european tv advertising –will it ever be the same again?

Toby Syfret The 2009 European Television Symposium ‘TV Anytime, Anywhere’ 6th November 2009

European TV advertising – will it ever be the same again?

ASI TV conference Istanbul 061109 (2009-101) 2

TV advertising crisis: What crisis?

“The traditional TV industry – cable companies, networks, and broadcasters – is where the newspaper industry was about five years ago:

“In denial.” Business Insider, June 12 2009


Agenda

  European overview

  TV advertising crisis in the UK

  TV Anytime/Anywhere threat


The digital TV (DTV) promise

  Many more channels

  Device proliferation

  Connectivity/convergence

  Promise of non-linear on-demand TV


European digital TV penetration end of 2008 (%)

European digital analogue split

[Source: SES Astra, Enders Analysis]

By the end of 2008, 50% of European homes had digital reception on at least one TV set according to SES-Astra survey of 243 million homes in 35 countries, up from 39% at

end of 2007


European DTV growth trends

End of year DTV homes in 35 European markets (m)

[Source: SES ASTRA, Satellite Monitors, Enders Analysis] **2004 onwards includes Bosnia and Serbia. Algeria, Morocco and Tunisia added in 2008


End of 2008 split of digital versus satellite reception (%)

European analogue/digital split by platform

[Source: SES ASTRA, Satellite Monitors; Enders Analysis] Note: Terrestrial includes TV over DSL/Optical fibre

Satellite – 72 million HH

Cable – 72 million HH

Terrestrial – 99 million HH


Multichannel TV already a reality in many countries End of 2008 penetration of DTH/SMATV/Cable platforms (%)

[Source: SES Astra]


European DTV penetration End of 2008 DTV penetration of TV homes (%)

[Source: SES Astra]


Analogue terrestrial days numbered

[Source: DigiTAG; Enders Analysis]

Country DTT launch

Completion of ASO/

DSO Country DTT

launch

Completion of ASO/

DSO United Kingdom 1998 2012 Austria 2006 2010 Sweden 1999 Completed Slovenia 2006 2011

Spain 2000/5 2010 Norway 2007 2009

Finland 2001 Completed Lithuania 2008 2012 Switzerland 2001 Completed Hungary 2008 2011

Germany 2002 Completed Ukraine 2008 2014

Belgium (Flemish) 2002 Completed Portugal 2009 2012 Netherlands 2003 Completed Croatia 2009 2011 Italy 2004 2012 Poland 2009 2013 France 2005 2011 Slovakia 2009 2012 Czech Republic 2005 2011 Ireland 2010 2012 Denmark 2006 Completed Russia TBC 2015 Estonia 2006 2010


Consolidation of TV advertising market share

Market shares of net advertising revenue across top three commercial groups (%) January – June 2009

* 2008 [Source : Enders Analysis]

70%

87% 88% 91% 84%

95%


Global economic and advertising downturn

[Source: GroupM; Enders Analysis]. GroupM forecasts published in Summer 2009

End of year homes (000) 2007 2008 2009f 2010f 2010f v 2007

France 2.3 -4.5 -12.2 -3.4 -19.1 Germany 1.0 -2.9 -7.5 -3.4 -13.2 Italy 1.8 0.4 -5.6 -2.3 -7.5 Netherlands 6.5 4.1 -10.0 0.0 -6.4 Poland 18.5 14.9 -8.0 0.0 5.7

Spain 9.0 -11.1 -14.2 -4.9 -27.5

Turkey 12.2 -14.5 -29.4 -7.2 -43.9 United Kingdom 2.2 -4.1 -14.0 -3.1 -20.1 Western Europe 4.4 -2.8 -10.0 -2.8 -15.0 Emerging Europe 20.6 11.5 -14.2 2.0 -2.5


Europe overview: key points

  DTV growth is proceeding very rapidly

  For some countries, rapid DTV growth has brought with it rapid multichannel growth

  Countries with well-developed satellite/cable reception pre 2000 have seen much less change

  Oligopolies rule in TV advertising

  The recession has caused major falls in TV net advertising revenue (NAR) throughout Europe, but with some big variations

BUT

  Is there anything more to expect?

