• by Joe Mandese  @mp_joemandese, April 25, 2005

You've heard the old joke: "how do you get to carnegie hall?" The punch line: "Practice." When cbs unveils its new primetime schedule in the hallowed hall later this month, it will be performing something it, and all the major networks, practiced and perfected a long time ago: a showbiz spectacular.

But it won't be the acts that will grace the stage during cbs' star-studded event that will be its most important performance. That will take place in the weeks that follow, as the major broadcast networks convince dozens of agencies to spend billions of dollars on behalf of hundreds of advertisers that, in all probability, will pay considerably more for a whole lot less than they got last year, or in all the upfronts before that.

While it's hard for many people  even seasoned industry insiders  to fathom the logic that drives the upfront advertising marketplace, it actually operates under a very simple economic model: the law of supply and demand. Like any prized commodity, the price of the networks' ad time goes up every year despite their eroding supply for one very simple reason: Demand for network ad inventory almost always grows faster.

Many factors drive that demand, some logical and some irrational. On the side of logic, demand continues to grow from new advertisers buying network tv. Another factor is the pressure from a few very influential, and fairly price-elastic advertising categories that don't seem to care how much they pay, as long as they secure their coveted ad slots.

Add to that the emergence of new, rapidly expanding ad categories such as pharmaceuticals and wireless, and you've got a fairly dynamic demand for a dwindling supply. That's the logic side of the upfront demand equation. Here's the illogical side:

>> The supply of television advertising impressions continues to expand. >> According to media planning reach theory, there is nothing more efficient about building audience reach via higher-rated broadcast network tv shows. >> With a few exceptions, the average rating of the major broadcast networks is not much higher than many less expensive shows in syndication or cable.

Each year in late spring when the upfront market gets hot and heavy, the networks make bold claims of upfront sales growth that inevitably fall apart later in the year. Using upfront sales estimates compiled by Merrill Lynch and Omnicom for each of the past 14 upfront marketplaces, and comparing them to actual network advertising revenues for each of the following full years reported by Universal McCann, there is absolutely no correlation between upfront sales estimates and actual network revenues.

Over the 14-year period, the networks claimed the upfront rose an average of 7.9 percent, about twice the 4.1 percent that network advertising revenues actually rose on average during that period. Clearly, something's amiss. While much of the variation can be explained by market events that occur during the year after the upfront has transpired  advertising makegoods for network ratings deficiencies, cancellation options, and weak scatter market sales  the bottom line is that the upfront is not a very good indicator for how the networks are doing, or even how much demand there is from advertisers.

Why is there an imbalance between the continuing emotional appeal of the network upfront and the logic to move money elsewhere? It's a good question, and virtually every year during the Association of National Advertisers annual Television Advertising Forum conference in New York someone floats the idea for change.

Last year, Carat ceo David Verklin called for an industry committee to convene and fix the problems that make the upfront illogical, and a bad deal for advertisers. That call actually manifested into a working group dubbed nudg (Network Upfront Discussion Group), which advanced some fairly reasonable suggestions on how to fix the upfront process, including the creation of an "opening bell" and a "closing bell" to start and stop upfront deal-making. But when the nudg finally met, the ideas were shot down, and business was back to its old ways.

This year, Julie Roehm, director of communications for auto heavyweight Daimler-Chrysler, suggested changing the structure of the upfront to mirror that of Wall Street's Nasdaq stock exchange. The idea generated plenty of attention, but hadn't taken root by press time.

"The supply-and-demand balance in the tv market is distorted by the selling of 80 percent of the future year's programming three to five months in advance," Roehm said during the ana forum in New York last March. "Prices are distorted for scatter market buyers by 'make goods' for improper forecasts and promised audiences. Prices are distorted for the networks, or sellers, when a program turns into a smash hit and over-delivers." "In other words," she added, "neither buyer nor seller knows exactly what is being bought or sold." The upfront is not an open market, but is really a series of discrete closed deals between a handful of big agencies and the networks. The lack of data makes it almost impossible to know where the market is at any given time, or for any advertiser to know what the relative value of a buy is. That would require an open database. Without that, it would be impossible for the upfront to operate like an open market.

That's something the networks would likely resist, since they typically have the leverage. Each spring, the networks play an intelligence gathering game. Network sales executives ask media buyers to fill them in on their clients' advertising budgets. In other words, the networks ask media buyers to tell them what their demand will be. With that information, the networks are in an advantageous position to price their ad time based on how much supply is in the marketplace. Media buyers participate in this for several reasons. One, it is common practice and a long-standing tradition. And two, the networks tell them what they need to know.

The result has been a lop-sided market dynamic in which the networks hold all the cards  or at least are the only ones in the position to count them up before the game. That all began to break down last year, when sqad, a syndicated data company that provides advertising rates for local tv stations, entered the marketplace with a new report called NetCosts.

The data is collected based on actual media buying costs and is pulled directly from the same systems used by ad agencies and major advertisers to process their media buys. Larry Fried, chief revenue officer-national tv at sqad, says the data is, in some ways, superior to what the networks are able to gather themselves. As such, he says, the data could help restore the equilibrium to the upfront marketplace, or may even give advertisers the advantage.

While it's unclear how such data, or the push by Roehm to open the marketplace, could impact the workings of the upfront, one thing is clear: Historically, it hasn't worked the way a lot of people think it works.