The True Cost 

1 January 2004

Brian Butterworth’s UK Free TV web site has a very interesting section.

It lists some of the channels available in the UK and how much they cost us, per person, per week. The list looks like this:

  • itv1 + GMTV 48.5p
  • BBC ONE 35p
  • Channel 4 18.7p
  • Sat and cable 16.8p
  • BBC TWO 12p
  • five 7.7p
  • BBC THREE 2.5p
  • BBC FOUR 1.3p
  • S4C 0.3p

(Figures based on advertising spend and BBC Annual report)

According to this list, itv1 is the most expensive television channel in the UK. But how can that be? It’s not like the BBC, where it’s funded by a licence fee that’s paid, in theory, by everyone with a television. It’s commercial television – it’s free… isn’t it? The answer is no – and here’s why.

Advertising is paid for by people who buy advertised products and/or via advertised outlets, and they pay whether or not they watch the channels on which the products are advertised – or even own a TV!

There is a strange and fundamentally erroneous idea that commercial broadcasting is ‘free’. There is no such thing as a free lunch. Commercial broadcasting is paid for by… commercials. Commercials are paid for by companies advertising their products.

Irrespective of the success (eg increased sales or market share) of broadcast advertising for a product, part of the cost of a product is covering the advertising budget. You’re paying for commercial TV – even if you don’t have a means of watching it. And anyway, a successful advertising campaign does not generally result in a lower selling price in any direct sense.

Let’s look at all this in a bit more detail. What does advertising actually do in economic terms?

Fundamentally, advertising makes consumers less price sensitive, increasing the ability of manufacturers to charge more than marginal cost. A product as a result of advertising may become more desirable, for example, and acquire increased perceived value.

How does this work? Everyone needs soap, for instance: they are going to buy it anyway. Advertising a brand of soap is going to tend to change brand market share, but is it going to increase the overall consumption of soap?

Well it might have done once, but it probably doesn’t today. Yet the cost of advertising has got to come from somewhere. Where? The answer is by being able to charge more for the product because it’s more desirable.

In fact, the increased selling price not only has to cover the cost of marketing, but also increase profitability, or it’s not worth doing, even if there are economies of scale resulting from increased sales.

The effect of advertising is not only to increase the product selling price because of the cost of advertising itself, but also because of the increased margin the advertising is intended to facilitate.

Successfully advertising, say, a brand of soap and thus raising the price you can charge, does not just affect that one brand. All brands are affected, as there is a resulting change in the perceived value of soap as a whole (it is made more desirable): thus the price the market will bear is increased.

Conversely, if prices as a whole do not rise, then we will find that advertised goods will be more expensive than non-advertised goods, still demonstrating that the consumer is paying for the advertising, albeit indirectly – although if that was the case you could then certainly argue that you do in fact have the choice to buy products whose prices you believe are not increased by advertising – the ‘generic’ or ‘simple’ products that you find in some parts of some supermarkets, for example. And yes, they are indeed cheaper, although there will be other factors reducing their price (such as lower desirability).

The ability to raise prices is only one of the functions of advertising. There is also the goal of acquiring market share, so that you make the margin rather than someone else, and move the market more towards a monopoly where you can control prices more effectively down the line.

Another function can be to keep competitors out of the market by setting a barrier in which newcomers have to spend money on advertising to compete, which they may not be able to do – again moving towards a monopoly or oligopoly where prices can be raised later.

And advertising can also be a useful tool if you are engaged in non-price competition, for example where a small dominant group of sellers wants to artificially keep prices high by giving an impression of fierce competition.

None of these factors bring prices down. What brings prices down is a truly competitive market where no supplier has an edge. This is, of course, imaginary. In fact the fundamental purpose of advertising is precisely to give the advertiser an edge and move the market away from true competition (which would be characterised by the lowest prices and all suppliers making the minimum profit required to stay in business, plus universally available unbiased information on all products) towards an oligopoly or monopoly in which upward price influence, and thus increased profits, are possible.

My strong suspicion is that if you accept that the population is going to pay for broadcasting one way or another, then transferring that money directly from the viewer to the broadcaster (ie a licence fee or equivalent) is considerably more efficient than going the roundabout commercial route where the funds go via a bunch of middlemen each taking their cut, and people have to pay irrespective of whether they use the service or not.

This is not to say I am against commercial broadcasting; I am not, though I dislike some of its compromises. And, having edited several magazines that are funded entirely by advertising revenue, I don’t think the quality of advertising-supported media is necessarily any lower than media with other methods of funding (though this is in fact often the case in mass-market examples such as broadcasting).

But I would like to squash the idea that commercial broadcasting has no end-user costs involved, along with the idea that you have a choice whether to pay those costs or not. You actually have less choice than you do with public broadcasting. You can’t go into a supermarket and say, “I don’t have a television, so I would like a discount on the price of this bar of soap.” Yes, you can buy a different bar of soap that isn’t TV advertised, but the price will likely be no different – because in the shops the price is also influenced by ‘what the market will bear’ and that is determined by the average prices in a product area – which will include those that are advertised.

And even if you could save by buying non-advertised goods, you would be limiting your choice (though you could then theoretically watch commercial TV without paying for it).

But to return to the list on UK Free TV. Is Butterworth’s analysis of the costs of commercial television channels to the UK population reasonable and accurate?

Well, there are obviously some oddities, like the vague ‘Sat and cable’, but in principle there should be nothing to stop you making this kind of analysis.

Putting an actual number on the cost to the populace of commercial television as a whole, let alone a single channel, however, appears more difficult. We’ve already considered the actual cost added to products to pay for advertising them, and how one might determine the cumulative effect of a number of variables on that cost.

These variables include whether selling more products as a result of advertising them on TV actually reduces their cost because of economies of scale; whether any such reductions are passed on (generally they are not: prices seldom go down); and whether advertising in fact allows manufacturers to elevate the price by having a more desirable product and more of a monopoly supply position in the market (which generally appears to be the case).

Having done this, how do you factor in the actual cost per viewer because of differing viewing figures for the channels? Well, arguably, you don’t – because the costs are spread over everyone who is a consumer of UK-advertised entities (just as the cost of the BBC is spread over everyone who is a licence payer), irrespective of whether or not they watch.

Butterworth takes an easy way out by using the advertising spend as his base figure, but arguably this is actually fine, because whatever the effect on pricing and margins, the fact is that the money for advertising comes from the purchasers of products one way or another.

Thus it makes no difference whether or not the prices would be different if advertising was not taking place, because it actually does; and there is thus an actual advertising spend that actually does come from the income from selling products and services.

But then what you divide that spend by to get a final result might be open to dispute. If you watch television in the UK, you are supposed to pay for it via the licence fee. This applies even in the supremely unlikely event that you never watch any BBC channels.

However, if you buy UK TV-advertised products, you are paying for UK commercial television, not only if you never watch any commercial TV programmes, but if you don’t even have a television receiver. The safest bet, then, is to use the entire population as the divisor, and this appears to be what Butterworth does.

So, are we paying for commercial television by going shopping? Yes, by definition. If the advertising didn’t work, then advertisers wouldn’t do it and commercial TV would fail. Does advertising increase the prices of goods? Yes, though they are not linked by a piece of string, rather by a complex web of factors.

But linked they are, nevertheless. There is, indeed, no such thing as a free lunch: your lunch is paying for commercial television.

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