The move, which startled a number of media buyers, was revealed in Scripps' third-quarter earnings announcement. In the Oct. 11 report, Scripps noted, "In the third quarter of 1999 the company accrued $2.5 million for 'makegoods' to HGTV advertisers related to possible underdelivery of audience levels since 1997."
Scripps spokesman Mark Kroeger confirmed the underdelivery was the result of national spots being placed in time slots where they were covered on some cable systems by local spots. He would not comment on the value of advertising affected, but said the $2.5 million should cover any make-goods that have to be given to advertisers.
The accusation that HGTV engaged in the practice was first revealed in a legal action against Scripps filed in New York state Supreme Court by Reese Schonfeld (AA, Sept 27). Mr. Schonfeld is the founding president and former CEO of Television Food Network, a company co-owned by Scripps.
Various parts of the legal action, which was moved to federal court, are still pending. Contacted late last week, Mr. Schonfeld declined comment.
Ken Lowe, HGTV president-CEO, sent a letter in recent weeks to a number of media buyers responding to revelation of the suit in Advertising Age.
The letter says HGTV "has never instituted a policy of 'fraudulent selling of billing' " and has asked its accounting firm, Deloitte & Touche, to "help us review our records. . . . If this review in any way discloses advertising shortfalls, discrepancies or irregularities that impact you or your clients, we will contact you shortly."
Howard Nass, senior VP-director of local broadcast for TN Media, New York, was surprised at the latest revelation by Scripps.
"This truly scares me," he said. "If HGTV has done this, you wonder what bigger cable networks have done it or are doing it."
Indeed, a top ad sales executive at a major cable network told Ad Age, "I could name two or three other networks who also sell national spots that get covered locally." The executive declined to name the networks and insisted his did not engage in the practice.
The National Television & Radio Committee of the American Association of Advertising Agencies took up the issue at its most recent meeting. The committee will query various cable networks about their policies, and plans to invite Joe Ostrow, president-CEO of the Cabletelevision Advertising Bureau, to talk about the issue.
Typically, when a network accrues money for make-goods due to underdelivery, it is because of a ratings shortfall. HGTV doesn't have that problem; in the recently completed third quarter, during an average minute over 24 hours 220,000 homes had TVs tuned to HGTV, compared to 136,000 homes in the third quarter last year, according to Nielsen Media Research.
"Their ratings have been good, and they haven't had a problem overpromising in their ratings guarantees," said one media buyer about HGTV.
In its financial report, Scripps said the $2.5 million it has accrued for the possible underdelivery "reduced net income $1.6 million (2 cents per share). HGTV expects to be able to insert the make-goods in available inventory in subsequent periods."
At least one media buyer speculated the amount due in makegoods could exceed the amount set aside if the practice was widespread.
James Marsh, analyst at Prudential Securities, said the make-goods represent "another black eye at a time when the company is trying to get its footing."
Scripps TV operations, particularly its station group, have been hurting for the last six quarters, with margins dropping from the 40% to the 30% range, Mr. Marsh said.
But Scripps cable operations are growing quickly, excluding the special charge. HGTV's third quarter operating cash flow rose to $3.4 million from $900,000, and revenue rose 58% to $36.7 million. Food Network revenue jumped 53%; operating cash loss was trimmed to $1.8 million, from $2.3 million last year.