ABC: An Upfront Spoiler?

ABC Ad Sales President Mike Shaw, who heads a team that is bringing $2 billion or so in the door, has no reason to be paranoid.

So why does he keep a bullet-proof vest in his office? The front bears a label with his name; the back features a bulls'-eye with the ABC logo in the center. The body armor was a gift from Disney-ABC Television Group President Anne Sweeney during tougher days, when advertisers were trying to drive ABC's prices down.

ABC's Nielsen resurgence means that Shaw needs no protection from advertisers this year. They showered his company with hundreds of millions of dollars in new business during recent upfront ad negotiations.

But the vest might come in handy for deflecting potshots from rival networks whose upfront was far more disappointing. With cable sales teams still working to wind up negotiations with advertisers, even strong networks are ending up with far smaller price increases than expected. And weak networks have had a horrible time, evidenced by NBC's price declines and $1 billion drop in upfront commitments.

A weak upfront market for national advertising could reverberate into the sales offices of TV stations and cable systems.

Shaw's position now and the gloomy outlook so far raise a few questions worth exploring:

Sanford Bernstein media analyst Michael Nathanson bluntly titled of a recent upfront market report Apocalypse Now...or How ABC Helped Themselves and No One Else. He argues that ABC “panicked” and set its cost per thousand viewers (CPM) too low. Disney had expected 9% increases but settled for 4%-6%.

Because ABC concluded its negotiations less than a week after broadcasters finalized their fall schedules, Shaw set the pace for the entire market. CBS and TNT had expected to secure increases of 8% or more but settled in ABC's range. Fox, The WB, USA Network and HGTV are coming in a bit lower.

Executives at ABC's rivals echo Nathanson's sentiment.

Sitting in his office, Shaw chuckles. His team increased ABC's take in the upfront by 30%, from $1.7 billion last year to $2.1 billion. Prime time commercials are now selling for an average of $101,000 each, up from $80,000 last year.

Shaw doesn't see any money that he left on the table. It was immediately clear to him that ad buyers didn't have as much money to spend as expected.

“We got to a point where we believed our clients,” he says. “Obviously, we would have preferred it to be a stronger overall marketplace. Then, we could have driven CPMs.”

Other networks have not proved that ad buyers have some secret cash stash that ABC has missed.

Nothing good. The upfront market is suffering from a weak economic outlook, problems in major ad categories (cars, drugs and movies); and a growing unease over the effectiveness of television, particularly in the face of the targeting offered by Web ads.

None of that bodes well for TV stations and cable systems selling ads in local markets. If GM is floundering nationally, it's not likely that GM dealers will be back anytime soon. The same goes for retail chains like Wal-Mart, Target and Sears, all of which are trimming spending.

Networks—particularly cable and NBC—are pinning some hopes on a strong “scatter” market, believing that advertisers that didn't reserve time during the upfront market will be spending more freely in the fall and winter.

But no one's forecasting any rebound. “You need a category story,” says one major TV buyer. Domestic car makers are in a cyclical slump. Pharmaceutical companies worry about regulatory scrutiny. Even DVD sales are beginning to slow. “What category is coming back? I don't see it.”

This is bad news for some media conglomerates heavily reliant on TV advertising. CIBC media analyst Mike Gallant calculates that broadcast and cable advertising accounts for 42% of Viacom's companywide revenues and 39% of its operating cash flow. For News Corp., TV ads are 25% of revenues and 37% of cash flow.

NBC's prime time upfront sales dropped from $2.9 billion last year to $1.9 billion. Most of that stems from the network's steep 17% ratings drop. But about a third comes from a decision to bet on the scatter market.

NBC traded the certainty of committing time upfront for the hope of higher prices in scatter. So instead of selling 83% of NBC's time upfront, the network committed just 70%.

NBC executives are praying for three things. One is a rebound in the ad market, which is unlikely. Another is a ratings meltdown at rival networks, which would tighten inventory by forcing them to devote spare time to make-goods.

The third hope? A dramatic NBC ratings revival. That would give the network more viewers to sell and offset some—though not all—of the network's loss. Of course, if NBC's fall schedule doesn't succeed, some network executives may be calling Mike Shaw to borrow his Kevlar vest.

E-mail comments to jhiggins@reedbusiness.com