Upfront TV Ad Economics 101, Broadcast Revenues Likely To Fall
June 9th, 2008 by Bill Gorman
I wondered earlier (somewhat tongue in cheek) about how ads would be sold in the current TV upfront advertising season. Now that negotiations seem to be substantially complete for most of the broadcast networks, and in light of the glowing, upbeat, uncritical coverage of the upfront selling results I thought I’d shed a bit of light on all the claims in the television trade media. Understand that I have no inside information, and even worse, am relying entirely on published accounts of results that may be somewhat or entirely wrong.
Here’s what has been reported:
The industry as a whole booked about $9.2 billion in upfront ad sales, an increase over the $9.1 billion last year.
- CW secured CPM [cost per thousand viewers] increases of 6-8%.
- NBC secured CPM increases of 6-7.5%, or 5-7%, 5%, or mid to high single digit increases.
- ABC secured CPM increases of 8.5-9%, 9% or “about 9%”.
- Fox secured CPM increases of 8-9%, “about 9%”, “bigger CPM increases than ABC”.
- CBS secured CPM increases of 7-8%, “a tick under [Fox and ABC]“, “tucked behind ABC“.
Sounds pretty good doesn’t it? Increases of 5-9% on anything in the current economy? But let’s look at some basic facts.
- An increase in ad sales dollars during the upfront period doesn’t equal an increase in overall ad sales or revenue. It could just be advertisers shifting their buying from the later “scatter” market (buying available inventory later in the year). That won’t be known till much later, and the fawning trade press will have moved on.
- An increase in CPM doesn’t equal an increase in revenue. The TV networks saying “Our CPMs increased by 8%” is like GM saying “We’ve increased our car prices by 8%” not “We’ve increased the number of cars sold by 8%” or “We’ve increased our revenue by 8%”. And unlike most markets, the sellers [TV networks] of the product [advertising availability] do not control the supply, TV viewers do.
- Unless viewership bounces back substantially from the strike plagued 2007-8 season the broadcast networks will suffer revenue declines, not increases, compared to previous years. If we assume that advertising availability is tied to the adults 18-49 viewership of the different networks [which is the best guessing we can do given our limited data], then CBS and CW lost 20%+ of their advertising availability between 2006-7 and 2007-8, ABC lost 16%, and NBC lost 10.5%. Only Fox saw an increase [of 3.9%] much of that attributable to the Super Bowl, which NBC will have next year. The conventional wisdom is that viewership will increase next season compared to 2007-8. I think that’s reasonable, but I don’t think it will increase enough to increase the revenue of most of the networks. If your prices increase by 8%, but your “production” falls by 10%, that’s a revenue decline of 2%. Long term broadcast network viewership is in decline. That trend accelerated substantially in 2007-8 because of the strike. I think it’s reasonable that it returns to it’s long term trend, but that still would argue for a decline in both viewership and advertising revenue.
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Given the widespread predictions of weakness in this year's upfront, isn't it fair to say that the market came up strong for broadcasters?
The likelihood is that revenue will be up this year at every broadcast network, and perhaps up quite substantially. The scenario you outline in which ratings don't bounce back from the strike season seems awfully bleak to me.
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I'm guessing this spring was the last "normal" upfront for the nets and that next year will be harder. We'll see. If the actors strike *that* would be really gloomy, and then of course, all bets would be off.
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I think it's reasonable to guess that revenue in 2008-9 is slightly up vs. 2007-8 because price increases will outdo any ratings decline [or strike recovery increase], but 2008-9 revenue will unlikely be up vs. 2006-7 because even with a 2 year price increase of 10-18% viewership losses in those two years will have been even greater.
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Not true. Networks can and routinely do control their supply, usually by adding more commercials. Sometimes this can have a greater impact than rising or falling ratings.
Fox is famously controlling its supply in the coming season in the opposite direction by reducing commercial load in two new programs, which drove up the cost of these shows. What Fox hasn't told us is if the deleted spots from those shows will be filtered in throughout the rest of their primetime lineup.
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If we can agree on a credible source for revenue data, I'd offer you a friendly wager that total revenue for the four major broadcasters will be up over two years ago
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However, I assumed that networks *always* place the number of ad minutes that they believe will maximize their revenue, so any variability in ad availability comes from changes in eyeballs.
The example of Fox reducing the ad minutes during those new shows is consistent with this. They still expect to maximize revenue by doing that, with a combination of higher CPMs and, they hope, higher ratings.
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