The networks' new advertising model
The May "upfronts" that showcase the fall television season to advertisers are becoming a relic of the analog age.
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| The TV networks' old way of making money is changing as advertisers shift their dollars to the web, mobile phones and product placement. |
(Fortune) -- In the aftermath of the writer's strike - and with ever-increasing competition from the Internet, cable channels and digital video recorders - primetime network television isn't the all-powerful medium it used to be.
That erosion of power will be in evidence over the next several weeks when the networks host their annual "upfronts" - gatherings where TV executives attempt to persuade advertisers to buy ad time by showing off previews of the upcoming fall season.
So far this season, according to the Nielsen Company, ABC (DIS, Fortune 500) has a 5.2% share of the TV-viewing households, down from 6.4% from the 2006-2007 season. CBS (CBS, Fortune 500) has a 5.6% tally, down from 7.9% last season. Fox (NWS, Fortune 500) has garnered 5.3% of households so far this season, down from 6.4% last year. And NBC (GE, Fortune 500) has captured 4.8% of the viewership, down from 5.8 during all of last season. Meanwhile, many of the largest cable networks have seen an upsurge in viewers.
Broadcast networks typically generate about half of their ad income during the upfronts. During the 2006-2007 television season, the upfronts brought in $9 billion of the U.S. broadcast networks' combined $18.6 billion in ad revenues. But that take has fallen by 4% and 3% respectively over the last two seasons.
Perhaps as a result, the major networks are, for the first time in decades, changing the way ads are bought and sold. Networks, after all, are airing their programs on the Internet and streaming content to mobile phones. No longer do they consider themselves mere peddlers of 30-second spots. NBC, for instance, held a gathering for advertisers in early April that it dubbed "In front." Advertisers had a chance to read scripts of prospective shows to figure out how their brands could be integrated into storylines, says Cory Shields, NBC Universal's executive vice president for communications. "We're now featuring all the different platforms that advertisers can buy with NBC Universal, not just network [television]".
One major difference between this year's upfronts and previous events is the brisk market for ad bundles. That is, cross-promotional deals where advertisers purchase traditional spots on broadcast TV along with, say, the sponsorship of a program when it is streamed on the network's website. Those deals, say experts, require networks and advertisers to be in closer, more constant contact, which is the real reason the upfront is evolving into something new.
"Those deals are taking place all year long," says Jack Myers, president of Jackmyers.com, a media, advertising, and entertainment research firm. "So, an upfront where a network used to sell almost 80% of its ad inventory, is much less important. The relationships have extended beyond showing pilots."
For several decades, Myers's company has released detailed projections for the revenue each network would likely draw from its May upfront. This spring is the first year Myers will not unveil predictions. "The upfront is a false indicator," says Myers. "It's a misleading indicator. The economics have changed so radically that you can't use old metrics."
As a result, networks are downplaying the importance of the springtime ritual as a major revenue windfall. "The process has changed dramatically over the years," says Jon Nesvig, president of sales at Fox Broadcasting Company. "The old system called for revealing what your programming schedule would be, then having this auction process. What the market has changed into is that there's still that commitment stage in June, but it's really just the finalization of a process that's been happening year round."
"It's a sales process a lot more deeply integrated than before," he adds. What that meand is that Fox and advertisers collaborate to incorporate brands into shows. "Take 'American Idol,' " he says. "You see Coke cups in front of the judges, [contestants making] Ford music videos, and an AT&T call-in number - and there are more deals than that for online."
Networks are scrambling to garner what they can from Internet and mobile content deals because of the downward trends in their core business. According to recent report by research firm, Screen Digest, "2008 will be a difficult year for TV advertising, with spend growing at a lower rate than the economy: that is, just 1.9% in Europe and 1.5% in the U.S."
The report notes that "key events" such as the Beijing Olympics and the U.S. elections, will temporarily help avoid a recession for global TV ad revenues in 2008. But that's not worst part, according to Screen Digest's research. "By 2009, a fragile advertising environment will have been created, with marketing budgets being slashed, especially in the U.S."
This year's upfront season is looking rather austere. Networks once threw lavish parties to herald their new lineups. This year CBS is opting for a pedestrian press event on May 14 at New York's Carnegie Hall. In some cases, the paring down of pomp will mean that advertisers have less to see of upcoming shows than in years past.
CBS chief Les Moonves told investors during a conference call April 29 that for the upfronts, "many of our shows were filmed as presentations rather than full pilots, representing significant savings, while still providing the creative content on the screen to make an informed decision regarding the best new series."
ABC plans to hold a similar event May 13 in New York. Of all the major networks, only Fox (which is likely to finish the season topping the ratings) will host a party, on May 15 in New York.
NBC says its "In Front" was just a precursor to a more traditional upfront that it has slated for May 12, where it will formally introduce it's new 52-week schedule. The lineup includes a host of new shows, such as a spin-off of "The Office" and a knock-off of the Australian comedy "Kath and Kim," starring former Saturday Night Live comedian Molly Shannon.
The fact that NBC is trumpeting sitcoms could be a good thing. Advertisers are apparently in need of a good laugh. "They're looking to one of the networks to make in-roads into the comedy front," says Bill Carroll vice president and director of programming at Katz Television Group, a firm that serves as a liaison between local television stations and advertisers. "Everyone's going to be looking at which network can develop something with broad appeal." 
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