What to make of booming upfront

Jun 10, 2002  •  Post A Comment

It’s difficult to know what to make of the unexpected burst of advertiser spending that has turned this year’s upfront market into an economic event.
Industry analysts and executives are varied in their opinions on why the broadcast network television market was bolstered by about $1 billion more in ad spending than was originally expected. The estimated $8 billion in overall broadcast network upfront commitments-of which NBC and CBS were the biggest beneficiaries-brings the long-hammered industry sector back in line with the level of ad spending that set records in 2000. That makes comparisons to last year’s record slump not nearly as meaningful.
With cable continuing to gain audience share last season and having topped 50-50 parity with broadcast during the most recent summer viewing, that industry sector could realize a similar surge in advertiser spending in its unfolding upfront deals.
But the question remains just how far, wide and long this revitalized advertiser spending will go-and what, ultimately, it will change.
Raymond Katz, veteran analyst at Bear Stearns, said the heavier-than-expected advertiser demand will “lift all boats” and benefit even ABC and Fox, which were ravaged by ratings shortfalls and advertiser make-goods last season.
When the smoke clears, Mr. Katz said, there likely will be evidence of new advertisers entering the broadcast network TV fray to push new products or new line extensions of existing products. “When you think about it now, that’s all the dot-com spending was about: new product introduction,” Mr. Katz said. “Two years ago, the numbers included a lot of dot-com spending. This year there isn’t any. A whole industry and spending category has disappeared, and ad-supported media is back where it was in less than two years without a new industry spender to replace it. I can see that as a very bullish scenario.”
Eventually, that should translate into analysts’ upward revisions in ad-supported media-company revenues and cash flow estimates for the fourth quarter of 2002 and 2003 if it becomes clear that this increase in ad spending is sustainable. Since many of these same media companies have core TV and radio stations or cable systems, much will depend on whether this advertising lift will carry over to local markets, which often are hindered rather than helped by robust national spending.
Mr. Katz and other analysts said the increased upfront spending by advertisers in the battered telecommunications sector, retail, autos, packaged goods and movie studios should be sustainable in the scatter and spot markets.
We may not know for weeks whether this spending was shifted from bulk, cross-platform deals that media companies, advertisers and agencies were touting as an important new way to write business.
Some of the spending could be pent-up demand from advertisers who curtailed their activity during the slowdown of the past 18 months and in the aftermath of the Sept. 11 terrorist attacks.
The swiftness and scope of last week’s initial upfront spending suggested that current demand for advertising time could be a hedge against what advertisers know will be 15 percent or more premiums in scatter-market pricing next season as the economy continues its gradual recovery.
However, Richard Bilotti of Morgan Stanley Dean Witter points out that national spot and scatter demand could be even stronger the remainder of this year and in 2003 since some smaller media buyers could not get their orders completed in last week’s three-day stampede.
“Advertisers appear worried that they are not going to get a good price or plentiful supply of TV inventory if they wait,” Mr. Bilotti wrote in a report to clients. “The critical element is the CPM growth. The volume increases in the upfront will be matched by decreases in scatter, as the total number of spots is relatively fixed.”
In any event, all this raises a perplexing thought: If broadcast networks are delivering less of the mass market reach they once monopolized, with overall ratings and audience shares down, how can they justify charging for and getting upfront unit price premiums?
Some experts speculate that broadcast network cost-per-thousand gains averaging 8 percent to 10 percent, or more than double what was originally predicted, could be the precursor to more robust widespread advertiser spending in most media well into next year. But that’s not likely, given the volatility of the economy, world markets and consumer sentiments.
In fact, many experts have rushed to offset the euphoria by suggesting that advertiser spending simply has shifted back to the traditional upfront market from the scatter markets, where it had been mounting over the past 18 months. Factoring back in the two weeks of Olympic Games advertising that went to NBC a year ago, could yield roughly the same level of spending volume scattered around differently.
Last week’s advertiser spending spree was no small matter, considering that prime time accounts for more than 50 percent of major broadcast networks’ revenues and an even larger percentage of revenue for smaller, fledging networks, Mr. Katz said.
It will be important to determine in the coming weeks just how real the ad spending growth is and whether there is enough new spending by advertisers to carry broadcast and cable networks forward to new highs in the normally higher-priced scatter and spot markets. It ultimately could have a devastating impact on corporate balance sheets.
“This burst of spending will not turn around ABC’s fortunes,” Mr. Katz said. “It just means that instead of losing $450 million like this year, it will lose $350 million.”
Early indications were that ABC barely matched its $1.6 billion in upfront revenues from last year, although it was able to eke out 4 percent to 6 percent CPM increases.
The notable gains made by Viacom’s CBS and General Electric Co.’s NBC will significantly bolster their revenues and earnings in the fourth quarter of 2002 but mostly in 2003, as long as the economy and advertiser spending do not fall apart in the meantime.
Ratings leader NBC sold a record $2.7 billion in the upfront. CBS’s record $2 billion in upfront sales, compared with last year’s $1.3 billion, represents a 12 percent increase in pricing and an 82 percent inventory sellout.
“[Viacom] has mitigated any downside risk associated with a delayed economic recovery” by leaving only 18 percent of CBS’s ad inventory for make-goods and sales in scatter markets, the strength of which remains questionable, said Christopher Dixon of UBS Warburg.
Gordon Hodge of Thomas Weisel Partners said UPN could finish up to 47 percent ahead of last year with $250 million in upfront advertising commitments and an average 15 percent unit price gain, which also will strengthen Viacom’s overall financial performance. AOL Time Warner’s WB network also sold about 85 percent of its ad inventory for a record $560 million, sources said.
At the time this column went to press, there were mixed signals out on cable. USA Networks was writing upfront business early-but at reduced unit prices, sources said.
Industry analysts expect MTV to achieve double-digit growth, while Nickelodeon will likely rise 5 percent in a tough children’s market. MTV Networks’ cable channels overall should achieve a collective 6 percent to 8 percent increase in upfront sales, analysts said late last week.
Analysts cautioned that the glut of advertising inventory accumulated in cable could work against even the most popular cable networks in the upfront, the same way the increased demand for tightened inventory has worked to the benefit of the broadcast networks.
With the number of cable networks becoming “nationally distributed” by passing the 70-million-home mark, the supply of cable advertising spots is increasing well beyond cable viewing and advertising, said Merrill Lynch’s Jessica Reif Cohen.
Even if cable doesn’t set any new records in upfront selling this month, it will be positioned to sell well quarter to quarter in a gradually strengthening market. Or playing devil’s advocate,
it might just find itself on the offensive. We won’t know for sure until later this week or next week whether the advertising market is bigger overall, or whether spending has simply shifted back from cable to broadcast TV.
That theory may have some teeth if you accept that overall advertising budgets are up only slightly this year.