THE SKED: Upfront Ad Sales and Their Moving Parts

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According to published reports, CBS, CW and now FOX have largely concluded their upfront sales of advertising time for the 2013-14 broadcast season.  (“Upfront” meaning sales closed before the season begins, as opposed to the “scatter” market, which sells time during the course of the season–normally networks try to sell 70-80% of their ad time in the Upfront.)  The general news from these deals is not good for the networks, and it’s not likely to get better at ABC (the past season’s last-ranked network aside from CW, which has a very different economic model) or NBC (which had gains last season, but almost exclusively because of the addition of a fall cycle of The Voice).  There will be plenty of factoids and propaganda (both official and leaked) about these transactions, so let’s take a look at the ever-increasing number of moving parts in Upfront sales.

The first confusing thing about television advertising sales is the rate paid for them, which is calculated on the basis of something called CPM.  A logical human might think that this refers to the cost-per-million viewers expected to be reached by a given ad, but that would make too much sense.  The “M” in CPM actually stands for the Roman numeral for 1000, and thus CPM equals cost-per-thousand.  (Possibly because of the ads for frozen pizza and Olive Garden that famously ran during Caesar Augustus’s addresses to the Roman Senate.)   So in the same way that one might pay $3 for a pound of ground beef or a gallon of milk, an advertiser pays a given price for each thousand viewers it expects an ad to reach.

That amount is a matter of intense negotiation, and not every thousand viewers is worth the same.  An affluent thousand is worth more than a less well-off group.  The same goes for an educated thousand, and depending on the product being sold, premiums may be paid for groups of thousands that are predominantly female, mostly urban, etc.  The most famous preference among advertisers is that a thousand viewers aged 18-49 are worth more than a thousand who are over 50, in part because advertisers believe that once consumers are in their 50s or over, their brand preferences are relatively set, and they’re less likely to change their established buying patterns no matter how skilled or sexy the ads they see are.  Within the advertising world, men 18-34 are a particularly prized group, because they spend much of their leisure time doing things other than watching television, which is one reason why sports are so valuable for the networks.  (The giant license fees the networks have to pay to attract that audience, however, often wipes out the premiums they get in return, but that’s another subject.)

Also:  contrary to popular belief, most upfront sales are not conducted on a micro basis, which is to say that NBC doesn’t get a call from Coca-Cola saying “We want 45 seconds on every episode of Parks & Recreation!”  Generally, sales are made by advertising agencies and media buyers that control multiple clients with multiple needs, and the buys are for a huge range of programming.  (Of course, there are exceptions:  movie studios want Wednesday and Thursday time because their films open for the weekend, certain buys are keyed to holiday sales and the introduction of new products, etc.)  The idea isn’t that a particular show will give an advertiser all that it needs, but that the mix of programming bought will provide satisfaction.

The CPM being the rate that’s paid for ad time, the other key part of an upfront purchase is the specific number of thousands of viewers being bought.  This is based on the estimated rating for a given show, for which the advertiser is given a guaranteed minimum.  (There isn’t any maximum–if a show overdelivers, that’s a bonus to the advertiser.)  A concrete example of the perils of these kinds of guarantees is last season’s American Idol.  We don’t know just what FOX guaranteed its advertisers, but with 30% drops from in the ratings from 2012, it’s safe to assume that the targets weren’t met.  When networks underdeliver in the ratings, their first recourse is to provide the advertiser with “make-goods,” in other words additional ads on the same or other programming that will reach enough people to hit the guarantee.  Obviously, this make-good time is made up of ads the network now can’t sell to anyone else in the scatter market, so there’s a cost to the network.  But that’s still considered preferable to having to actually pay the under-reached advertiser a cash refund, which is only done as a last resort.

American Idol (and Revenge, and 2 Broke Girls, and other underperforming veterans) aside, it’s certainly easier to figure out a reasonable ratings estimate for a show that has a track record.  It’s a lot trickier when the buy is for a new show.  The lead-in and competition are of course taken into account, but in the end, these guesses are a throw of some very pricey dice and, again, a subject for serious negotiation, because the network wants the guarantees as low as possible, while the advertiser wants to know it’s getting its money’s worth.

