Content

Lowdown on the Slowdown

6/09/2006 8:06 PM Eastern

This year’s advertising upfront market is stuck in neutral.

Three weeks after the broadcast networks wrapped up presentations to potential sponsors, CBS, NBC, Fox and The CW all have struck deals for the upcoming season. But cable networks have little to show, so far. The most notable: MTV Networks’ $300 million linear and multiplatform deal with Omnicom Group’s OMD unit and Turner Entertainment’s pact with Starcom.

Gauging the Upfront
Projected national advertising commitments:
Network Amount Year to year change
CBS $2.63 billion 1%
ABC $2.23 billion 7%
NBC $1.84 billion -3%
Fox $1.78 billion 12%
CW $600 million N/A
MyTV $50 million N/A
6-net total $9.12 billion 0%
Cable $7.46 billion 5%
Source: Merrill Lynch Research estimates.

Whether the needle will ultimately point upward remains to be seen. Last year, upfront sales for the broadcast primetime were down 3% to $9.1 billion, according to Merrill Lynch media analyst Jessica Reif Cohen, while cable grew 8% to $7.1 billion in the evenings. For the current go-round, Reif Cohen projects broadcast will be flat, while cable could grow 5% to $7.46 billion.

WITCHES’ BREW

A soft scatter market for ads not sold through upfront buys, the lack of new broadcast hits to drive a broadcast-buying frenzy and agencies trying to hold the line on cost-per-thousand (CPM) pricing are all putting brakes on the market’s pace.

There’s also, for the first time, a real “witches’ brew” of new digital-media extensions to traditional TV, from downloads to broadband “channels,” that warrant additional scrutiny by agencies and their clients, according to Tim Hanlon, senior vice president of Denuo, Publicis Group’s media futures consulting practice. This mashup could portend a protracted market.

The first delay was ABC’s push to get pricing driven by Nielsen’s new “live, plus 7-day” metric. That would add viewing from digital video recorders to the audience count, heavily skewing — or favoring — the ratings toward hit shows. But agency buyers held firm, saying they would only pay for the original, live audience.

The Alphabet Network dropped the point last Monday, leading to the first round of upfront activity of any type for the broadcasters, with CBS, Fox, NBC and The CW all landing deals within a day.

ABC’s pullback probably hurt cable networks as well as broadcasters.

“If ABC had succeeded with DVR viewing, it could have spurred huge growth for cable,” said an ad-sales executive at one of cable’s leading programming groups. “Many networks would have gone in and said we’ll offer live only for a bigger share of dollars.”

Hurt as much as anyone: ABC itself. As of Friday afternoon, The Walt Disney Co.-owned broadcast network had not reported any upfront deals at all.

MTV’s $300 million deal with OMD came last Tuesday, with 10% of the money from some 30 clients earmarked for new media. Turner’s deal also came that day.

But how cable networks are faring is largely unknown. Industry executives say Discovery Communications Inc., Scripps Networks and Lifetime Entertainment Services have picked up some upfront commitments. But Turner, Discovery, Scripps and Lifetime would not comment or provide any details.

“The biggest issue is the scatter market being soft. Buyers don’t feel any push to action,” said A&E Television Networks executive vice president of ad sales Mel Berning.

In the scatter market, advertisers buy commercial time opportunistically closer to air or wield budgets that have just been released.

Typically, broadcast sells 80% of its primetime inventory in the upfront, while leading cable networks only move half of their commercial load in the market. But if no one is buying spots on a spot basis, there’s little push for agencies to lock up air time in big chunks.

“There are some broadcast deals here, some there. Nobody’s putting money down helter-skelter. The [cable] inventory you want to buy will be there,” said Aaron Cohen, executive vice president and director of broadcast at media buyer Horizon Media.

Also holding back the market: Dickering over pricing.

Typically, advertising is priced based on how much a client is willing to spend for 1,000 viewers, establishing the “cost per thousand.’’

But that cost is up in the air. One top-15 cable network executive said the service has “budgets registered. We’ve had deals pending for a couple of weeks. Everybody’s still waiting for broadcast to really set the pricing.”

While it’s hard to verify, NBC reportedly is writing orders with 3% to 6% lower prices per thousand viewers; and CBS is ahead 1% to 2%, supposedly.

“CBS is taking a little less to get share. It’s their first year as standalone company and I guess [chairman] Les [Moonves] doesn’t want to show shareholders any weakness in volume,” said one cable network ad sales executive.

This cable ad seller hopes that Fox, which has been up 2% to 3%, and ABC will conclude deals at higher rates “because that could make some clients and agencies place more money in cable as an alternative.”

But that may not happen this upfront season.

“Traditionally, buyers use cable to lower CPMs to offset higher broadcast CPM, but it seems buyers are really looking at zero pricing this time,” said Jack Myers, principal in advertising publication Jack Myers Reports.

DIGITAL DECISIONS

Like auto salesmen, executives at most broadcast and cable upfront presentations this season were peddling options beyond TV shows. They were getting wired — and unwired.

“Broadband video, video on demand, a dabble of mobile properties like ESPN [Mobile] — we’ve been talking about these digital extensions for a few years,” said Denuo’s Hanlon. “They’re really here now.”

But figuring out what to pay for those extensions takes time, according to Horizon’s Cohen.

“You have to analyze it, see if a client really wants it, and then start negotiations on that aspect,” he said. “It’s definitely slowing down the process.”

That doesn’t have to be the case, though, said Bruce Lefkowitz, executive vice president of ad sales for Fox Entertainment Sales. “If MTV has 30 networks and 30 other new media offerings, and got its deal done with OMD, it can’t be that difficult,’’ he said, noting his group has done one upfront deal with one client for the National Geographic Channel.

Lefkowitz pegged the advertising market for broadband video at around $100 million this year, between cable and broadcast, with on-demand video generating a fraction of that. “That’s not a small amount, but it’s not a market maker this year,” he said.

Advertising on digital video media could be such a factor down the road, though.

“In the past, you knew there was this much money for primetime, for daytime, for news, for cable. It rolled itself up,” said the ad-sales chief at the top-15 network. “Here, you’re creating the equation as you go along.”

The ad-sales boss at a top-10 cable network said any money that trickles in from the digital side this year will be duly documented going forward.

“The digital stuff is not going to represent a lot of cash. But for some clients, it is serving as driver for interest in our [regular TV] business,” he said. “This is a swing year. In many ways, [digital] will be like found money. But whatever you write this time, you’ll have to beat it next year.”

NEED FOR SPEED

There are other drags this year. Pharmaceutical giant Johnson & Johnson, which spends about $500 million a year in national TV advertising, pulled out of the upfront market.

Network ad sellers also express concern about the strength of the domestic car companies, also big spenders. Weakness there could be offset, though, by more spending by the imports, particularly Toyota, which is expected to heavily promote its new Tundra pickup truck.

Spending to trumpet movie and DVD releases is expected to retreat, while mobile phones remain strong and pharmaceutical spending, in general, is still substantial.

But it’s still anyone’s guess whether the upfront market will pick up — or by how much.

Myers, the ad-industry watcher, going in predicted that broadcast was down 2% and cable up no more than 3%. “I haven’t seen anything yet to change that,” he said.

Lefkowitz said the market for cable should start to shape up next week. He estimates that by Friday, 35% of budgets will be registered and more deals will have been written. By the week after, 75% of the budgets and 20% of the deals will have been concluded.

“Broadcast is starting to go. I think cable starts to get on the stage next week,” the ad chief at a company with multiple cable networks said Friday.

March