Upfront Double-Digit CPM Increases: The Counter Argument

Last week's Jack MyersMedia Business Report Upfront Advisory has spurred quite a response from both the TV buyer and seller communities. Data suggesting 2011/2012 Upfront cost-per-thousand increases will be in the mid-double digits would typically raise a loud voice of protest from the agency community and even louder protests from advertisers themselves. But there is general marketplace consensus that current indicators point to strong demand compounded by dwindling supply for the most valuable broadcast, cable, syndication, cinema, online and point-of-influence video inventory.

However, both buyers and sellers warn that there are dark clouds looming on the horizon that could negatively influence advertiser spending decisions. Foremost among these is the steep increases in commodity prices. Oil, corn, wheat and cotton prices have skyrocketed. Resulting food shortages in countries that are import-dependent have contributed to political unrest and upheaval, further destabilizing the economies of the U.S. and many other countries. High costs for food and clothing impact on advertising budgets across multiple categories, especially retail, CPG and fashion. Rising gasoline prices historically have a trickle down effect across several domestic U.S. business categories, especially travel and tourism. Fast food and in-home entertainment, however, should be stronger as these forces impact the economy.

Another negative economic factor is the impact of the Japanese tsunami and nuclear disasters on availability of parts for home electronics and auto manufacturing. Two of the most robust categories over the past year have been automotive and home electronics. Manufacturing disruptions in Japan have caused a shortage of parts in both industries and could have some economic impact on projected sales and advertising budgets.

Our domestic economic reality points to an industrial recovery that is not yet translating into a consumer-led recovery. In 2003, when Upfront CPM increases were 15% to 16%, strong consumer spending was powering increased manufacturing and strong retail results. Today consumer savings rates remain at record levels and resistance to credit card debt is high. Industrial production is improving but consumers still aren't spending at pre-recession levels.

Although unemployment rates have been improving and the job market appears to be gaining some steam, it's not yet translating into real economic growth for most advertisers. In the past several months, consumer sales promotion (such as coupons) has been curtailed. This indicates that consumer packaged goods manufacturers are absorbing higher costs for raw materials and are unable to pass the costs on to wholesalers, retailers and consumers. The most opportune short-term cost-saving measure is to cut promotional spending, which is significant and immediate. Unless commodity prices decline, which is unlikely, CPG manufacturers will look for additional cost saving measures, and advertising will certainly be a target.

Marketers clearly understand that advertising is at the core of their consumer communications strategies, and reduced advertising can negatively impact on their business. But global economic realities are likely to empower procurement executives to draw a line in the sand on spending increases. The challenge for marketing execs at leading national and regional advertisers will be to maintain or reduce costs while generating equal or increased advertising value and impact. There will be greater focus on metrics that validate sales performance. There will be a drive for more cost efficient media alternatives that deliver the scale of national television.

Ultimately, national television remains the engine that marketers depend upon to pull their business ahead in difficult times. The market will be strong. But those who believe that double-digit CPM increases are secure need to be aware of the countervailing winds and storm clouds on the horizon.

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