Payback Time

Advertisers have a new playbook, and cable is the prime beneficiary. Cable networks are selling the bulk of their ad inventory in the so-called upfront market before broadcasters are out of the gate. Is this a permanent power shift in the complicated dynamic between advertisers and networks? Or is it a onetime ploy to keep broadcasters' prices in line?

Traditionally, the handful of major buying firms that control billions of ad dollars talk first with the broadcast networks. Then the market "breaks" into a three– or four-day deal-making frenzy, in which advertisers lock in commercial prices for the next season. Meanwhile, cable waits around for the table scraps. But not this time.

Industry execs estimate that cable networks have already sold $3 billion worth of advertising for next season. Ad buyers say major cable groups MTV Networks, Turner Broadcasting, USA Networks, Lifetime, and Discovery Networks have each sold 60% or more of the inventory they plan to commit to the upfront.

"We are further along much earlier than we've ever been before," says MTV Networks President Mark Rosenthal, declining to give specifics. "Pricing is strong, and volume growth is unbelievably strong."

Conversely, by press time, broadcast networks NBC, CBS, and ABC had struck only what one ad executive characterizes as "isolated" deals. Buyers speculate that the broadcast-network market could move soon.

This year, buyers seem intent on avoiding a frenzied rush to line up at broadcasters' doorsteps to place their orders. "The market is proceeding in a much more orderly fashion," says Steve Grubbs, CEO of PHD North America. "You don't hear anything about overall demand being up or about any particular product spending category being way up."

Demand for broadcast time, Grubbs says, is "relatively flat" compared with 2003. "We do see an increase in cable budgets that's more substantial than [hikes] we see for broadcasters."

Still, when the broadcast upfront gets rolling, CBS, coming off a strong season, may hold back a significant part of its inventory if advertisers balk at demands for a fat CPM (cost per thousand viewers) increase of 10% or more. Fox is looking for high-single-digit growth. In contrast, ABC, reeling from a poor year, may start cutting prices to drive volume. It's anybody's guess which way NBC will go.

A slow market doesn't mean the broadcast networks won't cash in.

"I don't think this is a death knell to broadcasters," says Merrill Lynch media analyst Jessica Reif Cohen. "Advertisers are not going to satisfy their needs with cable." Conventional wisdom on Wall Street and Madison Avenue is that broadcasters' cumulative take will be flat from last year.

Little or no growth in the broadcast upfront and only an uptick in cable are partly a backlash to last year's $14 billion upfront, in which an unexpected surge in last-minute demand allowed broadcasters to squeeze buyers for sharp 15% CPM increases. With broadcasters saying they wanted 10%-plus CPM hikes for next season, buyers have threatened to snatch $1 billion away and zap it into cable.

That's also a reflection of broadcasters' steady loss of audience to cable. This year, in the key 18-49 demo, broadcasters as a group lost 7%. "There is a piece here that is punishment," says Bear Stearns media analyst Ray Katz, adding it's also an inevitable shift: Advertisers follow viewers.

But this year, cable networks started signing deals as broadcasters unveiled their final schedules. "It's like the buyers are screwing with the broadcasters' minds," says one cable-network sales rep.

Cable pricing has been relatively strong, with major networks generally fetching 5%-7% CPM increases. That's not the 9%-plus some wanted. But TNT, Discovery, USA Network, and Sci Fi Channel have seen strong ratings gains. Even moderate CPM increases translate into strong double-digit percentage gains in revenue that networks generate per spot.

Analysts expect cable to get an additional $500 million-$800 million over 2003's upfront take of $5.4 billion. Broadcasters' share is expected to remain flat at around $9 billion. Advertising in syndicated programming is expected to grow 10%-15% to around $2.7 billion.

Cable's dramatic move to the head of the line may be the defining moment for upfront 2004.