Brian Wieser is a senior analyst at Pivotal Research Group.
“Buyers groan at high prices, format similarity of fall shows” read the headline in Ad Age. This didn’t run in the past week, past year or even in the past decade—this was from April 1973, ahead of that year’s upfront. In many ways, remarkably little changes about television as a powerful and in-demand advertising medium.
Almost every year some claim is made by an advertiser or agency regarding frustration with prices or some other element, and yet the money keeps coming back. The reasons are pretty simple: the economy continues to produce new brands who seek to distinguish themselves from their competitors on the basis of awareness of differentiation of brand attributes.
Television in general—and network TV in particular—remains the least inefficient way to accomplish this goal, despite a myriad of alternative choices and despite high absolute costs. Further, it helps that the medium is somewhat stable and predictable in terms of consumer usage and well-established in terms of the core standardized ad unit: the 30-second spot.
Based on trade press reports, we have just emerged from the thick of the annual national television upfront marketplace. News surfaced recently to indicate that the focus in early negotiations was on the metric of negotiation. Reports indicated that WPP’s GroupM and Dentsu’s Carat were looking to negotiate on a C7 basis, while agencies owned by Publicis seemed to indicate that C3 was still their preferred metric. To the extent that C7 and C3 are both used separately, it will make for a confusing market to analyze, as some buyers would be negotiating against one set of numbers, while other buyers would negotiate against a different set. Reported price changes would presumably be different for each group if they complete deals as they prefer (far from a given, we might note).
The varying bases of negotiation could hinder outsiders’ analyses of the marketplace, but then again this would not be the only element that has a heightened degree of subjectivity for outsiders to asses. For illustrative purposes, we may hear once all is said and done that $9 billion of commitments were made among the networks at 4% to 8% CPM increases with 75% of inventory sold.
But what would these figures really mean? Most observers at least are aware of the distinction between Scatter and Upfront markets, but connecting these numbers to the health of a network or a medium was always a much more complicated exercise. If we were to actually do a fulsome analysis of the market using tangible figures, in most years we would have wanted to consider the following:
• Dollar volume commitments are usually “gross,” not “net.” One notable anachronism from television’s early days as an advertising medium is that the figures cited around the upfront include a 15% commission for the agency negotiating the media buy. We’ve always noted an oddity with this concept: essentially no one pays their agencies on a commission basis any more. The most recent survey from the advertisers’ trade association, the ANA, indicated that only 5% of advertisers pay agencies entirely on a commission basis, compared with 70% 30 years ago. And among those remaining advertisers who use commission-fee structures and are large enough to buy network television, we can be reasonably certain that no one pays 15% any more.
• Dollar volume commitments are verbal agreements, not contractual. Another major issue with analyzing upfront data is that the amount negotiated at this point in time may deviate significantly from the amounts that actually get transacted. By the time contracts are signed late in the summer, advertisers may add to their commitments or cut their commitments (this is called “slippage”). Further, options may be exercised to reduce commitments throughout the year.
• Price increases can be relatively uniform between large agencies, but different advertisers can have different cost bases. The relationship between price and revenue growth is particularly distorted by changes in mix of advertiser spending money with a given network. To overly simplify, knowing that a network captured a ~6% CPM increase doesn’t tell you what their real pricing power is if 60% of current year advertiser commitments come from advertisers with a $40 cost base and 40% of current year advertiser commitments come from advertisers with a $20 cost base, versus a 50/50 split in the prior year. In this illustration, an average $30 CPM in the year-ago period turns into an average $34 CPM, or a 13% average CPM increase (from the network’s perspective) rather than a 6% like-for-like increase (from the advertiser’s perspective). Such an extreme outcome is unlikely in any given year, not least as there will be tighter clustering of price among advertisers, but the extreme ends of price range may involve very large advertisers, who can very well skew average pricing.
• Inventory sales may or may not mean what we think it means. When a network says they have sold some percentage of their inventory in the upfront, do they mean a percentage of units? Or a percentage of GRPs? And if GRPs, do they mean expected GRPs or guaranteed GRPs? (These are not the same thing, as networks always intend to bake in a need for make-goods in order to capture greater volume commitments from advertisers.) While it’s probably the case that an individual network is usually consistent, we’re not certain that all of them are consistent on all dimensions over extended periods of time.
This year will be even more complicated. It has been the case for much of the past decade that little data has been made available for non-primetime dayparts (early morning, daytime, news and sports), and it’s unlikely we’ll hear much about volume commitments to those other dayparts this year, either.
Further, the definition of “sports” as a distinct pool of inventory for ad budgets may or may not change. Historically, references to primetime activity in the upfront excluded sports, including ABC’s Monday Night Football, which ran during that daypart. This made sense as it was mostly budgeted by advertisers and priced by salespeople very differently than was the case for other network TV advertising. However, once NBC secured the equivalent package of programming from the NFL, the most commonly cited figures on upfront volumes included this NFL programming… but not the packages sold by CBS and Fox which ran on the weekend. So it will be interesting to see CBS’ new Thursday night NFL package will be included when primetime upfront figures are put forward by marketplace participants.
Digital budgets will also prove to be a complicating factor in analyzing the market. As has been the case for several years, the broadcast networks have bundled sales of like-for-like advertising inventory in digital environments on online video players, such as Hulu, alongside traditional sales. We think the market of buyers is very willing to accept this inventory. While the bulk of this budget will originate from what we would call a “TV” budget, it is possible that some of this activity from some advertisers will be funded from digital budgets.
The medium of television is still very simple in the rationale marketers have for putting it on their media plans. It’s also simple to see that new brands have gradually emerged and become increasingly important marketers. At the same time, it’s increasingly complicated for most observers to cut through the noise of unimportant data to see the more important factors that drive the health of the overall medium relative to other “traditional” forms of advertising. Arguably, these factors and a long-term perspective on the medium are much more important considerations than any precision we might have in analyzing current data behind the upfront marketplace.