What Ad Slump?

By Eric Mink

Six months ago, the state of the TV networks seemed grim. For the first time during a regular television season, cable's basic channels had collectively passed the six broadcast networks in their share of the prime-time audience. Ad spending--down for all media since the start of the recession--seemed unlikely to do much to improve the picture. Some industry analysts were predicting that when the so-called up-front market began--the period in May and June when major advertisers reserve the bulk of their commercial time for the upcoming TV season--the networks would be lucky to match the dismal results of 2001, when revenues fell a hefty 12.5% from the year before. All this seemed to bolster the doomsayers who have long predicted that network TV is an endangered species.

But a funny thing happened to the networks on the road to ruin. Although the American economy is still struggling to emerge from the recession, advertisers have started throwing money at the national broadcasters. Gobs of it.

When last spring's up-front market closed, the six networks had accepted a record $8.2 billion in commitments for advertising time in the upcoming season, up substantially from the previous year's depressed $7 billion total. Even better, cancellation rates over the summer for those orders were only about 5%, a big improvement over the nerve-jangling 10% to 15% rates last year. Comparably low cancellation rates are starting to register for the first quarter of 2003. All this has left relatively little ad time available in the so-called scatter market, where advertisers who prefer to buy time at the last minute come to shop. The scarcity, combined with surprisingly strong demand, has sent prices soaring.

"We got premiums of between 25% and 40% in scatter" above the prices fetched last spring, says Joseph Abruzzese, the former president of sales for Viacom's CBS Television, who just left to take over ad sales at cable's Discovery Networks, a unit of Discovery Communications. And that was after CBS leveraged last season's muscular prime-time performance into 10% to 12% up-front rate increases, especially for such younger-skewing hits as Survivor, Everybody Loves Raymond and CSI.

Network TV is outperforming most other media. Up-front sales for cable TV were up about 14% from last year, but revenues for the first six months of the year were off 10%, according to Competitive Media Reporting. Ad revenues of local newspapers climbed 6% in the same period, but those of national newspapers were down 6%. Magazine ad pages ticked up 2.6% in September, according to the Publishers Information Bureau, but ad-page totals are still down almost 7% for the first nine months of the year. Radio revenues, says the Radio Advertising Bureau, have shown a 3% gain so far this year, after suffering a 7.5% decline last year.

In a dicey economy, the networks appear to have played their cards shrewdly. Broadcasters sold a higher than usual proportion of their ad time last spring--about 85%, vs. the more typical 75%. They not only got their high prices up front but also created a squeeze for the few spots left this fall. Yet the high prices reflect an increase in demand, not just a contraction of supply. Jon Nesvig, sales president of News Corporation's Fox Broadcasting Co., says his network has seen a big boost in advertisers seeking spots in sports programming (demand that was depressed last fall, in part because of Sept. 11) as well as from advertisers that spend heavily in prime time, such as theatrical films and home video, carmakers and national retailers.

Why, at a time when the advertising market for much of the rest of the media is still uncertain, are the networks seeing such rosy times? "It's counterintuitive," admits Tim Spengler, executive vice president at Initiative Media, a media-buying agency that billed more than $10 billion in U.S. advertising last year. Historically, he points out, significant increases in ad spending don't occur until a weak economy has begun to turn around. "What we've seen instead," Spengler says, "are clients saying, 'We need to go for it. We need to support our brands for the long-term viability of those brands,'" regardless of the economy's overall sluggishness.

The boom in ad sales may also be an acknowledgment that network TV, for all its woes, remains the only way to deliver commercial messages to vast numbers of potential customers at exactly the same time. In an increasingly fragmented TV world--89 viewing choices in the average home, according to Nielsen Media Research--that reach is arguably more valuable than ever. Though the six networks' share of the viewing pie has shriveled to 56% (compared with 90% for just three networks as recently as1980), an advertiser would have to buy spots on several cable channels, perhaps dozens, to reach a comparable audience. "I think this year advertisers seemed to get a little more faith," says Fox's Nesvig. "They said, 'Yeah, this really does move product.'"

Might the networks be tempted to pump up their revenues by adding more commercial time to their shows while the ad market is hot? NBC--whose $2.7 billion in ad revenue for last spring's up-front period dwarfed second place CBS's $1.8 million--raised some eyebrows early in October when it announced that it was adding two minutes to each episode of TV's top-rated sitcom Friends. But Jeffrey Zucker, president of NBC Entertainment, a division of General Electric, says the added minutes represent program time, not commercials. The aim is to make Friends run two minutes past the half-hour mark, pulling more viewers into the next show on NBC, the medical sitcom Scrubs. "This is not about revenue," says Zucker. "The way to take advantage of high ad prices is to put on programs that work and minimize problem time periods quickly."

Still, if you think TV shows have less "show" and more ads than than they used to, you're right. The amount of "clutter"--the industry term for commercials, promotional messages and other nonprogram content--in prime-time network shows has grown from 13 min. 26 sec. in 1992 to an annoying 16 min. 8 sec. in 2001, according to the annual surveys commissioned by the American Association of Advertising Agencies and the Association of National Advertisers. So far, that total is not rising this fall. Network executives insist they have no intention of taking advantage of the ad boom by increasing adtime, at least not in the short term, and advertisers despise clutter because they believe it damages the effectiveness of their messages. They're wise to worry, especially as increasing numbers of viewers find ways--everything from established ad-free cable channels like HBO to such sophisticated new digital recording devices as TiVo--to avoid commercials.

Everyone is trying not to kill the golden goose--if indeed the goose is golden again. Thomas Wolzien, media analyst for Sanford C. Bernstein, is not certain that the networks' good times are going to last. "One of three things could be happening," he says. "A) The economy could be a lot stronger than we think; B) there could be a lot of pent-up demand from people who have been out of the market; or C) this could just be a last, desperate hurrah.'' There's a comforting thought to take to the bank.