With sinking revenues and tightening budgets, every expense is being scrutinized. Every line item has to be justified. The new budgeting mantra is ROI, Return-On-Investment. Every employee, every promotion, every research project must produce an adequate financial return.
For many stations, the Arbitron bill was already second only to wages as the largest operating expense. Now stations in markets that are switching from diaries to PPM are facing a 50-60% rate hike. Today’s realities beg the question: What is PPM’s ROI? What financial return can a radio station switching from diaries to PPM expect?
In 2004 Arbitron funded a PPM Economic Impact Study in cooperation with the Radio Advertising Bureau. A summary of the findings can be found here. The study found that advertisers and agencies planned to cut their spending by 2% if radio was measured with diaries, but increase spending 3% if radio switched to PPM. The authors concluded that deploying PPM in the top 50 markets would drive spending increases of $150 million. They estimated the net difference in spending with PPM versus diaries at $696 million if PPM were fully deployed in Arbitron measured markets.
Now that PPM has been deployed in 20 markets, we believe it is time to evaluate the accuracy of the forecasts. Has there been a 5% positive swing in spending as markets switched to PPM? Is radio seeing additional revenue fueled by what then Arbitron CEO Steve Morris called, "advertiser’s increased confidence in the medium, thanks to the increased accountability that electronic measurement delivers."?
At first glance one might dismiss the notion that we can measure the positive impact of PPM in an advertising recession. The truth is that a recession is an ideal time to determine PPM’s value. It wasn’t that long ago that radio was growing by double digits without PPM. In a growing environment, the effects of PPM might have been lost. Now that radio is facing a downturn, we should be able to more clearly see any positive impact that PPM might have.
First, we can look at the results in Philadelphia. The market’s last diary based quarterly report was Fall 2006. Agencies have been using PPM for two years now. How has PPM impacted buys? The RAB study predicted greater spending. Are agencies spending more?
According to the RAB, national radio sales peaked in 2006, and then declined slightly in 2007 to essentially 2005 sales levels. If PPM really increases sales by 5% over diary based sales, then Philadelphia stations should not have been hit as hard as the rest of the country. Is that what happened? Were sales declines in Philadelphia smaller than for other markets using diaries?
PPM supporters declared that electronic measurement would aid in helping radio compete against new media. Arbitron reinforced this assertion by issuing a succession of press releases announcing agency PPM signings. One such release in February 2006 announced that Zenith Optimedia, a division of Publicis Group, had signed a commitment to use PPM. According to Arbitron, "The company (has) been a strong advocate of the Portable People Meter system and the benefits it will bring to radio and advertisers alike." Perhaps the RAB could try to find some agencies that have increased their radio budgets to see if their advocacy has translated into dollars.
The RAB study concluded that agencies would increase their radio spending with PPM adoption. Now that PPM is live, are agencies spending more on radio? It appears not, so the question is why? If radio budgets have been cut temporarily because of the recession, we need to understand whether budgets are going to increase after the recession ends. If radio dollars have been permanently diverted to new media, then PPM will provide no future benefit.
Houston was PPM’s second market, going live in June 2007. Houston buyers have been working with PPM for two years now. Are we seeing increased time buying in Houston? Dallas is a relatively new PPM market compared to Houston. How do the two markets compare? Has Dallas lost ground to Houston?
Based on the RAB study, Houston stations should have done relatively better than Dallas stations in 2008. Comparing the two markets would be an interesting case study in evaluating PPM’s economic impact on radio.
Now PPM is in 20 markets. This three year roll-out gives us an opportunity to see the impact of PPM across markets and time. Early PPM market stations should be better off than stations in markets that more recently switched to PPM. How is revenue tracking in Philadelphia, one of the first PPM markets, compared to (say) Boston, the last PPM market?
If there is a clear pattern where stations in early PPM markets are doing better than stations in later PPM markets, then we have strong evidence that PPM is helping radio sales. Is there a difference or are they moving in lock-step? If PPM markets are suffering as badly as diary markets, then we have no evidence that PPM is helping sales.
In fact, the anecdotal evidence suggests that PPM is not helping sales. The last two year’s declines have disproportionately fallen on the largest markets, the very markets that have switched to PPM. Smaller markets still measured with diaries are performing better.
This fact alone is not sufficient to prove that stations have failed to benefit from the switch to PPM. However, it ought to raise sufficient doubt about the validity of the upbeat projections in the study to justify analyzing recent revenue data to better understand the relationship between revenue and PPM adoption.
This slide from the presentation projects that the total annual positive revenue swing switching over to PPM in the top 10 markets would be $362 million. However, while the top 10 markets will benefit to the tune of $362 million, markets 11-25 will only add $34 Million to their annual revenues ($396-$362 million). In fact, 84% of the theoretical gains of PPM go just to the top 10 markets. Smaller markets gain considerably less.
Arbitron is proposing 50-60% rate hikes for stations in these smaller markets, but the RAB study suggests that the stations won’t see much in the way of increased revenue. And we’ve yet to see any proof that even top 10 market stations gained any revenue by switching to PPM. Smaller market stations ought to reflect on these numbers in judging the real ROI of PPM.
Since the RAB Economic Impact Study predicted a significant positive swing in revenue with PPM, shouldn’t the organization follow up with an analysis of what has actually happened? Wouldn’t the organization’s members benefit from such an analysis? Shouldn’t we find out if there is any evidence that the rosy predictions have come true? With Arbitron pressuring stations outside the top 50 markets to sign long term PPM contracts, it would be a timely study.
Yes, we are in a recession that no one could have predicted five years ago. Yes, radio is under attack on many fronts. Unfortunately, these are the cards we have been dealt. If PPM is to benefit radio, it must do so in this environment, not just the one we enjoyed earlier this decade.
If PPM can’t change radio’s fortunes, if it can’t reverse the declines we’ve seen over the past few years, it is an expense without a return. In a world where every dollar matters, it is time to determine PPM’s real economic value.