Upfront 2015: Major TV Networks Face Severe Pressure on Ad Prices

Analysis: Ad buyers set to seek price reversals for first time since the recession

TV Upfronts
Mario Wagner

Starting next week, advertisers are bound to hear some exciting things about TV. Fox is likely to talk about “Empire,” the music industry drama phenomenon. NBC may have something to say about a live presentation of the Broadway spectacular “The Wiz,” and CBS and ABC will finally let die-hard fans know if they can expect to see “Supergirl” and a revival of the Muppets on their screens.

The news may win Madison Avenue’s interest. But will it lure its multimillion-dollar budgets?

Ad buyers say they will bring intense pressure on TV pricing in 2015, a sign the industry’s coming upfront marketplace may be one of the most pernicious in recent memory. To be certain, buyers at this time of year have an interest in tamping down the market. They often talk of winning lower rates in the cost of reaching viewers. This year, however, they are pushing for something more severe: no increases. In some cases, they may even seek reversals of current pricing.

“Some folks are looking for rollbacks,” said John Muszynski, chief investment officer at Spark, a media-buying agency that is part of Publicis Groupe. “I don’t see any kind of positive story being spun in this marketplace for the sellers.”

The upfronts, when U.S. TV networks try to sell the bulk of their advertising for the coming season, has become more complex and difficult in recent years, owing to declines in traditional ratings and new competition. Advertisers are interested in new technologies that allow consumers to stream video unhitched from the good old boob tube, even as the availability of those new venues has leached viewing from traditional TV.

That dynamic has given them more leverage in these discussions. For the last three upfronts, advertisers have largely been able to narrow the rate of increase in reaching 1,000 viewers, a measure known as a CPM that is an integral part of these annual discussions between TV networks and Madison Avenue.

For the last two years, CBS has done deals with an average CPM rate increase of 7.5%, compared with 8% to 9% in 2012; and 13% to 15% in 2011. ABC did many deals last year with CPM increases of between 4% and 5%, compared with upfront deals that called for an average CPM hike of 7% to 8% in 2013; 6% to 8% in 2012; and 10% to 12% in 2011. The CW last year did upfront deals with an average CPM increase of 5% to 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% to 12%.

Fox is seen to be under more pressure than its rivals, media buyers said. In 2014, Fox did deals calling for a CPM increase of between 2.5% and 3.5%, compared with 5% and 7% in 2013. Given the network’s ratings declines among viewers 18-49, the demographic most coveted by advertisers, buyers say they may push for Fox to rework its pricing structure, potentially creating a situation similar to one NBC faced during the last recession after its longtime ratings dominance eroded.

Fox has for several years had the highest CPM among the Big Four networks, according to a person familiar with negotiations, owing to the ratings surge it enjoyed with the growth of shows like “American Idol” and “House,” fewer hours of programming than its rivals and younger audience.

NBC is likely to try to hold fast against the trend. In 2014 the network largely sought deals that called for a CPM hike of between 7.5% and 8% – roughly flat with what it sought in 2013. The network is expected to fight for share by touting its 2016 broadcast of the Olympics from Rio as well as live specials slated in the fourth quarter of 2015.

The push comes as broadcast TV’s ability to lure advance ad commitments has shown signs of strain. Advertisers placed between $8.17 billion and $8.94 billion for the 2014-15 broadcast primetime schedule, according to Variety estimates, compared with between $8.6 billion and $9.2 billion for 2013-14 and $8.8 billion and $9.3 billion for the 2012-13 season.

Cable may also come under stress. For years, cable networks have been able to woo dollars from broadcast by playing up the growing quality of their programs and cheaper prices. In recent seasons, however, these networks have also lost viewership to new technologies, and some buyers said they intended to make sure ad prices were in line with these networks’ new realities. In 2014 cable networks secured $9.6 billion in advance ad commitments, according to the Cabletelevision Advertising Bureau, a 6% slip in volume and the first dip the medium had experienced since before the 2009-10 season. Disney’s kids networks and Turner’s entertainment networks were among those agreeing to a reduction in the rate of increase for CPMs.

Buyers don’t always get what they want. As many options as advertisers now have, TV still reaches the greatest number of consumers in a fell swoop. Its sports broadcasts, awards shows and growing number of live specials can be crucial venues for making a pitch to the masses. And there are always fears of scarcity: The economy is getting healthier, and there are some expectations in the marketplace that the next round of advertising related to the coming race for U.S. president might overflow the local stations it normally floods and start taking up inventory at national networks.

Buyers see room for discussion. They say clients might be wooed by TV networks that offer a chance to be flexible, guaranteeing inventory even if the ad commitment comes later in the year. The buyers are also interested in new kinds of data that help advertisers find more specific kinds of viewers – first-time car buyers, expectant mothers, young moviegoers, heavy drinkers of orange soda.

“People who are willing to be flexible in the way they construct the deals will in turn probably get rewarded with either a better share or more volume,” said Spark’s Muszynski. Even so, he cautioned, Madison Avenue is not adding to the pot of money it earmarks for TV. “There won’t be an increase in volume, he said. “I think a lot of this is going to come down to how do I steal share from my competitor. I can do that in one of three ways: I can lower my price. I can offer some incentive to increase my share. Or I can do a combination of the two.”

Before discussions between advertisers, ad buyers and TV networks loosen, they’ll probably start pretty tight. Buyers’ demands for no increase will clash with TV’s need for the ad fuel that keeps its economic engines running. If haggling for this year’s upfront is completed by July 4, both sides ought to consider themselves lucky.