Idle Threat?

GM’s stall tactics chill upfront, but history favors the networks

General Motors is driving a hard bargain, calling on broadcast networks to roll back pricing on their 2012-13 upfront inventory by as much as 20 percent—an opening gambit that has yet to pay off. And while a standoff could result in GM sitting out the spring bazaar altogether, the automaker’s absence is unlikely to have a long-term impact on annual TV revenues.

According to multiple sources, broadcasters have rebuffed GM’s price-slashing overtures, leaving the third-biggest TV advertiser idling as other major auto manufacturers lock up their own advance commitments. And yet, even if GM were to pull out of the upfront marketplace altogether, history suggests it won’t undermine the networks’ overall sales performance.

Here’s the precedent: Back in May 2006, pharma/CPG giant Johnson & Johnson elected to sit out the upfront, choosing instead to buy time on the networks on a calendar-year basis. In other words, rather than begin ponying up for time on the 2006-07 schedule in the spring, J&J would instead begin making its investments that August.

At the time, J&J said its decision to shift its TV buying to late summer reflected a desire to align its media-investments cycle with its business-planning cycle. The company’s overall TV spend was not compromised by the delayed investment; J&J in 2007 spent $862 million on national TV (broadcast, cable, syndication and Spanish-language), down just 2 percent from $878.2 million the previous year.

J&J’s broadcast spend for 2007 was $475.2 million, down 4 percent versus the previous year.

And while J&J would radically restructure its 2008 spend, cutting its broadcast investments in favor of more cable and syndication opportunities, the company’s overall TV outlay was flat versus the year-ago period ($865 million).

In a nod to the cable model, in which as much as 40 percent of the available inventory is sold on a calendar-year basis, Coca-Cola and Bridgestone joined J&J on the sidelines in 2006. Neither spent significantly fewer dollars on TV in the intervening period.

If J&J’s spend lags behind GM’s annual investment—per Kantar Media, the automaker last year spent $1.11 billion on TV, a figure topped only by Procter & Gamble’s $1.72 billion and AT&T’s $1.33 billion—it’s not exactly chickenfeed, either. And the decision to stand down during the 2006-07 bazaar had no material impact on J&J’s overall TV investment, largely because the company never intended to abandon the medium.

Unfortunately, GM hasn’t been nearly as vocal about its support for any media platform. In short order, global chief marketing officer Joel Ewanick pulled $10 million in Facebook advertising, walked away from the Super Bowl and asked broadcasters to swallow those 20 percent price cuts—this as the Big Five nets are booking average increases between 5 percent and 9 percent.

And while no one expects GM to back out of national TV in a significant way (the company says its overall ad spend will be flat versus a year ago), the gamble it is taking with this hard line stance is a risky one. Not only is GM putting a good deal of strain on its relatively friendly rate schedule—as an eons-old TV sponsor, the car company enjoys the luxury of paying far lower CPMs for prime-time inventory than, say, an Apple or a Chipotle—but if it should walk away from the table, its essential fall buys are almost certain to be priced well above scatter rates.

No upfront commitments would also shut GM out of desired program selection and, perhaps most importantly, guaranteed ratings deliveries. 

While it’s anyone’s guess how the standoff will shake out, sellers are operating under the assumption that GM and Carat will blink first. “There are two things GM cannot do without, and they are fall TV and the National Football League,” said one ad sales exec. “If they want to move their 2013 models, they need to buy network TV, they need to be all over football. It’s as simple as that.”

Per Kantar Media estimates, GM spends 49 percent of its annual broadcast TV budget on sports—$274.4 million out of a pool of $563.3 million. Of the $470.5 million the automaker invested in nationally televised sports (broadcast, cable, Spanish-language), 34 percent, or $159.7 million, was devoted to time in and around NFL games.

A former sales exec nearly sputtered with disdain for GM, saying its demands amounted to a betrayal of a decades-old understanding. “For 50 years we’ve planned our schedules around cars. The entire rationale for the upfront was to line up the new shows with the new cars,” he said. “This is a shot in the mouth.”

Sellers who are actively participating in this year’s marketplace were a bit more sanguine. “Look, nobody’s thrilled about this,” said one exec, clearly warming to the subject. “But no single client can control much of the marketplace. Say you do $30 million in business with your biggest client. They disappear altogether, who knows why. So you’re out thirty, and that’s too bad, but say you do $2 billion in overall business. That’s 2 percent of your total. That’s not nothing, but it won’t send you to the poorhouse either.”

And should others follow suit in this entirely hypothetical exercise? “Would they? I’m not sure I follow the logic,” the sales exec said. “There’s a reason the clients invest $40 billion in TV every year. Is it perfect? It was never perfect. But it works better than anything else.”

That sentiment is echoed by Pivotal research analyst Brian Wieser, who in a nod to Churchill, characterizes TV as “the worst form of advertising, except all the others that have been tried.”

As Wieser observed in a recent note to investors, anyone who can demonstrate a credible ability to walk away from the table is likely to command at least some sort of price reduction. Trouble is, broadcast TV continues to hold most of, if not all, the cards.

“Network TV remains a fixed starting point for TV plans, and will continue to serve this purpose for as long as it satisfies goals better than any alternative that may be tried,” Wieser wrote. “Neither cable TV nor online video, nor other media yet provides sufficient credibility to accomplish this goal for the largest brands, even as incremental shares of marketers’ budgets shift to new platforms.”

In the wake of GM’s Facebook divestment, Wieser last month predicted there would be some sort of dustup between GM and the networks. The very public announcement signaled GM’s “willing[ness] to walk away from any given negotiation,” Wieser said.

Facebook aside, the first real rumblings of a GM insurrection began resounding in February, when sources confirmed that the automaker had pulled out of 50 percent of its second quarter upfront commitments.  

Thus far, no one involved in the GM staring contest has blinked. In the meantime, it may be worth recalling a more distant precedent. When CPM premiums swelled to an unprecedented 25 percent during the 1975-76 upfront, J. Walter Thompson, then the largest TV agency in the business, decided to sit it out and wait for more reasonable rates. After all, it seemed a safe bet that the networks would temper their pricing rather than risk losing out on their share of JWT’s $95 million purse. 

It was a bad bet. Ultimately, JWT got burned and wound up paying even higher rates in scatter for what amounted to a bunch of leftovers, and no agency since has tried to play a game of chicken on that scale.