Cable nets may swap rates for greater share

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What a difference a year makes. Even bullish, relentlessly optimistic Viacom President-Chief Operating Officer Mel Karmazin acknowledged in April that this upfront season will be more challenging for networks due to the economic slowdown. * Mr. Karmazin was overheard at an industry conference saying that last year was a seller's market, which benefited Viacom's fleet of cable networks from MTV to TV Land. This year, he conceded, will be a buyer's market.

But Mr. Karmazin stopped far short of predicting any gloom for his huge company. Of course, it might take Armageddon to do that.

For network executives like Mr. Karmazin, the recent upfronts, driven by the late 1990s stock market boom, are now in the rearview mirror.

TABLES HAVE TURNED

The tables have turned, and media buyers who had to sheepishly go to clients and report sizable price hikes now are looking forward to currying some favor with their paying customers by presenting them better deals.

Last year's cable upfront saw double-digit price increases over 1999 levels for some networks. This year, increases aren't expected to even come close-if they happen at all. Some media executives are predicting cost-per-thousand rates may remain the same or even decline. Others say single-digit increases may still be likely.

"The ad economy and overall economy clearly are not as strong as we'd like them to be," says Larry Goodman, president of ad sales-marketing for AOL Time Warner's CNN. "It will not be a market where sellers have the kind of leverage that we've enjoyed over the past four or five years, that's for sure."

Media buyers are eager to get the upfront started, and sellers would like to wait until there are some signs of an economic upturn. That game of chicken is just one reason why this upfront is shaping up to be an intriguing one to watch for the neutral observer outside the fray.

Consider: One of the most influential people on upfront fortunes may not be a Karmazin but Federal Reserve Chairman Alan Greenspan.

ECONOMIC FORECASTERS

In each spring upfront, media buyers purchase airtime months before the ads begin running in the fall, so clients engage in economic predictions for the next 20 months before deciding how much money to put forward. This year, with a sputtering economy, there may be a greater degree of gambling involved. But economy-boosting moves by Mr. Greenspan as the upfront approaches-with resulting stock-price advances-could embolden advertisers to release larger budgets and sellers to push for higher prices.

For their part, media sellers are trying to use the uncertainty surrounding the future economy to their advantage. Some have seized on the notion that the economy will pick up in the fourth quarter as a way to market to buyers and gain some leverage. The economy will hit bottom in the second and third quarters, they say, but is likely to improve thereafter. Their argument holds that this would drive scatter prices higher.

Thus, they feel they can still pursue spending increases.

"Most advertisers will tell you it's a difficult first quarter, second quarter, third quarter, but next year will be better ... '02 will be better than '01," says Tom Freston, chairman-CEO of Viacom's MTV Networks.

Realizing that client budgets are likely to remain flat or even see some decreases, some cable networks will likely pursue a share strategy as a way to keep their revenues up. Under that tack, networks-especially larger cable players such as a TNT or a USA-might go to an agency buyer for either an individual client or a group of them and offer low CPM increases or even flat rates in exchange for a larger share of a total ad budget.

Of course, that strategy is not without risk from a selling perspective. If the economy starts to swim again and the scatter market sees a price increase, then a network might have locked up inventory at a below-market rate.

"Some sellers are going to have to be careful about how much of a share strategy they adopt because if the economy rebounds ... people who took too much money at CPMs that were too low would all of a sudden, in a tightening ad market with more demand and better CPM potential, be looking at lost revenue potential," Mr. Goodman says.

A similar risk comes with making early or pre-upfront deals. Some networks fearing revenue drop-offs may seek early deals at lower CPM levels as a way to simply stave off a revenue migration in the economically troubled sea. But once again, if things pick up, then networks may feel they moved too quickly and missed an opportunity.

"In a weak market sometimes going early can hurt you because you may underestimate the potential of the market," says Joe Uva, president of AOL Time Warner's Turner Entertainment Sales. "If it turned out to be stronger, you really left money on the table."

Mr. Goodman says CNN would evaluate early deals, but wouldn't engage in any kind of fire sale. "If we get the right price, we'll sell it," he says. "But if we have to discount too severely, we won't move it."

The bumpy economy isn't all bad news for cable.

Since the medium is priced lower than broadcast, cable executives might be able to attract advertisers seeking to be more cost efficient as dollars get scarcer.

SPRINGBOARD EFFECT

And cable executives are likely to use the economy as a springboard to talk about the niche programming aspect of cable and how the medium can be used to target audiences more directly, thus maximizing a trimmed or pressured budget.

Cable executives also may trumpet the brand identification of their networks, which they feel generates more consumer loyalty because of their more-defined audiences.

"Advertisers still have to spend and they're going to spend where the programming has a connection with the audience," says Sean Moran, director of ad sales-Eastern region for Viacom's VH1.

It is that basic tenet of marketing-that advertising is an essential part of a functioning business that can be tinkered with, but not abandoned-that's also giving ad sales executives some confidence.

"You can't shut down advertising for" the long term, Mr. Freston says, acknowledging it could be scaled back for a brief period.

"People start worrying about their brands and the fact that if they're not out there making noise, sooner or later brand identity is not protected," Mr. Goodman says.

Other factors giving the cable upfront a different face from recent years are any job actions from the actors unions, and the writers union, which still must ratify the tentative agreement reached with producers earlier this month.

But some cable executives-particularly those who work for sports, news and documentary-heavy networks-are preparing to spin any strike activity into an advantage. With reruns possibly dominating broadcast networks during a work stoppage, more viewers might gravitate to cable, where the programming lineups would be less altered.

"All the cable networks that don't rely on new scripted product will be better off because there'll be fewer people watching reruns on the networks," says Mr. Freston.

GETTING A LEG UP

Some cable networks also feel they can gain a leg up in this upfront because of strong Web sites affiliated with their networks. In an intriguing twist, the Web sites linked with cable outlets-such as cnn.com, espn.com, msnbc.com and mtv.com-have as a rule been more successful in driving audiences than their TV-associated brethren. As a result, cable executives feel they can offer joint ad/sponsorship deals packaging and connecting their networks and their Web sites in creative ways to drive ad sales in a slowdown.

"There are powerful value-added opportunities whether they be promotions on-air or marketing platforms that extend from our networks to our Web sites," Mr. Uva says. "In a strong market, [Turner] uses those resources to drive price increases. In a market such as this, we would use those as incentives to have advertisers increase their share of spending with us."

In that vein, this upfront also could mark a watershed for cross-media deals. Deals where advertisers buy space across a variety of media from large, multiplatform media companies have been on the increase.

This will be the first upfront in which Turner sales executives are armed with the resources of the full AOL Time Warner. Competitors such as News Corp., Viacom and Walt Disney Co. will be attempting to do the same. The upfront will continue to be known as a TV buying period, but it may take on a different face in years to come, as audiences continue to fragment and advertisers seek to follow them.

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