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Weak market will hit TV sports ads hardest

Apr 16, 2001  •  Post A Comment

A potential blowout in television sports advertising could eclipse the widespread contraction in general ad spending.
In fact, Morgan Stanley analyst Richard Bilotti, who has taken a bearish view of the current advertising downturn, says sports advertising “could be a car wreck.”
“The most devastating part of the market is sports,” he said in an April 11 conference call with other Morgan Stanley media analysts. They were the latest on Wall Street to concede that ad spending will be flat to negative this year, exacerbating what has been advertisers’ growing resistance to paying high costs per thousand (CPMs) to offset pricey broadcast license fees.
“What advertisers are saying is that they can’t afford to pay the CPMs required to reach the male demos they want,” he said. The correction in sports advertising that will reach into 2002 “will be greater than for overall advertising.”
Broadcast networks have already been moving some high-priced sports events, normally televised in daytime on weekends, into prime time to command higher ad rates.
The squeeze will be felt particularly at ESPN, Fox Sports and any broadcast network that will experience a 7 percent to 10 percent increase in its amortization of costly sports rights next year, he said. Regional sports networks may prove to be more immune.
Tom Wolzien, analyst at Sanford Bernstein Research, said last week that ESPN, traditionally a profit gold mine, is “under advertising pressure,” suffering “from a glut of sports programming” and unable to pull ABC’s broadcast operations “out of the sag.”
The inability of cable operators and broadcasters to fully cover their hefty licensing costs for sports with advertising revenues could force the renegotiation of existing agreements and will undercut the future negotiating leverage of sports leagues, analysts say.
Cable’s ability to seek advertising pricing parity with broadcasters also is in jeopardy, analysts say. For the first time ever, the top 12 cable networks are losing rather than gaining audience. Still, cable will outperform broadcasting, but not by as much as expected.
“The cable upfront will be down 5 to 7 percent, but it will all be in volume-almost none in pricing,” Mr. Bilotti said. Broadcasters will tighten upfront inventory.
Sports and big events generally are the only programs that can command ad prices similar to those of the broadcast networks, Mr. Bilotti said. “Sports could be the real inflection point for the industry,” he said.
However, Stuart Linde, analyst at Lehman Brothers, pointed out last week that CBS, which led broadcast and cable networks with 16 percent of all televised sports last year, could actually benefit if there is a writers strike this summer. The dearth of original entertainment fare could boost the demand for sports programming and the price of related ad time.
The Walt Disney Co.-which owns ABC and the ESPN networks-accounted for 36 percent of all sports programming last year, he said.
Any economic upturn that does come will translate into a “substantial upside to media conglomerates,” he said. But Mr. Wolzien recently lowered his earnings estimates again for media conglomerates based on the ad weakness, cutting $90 million in earnings out of Disney’s already weak estimates, exacerbated by a weakening of the ABC TV Network.
For now, broadcasters of all sizes are hurting. Mr. Wolzien said station managers and owners he has talked to say national spot advertising is down 15 percent to 25 percent from a year ago. Although locally sold commercials are flat, there isn’t enough time or staff to replace national ads, he said.
“It takes a lot of sales of $2,000 spots in smaller markets to make up for the elimination of a $2 million auto deal,” he said.
Mr. Wolzien expects overall television advertising growth rates to be less than 1 percent this year and 3.4 percent in 2002, compared with 14.3 percent last year.
Mr. Bilotti said the pricing power of television will be challenged in this year’s upfront, which could be a “watershed” if broadcasters are unable to command traditional CPM prices.
However, the pending writers strike has only served to further depress media stock prices and forecasts.
“More downward revisions are coming,” said Frank Bodenchak, Morgan Stanley broadcast analyst. “Gloom and doom is setting in among advertisers. CEOs are becoming more short-term-focused.
“I don’t really see things getting better until December.”