When the economy starts getting hairy, one of the first things marketing types will tell you is that the only way for brands to power their way through a downturn is to crank up the advertising spend. In support of this thesis, they’ll dust off the old chestnut about how Kellogg’s doubled its ad budget in the run-up to the Great Depression, and when the dust cleared, the Rice Krispies manufacturer had all but buried its far more risk-averse rival, Post.
While there’s something to be said for the way Snap, Crackle and their buddy in the drum major’s shako helped steer Kellogg’s through a decade of catastrophe—today, the company has a $25.4 billion market cap and is about five times more valuable than the purveyor of Grape-Nuts—it’s also more than a little weird that the analogy everyone reaches for is nearly 100 years old. Back then, radio was still in its infancy, and the only venues for advertising were outfield fences and the pamphlets that were distributed whenever the medicine show trundled into town. The prize at the bottom of a box of cereal was usually a phial of laudanum, and if a dandy from that era were to lay eyes on the likes of Toucan Sam, he’d topple from his velocipede in a great, foppish heap.
Although none of the top media execs has said as much in so many words, this earnings season has made it clear that the ad market is heading for a world of hurt. While the metaphor du jour is “headwinds,” that may be too easy-breezy an assessment for what lies ahead; in terms of sheer discomfort, the next few quarters would seem to offer little more than a steady diet of mouth-shredding Cap’n Crunch.
The pain of tucking into an insufficiently pre-soaked breakfast cereal is already being felt. In the second quarter of this year, national TV ad spend was down 1% year-over-year to some $9.4 billion, according to Standard Media Index data. While not an agonizing drop, comparisons to the same period in 2019 are a lot rougher, with Q2 ad investment down 20% versus that pre-COVID interval, which works out to a loss of $2.4 billion.
While everyone from David Zaslav to Lachlan Murdoch deployed “headwinds” during this month’s earnings calls, Paramount Global chief Bob Bakish tempered his message to investors with a multidirectional approach. “Well, look, we see both headwinds and tailwinds in advertising,” Bakish said last week, before noting that the slowdown in the ad market is a direct function of “the state of the macroeconomic environment.” The CEO of CBS’ parent company confirmed that the microchip shortage is still hampering auto spend, while the packaged goods category (i.e., the straw that stirs media’s drink) is “managing through inflation issues, which is really impacting ad spending as [companies] look to protect margins.”
If you’re wondering about the compensatory tailwinds to which Bakish alluded, the Paramount boss went on to characterize the ad turbulence as a “short-term challenge,” thanks in large part to “a very tight supply” of TV inventory. While it seemed almost an afterthought at the time, Bakish’s throwaway line about the resilience of TV should provide investors with a measure of reassurance, as it subtly underscored the near-hermetic unflappability of the sports ad market.
That live sports is kitted out to withstand the worst of the turmoil in the ad market is a function of massive reach, dumb luck and an age-old procedural wrinkle that prevents marketers from trying to wriggle out of their fall TV commitments. Rather than engage in any postmortem equine flagellation, we’ll skip the familiar bit about how sports all but singlehandedly drives ratings, and instead take a deeper dive into the far more esoteric rules that govern the summer upfront bazaar.
Here’s how the blocking and tackling gets done. As of today, the networks have roughly five-and-a-half weeks in which to convert their upfront holds into orders; in other words, the handshake commitments that were made since the upfront negotiations began in early June must be formalized before the 2022-23 broadcast season officially gets underway in September. (The NFL is on a more accelerated calendar; if you ordered up a few in-game spots in the NFL Kickoff Game, you have exactly four weeks to get that check in to Dan Lovinger.)
Once the fourth quarter deals are locked in, those arrangements are “firm,” which is to say that advertisers who’ve bought time between the start of the season and the end of the calendar year don’t have much leeway to back out of their contracts. Cancellation options are available in advance of the other three periods—broadly speaking, advertisers may back out of between 25% and 50% of their Q1, Q2 and Q3 upfront allocations—but the ontological status of fall buys is a lot less equivocal. A deal’s a deal. No takebacks, no refunds.
Of course, everything is a negotiation, and even the time-honored policy of holding firm on fourth-quarter commitments is often beholden to more organic concerns, like the complex human interrelationships between sellers and buyers. Nobody wants to start a war of attrition over an issue that could overshadow the coming financial year, and many of the most lucrative sports-advertising partnerships have been in play for decades. But since all parties concerned are well-versed in the rules of engagement, it’s exceedingly rare that advertisers will try to pull out of their fall investments, especially when their dollars have been pinned to the NFL and college football.
