Upfronts against a wall

Pledged ad coin has little impact on bottom line

Forget what you think you know about the upfronts. The supposition that advertisers are paying more for access to ever bigger audiences is false.

Program ratings — much like pork bellies or crude oil — are scarce commodities: The less there is, the more it costs. In fact, slow and steady ratings erosion actually helps broadcasters by limiting supply and therefore maintaining prices (CPMs) in the broadcast TV market.

Worse, there isn’t even much correlation between the big dollar gains trumpeted by the networks during the upfront and what actually transpires in national ad expenditures.

Last year’s record $9.3 billion upfront repped a 15% jump over 2002-2003’s commitments for the Big Four Nets. Actual ad spending on those nets in the last cycle translated to a less impressive 6% gain. Even the much-touted 15.5% average price gains secured in the 2003-2004 upfront were ultimately diluted by make-goods and weak scatter.

The unique peculiarity of broadcast ad sales creates a market where advertisers pay ever-higher rates for ever-more elusive viewers. And that’s precisely what makes the network business so enticing to congloms. Proof of the power of the broadcast oligopoly is the advertisers’ reticence to call the broadcast bluff. Advertisers are just as perplexed as broadcasters as to how to transform the old primetime ad model in the face of changing technology, fragmentation of content and viewing habits.

“Even with DVR proliferation there’s no perfect substitute for TV advertising,” says JP Morgan media analyst Spencer Wang.

Preferring to play safe with network primetime, media buyers are complicit in keeping this illogical status quo humming along, says one analyst.

“Agencies complain, but they don’t hold back their dollars,” says Sanford Bernstein analyst Tom Wolzien.

But some blue-chip companies like GM, Procter & Gamble and Pfizer are getting antsy. The trio have said they’re dissatisfied with the upfront buying method and some marketers are demanding that ad rates be set by commercial ratings and minute-by-minute ratings rather than overall program ratings.

But the upfront ship is too big to turn around quickly. Whatever the dollar figure totals are in May, broadcasters will be able to paint a rosy face on it, because the bottom line won’t become evident until later in the year.

If total dollars come in flat, it will be because more advertisers opt to hold their wallets for the upfront or because nets like CBS are confident enough to sell less upfront in order to hold the line on CPMs.

“There is a disproportionate amount of attention to the big upfront number that broadcasters announce, which is just a function of how much you choose to sell,” says WB co-chair Garth Ancier. Last year, the headlines touted the huge double-digit increase in total dollars committed. This year, seers predict total dollars will come in only a few percentage points over last year (enough for another “record upfront year”), while CPMs could rise a healthy 7% on average despite lower ratings guarantees and big scheduling question marks at ABC or NBC.

But such are the machinations of the upfronts that this year’s anticipated price hikes may not translate into robust ad revenue growth down the road.

“The scarcity of broadcast television inventory only increases over time, with ratings erosion for broadcast networks helping to constrain supply and increase equilibrium prices in broadcast TV,” says CIBC analyst Michael Gallant.

“So prices will be up, most likely by mid- to high- single digits. That should be a positive for Disney, Viacom and Fox shares, right? Not necessarily.” Gallant notes in a recent report that rating guarantees should be “well below 2003 levels” for every network except CBS.

“If NBC decides (again) to sell a very high percentage of its available inventory, and is willing to accept a modest (mid- single digit percentage) rate increase, then other networks will have to respond. In the absence of ‘Friends,’ and with the ratings erosion of ‘ER’ and other key shows for NBC, the network will have much less inventory available for sale.”

He believes ABC is likely to come near NBC’s rate increase levels, though with lower ratings guarantees.

“If Fox, ABC, and NBC, the three weakest networks from a ratings momentum point of view, all decide to “take the money and run,” then Viacom execs may choose to sell a lower percentage of total available inventory in order to achieve maximum pricing.

Viacom COO Mel Karmazin did just that in 2002, when he boldly sold only 65% of CBS inventory in order to capture higher prices later on. Over time, says Gallant, Karmazin’s game of “chicken” with advertisers paid off handily, since it was the only network with inventory available for sale in a very tight scatter market.

Pundits wager CBS, with a slate the includes eight out of the 20 highest rated programs season-to-date, will do the same thing this time, while demanding even higher rate increases later this year.

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