• by David Goetzl , August 9, 2006

A proposed online trading system for buying and selling TV ad time could lower and eventually eat into network profits. That's according to a top Wall Street analyst, who believes media stock investors don't have much to worry about--for now.

Merrill Lynch's Jessica Reif Cohen writes that the eBay-enabled system is unlikely to make much headway, since both networks and a slew of major advertisers oppose it. Cohen did, however, issue a warning. The system could eventually serve as a platform for some small cable networks to one-up the competition--possibly forcing other networks to sign on, and wreaking some havoc in the TV ad industry.

Executives at both broadcast and cable networks have expressed fervent opposition to the e-Media Exchange on the grounds that it would commoditize their product. Nine advertisers, including Wal-Mart, Microsoft and Toyota, reportedly are prepared to pool together $50 million to test the system next January. But Cohen believes that its prospects are dimmed by the fact that "not a single one of the 10 largest television advertisers is participating in the process."

"We are generally skeptical that the auction platform will take hold in the near term, as neither the large networks nor the largest advertisers appear willing to cede control of the selling/buying process," Cohen adds.

"The response has been greater than we imagined, and it's pretty early to tell what the success is going to be," says Ray Warren, president of Carat USA and a member of e-Media's planning group. "To assume that there's any way to project right now and have a point of view on the ultimate success seems a little premature."

The nine advertisers advancing the system argue that it would rip away the curtain on the secretive buying and selling process and provide "greater transparency." And that increased openness could allow "smaller advertisers to gain access to preferential pricing," writes Cohen--a negative for the networks and top-10 advertisers. Large advertisers "are unlikely to find pricing transparency to be attractive," since they hold pricing advantages. Their edge: they spend more and have been doing business with the networks for years.

Cohen notes that the Discovery Networks has agreed to participate in discussions with the industry task force--effectively comprised of the nine advertisers, the ANA, the AAAAs and some media agency executives. "This is not altogether surprising to us, as Discovery has been struggling, owns and runs 14 cable networks (thus large amounts of unsold inventory) and is therefore more likely to be susceptible to this sort of pitch, in our view."

A Discovery spokesperson did not provide comment.

Cohen observes that a small cable network in the Discovery fleet, another lower-tier cable outlet or a struggling broadcast network, could embrace the system "to gain share," forcing the rest of the industry to use it. "We do not believe this is likely over the near to medium term, but is a long-term risk for the industry."

"When you think about marketplaces that move, they start out pretty slow and they gain momentum," says Warren. "This thing just pulled out of the station."