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AdvertisingBounces Back

As 2010 began, being dependent on advertising was a bad thing in the television business, while subscription revenue was good as gold. Going into 2011, the shoe might be on the other foot.

The smart money is bullish on the resurgent ad market staying strong, but Wall Street is concerned that digital marauders ranging from Netflix to Google will disrupt what has been a steady stream of sub fees.

Though the overall economy remains uncertain, TV advertising revenue is surging, and outlets that looked like road kill a year ago—particularly local stations—are posting double-digit gains even after the frenzy of political spending has subsided.

Madison Avenue media buyers recently raised their forecasts for 2011 spending. GroupM, for example, bumped up its U.S. spending outlook to 3.7% growth, following a 1.2% increase in 2010 and a 7.1% drop in 2009.

“Television and online media have been the primary beneficiaries of the rebound in spending,” said Rino Scanzoni, chief investment officer of GroupM. “Moderately accelerated growth is anticipated in 2011, as corporations with significant cash reserves deploy investment in marketing and advertising to drive top-line growth.”

During the strong 2010 upfront market, the networks quickly sold a higher-than-normal share of their commercial inventory for the broadcast year as they looked to lock in prices that were up by nearly 10%. Those prices proved to be a bargain. In the scatter market, where commercials are sold closer to air time, prices were up as much as 30%.

What happens next? At the annual UBS Media and Communications conference in December, CBS’ ebullient CEO Leslie Moonves predicted that the scatter market would remain strong through the rest of the TV season. “That means the upfront should be even better this year,” he said.

This year’s upfront will be missing a familiar face—Jon Nesvig, who headed ad sales for Fox for more than 20 years and has been replaced by Toby Byrne. ABC will be showing off its first upfront slate under Paul Lee, while the new team at Comcast tries its hand at repairing NBC’s schedule.

Indeed, assuming the year-long review of the transaction closes, Comcast’s leaders will be feeling the effects of buying NBC Universal, which means managing talent, wrangling talkative affiliates, and learning new businesses like international, theme parks and motion pictures. Depending on what concessions the government gets, Comcast will also be taking charge of Hulu.

Also under new management are Lifetime and Travel Channel. And March Madness starts its move to cable under a new deal struck by CBS and Turner Broadcasting to share the NCAA men’s basketball tournament.

While everything appears to be coming up roses with advertising, threats that consumers might cut their cable cords has Wall Street worried silly. At a time when the number of traditional video subs is shrinking for the first time, the notion that digital upstarts could cause a fundamental change in the content creation and distribution ecosystem is affecting the earnings multiples investors assign to media stocks, limiting their upside.

Chief among the skunks in the media garden party is Netflix, which is able to stream movies and television shows directly to TV sets for about $8 a month, well below the $40-$60 cable bills some consumers are balking at as times get tougher.

Jeff Bewkes, CEO of Time Warner, a company whose stock analysts say has been particularly impacted by cord-cutting fears, has been taking aim at Netflix in recent statements. Bewkes recently suggested that Netflix won’t be able to get access to expensive content without paying higher fees than it does now.

This year, one of Netflix’s biggest deals—one with Starz that gives it access to movies from Sony and Disney—expires. Netflix is now paying an estimated $30 million to Starz per year, and analyst Richard Greenfield of BTIG Research estimates a new deal could cost 10 times that.

But not everyone’s afraid of Netflix. In December, Disney signed a deal that lets Netflix distribute shows from ABC, Disney Channel and ABC Family over the Internet 15 days after they’re initially telecast.

According to reports, Disney is getting $50,000 to $150,000 per episode for its shows—significantly less than it gets in syndication. But the one-year deal’s total value, estimated at $150 million to $200 million, demonstrates that a little bit of green will go a long way in the new year.

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