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Media revenue management with audience uncertainty (RV of 2007/73/DS)

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An important challenge faced by media broadcasting companies is how to allocate limited advertising space between upfront contracts and the spot market (referred to in advertising as the scatter market), in order to maximize profits and meet contractual commitments. We develop stylized optimization models of airtime capacity planning and allocation across multiple clients under audience uncertainty. In a short-term profit maximizing setting, our results suggest that broadcasting companies should prioritize upfront clients according to marginal revenue per audience unit, also known as CPM (cost per thousand viewers). For capacity planning purposes, accepted upfront market contracts can be aggregated across clients. The upfront market capacity should then be allocated to clients in proportion to their audience requirement. Closed form solutions are obtained in a static setting. These results remain valid in a dynamic setting, when considering the opportunity to increase allocation by airing make-goods during the broadcasting season. Our structural results characterize the impact of contract parameters, time and audience uncertainty on profits and capacity decisions. The results hold under general audience and spot market profit models. Our numerical results, based on real data, suggest that the benefits from modeling audience uncertainty in the media revenue management context can be significant.

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