Looking to Tomorrow

The war in Iraq and economic doldrums in the U.S. punched a hole in local and national spot TV sales this year, depressing results, in varying degrees, for both broadcast and cable TV. Station managers, who watched sales crater as early as February, slogged through tough second and third quarters, hoping for a reprieve in the fourth, but it was no-go: A rip-roaring network upfront had snapped up at least some of the money that might have gone into national spot. Cable sales managers got off a little easier, with a strong first quarter but slow going in the second, third and fourth.

"It was a very slow, rocky road," said Comcast Advertising Sales Senior Vice President Hank Oster, echoing the thoughts of many top managers on both the broadcast and the cable sides of the industry. "Every time we thought we'd see a spike and thought business would get back on track, something would happen, and we'd find ourselves still behind where we thought we'd be."

Generalizing about the spot marketplace is difficult. Business conditions vary across the 210 Nielsen-measured television markets, and ABC, CBS and NBC affiliates experience different spending patterns, to some extent, than Fox, WB, UPN and Pax affiliates do. Tribune Broadcasting, for example, had "a fabulous first and second quarter" and "was on budget through third quarter," said Vice President of Sales John Hendricks, adding that fourth quarter hasn't shaped up as strongly as expected.

What's more, cable, which is growing faster than broadcast, sees different spending patterns still, including a greater reliance on local small business advertising.

That said, interviews with a number of broadcast and cable sales managers report common trends that have influenced 2003 sales.

Both industries continue to write fourth-quarter business, but, for the most part, 2003 opportunities are over. When final numbers are in, cable operators expect to post an 11% gain in combined local and national spot sales, according to the Cabletelevision Advertising Bureau. Broadcasters, who report their numbers to the Television Bureau of Advertising, should finish the year flat or up just a hair in combined local/national spot sales.

Both industries had expected better outcomes. The TVB originally forecast a gain of 1%-3% for local/national spot broadcast, and cable prognosticators, including Jack Myers, publisher of The Jack Myers Report, had looked for an increase closer to 15%.

It wasn't to be, and the reasons were the same for broadcast and cable. Slow domestic auto sales depressed spending by dealer associations and manufacturers. Several significant mergers among store chains trimmed retail advertising, and a lack of hits dimmed the lights considerably in the movie category.

Aggravating all this was a pall cast by the conflict in Iraq and lingering high unemployment. "We were still coming out of recession, and there was a war. Those two things are never good for our business," said Tim McAuliff, president and CEO of national rep firm Petry Media Corp.

Not all the news was bad. Stations saw their local sales grow 8%-9% from 2002, although the gain was largely canceled out by a 9% falloff in national spot sales. The latter suffered not only from tough comparisons with a surge in political spending in '02 but also from weak outlays by several important categories. Even with '02 political spending removed from calculations, national spot would be finishing flat or up only about 1%, on average.

On the whole, it was a disappointing year. "We thought the spot market would have more energy on the national and local sides," explained Bill Spell, vice president of sales at Cox Television.

Cable operators, which have begun to experience a smaller version of the every-other-year swings of political/Olympics revenue infusions, had an easier time of it. Local sales are set to finish up 7%-8%, although that number is held down somewhat by tough comparisons with '02, when at least one big operator posted extraordinary gains from now-abandoned accounting methods that recorded promotional payments from networks in local-ad-sales totals.

In national spot cable, sales rose 18%, that fell a little short of the 20%-21% that the industry's top three operators, which own 90% of insertable inventory, had hoped to achieve. "Going into the year, there was a hope and expectation that business was improving," explained Tom Olson, who will soon retire as president of rep firm National Cable Communications (NCC). "We knew we'd have the hurdle of political, but, when the war broke out, business came to a halt, particularly in the largest markets."

Station and system owners had every reason to expect a better 2003. "To be up 12%-15% in December, after all the '02 political spending had ended, was a very strong showing," said TeleRep Executive Vice President Jim Monahan, "and we were up double digits again in January."

Once talk of an Iraq war intensified, however, advertisers pulled back sharply. "Uncertainty stops people from action, and people didn't know when the war might start," McAuliff recalled. "People didn't want to start spending because they didn't want to be in the middle of a war. Once the war started, there was a little bit more firmness, but, by that time, we had wasted two months and were behind the eight ball."

Softness in three major spot categories didn't help. Retail spending is down 7% for the year, according to Katz Television Group President Jim Beloyianis. "Retail has been the toughest category," he said, adding that fast-food spending has been down more than 5% and movie spending off 9%. A network promotion drew Pepsi out of the national spot market altogether at one point, forcing a 50% decline in soft-drink advertising.

On the plus side, foreign auto manufacturers spent strongly, making up for soft spending by their domestic counterparts. Automotive spending is up 5% for the year, Beloyianis said. Financial services, although a smaller category, was up a rousing 20%. Telecommunications is up 5%, but spending is "very sporadic, varying from market to market," he said.

In cable, both domestic and foreign auto manufacturers increased spending this year, although the gains weren't as big as those of some other categories, Olson said. Fast-food and movie spending also increased, and there were big gains in home-improvement, furniture and large-appliance advertising. Travel and tourism spending fell, and retail, particularly at the local level, underperformed.

With economic indicators pointing toward more-sustained growth, broadcasters and cable operators are expecting, with some caution, an exceptionally strong year next year. Political advertising, which represented 10.7% of 2002 national spot revenue on the broadcast side and 6% on the cable side, could inject more than $1 billion into the market, and Olympics telecasts on NBC, Telemundo, Bravo and CNBC could buoy spending on those networks and others, which serve as alternatives for displaced regular advertisers.

Station-group managers report that 2004 business is pacing, on average, 30% ahead of a year ago and McAuliff confirmed that annual buys placed by large advertisers hoping to get a jump on the market are also pacing ahead. All of these sources caution that it's still very early in the game and pacing can be deceptive, signaling an early market but not necessarily a strong one.

"Pacing almost doesn't mean anything," said NBC Station Sales Senior Vice President Alan Brittain. "It gives you a gauge." Cox's Spell notes that most of the strong early pacing is in local business, with far less evidence of pressure on national spot.

That said, trends in key categories could bode well for the spot-TV market.

Analysts are calling the 2004 model year "the biggest in automotive history," with domestic and foreign manufacturers planning 60-65 new vehicles. This compares with the 50-55 that debuted this year and an average of 30-40 over the past decade.

Fast food and telecommunications also hold promise. McDonald's, which finally broke a long drought on successful product introductions, had its best year in five years. Analysts expect increased spending next year to continue the success of its McGriddles breakfast hit and popular new salads. Meanwhile, new government regulations allowing consumers to keep their phone numbers when switching among cellular services or to transfer numbers from wired to wireless carriers could unleash a barrage of competitive ad spending.

For stations, TVB forecasts a 10%-12% gain in local and national spot revenue next year, with a 14%-15% increase in national and a pickup of 7%-8% locally. The organization expects 6% of the gain to come from regular advertisers, 4% from political advertising.

NCC predicts a 20% jump in national spot-cable sales, and a consensus of cable operators and analysts looks for a 14% climb in local sales. That averages out to a 15% increase for cable operators in national and local spot revenue.

Despite continued uncertainty in some economic indicators (retail sales slipped in both September and October, and jobs growth is painfully slow), broadcasters and cable operators look for a much better year in 2004.

"We're not sure we're completely out of the woods yet," McAuliff said, "but I believe we'll start out strong and, from beginning to end, it will be a good year."

NCC's Olson is also bullish: "We think that the recovery in the economy is real and will translate into aggressive expenditures by many advertisers."