Scatter Shot

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CBS must scramble in scatter or Mel Karmazin will lose his biggest bet.

On the eve of Viacom's year-end earnings report due this week, the media conglomerate is still haunted by the controversial decision made by its president-chief operating officer to hold back inventory from last year's depressed upfront market.

Mr. Karmazin gambled CBS would make up revenue by selling more time during the TV season. With the market still in a slump, he faces long odds to win this hand.

It's not clear whether the risky bet has played into growing tension between Mr. Karmazin and his boss, Viacom Chairman Sumner Redstone. Their management differences are serious enough, according to various press reports, that Mr. Karmazin may not continue past his contract expiring in 2003.

Mr. Karmazin declined to comment for this story; through a spokesman, he referred calls to CBS. Joe Abruzzese, president of advertising sales for CBS Television, acknowledges the network's sales have been down "probably a couple of hundred million dollars over the course of a year" because of last spring's upfront holdback.

Mr. Karmazin last spring ordered CBS to limit what it sold as TV prices were falling in the upfront market, the period when networks sell time in advance of the coming fall-to-summer TV season. Explaining the strategy to analysts, Mr. Karmazin proclaimed: "We have a saying around here: Viacom will not participate in any recession."

counting on a rebound

Because of the gambit, Viacom's flagship ended the upfront with sales of an estimated $1.35 billion-conservatively about $250 million less than it could have booked had it sold the usual amount of inventory at market prices, according to media executives. Walt Disney Co.'s ABC brought in $1.7 billion and General Electric Co.'s NBC $1.9 billion in the upfront, media executives said.

Mr. Karmazin, counting on an ad rebound, bet CBS would make up revenue by holding back inventory for scatter, the time networks sell during the TV season.

"It was a nerve-racking decision that Mel made," said Larry Novenstern, senior VP-director of national broadcast for Interpublic Group of Cos.' Deutsch, New York.

Mr. Abruzzese said CBS last spring sold 70% of 2001-2002 TV season inventory, vs. 80%-plus the prior year. Rivals sold 70%-80% of their inventory in the 2001 upfront. CBS maintains it struck cost-per-thousand-viewers deals at the same or slightly higher level than in the 2000 upfront, essentially better than other major networks.

Will the bet pay off? Mr. Abruzzese said yes-if market conditions improve. "In the end, we'll be better off if [the] second or third quarter materializes like I think they will. But I'm not going to say, 'Great strategy. We won; they lost.' This is about risk and reward."

Mr. Abruzzese said there are signs the second quarter could be comparatively strong. CBS advertisers are only canceling 7% of second-quarter second upfront TV budgets; a year ago, they cut 13%.

A slightly improved TV ad market is in CBS' favor courtesy of ABC and News Corp.'s Fox, according to media executives. Due to audience erosion, ABC and Fox have comparatively little to sell since much of their inventory is going to advertiser make-goods. Program prices for CBS as a result have remained the same as upfront prices or gained slightly.

CBS in the fourth quarter of 2001 rang up $200 million in scatter sales, at least $75 million more than it typically does in the quarter. Its first-quarter scatter inventory has sold at about the same levels as the fourth quarter; this means another $40 million for CBS, according to media executives. Assuming CBS ended the upfront with a $250 million shortfall, it will need to sell $135 million in the second and third quarters to make up lost ground.

Though the goal seems close, Mr. Abruzzese said revenue estimates are constantly moving targets since advertisers regularly cancel portions of, as well as add to, their overall TV buys throughout the year.

"The problem with the upfront market and the [scatter] market is that you don't know until end of the year" how sales will net out, said Chris Dixon, managing director for UBS Warburg, New York.

Estimates are that TV ad dollars this year will drop 4% to 5%. For CBS to continue to gain, ABC and Fox will need to continue to have difficulty selling commercial time-and advertisers will need to spend. CBS is the only major network to gain in household ratings, total viewership and adults age 18-49 ratings this season.

Some believe

Some believe CBS will make up its upfront shortfall. "CBS took a very risky strategy in getting back to the same place they would have been," said Mel Berning, exec VP-director of national broadcast at Bcom3 Group's MediaVest Worldwide, New York.

Perhaps good news for Viacom is that Mr. Karmazin's position didn't extend to other parts of the media conglomerate's empire. Viacom's MTV, for example, held up better in the upfront than did other nature cable networks, media insiders said.

In hindsight, Mr. Abruzzese wouldn't say yet whether last spring's holdback was a good or bad strategy. "Being more sold out during the upfront seems to be less of a factor than in years past because the money did show up [in the scatter periods]," he said. "It meant there may have been a little bit more work in scatter to write."

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