Cable Wants Bigger Bite of Broadcasting's Pie

Having missed out in '02, the industry plans an aggressive upfront this year

Cable networks hate reruns—not necessarily on their schedules but definitely in the annual ritual of the upfront ad market. Network executives are desperate to avoid a repeat of their underwhelming experience a year ago.

Working in cable's favor this year are a surprisingly strong scatter market and a wave of new hits strengthening a wider range of cable channels. Working against it are sharper competition among their brethren and buyers' continued willingness to opt for the greater reach of broadcast networks, despite broadcasters' shrinking share.

"Cable is the real deal. The ratings are high enough now," said Joe Abruzzese, a broadcast defector who left CBS last fall to become president of ad sales for Discovery Networks. "There's no reason why a viewer of Trading Spaces
isn't as good as a Law & Order

Last spring, having weathered 9/11 and a dismal economy, advertisers were expected to sit back during the upfront market, when advertisers lock in commercial time and networks guarantee buys for the coming season. Instead, advertisers pounced, fearing that an ad-market recovery would drive up scatter prices.

Stinging disappointment

Broadcast networks commanded sharp price increases, pushing volume up 20% over the 2001-02 season, to $8.3 billion.

But cable networks missed out. They wrote more volume—$4.8 billion vs. $4 billion in the 2001-02 upfront season—but pricing, the cost per thousand viewers (CPM), was flat while broadcasters secured 11% hikes.

The cable upfront wasn't a total disaster, but it was a stinging disappointment. It saw half the take of the broadcast networks. And cable networks badly lost ground in their battle against the "CPM gap": broadcasters' ability to sell a viewer for double the price that cable networks can.

That riles cable-network executives. "There are quality rating points, quality programming and creative ideas coming out of cable," said Mark Lazarus, president of ad sales for Turner Broadcasting. "We need to prove that to advertisers."

Cable's vast—and constantly growing—supply hurts pricing. Over a year, every new cable network adds thousands and thousands of ad spots to the cable pool (about 17,800 new spots per cable network in prime time, 105,000 for all dayparts). Then the growing ratings on existing cable networks means—paradoxically—that prices for ratings points on broadcast networks are surging, because they're more scarce. And broadcasters' broad reach means they're simply the preferred buy.

Steve Grubbs, CEO of media-buying firm PHD North America, said national TV advertisers still largely have two separate buckets of money: one for broadcast and one for cable. "There's some interchange between cable and broadcast budgets, but not to the degree that cable networks think."

Improving fortunes

That battle won't rest this year, but, as the upfront approaches, cable's fortunes should improve. Two key indicators of upfront pricing are working in cable's favor: Cable scatter pricing is up an average 20%-30%, and ad cancellations are low.

"It's a broad-based market," noted Neil Baker, E! senior vice president of ad sales. "Business is coming from all over, from automotive, packaged goods, beverage, wireless and cosmetics." Videogames, entertainment and retail advertisers are also in the mix.

Broadcast networks typically sell 75% of their commercial inventory in the upfront, while cable deals a more conservative 50%, according to Morgan Stanley analyst Richard Bilotti. After last year's upfront, though, broadcasters had very little inventory left for scatter, so dollars flowed more freely to cable.

And, given cable's seemingly endless inventory, "the fact that cable scatter is running 15%-25% above last year's upfront pricing bodes really well," noted Thomas Weisel media analyst Gordon Hodge.

Now, with scatter as a guide, experts project positive gains over the 2002 upfront. More advertisers may move to commit, fearing those scatter increases, but executives are hesitant to make numeric predictions, saying it is too early in the process.

"No one can use fourth-quarter scatter in an upfront negotiation," said Initiative Media Executive Vice President Tim Spengler. "Second-quarter scatter will play more of a role."

Buyers insist there aren't really any must-buys on cable anymore, not even ESPN.

"The more finite the audience and underserved, the more you look to cable," Grubbs said.

That rationale favored networks like MTV, Comedy Central and E! Entertainment Television in last year's upfront, rewarding them for their hard-to-reach audiences with among the highest CPM increases.

In the past year, shows that collect big ratings, like Trading Spaces
on TLC or Taken
on Sci Fi, helped spark new, or renewed, interest in laggard networks.

"Who cared about TLC a year ago? Now that Trading Spaces
is a hit, they'll be on people's radar screens," said one network executive.

But another cautioned, "Trading Spaces
is their big gun. If it falls apart, they are in trouble."

Until an original show declines (and sometimes even long after), cable nets will lean on their homegrown hits. In the 2003-04 upfront, Universal Television ad-sales chief Jeff Lucas will pitch advertisers on originals like Monk
and The Dead Zone. "Now our originals are real," Lucas said. "We're there."

Last year, it was Lucas—not the shows on his USA or Sci Fi Channel—that stirred upfront controversy. Looking to correct abysmally low sellout rates, Lucas, who had joined USA from NBC Sales, slashed CPM rates about 10% to increase sales volume. (Lifetime joined USA in taking a similar CPM discount to boost volume.)

A different strategy

Other cable network execs were irked. Some blamed USA for undercutting their chances to write increases. Cable, on the whole, finished the 2002 upfront with flat CPMs. Turner Broadcasting's TNT and TBS eked out hard-fought low-single-digit increases.

Don't look for USA to deal so quickly this year. Universal Television Chairman Michael Jackson says, "Lucas did a smart move going into the upfront and securing cash volume, but that clearly predated the success of Dead Zone, Monk
and Taken." This year, he said, his networks' strategy will be "secured by the success of our original programming."