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Discovery Tailors Make-Goods

Feb 14, 2005  •  Post A Comment

Editor’s note: This story was corrected at 4 p.m. Feb. 14.

With ratings for TLC off by more than 30 percent season to date compared with the year before, parent Discovery Communications is letting some clients keep several million dollars worth of advertising on the air, even though clients have opted out of deals for those spots.

The money is going to advertisers who want to return some of the advertising they committed to buy in the upfront on TLC, which named a new general manager late last week.

When advertisers buy in the upfront, they are given ratings guarantees and the option not to buy some of the advertising they agreed to purchase. When ratings fall short of ad guarantees, advertisers usually get make-good spots. Very rarely, advertisers get cash back. Discovery said it never gives cash back.

In a statement Feb. 14, Discovery Networks said, “At no time does Discovery Networks give cash back for ratings underdelivery to its advertising clients. Consistent with industry practice, Discovery works with its clients to make good on any underdelivery of audience. Discovery endeavors to ensure the value of its advertising clients’ commitment to its networks in a variety of ways, and none of these ways includes returning cash.”

Rather, Discovery in some cases is leaving ads in place that were scheduled to run but that advertisers have opted out of.

Some network ad salespeople say options are running a bit higher in the second quarter, with packaged-goods companies like Procter & Gamble and some of the major drug companies looking to cut back on their advertising spending.

Joe Abruzzese, president of advertising sales, U.S. Networks, for Discovery, said that in some cases, “If a client wants to take an option, we give them the money back, but we leave the units at no charge.”

He said that if a marketer bought $4 million of advertising time, Discovery would owe it about $500,000 in audience deficiency units, which make-good ads are called. If the advertiser wants to lower its costs, Discovery drops the price of the original ad buy to $3.5 million, and keeps intact the schedule it originally bought.

“Then we don’t owe them any more units; they’ve already got the units they’ve laid in,” Mr. Abruzzese said. “A big benefit for the advertiser is that they get the advertising in the shows they wanted, in the weeks they wanted, instead of make-goods, which would appear later in the year.”

Mr. Abruzzese said Discovery made this kind of deal with a handful of advertisers, but he did not say exactly how much the deals were worth overall. Based on knowledge of the company’s business, it’s likely to be at least north of $1 million.

“It depends on the client. If a client’s got a schedule running, they really need it. Like if it’s a movie company, we’ll definitely do it,” he said.

There’s a benefit for Discovery as well. “The best thing to do is make sure they’re successful using our inventory,” Mr. Abruzzese said. “And if you don’t do that, you’re kind of screwed. You’re giving them back money, but you owed it to them anyway.”

Discovery also gets to keep its effective costs per thousand high and not flood the scatter market with unsold spots.

Mr. Abruzzese said most of the make-goods were owed clients who bought time on TLC.

Last Friday, Discovery named David Abraham executive VP and general manager of TLC. He replaces Roger Marmet, who resigned last month.

Mr. Abraham, who had been general manager of Discovery Networks U.K., must shore up TLC, which has been suffering due to plummeting ratings for “Trading Spaces,” a show that put TLC on the map and spawned dozens of competitors in the home-remodeling genre.

A former ad man, Mr. Abraham doubled audience share of the U.K. channels since 2001 with an aggressive program commissioning strategy.

In its most recent earnings statement, Liberty Media, a part-owner of Discovery, said net advertising revenue was up only 2 percent in the third quarter. “The impact of higher CPMs was partially offset by a decline in ratings at TLC, most specifically with the “Trading Spaces’ franchise,” the earnings report said.

Several ad buyers said that they are in negotiations with Discovery over make-goods on TLC.

Most networks set their ratings guarantees a bit higher than they think their schedules will deliver and build make-goods into their inventory management plans. But TLC’s 30 percent decline clearly wasn’t part of the plan.

“They were on a pretty good growth curve. They ran into a wall,” said Rino Scanzoni, president of Mediaedge:cia. When ratings plummet that much, make-goods don’t always help. “You don’t want 40 percent more units,” he said, “because viewers will see the same spots on the same channel over and over again.”

“Hopefully, they will get on track and do the right thing with regards to taking care of their current advertisers,” said Ed Gentner, senior VP and group director of national broadcast at MediaVest. “The right thing is making us whole one way or another.”

While Mr. Gentner called the TLC shortfall serious, he thought Discovery would be able to handle it. “They have always delivered, year after year,” he said, “so I don’t anticipate a problem.”

Mr. Abruzzese said that Discovery Channel was underdelivering its guarantees, but by a much smaller margin. And he minimized the financial impact of make-goods, saying that the sells only about 45 percent of the networks’ inventory during the upfront.

“So really, what we’re talking about is 45 percent of our business that is under water as far as ratings,” he said. “Then when we start going to scatter, we adjust [the guarantees] downward. We don’t bet every dollar on upfront ratings.”

While some buyers indicated that Discovery’s deficiency situation may take it out of sale, Mr. Abruzzese said inventory is tight, but he is open for business. “We’ve put aside make-goods to get us out of the first quarter and we’re selling the rest.”