Advertisers' growing insistence to connect with the right audiences -- not necessarily the biggest -- could transform a projected 13% to 20% decline in upfront spending to as low as $7.5 billion (putting it on par with cable). That change of heart would be a financial disaster for TV networks and their corporate parents.
The $9 billion network prime-time upfront (that comprises 46% of total annual TV-related ad spending) has been predicated on Madison Avenue buying into annual mass, supported by Nielsen's sample estimates of large swatches of the population. The plausibility of these assessments crumble when interactive connections can be made, measured and potentially monetized with individual targeted consumers. The days of marketers and agencies having to dumb down their target audiences objectives to broad demographic categories are over.
"We need to ask what is our marketing strategy, and how are we funding it? Media is only one discipline that supports marketing. Are we buying properties like networks, shows and stations, or are we buying audiences that are much more free-flowing and can be any targets we want? There are people fiercely defensive about each of those approaches," digital guru and Vivaki Ventures vice president Tim Hanlon told me in an interview. "The fact is, most marketers are looking to find the right audiences, not the biggest audiences."
The disruption doesn't stop there. Google TV Ads' aggressive upfront play is attracting agencies such as Deutsch and Saatchi & Saatchi and their Fortune 500 advertisers to a platform that will also facilitate new media and spot buys. The continuing loss of such direct or any ad sales eventually will require TV networks to sharply reduce costly content production and even the number of prime-time hours programmed. Perhaps in anticipation of that inevitable change, NBC will stabilize and ultimately reduce spending on prime-time scripted series by programming Jay Leno at 10 p.m. -- a controversial but economically savvy move.
Cable's Canoe Ventures also is expected to begin siphoning dollars with its addressable, accountable ad options that will provide specific local consumer connections.
Still, it will take time to secure an industry-wide system for marketers, agencies and media to swiftly execute and monetize fully accountable hyper-targeting. The sad truth: media and advertising industries are a generation behind the way consumers create, consume and share interactive media. Gathering, analyzing and leveraging data from countless media platforms and devices eventually will render new media currencies. The struggle to craft new media and marketing economics will be compounded by the ongoing credit malaise that will set back consumer and corporate spending for years.
For now, industry analysts are left to examine advertiser spending patterns within the confines of a challenged business template. Unfortunately, most assume that automotive, financial services and other major forces stand a chance of resuming former levels and stature. That hardly seems likely -- as reinventing these industries, resetting values and recovering corporate profits will take time. Meanwhile, technology will continue to push consumer connections and capital in more sophisticated directions.
There is a stunning underestimation by all parties of the dramatic snowball effect. Despite optimistic declarations by media executives during their upfront bashes last week, we are nowhere near the bottom.
As long as distressed automakers remain "the unrepaired hole in the market," holding back as much as 50% of their prior ad spend, otherwise healthy advertisers have significant leverage to negotiate price discounts. "Most appear to be using the savings to spend elsewhere or to drop to the bottom line," notes Goldman Sachs analyst Mark Wienkes. McDonald's offered the "most chilling commentary," saying it feels the media pricing environment is permanently altered. Nike has said it is "evolving away" from more traditional media to more online and digital.
Even if economic deterioration abates, there is no evidence that consumers and advertisers will revert to their previous spending habits. Not all traditional media -- particularly local TV stations and newspapers, and even national TV networks -- will survive the shift. Even major operators such as Disney and Fox are sustaining 30%-plus declines in TV station group ad revenues.
Credit Suisse analyst Spencer Wang argues against the myth that broadcast networks are dead by citing their effective reach and frequency based on broad Nielsen demographic estimates --- which are becoming less meaningful and even desirable metrics for media and advertising industries influx. Another 10% decline in network prime-time audience, 5% decline in upfront ad inventory sold and flat CPM pricing are all relative. Merrill Lynch analyst Jessica Reif Cohen notes that another season of double-digit ratings losses "could severely limit the absolute amount of dollars both taken in the upfront and eventually spent on broadcast television in the coming season." As a stop-gap, networks will adopt more liberal cancellation options and increase scatter sales closer to the time of air.
Barclays Capital analyst Anthony DiClemente upgraded his entertainment sector rating to neutral from last year's negative downgrade, citing how deep, permanent cost cuts at the broadcast TV networks and stations will restore 14% normalized margins if GDP growth accelerates to 3% in 2010. "We believe cyclical growth is likely to become a much more powerful offsetting trend to the secular headwinds in the coming two years," DiClemente said.
That assumes most industry economics and advertisers and consumer behavior will return to previous levels.