Network TV Upfront Overview and Forecast

Read Preliminary Upfront CPM and Volume Forecasts Below

(See the schedule of Upfront and Newfront presentations here.)

"This could be the most complicated and challenging Upfront in years," commented GroupM executive Mike Bologna at a recent iMedia Video Conference. More accurately, this year's broadcast and cable network Upfront is likely to be a throw-back to the pre-recessionary years of 2006, 2007 and 2008 when networks and agency buyers engaged in prolonged debates and negotiations. When the Upfront markets collapsed in 2009 and then returned with a vengeance in 2010 and 2011, Upfront negotiations proceeded quickly and methodically. This market is unlikely to unfold as predictably.

Disparities on pricing forecasts between buyers and sellers are normal. Sellers are bullish, especially CBS' Les Moonves who has predicted double digit cost-per-thousand (CPM) increases. Buyers are bearish, arguing that volume growth simply is not materializing, that inventory availability is stable, that automotive spending will not be as robust as anticipated, and that procurement officers at leading marketers are intensifying their demands for cost containment. This year, there are sincere differences in interpretation of current market realities and projected market conditions that will impact Upfront negotiations.

There are several new dynamics in play this year. Primetime and cable ratings are relatively flat, putting less pressure on networks to compensate with increased costs-per-thousand. There are new sales executives in key decision-making responsibility at several networks, changing the dynamics significantly at some of these networks. At a number of leading agencies, digital executives have been elevated to senior positions that include responsibility for Upfront negotiations. General Motors has moved to a new agency, Unilever's global account is in play, P&G has announced cost-cutting measures and several major retail advertisers are struggling.

Sell-out levels in last year's Upfront were unusually high, enabling broadcast networks to reduce sell-out this year, managing inventory in order to generate demand pressure for higher CPMs. But that will require networks to accept lower volume, in hopes that there will be greater demand and higher pricing in scatter markets. While this has been a safe bet in the past, there's less certainty that traditional Upfront/Scatter patterns will hold. The scatter market has been soft since the fourth quarter and scatter CPM inflation over Upfront costs have been moderate to low. Buyers suggest this is an indicator of a soft market. Sellers argue this is consistent with strong 2011/12 Upfront demand and is in line with market expectations.

For the first time, the digital video community is actively soliciting Upfront TV dollars with coordinated Upfront presentations, with enough inventory in quality original content to make their pitches viable. Networks, especially broadcasters, will see significant revenue growth from their digital assets, benefitting from buyers' increasing focus on digital. Last year, Fox-TV incorporated online video as an offset for potential ratings under-delivery. This year, digital inventory is being packaged, essentially as an additional daypart, by ABC-TV and others.

· I'm forecasting calendar year broadcast network incrementaldigital revenues in 2012 of $1.3-$1.5 billion (+40% YoY) for broadcast and $0.9-$1.0 billion (+20%-25%) for cable.

· For the 2013 calendar year, which is more impacted by this year's Upfront performance, broadcast network digitalad revenues are forecast to grow to $1.8 to $2.0 billion. Cable nets will generate $1.2 to $1.3 billion in digital ad revenues in 2013, according to our estimates.

· Pure play (online originated) digital video revenues (YouTube, VeVo,Yahoo!, Aol, Tremor, Grab, Yume, MSN and others for calendar year 2012 are estimated to be $1.2 to $1.3 billion, growing 70% to $2.0 to $2.2 billion in 2013.

Wall Street also has more influence than ever over Upfront negotiations, as they pay inordinate attention to the Upfront as a measure of the economic health of the television medium and advertising business. Among analysts, there is a wide range of expectations, consistent with the larger-than-usual bid-ask spread between ad buyers and sellers. CBS, Viacom, Discovery and Scripps stocks are more impacted by Upfront performance than most of their more diversified competitors, and Upfront performance impacts shareholder valuation.

Pivotal's Brian Wieser questions "the importance of Upfront volumes," and says "we have long been surprised at the focus investors place on Upfront pricing. Historically, pricing has very limited predictive qualities with respect to actual revenues. We know this to be true when we compare historical Upfront outcomes with actual historical daypart revenues. Pricing has only a limited relationship with actual revenues."

Jack Myers Preliminary Upfront Forecast:

Broadcast CPMaverages will increase low-to-mid single digits while average cable CPMs will increase mid-to-high single digits. Overall volume for broadcast networks across all dayparts (excluding digital) is forecast to be flat to up or down 2%. Volume for cable networks will be up 5% to 8%. Syndication will be volatile, with market leaders achieving CPM growth commensurate with cable entertainment networks and market laggards -2% to +2%

This is far more negative than the Upfront Preview of Janney's Tony Wible, who called for 6% to 10% increases for Broadcast and 10% to 15% for Cable networks. Buyers suggest a more conservative 2% to 5% CPM increase for the broadcast nets and slightly higher for cablers. Sellers are arguing that market demand will justify 8% to 11% CPM gains for broadcast primetime and similar results for cable nets. Janney's analysis suggests "those networks with a 5% ratings headwind would need to see at least a 7% CPM increase to keep earnings flat and would need 12% to hit the roughly 8% earnings growth targets on the street."

Pivotal's Wieser, who until recently was the senior industry economist for IPG's Magna Global, projects +8% broadcast primetime CPM increases for the market leader, but also writes that he bases this on the assumption that overall dollar volume growth will be flat."We expect high single digit 2012/2013 Upfront CPM increases."

Wieser adds: "In establishing our expectations for future pricing, we assume that volume in the Upfront will be in-line with revenues for the upcoming broadcast-year, or essentially flat when compared with the 2011-12 Upfront. Our model of historical data indicates that in a year with flat volume change we should expect pricing for the market "leader" in any given daypart should rise by 8%. If demand at the time of Upfront negotiations falls by 5%, our model predicts CPMs will rise by only 5%. All other negotiated prices will be effectively anchored around this price. For network prime time, CBS will serve as the "leader" during 2012-13. On average "followers" secure pricing below the leader, although Fox has often been able to secure a premium given its younger audiences. Cable network groups should similarly be able to expect pricing that falls slightly behind the leader."

Jack Myers Media Business Report will provide regular updates on Wall St. analysts' reports on Upfront market conditions in our weekly Wall Street Media Business Report, published every Friday.

You are receiving this e-mail as a corporate subscriber to Jack Myers Media Business Report. Re-distribution in any form, except among approved individuals within your company, is prohibited. As a subscriber you have full access to all archives and reports at www.jackmyers.com. If you require your ID and password, contact maryann@jackmyers.com