Will Addressble TV really save the TV industry

Since I started TVision, every year I hear from people in the industry telling me, “Addressable TV is going to save the TV industry. It will grow exponentially starting this year.”

eMarketer has been lowering its estimates on US Addressable TV Ad Spending every year since 2015. Clearly, we start every year being too bullish about addressable TV, then get disappointed around Christmas.

Let’s take a look at the value of addressable TV from both the buy and sell points of view.

For brands, the value is clear: It will improve targeting capability. Brands will be able to broadcast ads to only their target audience, which is very attractive. The question really is: How much of a premium should brands pay?

Let’s take a look at the following four brands. They have very different addressable audience percentages. Brand A is a large CPG brand that sells soap. Everyone is a potential customer. Brand D is a luxury auto brand. If we assume that the average linear TV CPM is about $10, Brand D’s target audience based effective CPM will be around $100.

Addressable TV today is sold at a much higher price. Usually, its targeting data is based on household-level data. As we all know, a TV set is a passive multi-viewer device. Even if the targeting data is 100% accurate, there is at least a 50% chance that ad exposure is directed at the wrong individuals. If we assume the price of addressable TV CPM is $50, the actual CPM might be $100 or above.

This is a very rough analysis. However, it does show that if a brand has a very board target audience, most likely it doesn’t make sense to leverage addressable TV at all.

I think that even for Brand D, the cost benefit is questionable. First of all, at $100 CPM, Brand D can purchase premium display or video ads via a digital channel. A digital channel provides a much better capability to target each individual and not the entire household. In addition, the potential customer base might be much larger than 10% if the sales cycle is very long. A poor college student may eventually buy a BMW in his 40s. However, it’s impossible to target the high-potential college student in an effective manner.

To sum up, unless it’s a super-niche brand, most likely addressable TV doesn’t make sense, at least at the current CPM level. 

BrandAddressable Audience %Linear CPMEffective CPM (Linear)Addressable TV CPMAddressable TV CPM (Actual)
Brand A70%$10$14.29$50$100
Brand B50%$10$20.00$50$100
Brand C30%$10$33.33$50$100
Brand D10%$10$100.00$50$100

TV networks have been selling the best inventories during Upfront for the last few decades. By selling all the premium inventory at once, networks were able to artificially create scarcity and charge a premium. However, addressable TV inventories are much harder to optimize for the yield, even if it is part of a private marketplace. To offset the potential risk, networks must charge a very high CPM for addressable TV ads. Given that the Upfront market is getting stronger every year, it’s very unlikely that networks will make addressable TV part of their main offering.

Please don’t get me wrong. I do agree that current Nielsen age/gender targeting is outdated. However, this doesn’t mean that digital media like one-on-one targeting is the best answer for the TV industry. Most of the brands use TV to quickly get a massive reach and grow their brand. Data-driven linear might be a happy middle ground. I think that the automation of the TV planning/buying process makes a lot of sense but, most likely, the answer is not addressable TV.