UPFRONT 2: Programming Report – So Much for the Extinction Theory

By Alan Gottesman

Earlier, larger buys in the upfront proof of broadcast nets’ viabilityThe chatter about a $6 billion plus upfront market has all but smothered the cries about the four broadcast networks being dinosaurs. The prospect of a record-breaking performance is not what you would expect from a business going extinct. It is possible, however, that the ‘strength’ we’re likely to see over the next few weeks is the result of subtle movements among the media world’s tectonic plates–not exactly an earthquake but something that is forcing big changes in the landscape. The extinction theorists may still have a point.

The network television business has grown by at least a third since 1992, enjoying an 8.2 percent compound annual rate of growth, according to data from Competitive Media Reporting. Over the same span, however, total national advertising expanded by more than 50 percent, at a 10.8 percent average annual clip. The medium’s share of all ad volume has declined by two percentage points.

Anecdotal evidence suggests that even as the network medium is losing some of its stature, the upfront selling event is taking on greater importance. It’s highly likely that both trends–a slow loss of revenue share, plus a gravitation toward larger, earlier buys–will continue for at least the next few years.

Network television is a very concentrated business. That, of course, is true for all advertising, where marketers in the 20 largest categories account for about two-thirds of all spending. But in the network business, the top 20 account for three-quarters of the volume. And the concentration appears to be growing, even as the networks’ total share of advertising continues to slide.

That’s important for a couple of reasons. For one thing, an industry whose customers are becoming fewer but larger will ultimately lose bargaining leverage. That may ring a little hollow in light of steep increases in network TV pricing. The point here is that the increase in concentration–which has a parallel dimension as ad agencies pool resources to gain buying clout–is probably not a good thing from the networks’ point of view.

In 1992, when network advertising accounted for 24.3 percent of total national ad outlays, 57 industry groups spent a proportionate share–24.3 percent–or more with the networks. Last year, when the medium’s share of total ad spending dropped to 22.1 percent, only 52 categories spent that much or more of their own ad budgets with the networks, even though the bar had been lowered.

This concentration makes the analysis somewhat simpler because there are fewer variables. A look at the priorities of some of the largest network-TV ad buyers results in a surprisingly bullish case for the industry, especially the upfront market, at least over the next few years.

The largest industry in the U.S.–automobiles–is also the largest advertising category. Factory-level spending on network television alone grew by $40 million per year between 1992 and 1996. The increase, by itself, is about the same as the total ad spending by the computer software industry. That’s a lot of money. But the growth rate of auto spending on the networks was only 28 percent in that four-year span, less than the medium’s 37 percent overall increase. Automakers’ spending for all media grew by 55 percent in the period versus the 51 percent gain for all advertisers’ national spending. Car advertisers, it seems, are driving elsewhere.

Other industries, however, are coming in to the networks’ fold. The movie industry, for example, vastly increased its advertising budget, up $833 million over the four years, a gain of 98 percent. In fact, the studios came to rely even more heavily on network television, where outlays rose by $361 million, or 119 percent.

Why the shift in ad spending? Hollywood has become a big-stakes place, with more than $100 million at risk on many productions. As the amount at risk has gotten bigger, the marketing has become more aggressive, more consistent and more planned. The studios have become choice network customers since their products are in national distribution, and they can benefit from upfront purchasing as a way of locking in key dates. They are not, however, especially price sensitive, an attribute you like to see in your clients.

Restaurants are another hot category propelling network TV’s growth. Feeders’ total ad outlays went up slightly faster than average, by 59 percent over the 1992-96 period, but spending on network television grew 83 percent in the same span. Perhaps these marketers are responding to new research that indicates recency of commercial exposure can be as important, or even more crucial, than the standard measures of reach and frequency. With a multitude of national brands and a requirement for a constant din of advertising, this group is clearly a prime candidate for the network upfront race.

The networks’ continual audience erosion is another important consideration. Time bought in the upfront market comes with a guarantee as to audience size. That, by itself, is reassuring. But with audience estimates more apt to be higher than actual performance, this guarantee distorts the market in a number of ways. For one, as upfront buyers are given ad units to compensate for ratings shortfalls, whatever time remains on the market takes on a scarcity premium. Prices can reach dizzying heights, which makes the medium less attractive to the marginal buyer but more attractive to the very large advertiser. This is probably a major factor behind the medium’s increasing customer concentration.

In addition, the audience deficiency units may not be in shows that an advertiser would have selected ordinarily. Since there’s not much choice, advertisers generally take what they are given. This, however, has the effect of commoditizing the medium, equating all gross rating points with all other points, regardless of qualitative considerations. That’s less of an issue for the mega-spenders but probably intolerable for the little guys, another factor behind the continued concentration. Buying time in the upfront market provides some immunity from price uncertainty and scheduling problems, but it requires a large investment and leads toward regarding airtime as just another commodity. It’s not, if it ever was, a ‘value’ sell.

Right now, network television remains the most efficient way for most advertisers to distribute a message on a national scale. Even with the decline in audience share and increase in prices, a spot on a web is relatively cheap. A recent analysis concluded that the price of buying a prime-time network spot, with the message appearing simultaneously in more than 200 markets, was about the same as buying spots on individual stations in markets 1 through 50. And that’s with no regard for the mechanics and effort involved in making a multi-market purchase.

It seems clear that until something cheaper comes along, the networks will have a valuable commodity to sell. It is also likely, however, that they may be depending on a declining universe of customers who use the upfront market as a risk-avoidance mechanism. If alternative media get stronger, it will take the defection of a relatively small number of advertisers to prove the dinosaur theorists correct.

Copyright ASM Communications, Inc. (1997) ALL RIGHTS RESERVED