• by Dave Morgan , Featured Contributor, September 15, 2021

The following was previously published in an earlier edition of Marketing Insider.

In a recent discussion about the reshaping of the TV and video landscape, I was asked a question that I’m hearing more and more often: “Why are CTV ad rates so high?”

Because the question was posed by a super-smart industry leader, it presumed a well-known but not-much-discussed  fact: that CTV ad rates are in fact high, both compared to other digital ads and to linear TV as well. The question was immediately followed up with, “Is it just a matter of supply and demand?”

As you’ve probably guessed, the follow-up question was the answer. CTV ad rates for premium publishers are typically priced from two to six times national linear TV ad rates, and the biggest reason is scarcity.

How is that possible, you ask? Isn’t everyone today watching streamed content? Shouldn’t there be tons of inventory?

Yes, lots of Americans today watch streamed content. Nielsen data tells us that 24% of TV viewing times is now on streamed programming. However, because the vast majority of that is on ad-free services -- Netflix, Amazon Prime, Disney+, HBOMax, etc. -- or ad-light services Hulu and YouTube, that viewing is creating very little ad inventory.

In fact, Nielsen data and data from smart TVs tell us only 4% of the ad viewing time on TV today is on streamed content. So, while streaming may have one-fourth of programming viewing time on TV, it only contributes a twenty fifth of ad viewing time.

With much of the ad spend previously earmarked for the lost linear viewing time now looking for a new, premium video home, we have a classic situation of lots of money chasing a relatively small amount of CTV ad inventory.

Will this change soon? Probably not. While we’re seeing the launch of more ad-supported streaming (Peacock, Discovery+), it’s a question of human behavior change. And the ad-free services still have very attractive price points. Plus, Pew Research reminds us that 35% of American households still do not have fixed broadband at home. That’s 100 million people who can’t watch streamed video ads.

What can we do in the meantime? First, this is the time to be experimenting with CTV ads. They will be the future. Second, optimizing linear TV ad spend has never been more important. This is the time to stop “empty calorie” GRPs on TV and focus on more impactful -- and, more expensive -- optimized TV ad delivery. It is still well below the price of CTV and has a lot more scale.

Third, watch out for fraud. As we learned in the early days of mobile advertising, an imbalance of supply and demand is quickly filled with fraud and bots. We also learned this week -- once again -- that it's not unusual for 40% of programmatic CTV buys to be fraudulent, which is why those rates are relatively cheap. Thus, buying directly from publishers like NBCU/Peacock, Hulu, A&E or companies with direct, transparent relationships with publishers like Roku, is the best way to stay fraud-free.

Finally, this is also the time to be looking where premium video ad inventory may be opening up down the road, particularly in places like video gaming. As Netflix CEO Reed Hastings said earlier this week in his company’s earnings call, "We earn consumer screen time, both mobile and television, away from a very broad set of competitors. We compete with (and lose to) 'Fortnite' more than HBO."

CTV ad rates may never normalize with linear TV, certainly not until gamer-friendly video advertising becomes an acceptable and valuable component of video games like "Fortnite."