A TV paradox: ratings down, ad revenues up.

It would seem to follow basic logic: High ratings demand high ad prices. But this traditional rationale is being flipped on its head, as TV networks experience a decrease in viewership while recording across-the-board increases in advertiser revenue.

Today, a major U.S. terrestrial network wins the primetime ratings war with an average eight rating (a little over 17 million viewers), in the highly coveted 18-49 demo. Five years ago, the same network needed a minimum rating of 12 to keep a show on the air. Prior to 1999, a program was considered dead in the water if its rating was lower than 15.

A Nielsen Media Research analysis of the most popular terrestrial network shows' ratings over the past five years indicates that there has been a total 17.4 percent decrease in audience-viewing.

So far this season, NBC's ER has seen its total viewers drop to 17.85 million, from 24.95 million in the '99-'00 season. Similarly, Fox's That 70"s Show has dropped to 6.07 million viewers from 9.06 million, five years ago. ABC's NYPD Blue is down to 6.07 million viewers in its final season, compared to 9.06 million in the '99-'00 season. UPN's WWE Smackdown! has seen an audience decrease from 7.31 million in '99-'00 to 4.79 now. Of the few shows doing more than just hanging steady are CBS' Everybody Loves Raymond and WB's 7th Heaven; though the latter's ratings were higher last year than they have been so far this season.

The erosion of major U.S. TV network audiences began in 1993. In 1988, two thirds of total TV viewers tuned in to the networks. That number plummeted in the early '90s, when their cumulative share dropped to 53 percent. In 2003, this share fell even further, landing at 38 percent.

Broadcasters in the U.S. and elsewhere are responding to the fragmentation of audiences with riskier fare, in an attempt to get higher ratings by titillating viewers. Shows that are considered racy, like the U.S.'s Desperate Housewives (a soap drama on ABC about affluent suburban women) and the U.K.'s Sexual Inspectors (a show, broadcast on Channel 4, that features people engaged in sexual activities, followed by coaching on how to better perform) are getting plenty of airtime.

So, who is to blame for this overall loss of viewer eyeballs? The proverbial pointed finger has always been aimed at the cable networks that are accused of stealing away audiences by providing so many alternative outlets. But, with the networks spreading themselves thinner, airing the same programs from their main channels on corresponding cable nets, the cable networks are not the lone culprits. This trend, often referred to as the "hub and spoke method," uses the terrestrial network as a hub, or center for content, and the cable nets as spokes--more outlets through which to reach viewers. The result is fragmentation in order to aggregate the audience for advertisers.

A decade ago, the average family had access to 26 cable channels. Today they have 100, and with satellite and digital capabilities, that number could reach somewhere around 500. According to Evelyn Skurkovich, director, Research and Insight at Cabletelevision Advertising Bureau (CAB), so far, during the 2004/2005 season, cable has captured 52 percent of total TV viewers (as compared with 25 percent in 1993 and 41 percent just five years ago). "It's not necessarily that people are watching their favorite shows less, it's just that since they have many more choices, they are checking those out too, and sometimes instead," explained Nielsen Media Research spokesman Jack Loftus, who predicted that the digitalization of TV will keep this trend going, Fragmentation is forever," he said.

But the increase of more cable channels hasn't deemed cable networks the clear winners in the battle for viewer eyeballs. Though the cumulative share of cable TV has grown, the ratings for single channels remain low, unable to transcend 2 points. Major channels, such as Lifetime and USA average as little as 0.5 points.

Though the ratings are getting lower, advertising revenues are climbing steadily.

Cable TV's advertising revenues have grown--from $11.9 billion in 1999 to $16.4 billion in 2003. "The money is following the consistent migration of viewers," said Ira Sussman, vp, research and insight, Cabletelevision Advertising Bureau. "Over the past five years, the share of audience has changed dramatically" in favor of cable, he said, noting that this change has been offset by an increased number of channels, which go after a slice of the same advertising pie and revenues from the cable operators.

Similarly, despite the terrestrial TV networks' audience losses, advertising revenues grew from $24 billion in 1999 to $30 billion in 2003. The 20 percent increase in revenues, in contrast to the 17.4 decrease in ratings, is attributed to a large increase in CPM (cost per thousand viewers). According to Nielsen Monitor-Plus, the average CPM for the six major networks in 1999 was approximately $13. In 2004, it hit $16.

In the same period, CBS has risen from $9.27 to $13.73. Fox now demands $20.12 versus $16.75 in 1999. UPN has grown from $9.60 to $12.54, and WB climbed from $12.93 to $18.71. The slight exceptions are ABC, which has only slightly increased its CPM (from $13.79 to $14.17), and NBC, which has moved up and down over the course of five years, ending up today at basically the same amount as five years ago ($16.28 in '99 to $16.91 in 2004).

Ranking number one in the 18-49 demo warrants higher ad-time demands, and NBC has, over the last decade of dominance, averaged ad rates 10 percent higher than competitors. "Advertising on the networks has an increasing CPM, but it's an extremely effective tool with enormous financial value," insisted Alan Wurtzel, president of research and media development at NBC Universal. "When something special occurs, like the Olympics, we can attract 80 percent of the viewers. That is huge."

To CAB's Sussman, cable provides a significantly more affordable option for advertisers. According to the Cabletelevision Advertising Bureau, last year's cable CPMs averaged about 78 percent lower than terrestrial TV's CPMs.

But NBC Universal's Alan Wurtzel said advertisers need not choose between the two. "We can use cable to compliment our own advertisers packages," he said. NBC Universal sells its network and cable channel time slots to advertisers as package deals because according to Wurtzel, "we've figured out that one plus one equals three."