« Big Media Fundamentals Holding Up For Now | Main | Newspapers Final 2007 Data As Ugly As Expected »

March 20, 2008

Previewing The TV Upfront

The upfront TV advertising market will kick off in May as usual despite dire protestations during the writer's strike that it would be a casualty of a new post-strike business model for broadcast and cable networks. NBC is saying it will not participate as usual but all the rest of the major broadcast and cable networks plan the usual lavish rollout of shows scheduled for the fall TV season followed by negotiations with advertisers and media buyers. Some of the major cable networks, including Time Warner's TBS and TNT, plan to rival ABC, CBS, FOCX, and NBC by matching the traditional broadcast approach to the upfront. With most cable channels increasingly relying on original productions and cable ratings still gaining on the big four networks, this is not surprising.

What might be surprising is that the upfront is generally expected to quite strong. Advertisers and TV networks both except a significantly higher level of spending this year than the past few years. This is expected to occur despite (1) another year of terrible ratings for the broadcast networks that was exacerbated by the writer's strike and (2) continuing controversy over the impact of DVRs.

A strong upfront is the result of a couple factors. First, advertisers are expected to buy a meaningfully higher percentage of inventory this year than the past two years. For two straight years, advertisers made fewer commitments in the upfront and then ended up paying big premiums, often as much as 20%, for similar advertising time one the season had started in what is known as the scatter market. The fact that scatter is receiving premium prices because advertisers are bidding aggressively to make up shortfalls in ratings is ironic but it is reality to the broadcast and cable networks which benefit. The impact of scatter can also be negative so if advertisers cancel upfront commitments or ratings are especially poor, it is possible that a weak scatter market will offset a strong upfront.

The second factor supporting the upfront is the shift in advertiser budgets toward national advertising at the expense of local advertising and the fact that TV remains the only and best place to reach a mass audience. The internet is clearly attracting the bulk of dollars shifting from local to national but TV remains an attractive buy for advertisers and its piece of the share shift is enough to keep broadcast TV advertising fundamentals healthy even as ratings suffer at the hands of cable networks and DVRs.

Before getting handle on which companies could benefit from a strong upfront, let's take a quick look at the growing influence and controversy over DVRs....

....According to SNL Kagan, more than 20% of all US households had DVRs at the end of 2007. Kagan expects penetration to rise to 45% by 2011. I have seen various estimates of how many DVR users skip commercials but 40-50% seems like a consensus. Obviously, this is a concern to advertisers. An equal concern is that many viewers watch shows on DVR up to seven days after their original airing. For example, in the final quarter of 2007, according to Nielsen Media Research, NBC hit Heroes had a 4.44 live rating in the 25-54 year old demographic but saw a 39% boost to a 6.15 rating on a live plus seven basis.

Last year the upfront settled on a Live plus 3 days of viewing as the basis for negotiations, however, there are still a significant number of deals done based on live only, live plus same day, or even live plus seven days. Eventually a standard must emerge but for this year, the controversy over DVRs will continue to plague the upfront.

All companies owning TV networks will benefit if the upfront is strong. The networks will have greater predictability of their advertising revenue. And while a song upfront is no guarantee, having a lot of inventory sold certainly offers hope that the fall TV season will enjoy a strong scatter market. Here's a look at how the leading TV network owners are situated ahead of the upfront:

Disney's two key ad supported TV assets are ABC and ESPN. ABC is in decent shape with modestly lower ratings this season. It has had some success with new shows and its hit shows are not that old. ESPN is a juggernaut and should enjoy strong demand as sports are DVR averse.

Ratings issues at the CBS network are a significant contributor to the very poor action in CBS shares. The current TV season has shown sharp ratings drops for CBS for the second consecutive year. Many of its hit shows like Survivor and CSI are beginning to age. A good upfront will insulate CBS for the time being but if ratings take another tumble next year the impact could be significant. As the leading network for several years, CBS could see a negative swing of several hundred million dollars if past history is any guide.

News Corporation owns FOX which has emerged as the leading network this season and is the only network enjoying higher ratings vs. a year ago. FOX has developed several hits besides American Idol (a good thing since Idol is off double digits this year). FOX also gets hit series 24 back next year. News Corp also owns several cable networks. Fox News should benefit from the Presidential election and recent ratings for it and CNN have been quite good. Others News Corp nets get very small ratings but would be carried along on a positive upfront tide.

NBC is owned by General Electric. NBC remains mired in last place in the ratings but has made some progress with a few hit shows. To GE, the upfront matters little outside of perception. But with ongoing strength at NBC owned cable nets like USA Network, a good vide form the upfront could help support GE valuation as NBC is a high profile asset.

Viacom has enjoyed a ratings turnaround at many of its cable networks, especially MTV. The turnaround has been in place for several quarters so the upfront will be the first real good chance to capitalize.

Time Warner owns only cable networks. As mentioned, TWX plan to turn things up a notch and treat the upfront for TNT and TBS as though they were broadcast nets. Cable network ad pricing remains at a sharp discount to broadcast network pricing. TWX may be able to close that gap with this strategy. If so, it could be a big benefit to all cable network owners.

EW Scripps is splitting off its cable networks into a separate company. HGTV and Food Network are the key assets. Ratings have been OK and scatter pricing has been solid. SSP is under a lot of pressure to perform well in the upfront due to the spin-off. I expect this management team, which has a superb record in cable networks, to execute again.

Discovery Holdings enjoyed a turnaround last year when ratings at its major networks reversed a multiyear downtrend. This year ratings at the major networks (Discovery, Animal Planet, TLC) have stalled but smaller networks including rebranded networks (Science, Military, Investigation Discovery) have picked up. I think the next leg in Discovery shares is related to the new networks which have great asset value but produce minimal cash flow.

Posted by Steve Birenberg at March 20, 2008 01:43 PM in Advertising