CBS owns two broadcast network TV channels – CBS Network and the CW Network – both of which make money from TV advertising and do not charge cable or satellite companies any fees for carrying their channels.
Both TV channels reach millions of viewers but contribute substantially different amounts to CBS’s value. The differences are attributable to the key factors that determine how money is made in TV advertising:
1. Viewership Levels (e.g. average number of weekly viewers) as measured by ratings
2. Ad Pricing
3. Number of ad spots available (“inventory”)
4. Fees paid to ad agencies
Viewership: CBS Network has about 5x more viewers compared to the CW
TV ratings are a measure of viewership levels used by advertisers to price ads for specific channels and shows. Each rating point represents viewership by 1% of US TV households or about 1.15 million TV households.
We estimate that CBS has average weekly viewership levels of 6.5 million TV households compared to only 1.3 million for the CW. Viewership for the CW has declined since 2005 as the channel began focusing exclusively on the 18-34 female demographic.
Ad Pricing: The CW has higher average ad pricing today but declining rapidly
Ad pricing is dependent on the broadcast time (day, primetime, evening), ratings and the demographic served by the channel.
The CW’s average ad pricing is higher than that of CBS since the CW focuses on primetime broadcasting when rates are higher for all broadcasters. CBS has programming throughout the day at lower ad prices which brings down its average.
CBS serves a mixed 18-49 demographic whereas the CW is increasingly focusing on the 18-34 female demographic with shows like Gossip Girl and America’s Next Top Model. The CW is suffering from declining ratings (viewership) which we believe will continue to drive down its average ad pricing.
Ad Spots Available: CBS has about 3x the number of Ad Spots
CBS has nearly 88 hours of programming each week compared with about 30 hours for the CW. Both channels have about 22 minutes of advertising during each hour or, in other words, 44 30-second ad spots per hour.
Ad Agency Fees: Estimated to be the same for CBS and the CW at 15%
Advertisers (e.g Ford, Proctor & Gamble, Coca Cola) pay advertising agencies (e.g. Omnicom Group, WPP Group, Publicis) an Agency Fee representing the percentage of a TV advertisement’s gross purchase price for assistance in the creation and placement of advertisements. The proceeds from ad pricing that CBS and other programming providers receive is net of this fee.
We estimate that CBS Network constitutes about 32% of CBS’s value. Based on the information above, how much do you think the CW contributes?
A. >60%
B. 30%
C. 10%
D. <5%
Make a selection above to see the answer.
