One of the reasons I like Disney (DIS) is that it has strong fundamental operating momentum with identifiable catalysts. One catalyst is the upfront network television advertising market that gets underway this month. The upfront market occurs each spring when the broadcast and cable television networks sell options on much of the advertising time for the next fall’s new television season. The turnaround of ABC should finally have a tangible economic impact as ABC will be able to sell a larger percentage of its inventory at higher prices than it has in many years. This should lead to a multi-hundred-million dollar shift in profitability at ABC, which is meaningful against a $6 billion-plus operating cash flow estimate for 2005….

Understanding Broadcast Network Ad Trends
An interesting dynamic has played out over the last decade as, despite steadily deteriorating ratings, the networks have been able to consistently raise the pricing of television advertising spots. The reason for this was on display last Thursday night. President Bush’s news conference occurred at the start of primetime on the most watched night in television when advertising is priced at its dearest. CBS, which is normally the least watched network when it comes to news (excluding 60 Minutes), easily won the ratings race for the Bush news conference with 11.8 million viewers compared to 6.9 million for NBC and 5.8 million for ABC. Fox News Channel led the cable outfits with 2.7 million viewers followed by CNN with 896,000 and MSNBC with 569,000.
Broadcast Networks Still Draw Largest Audiences
A couple of things are worth noting in these figures. First, the broadcast networks are still the only place where really large audiences exist. Second, CBS won the hour because the press conference took place when the smash hit Survivor is usually on. Third, no one really watches cable news most nights. Fourth, the decline at CNN has been astounding and complete.
The first two points explain why the broadcast networks have been able to continually raise prices despite steady and significant ratings erosion. Advertisers need to reach mass audiences to launch new products and build brands. They still really only have one choice that is easy and efficient: broadcast television. Hit shows can pull down 15 to 25 million viewers (people watched the press conference on CBS because they had tuned into CBS for Survivor). Even poorly rated network shows draw millions of viewers. Add these large audiences to the superior advertising imagery available via television and the broadcast networks still are the place to be for advertisers. Thus, pricing remains firm and the broadcast network business remains viable even as ratings decline.
Upfront Market Could Be Hurt By Tivo Type Products
Ratings erosion and time shifting and ad-skipping products like Tivo are gradually taking their toll. In fact, this year some observers believe the upfront market will finally stumble against these larger trends. As the upfront unfolds, analysts expect an overall increase of 2%-4%. ABC, owned by DIS, should have the strongest upfront with rising pricing and more inventory sold. CBS should also perform solidly due to its ratings strength across most nights of the week. FOX will likely be mixed as its ratings success is narrowly focused on a few shows, while NBC will suffer greatly vs. prior years as its ratings have dropped sharply (down over 10% vs. a year ago). Wall Street seems prepared for these outcomes, so the key thing to monitor will be how the upfront develops against these benchmarks. For DIS, all that should be needed is confirmation of the strong upfront.