Uncertainty rolls downhill.
Advertisers have been asking TV networks for more flexibility as they deal with the coronavirus crisis. In the next round of upfront negotiations, that means ad buyers will be asking the networks to put that flexibility in writing, including the greater ability to wriggle out of ad commitments.
Advertisers will focus on three main categories of options in their upcoming upfront deals, according to agency executives. They want the option to cancel their quarterly spending commitments closer to when the quarter begins. They want the option to cancel a higher share of the budget they have committed. And they want the option to reverse course by gaining so-called “expansion rights” that would allow advertisers to buy more inventory from a network during a given quarter but at their upfront prices.
Agency executives expect advertisers will need to make concessions in exchange for networks providing the increased flexibility, such as having to pay higher rates for shorter cancelation windows.
Cancelation options “will be a pretty big negotiating point this year,” said one agency executive. “I don’t think the networks will roll over.”
Cancelation options were not expected to play such a primary role in the next upfront negotiations. Managing how often people are exposed to an advertiser’s’ ads was going to be a bigger priority, for example. But the crisis has pushed advertisers to prioritize flexibility and is remaking the TV ad market to be more akin to digital advertising, in which advertisers have more freedom to spend and stop spending their money at will.
“Having the flexibility to take money out or put money in is what we’re going to look towards,” said a second agency executive.
Upfront deals’ cancelation windows, in particular, have become a major focal point among ad buyers over the past two months. Upfront deal terms allow advertisers to cancel a percentage of their quarterly spending commitment, but an advertiser typically must submit the cancelation request at least 60 days before the next quarter begins. With advertisers not knowing how their businesses will fare over the summer as parts of the country reopen, advertisers have canceled 20% to 30% of their third quarter commitments largely out of precaution, according to agency executives.
Advertisers would like to see the 60-day cancelation window shrunk to a span closer to digital advertising’s 14-day cancelation window for guaranteed deals, as stipulated by the Interactive Advertising Bureau’s standard terms and conditions. However, the agency executives do not believe that a 14-day window is attainable and instead have their sights set on 30- to 45-day windows.
The 60-day cancelation window is somewhat arbitrary anyway. As recently as a few years ago, upfront deals had 90-day cancelation windows. “It did get shortened to 60, but nobody made that announcement and there’s never been a black-and-white answer on why it couldn’t go shorter,” said the first agency executive. For some advertisers, it is shorter. Entertainment and retail advertisers often have 30-day cancelation windows, though they pay more for that flexibility.
For advertisers, the purpose of the upfront is to lock up TV networks’ ad inventory at lower prices than they would pay in the so-called “scatter” market, in which advertisers can buy TV ads weeks and even days before an ad airs. Meanwhile, the upfront enables TV networks to secure revenue in advance. The less secure that revenue is for the networks, the less reason they have to lower their prices for upfront advertisers.
“It’s the risk and reward of being an upfront advertiser. Brands and agencies hold some responsibility about how we properly go in knowing we’re taking on some risk and understanding what those trade-offs are,” said a third agency executive.
Additionally, advertisers feel some obligation to the networks that have allowed advertisers out of their commitments since March.
“The media companies have been good partners, and we have to acknowledge that and that it’s been to [the media companies’] detriment in some case. They could have held clients’ feet to the fire in their upfront commitments,” said the second agency executive.
As in life, everything is a negotiation in the TV world. Networks are going to insist ad buyers pay more if they want new flexibility.
Advertisers’ cancelation amounts vary by advertiser and by quarter, but usually advertisers are able to cancel 15% to 30% of their quarterly commitments; in some cases, the figure is as high as 50%. By comparison, advertisers are able to cancel 100% of the money they commit for guaranteed digital ad deals.
The agency executives do not expect advertisers will be able to negotiate options to cancel 100% of their upfront commitments. More likely, advertisers would have to pay a penalty for canceling above a certain threshold, such as a higher price for the inventory they remain committed to buying or a kill fee on the canceled amount.
“As an advertiser, I would rather pay a premium knowing I have the flexibility,” said the third agency executive.
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