Cable Upfront Confusion: Up or Down?

Published: January 1, 2007 at 07:58 AM GMT
Last Updated: October 11, 2007 at 07:58 AM GMT

Originally Published: July 31, 2006

Cable Upfront Forecast: Volume Down 2% to 5%
Where Has The Growth Gone?

Conflicting data is emerging as the cable network Upfront marketplace winds slowly toward an early-August conclusion. At this time, mixed market signals suggest overall cable network Upfront volume will be down by two to five percent from 2005/2006 Upfront revenues of $6.6 billion.

However, expect reports in the trade press and from analysts to vary greatly as different network executives express differing perspectives on market conditions. Estimates from different sources range from down five percent to as much as plus five percent. Although most industry insiders agree with Jack Myers Media Business Report that the broadcast network Upfront market declined by five to seven percent, data issued by respected financial analysts and embraced by the trade press projects cumulative broadcast network declines of less than one percent.

Here's what's clear and uncontested: costs-per-thousand are flat across the board, with very slight increases at some networks and slight declines at others. In selected rare instances, buyers have successfully forced networks to accept CPM reductions in the mid to high single digits.

Some networks are claiming to have achieved overall CPM increases, but these are primarily being gained by restructuring of the client mix to include a larger share of higher paying advertisers, and reducing the dependence on low-CPM advertisers. As a result, these networks' may also be accepting reduced sell out levels as they hope for an improved scatter marketplace.

Several networks report last-minute budget increases as negotiations are finalized. The largest network groups have completed most Upfront deals and probably optimized their revenues through slight share increases. Mid-sized and smaller networks have about half their projected budgets registered and expect the Upfronts to conclude in the next two, possibly three weeks. Unless there is a last minute surge of incremental spending, the overall cable market will decline for the first time in cable history other than the crash year of 2001. Last year, cable grew only by 4.8 percent with cost per thousand increases averaging only 2.6 percent.

But the industry had high hopes it would benefit this year from improved programming, more targeted audiences, efficient pricing, digital offerings, integrated marketing initiatives and creative research applications. While advertisers value these attributes, they ultimately proved for many networks to be little more than an addendum to the traditional business model, with ultimate decisions still being primarily price-based.

Revenue declines in this year's Upfront are taking the industry by surprise. Our pre-Upfront projection of only two to three percent growth was among the most bearish.

Annual cable network Upfront growth has averaged 18 percent since 1992, when the industry first gained real traction in the ad community. Upfront spending leapt forward by 50 percent in the 1995/1996 Upfront and over a seven year period from 1994 to 2000, average annual increases in cable Upfront spending were 27 percent. There were average 16 percent gains in 2002, 2003 and 2004.

Why Haven't Cable's Advantages Attracted Continued Increases

Why haven't cable's advantages of improved ratings and value attracted continued increases in revenues? One reason is the "zero-based" procurement strategy being applied by media buyers to their established media purchases, combined with the continued expansion in the number of cable networks achieving critical distribution mass. At least 60 networks are included in the mix considered by media planners and buyers. Plus they have an endless stream of out-of-home and place-based video outlets that have become viable alternatives in the past 24 months.

Obviously, marketers are actively investing in new media, especially online and search advertising. While the growth of these media has been primarily fueled by sales promotion and direct marketing budgets, marketers are now moving funds from traditional media advertising to these newer media, especially broadband. While several cable networks offer advanced digital opportunities, the television industry remains mired in traditional commoditized supply/demand economics that must be restructured before incremental budgets can once again lift cable revenue growth into the double digits.

Agency and network executives estimate more than 90 percent of total cable ad revenues are generated from the traditional Upfront and scatter markets using traditional cost-per-thousand and Nielsen metrics. Most industry observers believe the combined Upfront and scatter markets for broadcast and cable networks will steadily decline for at least the next three years.

Less than ten percent of cable revenues today are built around new integrated marketing and multi-platform initiatives that feature value-based pricing and measurement models. The problem is these initiatives are costly to the networks and they are unproven to advertisers. These same initiatives that are now small parts of most Upfront deals must increasingly become the caboose that goes to the head of the train, but they need to be fueled with premium rates that advertisers are yet unwilling to pay.

Media sellers, buying agencies and marketers need to identify their own business and marketing priorities and allocate budgets accordingly.

Branded networks are best positioned to reverse current trends and generate double-digit revenue gains by shifting their focus away from the Upfront and scatter markets, and investing aggressively in strategic and value/ROI-based relationships with selected agencies and marketers that share these objectives. Many companies thrive in a commodity marketplace and many others have been forced unnaturally to operate in this market. These companies will be well served if they invest quickly and aggressively in marketing and research relationships.

Today, the industry group exploring the development of an online media exchange will announce positive progress and continued commitment to the effort. Media sellers who can optimize revenues in a commoditized supply/demand marketplace should welcome it with open arms.

To communicate with or to be contacted by the executives and/or companies mentioned in this column, link to JackMyers Connection Hotline.