Pivotal Research Group’s Brian Wieser is forecasting that broadcast ad pricing in the upfronts this spring will rise 8% on the assumption that spending by the national marketers will be about the same as last year — $8.9 billion. That’s not only good for broadcasting; that’s good for cable, he says. The “tacit collusion” among the Big Four insures that the anchor price of all upfront advertising remains high.
For several years, Brian Wieser worked for Interpublic’s Magna Global, helping it develop its ad-buying strategies. Today, he is securities analyst at Pivotal Research Group where he continue to closely track the dynamics of the ad markets as a means of forecasting the revenue of the media companies he covers.
For the 2012 upfronts, he is projecting that the Big Four broadcast networks will match last year’s total take of $8.9 billion, with prices rising on average 8%.
In this interview with TVNewsCheck’s Harry A. Jessell, Wieser explains the thinking behind the forecast and why broadcast networks’ value keeps rising even as their share of total TV viewers keeps falling.
Wieser also presents his theory on why the big cable networks are better off if they fail to obtain equal status in the upfronts because of the broadcast networks’ “tacit collusion.”
An edited transcript:
Can you recap what happened last year in the upfronts?
Last year, we saw double-digit rates of change in pricing and it was generally regarded to be a very strong upfront. Pricing was generally regarded as very, very high by the buying community and fair and reasonable, of course, by the selling community.
You have to consider what was happening in the scatter market going into the upfront. While there is no direct correlation between scatter markets and upfront markets, they do set some context for the upfronts.
You were seeing 20%, 30% and 40% premiums on scatter pricing versus the prior upfront. That was extremely high by historical standards. Many marketers decided to pull forward much of the money that would have gone into the scatter market and put it into the upfronts. That led to higher volumes, which, in turn, led to higher prices.
So, what did the increases amount to last year?
Well, nobody knows what the actual numbers were, but what I took away from my interpretation of what happened would have been 10.5% at ABC, 13% from CBS, 9% from NBC, 11.5% from Fox.
What’s happening in the scatter market today?
What has caused a lot of noise in the last couple of weeks was the news that General Motors, Procter & Gamble and others were exercising a lot of options on their second-quarter commitments. It’s just a question of is it within a normal range. It sounds like for some networks it was in excess of the normal range, but in aggregate probably not much more than a normal range. So we’re talking in the low single-digit percent of commitments that would have been canceled.
Nothing alarming, nothing to upset the upfronts?
I think some people are alarmed. I am not alarmed.
So you came out with your early forecast of 8%, which you said is greater than the consensus. How do you get to the 8%?
That’s based on a presumption that volumes in the upfront will be flat when compared with last year’s. What we’re saying is that there is nothing that we have seen to indicate that volume in the upfront will be materially down from where it was last year, let alone materially up. So flat in the network primetime upfront would be $8.9 billion on a gross basis.
What about the percentage of inventory that will be sold?
That’s not relevant. What actually matters and what is the predictable variable is the change in dollar volume, not the percent sell out or anything else. The percentage sold out is not a knowable number. Those numbers are often cited by the trade press. It’s not necessarily clear that those numbers are consistent from period to period, from network to network; nor do those numbers necessarily reflect how networks may modify their inventory over the course of the year by adding or removing public service announcements, adding or removing units to the commercial loads or other factors.
But isn’t a dollar volume a function of price times inventory?
No. That’s a post hoc calculation. In other words, the money is budgeted [by the marketers]. That’s the first thing that happens.
So, the dollar volume is simply how much the buyers are bringing into the market?
Yes, exactly. That’s the variable that matters because that’s essentially the process that plays out in the upfront. The buyers interact with the planners who work on accounts and interact with the account executives. They go to the clients to say how much money do you want to put into the upfront this year? You did this much last year. The client says, well, I don’t know. How much will pricing go up? That’s what leads to the planning cost process in which the clients say how much should go to network TV and primetime and how much to daytime and other dayparts.
Let’s assume you are right about the 8% and flat volume. What does that portend for cable networks, national syndication and others?
Generally, we have observed with respect to national cable that buyers apply what we call an anchor. That just means that when you hear a buyer and a seller negotiating, they will reference some point and that point is the network primetime leader CPM. The price increases for cable rarely exceed what the network primetime leader gets. So it would suggest that the bulk of cable should come in under that from a pricing perspective. So we would characterize that as in single digits. Now there will be some cable networks which certainly can get in excess of that.
But on average they’re not going to do that?
I would not expect that, but it’s very difficult to know because the range of prices that cable networks can secure is much wider than is the case with network TV, and network primetime in particular. I would not even hazard a guess with respect to syndication because I have never seen what I would deem to be reliable information historically.
What about spot TV?
I never had enough useful data to do the math on local broadcasting either, but I would suggest that there is some degree to which local TV becomes more appealing to a national advertiser when faced with high price increases. There’s no question that buyers look for alternatives to the extent that they are able to. However, the reality is that the overwhelming trend among the largest marketers is to continue shifting money out of local and into national.
