, channels in ITV portfolio, C4 portfolio, and Five portfolio. These are shown as part of our first results table in Figure 0.3 below (page 5). Ref: 15880-275 An econometric analysis of the TV advertising market: final report | 3 Based on the two-sided nature of the advertising market, the available data and existing TV advertising regulation, we have developed the final model specifications. The key characteristics of these model specifications are summarised in Figure 0.2 below. Advertising demand model Viewing demand model Underlying economic model Inverse demand system Logit market share model Econometric method Ordinary Least Squares (OLS) Ordinary Least Squares (OLS) Cross-equation restrictions Seven individual equations Four individual equations Sample size 79-90 (depending on equation) 7540 – 198 583 (depending on equation) Period under evaluation January 2002 – August 2009 January 2009 – June 2009 Applied time unit Month 30-minute blocks across the day Dependent variable Cost per thousand (CPT) for an Market share of a programme individual channel or a channel family Independent variables Quantity of commercial impacts Length of advertising break supplied by channels Monthly lags of cost per thousand Programme (dummy) Share of Commercial Impacts (SOCI) Hour of day (dummy) Monthly dummy variables Month (dummy) Online page impressions FTSE index Figure 0.2: Overview of key characteristics of the advertising and viewing demand models Ofcom’s primary concern is to understand the effects of changes to the COSTA rules on advertising revenue streams. Rule changes are likely to result in a change in advertising minutage, and therefore the supply of impacts, by (at least some) channels. This will in turn directly affect the market prices for advertising impacts. The goal of our advertising demand model is therefore to capture the dynamics of supply and demand for TV advertising. The main outputs we have derived from this analysis are the own-price inverse elasticity and the cross-price inverse elasticity of TV advertising demand, for the seven channel groupings.2 In order to derive the relevant price inverse elasticities, we have used an ordinary least squares (OLS) approach. In Section 4.1 we justify in detail the use of this comparatively simple approach in the context of the UK TV advertising market.