Commentary

Look Past Headlines To Bottom Line When Gauging Upfront Market

Some members of the media – not sure whom – rush each spring to attach a figure to the pricing ups or downs in the upfront market. “Soaring Market, CPMs Up 12%” might be the ad trade equivalent of “Seal & Heidi Split."

Quick, easy, attention-grabbing. And, there’s so much interest in the machinations of top buying and selling executives that the singular number -- +12%, down 5% -- might brand them winners or losers.

But, it's a bit like a limp hand shake. It’s far from a signed contract. While the figure – couched as average or approximate – can provide some indication of the health of the ad market, it’s sort of like a regular season scoring average. Nice to do well, but it’s the playoffs that matter (ask LeBron).

So, here’s a Sisyphean call to shift from the headlines to the bottom line. (Not that MediaPost is going to do that come June, so hopefully everyone else will.)

The wisdom of that circumspection is made clear in a report Wednesday from Brian Wieser, the former Magna Global analyst now crystal-balling it for Pivotal Research Group.

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He’s following the money, not the ink – mostly pixels now – while trying to advise investors where to make their bets. And he’s got sturdy reasons why CPMs might be up, but dollar volume won't budge much.

Of course, before the headlines come in June, they are generated as Wall Street firms offer their market projections, which deserve some credibility. They understand something called “nonlinear regression” and how e=mc2 applies to the upfront market. Quick summary: buyer “enthusiasm” = network “money counted.” 

Give the astute Wieser credit for revving the engine first. He’s making a call in advance of many media companies reporting earnings in the coming weeks. Investors are likely to ask CEOs then about an upfront forecast, but answers regarding pricing may prove to have little meaning.

Nonetheless, Wieser is projecting that CBS, the top-performing broadcast network with 22 prime-time hours a week, will land 8% price increases this spring. ABC and NBC could tuck in right beneath, maybe at 7% and 6%, respectively.

Fox can be more attractive to buyers with a younger audience and might land a higher bump. The same goes for cable networks such as TNT and USA, which can attract marketers with flat budgets that need to maintain reach and frequency levels and seek out lower prices.

An 8% percentage jump would appear to come in lower than last summer, though Wieser notes a cumulative 20% or so jump over two years is kind of a nice return for a network.

But for readers of his report, Wieser might be happy if they start with the second paragraph, which accentuates his thrust: “Given the importance of upfront volumes, we have long been surprised at the focus investors place on upfront pricing,” Wieser wrote, mercifully sparing the media. “Historically, pricing has very limited predictive qualities with respect to actual revenues."

(The fascination with the $3.5 million Super Bowl spot is more interesting on NBC News than on the balance sheet at NBCUniversal, which expects to collect $250 million Sunday.)

It's with that type of end-of-day approach that Wieser is tossing out a damp rag. He’s predicting ad revenues for the network TV business collectively will be flat in 2012 and 2013. Upfront pricing may surge, but revenues hardly move.

Wieser lists off a run of factors. There’s “good money” vs. “bad money.” If P&G has a base CPM of $20, a 20% increase is a $4 bump. If Paramount has a  $30 base, the network is scoring $6 more. If you’re Groupon and show up last year, you’re paying a high base and a lot on top the next year.

Then, there are the opportunities for breakage – advertisers can make upfront commitments and renege or exercise options to cut as the season goes along. (Word on the street is these instances have been largely immaterial in the post-recession era and Wieser says networks can “punish” advertisers availing themselves.)

Wieser also says there are variations in the inventory networks have to sell, impacted by declining ratings. And there are the dynamics of the upfront and scatter market.

So, Wieser’s prediction of flat network revenues for the next two years should give pause to broadcast bulls?

Hardly.

Networks are “strategic assets” and maybe more valuable than ever. If they break even or lose a bit with ad dollars alone, they’re in the money.

New money is coming from from cable operators and online distribution. All of which makes upfront pricing figures fall even further down the list of importance when evaluating revenue at large. 

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