TV ads are a good barometer

An interesting report came out in Mediaweek this week talking about Discovery Communications advertising sales up 5% and the article further notes Rainbow (that's WEtv, Sundance, AMC etc.) was up 18+% .  How good news is this and what does it tell.

First Discovery Channel is and has always been a premium niche  outlet.  They, like A&E, Food, HGTV decided on programming that was consistent in genre and therefore audience.  Discovery never put out a blockbuster series but had a nice mix of specials and regular programs that produced a well defined audience. Reading their media kit, their best performance is for middle to slightly older men, high household income, professional, educated and, if you look at the economy, these are the folks that have a chance to dance through the economic mess.

Media buyers used to refer to Discovery as the Mercedes and Volvo channel as that is exactly the audience/product fit.  Now cars haven't faired well in this recession so that's a bad example.  However if ad sales are up then higher end advertisers are coming back in the game and that is the point of this blog.

Watch advertising on TV and see who and where ads are being bought by and the networks they are being placed on. It is a very good indication about where there is sufficient corporate recovery that enables advertsing spending.

How Nonsense Sharpens the Intellect

As kids we played a picture puzzle that you will all remember...the "can you find the hockey stick in this picture". That was fairly easy in that the image (the hockey stick) really was there and simply in the midst of a number of other recognizable objects. The observations posed in the NYTimes piece linked in the title explore this a bit and it is a good read. I'll let you read it or encourage you to do so.

In advertising there is a theory about white space in an ad. The simple truth is that eye/mind doesn’t focus on white spaces and move toward the first identifiable recognizable product. Simply it is somehow reassuring to find something that one can relate to in some way and the brain goes through all sorts of gyrations until it solves the problem or, in an advertising scene, arrives at the message.

As I sit with traders all day long I see this often. Seemingly unrelated materials and events that are really a pattern of sorts fill their screens and therefore mind. A lot of very smart people sitting around trying to find out what is what with what we now know to be their brains lighting up.

If you are intrigued by this you should be a trader...but then you should be a trader anyway.

Advertising Issues Redux - wakeup call to IPG

I and members of my family were once employees of firms taken over by IPG, the huge advertising and marketing firm. Over the last year the stock has been at a year 2008 low of $2.50 or so and has moved slowly up to a $7.40 close yesterday.  One would think that things are getting better - much better.  Happily I got out in 2007.  The bad part of all this (and there is indeed a bad part) is that the revenues for an advertising/marketing conglomerate are, well fees from advertising and marketing. OHOH.

I've written several times about the "advertising upfront" and the drop in ad sales generally. Well that two edged sword not only slays the networks it slays the ad agencies. Here is how it works for a firm buying advertising time.

A long time ago networks established a professional courtesy price structure for companies  that used advertising agencies to place their media (buy ad space).  It is a "net-gross" adventure in accounting.  Agencies of record for a company buy media at the gross negotiated rate and when the bill comes due it is paid in "net dollars" which is 85% of a gross dollar. For instance, if I buy a :30 second spot on My Little Margie starring Gale Storm for $1,000 gross dollars my bill for payment, submitted to the agency will be 85% or $850.  Originally the 15% difference was the agency profit and covered the agency's costs.  With better software systems and EDS innovations, the real cost for handling advertising buying was substantially reduced and is now a fraction of the 15%.  Major accounts are either bid at a low flat rate of the gross (2-5%) or the buying is done on a flat retainer fee.  This is big trouble for an IPG.

They were being hacked to death by competetive bidding and had to reduce their commissions to the bone.  Now the raw advertising spending has dropped like a rock so not only are their margins low their dollar volume goals in gross advertising placement are hard hit.  IPG is in survival mode like almost all agencies.

The debt that they acquired in their buy out the competition is coming due just as their revenues are drying up.  It doesn't help that GM was a big account. Twisting the clock backward, they would be fine. Running the clock forward.....ohmy.

Talk about dominoes falling...the TV Upfront

Obviously when companies who advertise face tough times the CFO runs to the president and demands cuts in the ad budget. He runs into one of two types of CEOs....the I need quick bottom lines and the orders go to cut the ad budget as Mr. Shortsight will be out of that position and on to another pretty soon. Or the CFO runs into the other type of CEO who calmly asks the finance guy where does he expect to get the next customer.

Advertising cutbacks are like blood in the water to the opportunistic. So what does this have to do about advertising upfronts? Plenty and there is a wealth of information about the company that can just be gained by a look at the advertising position.

THIS ISN'T INVESTMENT ADVICE. GOD STRIKE ME DEAD IF IT IS.

The upfront is a time of year where agencies register budgets with the networks on behalf of clients. Negotiations ensue and this is the part of the advertising buying and selling time called the "up front" because it is for inventory booked "in front of"the upcoming season that launches usually in the last weeks of the third quarter. Inventory that isn't bought or sold during the upfront becomes "scatter" inventory and is sold on a "scatter shot" basis and usually at a significantly higher rate. Key word here is "usually"

It is the disconnect of understanding of the timing of the fallout of the "upfront" that maybe someone misses here. The article indicates a 9+% decrease in upfront buying. Although NO ONE KNOWS the real number, the 9% generally reported is, like all advertising, probably a bit optimistic.

So let's play a "let's suppose" here. Suppose I have a business in women's hats. I need to keep the family and my local bank happy so I propose a spring sale of next year's collection. I put on a dog and pony show, plenty of food and drink. A nice desk thing giveaway and I schmooze my customers to death. In the end, I find that I've sold almost all my good inventory of hats and my total sales are (gasp!) 10% less than last years which were down as well from the year before that.

My banker tells it to me flat out: You are going to have 10% less to spend in every catagory...from new hats to salaries for your best people. Everyone will have to work 10% harder just to keep your overheads from eating you alive. You'll spend 10% less on your suppliers who will have that much less to spend.

Of particular note your hat shop lives on new creations. You can't "take the chance" on a brilliant but new designer so a good idea goes begging and he/she goes back to work at Starbucks and the trail of havoc is nearly endless.

All this because someone thought that advertising was an overhead that had no effect but more on that next time. Right now the Viacoms of the world will see a pinch (yet again) and you'll see a pinch with bad and cheap programs flooding primetime but if you look closely, development studios who product the pilots will be hurt as will the script writers, costumers, etc., right down to the Foley artists who slam the door you hear.