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Disney plays it safe with OMD

Jun 17, 2002  •  Post A Comment

A strong upfront marked by the record $1 billion OMD deal and an estimated $300 million more than expected in advertiser spending at the ABC TV Network-despite last season’s 20 percent ratings decline-will help The Walt Disney Co. begin to climb out of a $1.5 billion hole.
Disney is likely to spend an estimated $1.5 billion over the next two years to turn around ABC’s ratings and restore profits, said Christopher Dixon, an analyst at UBS Warburg. “I think the first time you’ll start to see a significant turnaround at ABC will be [in] 2004,” Mr. Dixon said.
Disney began that investment last season with costly sports license fees and other increased program costs against a backdrop of declining revenues exacerbated by nearly $400 million in advertiser make-goods due to ratings-guarantee shortfalls.
At this point in Disney’s fiscal year, some experts estimate that ABC could lose as much as $700 million. That is twice what most analysts figured earlier this year, and it could set a record for broadcast network losses. ABC and Disney officials declined comment.
`Millionaire’ to the poorhouse
ABC’s losses began spiraling out of control 18 months ago when its runaway prime-time hit “Who Wants to be a Millionaire?” began losing steam. The turning point came in December 2000 when ABC’s profits collapsed into a quarterly loss of $275 million, according to analysts and Disney’s own financial statements.
“It was truly ugly,” one knowledgeable source told me. “To give you an idea of how bad that was, that meant that every single minute of advertising time sold for $100,000 less in that December quarter than it did a year earlier.”
The revenue-cost gap has been widening for ABC ever since.
The estimated $1.5 billion in upfront business written by ABC this month, and the upfront business currently being written by Disney’s cable entities, including ESPN and ABC Family, help balance out that picture, partially offsetting an estimated $2 billion-plus in annual programming commitments that will likely grow even as Disney’s own Touchstone unit produces a majority of its new ABC prime-time series next season.
ABC has tried to minimize midseason cancellations and other advertiser options that could hurt revenues by generally guaranteeing not much more than maintaining the prime-time series ratings with which it ended the season last month. ABC is keeping about 18 percent of its prime-time inventory in reserve for higher-priced scatter sales and make-goods.
“We took a very realistic approach to the ratings projections that we sold to advertisers,” a high-level ABC executive told me. “ABC will not be in the same position we were in this year, where we were unable to participate in the last few quarters of scatter. … We absolutely will have scatter going forward.”
The key unknown for all of the broadcast networks-and especially for ABC-is what it’s always been: How much of the upfront business written will stick over the next year?
A hedge against uncertainty
ABC and Disney took their biggest step to ensure against another revenue slide when they made a $1 billion upfront deal with OMD. But there are deeper financial implications to the deal than meet the eye.
The estimated cross-media platform deal cut between OMD and Disney’s ABC Unlimited, which represents all of the company’s media entities involved, is important because it took $1 billion in advertising time and uncertainty off the table.
Disney has secured $1 billion in advertising revenues in an uncertain advertising and ratings marketplace, freeing up its various sales media forces to concentrate on aggressively selling its remaining broadcast and cable inventory.
Especially important to ABC is that the OMD inventory carries no cancellation or other conventional advertiser options. ABC will not have to forfeit the $300 million in prime-time revenues and $200 million in nonprime revenues earmarked in the deal if it falls short next season.
The tradeoff is that ABC and Disney will never know whether they could have sold any of the $1 billion in cross-media platform inventory at higher prices in future scatter markets. Most likely the answer will turn out to be a resounding yes. Sources said about 10 percent of the OMD deal, or $100 million, has been earmarked for scatter market sales to OMD clients who would normally buy time that way.
The deal essentially turns OMD into a “de facto wholesaler” of a block of Disney’s advertising inventory, giving the agency complete flexibility to shift the time among its clients’ brands and among Disney media properties from Oct. 1, 2002, to Sept. 30, 2003. Experts said this arrangement, though not likely to be repeated often on such a grand scale, will become more commonplace in the future.
So why do the deal? Because in an unstable financial and competitive marketplace in which ABC and Disney are getting hammered, OMD’s $1 billion business represents 10 percent of the $10 billion in overall revenues that will be generated this year by Disney’s Media Networks unit, which includes ABC and ESPN, Mr. Dixon said.
That same unit contributes as much as $1 billion in operating income to Disney’s corporate bottom line.
