TV Marketers Pull Back Upfront Buys: What Happens Next?

By Jon Lafayette
TV Week

The recession is finally having a deep effect on the national television advertising market.
Last week, major media companies reported that marketers have been exercising options to cancel some of the second-quarter commercial time they bought in the upfront.

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As of last week, the cancellations were running between 10% and 15% of upfront revenue, and there were still a significant number of large advertisers that hadn’t made a decision yet. In the previous quarter, cancellations were only slightly larger than normal.

Network executives commenting last week on the rate of second-quarter cancellations said they had expected worse, and had seen worse in past downturns.

Peter Chernin, chief operating officer of News Corp., said that about 8% of Fox Broadcasting’s second-quarter upfront sales had been canceled.

“We would expect that to end up at about 11%,” Mr. Chernin said, adding that normally cancellations are in the 7% to 8% range.

“We’re a little higher than we’ve been running in the past several years, but honestly we’re feeling that’s a little better than we expected,” he said.

At Walt Disney’s ABC, upfront orders are “coming in slightly lower than what you otherwise might have expected, but not to the extent that we’re alarmed about that,” said Tom Staggs, the company’s chief financial officer. “We’re seeing a little more holdback in consumer goods and, to a lesser extent, pharmaceuticals, with some strength in some other categories.”

David Levy, president of Turner Sales and Turner Sports, also said options were running lower than expected so far.

“But we’ve given out extensions, so we don’t know where this will end up,” he said. “I do believe it will be higher than last year for sure, but I’m not sure it will be the highest we’ve ever had.”
Mr. Levy said advertising budget cuts are deeper than they were during the media meltdown in 2001.

Those assessments are the most tangible reflections of how the declining economy is reverberating through the television ad market. The pullbacks announced by media companies on last week’s earnings calls could signal how a reduced flow of advertising money will play out in the May upfront, as well as the scatter and cable markets.

Some major marketers, led by Procter & Gamble, have cut their upfront buys by the contractual maximum of 50%, network executives said. General Motors is believed by some market observers to have canceled half of its upfront buys as well.

Some of the upfront money may go to prop up marketers’ earnings. In other cases, marketers might cancel upfront options, then come back to the networks in the scatter market to try for better prices.

“I do think that some of the money that’s coming out of the marketplace is going to be coming back in,” said Andy Donchin, director of national broadcast at media agency Carat.

At Scripps Networks, where cancellations of upfront orders were running in the low teens, President John Lansing said many of the advertisers taking options are jumping back into the scatter market.

Some of those advertisers may be hoping to buy ads at lower prices, but, Mr. Lansing said, “We will be very determined not to break our pricing structure.”

Most network sales executives say they have kept their prices at or above upfront levels in the scatter market so far.

“We have not done any rollbacks. If anything, we’ve gotten slightly higher scatter rates,” Mr. Levy said.

He’s hoping advertisers taking options on broadcast will move some of those dollars to cable, where ratings points are substantially cheaper.

“Advertisers right now have to have efficiencies,” Mr. Levy said. “We’re hoping that our brands, our promotions, our product integrations are what’s going to keep people within us. We’re working with our clients right now to make sure they’re getting the biggest bang for their buck.”
Pricing is likely to be an issue as advertisers and the networks head to the upfront.

With their ratings shrinking, the broadcasters can’t preserve total revenue levels if they cut prices on a cost-per-thousand-viewers basis, one buyer said. Cable sales executives also have been working to avoid cutting their CPM prices.

If there is money in the scatter market, and that money is joined by funds that have been pulled out of upfront options, prices could hold.

But the buyer said clients are exerting incredible pressure to bring down media prices.With advertisers expecting lower prices and networks holding the line, it’s unlikely that the upfront will be a smooth one.

“In theory, we could be entering one of the most highly unstable times for TV ad pricing ever,” Sanford Bernstein analyst Michael Nathanson said in a research report. “With an eye on lowering their CPM costs, clients could shift money out of higher-priced broadcast inventory and reapportion that money to cheaper cable networks.”

Alternatively, that money could be held back by marketers, drying up demand for scatter advertising and depressing prices in that market.

“The truth is no one knows anything until we get to the middle of the second quarter,” he said.Mr. Nathanson noted that in a weak market, “Network owners will face the critical decision of whether to accept lower upfront prices or hold back inventory in the hopes that a late 2009 economic recovery will drive more robust scatter pricing six months henceforth.”

But calling a bottom on the recession will be risky given the unprecedented economic conditions.
In 2001, CBS tried holding back inventory from the upfront in hopes of selling it at higher prices in the scatter market, but that strategy was foiled when the Sept. 11 terrorist attacks undercut the economy’s building recovery.

During the 2001 recession, CBS sold just 55% of its inventory, Mr. Nathanson said.Still, in times of uncertainty, avoiding the long-term commitment of an upfront buy could be attractive.
“This could be the year scatter becomes a lot more attractive on both sides of the desk, rather than committing all this money in the upfront at a number you’re not comfortable with,” a media buyer said.