This spring’s upfront advertising market signals a long anticipated reallocation of spending that will accelerate throughout this decade.
As cable edges past broadcast network advertising spend and the Internet intensifies its assault on upfront ad dollars, broadcasters are taking refuge in another 8% CPM increase this election and Olympics year (just shy of last year’s 9%), according to Pivotal Research Group.
But sales volume--a more accurate indicator of the health of the broadcast ad market--is less certain.
While it took cable three decades to dominate upfront advertising with more than $22 billion in commitments anticipated this spring, it is as vulnerable as the broadcast networks to inroads from ad-supported Internet players Google, YouTube, Yahoo Hulu, Facebook and others.
The lure of smart Android and Apple TVs, as well as the next generation of connected mobile devices will increasingly support their efforts.
Any doubt about the potency of these players? Consider that Apple’s rare $500 billion market cap, driven by its mobile connected ecosystem and walled content garden, far exceeds the combined market cap of the top 12 TV-related media company-owners of leading broadcast and cable networks, such as Walt Disney, Comcast NBC Universal, Time Warner and Cablevision.
Former MTV CEO Tom Freston says he considers YouTube’s $100 million development of 100 specialized video channels and its role as Google’s premiere video search engine “a tipping point for the Web that will spur “significant migration of viewers and ad dollar from traditional video channels. Google and its YouTube subsidiary, Yahoo, Microsoft and Hulu are among the Internet players planning major upfront pitches to Madison Avenue in April ahead of the broadcast and cable networks’ traditional upfront presentations.
Some experts believe the Internet and mobile connectivity will at least match broadcast spending before decade’s end. Online video ad spending will morph to $7 billion by 2015 from $2.16 billion last year, up 52% according to eMarketer.
And it's not just broadcast television that is vulnerable.
Cable’s gatekeeper stranglehold is under siege by over-the-top video streaming, while cable operators’ bottom lines are being strained by rising subscription distribution renewal fees paid to cable and broadcast TV networks. Since 2012, 2.3 million former cable subscribers have cut the cord leaving about 41.4 million domestic video cable customers, according to ISI Group.
In the long-run, social media may pose the biggest threat -- and opportunity -- for conventional television. Facebook’s aggressive advertising and video strategies leveraging user’s Timelines, shared “likes” and friend preferences are as focused on siphoning TV advertising dollars and viewers as Google’s YouTube, Hulu or Yahoo. Facebook hosted a New York marketing conference Feb. 29 aimed squarely at getting Madison Avenue agencies and advertisers to partner with the social network and shift spending from conventional TV. Twitter’s new self-serve advertising platform is playing to the same crowd as it morphs into a full-fledged media player.
“The Internet isn’t going to kill TV -- $60 billion in TV advertising will continue to grow at about a 3% average annual rate,” Bernstein analyst Todd Juenger says in a new report. Accelerated cord-cutting could stem affiliate fees and declining TV audiences could drive down advertising revenues, only the television universe isn’t defined by its digital extensions. Incremental digital monetization will benefit a select number of content owners -- such as Disney, News Corp., Discovery, Time Warner, Viacom and CBS -- whose revenues will rely equally on fees and advertising.
Subscription video on demand will be a $6 billion global business by 2015, $2 billion of which is incremental today, Juenger said.
In that context, Morgan Stanley analyst Benjamin Swinburne insists 3% growth in U.S. advertising overall this year be “good enough.” But that doesn't take into account some changing marketplace dynamics:
*An 8% increase in pricing for the broadcast TV networks would not have as great an impact on overall advertising revenues as volume, and the amount of ad time sold is expected to decline. Overall, there are no guarantees the broadcast networks will sell enough TV ad time to match last year’s $9.1 billion commitments, according to Pivotal analyst Brian Wieser.
*Although most marketers with national budgets continue to prefer network TV advertising as a starting point for their media plans, many are increasingly shifting dollars to online and mobile which are affordable, low-risk and more strategically measurable.
*Major marketers’ circumstances are radically changing, forcing them to consider new ways to reach target consumers. Sears is selling off stores; Wal-Mart is struggling to revitalize its low-price image. The marketing strategies and ad spending of even the biggest retailers will become less predictable and reliable.
*In addition to upfront volume spending being more influx, advertisers could defer scatter market commitments closer to air time, while TV network could hold back upfront inventory. Marketers could exercise options to buy back 25% to 50% of their original upfront commitments.
*The adverse impact eventually will be more extreme for a pure-broadcaster, such as CBS, even in this election-Olympics year. Ad revenues declines of 1% to 2% (or as much as 4% without political ads) could cost CBS $2.00 of earnings per share, Swinburne estimates. “Weaker-that-expected ad growth would cause negative operating leverage across CBS’ radio, outdoor and broadcast operations,” Swinburne said.