Writers Strike Barely Impacts the TV Networks

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Includes: CBS, DIS, GE, NWS, TWX, VIA
by: J.P. Hannan

As the Writers Guild of America continues its labor strike into its third month, the Hollywood Reporter is reporting that the major television networks are not being heavily impacted and “advertisers are sticking with their upfront media commitments”. This is good news for NBC (NYSE:GE), ABC (NYSE:DIS), CBS (NYSE:CBS), Fox (NASDAQ:NWS), My Network (NWS) and CW (jointly owned by CBS and Time Warner (NYSE:TWX)). According to the article, “Most advertisers had until this week to cancel up to 50% of their upfront ad purchases for the second quarter. But with the deadline passing, few clients actually opted out, network and media agency sources said”.

One would think advertisers would be wary to keep these commitments in the ratings impacted spring season as the networks run out of original scripted programming, a direct impact of the WGA strike that started in early November when television productions are in usually in full swing. However, it is the strength of the so-called “scatter” markets- the ongoing selling of advertising inventory by the networks remaining after the “upfront” commitments are sold prior to the start of the television season, that has advertisers holding tight.

According the Hollywood Reporter, “With the scatter marker as strong as it is, they would be glad to give their money back so they could sell the spots for significantly more than they did in the upfronts”. It further goes on to quote Jason Janefsky, Senior VP group account director at MPG, as saying "The networks don't care if advertisers exercise options or take money back. They can spin the inventory for a higher unit cost." Rather than cancel the orders and face higher prices in the scatter market, these advertisers appeal content to simply take “make-goods”, or additional ratings points down the road that make up for any strike-induced ratings shortfalls.

The changing dynamics of the scatter market has been an interesting development over the past few years not widely examined by the financial community. The television networks have done a much better job of managing their commercial inventory loads, and while holding back much more lends additional risk for the networks of not selling-out, it has also helped drive rates higher. Initially, many national advertisers felt they would hold out on network upfronts, but they are finding so much competition in the scatter markets that the rates are not any better there. This should help the networks in coming upfront sales as well as more advertisers look to front load and lock in their buys for their clients, rather than risk paying higher prices later.

This is all very positive for the networks, and not such great news for the union out on strike. Along with the money the networks have been able to save through cancelling writer contracts and eliminating other non-writing staff, the networks seem to be weathering this strike economically far better than previous labor walkouts. As they roll out much less expensive reality based programming, game shows, and the like in the spring season, the networks could come out ahead in this strike, helping the bottom lines of their parent companies.

This effect would be most pronounced on CBS which was spun off from parent company Viacom (NYSE:VIA) last year, and where the impact of the networks financial results are much more profound on corporate earnings. With the successes CBS is having in other areas of the company, particularly the turnaround of their radio division, CBS could be a market standout in the coming earnings season.

Disclosure: None