Once Again, An Upfront Like No Other

Each year the upfront ad negotiations are different. Typically, upwards of $20 billion of national advertising time is negotiated every year between programmers and marketers. This year there are a number of changes from just last year’s upfront in which programmers declared the ad marketplace was a “watershed moment” or “one for the ages”, with cost-per-thousands or CPM’s (the negotiating currency) had increased by a reported 20%.

Ad economy: With signs of a potential recession, the ad pricing for this year’s upfront was not as robust. The inflation rate is at a 40-year high, the price of gas has reached an all-time high and the stock market has dropped significantly since January. Other contributing factors have been Russia’s invasion of Ukraine, continued supply chain issues and the Fed raising interest rates.

In a recent interview with CNBC, NBCUniversal CEO Jeff Shell said, “The scatter market has weakened a little bit.” An acknowledgment that the ad market has been slowing down. Moreover, for the second half of 2022, several ad agencies have revised their ad spend forecasts downward citing economic concerns. Nonetheless, a strong year-over-year increase in ad dollars in 2022 is anticipated with record high ad spend totals for the year.

The last economic slowdown impacting the ad marketplace occurred in the Spring of 2020 when the pandemic shut down a number of businesses. This impacted ad spending for several months. The ad economy however, rebounded quickly as marketers increased their ad budget to digital media in the second half of the year. A number of prominent product categories including travel, retail and entertainment however continued to cut back its ad spend commitment for the year. The Great Recession of 2008 was far more impactful with year-over-year U.S. ad spending dropping by 13%.

Ad Marketplace: As mentioned, this year’s upfront ad marketplace has not been as robust as last year. Several prominent programmers reported CPM gains approaching 10%. Disney was first negotiating deals as early as in late May. By mid-June, NBC, Paramount Fox and The CW were reportedly close to finishing up their negotiations.

As of late June, Warner Bros. Discovery has yet to finish their upfront negotiations. There have been reports the recently merged company is seeking CPM increases at a much higher ad increase than the marketplace (some reports were +25%). The newly combined company has a bullpen of top-rated cable networks, premium sporting events such as the NBA, MLB, NHL and “March Madness” along with CNN discovery+ and HBO Max. During their upfront presentation, David Zaslav, the President and CEO referred to Warner Bros. Discovery as the fifth broadcast network and has been seeking premium broadcast TV pricing.

The fastest growing segment in this year’s upfront is CTV. eMarketer reports CTV ad spend to grow by 35% and reach $6.4 billion for the year. In addition, CTV is expected to account for nearly 70% of all digital video ad dollars with highest demand for Hulu. NBCU announced they had nearly a 20% increase in digital and streaming platforms with Peacock doubling its ad revenue from 2021 to $1 billion. Overall, NBCU had record-breaking investments in advanced advertising across their platform, exceeding 30% growth. Despite the strong growth, similar to other digital media segments there remains some measurement hurdles.

iSpot TV and GroupM released a study that said up to 10% of CTV audiences are being counted when the TV is not on, resulting in an estimated ad revenue loss of $1 billion. With more ad dollars being allocated to CTV, the study called for a new standard for the platform.

Measurement Issues: Back in April 2021 the advertising community first raised concerns about Nielsen’s inability to accurately measure TV/video audiences. An audit from the MRC found Nielsen had unreported TV usage for adults 18-49 in February 2021 by 2%-6% resulting in a loss of ad revenue in the hundreds of millions of dollars. Soon afterwards, the MRC suspended Nielsen’s accreditation.

With Nielsen becoming more vulnerable, a number of ad data companies that measure audiences saw an opportunity to replace them as a source for negotiating TV/videos ads. Since last year’s upfronts, a number of agreements were struck by programmers and ad agencies with ComscoreSCOR
, iSpot TV, VideoAmp, Samba TV, OpenAP as well as Nielsen’s cross platform initiative Nielsen One to evaluate their capabilities.

Earlier this year NBCU issued a 116-page document that evaluated the capabilities of several audience measurement companies including Nielsen. At their One22 event in March, NBCU announced they would be sharing iSpot TV data with clients during the upfront negotiations. As a result, in June NBCU reported that about 40% of their upfront deals were completed outside traditional age and gender guarantees. Prior to the upfronts, Horizon Media said 15% of their upfront buys would be based on non-Nielsen measurement providers. Despite the announcements and agreements, Nielsen, which was sold to a private equity firm in March, was the primary source for trading upfront dollars in 2022.

Programming: One of the traditional highlights of the upfront week is the announcement of the new programming schedule. That was not the case in 2022 as programmers focused attention on streaming video as viewers migrate to that platform. According to the Hollywood Reporter, the five largest English language broadcast networks had ordered an average of 77.4 pilots each year since 2012. In 2022 that figure dipped to 35. In addition, only 17 new programs were picked up, compared to 54 in 2013. For example, Disney with Hulu and Disney+ launching an ad supported tier later this year announced only four new programs for ABC. NBCU ordered even fewer new programs.

The primary reason for programmers continued focus on streaming is advertisers have been allocating more of their ad budgets to streaming video instead of linear television as audiences (especially younger viewers) migrated to this platform. It was expected upwards of 50% of ad budgets went to streaming properties compared to just 10% in 2019.

That figure will continue to rise, besides Disney+, category leader NetflixNFLX
will also launch an ad supported tier in the fourth quarter. With no ad sales infrastructure in place, Netflix has reportedly been in discussions with a number of companies including Google and NBCU to sell its ads. As of May, Netflix accounted for 6.8% share of all viewing, more than any streaming video provider.

Microsoft
MSFT
is sitting out the upfront: Through the years the advertising community has taken issue on when and how upfront negotiations take place. Many marketers have asked the ad buying frenzy should be held later in the year and cover a calendar year instead of a 52-week broadcast season starting in late September. There are other issues as well.

Once in a while an advertiser will sit out the upfront and opt to buy commercial inventory in the scatter marketplace. In early June Microsoft announced they would sit out the 2022 upfront and be active in the scatter marketplace. Microsoft sells a lot of high-end products and with an economic slowdown, a possibility, decided to wait. Variety reports Microsoft invested nearly $300 million in network TV ads in 2021 and has a strong presence in TV sports. There have been reports the automotive category, typically among the heaviest spenders during the upfronts, were pulling back their ad commitments as supply chain remains an issue. On a positive note, such categories as travel and retail that had their cut back ad commitment during the pandemic returned.

Microsoft is following in the footsteps of Johnson & JohnsonJNJ
. In 2006 the pharma giant opted to bypass the upfront and wanted to start negotiating ad time in August for a calendar year buy. In 1975 J. Walter Thompson, then a prominent Madison Avenue shop, boycotted the upfront saying CPM increases of 25% were outrageous. JWT clients eventually wound up by buying lesser quality shows at higher prices in the scatter market. In 1987 J. Walter Thompson was acquired by WPP.

As this year’s upfront negotiations wind down, we can expect the 2023 upfronts to be, once again, different. For example, we will know the impact of Netflix and Disney+ on the ad marketplace. There will be improvement in audience measurement as viewers continue to watch more streaming content. There will be more ad negotiations based on advanced audience analytics and more guarantees based on business outcomes. The emphasis on linear TV programs will become even less important than they are now to programmers, advertisers and viewers. Also, the ad economy which impacts demand will be different.