TV networks are now getting hit with the full brunt of a softening economy.
Advertisers are canceling as much as 25 percent, or $300 million, of their upfront buys in the crucial TV network second quarter-more than double the typical 5 percent to 10 percent number for the period.
"It's huge," said one executive who runs a major New York media-buying agency.
Leading the list is struggling General Motors Corp., the nation's leading advertiser, which network sales executives say is cutting $80 million from upfront buys made last spring. This follows a $20 million cutback in the first quarter; combined cuts mean GM has canceled 20 percent of its 2000-2001 TV season upfront network buys.
A GM spokeswoman said: "We have made some reductions in our second-quarter national TV, but our overall ad budget in 2001 is going to remain the same as last year."
GM's 2000-2001 upfront media budget for some of the top broadcast networks looks like this, according to one executive: NBC grabs around $80 million to $100 million; ABC pulls in $60 million to $70 million; CBS, $50 million; Fox, $40 million; and UPN, $5 million. Upfront refers to ad commitments made in the spring for the TV season beginning that fall. Typically, networks sell 70 percent to 75 percent of their ad inventory upfront. The rest of network time is sold in the so-called scatter market-time sold closer to when the commercial runs-or used for advertiser make goods.
Some other major advertisers are also looking to cut back on their upfront TV buys, including Chrysler Group and Procter & Gamble Co.
DaimlerChrysler's Chrysler Group, struggling with red ink since last year, already cancelled an undisclosed amount of first-quarter network TV buys last year, according to an agency exec close to the situation who asked not to be named.
The exec estimated that the auto industry is exercising cancellation options for network TV upfront buys at a much higher percentage than the normal 5 percent to 10 percent annually in recent years. The industry has also made deeper-than-usual cuts in the spot TV market in the past six months.
Chrysler's second-quarter cuts won't be as severe as the first since it has to launch the Jeep Liberty sport utility. The marketer will likely shuffle its TV ad inventory from Dodge and Chrysler brands for the Jeep launch.
Arthur "Bud" Liebler, Chrysler's senior VP-global marketing, declined to comment on specific plans but estimated the auto marketer's 2001 ad spending would be down by more than 10 percent. Chrysler is in the midst of a drastic reorganization to cut costs and jobs.
P&G, the nation's second-largest advertiser, is also looking to cut, according to media buying executives.
"We have taken some cuts for our [April-May-June] quarter," said Tom Millikin, P&G manager-financial communications. "However, we are continuing to invest in our established brands." He said P&G is cutting less from its second-quarter budget than it did last year.
"With all the opportunities we have to reach our target consumers these days, in many of the brands, a reduction in TV spending doesn't necessarily correlate to a reduction in the number of contacts we have with the consumer," the spokesman added.
In a conference call with analysts Jan. 31, P&G President-CEO A.G. Lafley said P&G's marketing spending will be "flat or down" as a percent of sales for its fiscal year, backing away from projections made last year that it will keep marketing spending flat as a percentage of sales. In its fiscal second quarter, ended Dec. 31, P&G's spending as a share of sales fell by 0.2 percentage points, or about $20 million.
The TV market's weakness started in last year's fourth quarter, which typically pulls in 30 percent of all upfront revenue, or $2.46 billion in the recent fourth quarter. Weakness in the economy forced advertisers to abandon many buys just before the fourth quarter began-almost $400 million. During last spring's TV broadcast upfront, the seven networks pulled in $8.2 billion.
Second quarter is the second-biggest quarter 1 roughly 28 percent of the entire upfront. For this year that amounts to $2.3 billion. Advertisers can drop as much as 50 percent of their upfront buys in the second quarter, as well as in the third quarter. Only 25 percent of an advertiser's first-quarter upfront buys are cancelable.
Canceling upfront buys does not necessarily translate into cutting ad spending. Advertisers may choose to reallocate money into the scatter market or local buys.
With an extremely soft marketplace, many advertisers feel they can get better prices in scatter, which has been 15 percent to 50 percent below upfront pricing since the beginning of the fourth quarter 2000.
"There are a number of people releasing their holds to go and buy on the scatter market. That's the real issue. If everyone released their budgets, you have a huge amount of supply," said the executive. Many network sellers say they saw this coming-and sold more inventory with the knowledge that advertisers would make cuts this season. "The scatter marketplace is basically holding to upfront [prices]," said one ad exec at a small broacast network. But even that's different from a year ago, when scatter prices were running well above previously negotiated upfront deals.
Still, weakness in TV advertising could signal turmoil ahead. Second quarter is key for TV advertisers and networks since it can be the harbinger of the upfront sales period that begins in May. One exec at a small broadcast network said: "This is positioning time. For the last couple of years, agencies had it forced down their throats. Every agency knows that." Agencies and advertisers aren't buying it anymore.
Contributing: Jack Neff
Copyright February 2001, Crain Communications Inc.