• by May 24, 2002

In the unlikely event that the network upfront could talk, it might quote Mark Twain. In a media industry that’s been battered, consolidated, and revolutionized beyond all recognition, even the upfront — the annual dance (or brawl) between buyers and sellers — has often been declared to be on its deathbed. But just as it was with Twain, accounts of the upfront’s demise seem premature.

In this MEDIA debate about the coming swap meet, its viability isn’t really questioned. Rather, the panelists — drawn from several networks and media buying agencies — seem more concerned with how to navigate successfully through increasingly uncharted territory. The moderator was Mike Drexler, CEO of Publicis Groupe’s Optimedia USA. Panelists were Joe Abruzzese, president, ad sales, CBS; Steve Grubbs, CEO of Omnicom Group’s PhD North America; Jon Mandel, co-CEO of MediaCom, U.S.; Mike Shaw, president of sales and marketing, ABC; and Donna Wolfe, executive VP, director of broadcast, Interpublic Group’s Universal McCann North America.

Mike Drexler: We saw network rates go down somewhat last year for the first time in a long time. Now I think we’re beginning to see the scatter market pick up. Is this creating more momentum for the coming upfront, and to what do you attribute the recent increase in scatter activity? Has there been some artificial tightening, or do you think there’s really more money working in the marketplace?

Joe Abruzzese: Scatter rates have climbed every quarter starting with the fourth and have progressively gotten better every quarter. Second- and third-quarter rates are and will be 15% above upfront, sellouts are very high, and pacing is way past last year. The cutbacks in third quarter will be very light. This will lead to a strong quarter and a stronger upfront. I think the agencies and the clients don’t see what we see, or they just refuse to believe us. Steve Grubbs: I think number one, we are starting to move out of this recessionary period. We do see budgets picking up, coupled with the fact that some networks’ ratings are off; they’ve had to pull inventory out of sale and that does artificially tighten the marketplace.

Drexler: Are there any network day parts, as well as syndication and cable, you feel might surprise buyers or sellers in this year’s upfront with respect to spending levels or CPM increases or decreases?

Jon Mandel: I think, unfortunately for the cable guys, that you’re going to continue to see them very out-of-market. If you see networks stay within the range of last year, I think whatever network is, and whatever syndication is, cable will be a lot worse, because they have not yet figured out how to deal with the massive amounts of inventory and rating points that they have.

Abruzzese: Some day parts that will surprise people may be syndication and NFL. I don’t have a feel for cable yet. I think the top-tier cable networks will do fine. The bottom may not!

Drexler: From what I can see, the network upfront market really depends very heavily on the amount of rating points available. Will there be fewer, more, or an equal amount of rating points for sale this year?

Mike Shaw: I don’t believe you’ll see us take an overly optimistic view about capturing all that was lost this year in terms of those rating points, but I think in aggregate, the four major networks’ total rating points will be down.

Abruzzese: We will be dealing with fewer rating points in the market, but that will probably drive prices further upward. Mandel: I think part of the other issue too, regarding the ratings —and I know, Mike [Drexler], you’re asking about the rating supply — but I think one of the things that hurt the upfront this year was a game of chicken. Clients didn’t feel they needed or wanted to commit, and I think some of the scatter money you’re seeing now is money that two years ago would have been in an upfront situation.

One of the hard things to figure out is the courage of conviction of clients. Do they go back to the kinds of upfront commitments that they did before as a percentage of their budget? Or do they stay where they were last year, or somewhere in between?

Drexler: To that point, I keep hearing that advertisers are really concerned about the volatility of the economy. Doesn’t this suggest there may not be significantly more money going into the upfront?

Donna Wolfe: I don’t think that the year we’re going into is going to be any worse than the year we’re coming out of. And so to expect advertisers to hold back more than they did this year — if they held back anything for scatter — I don’t think this is the approach that will be taken. But to the earlier point, a lot of what we’re seeing now with scatter, agreeing with Jon, is that a lot of money left the upfront market last year. So a lot of the money that’s coming back now is money that was held out.

Grubbs: I think most of the traditional upfront advertisers would prefer to continue [buying upfront] so long as they are incentivized by the networks to do so. And what I mean by that is so long as buying upfront is a better deal. On the other side of that equation, without a doubt, Mike [Drexler], as you pointed out, there’s a lot of short-term thinking, and there’s concern over meeting financial forecasts.

Mandel: One of the things that always amazed me was that something like two-thirds of national advertisers are on a calendar fiscal year. And maybe some of what we’re seeing now is that they spent the money in the first quarter, and it was their first fiscal quarter. And they didn’t get their hands slapped, so now they think, "OK, now I can go into second quarter." I wonder how long that’s going to last.

