Each fall, viewers get a sparkling new season of TV: an inevitable raft of reality shows, sitcoms and, this year, new broadcast networks. But network sales reps may be stuck in an unwelcome rerun, a reprise of this season’s gloomy ad market.
Early assessments of the market indicate that upfront advertising commitments to national broadcast, cable and syndication will rise an estimated 4% to around $19.4 billion. Last year’s upfront totaled about $18.6 billion. Overall, pricing will likely be weak, according to financial analysts, ad buyers, and network and cable executives.
The Big Four broadcast networks will likely increase sales by a little more than 5% to $8.4 billion, largely due to NBC’s strategy. The network is expected to reverse its stance and sell more inventory in the upfront. Last year, NBC held back an unusually large amount of time, hoping for better prices in the scatter market.
NBC’s upfront may be boosted by football. Beginning in September, the network will air NFL matchups Sunday nights. If sold in the upfront, football could increase NBC’s take by $300 million-$400 million.
The new CW network is expected to pick up some—but not all—of the money that its predecessors The WB and UPN were collecting, and much of the difference will go to cable networks and other media. So what will be the Big Five (ABC, CBS, NBC, Fox and The CW) should see 2% growth in upfront ad sales.
With cable ratings up approximately 4% this season, basic networks should be able to raise prices slightly and secure a 6%-7% increase in sales. Network, ad-agency and Wall Street executives don’t see any catalyst for a surge like the surprise 13% that the combined cable and broadcast networks enjoyed during the 2003-04 upfront. Instead, they see many of the same issues that plagued last year’s market.
A sluggish economy, buyers’ annoyance over high costs, and the allure of the Web again seem to be combining to rob TV networks of the momentum they need to sharply increase prices and sales.
To be sure, forecasting this early in the cycle is tricky. Broadcast networks are still figuring out what pilots to commission, and they won’t finalize their fall slates until their upfront presentations in mid May.
And major advertisers haven’t finalized their budgets, much less told their buying agencies. But Initiative Media Executive VP Tim Spengler echoes the sentiments of a number of buyers: “Upfront spending overall is anticipated to be basically flat.”
Says Magna Global Worldwide Chairman/CEO Bill Cella, “We see dollars being flat or down. Nothing looks robust. That’s the first look.”
Even the sell side can’t muster much enthusiasm. “It’s going to be at best modest,” says the ad-sales president of one of the top cable-network groups. “What really drives upfront is a strong scatter market and scarcity.”
This year, the executive sees neither.
There are some bulls in the bunch. CBS Corp. President Leslie Moonves dismisses ad-agency executives “who always at this time of the year start the march, 'The upfront is going to be down, the upfront is going to be down.’ And then, guess what, come June, the upfront is up.” However, his own market prediction isn’t very exciting: up 4%.
During last year’s upfront, broadcast networks generated just 1% growth to $9 billion. Cable networks rose just 3% to $6.8 billion; syndication, 2% to $2.8 billion. (That’s slightly lower than B&C had forecast. Around this time last year, we predicted the upfront market would rise 4%-5%).
Even if the market is sluggish, the players will be fighting for leverage. Networks and buyers may be headed for a battle over ratings that take into account audiences using digital video recorders (DVRs). In January, Nielsen started issuing three kinds of ratings: shows watched live as they aired; those recorded but played back in short order (live + same-day); and shows played back within a week (live + 7).
DVRs: “Hit Machines”
Right now, there’s little difference in the three measures because the number of DVRs in Nielsen’s national sample is so small—just 100 homes. But networks have much at stake because, as Nielsen gets better and DVRs become more widespread, the gaps will get bigger.
So far, the data show that DVRs are what one network research executive calls “hit machines.” The shows that are highest in the conventional ratings tend to be the ones most frequently recorded on DVRs. One major exception: The Daily Show, which regularly shows up on TiVo’s top-10 list but gets minuscule ratings by overall Nielsen standards.
ABC and NBC want credit for delayed viewing. ABC President of Sales and Marketing Mike Shaw argues that networks have been credited for viewers recording shows on VCRs for two decades. “Why would the other box not be counted the same way?” he asks. Nielsen counts shows that are merely recorded on VCRs, but DVR shows count only as they’re played back, he adds: “ We think that live + 7 is absolutely the fair way to count audience.”
