Commentary

Fuzzy Math: Viewers Slide, Upfront Survives

The broadcast networks' reported $9.2 billion upfront tally looks like numerical magic. The trick will be to keep the ad dollars coming in--even as the program ratings continue to decline.

Although media analysts and executives were expecting the worst (down as much as 14%), network executives say they have locked up about $100 million more in upfront commitments than last year, despite a weak economy. What is going on?

The networks will tell you that advertisers still rely on the only truly mass-market medium, especially in uncertain times. They are less forthright about what they had to promise in order to secure those faster-than-expected commitments. The ratings guarantees will be trickier than ever to achieve in the coming season (short of a runaway series hit). Less inventory of unsold ad time is being reserved for scatter-market sales, and experts forecast that network prime-time audiences could deteriorate another 10% in the 2008-2009 TV season.

If that occurs, broadcast networks falling short of their ratings guarantees and makegood inventory could resort to reimbursing advertisers with cash--as NBC was obliged to do this past season. Sources say that as an incentive, the networks are granting some advertisers exit clauses with little or no additional costs attached.

advertisement

advertisement

All domestic advertising is expected to decline in 2009 as a non-election, non-Olympics year collides with what have been faltering television and newspaper markets and an overall recessionary economy. Even the Internet's meteoric rate of search and display advertising growth is expected to slow in 2009 from this year's anticipated 20% to 25% gains. Online display advertising grew just 8.5% in the first quarter of 2008, or half as much as a year earlier--while overall U.S. ad expenditures grew a mere 0.6%, according to TBS Media Intelligence.

The broadcast networks' advertising math has been boggling minds on Wall Street for some time. JP Morgan analyst Imran Khan this week lowered his forecast for broadcast networks' ratings in the 2008-2009 TV season to a 10% year-over-year decline, or twice what he had previously projected. The catalyst was a 12% loss in 18-to-49 age audiences in prime time in the just-ended season. For the coming season, Khan now forecasts a 17% decline for CBS, a 14% decline for ABC, a 4% decline for Fox and a 5% decline for NBC, which is hosting the Olympics.

Despite that continuing loss of viewers, the broadcast networks reportedly held their own in the current upfront, with ABC and CBS each writing about $2.5 billion in advertisers' commitments, Fox writing $2 billion and ratings also-ran NBC writing $1.9 billion. Even with cable's single digital ratings gains last season, overall television audiences declined 4%--which is surprisingly not expected to have a correlating loss in combined ad revenues.

It is a breed of math that defies logic.

UBS analyst Michael Morris said the marginal lift in overall upfront sales is roughly half the higher low-single-digit rates the networks are charging, acknowledging they will have fewer viewers next season. "They are guaranteeing lower ratings than they did last year," Morris said. In the face of negative ratings and economic trends into 2009, "the more they can sell upfront, the more secure they can feel about their revenue in the coming year," he said.

However, that could be a massive sense of false security, given all the trends.

Industry pundits have said cable networks will attract advertising dollars from their broadcast network counterparts based on their accelerated ratings. If cable ad spending for the 2008-09 season rises as expected, the dollars will have to shift from other media, such as newspapers, radio and possibly even the Internet. Or cable networks could see their ad growth cut in half, as Viacom recently warned for the second quarter.

In the first quarter of 2008, television ad spending increased 1.7%, radio declined 4.2% and newspapers fell 5.2%, TNS said. Digging further still in the first quarter: cable TV ad spending slowed to a rise of 4.1%, syndicated TV rose 11.2% on a bigger supply of programming and limited exposure to the writers' strike, spot television ad sales slipped 2.4% despite easier year-earlier comparisons, and network TV ad sales rose 0.8%--its best quarterly performance in two years.

All traditional media companies are hoping that their Internet ad revenues will more than offset declines in their traditional revenues, which is all the more unlikely during this economic downturn. Google CEO Eric Schmidt says his company has "a moral imperative to help" content producers increase their Internet advertising revenues by targeting ads and consumers. Only about 3% of the estimated $26 billion in 2008 Internet advertising will come from behavioral ads, according to eMarketer.

In fact, the degree to which online ad extensions helped to bolster current television upfront sales by being additive--and commanding their own dollar value as a component of deals--is unclear. In just the past year, advertising and media executives have become more comfortable with acknowledging the value of ads in network content streamed online, but continue to wrestle with ways to quantify and price it.

Hulu.com appears to be making some inroads with an interactive ad sector tool that allows users to select the kinds of advertising they would like to see, thereby minimizing the chance they will skip commercials. That and other demonstrations of reverse psychology may prove useful to the broadcast networks when--not if--their ad revenues follow their long, excruciating audience slide.

Next story loading loading..