Special Report: Will the TV Upfront Ever Change?

After two years of swallowing double-digit cost per thousand increases in broadcast and cable TV, 2004 may well go down in history as the year advertisers put their feet down. We may look back and say that this year, clients got mad as hell and decided not to take it any more.

Not that history favors such a change, since everyone in the industry knows that it's just part of the dance, with advertisers and agencies saying they're going to push back in the months leading to the upfront. When the smoke clears, the networks still get their CPM increases and advertisers are left wondering what happened to all that resolve. But it doesn't take a regression analysis to believe that this year, the tide is turning. The 2004-'05 upfront is still weeks away, but one thing is clear: The forces for change are not only talking the talk, they also seem to be walking the walk.

A recent survey of planners and buyers by MEDIA magazine finds heavy disenchantment with the upfront process, with results that follow those obtained when the Association of National Advertisers asked its members earlier this year. Fifty-eight percent were dissatisfied with the upfront, with 18 percent ambivalent and only four percent "very satisfied" with the process. Only 27 percent surveyed thought the upfront worked for their companies. More than half disputed the networks' contention that the rules of supply and demand governed the upfront marketplace.

MEDIA magazine recently held a roundtable in New York City to discuss the upfront and the issues surrounding it. While the discussion touched on a wide range of issues, it kept coming back to the dissatisfaction advertisers and agencies have with the upfront.

What has changed since last year's upfront, when the broadcast networks hauled in $9.3 billion for prime-time advertising from advertisers who were already shell-shocked by the 2002-'03 upfront's record results? It's partly the realization that in a fragmented media landscape and declining viewership, network TV isn't the rock of the media plan it once was. It doesn't hurt that in many agencies' eyes, cable and syndication are becoming a viable substitute for broadcast. With video-on-demand, digital video recorders, and broadband only beginning to flower, traditional television itself may become less relevant.

"A new day is dawning," says Bob Flood, a veteran TV buyer who runs the emerging technologies division at New York-based Optimedia.

Daylight broke in March, when the nation's biggest advertisers unexpectedly embraced the call of Carat North America's David Verklin - long a critic of the upfront - to convene a panel to tackle some of the perceived structural problems of the upfront. The Network Upfront Discussion Group, or NUDG, came to life with the help of the Association of National Advertisers and the American Association of Advertising Agencies and the begrudging assent of the networks. While the group's first meeting, on April 29, hadn't occurred by press time, there were hopes that NUDG could bring some change to the frenetic process. Among those upfront tenets in NUDG's cross hairs are whether there should be a closing bell to put a stop to all those late-night deals, and just when the upfront should take place. In recent years, the upfront's timing has snuck forward from July 4 to Memorial Day. That, many advertisers say, makes it hard to determine spending for the next year when the rest of the company's budget hasn't been worked out yet. While different advertisers have different needs, it's clear from both the MediaPost and ANA surveys that half of advertisers would prefer the upfront to happen between August and November.

On the pricing issue, the networks will tell you that no one complained three years ago when the marketplace was down by double digits. It's only been in the past two years that the networks have asked for and received double-digit CPM increases.

"You know what the problem was last year? It's a little bit like the halftime at the Super Bowl show," says Jon Nesvig, president of ad sales at Fox Broadcasting. "Something unexpected happened. The marketplace was stronger than any of us anticipated, so therefore there must be a problem with the process. Two years ago, the marketplace went down seven, eight, nine, 10 percent, take a number. Worked great [then], didn't it?"

It's all about leveling the playing field, which some say is weighted heavily toward the networks, which control the supply of TV inventory and use their leverage to charge whatever price increases they want.

"The networks don't really care about what CPM you end up with," says Lawrence Fried, chief revenue officer of media cost service SQAD and a former head of ad sales at ABC. "They're focused on managing money and what they care about is the unit price they're getting from you as opposed to the CPM that you're able to manipulate with the schedule that you buy. If the advertiser was 10 percent above the average unit price last year, the network wants to come in 10 percent above the average unit price again this year."

"Your CPM is your CPM. You're stuck with it forever," asserts Gene DeWitt, founder of DeWitt and Optimedia. "And you're going to go up 5 percent, or 8 percent, or 10 percent, or whatever the hell they want to charge you. If you're paying 20 percent over the market, that's your base."

Nesvig doesn't deny that the networks set the marketplace, though he denies the buyers' claims. What else would someone do when there's a commodity in limited supply and often in strong demand?

"Our interest in setting this marketplace is truly - and it may be difficult for some of you to believe that - it's to try to balance," Nesvig says. "I don't want to overcharge and I don't want to be undercharged. I want the process to work. I want you to be able to move your product."

