TV Bracing for Second-Quarter Cancellations

'Leakage' as High as 12%, Compared With Typical 2% to 4%

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NEW YORK (AdAge.com) -- Hit hard by the flailing economy, advertisers are indicating they will cancel a larger-than-usual portion of their upfront TV buys in the second quarter, according to ad buyers and media executives.

Advertisers commit the majority of their ad budgets to TV in May and June, then have the right to cancel a portion of that promised money during an options window prior to each fiscal quarter. For the 2008-2009 season, marketers committed $9.2 billion to the broadcast TV networks and $7.5 billion to cable. Buyers have said the percentage of advertiser upfront commitments that are canceled, also known as "leakage," typically amounts to 2% to 4% each quarter. The consensus is that cancellations for the second quarter of 2009 could come in between 8% and 12% -- and in some cases even higher.

Buyers and media outlets are in the midst of negotiating, and TV networks have extended the window to cancel options well into February and, in some cases, March; typically decisions are made in mid-January. So there's bound to be lots of posturing until decisions are made.

"Are people panicking? Or are buyers excited about getting discounts?" asked Sanford C. Bernstein analyst Michael Nathanson. "The big unanswered question is: What gets recycled back into the marketplace?"

The dust likely won't settle until late winter or early spring.

Taking a gamble
Advertisers may be taking a gamble by pulling funds. All the networks have shown double-digit percentage declines in household ratings, according to analyst from Wachovia Capital Markets -- except for CBS, which had increased its live-plus-same-day household ratings 2% as of the week ending Jan. 18.

When the networks have fewer ratings points to sell, advertisers need to buy more time in order to reach the same number of consumers they did a year earlier. That means supply is tightening even as advertisers threaten to draw money out of the market. Scatter prices in this case would hold steady, and networks may not be able to accommodate every marketing plan cobbled together on an as-needed basis.

That isn't slowing down the threat that marketers could take money back. At one large media-buying shop, the expectation is that a greater percentage than usual will be taken out of broadcast-network prime time. In cable, a smaller number of options probably will be exercised, the buyer said, but some of that money could end up put back into broadcast.

Media buyers said the large consumer-package-goods companies are taking back money in order to have it closer at hand. The companies aren't necessarily going to cut back on ad spending, buyers said, but they'd rather have the money in their own coffers, able to let it out dollar by dollar as needed, rather than keep it tied up elsewhere.

Cable cancellations
Scripps Networks Interactive, which operates the Food Network and other cable outlets, said Feb. 5 that the percentage of upfront cancellations is running in the low double digits, as opposed to cancellation rates of 2% to 5% in the first quarter.

Speaking to investors on a conference call held by investment-bank Credit Suisse First Boston on Feb. 6, Mel Berning, A&E Networks exec VP-national ad sales, said second-quarter option cancellations could come in at about 10% across cable. Top-tier outlets have been able to maintain scatter pricing, he said, but scatter at other places is down by percentages in the mid-single digits. Mr. Berning said it was difficult to figure out how much money was being reclaimed because of business problems and how much because advertisers are trying to play out the marketplace.

TV executives this week also pointed to advertising softness in the fourth quarter, with more cancellations than expected. Speaking on a conference call with investors and the media on Feb. 5, News Corp. President-Chief Operating Officer Peter Chernin said the company expected fourth-quarter cancellations to "end up" at about 11%, and saw 7% to 8% in the third quarter. "And so, we're seeing an increase, but not increase all that dramatically," he said. Scatter, or ad inventory purchased closer to air date, has been holding at or above upfront prices, he said.

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Marissa Miley contributed to this report.
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