“It’s enormously important for Disney to stop the bleeding,” Mr. Dixon said. “The deal gives Disney some breathing room and allows its salespeople to focus on selling the new shows and eliminating at least $1 billion of risk it otherwise faces in the market.”
Debate on Wall Street
Although CBS walked away from a similar deal with OMD, it makes sense for Disney and ABC. Sources said OMD would have spent $800 million to $850 million of the $1 billion with ABC, ESPN and other Disney units next season anyway, or about the same as the agency and its clients did last season.
There is a debate among industry and Wall Street experts about how much of the remaining $150 million to $200 million in the OMD deal is incremental-or revenue that ABC and the other Disney media entities might have gotten otherwise. Some say the ABC TV Network, ESPN or other entities would have sold the additional inventory in the market anyway-maybe even to OMD and its clients.
As it was, that $150 million to $200 million in incremental revenue from OMD will funnel mostly to non-ABC Network TV entities, although some of it also was generated from selling sports and event programming such as the NBA and the Super Bowl. An estimated $350 million of the OMD deal has been earmarked for ABC and ESPN sports at levels OMD bought last season. Disney spends an estimated $1.1 billion annually on sports programming, sources said.
An estimated $150 million of the OMD deal has been earmarked for Disney’s cable entities, such as ABC Family and the Soap Network, much of the programming of which is recycled and represents minimal cost. That means a large chunk of the ad business written against it will fall to the bottom line.
Sources said the ABC TV Network carried minimal price discounts and conservative guarantees to generally maintain last season’s ending ratings. Consequently, only about $50 million of the $200 million in incremental revenues from the OMD deal will accrue to ABC.
A win-win proposition?
Indeed, the OMD deal was a headline deal for Disney and its beleaguered ABC that sends the message to investors, analysts, advertisers, agencies and other key constituents that they have momentum and value among all of their media properties.
Some experts said all of those and other considerations about the complex deal generally make it a win-win for OMD and Disney’s ABC Unlimited. But not everyone agrees.
The fact that Disney’s ABC Unlimited agreed to make the $1 billion block sale to OMD in an explosive upfront market-at what sources said are roughly 1.5 percent to 2 percent unit price discounts at many of the media entities-has some industry experts questioning the wisdom of the deal.
Indeed, ABC and OMD declined comment on what sources said was a recent attempt by Disney to withdraw from the OMD negotiations, which began in February, once the strength of the upfront advertising market be
came apparent.
“The $150 million or $200 million in incremental revenues cost them 2 points, or as much as $20 million, that would go to their bottom line. In a hot market like this, nobody discounts in a market like this-not even ABC!” a high-level executive at a rival network said. “The extra money in their coffers is just money. It cost them money to their bottom line. It looks idiotic to us.”
Still, even with a market-leading $1 billion more in upfront advertising business written at NBC, Peacock executives spent some time with General Electric Chairman Jeff Immelt last week explaining why the deal didn’t make sense. NBC executives declined comment on ABC’s OMD deal and the larger, prescheduled meeting with NBC’s corporate parent.
Keeping upfront fingers crossed
The most troublesome ongoing concern for all of the broadcast networks and their corporate parents is just how quickly the upfront bubble can burst and the ambitious commitments can fall apart in another sudden economic downturn.
For now, it looks as though CBS and NBC will see their 2002 and especially their 2003 profits boosted by the increase in advertiser spending. Even before the upfront, NBC overall was slated to post a nearly 20 percent increase in operating profits this year, or about $1.5 billion, on a 16 percent rise in revenues of about $6.7 billion, driven largely by the NBC TV Network. Analysts said they most surely will increase those already impressive estimates based on NBC’s upfront showing.
As for ABC and Fox, executives last week were marveling about how they were able to write upfront prime time within 2 percent to 4 percent of what CBS and NBC did.
And in places on Wall Street, some analysts were scratching their heads about why advertisers would pay premiums and generally increase their spending in a broadcast network TV arena that continues to suffer from pitiful ratings declines.
Mr. Dixon said those analysts are missing the point. He sees the strong broadcast network upfront as “an affirmation that broadcast television advertising is still a very viable advertising medium despite the ongoing and deep fragmentation, and it will remain the most significant part of most media planners budgets,” Mr. Dixon said. “Remember, in the land of the blind, the one-eyed man is king.”