The question to me is not really about this coming upfront, but the one after that. If people get whacked in the fourth quarter, in having to turn back money for profit protection, then what happens a year from now? And I think the networks, the Mike Shaws of the world, have to be very cognizant of what Steve just said, which is that as long as advertisers continue to be incentivized to be in upfront, there will be an upfront.

Shaw: And I would agree with that. But I also would say, what, there’s probably been only one year out of the last 10 where you’ve had significant scatter pricing below upfront. So it seems, on a historical basis, that the incentive for going in the upfront in addition to options, guarantees, price protection, is the pricing, the raw pricing itself…you’d take your odds and buy that mutual fund.

Mandel: Speaking of mutual funds, there’s another thing that concerns me not just for the upfront but for our industry. There were the financial services, there were the phone companies, there’s often been new categories, [but] where are the new product introductions? We all talk new business, but Steve steals business from Donna who steals business from me…but where is the new business?

Drexler: I think that a lot of the advertisers who have been spending in the past, unless they have new brand introductions that are going to generate new funds, it doesn’t look like individual brand budgets are increasing substantially.

We know negotiations last year dragged on much longer than they had in the past. What do you folks anticipate the timing of this year’s upfronts to be?

Mandel: You know, I think you have to go back to the old saw, which is that if on May 12 [seller] expectations are almost the same as buyer expectations and client expectations, it will happen by May 13. If they’re a mile apart, it will happen a month later, and if they’re a cavern apart, it’ll happen in October.

Grubbs: I would absolutely agree. Negotiation is about a meeting of the minds, and you’re absolutely right.

Abruzzese: I think the timing will once again be late. I think that advertisers will have to be convinced that we are serious about the increases we are looking for. Traditionally, syndication would move first and then the networks and then cable. The sequence may be altered this year, with the first volley going to network and then to cable and then to syndication.

Drexler: Recently we’ve seen some interesting product integration agreements. I think of Revlon with ABC’s All My Children, and Lincoln Mercury with The Tonight Show. Do you consider these a mainstay of future upfront negotiations?

Abbruzese: Product placement is a reward for media spending. Placement in Survivor has to be organic to the show also. It’s a very thin but distinct line.

Wolfe: I think it’s a combination of the marketplace and being able to negotiate these added values, but I also think it’s a trend, in terms of trying to make your product, your commercial, stand out. It’s becoming harder and harder with clutter, with TiVo, with the number of stations.

Mandel: If Ford can bring out the Thunderbird again, why can’t this industry bring back product placement and put it into the show? I mean, what’s old is new again. It worked before. What I hope is that people recognize that regular 30-second advertising still works. I hope we don’t get caught up in this vogue too much where we trash the product. The reason I jumped in on you, Donna, is because you said it’s so hard to make the commercial work now…

Wolfe: It’s harder…

Mandel: I hope we don’t do it out of thinking the regular stuff doesn’t work, or because there’s creative bankruptcy, and we’re going to this as a way to save our butts. I think it’s something we should view as an extra way to do it, but I don’t think it’s an equivalent… Wolfe: No, it’s a supplement.

Shaw: And there truly are, Mike [Drexler], a finite number of Revlon and Lincoln Mercury opportunities out there, so it’s not like this proliferation is just going to explode across all program types or all day parts, even. If they don’t add to the story line — and certainly if they detract from it — I don’t think the creative community will embrace it.

Wolfe: Well, the consumer won’t embrace it, either.

Grubbs: The consumer is already so turned off by all the clutter and all the stuff that’s out there now. Donna’s point is absolutely right that we have to find a way to make the dollars work harder.

Drexler: Isn’t the increasing emergence of DVRs, and TiVo being integrated into the set top box, going to push the buyers’ side and the sellers’ side into, "How are we going to integrate product into programming?"

Mandel: Yeah, it’ll accelerate it, but I hope it doesn’t devalue the medium too much. To me, the ultimate example of that is this new Major League Baseball/Real Networks deal, where you can watch the entire baseball game in 20 minutes. They take out all of the standing around. That’s a hell of a note on our society. That shows where we’re going? I hope not. A guy like Mike [Shaw] works for a company that has two different customers: the viewers and the advertisers. And they’re inextricably intertwined. And we have to make sure that we still have viewers who think, "I don’t care if I can fast-forward, I want to stay glued to this."

Shaw: That’s why I believe those types of opportunities are finite and you won’t just see an explosion of them.

