But the upfront is far from what Fed Chairman Alan Greenspan might call a "perfect market." There is misinformation, mind games and the fix. The large sellers have better market information, more control and have stacked the deck.
Consider that each network is simultaneously pressuring more than a hundred buyers to make a deal before the inventory runs out. Each network has a good sense of the demand and it knows the range of pricing on the table. The poor buyer knows for sure only what the agency is offered, and knows that much only if she or he has the time to find out.
Consider that the upfront spans two years (fourth through third quarters), requiring advertisers to budget more than a year ahead, long before they've given thought to other media or pricing. A spring upfront made sense when there was a new season but not now, when shows are dribbled in across the fall and winter.
Consider that sellers modulate supply: how much inventory is sold upfront and how much is held for scatter. While buyers seem less able to modulate demand, many prefer to buy it all upfront since it's easier, and scatter has a history of higher prices for poorer inventory and is not as rigorously guaranteed.
Even cancellation options, ostensibly there to protect the buyer, benefit the seller. They encourage advertisers to overcommit, which exaggerates the sellout rate and pushes prices higher. In the world of TV, a fully sold network is 31% cancellable.
And, of course, there is self-fulfilling prophecy. Advertisers buy upfront because the scatter market is unattractive, but the scatter market is unattractive because advertisers buy upfront. So what should be a market-driven decision-"How much should I spend upfront at these prices?"-has become a routine of buying upfront at any price. Experience seems to have conditioned buyers to believe that the economic risk of buying early and paying too much is preferable to the personal risk of holding back and getting shut out.
UPFRONT NOT NEW
For all of its recent celebrity, upfront buying is not new. In the earliest days of TV, everything was sold upfront. Sponsorship discussions started the week after the February Washington's Birthday holiday, and by the end of February the programs and time periods for the following season had been spoken for.
Although it was all upfront, it was different. Negotiations were low-key and discreet, more like private banking than a sheriff's auction. For the turbulent upfront, as we know it, to become the key selling event, the networks needed to control their programming and the new TV season had to be invented.
NETWORKS TOOK CONTROL
In the 1950s, advertisers owned many of the top-rated shows. The networks needed to control them to package the shows with lesser programs. In the late 1950s, the popular advertiser-controlled quiz shows turned out to be rigged. That gave the networks the political cover to take over all programming from advertisers, and they did.
Back then, there was no TV season, either. The start date of each program's cycle determined when its new season began. "I Love Lucy" premiered in October, "Dragnet" in January. Then, in 1962, ABC came up with the idea of premiering all of its programs in a single week following Labor Day. CBS and NBC joined in and by the mid-'60s, the new TV season marked the end of summer as surely as back-to-school.
The 1960s also brought higher costs and bigger risks to TV, forcing advertisers to rethink sponsorship. Costs rose rapidly when live TV production moved to film and the Hollywood studios.
Program risks became greater as a stronger ABC gave viewers the choice of a third network. This meant more shows would fail. The combination of higher cost and higher risk started the advertiser migration from full sponsorship to alternating sponsorship to today's package buying and the upfront market.
By the 1970s, the upfront was strong and the ever-confident networks were testing it with steep price increases. When it went up an incredible 25% in 1975-76, J. Walter Thompson Co., the largest TV agency, decided to sit out the upfront and wait for more sensible pricing. But the timing was bad and JWT's advertisers eventually paid more for poorer programs in the scatter market. That experience scarred buyers and for the next 15 years the major strategy for buying network was to buy it upfront.
Agencies discovered they were powerless to moderate price increases, so they began to promote "clout" and "corporate buying" as a way to beat the market. But by stressing the need for big dollars to get good prices, buyers became in-house advocates for TV. This helped the networks capture a greater share of advertising dollars, which increased the demand for TV time and helped support inflated prices.
Despite the rhetoric of tough negotiation, a supportive relationship developed between buyer and seller, where everyone's vital interests were protected. The evolution of CPM guarantees is a good example of how the system worked.
The first guaranteed CPM was negotiated by American Home Products Corp. with ABC in 1967. It was an informal commitment by a network to protect a buyer who bought early. The networks soon learned buyers would pay a premium for a guaranteed buy and wouldn't be as picky about the programs. The timing was perfect. Despite the celebrity of the Nielsen "Top 10," the TV networks were no longer selling shows, they were selling CPMs. To get the hits at a reasonable price, you had to take other shows and you had to buy it all upfront. If you did that, the networks would guarantee audience delivery.
Guarantees revolutionized the business. The move from sponsorship in the 1960s had reduced advertiser risk. The CPM guarantees of the 1970s and 1980s eliminated it entirely. By 1985, guaranteed upfront buys accounted for 85% of prime-time sales and the words "feeding frenzy" began appearing in print to describe the rush to buy TV. Then came the crash.
By 1986, network ratings were falling, so ABC, CBS and NBC began quietly increasing commercial time. By 1989, Fox had expanded its programming and both cable and syndication were supplying more inventory, all at a time when a weakening economy was reducing demand. For the first time in a long time, there was more time available than advertisers willing to buy it.
By 1990, the weak TV market led advertisers to question the value of an upfront. At the Association of National Advertisers Television Advertising Forum in February 1992, Procter & Gamble Co. (Jim Van Cleave), Young & Rubicam (Paul Isaacson) and J. Walter Thompson (Jerry Dominus, who had just moved from being head of sales at CBS) argued for abandoning the upfront in favor of a continuous TV market. But a reviving economy came to the rescue. In August 1992, $3.8 billion was spent in the prime-time upfront, considerably more than the year earlier, and CPMs were up for the first time in three years. In 1994, the prime-time upfront hit a record $4.5 billion. Last year it was $8.4 billion.
The networks claim they don't need the upfront to sell. They say "we'll get you now or get you later." That may be disinformation. A spring upfront for the following year's media plan is a pre-emptive selling strategy that all other media envy.
PLAYED LIKE A VIOLIN
Yet the upfront could not exist without daily proof of TV's remarkable ability to sell products and an expanding economy to test it. Over the years, this combination of value and demand has created a psychology of ever-rising TV prices. And the networks have played it like a violin.
But there is a relatively new player looking to set the price of TV, the mega-media agency. Today, close to 40% of TV dollars are concentrated at four big buyers. The question is whether they can use their market power to restrain prices the way the Big 4 networks have used theirs to increase them.
It's unlikely because of the difference in objectives. Sellers want the highest price. Buyers will settle for buying better than the market. This leads some to commit dollars for the guarantee of a lower than average percent increase, the so-called "concept deal." Buying for competitive advantage without a keen regard to absolute price invites the networks to charge more.
And there are the things not usually talked about. Like buyers using the sweetener of a high CPM advertiser's budget to make a deal work for another more demanding client. Or the very cozy relationships between some buyers and some sellers, raising the question, "When does comity become complicity?"
Adding it all up, the early, compressed, clubby, manipulated upfront market is probably costing advertisers an extra 2% to 3%. That's close to $200 million in prime time this year alone and the networks like that fine.
Perhaps a weak upfront for 2001-02 will send prices down and remind us that pricing is ultimately beyond the networks' control. CPMs go up when the economy is strong. And that may be why advertisers continue to suffer the TV upfront. When it seems most like mindless extortion, their business has never been better.