Managing on-air ad inventory in broadcast television

An analytical model for managing on-air ad inventory in broadcast television is presented. The ad inventory in this industry is priced based on rating points or the number of viewers that watch a commercial. The rating points during a broadcast year are sold through two distinct processes: the upfront market which occurs before the broadcast season, and the scatter market which occurs during the broadcast season. A firm needs to allocate its total rating points inventory to these two markets before knowing either the performance rating of its shows or the scatter market price, both of which are random. Broadcast networks offer ratings (performance) guarantees on the inventory that is sold on the upfront market while such guarantees are seldom offered in the scatter market. An optimization model is proposed that allows the networks to manage their rating points inventory. The model explicitly incorporates the performance uncertainty of the television shows as well as the revenue uncertainty of the scatter market. We derive conditions for feasibility of the problem and characterize the optimal amount of rating points to sell on the upfront market. Our model explains the current practice of selling around 60-80% of the total rating points for the season during the upfront market and analyzes other common strategies used by broadcast companies. In addition to providing key managerial insights, this work introduces quantitative methodologies to television networks planning their upfront market activities.