Drexler: Let me just throw out the subject of liquor. Why did NBC back off, and were the other networks prepared to embrace the same concept if NBC pulled it off?"

Grubbs: Not having the insight that any of the network guys do, it appears as though NBC kind of led the charge on this and expected support from the rest of the broadcast community, which they clearly did not get.

Abbruzese: I think NBC made a business judgment based on revenue, but I don’t think the revenue materialized. If there was $100 million for them I think liquor would still be on the air.

Mandel: Let me jump in, since I’ve been living this for the last few months. I think they didn’t really expect the other networks to jump on right away. They didn’t expect a backlash from their affiliates. I mean, they took the money locally for brand [liquor] advertising, and they didn’t expect the affiliates to jam them and have a problem with it, because [the affiliates] were running [liquor ads] when the money was going into their accounts.

We had a station in Presque Isle, Maine, I think we were one of five national advertisers on the station, and we were running public service "Don’t Drink and Drive" ads. The station decided that when [the network liquor ad] ran they would cover it over, because they didn’t want to increase teenage alcohol consumption…They felt they should be running ads to prevent teenagers from drinking and driving, so they covered over our national drinking and driving ads. I mean, if you can follow that long story logic, it was very simple: The money stopped going to local stations, it was going to the network, and the local stations bitched about it.

Shaw: Selfishly speaking, I would have loved to see another category come into the marketplace that Jon spoke about earlier. But we never seriously considered taking the ads at ABC.

Drexler: How about cross-platform deals, where are they going?

Shaw: Again, I can only speak on behalf of ABC Unlimited, and I can only say that up until this point the deals have been asset-based, meaning that if you needed a heavy print component, you might do something with AOL Time Warner. For broadcast and cable, you might do something with ABC Unlimited.

Mandel: It’s like the question about product integration before. If it’s done right, and it’s a unifying theme and it’s about moving both sides, the seller’s side of the assets and the buyer’s

side, and playing off of each other to build both of your businesses, it works. If it’s just some kind of buy, then you get into the desperation of announcing $15 million Snapple deals as some kind of big thing.

Drexler: Given that people think the world is going cross-platform and we’ve talked a lot on this call about product integration, how will that change the nature of upfront in the next couple of years? Because you’re not going to negotiate that Revlon will be on All My Children in a couple of years with a phone call, probably. How relevant will the upfront be to that process when there are all these other deals going on at the corporate level?

Mandel: Well, network TV upfront just becomes like the cable upfront then. It’s the same thing, it’s just smaller, but it’s a huge amount of money.

Shaw: And I think to a degree the upfront is really just part of a business cycle, and that business cycle is the planning, the buying, the evaluation of what you bought, and back into planning. And that business cycle that we’re on has worked real well, because the timing of that cycle has worked.

Wolfe: The timing of the upfront has always been out of sync with the planning cycle and the release of budget.

Drexler: No, I know that. The interesting thing is there have also been years of discussion about whether the upfront should continue the way it’s been going. Calendar plans on which most businesses are run are not really ready, money is thrown out early, they have to reconcile their plans because some of it’s already been spent in the fourth quarter of the previous year, and all those issues. Mandel: Well, there is one good thing about the system. We all know that this media type, television, is the most powerful thing we’ve got. It works. And whether you do an upfront in May, or April, or August, or you do a mini-upfront, you buy in January for three quarters…clients recognize that it is a valuable medium.

Drexler: Last question…What does the state of agency media consolidations portend for the way that negotiations are going to take place?

Abruzzese: The rise of huge media companies on both sides of the buying and selling equation should make it easier to create strategic alliances, but it really hasn’t yet. I think it will in the future but I don’t think it will be about efficiencies of media; it will be about helping both the buyers and sellers. We want higher ratings; they want more exposure.

Wolfe: The advantage of these [media buying] consolidations starts with marketplace intelligence, and in order to develop a strategy, having good marketplace intelligence is where it would start. So if you start at that level, certainly there is an advantage.

Grubbs: I very much agree with that. At the end of the day there seems to be, except for the very sophisticated media clients, the perception that size and volume equals deeper discounts and better deals. In fact, most of the marketplace upfront is within a very narrow range of percent increase or decrease.

Wolfe: The networks in prior years would collect everybody’s budgets and then decide how they were going to sell. And the agencies were at a disadvantage. I think this is just a leveling of the playing field so that the agencies now understand the marketplace probably before the networks.

Grubbs: The other thing about consolidation is it enables us to reinvest and reallocate certain resources and develop. Generally speaking, I think the industry is moving toward a different structure, where we’re developing as communications strategists rather than as just buyers.