Broadcast Network Upfront: Tighter Scatter, Shifting Dollars

Heading into a perfect storm of declining metrics, the broadcasters' upfront pitch sounds like they are screaming into the wind. The continuing slide in ratings is exacerbated by a dearth of original programming caused by the writers' strike. The resulting increase in advertiser makegoods has tightened the scatter market, fueling advertisers' continued shift to more cost-effective cable buys. As TV dollars shift to the Net, a recession will prompt an overall decline in ad spending through 2009.

While broadcast television remains the second-largest ad category behind newspapers, it is no longer a growth story. With annual drops barely offset by only quadrennial pops, broadcast TV ad spending can only hope to be flat, at best, overall. That does not take into account massive blows like a Screen Actors Guild strike, which could come in two months, when the upfront selling for the 2008-2009 season is in full swing.

The broadcast networks point to their steady gains in nascent online revenues, but even Fox Interactive Media--an early player--is finding that to be more difficult than anticipated. FIM reportedly will fall short of its $1 billion-plus target in fiscal 2008. However, all of the broadcast networks generally will lose traditional revenue faster than they can generate offsetting new digital dollars.



No one would suspect the formidable financial game change listening to the annual upfront ritual. NBC's "infront" for advertisers last week was a 65-week super-sized version of a normal prime-time season. It promised more original fare, fewer repeats and a streamlined pilot process, as well as more sponsored shows with greater product placement--paired with its aggressive ad-supported NBCU 360 online and mobile offerings. NBC will continue to pitch Madison Avenue as its rivals gear up for the ceremonial mid-May unveilings.

However, the current season has been a disaster. The broadcast networks collectively missed their 2007-2008 audience guarantees by 7%, due to the strike and prime-time deterioration, which will translate into air time or cash makegoods to advertisers. ABC missed its ratings guarantees by 18% and both CBS and CW missed by 12%, while NBC overdelivered by 3% and Fox broke even, according to Morgan Stanley. The broadcast networks' advertising revenues declined for the first time by 3.4% in 2007. They are expected to make that up this year from Olympics and elections-related spending for a total of just over $15 billion in ad revenues.

The networks did not feel the full brunt of the writers' strike until January and February, and the negative impact continues. Year-over-year household prime-time ratings have declined 13%, and for the all-important age 18-49 demographic they have declined 17%. In the first quarter of this year, live prime-time viewing of cable networks rose an aggregate 9.4%--the fastest quarterly growth for cable in five years. It was the fifth consecutive quarter of double-digit declines (13%) in live broadcast prime-time viewing. As a result, the price of a prime-time spot declined 12% in the first quarter, with NBC down the most at 25%, according to Targetcast.

Bernstein estimates that CBS' largest loss of ratings market share so far this season could result in "a material shift" in upfront advertising dollars to rivals, causing CBS to significantly hike its prices "just to keep its advertising bounty flat."

With the broadcast networks' share of audience (47%) still falling against cable (53%), and the economy settling into what could be a protracted recession, the challenges of pitching to Madison Avenue were never greater. Even before weakening economic trends are factored in, Wall Street was forecasting the worst-ever year for broadcast advertising in 2009--falling 4% to about $14.6 billion and erasing all of this year's gains. Local broadcast TV station will sustain an even worse decline of at least 6% next year, Morgan Stanley predicts. The free fall will be exacerbated by recession, which historically evokes a sharp decline in domestic ad spending.

With all of U.S. advertising growing at less than 3% through the end of the decade, broadcast television's losses are the Internet's gains. In fact, the quadrennial-year spikes will be the only growth in all broadcast television through 2015, when overall ad revenues will be about what they are in 2008, right around $46 billion. During the same period, Internet advertising will grow from nearly $26 billion this year to an estimated $60.4 billion in 2015, according to Morgan Stanley analyst Benjamin Swinburne. Cable ad revenues also will grow from $28 billion this year to nearly $40 billion. The overall U.S. advertising market also will continue to grow, from about $208 billion in 2008 to $261 billion in 2015.

Industry analysts increasingly are coming to the realization that broadcast TV is at a point of no return. The steady decline in ratings will begin translating into declining (or at best static) ad revenues, which will continue to shift to cable and the Internet. Over time, there will be a closing of the 50% average price gap between broadcast prime time and comparable upscale cable network ad prices, or what Bernstein Research refers to as the "iceberg" effect. "The potential lack of long-term broadcast pricing power, coupled with the structured fall in viewing, could materially pressure broadcast revenue growth rates in the coming years," observes Bernstein analyst Michael Nathanson.

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