Advertisers Show Cablers the Money

While the U.S. broadcast networks will still take the lion’s share of the upfront advertising money for the 2005-2006 television season, cable is poised to take the biggest bite ever out of the overall advertising pie. The early consensus is that cable will increase overall revenue by about seven percent, with some networks enjoying significant CPM (cost-per-thousand) increases, while broadcasters’ ad take will be flat, with mostly modest CPM gains - the notable exception being ABC, thanks to the triple play of Lost, Desperate Housewives and recent hit Grey’s Anatomy.

Industry analysts expect cable, as a whole, to increase its share of upfront revenue by $500 - $700 million dollars, or about seven percent, over last year’s record $6.3 billion upfront take. By comparison, the broadcast networks, which took in approximately $9.1 billion, are not expected to see much of an increase even though overall ad spending - which includes Internet, radio, TV and print - is anticipated to be in the $150 billion range, thanks to the health of advertising markets in general. Syndication - which brought in $2.8 billion last season - is also expected to be flat, or see small gains.

While broadcasters still assert that their networks can aggregate large audiences better than cable, advertisers are responding to more than just mass appeal. Precisely because they do not have the platform that free-to-air broadcasters do, cable networks have been forced to be more diligent when it comes to building their brands. Research released in December 2004, from Beta Research’s Ad Executive Survey, indicated that cable networks actually outscored broadcasters in some major areas. The top two cable networks in terms of brand image - ESPN and Discovery - ranked higher than NBC, the highest rated broadcaster at the time. The other three major broadcast networks ranked behind Food Network, TLC and History Channel. So it wasn’t surprising that ad buyers listed ESPN and Discovery as having the most appealing viewer demographics, with ESPN placed higher than all broadcast nets; and Discovery bested all the broadcasters except NBC. Perhaps most telling, was the fact that a third of the ad execs surveyed said they were prepared to increase the amount of advertising they’d allot to top cables channels including VH1, Bravo, Discovery, MTV, ESPN, TNT, Food Network and Comedy Central.

Also figuring into advertisers’ spending is cable’s continued assault on broadcast viewership levels. For the first time in U.S. TV history, cable beat out the broadcasters in primetime during the February sweeps (ratings period). For the third consecutive first quarter, cable household shares beat broadcast by a 51.9 to 45.8 margin.

In order to take better advantage of their increasing appeal to advertisers, many cable networks, including Lifetime, Discovery, TNT and TBS, started negotiating deals earlier than normal, several weeks before the networks had even finalized their fall schedules. Buyers were agreeable to the accelerated pace because they had already earmarked more of their money to go to cable anyway. The upside for the broadcasters, however, might be that all this early deal-making is actually an indication that more ad money might be available than Madison Avenue (ad agencies) has admitted.

Even though the 2005 upfront is ultimately expected to set the stage for another record-breaking year, most experts said that this year is more of a buyers’ market, due in part to the parity if the broadcasters and because there are more ratings points with which to work. CBS, which took in $2.4 billion in 2004, and ABC, with the relatively paltry $1.7 billion upfront last year, will demand, and probably enjoy, the highest CPM increases. Nonetheless, few expect the increases to be anywhere near last year’s seven percent hikes; even typically spirited Viacom COO Les Moonves has already gone on record saying he expects CBS to only command increases anywhere from five to nine percent.

But for NBC and Fox, the conventional wisdom is that those networks will be harder pressed to justify significant increases. NBC in particular seems the most likely to actually lose year-to-year. At last year’s upfronts, NBC raked in a gaudy $3 billion, but now the network is mired in fourth place among the 18-49 demo, which for so long was its bread and butter. But the loss of Friends and Frasier and the failure of highly touted series such as Joey and Father of the Pride have left the Peacock vulnerable. One estimate suggested that as much as $300 million worth of NBC advertising is up for grabs. Since its merger with Universal, another potential challenge for NBC is that its sales team has been charged with selling for both the broadcast network and the conglomerate’s cable properties. The idea was for NBC to leverage the two, but now, without the leverage of a strong schedule and solid 18-49 demos, buyers will probably resist the strategy.

Fox, however, remains bullish. Fox’s president of Sales, Jon Nesvig, pointed out that “Broadcast networks showed little or no ratings erosion from last year. Fox’s success with House, The O.C., 24 and the continued success of American Idol give us confidence that our upfront selling season will be very successful.”

But some believe the broadcasters have reason to be worried while looking to the future. As Brad Adgate, svp of research for Horizon Media pointed out, “Television networks don’t deliver the audiences that they did a year ago or five years ago, and yet ad prices continue to go up. Advertisers have a lot of choices now; at some point, the bubble may burst.”

Also, as broadcasters make efforts to go more year-round in their programming - a direct result of cable stealing viewers by premiering first-run series in the summer - advertisers may also adopt a more “year round” approach to spending.

Peter Gardiner, Deutsch Inc.’s chief media officer observed, “The big thing we’ve seen is that people aren’t laying everything down on the upfront; people are holding some money back for a bunch of reasons: one is the TV scheduling season has changed pretty dramatically. There’s lots of opportunity to scatter the market for new shows and integration deals.”