You are on page 1of 16

TiVoed: The Effects of AdAvoidance Technologies on Broadcaster Behaviour

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

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’?

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

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

Notation and Set-Up
• Broadcaster (& content provider)
– Monopolist – No marginal costs

• Viewers
[0, – Located in (x, γ ) space: Uniform on x ] × [0, γ ] – Utility: U x ,γ = θ + λ (1− x ) − γ a

• Advertisers
– Price per viewer: r(a); various concavity assumptions – Revenue per viewer: R(a) = r(a)a

Equilibrium without AATs
• Choose a to maximise R(a)N
γ

ε a (a ) = ε N (a ) < 1
∂R a ∂a R

− ∂N ∂a

a N

Viewers

• •

Anderson-Coate condition Proposition 1: Equilibrium level of advertising is unique.
( θ + λ )/ λ

x

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 …

Non-equilibrium Outcomes
ˆ a<a
γ
AAT Viewers

ˆ a>a
γ
AAT Viewers
ˆ p/a

ˆ p/a

Viewers
(θ + λ p)/λ (θ +λ )/ λ

Viewers

x

(θ +λ p)/λ

(θ +λ )/ λ

x

ˆ a = Advertising level anticipated by consumers

Equilibrium with AAT
• Proposition 2: For a given p, there is a unique equilibrium:
p ˆ ε a (a( p)) = 2(θ + λ ) − p

ˆ a (γˆ ) = a
γ
AAT Viewers

ˆ γˆ = p / a

ˆ p/a

Viewers
(θ +λ p)/λ (θ +λ )/ λ

x

Impact on Advertising
• Proposition 3: A lower AAT price increases equilibrium advertising.

p ˆ ε a (a) = 2(θ + λ ) − p
Decreasing in a Increasing in p

High disutility viewers purchase AATs so the marginal one has lower disutility. Hence, profit maximising to increase their ‘price.’

Network Effects
• As increase AAT penetration
– Broadcasters increased advertising clutter – Marginal consumers purchase AATs

• AAT purchases governed by a positive network effect

Impact on Welfare
• Decreased welfare
– low disutility viewers; including some who purchase AATs – Broadcaster
Viewers watch TV Viewers stop watching TV

γ

AAT Viewers (>)

AAT Viewers (<)

Without AAT

• Increased welfare
– High disutility viewers; increased viewership – Advertisers? When there is low quality and mild AAT penetration

ˆ γˆ = p / a

ˆ p/a

With AAT

Non AAT Viewers (<)

(θ +λ p)/λ

(θ +λ )/ λ

x

Impact on Content
∀ θ : vertical quality ∀ λ : horizontal quality
– AAT penetration decreases incentives to increase θ – AAT penetration decreases incentives to increase λ – Lower λ implies ‘flatter’ demand – switch to programming with more mass market appeal – Marginal niche consumer has an AAT so focus on average one that doesn’t. – Less targeted viewership

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

Subscription-Based 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.
w/o AATs

γ

(θ +λ p)/λ

ˆ a = p/γ

Viewers

ˆ p/a

(θ +λ )/ λ

x

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.