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Lots of Bellyaching but Few Resist Big Networks' Ad-Rate Increases

To hear many high-level agency executives tell it, the networks, after years of imposing steep upfront price hikes, are close to pricing themselves right out of business. Network price hikes have dominated talk in ad circles since the upfront market in June, when the network's commanded 15%-plus increases for the 2003-04 prime time season and collecting a record $9.4 billion in the process.

The talk prompted the organizers of last week's MediaPost ad conference in New York to create a panel session that put the question out there squarely: Are the networks guilty of price gouging, and what if anything can advertisers and agencies do about it?

Network pricing is a sore subject in ad circles, and the higher prices come at a time when many advertisers are having a hard time justifying their own price hikes, let alone increases to offset the higher TV charges. That in turn is keeping downward pressure on agency commission rates.

No wonder that a just released survey from the American Advertising Federation shows that 72% of responding advertising executives say their industry is still in recovery mode, with most doubting "the immediate prospect for strong growth." The survey also indicates how the ad industry perceives radical changes in the business.

But if agencies and clients are willing to pay, can the networks really be overpriced? Probably not, but buyers certainly aren't smiling as they write checks to cover the huge increases.

David Poltrack, executive vice president, research and planning, CBS, countered the ad industry's complaints, arguing at the MediaPost conference that, tracked over 30 years, average network prime time hikes have been a very consistent 7%—some years higher, some lower. Fragmentation has taken its toll, he acknowledged, noting that, in 1980, purchasing 300 gross rating points on the networks would get a buyer 85% audience reach. Today, those same 300 GRPs achieve a 75% reach.

Still, buyers said, this year's increases were a shock. "We all paid more than we liked," said John Gaffney, chief operating officer of ad-buying firm Media Planning Group and a participant in the MediaPost panel discussion. "The networks did an excellent job of managing the negotiating environment" and persuading buyers to plunk down $9.4 billion in about three days. "None of us would look at [the upfront process] and say gee, this is a smart thing to do."

Yet they did it. As ad-industry veteran Gene DeWitt put it, "We're all consenting adults and elected to participate." On the other hand, he added, bypassing the upfront is not really an option for many of the bigger advertisers, or at least it hasn't been.

The upfront process, he said, "is designed to manipulate the marketplace." Big spenders who feel they have to buy a lot of network time are essentially captives of the upfront market. But, if steep network increases continue, that will "drive the industry to look for alternatives."

Cynthia Ponce, executive vice president, ABC Sales and Marketing, took exception to DeWitt's suggestion that the networks manipulate the marketplace. Where, she asked, was the big hue and cry when the networks took a price cut at the height of the recession two years ago? The upfront market is designed for clients who want to be on-air at certain times with guaranteed audience levels.

And the fact is, buyers knew what to expect, she said. "They were planning for it for six months."

But the upfront isn't for everybody. Brands can be built without spending a dime on network TV, said DeWitt, who founded and ran DeWitt Media, which he later sold to Publicis. He eschewed the networks when BMW launched its Z-3 model.

Media-buying agencies want to be innovative, they really do, conferees seemed to be saying. It's those gutless clients, with their risk-averse mentality, who keep holding them back.

Jon Mandel, head of U.S. operations for Mediacom said, "Clients have to step up" and be receptive to the innovative ideas that agencies come up with. He recalled one client who demanded an innovative campaign but then rejected as too risky the one Mediacom devised. "It's not just a matter of thinking outside the box," he said. "We have to teach clients to get the hell out of the box."

Charles Courtier, CEO of Media-Edge:cia, agreed. Sometimes executing the right strategy "requires bravery on the part of clients that often isn't there."

Then there's compensation. Time was, not long ago, when the agency got a 15% commission for negotiating and executing the buy. That's now down to low single digits, even fractions of a percent. Thus, said DeWitt, most buyers are going to go for the network buy because doing otherwise would be "financial suicide." Thus, there is little incentive for buyers to consider alternatives "until they change the compensation structure."