That squeeze will begin to show itself in soon-to-be-announced second-quarter earnings that could take the edge off robust stock prices and bullish short-term earnings projections, industry analysts said.
Analysts estimate the four-network prime-time upfront declined 3%, to $5.7 billion, which could be partly offset by late-year political advertising. (Numbers provided by the networks put upfront sales at $6 billion, the same as last year.)
Even top-ranked NBC barely matched year-earlier upfront sales levels. NBC last week reported a 12% increase in second-quarter broadcast earnings on an 8% rise in TV network profits, in line with analyst projections.
Christopher Dixon, analyst for PaineWebber, estimates NBC and Fox Broadcasting Co. will dominate Big 4 network profits, which will decline to about $200 million from a collective $800 million in 1997.
"The combination of a flat upfront market with lower sellout suggests that network scatter will be weak and that overall network profitability will be down," Mr. Dixon said.
"With an incremental $650 million in cost increases from the NFL programming package, overall network profits will decline. Profitability swings will be driven increasingly by the network spot market, which is more sensitive to ratings shifts than the upfront market," Mr. Dixon said.
PROJECTIONS MAY DROP
David Londoner, analyst for Schroder & Co., said recently reduced profit projections for the broadcast TV networks may need to be lowered again if fourth-quarter ratings and scatter sales are weak.
The bid for higher unit prices during the new season, especially for ABC and CBS, will hinge on dramatic improvements in ratings and pricing in the scatter market, where more ad inventory has been shifted.
Mr. Londoner estimates in 1998, Fox network earnings will decline 160%, to a $15 million loss; ABC TV will see network profit decline 30%, to $260 million; and NBC's network profits will fall 18%, to $408 million.
CBS, WB SHOULD CUT LOSSES
Mr. Londoner expects CBS to cut its losses 35%, to $75 million, in 1998. The WB also will cut its losses, to $70 million, while UPN's losses should swell slightly, to $180 million this year.
Jessica Reif, at Merrill Lynch Co., is among analysts who recently lowered overall 1999 earnings estimates for CBS, expecting that TV network profit will be held to $50 million by hefty National Football League costs.
"Soft network ratings are the culprit. In its key prime-time demographic of adults ages 25 to 54, CBS was down by more than 10% during the second quarter," Ms. Reif said. "If prime-time audience delivery declines even slightly, CBS will likely find it difficult to post any increase in unit pricing in the 1998-1999 television season."
That would result in advertiser make-goods, more cost cutting and steeper losses.
IRREVERSIBLE AUDIENCE LOSS
Ms. Reif said the four broadcast networks' continuing loss of audience to cable TV cannot be reversed and has been compounded by rapidly increasing their ad inventory in an effort to offset audience deficiencies.
As the only pure broadcast player, CBS would appear to be the most vulnerable. But CBS earnings so far have been protected by the strength of its radio and TV stations, Ms. Reif said.
While the anemic upfront has rendered a new round of cost cuts at the broadcast networks, particularly ABC and CBS, analysts said that will not offset huge costs associated with the new NFL pact and the "ER" renewal.
Increasingly, companies such as NBC, Walt Disney Co. and Fox are focusing on creating new revenue outlets from cable, Internet and merchandise-based businesses.
Ms. Mermigas is financial editor of Electronic Media.