Early Upfront Forecast: 8% Price Hike on Flat Sales


How’s an 8% price increase in this year’s upfront grab you?

That’s the early prediction by Brian Wieser, the former Magna Global forecaster who’s now an analyst for Pivotal Research Group.

The 8%–or high single digit–increase would be much smaller than last year’s double digit gains but bigger than some other predictions. And while an increase of that magnitude would probably boost the sentiment surrounding stocks of network owners like CBS, Comcast, Disney and News Corp., it probably isn’t a good indication of what TV network revenues will look like in the 2012-13 season.

“There is an absence of empirical data which correlates upfront pricing to actual revenue results,” Wieser says in a new research note. “At a fundamental level, we encourage investors to focus on expectations of upfront VOLUMES rather than upfront PRICES, as these are ultimately more highly correlated to Network TV full-year revenues (which Pivotal expects in aggregate will be flat year/year for 2012 and 2013).”

How does flat volume translate into higher prices for commercials in the upfront? Wieser argues that the dynamics of the upfront market change little from year to year. If you can estimate what the volume will be on a macro basis you can figure out the pricing, even before the agencies start talking to their clients about whether individual budgets will be up or down or the networks formulate their programming plans.

“Our model of historical data indicates that in a year with flat volume change we should expect pricing for the market ‘leader’ in any given daypart should rise by 8%. If demand at the time of Upfront negotiations falls by 5%, our model predicts CPMs will rise by only 5%,” Wieser says. 

The network sellers have a number of advantages in negotiating prices with media agencies. With only a handful of major sellers, they are able to anticipate one another’s strategies. They have a clear view of demand when negotiations take place. And they are able to walk away or put off negotiations with agencies that push too hard, while the agencies have very specific demands for what inventory they want-and which inventory they’d prefer to keep away from competitors.

The price also generally set by a market leader, which is in the strongest position to negotiate. “All other negotiated prices will be effectively anchored around this price,” Wiseser notes. “For network prime time, CBS will serve as the ‘leader’ during 2012-13. On average ‘followers’ secure pricing below the leader, although Fox has often been able to secure a premium given its younger audiences.”

Cable network groups should similarly be able to expect pricing that falls slightly behind the leader, he adds.

Wieser adds that upfront pricing usually bears very little relationship to ratings growth or shrinkage.

“In our experience, we have seen that changes in audience ratings have virtually no correlation to changes in pricing, confirming that demand is independent of supply,” he says.