By Dom Serafini
This page gives me an opportunity to do something that I cannot even attempt in other parts of our publication: be biased and lose objectivity. So please bear with me. I ask you: How can an industry that survives on advertising promote the fact that they’re cutting advertising? What’s the message here?
We know that during every economic downturn the first thing to be cut is a company’s advertising and marketing budget. Everyone knows that this doesn’t make any sense, but the people on the front line cannot argue with the bean-counters who, to work, only need pencils, erasers and paper. We know how the system operates. When the bean-counters start cutting, they look first for those costs that are variable, i.e., promotion, marketing and advertising. This is also because cutting fixed costs is more troublesome.
So, we have a situation, when, during fat years — where there aren’t any real compelling reasons for advertising — companies tend to splurge (often with ego-driven campaigns). When sales are down and more push is needed, they retreat.
Now, instead of me going on a tangent to explain how important advertising is, let’s instead analyze what is at stake, plus the losses to entertainment companies that depend on advertising and are planning to cut their advertising budgets.
Let’s say that a TV network decides to cut 10 percent of their advertising and promotions budget, something like $5 million, out of a $50 million budget. Let’s also say that that a TV network generates $1 billion a year in advertising revenue. By publicizing its ad budget cuts, in order to make the suits’ job easier, the TV network is, in effect, promoting the fact that 10 percent can be easily cut, plus it is saying to all that:
• By cutting advertising there will be no marketing consequences.
• Generating revenues through cuts, instead of sales, is the way to go.
• Advertising will not increase the number of its viewers.
The problem, however, is that while the TV network is cutting just $5 million a year, it risks losing $100 million by encouraging its clients to do the same and, inevitably, by also losing viewers.
Let’s now move to the international program distribution business. Here we have companies that are taking orders (such as the U.S. studios) and those that have to sell each and every show (such as the indies). According to the MIP-TV 2008 directory, there are over 4,500 companies selling TV programs worldwide, and, it is estimated, about 2,000 international clients among TV networks, home video outlets, ancillary rights buyers and Internet services.
It is expected that the major U.S. and international studios are feeding at least 60 percent of the buyers’ needs, leaving what remains to be divided among some 4,450 companies, of which “only” 2,500 are really viable.
Now, to survive, the independent distributor has to do two things: First, wrangle some sales out of the studios’ grip and, second, compete for sales with the other 2,500 independents. All this is considering that prices will be cut and payments will be stretched, thus adding more money to the cost of doing business by compounding bank interests.
For an international program distributor, the average cost of distribution is 10 percent, meaning that, for a company that generates $50 million per year, the cost of doing business is $5 million. Of this, less than two percent is for advertising.
By cutting the customary 10 percent, the distributor will be saving $500,000 a year. Since it is a tradition, in this case, to cut mostly advertising and marketing costs, which could amount to 50 percent, the company is saving $50,000 or about $12,500 per TV trade show, representing less than 10 percent of the cost of participating with a booth.
One could assume that, at those TV trade shows, some 80 percent of the total yearly sales are originated or finalized ($40 million). So now the bean-counters, in the midst of fearsome competition, are demanding that:
• Sales revenues are to be kept at the same levels — even with lower prices.
• Volume is, therefore, to be increased in order to compensate for lower prices.
• Profits are to be guaranteed by cuttings those tools that generate more sales.
Unfortunately, lower advertising investments decrease visibility, traffic and can’t properly position new properties. Plus, the legendary Alan Howden, a former buyer for the BBC, used to give me a left-handed compliment commenting how he “read VideoAge only to see who doesn’t advertise” because with those companies presumably in trouble he could have slashed prices.
Any person who works in television should know that sales are, one way or another, related to advertising. And, if you don’t believe me, I’ll put you in touch with another legendary TV executive, Doug Friedman, who can tell you that when he was at New World in Los Angeles, he was able to sell a seemingly unsellable TV show internationally purely by the power of advertising.
