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LECTURE 9: ADVERTISING COSTS AND MEDIA,
ECONOMICS OF ONLINE ADVERTISING
AEM 4550:
Economics of Advertising
Prof. Jura Liaukonyte
Selling Network Television
NETWORKS SELL THEIR TIME IN 3 STAGES:
1.The Upfront Market
2.The Scatter Market
3.The Opportunistic Market
Television Sells Spots Like Airlines
Sell Seats
 If a flight leaves with empty seats, revenue for the seat is zero.
 To assure full planes, sell the seats at a price that will sell
them out early.
 Charge last -minute buyers highest price
1. THE UPFRONT MARKET
 Annual purchase of commercial time well in advance of the
telecast time.
 Upfront advertisers buy 70% of prime time and 50% of other
dayparts. Most buy for one year. Get best price.
 Biggest national advertisers buy children’s programs, prime
time, daytime, news, and late night.
2. SCATTER MARKET
 Sale of most of the year’s remaining
inventory not sold at upfront.
 Inventory generally tight.
 Prices usually 50% higher than upfront.
3. OPPORTUNISTIC MARKET
 Last-minute buying of inventory due to:
 Changes in programming
 Advertisers don’t want to be on controversial
programs
 Advertiser inability to pay
Cancellations and Guarantees
 Most network orders are non-cancelable. If an advertiser
cannot or does not want the time, it is the advertiser’s
responsibility to sell the time - not the network’s.
 Networks cancel programs with no notice to the advertiser
with the provision that commercials will run in another
program that delivers the same audience profile.
Ratings Guarantees
 The cost of network time is based on network guarantees of
spot price vs. audiences, computed in cost per thousand.
 If the ratings projected by the network to the advertiser are
not achieved, the network runs the spot in other programs to
accumulate sufficient ratings to bring the CPM down to the
promised level.
 The extra spots the advertiser gets are called MAKEGOODS
Ratings Guarantees
 Networks are incentivized to give a slightly inflated estimate
than to low-ball it and outperform (additional GRPs are free for
advertisers).
 Networks aim to estimate ratings of new shows within 5% of
what they will deliver (and usually on average they achieve that).
 Otherwise a lot of inventory will need to be given back as makegoods.
 Predictions are based on last year’s performances among other
things.
 Examples:
 2013 Baseball World Series resulted in makegoods.
 Some makegoods can be transferred to HULU
Volatility of Ratings
Advertising Avoidance
DVR Penetration
DVR Penetration
A Major Concern:
 Forrester predicts US HH to watch 15% fewer commercials due to
DVRs
 47% of [DVR] respondents skip ads most of the time (Jupiter
Media)
 60% of advertisers plan to decrease TV ad budgets due to DVRs
(Association of National Advertisers and Forrester Research)
 American Advertising Federation poll finds ¾ of ad execs feel
DVRs significantly affect TV advertisement methods
DVRs and ad avoidance
 DVRs may increase commercial avoidance, BUT:
 Facilitate the measurement of commercial avoidance
 Advertisers can use ad avoidance data to improve creative strategies,
targeting, message rotation and scheduling, media buying, and ROI
(return on investment) measurements
 The very act of fast-forwarding requires that the viewer pays
attention
 Alternatives: viewers getting up to go to the fridge or the bathroom or
turning away to the computer or to talk to someone else in the room
or flipping the remote around the channels
 There can be a real effect on purchasing behavior due to the
attention required
Advertisers Adapting
 Advertisers figure out ways to take advantage of the attention
fast-forwarding requires
 Improve ad creative itself
 Reduce viewers’ motivations to fast-forward
Advertisers Adapting
 Advertisers can use information gathered from DVRs to figure out
how to combat fast-forwarding
 Target niche audiences to tailor more effective advertising
 TiVo’s Stop||Watch is tracking second-by-second viewing among
all users and 20,000 DVR users with demographic data known
 Networks adopt to fast-forwarded commercials by:
 Further integrating products into programming – product placement
 Tricking viewers by changing the length of commercials
 Integrating Tune-ins for the show that is being watched
 Downside: may annoy viewers
One Early Study Finds No DVR Effect
 Why no DVR effect?
 Advertising has small effects to start with
 People do not skip many ads
 People in control group zap anyhow
 People attend to what they skip
 Mandese (2004) finds 67% of DVR viewers notice the
advertisements they forward through
 Multiple ad viewing from repeat plays
More recent findings (Wilbur 2015):
 Viewers were much less likely to avoid ads during:
 animated programs (31%-59%),
 followed by professional basketball (25%-36%),
 game shows (23%-36%) and
 situation comedies (26%-33%).
