• by Diane Mermigas , May 11, 2012

The question for the traditional broadcast TV networks this upfront season is, how do you compete with 25 hours of original programming on YouTube’s Awesomeness TV, and Netflix’s ever-popular replays of entertainment, kids and even sports cable programs?

While the typical upfront advertising market of predictable rivals is becoming a thing of the past, still the arsenal broadcast networks will rely on to retain viewer ratings and advertising revenues looks a lot like their old bag of tricks. Just how long can that go on while Google, Netflix, Microsoft, Yahoo and other new-media players aggressively take their case to Madison Avenue?

While it may take years for digital and online media to make a sizable collective dent in broadcast and cable networks’ roughly $20 billion upfront spending patterns, the process is clearly underway. Martin Sorrell, CEO of WPP Group, indicated in a recent CNBC interview that the global advertising agency will likely spend more than $2 billion on Google this year, which could exceed the $2 billion of advertising it buys from News Corp. media properties annually.

The situation in some ways parallels the early days of cable’s inroads on broadcast television’s then-dominance in advertising.This year cable’s upfront ad spend will eclipse last year’s upfront broadcast TV networks commitments, which ABC, CBS, NBC and Fox will be hard pressed to collectively top.

But the new-media challenge is not a simple case of us versus them, according to data analysis by Bernstein analysts Todd Juenger and Carlos Kirjner. “We think the inevitable collision course between ubiquitous on demand, ad free content on Netflix, versus  consumption of traditional linear TV, is starting to create fractures in the now infamous pay-TV ecosystem,” the analysts said in a recent note.

For instance, original series programming on AMC, TNT, TBS and even FX has a more symbiotic relationship with audience introduction to or reinforcement by Netflix replays of popular series (“Mad Men,” “Walking Dead,” “Breaking Bad”) which reinforce and encourage more viewing on the cable networks.

Netflix’s appeal to families with children doesn’t work the same way for kids’ and off-network syndicated programming on broadcast and cable networks which especially hurts Disney and Viacom (whose Nickelodeon is especially taking a beating). These companies have two options: pull their premium content off Netflix, depriving its 35 million domestic subscribers, or demand more money to compensate for their losses. Either way, Netflix imposes a David and Goliath dilemma on Disney and Viacom with an enduring economic impact.

Exercising the only control they have by not renewing their Netflix licensing agreements could initially generate the loss of $75 million in revenues for both Disney and Viacom, since Netflix accounts for more than one quarter of average daily bandwidth consumption. But that could improve their children’s channel ratings and revenues by forcing viewers back to linear channels for programming, the Bernstein analysts contend. It’s a big deal considering that Disney and Viacom channels comprise about 80% of kids’ TV viewing.

The challenge for broadcast and cable networks is to capture as much of the corresponding eyeballs and advertising dollars as they can, regardless of the platform or device where their programming appears. Although a slippery slope, the extended reach of their programs (whether it is a Netflix or Hulu.com share shift, or something else) is what the broadcast and cable networks are hustling to sell advertisers in the upfront in the face of changing fundamentals.

An anticipated rise in advertising demand (broadcast upfront spending is expected to rise 4% to nearly $9.5 billion, cable by 6% to nearly $9.9 billion) coincides with a general decline in broadcast and cable TV network ratings. How will the affected broadcast and cable networks base upfront pricing on robust ratings, only to be exposed to hefty make-goods when they fail to deliver later in the season? Pricing more conservatively on the upfront market will prevent them from capitalizing on any ratings improvement.

That familiar crapshoot is compounded by analyst forecasts that leading broadcast and cable TV networks will soon face rapidly declining fortunes, with ratings continuing to deteriorate, causing a decline in ad revenues, retransmission fees and global syndication value of content. The accelerated cost to develop replacement content will also squeeze the bottom line. The most vulnerable--and most likely to lead upfront volume sales--is CBS, with nearly its entire strong prime-time lineup returning. Any flux in how much or where advertisers spend could have a more extreme adverse impact on a pure-broadcaster such as CBS.

While this cyclical dilemma is nothing new for the networks, it has yet to be tested at a time when online, mobile, social media and other competing platforms are intensifying their assault on $60 billion in annual advertising revenues.  For the first time ever, digital media companies such as Google, AOL, Yahoo, Microsoft and Hulu are having their own upfront presentations with advertisers.

Although most marketers with national budgets continue to prefer network TV advertising as a starting point for their media plans, many are increasingly shifting dollars to online and mobile which are affordable, low-risk and more strategically measurable. Major marketers such as Sears and Walmart are wrestling with radically changing circumstances forcing them to consider new ways to reach target consumers.

Some experts predict the Internet and mobile connectivity will match or exceed broadcast spending before decade’s end. Online video ad spending will morph to $7 billion by 2015 from $2.16 billion last year, up 52%, according to eMarketer.

That’s just two upfronts away.