Each summer, it's a cat-and-mouse game. The Big Three networks post big rate hikes and purr quietly as advertisers scamper to lock up precious commercial time for the coming season. But this year, the mice are having all the fun. Advertisers are having little trouble finding available time. Best of all, they're getting discounts of up to 25%. Battered by a yearlong advertising downturn that feels more like depression than recession, CBS Inc. and NBC Inc. are offering these sweet deals because they have little choice. Their fear: If they don't catch the advertisers now, they may have to offer more expensive bait later.

Many magazine publishers are caving in to pressure, too. Until recently, most didn't budge much from their published rate card. Now, although most won't admit it, publishers are offering their advertisers premiums or outright discounts. "There's a school of thought that says: `If you can say you've got the most pages, you're in good shape,' " observes Reginald K. Brack Jr., chairman of Time Warner Publishing.

YESTERDAY'S DARLINGS. But rather than shield the traditional mass media from a decline in advertising spending, such stopgap measures have only worsened the pain (chart). Now, not only are media companies selling less advertising, but they're also earning less for what they do sell.

The effect on profits has been devastating. Profits of media companies are especially sensitive to fluctuations in ad revenue because they have high fixed costs involving staff, production, and distribution. Since the cost of adding ad pages or commercial time is fairly small, any incremental gain in ad revenue produces a much bigger jump in profits. Likewise, any loss of ads slashes profits disproportionately. Selling time at a discount, for example, will badly hurt CBS, which already reported a 67% decline in profits in the first half of 1991. Still, CBS's troubles are nothing compared to Financial News Network Inc. or Family Media Inc., publisher of Discover and Health magazines. Both have shut down.

The wave of failures has also come because of a glut in the business. For most of the 1980s, the media were everybody's favorite boom industry. All three networks were gobbled up by profit-hungry corporations. Rupert Murdoch paid $3 billion for TV Guide. Publishers flooded the shelves with hundreds of new magazines every year. And why not? The industry rolled up annual increases in ad rates of 8% to 10%. Now all the new players have vastly overbuilt the business--and the industry is in a shakeout.

Then there are structural changes in the ad marketplace that are reducing the number of traditional mass media advertisers. Airlines, banks, savings and loan associations, movie studios, and retailers are consolidating into fewer players, so each industry will spend less on advertising. The turmoil in the retail industry, for example, has sharply reduced the volume of newspaper advertising. In New York City, the liquidation of B. Altman & Co. and Gimbels hurt papers such as The New York Times. The Times, which saw its ad linage plunge 18.5% in the first half of 1991, says it doesn't expect its advertising to return to mid-1980s levels.

Magazines, meanwhile, are struggling as tobacco merchants, one of their key supporters, continue to retreat from advertising. Cigarette makers are reducing print advertising as they concentrate on promotions and direct marketing. Cigarette ad spending in magazines dropped 8.6% in the first half of 1991, according to Publishers Information Bureau.

The media have coped with lower profits by slashing costs. The Big Three networks have laid off scores of staffers and closed bureaus from Johannesburg to St. Louis. Newspapers and magazines are thinning their ranks through early retirement or layoffs.The media are also striving to alter their approach. Traditionally, magazines relied on advertising for more than half of their revenues. But many publishers are now raising subscriptions and newsstand prices. And most new magazines make the bulk of their revenue from subscription fees, according to Samir A. Husni, a professor at the University of Mississippi who tracks magazine growth.

Still, most media are scrambling to look more attractive to advertisers. CBS is selling packages of ads on several of its marquee sports events such as Major League Baseball, which were once sold separately at high prices.

The print media are dividing their readership lists into thinner slices for niche-minded marketers. Time, Newsweek, and four other magazines are using special ink-jet printing technology to allow General Motors Corp.'sBuick Div. to personalize ads for its readers. "There is a sea change in what advertisers are demanding," says Thomas Ryder, president of American Express Publishing Corp. "They want targeting and micromarketing."Multimedia companies are seeking an advantage by offering marketers advertising opportunities across several media. Time Warner has signed up Chrysler Corp. and Mazda Inc. to advertise in Time's magazines and in electronic media such as Warner's home videocassettes. In return, they get more attractive ad rates.

The networks, meanwhile, are extolling themselves as the last redoubt for mass marketers. With the proliferation of media, they say, nobody can match the broad reach of the Big Three. Daniel B. Burke, CEO of Capital Cities/ABC Inc., points out that even with declining audience share, each network still commands 20% of the viewing audience every night. Cable networks, by contrast, rarely reach more than 2% apiece. "If you look at what we're turning into," says Burke, "it's still an enviable, wonderful thing."

Such confidence led Burke to take a big gamble this year: ABC charged marketers significantly more per rating point than CBS or NBC. Burke believes advertising spending will recover in early 1992. And if it does, ABC will have more time left to sell.

Other entrepreneurs share Burke's confidence. Walt Disney Co., for example, just bought Discover. Kohlberg, Kravis, Roberts & Co. paid $650 million to buy nine magazines from Murdoch. And Fidelity Investments has snapped up several regional papers near Boston. "The recession will end," says Burke. "It always does." Now if only advertisers would agree.

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