Do you see the broadcast networks losing their position as the setters of the anchor price?
Not for the foreseeable future, not as long as advertisers allocate budgets on the basis of reach and frequency and as long as broadcast networks continue to uniquely satisfy reach and frequency goals better than the alternatives available. There is no comparison between what the networks can provide versus what cable can provide.
I know that you have a theory that this current system works beautifully for the cable networks, even though they are on the second tier of sellers.
Yes. I don’t think they recognize how good they have got it.
What I mean is I think that most cable networks would like to get a piece of the [broadcast] network pie and certainly their public statements have suggested as much. They feel that they’re not getting their fair share or that the [broadcast] networks are sucking up the money that could go to them.
What I am suggesting is that cable networks benefit [from] the way things are now because you have four players who can effectively set the price in the market in a less competitive manner than would occur if you had 20 suppliers out there competing with each other. As a result, you end up with a higher pricing anchor on which the cable networks can set their prices.
What you’re saying is that you have four networks setting the pricing that think alike and know each other pretty well.
Not exactly collusion, but close.
It’s called tacit collusion. There’s nothing illegal about that and it exists in almost every industry. You use the tactics including price signaling. The airline industry does this all the time. If your business is structured similarly and certainly if you hire people and you know people who have worked in the other companies, you understand enough about their psychology and the choices that they will make such that you can anticipate them. If you find yourself in a competitive equilibrium, then there may not be any collusion.
Sellers often use the press to signal their intentions, too, right?
That’s part of it. When any one network executive puts out in the press that here’s what prices will be, it is akin to an airline saying we will be raising prices by $10 next month, right? It is exactly the same thing. Now again, nobody has to agree and certainly we have seen years when deception happens — that’s the term in game theory — and someone goes and tries to undermine the market because it’s in his self interest to do so.
And you think this benefits the cable networks ultimately?
Absolutely, because they ultimately end up securing higher prices. They suffer in that they don’t get the same volume they could get, but they benefit over extended time frames because there’s price integrity that they can secure because of this notion of tacit collusion.
I don’t think the cable networks appreciate that they benefit from this industry structure, which is why it is always so amusing or interesting to hear cable networks saying that they want to be a part of the upfront.
Conversely, you would hear discussions several years ago about the broadcast networks going cable-only. That was one of the craziest things I had ever heard because if the broadcast networks were to limit their availability to cable, all of a sudden they’re now competing with 20 other networks and the price integrity falls apart.
One of the real paradoxes that always amazes me is that it seems that the lower the ratings go for the broadcast networks, the greater the demand for those rating points.
Those are coincidental indicators or coincidental things that don’t actually have much to do with each other and I think the press unfortunately focuses on that a bit too much. First of all, advertisers don’t buy ratings of individual programs in the United States. They buy packages of gross rating points.
The question really should be: were you able to buy 100 gross rating points over the course of a couple of weeks? Ten years ago, yes. Twenty years ago, yes. Thirty years ago, yes. Could you do it today, yes. That hasn’t changed. What reach do you get with that 100 gross rating points? Well, that number has fallen, but only marginally. You’re still actually getting pretty good reach, better than any alternative.
Really? How is that possible?
Network TV reach hasn’t fallen that much. Interestingly, the last time I looked at it was 2007 in the context of gauging the impact of DVRs. I looked it at between 2002 and 2007 when DVR penetration went from, call it, 5% to 25%. The reach of network television adults 18-49 in primetime in the course of a four-week period went from something like 96.8% to 97.4% over that time. So the reach of live-only network TV actually grew, but I would take that as flat.
The point is that the difference is 10 years ago you or I may have watched 10 different programs on network TV. Now, it’s more like two or three, but we’re both still watching network TV every month. So that’s what I mean by reach, and because reach and frequency are these metrics that marketers rely upon, the issue is always, can you satisfy your reach and frequency goals. Well, yes you can. It’s just gotten very, very expensive. Now, the reason it’s gotten expensive is because new categories of marketers keep showing up. That’s the problem. It’s too good.
So, you are saying that demand keeps increasing?
Particularly, new brands keep showing up. If you look at the list of the top 20 or whatever advertisers on network TV 30 years ago, it’s a completely different list from what you would see today.
You see the wireless category. It didn’t exist 20 years ago. Pharmaceuticals, illegal, 20 years ago, right? That’s still a decent sized category. Retail did not exist at a national level for the most part. We have consumer electronics that is now a massive category. The studios are a massive category. Those were not categories of any significant standpoint 30 years ago. All of them differentiate themselves on the basis of awareness for the brand’s attributes. The single most effective way — in the minds of the typical marketer — to drive awareness is by maximizing your reach and frequency. Network TV uniquely satisfies that in a way that no other medium can possibly come close to.