Network Upfront Results Will Impact the TV Content Landscape for Decades

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Although marketers, agency executives and even network TV salespeople have been challenging the relevance of the network television Upfront marketplace for more than a decade, it has remained the predominant influence in media buying and selling. This year's Upfront results will have significant impact on the future of the network television business for many reasons. As discussions between networks and agency buyers have stagnated there are few media sales executives, program content decision-makers, agency execs or Wall St. media investors who aren't withholding their own planning decisions until Upfront spending patterns become clear. These patterns have begun to emerge. Just last week, most agencies finalized budget planning with their clients and Upfront negotiations should begin in earnest during the next several days. The fact that cable discussions have not been heated in the past two weeks suggests first that budgets have not been finalized but also that media buyers are planning to approach the marketplace following reasonably traditional broadcast-first models.

Laura Martin, equity research analyst for Soleil Equity's Media Metrics group, suggests this year's Upfront market will provide signposts that will indicate whether Wall Street or consumers are winning the battle of free TV content (which consumers want) vs. price protection and paid content (which investors want). "Over the past two decades the broadcasters have been disciplined about raising prices enough in the upfront market to offset steady viewing shifts toward cable TV channels. 2009 is one of the worst ad environments in 30 years and if the broadcasters fall victim to price competition among themselves, it suggests that they will not cohesively stay within the economic protection of the bundled TV product offering."

Agency buyers are struggling with their own competing demands that square off client marketing and ad directors against procurement officers from the same companies. It is inconceivable, say procurement executives, that network television inventory cannot be purchased for considerably less in the 2009/2010 marketplace than last year and it certainly should be less than two year's ago. Clearly, demand is down, DVR usage is up and alternative media options abound. Agency buyers, while pressured to deliver CPM reductions, argue that broadcast network television operates in a world of its own and remains the engine that pulls the full advertising train for many marketers. Without a robust broadcast economy, the foundation of the advertising value chain collapses. Network sales executives have little incentive to reduce costs-per-thousand even in the face of declining demand.

Maintaining a separate and relatively independent ecosystem for the broadcast marketplace, while unsustainable in the long-term, is the underpinning for the favoritism displayed toward broadcast networks. While it is difficult to support logically, this model remains intuitively appropriate. Although cable is an increasingly viable and more cost efficient competitive alternative, most broadcast budgets remain distinct from cable budgets and negotiations are typically conducted independently of each other. The increasing vitality of cable content and cable's dependable dual revenue stream make it even more imperative, suggest broadcast network executives, that advertisers continue to financially underwrite premium payments to support the broadcast industry even as its economic foundations erode. These arguments fall on deaf ears among corporate procurement executives whose only job is to deliver cost savings. In 2009, these executives are gaining even greater corporate authority, so the most important negotiations taking place right now are not between agencies and networks but between corporate marketing and procurement executives. While procurement officers may listen to the case being made for the importance of broadcast network TV for value and long-term brand equity, they will require some compromises across the media buying landscape to compensate if they approve broadcast CPM stability. Where they are best able to achieve these offsetting efficiencies (which media have the scalability and are accepting significant CPM reductions driven by their depressed economic conditions) will be the interesting challenge for buying agencies.

Laura Martin's arguments connecting Upfront results to networks' free vs. paid content decisions are interesting and important to reflect on. If the broadcast network Upfront proves to be down in cost-per-thousand and in total dollars (the latter being an inevitability this year), the Wall St. pressure on networks to reconsider their free content distribution strategies will be intense. They must demonstrate to Wall St. their ability to add revenues through direct-to-consumer subscriber payments. They must build a strategy to generate fees from cable and satellite operators, which means they need to pull content back behind walled gardens. If however, the Upfront is a surprise and advertisers step up to pay premium (or even flat) CPMs for broadcast content, it will demonstrate a vote-of-confidence for networks' strategies and empower them to stay the course with their current free availability approach.

Following are highlights from Martin's recent report: "Disrupting the TV Ecosystem." To receive a copy, e-mail laura.martin@media-metrics.com.

Is Free Better than Piracy?

No. This question derives from the cautionary tale provided by the music industry. Music's premium content was stolen until iTunes came along and unbundled their albums and sold individual songs for $0.99 each. In this case, payments for the hits were better than no money for anything. Several comments:

Logic. The logic of "I'm having trouble getting paid for my content, so let me give it away for free", probably drives Wall Street to allocate capital to other industries.

Substitutability. Although listeners may view user-generated and premium music to be substitutable, this does not apply to professionally produced TV content. There is no user-generated content that is a true substitute for long-form premium TV content. Therefore, premium TV content (ex: Hulu) can only be cannibalized by itself and these companies need to protect their pricing power if they want to ensure funding for their next new series.

Consumer Adoption Momentum. If you force consumers to break the law and make it inconvenient for them to steal your premium content, you slow downward price deterioration, even if it's inevitable. However, if companies advertise on Hulu and hasten audience migration from the 30% margin platform (TV) to the 0% margin platform (PC) and retrain consumers to believe that premium content should be free, industry-wide valuation multiples should compress.

Math. Owing to sluggish broadband (modem) speeds, we estimate that less than 10% of TV content is being stolen today. Even if 20-30% were being stolen, why isn't price tiering (charging those who will pay) a better economic strategy for the 70-80% that are willing to pay a fair price?

Measurement. Online usage and wireless devices do NOT get measured in C+3, whereas DVR usage does get measured. Because cost per thousand viewers is the predominant payment method for TV content today, this measurement disparity hurts economics. AC Nielsen (respected third party measurement) does not measure other devices, so as content companies push viewing off of the TV platform toward mobile devices or the PC they lose measured audience and they undermine advertiser perception of professionally-produced content's effectiveness

Jack Myers advises companies on strategies, opportunities and relationships for incremental revenue-generation.