Ad Cuts Will Wound Viacom

When I started writing about the advertising revolution and the end of the interstitial advertisement, I was thinking in an intermediate time frame.

I was looking for secular declines in the interstitial advertising business (what you and I commonly refer to as the "commercial" on broadcast television and radio) to start gradually this year and accelerate over the next two to three years. But the time to bet against old-world media might already be upon us, and one that I'm starting with is Viacom (VIA.B - commentary - Cramer's Take).

You can forget the intermediate time frame. The advertising revolution is already in full swing and the commercial is already dying.

The first real shot across the bow was when the WSJ reported that Procter & Gamble (PG - commentary - Cramer's Take), the single largest advertiser in the U.S., said it would cut its cable television advertising commitments by 25% and its network television advertising commitments by 5% this year. P&G's advertising budget is a whopping $3 billion per year, and more astonishing is that it spent about $2.4 billion of that budget on television commercials in 2004. Moreover, it's not like P&G is cutting its entire advertising budget to such extremes. It's shifting this spend from television to other presumably more effective areas like the Internet and video games. Advertising itself isn't in decline -- it's broadcast commercials that are dying.

The second shot, which was little covered by the mainstream media and even less covered by the sellside, was fired last night when the WSJ reported that General Electric's (GE - commentary - Cramer's Take) NBC television network division said that it expected to see a 30% drop in upfront advertising sales from last year's levels. According to the WSJ, with more than 95% of the upfront sales finished, NBC is expecting, at most, $2 billion in advertising commitments. In 2004, that number was $2.9 billion. That's $900 million that advertisers are choosing not to spend on commercials at just one of four networks this year.

NBC certainly has company-specific problems with its programming. Anybody who's tried to get through even one episode of "Joey" can sum it up in one word. Brutal! And that's the biggest prime time "Must See TV" show. But that 30% drop isn't just because NBC's fallen from first to worst in the network television ratings game in the last couple years.

No, the vast majority of that decline is secularly top down, and I suspect we'll soon see the other networks show year-over-year declines too. It's all those companies like P&G that are shifting spending away from television that is the root cause of the stunning 30% drop in ad commitments at NBC. And, unfortunately for television broadcasters, this trend is just getting started.

---

At time of publication, the firm in which Willard is a partner was short Viacom, although positions can change at any time and without notice.

Cody Willard is a partner in a buy-side firm and a contributor to TheStreet.com's RealMoney. He also produces a premium product for TheStreet.com called The Telecom Connection and is the founder of Teleconomics.com. The firm in which Willard is a partner may, from time to time, have long or short positions in, or buy or sell the securities, or derivatives thereof, of companies mentioned in his columns. At time of publication, the firm in which Willard is a partner had no positions in any of the securities mentioned in this column, although positions can change at any time and without notice. None of the information in this column constitutes, or is intended to constitute, a recommendation by Willard of any particular security or trading strategy or a determination by Willard that any security or trading strategy is suitable for any specific person. Willard appreciates your feedback -- click here to send him an email.