In a comment at Josh’s place, slugfest asked what would happen to network TV if everyone bought TV shows online rather than watching them via ad supported TV. That’s the question I set out to answer tonight. Beyond the general point, it’s another angle into the NBC/Apple dispute.

I’m not that familiar with the TV advertising biz, and if anyone that knows better wants to chime in, I’d appreciate any insight. I’ll see if I can track down someone at ABC or ESPN to give me a better explanation.

For now, here’s my methodology to do a rough estimate. The key piece of data is the price of a 30-second spot. We also need to know the number of commercial slots per hour episode. We then need to estimate the number of households that would have to purchase iTunes to match the episode’s actual viewership.

Working backwards, here’s how I decided to tackle this. I’m going to assume an iTunes purchase is necessary per household. So, I should be able to take the number of households implied by the episode’s rating or share and just use that number directly. Looking through the 2007 Studio Briefings, a top 10 show averages around a 10-12 rating (non-rerun), which comes out to about 11.1-13.3 million households.

Looking at episodes of Lost, House, and CSI on iTunes, I’m seeing an hour episode running around 43:30, which means that there is 16:30 allotted for commercials. In order to simplify the math, I’m assuming this is sold in even 30-second chunks and is all national advertising. So, no regional slots, no splitting revenue with affiliates, cable broadcasters, etc. That makes 33 slots per hour.

The hardest thing to find was the per slot price for a 30 second spot. After a fair bit of Googling, I found several sources reprinting an AdAge article that breaks down the rates for the top 10 shows in 2006-2007. For the sake of simplicity, again, I’m going to pick an average for the top 10 at about $400,000 per 30-second slot. Obviously, this could be higher or lower depending on which show you’d like to do the math for.

So, based on these numbers a typical hour episode of a top 10 TV show brings in around 33 * $400,000 =~ $13.2 mil. This estimate is going to be on the high side because I doubt the national network gets all of the slots, as I mentioned before.

Based on the household numbers of 11.1-13.3 million households, we can estimate a gross take for Apple at $1.99 * 11.1 mil =~ $22 mil. At 13.3 mil households, it’s around $26 mil. Assuming it’s a 50/50 revenue split (unlikely — Apple probably takes a very small percentage), the network rakes in between $11 mil and $13 mil. More if they command a larger percentage of the retail price.

Based on this quick, “back of the envelope” math, it sure looks like TV will live if we all started paying for what we watched, at least as far as the top shows are concerned.

Where NBC may have a point, though, is if they wanted to reduce the price of some shows on iTMS based on ratings. I shouldn’t have to pay the same for, say, Mythbusters or Ice Road Truckers as I do for Lost or Heroes, which are way more popular. That’s not what NBC is arguing with their desire for “flexibility in wholesale pricing”, since they seem to be complaining that the prices are too low. TV Squad interpreted that statement to mean that NBC wanted to offer special promotions so that you could get an episode of The Office when you buy Evan Almighty (TVSquad’s example). That sounds as bad as the current cable scheme where I pay one “low” price and get more channels than I can watch.

As I mentioned above, I’m interested in feedback, corrections, or additional information from everyone, especially those more knowledgeable about ad sales and the TV business in general. I think this is a worthy conversation to have.

Update: One other thought: the total ad dollars above, based on a rating of 11 (12 mil households), would create a per episode price of $1.10. And, these are for the top 10 shows over the year. How much is something like Battlestar Gallactica or Psych or What Not To Wear worth in this scenario? Something else to think about.