In Upfronts, Big TV Nets’ Pricing Strength Is Threatened Yet Again

Analysis: New forms of video are weakening the ad leverage of some of media's biggest players

Television upfronts

In the next few weeks, Fox is expected to spotlight a series that plays off of the popular Batman character, CBS to talk up its new slate of Thursday-night football and NBC to promote its ongoing resurgence in reaching advertisers’ favorite viewers.

The chatter may help the TV giants snare the attention of advertisers. The bigger question: Will it open their wallets?

Predictions call for the broadcast-TV networks to face challenges in securing higher rates from sponsors in the coming “upfront,” that annual spring haggle when U.S. TV outlets try to sell the bulk of their ad inventory to Madison Avenue. Ad buyers have already suggested they will attempt to tamp down the rate of increase in the cost of reaching 1,000 viewers, a measure commonly known as a CPM that will be at the heart of the intense talks about to take place.

If they are successful, it would mark the third consecutive upfront in which the rate of increase advertisers paid for TV-ad time narrowed, suggesting the TV networks enter the discussions with less leverage each year.

“The upfront will not be particularly strong,” said Jay Baum, executive vice president and director of video at Interpublic Group ad agency Deutsch. “I would think pricing should be below last year’s levels.”

Ad buyers, of course, have a marked interest in trying to keep the market from getting hot. Even so,  a decline in the rate of increase in this year’s upfront would mark a protracted period of headwind for the broadcast outlets, which are facing a ramp-up in competition from digital rivals as well as advertisers’ desire to spread their money across social-media outlets, mobile devices and so-called second-screen behavior in which viewers turn from TV to tablets and back again. After notching sizable CPM gains in 2011 as the economy showed post-recession improvement, the networks now find themselves having to balance their need for ad revenue with their sponsors’ desire to be thrifty.

One analyst is calling for CPMs to rise in the mid-to-high single-digit percentage range. David J. Bank, an analyst with RBC Capital Markets, expects an average 5.5% CPM hike among broadcasters this year, and an average 7.1% increase for cable, which is adding to its viewership with original series. He anticipates the volume of advance ad commitments for broadcast and cable to be “flat to slightly down.”

The five English-language broadcast networks secured between $8.6 billion and $9.2 billion in advance ad commitments in the 2013 upfront, according to Variety estimates, slightly down from the $8.8 billion to $9.3 billion they attracted in 2012.

The rate of CPM increases is significant because it indicates how much confidence advertisers have in TV. When networks are able to carve out double-digit increases, as they did in 2011, sponsors are betting TV’s pricing effectiveness will outmatch that seen in print, digital and elsewhere. When CPM rates fall back in the mid-single digits, advertisers are showing their dissatisfaction with TV ad-price levels and likely considering the benefits of running ads in other venues.

Two TV toppers have already indicated they see opportunity in the upfront, not a reason for caution. CBS Corp. CEO Leslie Moonves told an assembly of investors that he expected CBS to “lead the marketplace in pricing and volume.” Meanwhile, NBCUniversal CEO Steve Burke recently suggested that ad demand has intensified and NBC’s focus on viewers between 18 and 49 made it worth more in advertisers’ eyes.

They had an easier time of it just a few years ago. CPM rates surged in 2010 and 2011, the result of major networks offering some “rollbacks” in recession-plagued 2009. Now, that growth has begun to moderate (it certainly couldn’t last forever).

Last year, CBS did deals with an average CPM rate increase of 7.5%, compared with 8%-9% in 2012; 13%-15% in 2011; and 9%-10% in 2010. Fox did deals with an average CPM price increase of 5%-7% vs. 7%-9% in 2012; between 9.5% and 12% in 2011; and 8%-9% in 2010.

For its part, the CW did upfront deals with an average CPM increase of between 5% and 6%, compared with the 5.5% to 6.5% it negotiated in 2012. In 2011, the CW did deals with CPMs rising on average 10%-12%, and in 2010, with an average of 7.5%.

TV networks that pushed last year to stay even with or surpass 2012’s CPM hikes found their upfront process slowed. In 2013, ABC sought upfront deals that called for an average CPM hike of 7%-8%, compared with 6% to 8% in 2012, and was penalized for it, according to ad buyers with knowledge of the discussions.

NBC will likely try to buck the trend. The network has seen a viewership increase in adults 18-49, the demographic most coveted by advertisers, owing to its strong reliance on “The Voice” and “Sunday Night Football.” NBC, which suffered significant ratings declines in the past, had to lower its CPM rates during its recent fallow years, and will no doubt attempt to prop them up to put itself on a more even playing field with rivals. In 2013, NBC sought CPM increases of 7%-8% vs. 5%-7% in 2012. In 2011, NBC’s CPMs rose around 9%, and in 2010 they rose around 7% in 2010.

To break the cycle, the TV networks will have to demonstrate once and for all that their glitzy programs are being watched in measurable fashion via streaming video, on tablets and in all sorts of ways that were never possible just a decade ago. When a new measuring system is put in place that advertisers find agreeable, those CPM rates might increase once again.