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With the big football weekend approaching, there seems to be the regular hype surrounding the amount CBS is charging for a 30 second spot. An "All-Time High of $2.6 million" reads a CNN story. After recanting the past success stories of ads for Coca-cola, Apple, and Anheuser-Busch, the article goes on to say that in 1997 it cost "just" $1.2 million and a measly $600,000 in 1987. To the writer's dismay, the cost of commercials has "more than quadrupled in the past 20 years."

This is sensational! Kinda, Well not really. Pulling out your handy calculator (all quant geeks have a handy calculator) and solving for the compound annual growth rate, you'll find that to quadruple in 20 years, you need to generate a 7.6% price increase. That's not far off from the increase for your generic cable bill, the price of a home, and far less than the returns for the S&P 500. It certainly pales in comparison to the 15% increases for college tuition or the 19% increases for healthcare.

For what it's worth, $2.6 million is still a lot of money today, but so was $600,000 in 1987. I sure hope the commercials themselves are more sensational than 7.6%.

Category(s): Valuation Thoughts
Posted by Tom Miller at 02:58 PM | Permalink | Comments (0) | TrackBacks (0)