TV Upfront Part 3

1. PIVOTAL U.S. Equity Research
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Pivotal Research Group
TV UPFRONT PART 3: THE SALES VIEW April 16, 2012
8-10% CPM NETWORK UPFRONT; DIGITAL DE MINIMUS
SELLER VOLUME EXPECTATIONS AFFIRM FEBRUARY CALL ON HIGH SINGLE/LOW Brian Wieser, CFA
DOUBLE DIGIT INFLATION RATE FOR TV IN ’12-13; CBS PRIME BENEFICIARY. In 212-514-4682
February and March we wrote on a) the structural characteristics of the Upfront (and how it brian@pvtl.com
derives 8% CPM rises for the prime time leader, CBS during flat volume growth markets) and
b) the views of network TV buyers which led us to revise our expectations to 8-10% CPM
growth. Over the last two weeks we surveyed teams responsible for selling advertising
on network, cable, syndication and Spanish-language TV. Consensus expectations from
sales teams for volume are remarkably similar to those of buyers, with a view towards 0-5%
volume increases for prime time advertising inventory. As we have previously described it,
volume growth expectations for the upfront are singularly correlated with pricing generated by
the leading supplier of network TV inventory (which, for this year, remains CBS). Sellers’
volume growth expectations equate to 8-10% pricing growth in our model, in-line with
buyers’ expectations of volume growth as described in March.
FOR MEDIA OWNERS, HIGH PRICING IS PREFERABLE, BUT REVENUE IMPACT IS
LIMITED. As we previously described the mechanics of the marketplace, benchmark network
prime time upfront pricing serves as a negotiating “anchor” around which all other national
television advertising is negotiated. To that end, pricing expectations reflected here should
bode favorably for all sellers of national television in the upcoming Upfront marketplace
(including Disney, Comcast, News Corp, Discovery, Viacom, Scripps and AMC). However, our
past studies indicated no correlation – at least on the network TV level – between upfront
pricing and broadcast-year revenues. Various factors associated with inventory management
by networks and mix-shifting by advertisers and agencies cause this. Still, strong pricing is
better than weak pricing for media owners, and if nothing else should contribute to positive
sentiment around the relevant stocks as we approach the May-June negotiating time-frame.
DIGITAL BUNDLES COMMON, BUT UPFRONT MOSTLY A SIDE-SHOW FOR ONLINE
VIDEO. A new takeaway relates to expectations for sales of online video properties and other
digital extensions during the Upfront. We have previously noted that buyers at agencies are
keen to purchase online video inventory to create an “escape valve” containing traditional TV
pricing, which is what marketers care about most. Sellers would generally love to sell it to
capture a higher volume of dollars, as they care about boosting revenues. However, sellers
expect limited bundles of sales of digital inventory. This is primarily because little inventory
actually exists today: consumption of online video remains de minimus (low single digits of
equivalent viewing hours for comparable properties) when compared with traditional TV. Still,
we would expect more bundles of premium properties such as network content on Hulu to be
sold alongside network content during the Upfront. We are less optimistic about the prospects
for other participants in the so-called “Newfront” (a concerted effort by publishers of online
video to capture traditional TV budgets). When online video is funded by digital budgets it
typically has shorter lead-times than TV, as online advertising is typically planned closer to the
time at which campaigns run. As well, for these budgets, online video is only one of an array
of digital tactics, and there remains no shortage of ways in which digital budgets can be
executed without committing months (or up to a year) in advance, as is the case with the
conventional Upfront. Online video growth remains robust – up 22% to $2.3 billion during
2012 in the US – but largely separate from the Upfront process.
AUTOS SHOULD REBOUND, TECH AND DOT.COMS GROWING. QUESTIONS AROUND
RETAIL AND PHARMACEUTICALS. Our respondents frequently highlighted the return of the
auto sector and growth of technology marketers (especially web-based advertisers, which we
have previously highlighted as spending increasing volumes of money online and offline as
well). While pharmaceutical weakness is well known, multiple respondents also highlighted to
us the risk that some retailers (such as Best Buy and Sears) could depart the Upfront market
altogether this year given the challenges they are facing.
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Important Disclosures Are Located In The Appendix

2. Appendix: Important Disclosures
Analyst Certification
I, Brian W. Wieser, hereby certify that the views expressed in this research report accurately reflect my
personal views about the subject company and their securities. I further certify that I have not received
and will not receive direct or indirect compensation related to specific recommendations or views
contained in this research report.
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Stock Ratings
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criteria:
BUY: The security is expected to have an absolute return in excess of 15%.
HOLD: The security is expected to have an absolute return of between plus and minus 15%.
SELL: The security is expected to have an absolute return less than minus 15%.
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Pivotal Research LLC currently provides research coverage of 16 companies, of which 75% are rated
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investment banking services. This data is accurate as-of April 16, 2012.
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