Oct 27, 2003  •  Post A Comment

The big news in the prime-time television season under way is not the networks’ overpriced and overhyped series, many of which will be canceled before it’s over. It is the upset in TV’s status quo that threatens to shift millions of dollars among broadcasters and cable operators, programmers and advertisers.
Surely the argument can be made-based on ratings for the initial four weeks of the prime-time season-that viewers simply are not gravitating in droves to new and returning network series as they have historically. While it is too soon to say for sure what the problem is, enough time has passed to know there is one.
The unusually steep declines in certain demographic ratings would suggest the culprit could be more than competition from high-profile Major League Baseball playoffs on Fox or a questionable Nielsen sampling. So far this season, there have been 14 percent declines at both NBC and CBS in prime-time viewing by adults 18 to 49; an unprecedented 7 percent decline in all forms of television viewing by males age 18 to 34; and a 22 percent decline in male viewers age 18 to 34 at the Big 3 networks.
Maybe television’s relentless fragmentation is finally having its way with viewers and advertisers.
Of course, there might be a rational explanation for everything that looks like a aberration in television right now, if it weren’t for the fact that television is in the throes of a digital, interactive transformation in which most of the old rules could go right out the window. Here’s an early go at what might be going on:
* A softer-than-expected scatter market.
It’s too soon to know where scatter pricing and demand will settle in. But so far, pricing generally is flat with the upfront’s 15 percent-plus hikes, and at least 50 percent of scatter inventory is still available. Even Viacom Chief Operating Officer Mel Karmazin, the networks’ most ardent booster, conceded during the company’s third-quarter conference call Oct. 23 that scatter isn’t the double-digit bonanza he had hoped for.
Experts such as Merrill Lynch analyst Lauren Rich Fine contend that this is just an allocation shift in the finite advertising dollars available. After all, the networks’ upfront was robust only because $2 billion worth of ad spending shifted from other media into the broadcast and cable space. “If advertisers took it on the chin in the upfront, why would you expect them to come back for more in scatter?” Ms. Fine explains.
That the robust upfront spending hasn’t trickled down to local TV advertising spending is a bit more problematic for the network-affiliated TV station groups, which also have suddenly found their local ad dollars under siege by savvy cable operators armed with local cable interconnects.
These same local TV broadcasters could be in for a double whammy if their respective broadcast networks fail to generate the strong prime-time series ratings and strong lead-ins needed for their late local newscasts.
Merrill Lynch analyst Marc Nabi last week further reduced his fourth-quarter TV station ad spending forecast to a negative 2.6 percent (from a previous negative 1.6 percent). As if difficult comparisons to heavy 2002 political ad spending weren’t bad enough, local stations now stand to lose some local spot advertising dollars to their networks’ lower-priced scatter time-the ultimate irony.
* This could be a season of above-average advertising make-goods.
The broadcast networks, which were fairly aggressive in their upfront demographic ratings guarantees, are economically vulnerable to any further audience erosion. ABC is still living with the fallout from its major prime-time ratings guarantee shortfall two years ago, which has saddled it with two consecutive years of $500 million-plus losses.
NBC may be generating a record $850 million in operating income this year, but it faces a whole new ballgame when its veteran prime-time series-some of which are already demonstrating some ratings vulnerability-retire after this season.
Analysts generally are willing to bet that Fox could make the most ratings and financial gains this season at the expense of its broadcast network rivals.
But in an uncertain and somewhat untested competitive environment such as this, all of the networks stand to lose if above-average make-goods become an issue, according to CIBC World Markets analyst Michael Gallant.
Based on figures specific to each network’s ratings, Mr. Gallant estimates that a 5 percent ratings shortfall would cause Fox to incur about $65 million in advertising make-goods, on the low end of the spectrum, and could cause NBC to incur as much as $136 million in make-goods, on the high end of the spectrum.
A 10 percent or greater ratings shortfall, which would result in twice as much make-goods time, would be considered a problem for any of the broadcast networks, Mr. Gallant said.
* Major changes in basic cable and paid tier cable programming will have an impact on all television economics.
The very public heated negotiations between Walt Disney’s ESPN and cable operators such as Cox Communications underscore the high stakes. Cox has several hundred million dollars in annual programming costs on the line. ESPN has at stake the $1 billion in profits it delivers to Disney at a time when other Disney core businesses, such as the other media networks and theme parks, are still in recovery mode. That formidable economic interest didn’t come up during ESPN’s Oct. 23 press conference on the matter, in which it took Cox to task for suggesting ESPN be yanked from basic cable and thrown onto a paid premium tier, or be taken off the air altogether.
It isn’t just Cox that is pressing the issue with the dominant sports programmer, which, for too long, has insisted on and received 20 percent fee hikes that top industry rate cards. The less vocal and visible Cablevision Systems, DirecTV and Comcast Corp. are making similar arguments in their own talks with ESPN. The truth is that ESPN and Disney are fighting for their economic lives. If Cablevision could knock the Yankees off the air in New York and then allow them back on only as a paid premium sports tier, then ESPN is vulnerable to similar change, experts say.
However it plays out, the shift in cable program affiliate fees-whether they are reduced, imposed as paid tiers or handled some other way through government regulation-will have a ripple effect throughout the television industry.
Experts say that is because the same media conglomerates that own ESPN and other major cable program networks and providers also own the broadcast networks, which are undergoing their own economic squeeze plays. This could be the season that no one escapes unscathed.
* All the other TV conventions you thought you could rely on may not hold up.
The strength of the 2004 quadrennial ad spending on elections and Olympic Games isn’t clear. As for political ad spending, many analysts argue that there are not nearly enough hotly contested regional races to warrant the aggressive campaign spending seen in years past.
Another notion that may not hold up in 2004 is that viewers will simply shift back and forth among broadcast networks looking for a new favorite series to latch onto in prime time. Experts say we may be witnessing the beginning of a phenomenon in which TV viewers may be taking their TV viewing time and energies and converting them into other activities.
In that case, interactive TV options that give consumers more control over whatand when they watch could be important to keeping them in the video loop that, with or without TV commercials, economically supports free and pay TV content.