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A day late, a dollar short at upfront

May 28, 2001  •  Post A Comment

The only place where heated discussion about the upfront advertising market appears to be taking place is on Wall Street-not Madison Avenue. And some surprising revelations are being made by and to media industry analysts.
For instance, most upfront advertising business is not expected to be written until the first two weeks of July, according to John Muszynski, executive vice president and chief broadcast investment officer at Starcom MediaVest Group. The company spent $17 billion in media last year, and its clients include Procter & Gamble and General Motors.
By this time in last year’s overall $8 billion upfront market, Starcom had completed nearly half of its clients’ upfront spending. As of last week, Starcom had not made a single upfront deal, Mr. Muszynski said during a conference call with Starcom executives hosted by Morgan Stanley Dean Witter for its clients.
The dollars coming into this year’s upfront are down at least 20 percent from a year ago, the lowest amount of upfront dollars in three years, he said. One major broadcast network last week conceded to Mr. Muszynski that its upfront spending would be down 18 percent from 2000.
Although he expects an aggressive scatter market later this year, Mr. Muszynski said he does not expect packaged goods and other major advertisers to resume more aggressive spending until the second quarter of 2002. Advertisers seeking young demographics will likely be the first to resume spending in a big way.
So not surprisingly, agencies and advertisers are seeking price rollbacks from a year ago, an improved mix of programming for those dollars and some value-added considerations thrown in for good measure.
Advertisers also are uniformly seeking more flexibility in their national broadcast network ad spending than they have had in the past. That means the ability to cancel or shift more of their upfront commitments to scatter. If networks balk at such flexibility, then advertisers surely will hold back more of their upfront dollars for this year’s scatter, experts say.
Such is the newfound leverage media buyers and advertisers are enjoying in a soft marketplace. That advertiser and media buyer advantage may continue into 2002, since next year’s Olympics and elections are not expected to completely offset this year’s sizable spending shortfalls.
The waiting game
So far, not many players on either side of the negotiating table are blinking. No one wants to be the first to make what could turn out to be a bad deal.
In fact, as of last week, many agencies and advertisers were still scrutinizing broadcast network series pilots and hadn’t even begun putting pen to paper, industry sources said.
With corporate profits generally off by 43 percent in the first quarter, companies of all sizes in all industries are unlikely to be rushing back into the marketplace with ad dollars anytime soon, experts say.
“Many [advertisers] will wait until the scatter market, where they can do as good or as bad, or better,” Mr. Muszynski said. “I don’t think any of the networks will sell out 80 percent of their [upfront] inventory this year.”
In fact, many analysts expect the broadcast networks to sell out only 55 percent to 65 percent of their upfront inventory.
Merrill Lynch analyst Jessica Reif Cohen says even scatter doesn’t look that great at the moment.
“Scatter pricing is being discounted below last year’s upfront, and third-quarter options are being canceled at abnormally high rates,” she said.
Just as it did in the second quarter, General Motors canceled the maximum allowable (50 percent) of its third-quarter upfront commitments on certain networks, Ms. Cohen said. Third-quarter cancellation rates are running at nearly 25 percent of total upfront commitments-nearly double the typical rates.
Still, we’re starting to get a clearer picture of the winners and losers in this tepid upfront.
Starcom said its network TV dollars are down 20 percent from a year ago, its cable budgets have declined 29 percent, and its syndication dollars are down 51 percent.
“Since we are 12 percent of the syndication marketplace, the spending in that marketplace is going to be down at least 6 percent, which would be a significant drop,” Mr. Muszynski said.
Starcom executives say their clients’ TV budgets generally are down 10 percent to 15 percent from a year ago, reflecting that 2000 was an extraordinarily robust advertising year and that 2001 is weaker than most post-election, post-Olympics spending years.
For instance, NBC still has about $250 million in ad time left to sell in its 2002 Salt Lake City Olympics telecasts, analysts say.
Kevin Gallagher, vice president and director of local investments for Starcom, said local broadcasters’ advertising fortunes largely ride on the network’s national ad business.
Advertisers increasingly view local television as “a flexible medium they can use at the last minute,” Mr. Gallagher said. The downside is that “it’s the budget you can always pull back on.”
It’s also becoming clear that packaging together multimedia platforms of a single company for a mega ad deal isn’t proving much of a panacea to a limp market.
