AOL Bails Out of Upfront Market

Jul 3, 2006  •  Post A Comment

AOL pulled out of the television upfront advertising market, undoing deals with some broadcasters and leaving cable networks wondering whether the troubled Internet service will be airing spots for the start of the fall TV season.

Time Warner’s AOL, which is struggling to boost revenue as subscribers defect, spent $136 million on broadcast advertising and another $100 million on cable during 2005, according to Nielsen Monitor-Plus. That data doesn’t indicate how much of AOL’s ad spending was booked during the upfront.

The decision to abstain from the upfront is connected to a strategic review at AOL, according to a company spokeswoman who confirmed last week that AOL has left the market.

“We are revamping our creative strategy, as often happens in the summer,” she said. AOL “thought it best to step back before making such a large commitment upfront.”

AOL joins packaged-goods giant Johnson & Johnson this year in sitting out the upfront, where about 70 percent of TV advertising time is sold. With upfront sales nearly complete for 2006, revenue is down by about $300 million to around $9 billion. Broadcast networks got smaller price increases for commercials than they had expected.

Advertising buyers and TV sales executives disagree over the causes of the decline and over whether networks will make up any reduction in upfront sales in the scatter market, where advertisers buy spots closer to air time.

Dealmaking in this year’s upfront has been complicated by the emergence of new distribution technologies, disagreements over how to measure TV audiences and a shift of ad money to the Web.

Johnson & Johnson said before the upfront started in May that the company planned to buy ad time later in summer, when it will have a better handle on its spending plans. Other companies’ ad spending plans are causing networks to fret that more may sit the upfront out or put off much of their buying until later.

Executives with one broadcast network and one cable network said American Express is forgoing the upfront, with one source saying Amex was setting aside dollars, waiting for the right concept in which to invest.

A spokesperson for Amex, which spent $272 million on national TV ads in 2005 according to Nielsen Monitor-Plus, contradicted those executives, saying the company is buying ad time in during the upfront.

With many advertisers holding back money for scatter buys, and some networks selling more time in the upfront to meet their revenue goals, AOL is taking a risk that prices will be higher later in the year.

Historically, advertisers have had an incentive to buy ad time in the upfront because prices were significantly higher in the scatter market. But in the past two years there has been little difference in price between the upfront and the scatter markets, making it easier for companies to stay out of the upfront, or skip it altogether.

As shown by AOL, which has been a drag on Time Warner since the companies combined in 2001, insecurity about business prospects may also be motivating companies to sit on the sidelines at the upfront. AOL is trying to shift from a subscriber-based business to an ad-supported model that draws visitors by offering music, video and other attractions. Some investors are pressing Time Warner management to spin off the online service.

The $236 million that Nielsen Monitor-Plus estimates AOL spent on TV time last year might be overstated, some ad buyers said. They noted that some of the company’s spots are less expensive direct-response ads encouraging viewers to call the company to sign up for service, which can run in less-desirable time slots.

AOL is trying to capitalize on an influx of advertising dollars to the Web. In a forecast released last week, ad buyer Universal McCann said online ad spending will rise by 25 percent to $9.7 billion in 2006. If AOL doesn’t compensate for its lack of upfront spending in the scatter market, it will be taking a different tack than other Web companies, which may boost consumer media spending by 25 percent to $4.6 billion, Universal McCann forecasted.

Changes in the 2006 upfront signal discontent with the annual ritual on the part of some buyers, who are trying to gain flexibility by buying time later. Others have expressed distaste for a system that pushes them to spend billions of dollars over the course of a few days.

TV network sales executives have expressed confidence that most, if not all, of the money that buyers are holding back will find its way into their coffers by year end. Some buyers disagreed, saying that even after taking into account money held back for integrated marketing, digital and other opportunities, overall spending on television will be down.

One top sales executive noted that the $300 million shortfall in this year’s upfront was about equal to the amount taken in last year by UPN, which is being folded into The CW along with The WB. The CW took in about $650 million in advertising commitments in the upfront, about the same as The WB took in last year.

Last week NBC said it finished its upfront with ad sales of about $1.9 billion, close to last year’s figure. This year’s sum includes about $250 million in sales for the network’s new “Sunday Night Football” package. NBC, which finished fourth in the ratings, lowered its ad rates by 5 percent to 7 percent, buyers said.

CBS brought in about $2.2 billion in this year’s upfront, the same as last year. The most-watched network did deals at prices flat to 1 percent higher than last year. By setting low prices, CBS may have been able to take some dollars away from ABC, which held out longer for bigger price increases.

ABC has completed deals with all but one of the major ad buyers, sources familiar with the market said. It had been expected to lead the market, both in terms of dollars gained and price increases. Late last week it was difficult to determine whether the network would achieve either goal when the final tallies are in.

Like The CW, Fox finished its upfront sales two weeks ago. Fox increased its haul by $200 million for a total of $1.8 billion, according to a source familiar with negotiations. The network, which is riding on the strength of shows including “American Idol,” increased its ad rates by 2 percent to 3 percent.

Fox was able to increase sales partly because some of its popular shows, such as “24” and “Prison Break,” draw an older audience, enabling it to sell to advertisers looking to reach adults 25 to 54. The network still got premium pricing for the 18- to 34-year-olds it attracts on Thursdays and Sundays.

Cable networks said budgets they are receiving from buyers have been flat at best, and in many cases lower than last year’s. That would enable buyers to press most cable networks for lower prices, just as they successfully did with the broadcasters.

Buyers said they expected the pace of cable dealmaking to pick up this week, after the Independence Day holiday.