The above factors are what you might call the classic pieces of an upfront buy.  These days, things are far more complicated, because many buys include product placement components, online as well as on-air purchases, and other novelties.  (For example, the placement of a given ad within a commercial break gives it varying value, as does the time of a particular break in a given program.)  One point, however, despite the ardent wishes of the networks, is not negotiated:  without exception (as far as we know), advertisers only pay for viewers who watch the commercials within the shows (not the shows themselves) within 3 days of initial airing.  This “C3” measurement is coin of the realm, and all the numbers you see flying around measuring 7 day viewing, or even 3 day viewing of shows but not commercials, are no more than garnish.  Even if a show that failed to meet its guarantee over 3 days doubled its audience with 7-days of DVR viewing, thus more than covering the negotiated minimum, that advertiser is still owed a make-good or a refund–period.  Incidentally, while C3 ratings remain closely-guarded secrets at the networks, the most reliable proxies to them on a show-by-show basis turn out to be the most commonly-circulated ratings of all, the Live + Same Day overnight ratings that we report at SHOWBUZZDAILY each morning and that are reported elsewhere as well.  Basically, the extension of the viewing period from 1 to 3 days ends up being a wash with the reduction in viewers who fast-forward through commercials, so the final result is very close to what advertisers use for their calculations of payment.

With all of that in mind, let’s take a look at the actual Upfront sales that we know about, keeping in mind that the details never disclosed publicly are usually the most important parts.  CBS, which won the 2012-13 broadcast season (even if you discount for it having the Super Bowl), reportedly won CPM increases of 6.5-7.5%.  This barely qualifies under the pre-Upfront prediction by CBS honcho Les Moonves that the network would have high single-digit or low double-digit CPM increases, but you might wonder why the rate is going up at all.  The answer is that in this increasingly crowded media world, as much as broadcast network ratings are imploding and cable networks are making substantial inroads on their territory, broadcast is still the place where millions of people reliably gather to watch television.  Leaving aside outliers like The Walking Dead or The Bible (pay-TV blockbusters like Game of Thrones don’t count because advertisers can’t buy time on them), the fact is that a successful basic cable show like Suits would be lucky (or on NBC) to avoid cancellation on network TV, and that ability to mass audiences is still extremely valuable.  (This is one reason, by the way, that network threats in the light of Aereo to pack up their bats and gloves and go home are tremendously unlikely in the foreseeable future–which isn’t to say that the network business model doesn’t need to change… but that, again, is another subject.)

However, even with its rate hike, the estimate is that CBS will, at best, hold even with $2.5B in Upfront revenue for the new season.  And even to get to that level, CBS is selling more of its ad inventory in the Upfront than it did last season, holding back less for scatter sales (the estimate is that the network sold 80% of its time this year, compared to 77-78% last year).  This is where the lower network ratings come into play–you can see how even the #1 network has to run very fast just to stay in place.

As you’d expect, the situation at FOX is even worse.  The estimate there is for a 5-7% CPM increase, but with estimated ratings that will bring the network’s dollar volume down 10% from last season to about $1.7B.  (Much of that, of course, is singlehandedly due to the downward adjustment for next year’s American Idol, since at this point the network can realistically hope just to stop the bleeding, not to recover many of the lapsed fans.)  Like CBS, FOX sold 80% of its inventory in the Upfront, limiting the upside it can realize in the scatter market if actual ratings are higher than the estimates.

CW, as noted, operates somewhat differently, aiming at a younger and more female demographic and with much of its revenue based on Netflix, Hulu and other digital streaming.  It’s estimated to have held more or less even from last season at $400M even though its CPMs are up only 5-6% and it has many marginally rated shows (the previous year’s CPMs rose a bit more, 6.5-7.5%), with only 75% of its inventory sold upfront.  Its success (very relatively defined) is probably due to its mix of platforms and desirable demos.

We’ll follow up with a look at NBC and ABC as their deals break into the public discourse.