Mary Ann Foxley, executive vice president and chief investment officer for Starcom, said CBS is more willing than other broadcast networks to tailor partial multimedia packages that better meet clients’ needs rather than throw together a massive bundled offering.
Going smaller
“They [CBS] are happy to go with $30 million and $50 million media pieces that meet clients’ needs instead of going with a $250 million deal for a client,” Ms. Foxley said.
Even so, P&G and CBS declined comment last week on whether the bundled $372 million pre-upfront ad deal they were negotiating several weeks ago has actually been finalized.
Surprisingly, Rishad Tobaccowala, president of Starcom IP Worldwide, said Madison Avenue is not buying the bundled cross-media deal AOL Time Warner is peddling, which is the heart of its marketing and advertising strategy.
“Most of the people aren’t buying the AOL Time Warner story on the buying side. Only the investment community is buying it,” Mr. Tobaccowala said.
“AOL no longer has the aura of invincibility. A year ago it looked like you had to buy AOL,” he said.
Now advertisers and media buyers are balking at its “one size fits all” tactics that usually involve five different AOL Time Warner media pieces and always include the AOL Internet service.
AOL muscles in
Some of AOL Time Warner’s best advertising deals are coming out of Cartoon Network, CNN and other Turner cable networks. “They are trying to sell the AOL service as a mass medium, and it’s not yet,” Mr. Tobaccowala said.
Starcom executives said they have had to challenge AOL Time Warner’s new merged management not to tamper with Cartoon Network or other Turner cable network deals already in place for its ad clients by trying to shift “chunks of the expenditures to the AOL service despite the fact that it was not consistent with the original strategy,” Mr. Muszynski said.
“Now they have to sell, which they don’t know how to do. For the next year it’s going to be a pretty rough go for AOL Time Warner,” he said.
That could in fact be one of the reasons AOL Time Warner sought to impose a long-awaited increase in its basic online subscriber rates last week, effective July 1. Although the company denies it, the conventional advertising and marketing dollars that make up about one-quarter of its overall revenues might not be as robust this year as originally anticipated, analysts say.
More immediately, the Starcom executives said that based on their fall series development and demographic and ratings strength, CBS and The WB would be the big winners in this year’s upfront, when it finally happens.
Fox is a “wild card,” with good properties and young viewers, while NBC and ABC are running neck-and-neck. Mr. Muszynski said NBC could be the target of “revenge” sought by advertisers who feel they were price-gouged by the network last year in better times, while ABC has “a bett
er program lineup than most people were expecting.”
A number of other Wall Street analysts weighed in last week with their initial take on the looming upfront market.
Ed Hatch at SG Cowen said he expects overall upfront ad spending at the broadcast networks to decline between 10 percent and 12 percent to $7.3 billion, and 5 percent to 7 percent in overall price and volume declines.
He estimated that overall ad spending could be up 3 percent from last year for CBS, up 4 percent for Fox, down 20 percent for ABC, down 15 percent for NBC, down 10 percent for UPN and flat for The WB.
Tom Wolzien, analyst at Sanford Bernstein Research, said he doesn’t expect broadcast network upfront advertiser spending to ever be restored to prior robust levels, even in Olympic and election years.
The reason, he said, is that there is already a $25 billion difference in the 30-year trending of all advertising spending in all forms of media between the reasonable highs and lows of the dollars committed.
That $25 billion in question could be held and not spent-or could be spent in other ways on other forms of media (such as online), marketing or promotions (including the new bundled multiplatform concept or cross-promotion strategies).
Downhill trend
“The advertising market is showing signs of a cyclical shift into more promotional, marketing-based ads and away from traditional brand building. Advertising has experienced similar shifts in past downturns,” Mr. Wolzien said.
One troublesome trend is that collective advertising spending of all forms, which is essentially flat this year, is trending well below the nominal gross domestic product, which is increasing at about 3.7 percent and which it usually tracks more closely, Mr. Wolzien said.
Next year, the gap will be as wide, with overall ad spending growing only at 1.9 percent to a 4.6 percent estimated growth in GDP, he said.
“What that means is that something else is going on with advertising spending in general,” Mr. Wolzien said. “This is more than just a down year or an off year, and advertisers responding cautiously to an uncertain economy. This could be more of a sea change that has greater implications.”