War in Iraq Takes Upfront Toll

Talk of fat ad increases for the 2003-04 season has quieted

Why This Matters

Upfront Heads-Up

Upfront Heads-Up

What the pros see

Richard Bilotti, media analyst, Morgan Stanley

Outlook: Don't believe the hype. "Talk of 12%-15% increases in TV upfront will mean falsely positive headlines in May. When the pre-upfront posturing fades, we believe the trends will support our thesis that TV-station, broadcast-network and cable-network advertising all grow 5%-7% in 2003-2005."

Early numbers:Broadcast volume up only 4% in the 2003/2004 upfront, cable up 6%-7%

Gainers: MTV, ESPN, Fox News

Laggards: ABC, USA Network, Turner networks

Jessica Reif Cohen, media analyst, Merrill Lynch

Outlook: Cautious. "Reality programming is a fast-growing segment in prime time, and it is unclear whether or not advertisers can or will commit to this programming genre in the upfront."

Early numbers: Broadcast increases in the "mid-single digits."

Gainers: Fox, CBS

Laggard: She's not saying

Jack Myers, ad consultant, publisher Jack Myers Report

Outlook:Modest for broadcast, bullish elsewhere. "In 1991, the market rebounded quickly after the war, followed by a sustained downturn in the media economy … But today's media marketplace is totally different, and we cannot depend on historical precedent."

Early numbers:Broadcast volume up 3.1%-4.8%, cable up 6.5%-8.2%; syndication up 5%-10%. Caution: Weak May economic indicators could make Myers bearish.

Gainers:Viacom nets (CBS and MTV); young-skewing nets, including WB, Fox, Comedy Central

Losers:ABC, secondary cable networks like Court TV, Bravo, ABC Family

Stuart Linde, media analyst, Lehman Bros.

Outlook:Fairly bullish. "Investors should not look at the network spot market [scatter] as a pure measure of the strength of the advertising market."

Early numbers:Broadcast volume up 7%.

Gainers:Fox, WB

Laggards: UPN, NBC


Upfront Heads-Up

The chatter in February and early March—before the war on Iraq—had it that the scatter ad market is so strong that the upfront advertising season was going to be a sellers' market, with buyers paying big increases for TV commercials. That wasn't just the swagger of broadcast and cable networks, which, of course, always brag about the big prices they will fetch. Even ad buyers were not bothering to take their usual posture that they won't continue to pay more for the broadcast networks' shrinking ratings.

A First Guess
Preliminary analysis of the 2003 broadcast selling season
02-'03 (million) '03-'04E (million) Chng.
Source: Stuart Linde of Lehman Bros.
The WB$580$70022%

Well, the war seems to have shaken things up, and ad-market forecasters have much more modest expectations of this year's upfront—advance selling for the 2003-04 TV season—than the talk two months ago. The analysts expect the broadcast networks to post modest 4%-7% gains over the $8.3 billion they booked in last year's upfront. Cable networks should see a slightly higher rate of growth from the $4.6 billion they booked last year. And the sole public estimate of syndication upfront business predicts a 5%-10% increase over last year's $2 billion.

Lehman Bros. media analyst Stuart Linde considers the strength of the scatter market misleading. Spots not sold in advance are currently going for 20%-30% more than equivalent time sold in last year's upfront. "There is a clear distinction between current market conditions and forward expectations for next year," he said.

Merrill Lynch media analyst Jessica Reif Cohen was startled when ad buyers at her firm's annual advertising conference in February pretty much said they expect pricing to increase sharply. "It was a little odd," she said. "I'm actually a little more comfortable with everybody in their traditional roles, buyers talking pricing down and networks talking prices up."

Morgan Stanley media analyst Richard Bilotti said broadcast networks have been boasting that they would post 12%-15% gains this year. He believes that network predictions will spark positive headlines in the press that might mislead many investors. "Don't believe it. If the economy's this stinky, it's not going to be that good."

He expects broadcast costs per thousand (CPMs) to be up but expects that the broadcast nets won't be able sell as much at the higher prices. So, instead of 80%-85% of inventory being committed upfront, sell-out rates should fall to around 75%. That means that even strong, 10%-plus CPM gains will mean modest volume growth of around 4%.

And to secure the higher pricing, Bilotti expects the broadcasters to take on more risk, offering higher ratings guarantees. If the ratings fall short, they will be stuck with higher volume of make-goods next fall and winter and less time to sell at the more lucrative scatter prices.

Cohen isn't offering a detailed forecast since ad buyers won't even start committing to pricing until late May.

She predicts that networks' reliance on advertiser-unfriendly reality shows will keep upfront volume down. Since so many reality shows have been tawdry (NBC's Fear Factor, ABC's Are You Hot?), buyers will avoid unknown reality shows. And reality is sucking up 12%-14% of broadcast networks' prime time schedules.

"A lot of reality you schedule, you won't sell in the upfront," Cohen said. "The stuff you can sell is [Fox's] American Idol
and [CBS's] Survivor."

Jack Myers, ad consultant and publisher of the Jack Myers Report
newsletters, offers the most detailed forecast, with modest expectations for broadcast networks but possibly double-digit gains for cable networks and syndicators. But he cautions against relying too heavily on those predictions until the advertisers get a better handle on what the economy is doing.

"I really didn't have war fears regarding ad spending," Myers said. But with indicators like car sales, housing start and unemployment all looking sour in February and March, "I want to see the May numbers before really making a forecast." That data won't be out until early June.