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UPFRONT: PAYING MORE FOR LESS

May 12, 2003  •  Post A Comment

The broadcast network upfront under way is an anachronism in a fragmented industry where the only “mass” audience left to sell is the Big 4’s diminishing 40 percent-plus of TV households, which is generating less than $1 billion in total prime-time profits-or half what it was three years ago.
That’s hardly the robust picture suggested by bullish double-digit forecasts that could push upfront spending close to $9 billion and still leave only NBC, CBS and The WB profitable. Nevermind that such wishful thinking is completely out of sync with more negative economic indicators. The cable upfront is expected to grow anywhere from 10 percent to 15 percent, pushing it to as much as $5.4 billion, experts estimate. What generally is a 50 percent unit price gap between broadcast and cable networks persists and in some cases, has worsened due to cable’s ad inventory glut.
That the broadcast networks’ average share of TV audience has plummeted to parity with basic cable but still commands a fuller, more traditional advertising price premium, is a perplexing value proposition indeed.
Rising CPMs, or price per 1,000 viewers delivered, that offset steady prime-time ratings erosion, continue to mask the simple disturbing truth that broadcast network advertisers are paying more for less. Recent scatter market pricing tested that notion, yielding as much as 40 percent increases over last year’s upfront, which were already up 18 percent over 2001 levels. But even broadcast network executives concede scatter was by large measure a supply-and-demand phenomenon and a byproduct of unusual factors such as a post-9/11 recession and 2002 ad inventory levels.
The artificially boosted scatter market, representing less than 5 percent of overall prime-time spending, and the biennial elections, which accounted for more than half of last year’s TV advertising growth, make it difficult to identify and analyze the networks’ true underlying, sustainable gains.
Network Revenue Stagnant
But some perspective is required, even for more moderate upfront broadcast network estimates of 5 percent to 7 percent volume increases and low- to mid-double-digit price increases that are more in line with 2 percent gross domestic product growth with which advertising is closely aligned. CBS and FOX more likely will increase their market shares at the expense of ABC and NBC rather than see the broadcast networks gain on cable.
Despite the robust upfront market auction, the overall amount of money advertisers have allocated to the broadcast networks has stagnated from an aggregate $14.4 billion in 2000 for the Big 4 and from nearly $15 billion for the six broadcast networks. At best, both will grow 5 percent annually over the next five years, analysts estimate.
So this year’s upfront may be as good as it ever gets, catapulting off of record scatter sales momentum. NBC, with a finale season of aging hits that have secured its ratings dominance for years, may barely muster a 4 percent gain in overall upfront dollars compared with as much as 10 percent or better for CBS and Fox each.
“There still is a huge disconnect between an uncertain economy and these bullish outlooks that nobody wants to talk about,” said Bill Cella, chairman and CEO at Magna Global. “How much money shifts to syndication and cable if pricing at the broadcast networks gets unreasonable? And how strong can the second half of this year grow before you ever get to next year’s Olympics and elections? ”
Most Wall Street experts concede that if the upfront were a business it would be a hard sell to investors because of its huge waste, low return on investment and almost no dependable growth. It is high-risk, considering that less than 10 percent of all network series ever survive the four seasons it takes to make it into lucrative syndication.
Fewer than 20 of the 140 series in prime-time each season make “serious money.” Most of the networks are stock sharing more than $500 million in annual sports-related losses that advertising revenues alone will never offset, according to Morgan Stanley analyst Richard Bilotti. And the problem isn’t just sports. Prime time regular scripted series profitability fell $1 billion from 1999 to $2.4 billion in 2002, while their total direct per-hours programming costs rose 19 percent.
Networks Must Lower Costs
Prime-time program costs generally increase 6 percent annual against long-term 4 percent to 5 percent advertising growth, Mr. Bilotti said. “Pricing cannot compensate for the continued decline in television ratings and the inordinate rise in program costs. This economic model is broken.”
Inevitably, long-term adjustments to broadcast network prime time will need to include increased hit series multiplexing, reduced sports and even reduced prime-time schedules, he said. Some such change already is evident. The WB represents a profitable new broadcast network niche model driven by underserved 18- to 34-year-old female viewers.
“The networks will have to do something different in the future to drive down the cost of content,” NBC Television Network President Randy Falco said. “ Maybe in the future, we go to more of a blended cost of scheduled programming,” through a combination of a 52-week TV year with fewer reruns, selective use of reality series to plug trouble spots and multiplexing popular series to maximize ratings and minimize program costs.
Even NBC, which is expected to realize a record $700 million in network profits this year, will be at economic risk after next season if it cannot develop low-cost popular series to replace the high-cost hit series that are ending-as much a creative as a financial matter. Just ask ABC, which is struggling to halve its record $600 million in losses last year as it rebuilds its schedule.
Surely upfront economics won’t change before the broadcast network system does. And that might not take any longer than it will for broadcast networks’ mounting losses to hit the balance sheets of the media conglomerates that own the networks, even though most also own cable networks with dual revenues.
“As the reality of what is happening catches up with these companies, the upfront will change and die slowly,” Mr. Bilotti said, “because it has to.”