Old upfront ways won’t play today

May 20, 2002  •  Post A Comment

Someone ought to cancel the upfront-and eventually someone will. The upfront is an anachronistic ritual that does not reflect the changing economic imperatives of a television business that simply isn’t what it used to be. It defies many of the changing financial metrics of broadcasting and cable and fosters program-spending waste.
Never mind that only two of the six major broadcast networks-NBC and CBS-will be profitable this year against a backdrop of aggressive cost-cutting and revenue shifting, new program models and increased viewer fragmentation.
Never mind that generally more than 80 percent of the new series touted as “epic,” “refreshing” and “bold” will disappear from broadcast network schedules within months of their fall premieres.
Never mind that each of the broadcast networks will spend between $50 million and $75 million on initial program development-and then more than $1 billion on prime-time series production. The broadcast networks last season paid for nearly 400 development projects, although that was one-quarter less than the prior season, against a backdrop of declining upfront advertising commitments that plummeted 14 percent from the record levels of 2000. Overall, broadcast networks will spend more than $12 billion on programming for the year, including sports and news, according to industry analysts.
As the underlying fundamentals of the television business continue to change, the practice of upfront ad spending surely will change with them. In some ways, it already has.
For instance, scatter market sales have been robust-and not simply in response to tight inventory created by ABC and Fox make-goods or by advertisers holding back in the last upfront. Increasingly, the scatter market is becoming part of a continuum, with more advertisers spreading out their spending across the entire calendar year to react more nimbly to the media opportunities and economics of the moment.
As that trend continues, broadcast and cable networks will have to work more diligently for the ongoing business they write as they face more intense short-term competition from all media.
That scatter sales have been up as much as 15 percent or 20 percent over last year’s dismal upfront prices is a no-brainer, even though such spending can be looked upon as a qualified sign of optimism. But ad spending, like overall economics and even prime-time ratings, are fragile, and media companies will take nothing for granted.
For now, the best defense against any dilution in upfront spending is taking just the opposite approach. Viacom and CBS are leading the way in appealing to agencies and advertisers to commit lump sums of spending that can be specifically allocated to Viacom’s broad media holdings later, when it will do the most good.
The increased ad commitments that come bundled and in bulk will dilute more conventional upfront spending. It all will play into the eventual reshaping of how advertising is packaged, priced and sold.
The Walt Disney Co. and its faltering ABC TV Network have been the first beneficiaries of this strategy, having secured a bulk buy deal with OMD valued at close to $1 billion, sources confirm. There will be others.
The demographic ratings guarantees and other caveats attached to such broad commitments will go a long way in determining whether such bundled bulk ad buying is a good alternative approach. That won’t be clear for another year.
But in an era when media companies are wrestling with spiraling content costs that comprise at least 70 percent of their overall budgets and are scrapping for every ad dollar and viewer in a highly fragmented market, the historical approach to upfront selling in a kind of programming “futures” market doesn’t make a lot of sense.
Broadcast and cable networks are not only competing with each other but with themselves when they re-arrange their existing prime-time schedule around five to eight new series and then slap it all up against the wall to see how much sticks.
The only way broadcast networks can bid for mass-market dollars-which they alone commanded 10 years ago-is to bundle themselves with cable, radio, outdoor billboard and other media owned by their corporate parents.
So it makes no sense for broadcast networks to squander production money and resources in a production-line approach to turning out a new fall schedule, then straining to better amortize those costs through repurposing, time-shifting and long-term syndication.
Somehow, a more financially feasible approach to program production, placement and sales seems in order. But this change will not come easily and will occur only as an industrywide mandate.
Clearly, few last week were thinking about the financial implications of the new season schedules as Madison Avenue, Hollywood and Wall Street were caught up in all the upfront hoopla. It was marked by all the promise of last year’s upfront, before television ran headlong into the worst-ever advertising recession and saw ABC and Fox’s ratings drop more than 20 percent each, with ABC sustaining $300 million in make-goods losses.
The true barometer of how successful new season broadcast and cable schedules are won’t be evident until next year’s balance sheets, analysts said.
But even the slightest gains and losses will have an impact. Every 1 percent increase in total advertising sales growth yields $100 million in revenues and $80 million of incremental earnings before interest, taxes, depreciation and amortization, according to Morgan Stanley Dean Witter analyst Richard Bilotti.
That is why the estimated $300 million to $500 million swing in advertiser spending that can occur in this year’s upfront (as money shifts away from ABC and Fox to the other broadcast networks-and from broadcast to cable) will have significant financial implications.
ABC and its parent Walt Disney are especially at risk, with all of their prime-time development and new series production coming out of their own Touchstone Television. If they win, they win big because they hold all the rights to series that spin forward into syndication and other revenue-generating venues.
But if they lose, they lose big. Some experts said ABC’s overall upfront revenues could decline by as much as 17 percent to $1.4 billion this year. If that is compounded by another season of weak ratings performance, additional make-goods and revenue losses, it will continue to adversely impact ABC’s owned TV stations and the 23 percent of the Disney earnings related to ABC.
With cable expected to take a larger piece of the upfront pie this year, the media conglomerates that own the six dominant broadcast networks are heding their bets. Viacom, Walt Disney, General Electric and AOL Time Warner are all out there pitching bundled cross-platform buys and making other maneuvers to extend the reach and potency of their new broadcast network prime-time fare. As one analyst described it, they are still passionately invested in the old upfront game while putting the new rules of play in place.
“They’re running as fast and as hard as they can to make a buck anyway they can,” the analyst said. “Can you blame them?”#