Paybacktime for Alphabet

Feb 18, 2002  •  Post A Comment

ABC’s prime-time make-good situation has become so tight that the network has so far paid $1.2 million in “cash-backs” to select advertisers-and could make as much as $10 million in such rare cash payments by season’s end if its dire ratings shortfall continues.
While the cash payments pale in comparison with the $1.5 billion in advertising time ABC sold in last spring’s upfront market, it is a virtually unheard of practice among the Big 3 broadcast networks in prime time-and tangible evidence of ABC’s massive make-good problem.
The result could be the loss of hundreds of millions in ad revenues that, short of another round of dramatic cost cuts, could only be offset by a reversal in ABC’s ratings fortunes.
“We estimate that the ABC TV Network will lose about $250 million, taking into account the prime-time ratings deficiencies and make-goods it is experiencing this season,” said ABN-AMRO analyst Spencer Wang. ABC’s prime-time ratings are down 19 percent from a year ago.
ABC executives, who asked not to be identified, confirmed the network is making cash-backs to a limited number of advertisers, mostly those on the bottom 25 percent of its client list, because there simply is no other comparable prime-time make-good inventory to offer them within a reasonable amount of time. On rare occasions in the past, the broadcast networks have made limited cash-backs to advertisers in their daytime and kids schedules.
ABC has been offering some of its make-goods in prime-time sports programming, such as “Monday Night Football” and the College Bowl Championship series, where there is an inventory glut. However, it is not tapping any ad time on its cable services, including ESPN and ABC Family, sources said.
ABC insists it still is selling a handful of prime-time spots at very high premiums-at as much as double the upfront pricing-to advertisers who need a particular time and reach for something such as a specific product launch. ABC declines specifics on where in its schedule the high-priced spots have been sold.
ABC has sold out its ad time on its Academy Awards telecast and is expecting to be able to bump up pricing of any available scatter time in some anticipated series season finales in the second quarter.
But by and large, ABC is “out of sale” in the prime-time scatter market into next summer, having used at least 25 percent (and as much as 35 percent at any given time) of its leftover prime-time scatter inventory for make-goods on its underdelivery on ratings guarantees across its schedule through the end of the season. Sources said ABC, like the other broadcast networks, had a greater percentage of scatter inventory available to sell in fourth-quarter 2001 and first-quarter 2002 than exists in this year’s second and third quarters.
Sources said Fox also has been out of sale in recent quarters, but it does not face nearly the same adverse impact as ABC because it has fewer prime-time hours and generally lower unit prices.
ABC declines to quantify its prime-time make-goods or to officially discuss television network financials not otherwise detailed by its corporate parent, The Walt Disney Co. Ad agency executives estimate the value of ABC’s prime-time make-goods to advertisers so far this season at between $15 million and $30 million.
However, those numbers seem low when one considers that ABC expected to generate at least an additional $500 million in revenues from its prime-time scatter market sales this season, assuming the network could have sold scatter spot at prices equal to the upfront prices paid by advertisers. Some industry sources speculate ABC might never see $300 million to $400 million of those scatter ad revenues.
It’s estimated that ABC sold about 75 percent of its upfront inventory for a total of about $1.5 billion, which represents about 24 percent of the total $8 billion upfront broadcast advertising pie.
However, knowledgeable analysts and company insiders caution about the need to factor in many complex variables that make it difficult to estimate the combined value of the make-goods and cash-backs to advertisers so far this season.
For instance, ABC has been allowing some advertisers who are exercising their second-quarter cancellation options to cancel more than the permitted percentage of their original order-thereby freeing up additional prime-time inventory for make-goods or sale to other advertisers.
Twenty percent of ABC’s second-quarter cancellation options have been exercised, insiders said.
The network also has converted about 10 percent of its on-air promotion time to create additional inventory for make-goods or sale. Whenever prime-time programs fall short of their allotted running time by a few seconds or minutes-a situation that happens most often with movies-ABC has converted that additional time into ad inventory as well this season. This season, ABC already had budgeted for a routine number of “shorts,” as they are called.
All told, such situations collectively have generated only an estimated 10 or so additional 30-second units weekly to use for make-goods or to sell.
“You’re talking about creating a handful of units a week, which is nothing compared to the thousands of units they are giving away,” said one industry source.
Some of the revenue shortfall in prime time is being offset by $15 million more generated in news-related advertising during the fourth quarter (especially from “Good Morning America” and ABC’s “World News Tonight”), which could swell to a $30 million advertising revenue windfall by the end of the season, ABC sources said.
ABC’s daytime schedule is delivering advertising revenues according to budget but is expected to generate increased revenues the second half of 2002. “So you do have some of this prime-time mitigated by some of the other dayparts,” said an ABC executive who asked not to be identified. “It’s not as bad as it looks, because we’ve been able to do a lot of these other things and realize upside in other places.”
ABC also protected itself going into the new prime-time season by setting aside an estimated 5 percent to 7 percent of its ad inventory for make-goods based on its internal projections-a common practice among all broadcast networks. As a result, ABC is having to “make-good” on only about two-thirds, rather than all, of its 19 percent prime-time ratings deficiency, sources said.
“There were very limited cash-backs made in the fourth and first quarters,” an ABC executive said.
Top ad agency executives contacted last week said they had heard that ABC had made some cash-backs to advertisers, and they were generally surprised that Disney, whose finances have been adversely impacted by the economy, would resort to returning cash to advertisers. One top industry analyst called the move “historic.”
Disney officials, who will be conducting their annual shareholders’ meeting this week, already are stinging from mixed or bad news on a number of fronts.
Disney recently announced fiscal second-quarter declines in nearly all its core businesses due primarily to the recessionary economy and cyclical factors. The network’s weak ratings performance recently has dragged down the revenues at ABC’s owned and affiliated stations. Major TV station groups with heavy ABC affiliation-such as Hearst-Argyle Television and Scripps Howard Broadcasting-have been especially hurt. The ABC TV Network’s swing from an estimated $140 million profit last year to at least a $250 million loss this year will have a trickle-down impact through its media networks group. ABC and Disney declined to discuss the group’s or ABC’s particulars.
Disney officials have pointed out that ABC overall represents a relatively small though strategic part of the company’s empire.
“The cyclical angst occurring at ABC is not a clear or fair indicator of the company, its management or its assets,” one frustrated Disney official said last week.