TV networks getting that sinking feeling

That softness in the TV advertising market that first appeared during this spring’s sluggish upfront season is starting to look like a sinkhole. Third-quarter earnings reports from several big media companies suggest that much of the ad money that was not committed during the upfront market is still missing in action, at least as far as the networks are concerned.

On Tuesday, Discovery Communications reported a 1 percent drop in domestic advertising revenue from its cable networks. On Wednesday, Time Warner reported that domestic ad revenue at its Turner cable networks unit was flat in the third quarter.

While cable networks have been the hardest hit by the continued slump, traditional broadcast networks have also struggled of late. CBS reported a 2 percent gain in advertising revenue in the third quarter buoyed by a spike in political advertising at its 14 owned and operated local stations. Without that spike, ad revenue would have been flat to slightly down. Last month, Comcast reported a 4.6 percent drop in ad revenue for NBC.

The networks generally insist that marketers are simply being cautious and that ad spending will ultimately pick up, but investors and analysts are clearly growing skeptical. Shares of Discovery, Time Warner, CBS, Viacom, Comcast and Scripps Networks have all been under pressure in recent weeks, while MoffettNathanson analyst Michael Nathanson lowered his full-year forecast for total TV ad spending in the wake of the third-quarter data.

Nor is Nathanson optimistic that the missing ad dollars will find their way back into the networks’ coffers. Instead, he sees the current trend as an indication of a secular shift underway in the market in which ad spending that used to go into TV is now being allocated to digital platforms, just as it has in other ad categories.

“We believe that online and digital advertising is beginning to take some share from the largest ad bucket—national TV,” Nathanson wrote in a recent note to clients.

As I discussed in a Gigaom Research report earlier this year, national TV advertising has long been the province of brand marketers because brand advertising has traditionally been heavily reliant on video to connect emotionally with consumers. And the TV networks have long had the choicest and the most video inventory available. But as more premium video becomes available online, bringing consumer eyeballs with it, the networks’ monopoly on choice video inventory is eroding.

At the same time, brand marketers increasingly are looking to capture the efficiencies offered by programmatic ad placement and other digital tools, including increased targeting ability and highly measurable ROI. According to a recent survey of marketers by AOL, 48 percent of advertisers say they currently use programmatic ad platforms to place video ads, and 54 percent say they expect to increase their use of programmatic platforms over the next year.

Daryl Simm, CEO of Omnicon Group’s media buying unit told the Wall Street Journal last month his agency now advises clients to move 10 to 25 percent of their TV budgets into digital.

The good news for the networks is that a significant percentage of the dollars now going into digital are actually finding their way to them because network programming accounts for a significant share of the premium video available online. That monopoly, too, however, may also prove ephemeral.

As he actor Kevin Spacey, star of Netflix’s “House of Cards,” warned in a widely noted speech last year to the Edinburgh International Television Festival, the traditional TV networks are in danger of loosing the next generation of A-list creative talent to digital platforms, just as the movie studios have watched talent migrate to TV, because of the creative freedom and innovative storytelling possibilities offered by digital.

As more compelling content is created originally for digital platforms, more of the audience will be found there as well, and advertisers will naturally follow the audience. Judging from the networks’ third-quarter results, brand advertisers have already begun to pull up stakes.