Make-goods is still a word that strikes fear in the hearts of many broadcast network executives, even in these days of extreme fragmentation and interactive competition. The reasons will become obvious again as the networks begin reconciling make-goods in a season that has been anything but predictable.
Some industry analysts estimate that based on the performance of the first seven weeks of the season, the Big 4 broadcast networks could be initially liable for between $100 million and $150 million in make-goods to advertisers if they fall short of the ratings guarantees they sold in the delirious upfront-most of the make-goods coming from Fox and NBC.
Of course, none of it so far is anything like the huge prime-time series ratings guarantee shortfall that beset ABC several years ago. That one ultimately resulted in an estimated record $600 million loss for the year. It was the product of a perfect storm: a dramatic shortfall in guaranteed ratings on series sold in the upfront; a lack of scatter market inventory available for use as make-goods; and the need to provide some form of cash compensation to advertisers to make up the difference in the needy post-“Who Wants to Be a Millionaire” era at ABC.
ABC continues to suffer the fallout from that fiasco, which was the impetus for several consecutive years of $500 million-plus losses. It still serves as a stark reminder of the potently damaging force ratings guarantees and make-goods can quickly become.
At least two of the Big 4 networks already are dealing with some of the same dangerous factors. The networks aggressively priced their upfront time and now have limited scatter market inventory, having sold 85 percent of their prime-time inventory at record 15-percent-plus rate increases.
But scatter inventory is not as tight as it might usually be, since so many advertisers who bought voraciously in the upfront are withholding dollars for short-term buys now. The use of scatter inventory for make-goods would not only tighten but raise the price of scatter inventory.
That said, some of the networks’ ratings shortfall problems are tied to dynamics unique to themselves that will likely persist the entire season, such as the greater-than-expected decline in viewing of such NBC’s veteran series as “Friends” and of more recent hit series on Fox such as “Joe Millionaire”; the overall continued decline in network viewing; and the more precipitous drop in viewing by males age 18 to 34, which, even if it is a Nielsen Media Research measurement problem, will not be rectified anytime soon. Fox already has canceled four of its new series and is placing a big bet on the January return of “American Idol.” Meanwhile, “Joe Millionaire” is averaging about half the 6.3 to 7 rating guaranteed in the upfront.
Consequently, a large portion of Fox’s and NBC’s early season make-goods issues will likely remain a drag on their bottom line. If extended over the course of the next seven months, even moderate but consistent make-goods can become a formidable hit to network economics.
For Fox, prolonged and even moderate prime-time make-goods likely will keep it from realizing its first full year of profitability, analysts said.
The estimated $15 million operating income windfall Fox will get at the network, and another $26 million at its owned TV stations from its recent baseball playoff telecasts, will help to offset the estimated $30 million in make-goods from prime-time series ratings shortfalls, analysts said.
“We believe `Joe Millionaire’ contributed 3 percent of the gross ratings points last season, and the networks guaranteed 9 percent higher year-to-year ratings this season. So a continuation of this trend could dampen Fox’s ratings growth this year by up to 2 percent from this show alone,” CIBC World Markets analysts Michael Gallant wrote in a recent client report.
“We believe 7 percent of the ratings guarantee increase reflects last year’s overdelivery in ratings, while 1 percent to 2 percent reflects more optimistic expectations for ratings delivery this season given the momentum in its scripted shows during the second half of last season,” Mr. Gallant said.
Fox was the only one of the Big 4 broadcast networks to suffer any substantive make-goods last season, with an estimated $20 million in make-goods in the fourth quarter of 2002. The season before that, Fox’s 15-hour-a-week prime-time schedule (compared with 22 weekly hours for the other major broadcast networks) generated $200 million in make-goods, Mr. Gallant said.
Even for NBC, which is expected to generate a record $850 million in profits this year, prolonged make-goods and ratings shortfalls can pose a problem.
It would provide an unstable foundation on which NBC would continue to struggle to build replacement series hits next season. Further, the NBC Universal merger could serve to mask some if not all of the operating income shortfall which, in a worst-case scenario, could be considerable, analysts said.
Several Wall Street sources estimate that up to one-third of NBC’s projected operating income growth in 2004 could be at risk due to prevailing ratings shortfalls and resulting make-goods. Some analysts have estimated that NBC’s overall corporate operating income-before the impact of the Universal deal-could rise about 10 percent in 2004 to $2.2 billion. So as much as $200 million of NBC’s total operating income could be at risk if the ratings of costly veteran series continue to decline and new replacement series fail to catch fire this season, sources said. Privately held NBC declined comment.
“It looks like make-goods could be a problem for every network short-term to some extent. The question is who will have the potential long-term make-goods problem?” Mr. Gallant said.
Complicating matters is a string of unusual factors that have come into play this year that are dramatically reshaping the broadcast networks’ prime-time performance: how viewers are measured, how ad time is priced and sold, and new competitive forces outside the TV arena.
A clear migration of age 18 to 49 viewers (particularly males) from many dayparts will result, if it sticks to any degree, in some adjustment for each of the networks.
Trying to identify what’s temporary and what’s permanent is more difficult than usual this season.
In fact, there may not be an accurate reading on trends and damage until the second half of January, after midseason replacement series have been introduced and there are no more November sweeps or December holiday program interruptions.
Analysts said the broadcast networks told them that no make-goods were being offered yet in the new season because they wanted to see how their series settled in without the interruption of baseball playoffs. They also wanted time to sort through Nielsen Media Research’s reporting of dramatically lower tune-in by key 18 to 49 demographic viewers. At least some of the networks are expected to begin delivering on fourth-quarter make-goods this week, sources said.
However, sources pointed out that even then, the broadcast networks can soften the original impact of make-goods by using the 5 percent of their scatter inventory that is considered to be the least appealing.
The ability to use ad inventory they might not otherwise have sold at all is a plus. But by doing that, the networks artificially tighten and raise the price of their scatter inventory pool.
Suddenly, otherwise negative make-goods become “opportunity costs,” with an upside potential.
“The broadcast networks want to guarantee aggressively enough to get paid more but just aggressively enough so that they will give away only worst inventory and not cut into their good inventory,” a veteran media executive said. “So you might be able to squeeze $50 million or $100 million in revenue from something you didn’t think you could sell.”