How Network TV Keeps Prices High Via Sweetheart Deals With Favorite Advertisers

(MoneyWatch)  One of my pet conspiracy theories is that the network TV advertising marketplace is effectively a cartel in which a handful of companies -- ABC, NBC, CBS, Fox and The CW -- control a limited supply of airtime and act in concert to make sure prices stay as high as possible.

They do this by offering their wares to buyers in limited timeframes (during the spring "upfront" bidding season), by holding back inventory if they don't get the prices they want (the so-called "scatter" market), and by refusing to disclose the prices paid by different advertisers for different spots.

Most importantly, the networks have made sure that the modern world -- in the form of online exchanges where ad time could be bought and sold like stocks -- doesn't impinge on their old-school business, which still relies on phone calls, face-to-face talks, and cozy, long-term relationships. And by amazing coincidence, TV ad prices have remained buoyant despite the advent of the Internet and the crushing efficiencies that has brought to almost all other types of ad media.

(The networks* and most media-buying ad agencies reject this notion out of hand. Of course we compete, they say, there are five of us and advertisers can go anywhere else they want!)

Another scintilla of evidence to support my theory emerged recently, when Adweek asked Julie Roehm, a former svp marketing at Walmart (WM) and a former marketing director at General Motors (GM), why her attempt to set up an online exchange for TV buyers and sellers failed in 2005. It's not news that the exchange didn't fly, but the explanation for the failure is: The networks refused to cooperate. And so did the cable channels.

All the TV networks declined to go along, even though the exchange was supported by GM, Walmart, Home Depot, HP, Intel, Toyota and Brown-Forman. Randy Falco, NBC's former COO, called it "ridiculous." Adweek said:

It quickly became clear that the major broadcast networks weren't interested for fear of devaluing their inventory.

But just a few lines later Adweek's Steve McClellan writes:

In the national TV space, where the supply of inventory is much more limited, an [online] auction system would have the effect of raising prices -- clearly not in the interest of clients.

Clearly there's some confusion here. Either an online auction would lower average prices or it would raise them. You can't have both at the same time.

Now, it's possible that the nets didn't go along because they believed it would lower prices, and so they persuaded media-buying agencies (who are close to the nets even though they have opposing interests) to join their opposition by arguing that prices would go up. Whatever the truth, the fact is that the exchange didn't happen -- another example of network TV maintaining the lucrative status quo in the face of methods that might improve competition.

McClellan adds one more fascinating detail: Some longtime advertisers, such as Procter & Gamble (PG), also refused to cooperate because they had grandfathered in deals that gave them inventory at lower prices than those paid by new advertisers. This, on its own, makes the case that online exchanges would bring some much-needed transparency and competition to the TV marketplace. How else are most clients supposed to get the best price if, in the next office down the hall, inventory is being sold at cut-rate prices to a handful of big advertisers who have sweetheart deals unavailable to anyone else?

*Including my bosses at CBS, which owns BNET. Related:

• Client Hell! BNET's Guide to the Advertising Underworld
• GE Gets $345M in Preferential Ad Rates in NBC-Comcast Deal
• Are TV Networks Colluding to Keep Ad Prices High in Time of Lower Demand?
• Is the TV Networks' Upfront an Antitrust Violation?
• Levi's Asks for Transparency and Media Buyers Balk