Networks can create the perception of a stronger market by tweaking the supply of inventory they offer. Buyers may cancel their reservations. Anyone trying to draw conclusions about the outlook for network TV and the overall ad market should approach the upfront with ... reservations.
Consider last spring's broadcast network prime-time upfront. The upfront market jumped 15% to $9.5 billion, according to an updated analysis by Advertising Age of the six broadcast networks (Walt Disney Co.'s ABC; Viacom's CBS and UPN; News Corp.'s Fox; General Electric Co.'s NBC; and Time Warner-controlled WB). The Big 3-ABC, CBS and NBC-climbed 13% in last spring's upfront.
Boom time? Not exactly.
For fourth-quarter 2003, the Big 3's prime-time revenue rose just 1.4%, according to figures the three networks provided Ernst & Young for the quarterly report of the Broadcast Cable Financial Management Association (BCFM), an industry group. That's below the rate of inflation, and hardly the beginning of a blockbuster TV season.
How do you go from the hype of a double-digit upfront to the reality of meager single-digit gains? Admittedly, this season is not over, so all the returns aren't in. But a dose of forensic accounting on last season's upfront figures shows true reality TV: the path from heavily hyped upfront to actual revenue banked by the networks.
The six broadcast networks tallied $8.2 billion in the May 2002 prime-time upfront, rocketing 22% from a year earlier, according to Ad Age's updated calculations. The upfront take that spring reflects official figures released for CBS by Viacom and for NBC by GE, plus estimates for other networks based on whispers from buyers and sellers. The Big 3's take: $6.1 billion, up 26%.
Those are eye-popping increases, and there's no doubt the ad market was primed for a rebound. Advertising's post-recession recovery began in May 2002 and has been on the ascent since then, according to measured spending figures from TNS Media Intelligence/CMR.
So how did the 2002-03 season end up? Here are four ways to count the numbers for broadcast network prime time:
* Preseason estimate: Start with reported upfront figures; subtract projected cancellations of upfront deals; add in projected revenue from sale of scatter time (TV time bought during the season on a quarter-by-quarter basis). Running those numbers, Ad Age in July 2002 forecast the six networks would see 2002-03 prime-time revenue of $8.6 billion, up 5%. The Big 3's projected full-season take: $6.4 billion.
* Measured media: CMR's database of estimated measured media spending shows the networks sold $12.9 billion in ads from fourth-quarter 2002 through third-quarter 2003, up 4%. The Big 3's measured tally came in at $9.6 billion, up less than 4%. These measured media estimates significantly overstate BCFM's actual revenue figures.
* Actual results: The Big 3 had fourth-quarter 2002 to third-quarter 2003 gross prime-time revenue of $6.9 billion (up about 12%) and, after agency commissions, net revenue of $5.9 billion, according to figures the networks gave to BCFM. These are the most accurate numbers available because they come from the networks' own reports.
* Postseason estimate: BCFM reports the actual combined total for the Big 3. (Fox also discloses quarterly revenue, reflecting mainly prime-time and sports programming, but it doesn't specifically break out prime time.) It's possible to estimate revenue for the six networks by using CMR data to figure market shares for each network and then using those shares to extrapolate from the BCFM report. Running these numbers, Ad Age shows the six networks had gross revenue of $9.3 billion (up 12.3%) and net revenue of $7.9 billion. These numbers offer a good estimate of revenue for the 12 months ended September 2003.
It's clear that actual revenue came in far below the blockbuster 20%-plus figures seen in the May 2002 upfront. The key reason: Networks made deals for about 83% of prime-time inventory in the 2002 upfront vs. just 70% in 2001. That made for loftier numbers in the headlines about the 2002 upfront but left less airtime to sell in scatter.
Market watchers arrive at the upfront market dollar total by using a relatively simple math formula factoring in changes in audience size, percentage of inventory offered upfront and cost per thousand viewers (CPMs).
Network audiences are on the decline as consumers spend more time on alternatives such as cable and the Internet. As a result, the audience size guaranteed by networks overall has been falling year-over-year by a few percentage points.
Upfront inventories go up or down based on networks' selling strategies. Offering more inventory can create the perception of a stronger ad market by inflating the upfront take. Holding back inventory may create the perception of a slower market in the near term while giving networks more inventory to offer (conceivably at a higher price if the market tightens) in scatter. Because the inventory offered varies from year to year, an increase or decrease in the upfront dollar figure doesn't necessarily mean much.
CPMs are the most important figures coming out of an upfront. The audience is shrinking, but networks are able to raise CPM rates because they still have the ability to deliver a massive audience far bigger than anything on cable. Networks' shrinking audience paradoxically makes what's left ever more valuable.
CPMs soared in last spring's upfront as advertisers shifted scatter money into the upfront following a jump in scatter rates during the 2002-03 season. Overall CPMs in the last upfront rose 15.5%, estimates JPMorgan analyst Spencer Wang.
How readily upfront CPMs translate into actual revenue is another question. Viacom financial filings show prime-time ad rates at broadcast network standout CBS increased an average of just 6% in calendar 2003 (including the fall start of the current TV season), on top of an average 5% increase in 2002.
For advertisers, the current season's CPM story may not end as badly as it began once scatter prices and other adjustments are made. For networks, revenue won't be as strong as last spring's booming upfront may have suggested. These are welcome signs for advertisers as they navigate this spring's upfront.