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Published: June 22, 2009 at 01:23 PM GMT
Last Updated: June 22, 2009 at 01:23 PM GMT
My full report, outlining media industry market economics, is provided exclusively to Jack Myers Media Business Report corporate subscribers.
Across all segments of the economy -- from auto dealerships, to retail shelves, to entertainment venues, to sports events, and to media – we are experiencing an inversion of the supply/demand equation that has spurred economic growth for the last six decades, a period during which demand has exceeded supply in most sectors of the mass economy. And while most economists and investors believe consumer spending will be re-accelerated through government intervention in the economic system, consumers have become far more sophisticated in seeking out low-cost providers in almost every business category, resulting in downward pricing pressure even as individual consumption increases. For the first time since the 1920s, it's very possible that the pattern of inflationary growth following a recessionary period may be broken. Although inflation is anticipated as the recession fades (although I do not believe the recession will actually fade until mid-2010), only a few consumer categories – where there is true pent-up demand and limited supply -- may actually experience significant pricing inflation.
The same principles apply to business-to-business spending and, of all b-to-b categories, media and advertising is the least likely to see a return to pre-recessionary growth patterns. In this new over-supplied economy, low prices become all powerful, and being the low-cost provider in any category represents a powerful and compelling market position. Which companies are best positioned in media and advertising to capture this valuable ground?
The likely scenario for the next several years will be that downward pricing pressures will be exerted on most media as marketers and media buyers seek to compensate for cost stability in those few pockets where demand for advertising inventory remains high and supply remains limited. There are limited areas in media where demand remains reasonably strong: sports; original high quality, highly rated original network primetime programming that reaches demographically appealing audiences; Oprah; and a small selection of magazines targeting difficult-to reach audiences. Secondly, there remains demand for content that reaches kids and their parents in a relevant environment. There is demand for online video advertising associated with quality professional content (Hulu). And finally, there is growing demand for positively branded media content that offers associated marketing, promotional, event and cause-related audience connections. Beyond that, media and audiences are overly saturated with multiple options, including the traditionally hard-to-reach young male audience that is now easily accessible online. As corporate finance executives require reduced marketing and advertising investments, media buyers will be forced to push for aggressive price concessions from most media to compensate for those few areas where pricing will remain relatively intact. The ideal market position will be to deliver both high-demand inventory packaged with low-priced inventory – all in one easy shopping trip.
Of course, low cost providers are constantly being challenged and must invest significantly in infrastructure and supplier price incentives to retain their market position. Thus Wal-Mart makes aggressive – even excessive – demands on suppliers to assure the retailer can maintain every-day-low-pricing dominance, and years ago they instituted an innovative last in-first out model to minimize warehousing costs. As other mass retailers followed suit, Wal-Mart imposed even more aggressive supplier demands, internal controls and modernization tactics.
In advertising and media, online ad sales networks have become a dominant force for commoditization and it is inevitable there will be dramatic and rapid industry consolidation as just a few lead players emerge. Traditional media have been slow to adapt to this new reality but exchanges and complex multi-media reach optimization networks are certain to gain traction in the next several years with both selling and buying organizations embracing them.
Among all major media companies, CBS is best positioned to emerge as the low-cost leader. While the company might be loathe to acknowledge this reality or even take measures to move in this direction, the combination of quality original content; comparatively mass television audiences; an abundance of local market inventory across television, radio and outdoor media; high reach online media under the CNET umbrella; plus the "ubiquity" online content distribution strategy the company has followed, all lead to the conclusion CBS has either intentionally or accidentally pursued a Wal-Mart model.
If intentional, we can expect CBS to begin actively embracing technology solutions in their sales and marketing organizations – seeking more efficient revenue generation models that enable them to keep costs to advertisers low while maximizing profitability and cross-platform packaging. Similarly, we can expect CBS to continue to drive ubiquitous reach for its myriad content offerings and be less concerned than its competitors over the need to drive direct-to-consumer subscription models. Ironically, CBS' distribution strategies position the company to be even more aggressive in seeking retransmission fees from cable and satellite operators. The threat by closed garden gatekeepers that they can prevent CBS from gaining access to audiences is an empty one if CBS has multiple points of distribution. And although Comcast, Time Warner, Cablevision and others may threaten CBS stations with exclusion from their portals, the distributors are likely to blink first if they truly believe CBS has alternatives. Not to mention the distributors' concern about raising the ire of Washington as we re-enter a regulatory era.
Being a low-cost provider, however, does not indicate CBS will set a downward pricing strategy in this year's Upfront. Conversely, it is in CBS' interests to push for the highest possible costs current market demand can support. Until the company and the buying community have in place systems, models, metrics, organizational resources and sophisticated inventory optimization systems that enable them to package media inventory across multiple platforms, CBS is playing in the same game as every other network. Executives at each of the six leading broadcast networks (including The CW and Univision) and the dominant cable programmers of original content realize they remain in a more balanced supply-demand market than most of their media brethren. Supply of valued TV inventory continues to diminish, so even as demand declines under the force of the economy and increased media options, supply of quality network programming rating points has stabilized or increased only slightly.
So, for 2009 and 2010, the network TV Upfront and scatter markets can be expected to be not great but okay for ABC, CBS, NBC, Fox, The CW, Turner, NBC Cable, AMC, FX, A&E/History, Nickelodeon, Comedy Central and a handful of others. Revenues will be down for many but costs-per-thousand will be between -5% and +5% on an aggregated basis with some traditionally higher priced advertisers receiving deeper price incentives, and traditional bottom-feeders being pushed to alternative commoditized options. Most media, where demand pressures are virtually non-existent, will be under intense pricing pressure throughout the year and into the foreseeable future.
Jack Myers advises media companies, marketers, agencies and investors on economic models and revenue generation. He can be reached at email@example.com
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