Media Stocks: Has the Upfront Ended?

by: Steve Birenberg, CFA

The following commentary first appeared in the "Dow of Steve" blog on SNL Kagan's subscription website on July 1, 2009.

There were signs at last that the upfront market was finally beginning to move although few, if any, deals have been struck between broadcast networks and advertisers. Experienced observers can point to only one other instance of the market breaking so late and rumblings about a haphazard, last minute ad marketplace that serves advertisers and networks poorly are growing. [UPDATE: The upfront stalled again after the July 4th holiday, though the bid-ask spread on advertising has narrowed]

The stand-off appears to relate primarily to advertiser demands for double digit cuts in ad pricing based on CPMs. The news last week was that broadcast networks were close to deals ranging from upper single digit CPM declines for NBC (NYSE:GE), the weakest network, to low single digit declines for industry leader CBS.

If this pricing holds the upfront could prove better than expected for broadcast and cable networks but pricing is only part of the equation. Broadcast networks will also take a hit from lower rating guarantees and are almost certain to sell less inventory than they did a year ago. With so many prognosticators believing the economy will begin to recover and grow again this summer and fall, networks seem willing to gamble that scatter pricing during the TV season will be far better than what can be negotiated now in the upfront.

Overall, if last week's reports are accurate, broadcast networks may be able to exceed the -15% overall upfront decline that many Wall Street analysts have been expecting. This would be good news for the stocks of the network owners including CBS, Disney (NYSE:DIS) (ABC), News Corporation (NASDAQ:NWS) (FOX), and General Electric (NBC).

The cable network upfront usually breaks after the broadcast networks so if broadcast networks can limit the decline, it is likely that cable nets, which generally enjoy stronger ratings, will be able to limit year-over-year declines to low to mid-single digits. This would be a win for cable networks stocks, including Discovery Communications (NASDAQ:DISCA) and Scripps Interactive (NYSE:SNI), whose networks should be among the best performers. The big conglomerates also will have pockets of strength, including Fox News for News Corporation.

While the latest news makes sense, the late breaking upfront still leaves the risk that a scramble to sell most of the ad inventory right before the new TV season starts is going to create inventory management problems for networks and advertisers.

It is funny, but with all the talk of eliminating the upfront it just might be the current economic crisis that kills it or alters it significantly. After all, the upfront is based on analog TV economics that is still being used in a digital world. NBC already claims to have opted out of the upfront with the changes it made last year. Could it be that a very late breaking market in 2009 effectively ends the upfront as we know it?

Should the theme that 2009 represents the end of the upfront as we know it, it would be a negative for TV networks, offsetting the possibility that the upfront itself is not as bad a as feared. I suspect that networks and advertisers can make the transition but Wall Street abhors uncertainty. For the networks the uncertainty is heightened because even though cancellation options exist, selling much of your inventory up to a year in advance provides a degree of predictability in financial results and business operations.

Disclosure: Discovery Communications is widely held by clients of Northlake Capital Management including in Steve Birenberg's personal accounts. A handful of clients of Northlake Capital Management hold positions in General Electric.