Not Exactly Prime Time for Television Advertising

By SALLIE HOFMEISTER

May 31, 2001 12 AM PT

TIMES STAFF WRITER

By Memorial Day last year, advertisers had committed to spend a record $8.1 billion for commercials on the six broadcast television networks’ upcoming prime-time schedules.

What a difference an economic slowdown can make.

This year, Memorial Day has come and gone, and most of the major advertisers have yet to spend a dollar. Moreover, many have not even started to negotiate with the networks, underscoring just how tenuous the economy is.

Traditionally, this is harvest time for the networks, the season when they sell commercials for prime-time programs.

It begins every May when networks give advertisers sneak previews of their new programs and rejiggered prime-time schedules during lavish ceremonies in New York. The buying spree usually ends by early July, with the networks having sold 75% to 80% of their advertising inventory.

But this year is shaping up to be different.

Because of the uncertain economy, Wall Street analysts have been warning that advertisers will spend less than they did the previous year for the first time in a decade.

This has shifted the balance of power from the networks to the advertisers. Most estimates predict at least a 10% drop--or an $800-million reduction--in advance prime-time spending this year.

The pessimism has set off a whirlwind of jawboning by network executives who are eager to deflect any notion that the soft ad market will lead to discounts on the pricing of commercials.

Though ABC walked away with the biggest share of advertising revenues a year ago, the Walt Disney-owned network could be the biggest loser this year as the popularity of its blockbuster game show “Who Wants to Be a Millionaire” fades.

CBS stands to gain the most as the Viacom-owned network benefits from the success of the “Survivor” series.

NBC still holds the ratings crown and with it attracts the highest ad rates.

This buying period, known as “the advertising up-fronts,” is the most critical financial time of the year for networks, determining their health and how much money they’ll have for programming. The six networks, including Fox, WB Network and UPN, account for half of advertisers’ up-front television spending, with their rates establishing benchmarks for cable channels and syndicated programs such as the Oprah Winfrey and Rosie O’Donnell talk shows.

Spooked by layoffs and corporate belt-tightening, advertisers are threatening to cut their spending budgets this year and are patiently waiting for prices to decline after double-digit increases last year.

“In previous years, you got in early because you didn’t want to be shut out,” said Tim Spengler, executive vice president of national broadcasting for Initiative Media in Los Angeles.

Spengler typically spends about $2 billion in the network up-front market for such clients as Disney, Home Depot, Gateway, Maybelline and AOL Time Warner.

“This year, supply will outstrip demand for the first time in 10 years,” he said, pointing to the overall retrenchment by some of the biggest ad buyers.

Spengler cited Chrysler laying off 25,000 employees over the next three years, General Motors eliminating its Oldsmobile division, and pharmaceutical companies launching fewer new drugs.

The advertising market cratered late last year, and prices in the open market for network television spots remain below last year’s levels. Companies have shifted several hundred million dollars from advertising to less costly promotions such as sweepstakes and in-store incentives, according to Jack Myers, chief economist for the Myers Report, a media research firm in New York.

That is one reason Myers considers forecasts of a 10% drop in up-front network spending to be conservative. He warns that the media recession will be deeper and longer than anticipated.

Last year, a frenzy of all-night deal-making compressed the normal two-month network up-front process into an unprecedented weeklong marathon.

This year, advertisers are taking time to study the fall schedules and the 34 new programs recently unveiled by the networks.

But Spengler acknowledged that the TV ad market could catch fire. He said this could happen if one of the networks cuts its rates as an incentive to get a major ad buyer to commit.

Over the last few years, consolidation among advertising agencies has put the spending power in the hands of just half a dozen companies. Movement by any one of these agencies could lead to a stampede.

Analysts and media buyers agree that the most vulnerable network is ABC, which saw the biggest drop in ratings.

By comparison, CBS has the best negotiating position, driven by “Survivor,” whose success knocked the wind out of NBC’s 17-year dominance of Thursday-night programming. Merrill Lynch has predicted a $1-billion increase in CBS’s fortunes this coming season.

CBS is expected to drive the up-front deal making, said economist Myers. Advertisers, he said, are enamored of new CBS programs and its fall schedule. The network’s ratings momentum, younger audience and historically lower ad prices could allow it to post the only increase in up-front ad revenues among the major networks this year, Myers said.

An added incentive for advertisers to buy from CBS is the network’s ability to add sweeteners by bundling its own air time with sister media properties such as MTV, the National Network and Country Music Television, Myers said.

CBS is working on what could be one of the largest bundled ad deals in history--a $300-million agreement with Procter & Gamble that puts the company’s packaged goods on CBS as well as Viacom’s cable channels.

Viacom Chief Operating Officer Mel Karmazin has been the only network executive to speak out in an attempt to counteract what he considers unwarranted gloom about the advertising market.

Karmazin also has threatened to hold back ad time and sell it later in the season, taking a risk that the economy will turn around and ad rates will firm up.

“Advertisers are always crying poverty and always saying business is bad,” he said in an interview.

“I don’t believe that companies are not looking for more customers. Nor am I hearing from any company that they are not spending more on advertising.”

Just as CBS could ride the wave of its ratings momentum, so could Fox, some analysts say.

Fox has fewer hours of programming than the three major networks--and therefore less inventory--and has the youngest demographics of the majors.

Analysts predict ABC’s take could drop 20% this year as the network lost key 18-to-49-year-old viewers whom advertisers covet most and added a battery of new and unproven shows.

Locking in billions of dollars in the up-front advertising competition historically has given networks bragging rights on Wall Street and assurances about the coming year’s cash flow.

But some analysts say those sales may no longer be a clear indicator of overall advertiser spending.

When the bottom dropped out of the economy last year, advertisers exercised options in their contracts allowing them to cancel up-front commitments by August.

GM canceled 50% of its second- and third-quarter commitments--the maximum allowable under its contract. Analysts estimate that some $800 million in canceled options cut up-front spending last year to $7.3 billion.

“Advertisers could be more Machiavellian, more tactical this year in the face of opportunity,”Myers said.

Times staff writer Greg Johnson con tributed to this report.

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Ad revenue could fall after a decade-long climb...

2001-2002 season estimate: $7.2 billion

...With most networks facing declines after years of growth.

Estimated percentage change in year-over-year advance prime-time ad sales for 2001-2002 season.

Sources: Mediaweek, Myers Reports, Merrill Lynch

Network Blahs

Broadcast networks could face a bigger decline in ad sales than syndicated shows or cable in this year’s advance advertising selling season.

Estimates for the 2001-2002 season:

Broadcast: -9.8%