TiVoed: The Effects of AdAvoidance Technologies on Broadcaster Behaviour

1
TiVoed The Effects of Ad-Avoidance Technologies
on Broadcaster Behaviour

• Simon P. Anderson (Virginia)
• Joshua S. Gans (Melbourne)

2
Advertising and Consumers

• Do consumers like ads?
• Information view will pay to buy ads (e.g.,
  trade mags)
• Nuisance view will pay to avoid ads (e.g.,
  television)
• Rise in ad-avoidance technologies
• VCRs
• DVRs (e.g., Tivo)
• Download TV (e.g., iTunes) and DVDs
• Ad-avoidance is a threat to the traditional
  two-sided model of selling content it unbundles
  the product.
• Will it cause a death spiral?

3
Research Question

• How will broadcasters respond to DVR penetration?
• Informal response
• will move to reduce the cost to consumers so as
  to limit incentives to purchase DVRs decrease
  clutter
• will try and target niche audiences to tailor
  more effective advertising
• Our formal result
• DVR penetration means that the marginal viewer
  has lower ad disutility so broadcasters will
  increase clutter
• will try and broaden the appeal of programming

4
Literature

• Anderson and Coate (2005)
• Armstrong and Weeds (2006)
• Wilbur (2005)

5
Notation and Set-Up

• Broadcaster ( content provider)
• Monopolist
• No marginal costs
• Viewers
• Located in (x, g) space Uniform on
• Utility
• Advertisers
• Price per viewer r(a) various concavity
  assumptions
• Revenue per viewer R(a) r(a)a

6
Equilibrium without AATs

• Choose a to maximise R(a)N
• Anderson-Coate condition
• Proposition 1 Equilibrium level of advertising
  is unique.

Viewers
(ql)/l
7
Modeling AATs

• Durable good
• Consumers purchase AATs fixed price, p
• Broadcasters observe AAT penetration
• Broadcasters choose advertising level
• (Technical issue look for rational expectations
  equilibrium)
• Rented good
• Consumers rent AATs and adjust behaviour
  simultaneously with the broadcaster choice of
  advertising level
• Later in the talk

8
Non-equilibrium Outcomes
AAT Viewers
AAT Viewers
Viewers
Viewers
(ql-p)/l
(ql-p)/l
(ql)/l
(ql)/l
Advertising level anticipated by consumers
9
Equilibrium with AAT

• Proposition 2 For a given p, there is a unique
  equilibrium

AAT Viewers
Viewers
(ql-p)/l
(ql)/l
10
Impact on Advertising

• Proposition 3 A lower AAT price increases
  equilibrium advertising.
• High disutility viewers purchase AATs so the
  marginal one has lower disutility. Hence, profit
  maximising to increase their price.

Decreasing in a
Increasing in p
11
Network Effects

• As increase AAT penetration
• Broadcasters increased advertising clutter
• Marginal consumers purchase AATs
• AAT purchases governed by a positive network
  effect

12
Impact on Welfare
Viewers watch TV
Viewers stop watching TV

• Decreased welfare
• low disutility viewers including some who
  purchase AATs
• Broadcaster
• Increased welfare
• High disutility viewers increased viewership
• Advertisers? When there is low quality and mild
  AAT penetration

AAT Viewers (gt)
Without AAT
AAT Viewers (lt)
With AAT
Non AAT Viewers (lt)
(ql-p)/l
(ql)/l
13
Impact on Content

• q vertical quality
• AAT penetration decreases incentives to increase
  q
• l horizontal quality
• AAT penetration decreases incentives to increase
  l
• Lower l implies flatter demand switch to
  programming with more mass market appeal
• Marginal niche consumer has an AAT so focus on
  average one that doesnt.
• Less targeted viewership

14
Extensions

• Endogenous AAT pricing
• Demand for AATs more elastic than an ordinary
  good due to the negative externality imposed on
  non-purchasers
• Broadcaster competition
• Results robust and simpler
• Pay television
• Advertising rates become linked to subscription
  rates when there are AATs

15
Subscription-Based AATs
w/o AATs

• Proposition 6 For low enough p, equilibrium
  advertising is set to shut out AATs.
• Always profit maximising to reduce advertising by
  a little bit to capture marginal AAT users.

(ql-p)/l
Viewers
(ql)/l
16
Conclusions

• Case of emerging substitutes on one side of a two
  sided market.
• Reaction to the substitute can be to accommodate
  rather than deter it.
• Suggests that two-sided markets cannot viewed in
  isolation of a broader strategic context.