That could spell trouble for the increasing number of Internet companies that advertise on TV, as they find themselves priced out of the market.
The broadcast TV networks - ABC, CBS, NBC, Fox and Time Warner's WB, in particular - made out big during this spring's annual "up-front" negotiations, the time when the majority of prime-time commercial inventory is bought for the coming season. (NBC is a partner in MSNBC.)
Based on industry estimates, ad spending on the broadcast networks will top $7 billion for the 1999-2000 season, a 13 percent increase over last year's $6 billion. Cable networks, still working out final up-front deals, will top $3.6 billion, compared with last year's $2.6 billion.
Industry experts credit a booming economy and increased demand from advertisers looking to reach TV's mass audiences. Although the final tally won't be available until negotiations are completed at the end of June, media experts say pharmaceutical companies, automotive manufacturers and telecommunications firms all increased their spending on television.
The bad news is, the furious demand for TV commercial time in the upfront means all advertisers - including Internet firms, which are increasingly reliant on television to build brand awareness for their new medium - will have to pay higher prices for the remaining advertising inventory, known as "scatter."
No money for long-term commitment
TV networks don't commit all of their advertising units during the upfront selling season, holding back a certain amount of inventory to sell later. For the most part, though, except for industry leaders like America Online (NYSE:AOL) or Amazon.com, (Nasdaq:AMZN) Internet companies don't have the money to commit to a long-term or upfront advertising buy.
"The velocity of the TV upfront will tremendously affect the scatter market," says Jon Mandel, co-managing director of Mediacom, the media services agency owned by Grey Advertising, which buys space and time for marketers like Procter & Gamble and Reebok.
William Croasdale, president of national broadcast at Western International Media, estimates that Internet companies will have to spend anywhere from 30 to 50 percent more if they want to advertise in prime time next season.
Joe Mandese, editor of The Myers Report, a media industry publication, agrees. "If the dot-coms didn't secure their TV time now, they'd better have deep pocketbooks."
The situation could ease up, Mandese notes, as buying during the scatter market usually doesn't occur until 45 to 60 days before the fall quarter begins. The economic picture could change between now and then, and supply could increase: Sometimes major advertisers cancel their up-front commitments.
But Mandese adds, "There are a couple billion dollars in the TV market that weren't there last year. When there's this much demand, prices go through the roof."
Higher costs for dot-coms
Some of the publicly traded Internet companies, such as Amazon.com or CDNow, which have been using television to reach the masses of people online, might be pressured to cut back their on-air spending if prices skyrocket. Already, marketing eats up as much as 40 to 60 percent of the budget for a lot of Internet companies, analysts note.
"Indications are that investors are becoming somewhat less patient about companies achieving profitability," says David Simons of Digital Video Investments. "In other words, spending in the name of greater growth isn't quite as well tolerated."
Not all investment analysts are concerned, however.
"TV is a small portion of every Internet company's budget," says Abhi Gami, Internet analyst with William Blair & Co. "They're very active in radio and billboards, too. There are a number of different alternatives for them to gain exposure."
In a separate, ironic twist, "dot-coms" actually made their first significant appearance as an advertising category during this year's blazing up-front negotiations.
Spending like crazy
"The Internet companies were spending money on the national scene like a sailor on shore leave," says Western International Media's Croasdale.
New media companies, flush with money from successful initial public offerings, have been spending tens of millions of dollars in traditional media as they try to build their brands in the minds of mainstream consumers.
According to Competitive Media Reporting, online companies spent an estimated $107 million on all television for the first two months of 1999 (the most recent data available), a whopping jump over the estimated $35 million spent on TV for the first two months of 1998.
"The dot-com industry is incredible in terms of ad dollars coming into the network," says Dana McClintock, spokesman for CBS. "It's grown by double-digits this year."
Although TV ad sales executives typically do not publicly comment about advertising deals, sources say that E*Trade Group Inc. made "big" buys during the cable television up-front on networks such as Discovery and A&E.
Charles Schwab cut a "multi-multi-million dollar" up-front buy on numerous cable networks, sources say.
E*Trade spokesman Russell Simon wouldn't specifically address the online brokerage firm's up-front deals, but confirmed, "We've very much increased our commitment to television."
Charles Schwab couldn't be reached for comment.