Managing On-air Ad Inventory in Broadcast Television

Abstract

Motivated by the experiences of the National Broadcasting Company (NBC), we present an analytical model for managing on-air ad inventory in broadcast television. The ad inventory in this industry is priced based on rating points or the number of viewers that watch a commercial. The rating points during a broadcast year are sold through two distinct processes: the Upfront, which occurs before the broadcast season, and the Scatter, which occurs during the broadcast season. A firm needs to allocate its total rating points inventory to these two markets before knowing either the performance rating of its shows or the Scatter market price, both of which are random. The networks offer ratings (performance) guarantees on the inventory that is sold in the Upfront market while such guarantees are seldom offered in the Scatter market. We propose an optimization model for the networks to manage their rating points inventory. Our model explicitly incorporates the performance uncertainty of the television shows as well as the revenue uncertainty of the Scatter market. We derive conditions for feasibility of the problem and characterize the optimal amount of rating points to sell in the Upfront market. Our model explains the current practice of selling around 60-80% of the total rating points for the season during the Upfront market and analyzes other common strategies used by the firms. In addition to providing key managerial insights, our work introduces quantitative methodologies to television networks in planning their Upfront markets.