  Although SES ASTRA data show strong DTV growth, still only 2.8% of European TV homes had broadband TV over DSL at end of 2008 (max 11.2% in France)

  SES ASTRA Satellite Monitors also reports:   62.4% PC ownership and 53.4% Internet access in all European TV homes at end

of 2008 (74.4% PC ownership and 65.3% Internet access in Astra homes)   74 million HD ready TV sets sold since January 2005, 37 million in 2008 alone


Agenda





Special features of UK

  UK Europe’s fastest growing DTV market – at end of October 2009, BARB estimates 90.3% of TV homes with DTV reception on at least one set (representing 94.6% of individuals aged 4+)

  Europe’s most heavily developed e-commerce and Internet advertising market, with online advertising spend now ahead of TV advertising spend

  Other particularities:   Heavily regulated   Highest TV programming spend per capita of any country in the world   Most heavily funded public service broadcaster (BBC) with mission to

be accessible for “free” across all platforms   Very strong pay-TV operator (Sky)


UK TV advertising spend in crisis Nominal TV advertising spend (£m)

Assumptions:   Recessionary cycle ends in 2010, flat 2011   Structural changes in the economy Square-root – L-shaped recovery (no V-shaped

bounceback)   Existing structural changes in the TV medium subside in course of DSO   London Olympics in 2012 provides a much needed boost

Figures based on net advertising revenues (NAR) with addition of estimated 2.5% actual media commission. [Source: Enders Analysis ]


UK TV advertising spend in crisis Real TV advertising spend (constant 2000 prices) (£m)

  Real prices show a medium in decline even before the recession

  Inflation based on RPI, assume 1.5% inflation in 2009, average 2.0% inflation thereafter

Figures based on net advertising revenues (NAR) with addition of estimated 2.5% actual media commission. [Source: Enders Analysis ]


  Cyclical change in the economy hypercyclical change in TV NAR

  Structural/long-term cyclical change in the economy Permanent downward pressures (e.g. national growth in debt, raised taxes, reduced credit, higher unemployment, higher energy costs, shift of economic power to the East, etc.)

  Structural changes to the TV medium

NOW   Online advertising substitution   Analogue to digital broadcast shift   Rise of client procurement power

RISK   Shift in audiences to pay-TV

FUTURE   Rise of TV Anytime/TV Anywhere

Forces of change in TV advertising expenditure


Effects of past downturns

Total advertising spend growth vs. GDP growth (%)

2007 prices [Source: Enders Analysis based on ONS, Advertising Association]

Hyper cyclical relationship between changes in GDP and adspend


Decoupling from start of new millennium

Advertising ‘structural’ shift

GDP vs. display ad spend (1990=100)

Note: Nominal prices. [Source: Enders Analysis based on ONS, Advertising Association]


  Long-term real trends in total advertising expenditure correlate very highly (>0.95) with broad economic indicators

  But, short-term changes show weak positive correlations:

  GDP and total advertising expenditure annual growth rates (1960 and 2007) = +0.63

  Y on Y % changes in GDP and total advertising expenditure (1960 and 2007) = +0.56

  Even adjusting for exceptional factors short-term correlations are weak

  No quick fix GDP multiplier

  Little advance visibility of advertising expenditure

  Our view remains that both the recession and structural change are significant in the present crisis

How much recession/How much structural?


Key factors include:

1.  SAP trading – discounts based on share of budget commitments

2.  CRR remedy – has let buyers reduce commitments without any loss of discounts

3.  Commercial Impact increases - many factors, such as audience shift from analogue PSBs to digital channels   PSB channels obliged to sell 100% of their inventory, while others sell 100% to damage ITV1

under CRR

4.  Analogue to digital drift - drift of advertising audiences from more expensive to cheaper media

5.  Accountability - commercial PSBs are obliged to publish regular rate card updates

6.  Consolidation - Progressive market consolidation into fewer sales and buying points

7.  Online drift - Further deflationary pressure due to shift of spend to online

Structural decline in UK TV advertising


Impact of online display on TV advertising expenditure

Top Ten online display categories – growth on internet versus TV, 2004-2008

[Source: Enders Analysis based on Nielsen]

(£m) TV Internet

Entertainment & media -32 58

Telecoms -129 53

Finance -56 47

Travel & transport 6 35

Business & industrial 3 26

Motors -76 23

Government/political/social 8 15

Retail -12 11

Online retail 12 9

Computers 18 8

Total Top 10 Internet growth categories -258 284

Other categories 81 25

Total all categories -172 309

  Online display advertising trends indicate significant negative impact on TV

  The top ten growth categories in online display accounted for 95% of total online display advertising spend in 2004 and still held 94% share in 2008

  The top 10 online display categories also represented 53% of TV advertising expenditure in 2008

  The other 47% of TV advertising expenditure includes all the FMCG sector

  The negative structural impact of online display on TV display spend shows in the sharp contrast between the negative overall growth in TV advertising spend across the top ten online categories (-£258 million) and the positive overall growth in TV advertising spend across all the other categories that saw least online advertising growth (+£81 million)


TV viewing by age: 2003 – End of June 2009

[Sources: InfoSysTV/BARB, Enders Analysis – 2008 is indexed on 2003 Jan-Nov]

