Bernstein Research was out yesterday with a really interesting piece of research noting the dichotomy between the poor ratings performance of the major broadcast television networks this season and the better than expected scatter advertising market. Scatter is jargon for TV ads purchased on the spot market as opposed to pre-bought last spring in the annual upfront market.
Their theory is that the combination of much lower than expected ratings and the lack of inventory purchased in the upfront market has left major advertisers well short of their goals for reaching consumers in the important holiday season. As a result, advertisers are bidding for more time, tightening the market and driving pricing of scatter inventory above upfront rates.
I have been cautious, especially toward CBS, because of poor ratings performance this year. Whether due to ABC and NBC’s scheduling and programming decisions of the heavy use of DVRs for watching CBS hits like Survivor and CSI, there is no denying that in key demos, some of CBS long-time hits, especially in the critical Thursday prime time block, are under heavy ratings pressure. A similar argument could be made for shows on NBC and ABC but those networks aren’t as critical to the financial performance of their parent as CBS….

Bernstein goes on to note that this situation of strong scatter and weak ratings is not sustainable. I agree. It seems eventually that the networks could be in for a more substantial setback financially if ratings don’t firm.
This could come to a head at next May’s upfront where the TV industry will also likely try to settle the debate over the value of ads in shows that are recorded on DVRs and watched over the next week. Many popular shows, almost exclusively on network television, are getting 10% or more of their viewers via DVRs.
Therefore, the next upfront could see dual pressure from advertisers complaining about weak ratings and the uncertain value of the ads appearing in shows watched via DVR that are highly likely to be skipped (and in the case of Thursday night depreciated further by the loss of timeliness for weekend driven advertising).
Additionally, cable networks are seeing more ratings stability partially due to the low level of DVR use on their original programming and they have plenty of ratings/viewers to sell and lots of unsold or undersold inventory. And no doubt, Doug Kass and others would remind us that if the economy slows more than expected next year, another major headwind for TV advertising will develop.
If a negative scenario were to develop for the broadcast networks next year, CBS and Disney would be most vulnerable. NBC resides at General Electric where it is overwhelmed in its parent’s massiveness. Fox has actually had decent ratings performance this year and is about to get its two biggest hits back for this TV season, American Idol and 24. This would seem to protect Fox’s parent, News Corporation, somewhat if the TV ad market suffers in 2007.
I am still long Disney but the stock’s great performance is bringing the shares close to my stretch target. The idea of a swap to News Corp is looking increasingly attractive as NWS should take the mantle of synchronized growth among its major divisions from DIS next year. I remain very cautious on CBS despite the good performance of the shares and Cramer’s vote of confidence.
Among cable network focused companies I prefer E.W. Scripps to Viacom. It is also useful to remember that any relative strength for cable networks gives a boost to DIS, NWS, and NBC/GE, which own many of the most popular channels. CBS has limited exposure to cable networks as those were given to Viacom when the company was split.