Effect of New Networks
Buyers generally don’t want to pay based on DVR viewing. “Viewers using DVRs are skipping commercials,” says one ad buyer. “Why do I want to pay for that?”
The recent birth of The CW puts a few hundred million dollars of revenue in play. The network is being created out of the ashes of The WB ($700 million in ad sales last year) and UPN ($375 million). Although it will be composed of the two networks’ strongest programming, it’s easy to see $300 million up for grabs.
Since My Network TV has no track record, Fox’s startup probably won’t have much of an upfront season. Young-skewing cable networks like MTV and FX will be in a scramble to scoop up that cash.
NBC’s best bet to get out of its Nielsen slump will come not from Donald Trump but from John Madden. Desperate for ratings juice, the network agreed to pay $600 million a year to move NFL’s Sunday-night games from ESPN. NBC executives position the deal as moving ABC’s Monday Night Football (which averaged around 12 million viewers) to Sundays. Executives at other networks see it as moving the Sunday-night cable package (around 8.5 million viewers) to broadcast. Either number would be better than the 6.5 million or so viewers that watched NBC some Sunday nights last fall.
NBC executives contend that they’ll do even better than ABC did on Mondays—partly because of stronger matchups, partly because Sunday is TV’s biggest night. Perhaps. But if NBC only matches Monday Night Football, it will more than double its Sunday-night revenue. Unfortunately, that would also match ABC’s annual $150 million loss in the departure of MNF.
Another important factor in the dull outlook this year is lower overall TV spending by major advertisers. The enormous problems at car manufacturers, the biggest spenders of all, are a major snag. Sometimes, slack business pushes automakers to boost ad spending to drive showroom traffic. But the financial crunch for domestic manufacturers is so severe—investors wonder whether General Motors might be headed for Chapter 11—that they’re expected to simply cut ad budgets.
“It’s been many years since we’ve seen GM, Ford and Chrysler all in trouble at the same time,” says a sales president at one cable network.
Also, some advertisers, led by giant consumer- products manufacturer Procter & Gamble, are bristling at the increasing cost of TV and emphasizing other media. New media are increasingly alluring. Web outlets aren’t cheap, but ads can be targeted more persuasively, and the spread of high-speed Internet access creates more interesting creative possibilities.
Indeed, spending for online advertising is growing rapidly, 28% to $12.4 billion last year, according to Forrester Research estimates. Still, online interest has had little effect on the TV upfront so far.
Online ads aren’t stealing as much business from network TV as from newspapers and magazines. But that doesn’t mean networks don’t take the Internet seriously. CNN Executive VP/COO of Ad Sales Greg D’Alba says his network, armed with one of the most powerful news sites online, eliminated the barrier between its TV and Web sales forces two years ago and now integrates Internet and multimedia opportunities into every TV sales pitch.
The upfront market balances buyers’ and sellers’ views of how strong the general ad market will be next fall and winter. If they think the market will be sluggish—as it is today—buyers may be able to get better prices by waiting to buy time in the scatter market. If they see a surge in demand, buyers will want to lock in prices now.
Sellers go through a similar calculus. Facing weak demand in last year’s upfront, NBC Universal President of Sales & Marketing Keith Turner held inventory back, expecting that a ratings revival would give NBC more ratings points to sell. That bet didn’t pay off: The network followed up a 16% slide in its prime time audience with an additional 11% drop (including Olympics coverage).
ABC took the opposite course. ABC’s Shaw figured that the market was weak and the network’s revenues were up simply because its Nielsen ratings were up 17%. So he settled for a little lower pricing and wrote a lot of volume.
Sanford Bernstein & Co. media analyst Michael Nathanson believes networks’ strategies will change. “It’s going to be a complete reversal from last year,” he explains. “ABC is going to have to go for price over volume, and if you’re NBC, the lesson learned last year is, go for volume, not price.”
As for cable, Nathanson believes some networks suffered by holding out for price gains and were startled when the market turned out to be soft: “They were price pigs.” He thinks they’ll be more realistic this time around.
Viacom President Tom Freston sees a clear sign of advertisers’ uncertainty. They are hesitating until far later in the quarter than in the past, expecting deals in the scatter market. “The bad news is, the money continues to come in late,” he says. “We have seen that for the last two or three quarters.”
That’s not such a problem for Viacom’s MTV, VH1 and other cable networks, because their ratings growth and pricing have been strong in the scatter market. But it’s not a good sign for the business overall.