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June 19, 2006

Upfront Moving Slowly So Far For TV Networks

So far, the results of the upfront selling season for network TV advertising have been slow. The upfront occurs every May and June when the broadcast and cable networks introduce their lineups and cut deals with advertisers for advertising over the new TV season that follows in the fall.

FOX Ahead of Other Broadcast Networks in Selling Its New Season

According to an article in the Wall Street Journal late last week, the pace of deals between advertisers and the broadcast networks (ABC, CBS, NBC, and FOX) is lagging well behind last year's weak upfront, and pricing is worse than expected. FOX is the only network that has completed the bulk of its upfront deals, selling 70% of its inventory at price increases of 2%-3%. FOX is coming off a strong season for ratings when "American Idol" was more popular than ever, and several other shows -- including "24," "Prison Break," and "House" -- had higher ratings.

ABC And CBS Will Have to Accept Ad Pricing Bar Set By FOX Deals

ABC and CBS each had some ratings success but have been slow to cut deals. Both networks appear to be looking for price increases ahead of what FOX accepted. So far, that is a no go with advertisers. ABC had a good season in terms of ratings growth but failed to add any new hits following the turnaround driven by "Desperate Housewives," "Lost," and "Grey's Anatomy." CBS led last season in total ratings across the broad demographic, but ratings have not grown in a couple of years. FOX has probably set the bar, and ABC and CBS will have to accept lower price increases. Both networks may hold back inventory, selling less than the 70% of FOX, hoping to meet ratings guarantees and then sell ads in the scatter market this fall at premium prices to the upfront.

NBC Continues to Cut Prices to Attract Advertisers

NBC, like FOX, has sold a lot of advertising time. In NBC's case, however, the sales have been made at lower prices than a year ago. This was also the case last year when NBC first felt the pain of its ratings collapse. Another down year of ratings, and the network is again cutting prices to attract advertisers. This is probably a good strategy for NBC as it can earn some good faith from advertisers in the hopes that ratings have bottomed out.

Advertisers Moving Money Online and Committing Closer to Start of Their Shows

Overall, it appears that this year represents an acceleration in the trend away from an upfront-driven TV advertising market. Advertisers are moving more money online and prefer to make commitments closer to airing of their ads. So far, the impact on the networks is felt more in their loss of leverage vs. advertisers than a loss of ad dollars. Advertisers have more places to go and want better measurement of ad effectiveness such as that seen on the Internet.

Erosion of Network Power Hurts Stocks of Network Owners

In the long run, the gradual erosion of network power is a negative for the owners of those networks, which include Viacom (VIAB), Disney (DIS), News Corp and General Electric (GE). This issue has been recognized by investors and is one reason for the steady erosion in multiples that has occurred over the past few years. The bottom line is that growth rates in broadcast and cable network advertising business are likely to remain below the levels they have been in the past when compared to GDP growth. That is a negative for stocks, but it is also conventional wisdom. To me, that means it is largely incorporated in stock prices. And that is why I have spent a lot less time analyzing the upfront this year.

New Outlets Possible for Products From Media Conglomerates

Is there a potential positive out there to offset the network's reduced negotiating position? If there is, it is likely the development of new outlets for all the programming these entertainment conglomerates produce. Whether that will be enough to offset lost revenue from the traditional industry is to be determined.

I remain long DIS, looking for strong earnings the next two quarters to drive the stock back into the low $30s.

Posted by Steve Birenberg at June 19, 2006 09:37 AM in Media