Upfront Results are Not Bad for the Networks

While reporters, pundits and analysts have been commenting on the protracted nature of this year's network television Upfront market, the most notable difference between this and past years has been the silence. Until late last week, when CBS' Les Moonves broke the industry's self-imposed silence in his conference call with Wall Street analysts, both networks and agencies maintained a code of silence during the lengthy negotiating process. Last week, when there was finally some Upfront data available to report, Advertising Age chose to not publish at all. (Did you notice?) As my readers know, I have been arguing for years that negotiating in the press was unhealthy and unproductive. This year the industry got the message. Although many believe this year's drawn out process signifies dramatic and sustaining changes in the Upfront market, in fact the Upfront turned out to be a reasonably traditional process with predictable results. In this week's report, I outline the reported performance of broadcast and cable networks and explain some of the dynamics that reinforce misleading perceptions of Upfront results. Plus I review the economics that suggest cable network Upfront investments could have exceeded broadcast network spending for the first time in history, but why available information is so misleading and inconsistent no one may ever really know.

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Before sharing my economic analysis and overview, it's important to note that the overall performance of both broadcast and cable networks in this year's Upfront market should be well received by Wall Street analysts. Although overall sales are clearly down and pricing is down, advertisers and agencies once again opted to reconfirm their commitments to television as a primary advertising vehicle. Earlier in the year, advertisers were clamoring for double digit reductions in costs-per-thousand. They did not come close to achieving those goals. Agency buyers and advertisers certainly had the option of sitting out the Upfront and waiting for the scatter marketplace or dropping out of TV altogether. They did not take this option and, ultimately, the networks were the winners in this year's Upfront negotiations. Forget that the Upfront negotiations ran into August. The negotiating process looked fairly traditional to me and Wall Street analysts should read the results as a positive for the network TV business.

Most of those who follow the reports of Wall Street analysts recognize that the base data upon which most are reporting is flawed but it's not necessarily in the networks' or agencies' best interests to correct it. Actual 2008/2009 Upfront investments totaled $8.2 billion for broadcast networks and $7.2 for cable networks. Most reports use inflated spending estimates of $9.2 billion and $8.0 billion respectively, based on initial reports rather than actual finalized pre-option commitments. Based on the composite overview of Wall Street analysts who cover the network television and advertising business, total Upfront investments for the 2009/2010 season will be down an estimated 20% vs. last year. Broadcast networks are estimated to be down 15% to 25% and cable down 10% to 15%. If broadcast sales are down 20% and cable down 12.5%, the midpoint of analysts' expectations, it would translate into $6.4 billion in finalized commitments for broadcast networks and $6.1 billion for cable nets.

If cable is down only 10% and broadcast down more than 20%, it would be the first time in history that cable Upfront spending exceeded broadcast spending. Conversely, broadcast and cable spending could be down 15% each, leaving broadcast investments at $6.8 billion and cable at $6.0. In the next few weeks, analysts will publish their evaluations and conclusions, most based on incorrect base data. Accurate Upfront data may never be available in any provable format.

On a cost-per-thousand basis, broadcasters reduced their CPMs between 1.0% and 8.0%. There is some disagreement among analysts on network-by-network CPM reductions, but there is agreement that overall CBS, NBC and Fox negotiated CPM reductions between 1.0% and 5.0% while NBC hovered in the negative 7.0% to 8.0% range. These are precisely the CPM ranges and the sell-out levels I forecast well in advance of the Upfront market. The disputes among analysts on CPMs result from several factors, including the lack of information on whether CBS and NBC include sports in their reports (ABC does not), sell-out levels across different dayparts, which dayparts are included in reports issued on and off the record to analysts and press, value-add components provided to marketers, variations in year-to-year daypart and program mix, and advertisers' scheduling requirements. Because there are so many variables and differences in foundation data used by each network, it's extremely difficult to formulate accurate reports.

In his conference call, CBS' Moonves stated that CBS had the best pricing among broadcast networks with CPM reductions of 1.0% to 2.0%, and with inventory sell-out levels at 65% -- down from last year's 75% to 80%. Fox CPM reductions are being reported at 2.0% to 3.0%. The consensus among analysts is that last year's sell out levels among the four leading cable networks ranged between 80% and 85%. If, in fact, sell out this year is down to 65%, it is significant. CBS may have taken a more aggressive stance on ratings but written less business. Analysts project broadcast network sell-out will be down by 10% to 20%.

Cable networks appear to have navigated the Upfront with considerably more positive results than originally anticipated by some analysts, although in line with our original projections of average CPM declines of 5.0% to 6.0% and overall sell-out slightly less than last year. Cable ratings are up year-to-year and broadcast ratings are down. Turner networks and NBC Universal Cable were able to maintain pricing at close to parity with 2008/2009. Buyers have exerted more intense pricing pressure on specialty networks that have benefitted historically from higher CPMs. In several instances, negotiations have yet to be completed.

Bottom line, this was a relatively good Upfront for the leading broadcast and cable networks but less positive for the media agencies that had to overcome intense client demands for reduced costs. Client procurement officers will continue to insert themselves in the media buying process and their demands to extract greater pricing advantages from the TV network community will not be alleviated. But they have been delayed and that's good for the business.

Jack Myers consults with media, agencies and marketers on transformative business models and revenue growth strategies. He can be contacted at jm@jackmyers.com.