Who Will Win the War for TV Ad Dollars?

The cycle keeps repeating itself. A big TV event gets broadcast. Millions of people watch it. But then come the headlines: Numbers are down, again. They’re especially down among millennials, who now make up America’s largest generation. Network executives spin the news and make excuses, but behind closed doors, the thin smile they brave in front of reporters turns to a beset frown.

It happened at the Rio Olympics. NBC’s marquee event was, by many accounts, a “nightmare” for the network. Ratings dropped 15 percent from London 2012. The precipitous decline was driven almost entirely by one demographic: 18-34 year old adults, whose ratings were down an incredible 31 percent. The audience was the oldest since the 1960 Olympic Games, at an average of 52.

What’s troubling is the Olympics should be the perfect combination of TV’s biggest remaining strengths: it’s (sort of) live, it’s a sporting event, and it’s programming that no other network can come close to replicating.

So what happened?

Many millennials migrated to online streaming. NBC claimed that “‘more than half’ of the 50 million viewers who streamed its Rio coverage were under the age of 35. Some, sans cable subscriptions, simply tuned out.

A similar thing happened at this year’s MTV Video Music Awards (VMAs). Despite a preponderance of star power from Rihanna, Beyonce, and Kanye West—people I can anecdotally confirm young people love—the once meaningful event was a dud. The numbers were strikingly similar to Rio: Total viewership was down 34 percent, while video streams spiked 70 percent.

Meanwhile, NFL and Premier League ratings are both down this year—something that was once unthinkable.

Yet brands are still spending plenty of money on TV advertisements. In fact, in spite of the ratings catastrophe, the Rio Olympics were a huge moneymaker for NBC. It raked in $1.2 billion in ad sales, a 20 percent increase over London, according to Ad Age. In other words, the network is making more money on fewer viewers, which seems to run counter to the rules of advertising economics.

It’s an odd phenomenon, one that defies easy explanation. Some think TV stays afloat because of certain features that can’t be replicated. Namely, scale.

“There’s still nothing on Facebook that equates itself to the Super Bowl or a major live event,” said Steve Rubel, chief content strategist at the communications agency Edelman. “I don’t think digital video is being used as a reach mechanism yet, but TV at all levels is.”

Yet as Facebook continues to colonize most of the connected world under its blue banner, and digital giants like Snapchat and Netflix dominate millennial’s attention, some think it’s only a matter of time before television’s dominance over ad spend comes to an end.

“It’s inevitable and already starting to occur,” said Rahul Chopra, CEO of NewsCorps social news agency Storyful. “There is not a TV executive today that is not worried if his or her audience is dying.”

The digital disruption

The potential migration of TV advertising to digital platforms gets to the core of what makes the internet such a transformative force for the business world.

There are a few characteristics that differentiate the internet from media platforms that came before it. Data collection is a huge one. Neither TV nor radio can even come close to gathering the kind of detailed demographic and behavioral data companies like Facebook offer.

Perhaps the biggest difference is the facilitation of direct relationships with consumers. In the past, brands could only reach consumers with expensive print and TV ads, which could do little more than promote brand awareness. Now, advertisers can be much more direct. With digital ads, consumers can subscribe to email mailing lists, click on ads, go to a product page, and so on.

Besides making direct marketing—and content marketing—a viable tactic, the internet has also allowed for the rise of e-commerce giants like Amazon, as well as smaller but still transformative direct-to-consumer businesses like Warby Parker, Glossier, and Dollar Shave Club. These companies typically eschew TV advertisements, relying instead on direct marketing like content marketing (Glossier, in particular, has perfected the method with its blog Into the Glossier) and targeted advertisements on platforms like Google and Facebook.

Traditional companies, however, still need the scale that TV provides. CPG companies like Unilever, retail giants like Macy’s, and car companies like Ford all need scale more than targeting. They’re the ones keeping TV ad revenue stable. This, essentially, is the argument Ben Thompson makes in his insightful article, “The Sports Lynchpin:”

I would argue sports are the linchpin holding the entire post-war economic order together. Because sports are consumed live, with significantly higher advertising load and viewer retention, sports are increasingly the only viable place for mass-market consumer companies to reach customers at scale and fight off niche e-commerce companies slicing off their customer base. That in turn helps preserve retailers, themselves both big advertisers and big targets for internet-based companies, particularly Amazon, and so on down the line.

It’s easy to see where Thompson thinks the future is headed: If sports can’t hold young people’s attention like they used to—as the Rio numbers suggest—then TV has a serious problem.

