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TV Ad Sales Are About to Get Much Worse

By Adam Levy – May 15, 2020 at 12:00PM

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The pullback on TV ad spend has been delayed.

Digital advertisers saw a near immediate pullback on ad spending in March when the coronavirus pandemic started taking hold in Europe, the United States, and everywhere else outside of China. But marketers couldn't move as swiftly with their national television commitments. They had their first real opportunity to slash their TV ad spend earlier this month with upfront deals slated for the third quarter.

One billion to $1.5 billion in U.S. TV ad commitments for the third quarter could be canceled, ad buyers told The Wall Street Journal. That's a considerable dent in the roughly $42 billion spent on national TV ads annually -- over 10% for the quarter. The majority of that spend is pre-committed with upfront deals, but marketers can cut half of those commitments per quarter with enough forewarning to the networks.

Combined with the pullback on ad slots bought closer to broadcasts, media companies with a lot of ad-supported networks could feel a lot of pain next quarter.

Closeup on a hand holding a television remote with a static-filled TV in the background.

Image source: Getty Images

What the media companies are saying

Management gave some early warnings that advertising revenue will fall sharply this quarter.

"We anticipate second quarter advertising revenue to be down in the range of approximately 30% year-over-year," AMC Networks (AMCX 4.33%) CFO Sean Sullivan told analysts on the company's first-quarter earnings call. Discovery Communications (DISC.A) CFO Gunnar Wiedenfels told analysts, "April is down around 20% year-over-year."

ViacomCBS (NASDAQ: VIAC) and Disney (DIS 2.97%) stopped short of providing specifics but noted significant downturns in ad spending for their networks this quarter.

Still, the companies are optimistic for the second half of the year.

"We believe there will be an improvement in advertising in the third and fourth quarters, assuming businesses begin to reopen at scale," ViacomCBS CEO Bob Bakish said on the company's first-quarter earnings call. "Much of the money that has moved away from second quarter, we've been able to keep on the networks in the second half of the year," AMC Networks COO Ed Carroll said.

Wiedenfels at Discovery was a bit more of a realist. Both May and June are looking slightly better than April, he said in his prepared remarks. "I'm just giving that to you guys in full transparency here, we're seeing a lot of rolling cancellations etc. So, take it with a grain of salt," he added later.

Those rolling cancellations combined with the cancellations in upfront commitments could mean a third quarter that's much worse than management currently is seeing. To their credit, management at each company noted there's a considerable lack of visibility going forward, and a lot depends on factors well outside of their control.

Will the TV ad spend come back?

Just as ad spend has been slow to move away from television, it'll be slow to come back. While management at all the media companies stressed that they're ready to work with advertisers when they are, it's still a relatively slow process.

The saving grace for television networks may be political ad campaign spending in the third and fourth quarters. But even that reliable source of spending may be less than originally anticipated before the impact of coronavirus. A lot will depend on whether there's a full fall TV schedule, and if the NFL starts its season on schedule. Without the content to draw in audiences, political ad campaigns will shift their spending to different channels.

Even if television resumes as normal in the fall and the economy rebounds quickly, the current environment will likely accelerate the shift to digital advertising. While most media networks have shifted in one way or another to digital distribution for some content, the vast majority of their ad revenue still comes from linear television networks. Meanwhile, they're competing with entrenched digital ad giants with heaps of user data for digital ad dollars.

So, investors should expect things to improve in the second half of the year, but we may have already reached the peak of television ad spend.

Adam Levy owns shares of Walt Disney. The Motley Fool owns shares of and recommends Walt Disney. The Motley Fool recommends AMC Networks and recommends the following options: long January 2021 $60 calls on Walt Disney and short July 2020 $115 calls on Walt Disney. The Motley Fool has a disclosure policy.

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