The surprising upside to this year’s record upfront could eventually have a troublesome downside for advertisers and broadcast networks. Despite how it appears, it is not a sure proxy for a healthy ad recovery or economy.
When the networks, advertisers and their agencies finally emerge from their euphoric stupor, they will need to rationalize a handful of truths, or facts, which run contrary to the average 15 percent unit price increase and overall 16 percent spending increase they managed to pull off in just one week.
The first of those truths is the variable nature of advertisers’ estimated $9.4 billion in upfront broadcast network commitments. Those commitments represent little risk to advertisers, who can exercise quarterly options to cancel or shift much of their upfront spending commitments elsewhere at the networks or into scatter. That’s why Donny Deutsch, chairman of Interpublic’s Deutsch, refers to the upfront as “the single- biggest head fake there is.”
The upfront is about good intentions: what advertisers say they are inclined to spend if networks deliver the shows and ratings they promise, if the economy doesn’t further deteriorate and if they aren’t blindsided by other adverse events.
That is a lot of ifs.
Even if the broadcast networks deliver the program lineups and series they announced-despite increased preemptions of plans in deference to a short-term boost from more popular reality shows-they also have to make their ratings guarantees or provide advertiser make-goods.
Although advertisers’ quarterly upfront cancellations and networks’ missed ratings guarantees were at an all-time low last season, next season represents a whole new ballgame.
That unpredictability in this upfront “futures market” for television has worked against each of the networks just as it has periodically worked for them. The most dramatic example of missing the mark is the $550 million-plus loss ABC incurred during the 2001-02 season. That was largely due to onerous advertiser make-goods caused by falling far short of its ratings guarantees after the network declined 18 percent in age 18 to 49 demographics and 22 percent in overall viewership that season. Ratings remain a key variable.
Avoiding Scatter Market
The second truth is the misleading and misunderstood importance placed on the scatter market. This year’s wild broadcast upfront, which had a hysterical selling quality to it, was partly driven by advertisers’ wanting to avoid another spiraling scatter-market price vortex. In a defensive move, they have settled instead for much higher-than-expected upfront prices.
But this influential scatter market pricing was artificially created and, in fact, represents less than 5 percent of overall network prime-time revenues.
Last season’s scatter market price gauging of 20 percent to 40 percent-plus over the previous upfront was a function of scarcity and supply and demand.
By selling out as much as 85 percent of their 2003-04 prime-time inventory upfront, the broadcast networks essentially have set themselves up for the same kind of dynamic in the new season. Only CBS appears to have held back enough inventory to be able to sufficiently satisfy scatter market demands before having to lose advertisers to more plentiful cable inventory.
Advertisers will shift their upfront commitments to scatter only if they believe they can get a better deal there. But given what is at stake, the broadcast networks surely will do everything possible to avoid that for any reason other than the bottom falling out of their schedules or the economy.
Despite its obvious distortion, the scatter market could once again alter the advertising endgame next season.
The third truth is the striking disconnect between the robust upfront market and the tepid U.S. advertising marketplace and overall economy. Yes, they are all related.
In a weak or uncertain economy, consumers pull back spending on products and services, which advertisers market in the media. Obviously, more advertisers are shifting dollars to network television, since ad spending is declining or flat in other media sectors, such as magazines, newspapers, radio and national and local spot television.
That spending shift could mean that advertisers are not spending appreciably more money on U.S. media. They are shifting more of what they are spending, especially to broadcast television, where they perceive the greatest reach and placement flexibility for the money.
On the other hand, a strong upfront could lift all boats and trickle down to national and local spot sales, radio and even print, which have been sluggish. Eventually, 2004 will see a lift to all TV advertising as biennial elections and the Olympic Games kick in. Only time will tell.
Upfront spending is out of sync even with the most optimistic economic indicators, which usually hinge on gross domestic product, whose growth rate is less than 3 percent for the year.
The fourth truth to be reconciled is the lingering disparity between broadcast and cable network pricing, which is being underscored this year by a record number of branded cable entities, including MTV Networks and Discovery Communications, joining the long-standing likes of the Turner and USA Networks in pushing for pricing parity.
Commanding 16 percent or better upfront price increases is progress, but overall cable still draws only about half the price of its broadcast counterparts, even though cable networks inched past broadcast networks in total prime-time audience averages last season.
Cable’s challenge is statistically demonstrating reach, frequency and quality-something Turner’s new computerized selling program is geared to demonstrate in spite of cable’s ad inventory glut. But cable’s breakout opportunity may come in future scatter markets in which broadcast inventory is tight and overpriced. The first and best place to demonstrate ratings, demographic and price parity may come in television sports and comparable programming, such as ABC Monday Night Football and ESPN National Football League telecasts, experts say.
Do the Math
The fifth truth that advertisers and networks must reconcile in the aftermath of this year’s runaway upfront is the basic math or cost to reach what is left of television’s so-called “critical mass.”
A thoughtful analysis of what advertisers have paid in recent years for targeted gross ratings points-the ultimate measure of advertising reach-will indicate that they are having to buy more 30-second spots in popular broadcast network programs to achieve the same level of reach.
That alone is eating up a lot of finite broadcast network prime-time spots, which drives up prices by tightening inventory.
The constrained supply, combined with the persistent perception that broadcast network time is a scarce and precious commodity, continues to boost its value beyond ratings and share substantiation. On the other hand, advertisers insist that national broadcast television provides them consistently with more of the specific reach they seek-even compared with aggregated cable, syndication and radio.
If advertisers want to measure what they are getting for their money, they need to look beyond the broadcast network ratings guarantees for next season and take a closer look at the bigger picture of spending patterns, pricing, delivery and shortfalls in recent years.
But chances are if advertisers and agencies take a closer look at what they are really getting for their money, instead of being caught up in impulsive upfront spending, they will begin to view broadcasting and cable advertising in a very different light.
Finally, the sixth truth is the target audience and preferred demographic advertisers want and networks design themselves to render. Age 18 to 49 viewers have long been considered prime time’s Holy Grail. But something interesting is occurring in the current upfront market. Automotives, which generally lead the spending pack, backed off this time around. It is unclear whether the auto companies will shift dollars to local TV advertising or reduce their overall spending. Ad categories suc
h as pharmaceuticals, entertainment and retail filled the void.
However, unlike entertainment, which is geared to weekend openings and younger demographics, pharmaceuticals have a decisively older skew. The more ad time they buy, the more power they shift to the population of age 45 to 55 consumers that has grown 52 percent in the past decade. The discretionary spending of consumers age 65-plus, representing nearly 13 percent of the population, represents a cash cow for certain advertisers and older-skewing networks. Unlike seasons past, those consumers are assuming more value in the mainstream TV marketplace.
It’s another reason that it isn’t enough to simply headline the record price and volume hikes without looking at what’s going on inside the advertising marketplace.