Of course, Rio is only one example. The World Cup and Super Bowl ratings have held relatively steady in the past few years. The Academy Awards, on the other hand, is decidedly down. Last year’s event held the lowest ratings on record for the 18-49 demographic. Overall, eMarketer has the percentage of “cord-cutters” and “cord-nevers” (people who have never paid for traditional TV) increasing by a steady 8 percent each year through 2017, 2018, and 2019.

Rubel believes that the appeal of TV’s scale is still something digital can’t match: “The way [advertisers] are looking at TV is mass reach, and the way they’re looking at digital video is more niche reach and engagement.” It’s possible for an advertiser to reach a similar scale on digital, but that would require an immense effort and a complicated web of ad buys.

Many questions still abound, however. For millennials, live events are just another story in the feed. Why watch the Olympics on TV when there’s Snapchat? Why watch the Academy Awards and deal with a bombardment of ads when you can fire up Netflix and watch the highlights later on YouTube? It’s what Thompson calls “the demotion of sports from mass media centerpiece to just another bit of content available on an aggregator.”

As the news industry has demonstrated, being a cog in the digital-platform machine is not a great place to be.

The digital cold war

Digital advertising is already beginning to overtake TV. Magna Global, Zenith, and eMarketer all predict it will happen sometime in 2017.

TV’s death will be slow—and calling it a “death” is really a misnomer, considering traditional TV will probably be around for many years. But there’s clearly been a shift, and a war has started raging to see who can win the lucrative budgets of TV advertising spend.

It’s a war between an overwhelming amount of combatants. There’s the social media platforms like Facebook, Twitter, and Snapchat. There’s the over-the-top (OTT), digital-native providers like Netflix (which will soon have as many subscribers as all of cable), Hulu, YouTube, and Amazon. And finally there’s the traditional TV networks and cable providers like CBS, DirectTV, and Verizon, all of which are positioning themselves in the digital market.

It’s a complicated space. There is an almost constant din of jostling as each player introduces new features, pricing models, and partnerships to woo advertisers, consumers, and content creators.

The Rio Olympics revealed the tension at the heart of this war. To cover the event, NBC enlisted two very different studios: NBCSports, the traditional TV network, and BuzzFeed, which is a master of social platforms like Snapchat.

According to Ad Age, NBC Universal CEO Edmund Burke predicted that, if millennials failed to tune into the Olympics, it would be because “they’ve been in a Facebook bubble or a Snapchat bubble and the Olympics have come and they didn’t know it was coming.” So the company enlisted BuzzFeed to run its Snapchat channel, which ended up driving 190 million minutes in attention time.

The problem for NBC is that Snapchat is a third-party platform. Publishers and partners like BuzzFeed and the NFL, which have their own channels on the platform’s Discover section, split ad revenue with Snapchat. If viewers are only watching Snapchat coverage, that means fewer people are exposed to NBC’s premium slots, at a fraction of the potential revenue.

It’s the same problem news publishers face: While platforms like Facebook and Snapchat offer scale to an outlet like The New York Times, fewer people will go to the Times website, where ad revenue is most lucrative.

Because of this cannibalization, TV networks and other premium content creators are increasingly playing hardball with internet giants like Facebook, Google, and Apple. The NFL, for example, isn’t renewing its content deal with Facebook this year, reportedly due to a lack of revenue-sharing options. Networks have balked at revenue sharing models offered by Apple, which has been trying to create a cable-like package deal for years.

Twitter has managed to spin some deals with partners like the NFL and the NBA, but what they’ve gotten is small potatoes compared to cable: Thursday Night Football and surrounding NBA coverage likely won’t attract many viewers, though Twitter’s price-point (free) still makes it an attractive viewing option for consumers.

Digital bundles, meanwhile, seem to be the focus of two of the biggest players in the space: YouTube and Hulu. Both plan to release bundles that combine original content with licensed content sometime in 2017.

This fight for TV ad dollars may not have a clear-cut winner. The most likely outcome seems to be a splintering of the landscape: A huge variety of options, constant change, and consumer confusion may be the status quo for a long time.

Some advertisers, like digital-native companies, may gravitate toward data-driven direct-marketing platforms like Facebook. Those looking for scale may stick with TV and digital bundles. Many will be left out in the cold since platforms like Netflix, Amazon, and Hulu allow for no advertising whatsoever.

If there is a winner, it will be the platform that can provide scale, premium content, and powerful targeting all at once. The battle rages on.