Targeted advertisements and incentive for market consolidation in next-generation TV

Abstract

The next-generation television (TV) standard will give over-the-air (OTA) broadcasters the ability to target advertisements. This could give a competitive advantage to broadcasters with more channels and hence create incentive for consolidation. Consolidation in the OTA TV industry could concern policy-makers. We construct a model to estimate revenues and costs of targeted advertising and derive profit-maximizing strategies. We find that profit is maximized by sending targeted advertisements via fixed broadband, even on devices that are watched for only a few minutes per week, but until costs drop significantly, not via mobile broadband in most cases. Our results show that targeted advertisements would not create strong incentive for consolidation in the scenarios that we consider most likely, so policy-makers should be sceptical of arguments that consolidation should be allowed on the grounds that consolidation leads to large cost savings. However, we do identify plausible scenarios where broadcasters with more channels would be significantly more profitable.