What influences advertising price in television channels?: An empirical analysis on the Spanish market. Germà Bel & Laia Domènech (Universitat de Barcelona & ppre-IREA) December

1 Introduction Motivation: Changes in market conditions: new operators, financial deficit incurred by public operators, development of new tecnologies and new regulatory framework. This situacion has increased pressures in advertising market, the main source of revenue for public and private broadcasters. Aim of the paper: We empirically analyze the factors explaining ads price in free-to-air TV market. Contribution: 1.We consider how ad prices are affected by factors such as:  Ownership  Contracting out 2.Provide new evidences about the relationship between ad price, ad time and share. 3.We study the Spanish case.

2 Plan of the presentation 1.Motivation 2.Aim of the paper 3.Relationship to the literature 4.Data 5.Methodology 6.Estimation and results 7.Concluding remarks

3 1. The free- to-air television market in Spain The free-to-air market in Spain is undergoing quick and intense change. The main characteristics of the free-to-air television market in Spain are: a)There are public and private operators in this markets. Television channels can be regional or national. National TV channels compete with the regional TV channels for advertisers. Regional channels have an important weight in the market. Some of they use in their broadcasting other co-official languages different from Spanish. These network enjoy a certain degree of monopoly over their viewers (there are not relevant competing channels in the same language) b)Many Television channels (public and private, regional and national) contract out the management of their sales of ad time. How do the channels sell their ad time? »Channel sells ad time to advertisers. »Channel contracts out to private firm the ad sale management.

4 1. The free- to-air television market in Spain c)Significant financial deficit incurred by Spanish public broadcasters, national as well regional. For this reason, several governments have designed and implemented reorganization plans. The financial stress is due both to the inefficiency of the existing financing system and to a loss of audience. Funding of public service broadcasting (SPAIN): Advertising and budgetary founds. (No fee) Consequently, public broadcasters compete with private television channels for TV advertising. Crowding out effect. d)The number of private channels in Spain has increased in New private national channels: Cuatro and La Sexta Conclusion: This, together with the financial stress placed of public operators, has increased pressuresnin the advertising market.

5 1. The free- to-air television market in Spain This mixed oligopoly type of market has some peculiars characteristics:  There are public and private operators  There are regional and national operators, and  Small percentage variations in the share level translate into large effects on revenues from advertising. Source: Comisión del mercado de las telecomunicaciones (2007)

6 2. Aim of the paper What influences TV advertising price?: The effect of television channel ownership on advertising price. The existence of externalities. Consumers don’t want to consume advertising. (Negative externality) Advertisers are willing to pay more for high level of audience. The relationship between price and management of their sales of advertising time. The relationship between price and specific characteristics of programming and viewers.

7 3. Relationship to the literature Recent literature has focused on the Two-Sided Markets concept. (Armstrong 2006) (Rochet y Tirole 2003). This concept has been used to understand the television market. Anderson & Coate (2005), Reisinger (2004), Bel et al. (2007) and King et al. (2008) have offered recent studies focusing on two sided markets in television. We understand Two-Sided Market as: Pay for advertising AdvertisersViewers Programs Attention (+) Advertising (-)

8 3. Relationship to the literature

9 According to the literature, we consider how ad price are affected : Advertising minutes. Audience share. Viewers characteristics In addition, we examine two effects : The effect on prices the existence of a public operator. The effect on prices that one channel contracting out the management of their ad time sales. 3. Relationship to the literature

10 4. Data We want to explain TV advertising price. To conduct our estimation we use panel data, with semester data, for 2002 thought 2006, and for 13 broadcasters (public and private).

11 5. Methodology The methodology used in the paper: Parametric analysis: We estimate the price equation by means of two-stage least square estimator. The model is estimated in two stages to avoid endogeneity problems caused by advertising price, share and advertising time. Non- parametric analysis: median spline Median spline between share and advertising price Median spline between share and ad time

12 6. Estimation and results We estimate the following function: Dependent variable: –Pmin it : Ad price per minute for broadcaster i at moment t Variables de control: –minutes it: minutes of advertising in network i at moment t. –share it : the percentage of viewers who are watching TV in network i at moment t. –contracting out : management of network i sales of advertising time. –public : ownership of network i –per14-29 : percentage of population years old in territory j at moment t –per30-44 : percentage of population years old in territory j at moment t –women : percentage of women in territory j at moment t –regional_gdp: regional gross domestic product per capita in territory j at moment t

13 6. Estimation and results Note 1: Robust standard errors in parenthesis. Note 2: *** significant at 1% level,; ** significant at 5% level; * significant at 10% level. Note 3: The instruments for minutes and share are log (entertainment), football, language, log(minutesT-1) and log(cultural).

14 Our results show: –The share is a key variable in advertising price. (High elasticity, 0.947, of ad price with respect to share). –Negative relationship between ad time and ad price. Advertisers pay more for ads on networks that have less total ad time. –We obtain a negative and significant relationship between public ownership and ad price. –The variables contracting out and women are not significant relationship. –We find a positive relationship between price and the percentage of population 14 and 29 years old and the strength of GDP in the region. 7. Concluding remarks

15 Thank you