Younger losses compensated by older gains, trends stabilising

Average daily viewing index (2003=100)


TV commercial impact (CI) delivery

UK commercial impacts Index (2003=100)

[Source: BARB/InfoSysTV; Enders Analysis]

Ever more advertising spot eyeballs just another deflationary pressure


Drift from higher priced to lower priced media

Year on year growth (%)

2003 adult 16+

Commercial impact (CI)

delivery profile (%)

2003 NAR per 000 impacts

(£)

2008 adult 16+ CI

delivery profile (%)

2008 Hypothetical NAR per 000

impacts (£)*

Decrease in total NAR per 000 impacts due to profile change (%)

Actual 2008 NAR per 000

impacts (£)

Total broadcast 100.0 4.9 100.0 4.4 -9.4 4.2

ITV1 42.7 5.8 30.0 5.8 5.3

GMTV 2.9 3.2 2.2 3.2 3.3

Channel 4/S4C 16.5 5.9 13.4 5.9 5.9

Five 11.1 3.5 8.5 3.5 4.1

Total terrestrial analogue PSB 73.1 5.4 54.1 5.4 5.2

Other digital 26.9 3.6 45.9 3.6 3.1

  ITV1 and Channel 4 average price premium of c65% over rest since 2003, but adult 16+ commercial delivery share fell from 59.2% in 2003 to 43.4% in 2008

  All else equal, migration of spend from more to less expensive media has entailed average 1.9% annual decline in TV NAR revenues per thousand impacts since 2003

  In hypothetical case below, unit costs per thousand impacts per channel stayed constant and only the CI delivery profile changed, resulting in a lowering of the overall average

* Hypothetical NAR values assume the same in 2008 and 2003 for individual TV channels, resulting in a different overall average owing to the different profiles of commercial impact delivery [Source: BARB/InfoSysTV; GroupM; Enders Analysis]


Changes in media revenue

Note: BBC reporting year runs from April to March, such that 2007 entry applies to the year April 2007-March 2008 [Source: Enders Analysis, Advertising Association]

Sector and company revenue growth rates Index 2003=100

Google


PSB TV: Trends in programming spend Growing funding gap Risk further loss in commercial PSB NAR shares

Group spend on TV programming (£000)

Note: BBC reporting year runs from April to March, such that 2007 entry applies to the year April 2007-March 2008. Commercial PSB figures exclude STV and UTV. [Source: Broadcasters; Ofcom; Enders Analysis]


[Source: Enders Analysis, based on industry data]

Changing balance in the funding mix   Pay revenues are climbing fast with boost of HD, licence funds assigned to

television rising steadily while spot advertising revenues fall


Agenda





Where have we heard it before?

‘”Television is passive entertainment. We’re betting people want to interact, choose different paths and get feedback from the machine about what they have really learned” (the PC).

Bill Gates, 1985

“What is driving the "telefuture" is not any convergence of films and TVs, consumer electronics and publishing, computers and games. What is driving the change is the onrush of computer technology invading and conquering all these domains. The computer industry is converging with the television industry in the same sense that the automobile converged with the horse, the TV with the nickelodeon, the word processing program with the typewriter, the computer-aided design program with the drafting board and digital desktop publishing with the Linotype machine and the letterpress.”

George Gilder, November 1995

“It is not yet clear at what point technology and users will cross over from an environment where content is consumed passively through the linear schedule to one where content is consumed actively through search and on-demand. Measures in this Report will accelerate the not-distant point when that occurs.” (Bold italics ours)

Digital Britain Final Report, June 2009


The non-linear IPTV growth challenge

  Linear TV works well

  TV Anytime comes in a variety of forms – non-linear IPTV is only one example that must compete with others

  Non-linear IPTV overlaps considerably with the PVR

  Mass viewing of non-linear TV requires delivery to the TV set – PC not enough

  Even then current viewing levels are very low

  Success of non-linear IPTV dependent on quality of navigation and EPG instruments

  Economics and monetisation a major challenge:   Network distribution costs   Consumer unwillingness to pay and low tolerance of ads in on demand environment   Division of spoils between participants


Linear TV works really well

  Famous   New

  Quick and easy to find

  Effortless and relaxing, just right at the end of the day

  Does not require too much choice

  To discuss with friends the next day


TV Anytime: Variety of forms TV Anytime takes a variety of forms including linear as well as non-linear applications

