Value: Television Ratings v. Online Users

I'm a huge fan of the Nerdist Podcast. I only found it a couple months ago, but I've listened to multiple dozens since then. Great interviews, great banter, great stuff. However, a warning: it often runs very, very blue, so, if you go and listen and are offended, don't say I didn't tell you.


Kevin Smith was on in a very recent episode, in fact, his second appearance.

A fair part of the discussion was about TV ratings. I found it interesting because they referred to (albeit without explanation†) the arcane, and, in my eyes, utterly, fantastically, and absurdly outdated measurement system that is called TV Ratings, and their discussion was very telling. In essence, let me just say that I am not the first person, nor shall I be the last, to say that the Nielsen box system is a living incarnation of the inductive fallacy.

Kevin smith pointed out that a show with a "seven share" is considered a network failure of such astouding proportions that it would be considered a strike-out. To translate, a "seven share" means that 7% of televisions, in America, that are actually turned on in the relevant time-frame are tuned to your show. There are approximately 116 million households in America with televisions. There are approximately 2.6 people per household in America currently. So, let's be generous, round down a bunch, and figure out a lower bound for what "seven share" means.

Let's say that, simultaneously, the Moon has burst into flames and the night sky has turned into an unusually compelling fast food advertisement. This would mean that probably only 25% of American households are watching TV. Then let's say that, in these households, 50% of the people are asleep or trembling under their beds.

Doing the math through, this means that ~2,640,000 people are watching a show that the networks would consider to be a dive-bombing failure.

Following through on the Nerdist discussion, they pointed out that Mad Men, which I am a big fan of, and is culturally an extremely influential show, maxes out at something like 3,500,000 viewers per episode, and this is after years of building a fan base.

Let's compare that to this handy chart, about the value of Internet companies, based on user count. Pinterest, a tiny company with no revenue stream I've ever heard about, has a per user value of ~$16.50.

Obviously, this is not an apples-to-apples comparison, as TV ratings and online user subscriptions are different beasts. However, in this comparison, they are about eyeball-time, and are driven by advertising dollars. If a service that literally offers no products can be worth $16.50 per user, what is the value of eyeballs on television shows? Why is it that a show that demands the attention of 3,500,000 eyeballs for a full hour, on Sunday evening, every week for 12 weeks straight, would be considered a network failure?

Let's use Facebook user-time as a rough gaussian, and estimate that Pinterest users are on Pinterest between 50% and 150% of the the average time, per user, on Facebook. This puts their yearly use at a total of 48 to 144 hours, as an over-under, per user, so let's call it total of 37.5 cents per user hour (Edit/Note: I messed up my math, [particularly unforgivable for someone with my background] and, additionally, I found better numbers; post to come and will be linked here, but, in fact, the number are even more favorable to Mad Men). The average Mad Men 'user' spends precisely 12 hours on Mad Men per year, so, doing a completely economically baseless, linear tranlastion, this values Mad Men at $15.75M. Mad men costs about $2.5M per episode, so a season costs approximately $30M. For ref, the most expensive TV shows max out at $100M per 12 episode season, and are black swans. So, in essence, by these very basic (and tell me if they are wrong) numbers, if you valued Mad Men as a flash in the pan Internet startup, it probably wouldn't be that far off from being able to take out a 100% equity loan to cover an entire season of production costs. If one assumes that TV ads for this incredibly relevant, culturally important drama with an extremely dedicated fan base (one that probably runs into the demographic gold of educated folks with disposable income) are sold and placed by people who actually know what they are doing, it should not be that hard to get more ad revenue in that. I mean, come one, Sterling is doing ads for Lincoln cars. There has to be some dough in that. Also, note, Mad Men is famous for having incredibly high production values. These guys probably spend like, I dunno, $30,000 per episode? And they are hilarious. The first episode of It's Always Sunny cost $50,000.

To me, the idea fact Mad Men would be a network failure is an indication that the cable distribution mechanism is beyond broken. If you cannot make money off of roughly ~42,000,000 eyeball hours, even with the premium budget that Mad Men demands, and deserves, something is utterly broken about your business model. The commentators on the Nerdist Podcast pointed out that only a show like AMC could take the 'risk' of promoting a show with such low ratings, and that AMC could 'work with those numbers' in order to keep the show going. That, to me, is insane. Totally, totally insane.

To be fair, I am going to make the counterpoint to my own argument. It is entirely possible that online companies are way overvalued, and that the true value of advertising supported fare is actually way, way lower than either TV shows or give-away-and-pray based Internet companies demonstrate.

However, I think it is somewhere in between.

I think that, historically, TV and dead-tree-print ads were way, way overvalued, largely because they were kitchen-sink style broadcast ads, targeted at broad demographics determined by systems measured by Nielsen, and because distribution media was rather expensive to produce. Originally, Internet advertising was similarly overvalued. Now, we have the flipside, with generic, kitchen-sink Internet ads pulling in a CPM of something like ~$1.00. However, I think that as web services become better at targeting their customer base, demonstrating that their users are not weirdos (which they probably aren't), and that they are willing to spend money on goods and services (which they probably are), that number will rise, as demonstrated very clearly by the per user value chart linked above. Similarly, if a TV show cannot sustain itself with 3.5M viewers per week, they are getting a pathetically tiny fraction of their advertising-dollar pie, or the people selling their ads are doing a bad job. In any event, I think that it is pretty clear that the TV industry is in a ridiculous mess if a show that demands 42M eyeball hours in a single quarter is considered a risky venture. So, the arbitrage that is occurring is this: TV broadcast ads are way overvalued, and only a small percentage actually goes back to the content producers; un-targeted Internet ads probably represent the true value of un-targeted ads in any medium, and ~90% go to the content producers; precisely targeted advertising to a dedicated fan-base is probably valued somewhere in the middle, if not even higher than TV broadcast ads, and ~90% of that revenue should be going to the content producers, because distribution is no longer a value added service.

So, folks, feel free to disagree. I'm always open to evidence and arguments proving that I'm wrong.

†Nerdists, I am a huge fan. But forgive me for pointing out a technical omission, which, frankly, is the most important kind of omission.


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