Fed-Up Advertisers Stop Paying More for Smaller TV Audiences

(Bloomberg) -- In the coming weeks, TV networks will host glitzy events in New York to convince advertisers to spend more money on the latest dramas and reality shows. Many ad buyers, however, say they’re tired of paying ever-higher prices to reach ever-fewer viewers.

Thanks to competition from so many new forms of entertainment -- Netflix, Facebook, Snapchat -- audiences for traditional TV networks, from ESPN to MTV, are declining. In the current TV season, the four major broadcasters have lost 8 percent of their audience. Because of the slumping ratings, advertisers who want to reach a certain amount of eyeballs can’t get what they need from television anymore.

To make up for the shrinking audiences and keep ad sales high, TV networks have kept raising their rates, believing ad buyers will just have to spend more to reach the people they need. TV ratings have dropped 33 percent in the last four years while TV ad prices are up 20 percent during that period, according to Magna, the ad-buying agency owned by Interpublic Group of Cos.

But now, marketers are losing patience with the networks, and ad sales in the $70 billion U.S. TV market are slumping.

“Advertisers’ businesses aren’t growing 10 percent, so when you charge 10 percent increases you’re going to scare people away from TV,” said Dave Campanelli, director of national broadcast at Horizon Media, an ad buyer.

Some ad buyers have been shifting more of their TV budgets to the internet, seeking to encourage the growth of digital competitors like Hulu and YouTube. Last year, Magna announced it would move $250 million of its clients’ TV budgets to YouTube.

Though major media companies Walt Disney Co. and 21st Century Fox Inc. won’t report quarterly results until next week, cable networks look likely to post their first decline in advertising since 2010, according to Bloomberg Intelligence.

“Fundamental revenue drivers (subscribers, advertising supply and demand) are incontrovertibly getting worse,” Todd Juenger, an analyst at Bernstein, said in a note Friday.

This week, the media industry reported a record first-quarter decline in pay-TV subscribers, and executives made cautious forecasts on advertising spending. The S&P 500 Media Index, which includes giants such as Disney and Comcast Corp., fell 2.2 percent this week, the worst since September. Time Warner Inc. and Viacom Inc. warned that second-quarter advertising sales are likely to be down.

In addition to the declining viewership, advertisers have gotten more cautious about spending because they’re even less sure than normal about how the economy is going to fare this year, given the volatile climate in Washington. John Martin, chief executive officer of Time Warner’s Turner cable unit, said on an earnings call that advertisers are “holding back a little bit” because of “some uncertainty in the economy.”

“They’re taking a little bit more of a wait-and-see approach,” Martin said. He also cited fewer product launches in categories like technology, cars and drugs.

There is some evidence to support the idea that advertisers are holding back spending. Major ad agencies like WPP Plc and Omnicom Group Inc. recently posted their lowest organic sales growth in seven years, according to Bloomberg Intelligence.

Another problem: TV networks and advertisers still haven’t agreed on a way to measure audiences on other platforms besides TV, like tablets and phones. Nielsen says it’s working on a solution, but programmers say many of their viewers are still not being counted in negotiations with advertisers, hurting their ad sales.

Turner, Viacom and Fox recently unveiled their own targeted advertising platform to better compete with digital video companies. TV networks will also try capitalize on recent concerns about brands appearing next to offensive YouTube videos and remind brands that TV is a “safe” place to advertise.

But the pitch is wearing thin. On Thursday, CBS Corp. said advertising dropped less than 1 percent from a year earlier, leaving out last year’s Super Bowl and another playoff football game. Ad sales at Comcast’s NBCUniversal cable networks, which include CNBC and USA, slumped 3 percent in the first quarter due to lower ratings.

It’s possible that advertisers are putting media companies through some pain ahead of the big upfront meetings in New York later this month, when TV networks showcase their upcoming programming to try to snag big commitments from ad buyers.

“Agencies try to project a softer market than there is,” Viacom CEO Bob Bakish said in an interview. He called it “posturing.”

Yet Bakish and his peers know they need to improve the performance of many of their networks, with a few exceptions like VH1 and Fox News.

No network needs more help than Viacom’s MTV, the once-great cable channel that has surrendered its grip on young viewers to YouTube and Snapchat. New MTV boss Chris McCarthy has scrapped his predecessors’ scripted programs to focus more on reality series and live shows filmed in Viacom’s Times Square offices. The channel will air eight new series in the coming weeks.

Earlier this week at a conference in Beverly Hills, California, CBS CEO Les Moonves expressed confidence that ad rates will continue to climb.

“I say the same thing I say every year,” he said. “It’s going up. It’s great.”

To contact the reporters on this story: Gerry Smith in New York at gsmith233@bloomberg.net, Lucas Shaw in Los Angeles at lshaw31@bloomberg.net.

To contact the editors responsible for this story: Crayton Harrison at tharrison5@bloomberg.net, Paul Barbagallo