2012 upfront previewed: 8% CPM increases


Pivotal Research Group analyst Brian Weiser expects some 8% CPM increases for network TV 2012-13 primetime advertising negotiated during this year’s Upfront: “We believe this is materially above consensus expectations and accordingly we would expect these seemingly favorable price increases to positively impact sentiment around ad-supported media stocks including CBS, Comcast, Walt Disney and News Corp. Cable network owners including Time Warner, Discovery, Viacom, Scripps and AMC may also benefit from a ‘halo’ effect around perceived strength going into the 2012-13 season.”

An analysis of historical data and negotiation practices shows that the single best variable in predicting Upfront pricing is the underlying year-to-year change in demand at the time of the Upfront.

At this early stage (February) in the planning / buying cycle, macro-driven estimates of network TV revenues for the upcoming year serve as the best predictor of Upfront volume. As the sentiment of media buyers and media sellers evolves in the weeks approaching actual negotiations, expectations for volumes – and thus pricing – should evolve as well.

In lieu of conclusive evidence from buyers (which will not emerge until April or May) indicating dollar volumes are significantly up or significantly down, we work backwards from our expectation of a flattish network TV revenue – and thus volume – environment, to arrive at our preliminary +8% CPM estimate.

Pivotal’s pricing model is based upon an analysis of historical data of network TV upfront price changes. Because data is more consistently available from public sources, they only included the Prime Time daypart from each of the main three networks since 1979, Fox since 1987, the WB and UPN from 1996 through 2005 and the CW from 2006 to the present.

The pricing of the market “leader” (or the network capturing the largest share of dollar volume in a given daypart) – is driven by a single variable: change in demand (ie volume) at the time of the Upfront. We focus on a market “leader” because we have observed that negotiations between buyers and sellers of all media properties tend to reference – or “anchor” – their negotiations to that leader.

In establishing expectations for future pricing, Pivotal assumes volume in the Upfront will be in-line with revenues for the upcoming broadcast-year, or essentially flat when compared with the 2011-12 Upfront: “Our model of historical data indicates that in a year with flat volume change we should expect pricing for the market “leader” in any given daypart should rise by 8%. If demand at the time of Upfront negotiations falls by 5%, our model predicts CPMs will rise by only 5%.
All other negotiated prices will be effectively anchored around this price. For network prime time, CBS will serve as the “leader” during 2012-13.”

On average “followers” secure pricing below the leader, although Fox has often been able to secure a premium given its younger audiences. Cable network groups should similarly be able to expect pricing that falls slightly behind the “leader” (see below).