Upfront Gains Overhyped, New Platforms Grab Future Profits

A reality check on concluding upfront fall TV ad sales shows they are far from the triumphant rebound heralded by industry executives and the press -- barely recovering half of last year's 20% recessionary spending losses.

The other $1 billion in lost ad spending (from the $9.2 billion high bar set in 2006) likely will never be recouped by the Big 4 networks as advertisers drift into new forms of digital marketing -- as well as mainstream online and mobile media.

Unlike other economic recoveries, advertisers now have viable alternatives to connect with targeted consumers that eventually should render more measurable and actionable than TV's ROI.

There is mounting, concrete evidence that this year's $8 billion upfront, generally created by 8% to 9% increases in ad pricing across the four broadcast networks, marks the beginning of the end of the bloated ad ritual that is a shrinking portion of a more than $250 billion ad market.



The absurd notion that ABC, CBS and NBC were mad at Fox for closing its upfront negotiations with advertisers too soon, and at lower than expected rate hikes, assumes a network TV is status quo that began a slow death in the last decade.

You don't need to look much further for proof than Apple and Google locking horns over a nascent mobile interactive ad business about to explode -- with or without much of Madison Avenue and Hollywood in tow.

The stakes are high as federal regulators begin to investigate whether  Apple is indeed shutting out the mighty Google from its walled iPhone-iPad ecosystem. Apple is launching its own iAds platform to fight Google's Double-Click, AdMob machine for what JP Morgan analyst Imran Khan estimates will be a $3.8 billion mobile ad market this year.

With mobile phones already matching TV's scale domestically, Khan says he expects advertisers and content producers to adjust to smaller screens and fragmented audiences in pursuit of long-term wealth creation.

Global online advertising will top $100 billion within five years, according to Magna Global

Morgan Stanley Internet guru Mary Meeker estimates the "golden age of mobile advertising" is initially a $50 billion opportunity with apps bridging advertisers to sustained rapport and transactions with target consumers. Meeker points to the disparity between 31% TV consumption by viewers and 39% TV ad spending, compared with rising  28% consumer Internet time and only 13% of all ad spending.

The broadcast upfront take on a whole new meaning in this broader media context. Consider these compelling data points:

*While the networks had nowhere to go but up from last year's disastrous $7.2 billion upfront, they are without real, organic growth.

*Emerging retrans fees as a second revenue stream barely makes the broadcast networks whole. The Big 4 initially will reap $1.24 billion in retransmission fees, based on 50 cents per subscriber and 50/50 revenue split with their owned and affiliated TV stations, Kahn said.

*The Big 4 power base will continue losing about 6% of their viewing audience annually. Since 2004, they started to erode their pricing power -- and not only against thriving cable networks, which tier corporate parents also own as hedge.

*Credit Suisse analyst Spencer Wang  points out that cable and broadcast networks this year reach relative parity, each with $8 billion-plus in ad sales, which cable achieves by selling more time at lower prices. Cable networks will grow ad revenues at more than 5% annually, while the broadcast networks look to flat-to-low single digits.

*In fact, Wang predicts that total 2010 advertising revenues for CBS, ABC, NBC and Fox could collectively decline 10% to $14.7 billion, more than 60% of which will be sold upfront.

*This lower, new normal in broadcast network revenues can only partly offset by continuing cost cuts and retransmission fees -- and those are only good until cable operators feel the competitive heat from web video. A majority of U.S. Internet users will come to routinely watch some long-form video on their mobile devices over the next several years, according to eMarketer.

 *Even then, cable networks already have the upper hand. The $25 billion in cable affiliate fees paid in 2009 outpaced broadcast and cable network ad revenues and outpaced cable ad spending, according to  Barclay's Capital analyst Anthony DiClemente.

*The proliferation of Web content presents stiffer competition to the networks' inefficient high-priced fare -- averaging $2 million an hour to produce and more than 95% of which fails every season.

*The broadcast networks and their corporate parents have not successfully monetized their content as streaming video in digital ventures, such as Hulu, co-owned by NBC, ABC and Fox, or CBS' As long as they maintain their legacy costs, operations and revenue models, their economic picture will remain strained.

*That is why, despite company denials, it makes sense for Disney to be preparing to sell its ABC-TV network and TV stations affiliations. Comcast also must dramatically revamp the last place NBC network when it takes ownership control next year. A pure-play CBS, which revolves around its broadcast network and relies on advertising for more than 60% of revenues, will most certainly become a takeover target. It's just a matter of time.

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