Should things get downright recessionary, then holding the line in the fourth quarter isn’t necessarily going to let anyone off the hook in 2023. After hanging on for dear life in the fall, even marketers with the most generous budgets may find themselves throwing their ad plans in reverse once the calendar rolls over. In 2012, General Motors canceled nearly half of its Q2 upfront buys across broadcast and cable, the maximum wriggle room allowed under the terms of network ad contracts. Just three years before that, Procter & Gamble pulled out of half of its April-to-June commitments during a period that saw overall cancellations soar as high as 15%.
All that being said, the autumnal sports bonanza can see a Fox or an ESPN through even a protracted downturn. Per Nielsen, sports accounted for 77% of Fox’s ad impressions in 2021—up from 49% just 10 years earlier—and in the fall, the NFL, college football and MLB postseason accounted for over 90% of Fox’s sales activity. When you’re generating the bulk of your ad revenue during the period in which consumers spend about $300 billion more than they do during the first eight months of the year, you’re in pretty good shape.
While the severity of the economic downturn remains to be seen, the experience of the last three recessions suggest the sports market should thrive through the worst of it. Ratings tend to improve when the money’s tight, as watching the Dallas Cowboys on the widescreen is a hell of a lot cheaper than taking the family out to the movies. (Or, for that matter, the stadium.) As in more flush times, viewers and deep-pocketed advertisers continue to flock to sports. And because so many marketers seem to have taken the Kellogg’s arcana to heart, many will choose to spend their way through the upheaval.
Auto spend may dry up because there aren’t enough cars on the lot, but the Procter & Gambles of the world will keep pouring money into TV as long as Americans are still in line for personal necessities such as toothpaste, deodorant and laundry detergent. Per Kantar estimates, P&G in 2021 was once again the top buyer of national TV inventory, pumping $1.72 billion into the cable and broadcast networks. During the previous year, which coincided with the lockdown phase of the pandemic, P&G spent even more to reach TV viewers: a cool $1.88 billion.
Sports rights-holders have braced themselves for the uncertainties that lie ahead by selling a greater volume of upfront inventory than usual, locking in high single-digit pricing increases while reserving fewer units for the scatter market. Although scatter rates are higher than the prices agreed upon during the upfront in nine out of every 10 years, the looming macroeconomic threats suggest that 2023 may well be an outlier. Better to sell off as much airtime now before the bottom drops out than to hold out 30% of your inventory to move in a scatter market that may never materialize.
Such was the path Fox and its broadcast rivals took this summer. “We chose a very purposefully and … judicious way to sell more volume into this upfront, because we felt it was a period where having the highest level of certainty we can around our sales and our inventory was important,” said Lachlan Murdoch, executive chair & CEO, Fox Corp., during his company’s Wednesday morning earnings call, before adding that Fox’s upfront sell was “in the low to mid-80s.” That figure Murdoch cited represents the percentage of Fox’s available airtime that was sold upfront, one that is significantly more robust than the usual sell-through of 70% to 75%.
While it’s unfortunate that analysts are no longer as attuned to the workings of the upfront market as they once were—Wall Street watchers long ago stopped pressing TV execs on the holds-to-order process, which translates to a greater amount of uncertainty as to how much of the ad money that was pledged in the summer bazaar will actually land in the networks’ coffers—our research suggests that sports isn’t being hampered by a late-summer outbreak of buyers’ remorse. Some free-spending categories (insurance, pharma) are even looking to expand on their fourth-quarter sports investment, while others (gaming/gambling) would be happy to pump even more cash into TV, if only the NFL would give them the go-ahead to expand beyond the six-spots-per-game limit established a year ago.
One exec who managed to sidestep the “headwinds” cliché was NBCUniversal CEO Jeff Shell, who reached for a nautical metaphor. “The advertising market is choppy,” Shell told investors on July 28. “It continues to be choppy, down year-on-year in the scatter market. It’s really segment-by-segment-based, though some segments are doing better [and] some segments are doing worse.”
As was the case with Fox and the other top-drawer sports networks, NBC looked to soothe the choppiness by upping its upfront dollar volume. At the end of June, the company said it had boosted its primetime commitments by as much as 20%, which translates to a potential haul of some $3.3 billion. Among the categories that outperformed for NBC include pharma, consumer packaged goods, streaming services, fast food and tech, all of which play a key role in establishing Sunday Night Football as a $1.4 billion advertising juggernaut.
To borrow a phrase from another Kellogg’s shill, it’s shaping up to be a Grrreat! fall for sports TV. And if things get dicey down the road, and they certainly could—sports is recession-resistant, not recession-proof—there’s no shame in eating cereal for dinner.