 Five product categories were found to reduce ad-avoidance:
 quick service restaurants,
 domestic hybrid automobiles,
 family clothing stores,
 pizza products and
 movies.
More recent findings (Wilbur 2015):
 Networks with highest ad skipping:
 MSNBC,
 CBS,
 Lifetime,
 NBC,
 Discovery
 Precipitation increases advertising avoidance, with one inch of rain
associated with a 2%-24% higher ad skipping probability.
Online Advertising
ONLINE ADVERTISING
Online Advertising
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Partially Based on HBS case
“Google Advertising”, which
is a required reading
Online Advertising Models
Measurability
Google Advertising Revenues
Online Ad Formats
 Floating ad: An ad which moves across the user's screen or floats above the content.
 Expanding ad: An ad which changes size and which may alter the contents of the
webpage.

Polite ad: A method by which a large ad will be downloaded in smaller pieces to
minimize the disruption of the content being viewed.
 Wallpaper ad: An ad which changes the background of the page being viewed.
 Trick banner: A banner ad that looks like a dialog box with buttons. It simulates an error
message or an alert.
 Pop-up: A new window which opens in front of the current one, displaying an
advertisement, or entire webpage.
 Pop-under: Similar to a Pop-Up except that the window is loaded or sent behind the
current window so that the user does not see it until they close one or more active
windows.
 Video ad: similar to a banner ad, except that instead of a static or animated image,
actual moving video clips are displayed.
 Map ad: text or graphics linked from, and appearing in or over, a location on an
electronic map such as on Google Maps.
 Mobile ad: an SMS text or multi-media message sent to a cell phone.
Search Advertising
 Highly effective since it reaches people when they are
interested in a topic
 Relevant, yet not obtrusive
 Has expanded rapidly in last few years
Online Advertising Measurability
 Huge advantage in measuring effectiveness
 Pay per click
 Conversion tracking
 Value of ranking system
 Ranks ads by bid x ad quality
 Show ads likely to get the most valuable clicks in the most
prominent position
 E.g., “best ads get best exposure”
 Creates a virtuous circle: individuals want to click because results
are relevant
Search Advertising
 Search advertising estimated to be 6 times more effective
than a banner ad
 Delivers qualified leads
 80% of Internet user sessions begin at the search engines
(Source: Internetstats.com)
 55% of online purchases are made on sites found through
search engine listings (Source: Internetstats.com)
Search Engines Market Share (2014)
Internet Advertising Models
 For what exactly should advertisers pay and when?
 When the ad is being shown to the user
 When the ad is being clicked by the user
 When the ad has “influenced” the user in the sense
that its presentation lead to a “conversion event”
 Conversion event - the actual purchase of the
product advertised in the ad
 Why wouldn’t an advertiser favor number 1?
Google Revenues
Advertising Payment Methods
 CPM – Cost per Mille – an advertiser pays per one thousand
impressions of the ad (“Mille” stands for “thousand” in Latin);
 an alternative term used in the industry for this payment model is CPI
(Cost per Impression).
 CPC – Cost per Click (a.k.a. Pay per Click or PPC; we will use
these terms interchangeably) – an advertiser pays only when a
visitor clicks on the ad.
 CPA – Cost per Action – an advertiser only pays when a certain
conversion action takes place, such as a product being
purchased, an advertised item was placed into a shopping cart,
or a certain form being filled.
 This is the best option for an advertiser to pay for the ads from the
advertisers’ point of view since it gives the
PAY-PER-CLICK Advertising Model
 Targeted advertisement based on two effectiveness
measures:
1.
Click-Through Rate (CTR): specifies on how many ads X, out of
the total number of ads Y shown to the visitors, the visitors
actually clicked; in other words, CTR = X/Y. CTR measures how
often visitors click on the ad
2.
Conversion Rate: it specifies the percentage of visitors who
took the conversion action. Conversion rate gives a sense of
how often visitors actually act on a given ad, which is a better
measure of ad’s effectiveness than the CTR measure
Recent History of CPC Method
 Cost Per Click is the predominant advertising payment
method, made popular by search engines such a Google and
Overture (now part of Yahoo!).
 Google introduced CPC AdWords program in 2002.
 Combining a particular ad payment method with a particular
targeting method. For Google and Yahoo! the two main
models are the keyword-based PPC and the content-based
PPC models.
Cost Per Click
Two problems with the Cost per click model:
 Although correlated, good click-through rates are still not
indicative of good conversion rates
 It does not offer any “built in” fundamental protection
mechanisms against the click fraud