Strong Upfront Now a Little Less So

In May and June advertisers placed about $18 billion in upfront national TV spending commitments for the 2010-11 season, up about 20 percent over the prior year. But with increasing signs that the economic recovery may take longer than expected, buyers say some clients have indicated they'll spend less on ads next season than originally anticipated. And many other advertisers are now considering whether to reduce their original upfront budgets as well. 

"If ever there was an environment for rethinking ad budgets this would be it," said the head buyer of one major holding company media shop, who asked not to be named. He notes that he already has had one client cut back significantly.

At a minimum, buyers and sellers said they expect roughly $450 million in commitments made in the spring to fall out of bed. And the total could reach $1 billion or more as the season progresses, when options to make further cuts kick in for the first, second and third quarters.

Typically, once an advertiser places a firm order for upfront time -- and those orders are being placed now -- the fourth quarter is firm. But usually clients get a window in which to reduce first-quarter purchases by between 25 percent and 50 percent, and second- and third-quarter buys by up to 50 percent.

Back in the spring advertisers made verbal spot-buy commitments, with requests that the networks hold time in reserve for them. The difference between the so-called "hold-to-order" requests in the spring and pared-back final orders submitted in September is known as "breakage."

Last year, when the recession was in full swing and many budgets were low, breakage was virtually nil, buyers said. This year, breakage rates are expected to pop back to the normal range and, possibly, higher.

Sources at several networks acknowledged that they are currently seeing breakage in the 2 percent to 3 percent range, which is about average for a typical year.
How much budget trimming actually takes place will be determined, in part, over the next several weeks when most national TV clients will submit their final upfront orders for the coming season.

"There are a lot of economic indicators suggesting breakage could go above normal, but I wouldn't expect it to go above 4 or 5 percent," said one senior buyer. "And 5 percent is a lot." But at the very least, he added, "it will be back to normal levels."

Analysts agree that the signs point to potential ad cutbacks.

"I think it's a legitimate concern," said Jon Swallen, svp of research, Kantar Media, a unit of WPP. "When the TV market started picking up around the first of the year, it was a case of advertisers being more bullish on the economic prospects and consumer spending." At the time, he added, "advertiser spending was outpacing consumer spending," in effect a bet that the latter would pick up steam over the course of the year.

But that hasn't happened, Swallen said. "By all measures consumer spending remains kind of soft, with lingering concerns about unemployment and the possibility of economic growth easing," he noted. "And the prospects for an increase in consumer spending are not real good. I think six months to eight months into this cycle advertisers are forced to reassess."

With formal orders due in about two weeks, many clients are now going through just that kind of reevaluation process, according to buyer sources. But there are advertisers who are standing pat.

According to Steve Farella, CEO at TargetCast tcm, the shop's clients are sticking by their commitments despite the ominous economic signals.

"From my perspective I think there's a huge disconnect between uncertainty in the economy and media budgets," he said. "It tells me we have clients that are trying to get ahead of it and make sure their businesses remain strong even in a weak economy."

And with the Dow Jones Industrial Average falling below 10,000 again last week, he added, "somebody's budget is going to feel it."

Over the past several weeks agencies have been making upfront presentations to clients as the latter have been preparing to make their final spot purchase orders. And buyers report hearing a lot of concern about the economy.

"Clients have a been asking a lot of pointed questions about just how much flexibility they have in their budgets should things take a turn for the worse," said one source who has attended a number of recent client meetings.

"There's certainly some breakage going on," said Harry Keeshan, evp, national broadcast at Omnicom's PHD. "I assume there will be more than there was a year ago." He noted that many clients, having recently been briefed on upfront prospects by their media shops, will soon decide whether or not to cut back from their original commitments.

"Now is the time for the marketing guys to go back to their CFOs and say, 'I'm ready to do this,'" said Keeshan, referring to clients making a final decision on their upfront buys.

And the economic news between now and mid-September may impact the extent of this year's breakage, he said. "Every bit of shaky economic news is cause for a little concern," noted Keeshan. "And I think we will go through these ebbs and flows over the next six to 10 months."