Momentum in the marketplace, the kind that leads to higher prices for the advertisers, has to do with demand for inventory. "It's just like any other market. Nobody's saying that you have to do this," says Howard Levy, of Buena Vista Television and chairman of the Syndicated Network Television Association. "But if you want guarantees, if you want to make sure that you're in these certain weeks, and you want all these other things, well, there's a cost to it."

Yet some of the blame can surely go to agencies and their clients, who haven't exactly been profiles in courage when it comes to the upfront. While there are some instances when the buyers have walked away from the negotiating table, what usually happens is that the networks get the prices they want. Some say there's been less negotiating power in the marketplace now that the big agency conglomerates have come back on the scene.

"Six guys are basically buying about 80 percent of all the upfront money," says Lou Schultz, former chief executive officer of Initiative Media. "We thought we were very clever in doing all that, but we were dealing with an oligopoly. The oligopoly has figured out a way to counteract it and so what's happened is that they've figured out how to leverage the big guys against themselves." What that has done is narrowed the range of pricing between the agencies, so there's no real good deal that can be done. In other words, the networks have the agencies' number.

"It has taken some pricing flexibility, but I don't know how much of that there truly was before," says Fox's Nesvig. "Pricing was a range. Maybe the range has gotten a little narrower."

Donna Speciale, president of broadcast buying at MediaVest in New York, thinks that the benefits created by the agency conglomerates' consolidated media buying have pretty much passed and the networks have been able to leverage their position.

"The marketplace has gotten to the point where, give or take a percentage or two, where there used to be a much bigger spread of what we could do on the agency side and get a benefit for each individual client - those consolidations now have created this very finite market and that's where we are today," Speciale says. She thinks clients are realizing that now and that many agencies can't maneuver as nimbly as others.

"You've got to be able to walk away, and you've got to be able to find another avenue, and the dollars have to be fluid, and those guys have created no fluidity... Until that falls apart, and it will, then the marketplace will go back to its normalcy where the benefits will be there on everybody's own strategic thought process and your own timing," she says.

Not that it isn't business as usual so far this year, even with outraged advertisers threatening to punish the broadcast networks. Networks and the buyers still dug into their established pre-upfront postures. CBS chief Leslie Moonves got the negotiations started in the trade press when he said that he expected double-digit CPM increases for CBS, drawing a chorus of boos from the media buying community and perhaps giving advertisers and agencies the nudge they need to shift upward of $1 billion from broadcast to cable and syndication in this year's upfront.

A consistent riff for most ad-supported cable networks over the past several upfronts - and one that shows no sign of stopping, judging from this year's round - is the assertion that cable is more efficient than broadcast and costs less. The Syndicated Network Television Association has also made its pitch for a greater share of broadcast dollars, leveraging its broadcast-like ratings and quality programming.

While there's certainly a growing awareness of cable and syndication options year after year, you won't hear planners and buyers saying they'll buy cable for cable's sake.

"The dollars should go to cable if it makes sense for the individual client, not just because anybody says the network dollars are going to cable," says MediaVest's Speciale. "Every client must be analyzed on what they are trying to do for that brand and that consumer. If it makes sense, you do it. If it doesn't, you don't. Maybe cable is not the answer. There are a lot of other mediums out there where dollars will work, whether it's print, whether it's radio. [Cable] is an answer, but it may not be the answer for everything."

Or, even more starkly for broadcast, cable, and syndication alike, advertisers might move tons of money to other channels altogether, like broadband or cinema advertising.

"We're not just focused on national broadcast," says Speciale.

"Television is just one component of our overall communications package. The clients have become a lot more sophisticated in terms of their receptivity about how you approach marketplaces," Optimedia's Flood says. "They take into account all of these different media. And so, as a result, they're giving us that latitude."

Will that latitude translate into a major shift of dollars away from broadcast TV? Flood believes that if network pricing is considered too expensive, there will be a major shift to cable, syndication, or broadband. MediaVest's Speciale thinks it's already happening.

"I do think clients are upset about what the price increases have been, but I also think that they're smart enough to realize that they have a lot to do with it, because they keep putting their money there," she says. "I think that everyone is becoming a lot smarter in looking at the communications model, on what are my other options if I don't want to do this."

Bill Morningstar, head of ad sales at The WB, acknowledges that the climate has turned against broadcast TV. But he says there's still a case to be made for the prime-time broadcast marketplace being the only one that makes sense.

"What we do is still so effective in helping clients move product. I think we lose sight of that sometimes," Morningstar says. "I think there's nothing better than prime-time television. It's the environment, it's the quality. It's the reach. I do think that, hopefully, cooler heads will prevail."

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