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Upfront Rerun: Not Quite as Good as Expected


The upfront for the big four broadcast networks came in a little below expectations despite early optimism.

As recently as two weeks ago, expectations for the broadcast upfront called for a low-to-mid single digit gain in total dollars committed. With the upfront sales wrapping up last week, most reports indicate that total advertiser spending was flat compared with a year ago. CPM price increases appear to have met the low end of expectations so the shortfall occurred mostly in volume. Last year, each of the broadcast nets sold about 80% of their inventory in the upfront. This year, sellout appears to be in the upper 70% range. Cable upfront appear to wrapping up this week. AdWeek is reporting cable nets will be up about 5% in total dollars, which is also below initial indications.

Two issues appear to have caused the last minute weakness. First, General Motors (GM) was looking for CPM declines of 20%. The networks refused to sell at this level and put off negotiations with GM until the end of the upfront. It is not clear how negotiations with GM ended but Advertising Age is reporting that deals were struck by GM but the automaker "remixed" its buys to lower cost networks and broadcast times and thus spent less than it did than a year ago. By itself, GM spending less could take a percent or two out of the upfront. Add in the looser market created with GM as a laggard instead of a leader and you can probably deduct another percent or two.

The second factor softening the market was macro related. The uncertainties of slowing US economic growth, the boiling crisis in Europe, the presidential election, and "fiscal cliff" in 2013 almost certainly would have caused hesitation leading by advertisers. Keeping some fresh powder for the fall/winter scatter market or just taking a wait-and-see attitude with a portion of the ad budget is a reasonable thing to do. Brian Wieser of Pivotal Research noted in his upfront recap that in 2008 the upfront volumes were up just 1% but broadcast revenues in the following season fell 8%. Remember that 2008 was when Lehman went under. The parallels to the crisis in Europe and Lehman are fresh in everyone's mind.

Put it all together and the upfront brought in around $9 billion, in line with 2011 and maybe $500 million short of expectations. The reporting in the business media and from Wall Street analysts had a negative tone and media stocks suffered a bit in choppy market awaiting the outcome of the Greek elections.

Several analysts and reporters reminded us that the upfront does not correlate particularly well with the health of the ad market in the TV season that follows. Wieser noted similar upfront volume growth in 1993, 1998, and 2004 ended with ad revenue growing hundreds of basis points faster. The disconnect between upfront and final revenue growth is due to the fact that upfront sales are mostly options that can be cancelled. In addition, pricing in the scatter market can fluctuate widely. As a result, the impact on media stocks comes from changes in investor sentiment. Unfortunately, for bulls on network owners like me, the broadcast upfront has to be considered a disappointment.

Management teams, especially Les Moonves at CBS (CBS), will surely say otherwise. Many cable networks are just getting started and could come in stronger. In the end, I stand by the year-long thesis that the national TV advertising market has reached equilibrium. 2011's strong upfront represented the peak of the rebound off the cyclical low from the Great Recession. Ratings matter again as do general macro factors impacting the market. In client portfolios and my hedge fund, I am sticking with strength and that means CBS, Discovery Communications (DISCA), AMC Networks (AMCX), and News Corporation (NWSA).

This column was previously published by SNL Kagan on
No positions in stocks mentioned.
Entermedia is a long/short equity hedge fund focused on media, communic= ations, and related technologies. Steve Birenberg is co-portfolio manager o= f Entermedia, owns a stake in the Funds' investment management compan= y, and has personal monies invested in the Funds. CBS and Discovery Communi= cations are widely held by Northlake Capital Management, LLC, including in = Steve Birenberg's personal accounts. Steve is sole proprietor of Nort= hlake, a long only registered investment advisor.

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