Timeshift

Push VOD PVR

Internet Downloads

Streaming

Anywhere Networked devices

Mobile

Linear TV

Staggered+1 Repeats

PPV

DVD Sales

Rental

Pull VOD TV

PC


  There is a growing body of evidence about the audience potential of VOD and other forms of TV Anytime. The following summarises some key points made in the conference organised by LBS/ACB (Actual Consumer Behaviour) and held at the London Business School on 7th July 2009 – The Future of Converged and On-demand Television: Early Evidence from Actual Consumer Behaviour*

  Main TV set use is growing its share of TV viewing in the home (now c88%), reflecting:   Enhanced quality of viewing experience to the main TV set (large screens, HD reception

capability and PVR adoption)   Greater substitutability of secondary set viewing among younger viewers by PC use

  We have drawn the following key points from the conference presentations:   Non-linear VOD represents a relatively minor use of the TV set and the growth of on demand

audiences will be gradual over the next ten years   Although VOD use has seen robust growth over the past two years, we expect rates to slow

significantly in the next two years, as much recent growth reflects post-launch uptake of BBC, ITV and Channel 4 catch-up TV services

  VOD consumption is largely substitutable by PVR use, with rapid PVR adoption expected to dampen VOD growth prospects

  Broadband developments over the next five years will improve the opportunities for both internet VOD and TV VOD via hybrid broadband/broadcast platform reception

  But, the current audiences of Virgin Media’s VOD services suggest limited room for growth

  Our one caveat is that navigation and EPG design make a major difference to the user experience – this is the most important area to address if VOD is to achieve its potential

Consumer appetite for VOD


An important constraint on VOD use is PVR timeshift

1.  Non-linear VOD use overlaps greatly with and is largely substitutable by PVR timeshift

2.  Among the similarities:   Top linear hits, especially drama and other popular entertainment feature prominently in both

PVR timeshift and VOD use   Catch-up is the dominant form of both PVR timeshift and VOD use   Main consumption of long-form video content is in the peak evening slots, slightly edging

towards later peak – PVR timeshift and VOD use both serve to reinforce the main TV programme brands

3.  Among the differences:   PVR timeshift use is significantly heavier (current c.17% viewing share in the 31% of UK homes

equipped with PVRs) than VOD use in homes with access to VOD (we estimate c.3-4% average monthly viewing share across all Virgin Media cable TV homes, or 7% in the c55% of Virgin Media homes that watch VOD content in a given month)

  PVR adoption is most pronounced among adults aged 24+, while PC VOD use is biased towards younger adults

  PVR content is generally easier to find, quicker to use, more personalised, offers higher quality than internet VOD especially, is less restricted (i.e. not confined to the catch-up lists of accessible programmes) and allows users to create their own collections

  PVR features favour the capture of popular series, while VOD comes more into its own when it: -  ‘Extends’ a hit programme (e.g. Inbetweeners on Channel 4 or the Susan Boyle clips on

YouTube surrounding Britain’s Got Talent on ITV) -  Gives access to recent films, adult and other premium content, as well as to archive

(though low demand for long-tail content) or catch-up content that users failed to record/missed

Appetite for VOD: PVR vs. VOD


DTV trends: 2004-2018

[Source: Enders Analysis]

TV household penetration, 2004-2018 (%)

Nearly digital already: End of June 2009 – 87% of homes, 92% of individuals with digital reception on 1+ TV sets


Flexilinearity the actual dream

Linear TV

Non-linear TV

Flexilinear TV


Preserving channel brands - NDS FluenTV

Scroll right to get the day’s schedule, catch-up and see in advance offer


Online activities

Base: 16+ internet users Use of social networking sites for March 2009 [Sources: ONS and comScore]

Internet activities undertaken within the last three months, March 2008 (% of internet users)

  Email, browsing/research and social networking services are the three most popular online activities – however, rising broadband penetration is facilitating growing use of audio and video content

  Nearly half of all internet users regularly make online purchases

Top 3 activities

Selected activities


VOD users were 52% of VMed DTV base in Q4 2008 versus 43% in Q1 2007. [Source: Virgin Media]

Average VOD views per VOD using home per month

Virgin Media: leading UK TV VOD supplier

VOD viewing as a proportion of total TV home and individual viewing (%)

Note: We have employed a simple 75% scaling factor to convert homes viewing figures into individual viewing figures. [Source: Enders Analysis based on comScore, InfoSysTV/BARB]

  VMed is leading TV VOD supplier. Half its TV homes use VOD at least once a month   VOD consumption is growing, but is still less than 4% of viewing   Free catch-up TV, principally BBC (iPlayer launch in Q2 2008), main driver   Direct revenues from VOD remain small. Main benefits indirect, e.g. encouraging

switches to higher tier packages and improving customer retention


UK non-linear IPTV: Addressable market

TV VOD households include digital cable TV households and IPTV-enabled households (satellite, DTT hybrid and pure IPTV). Internet VOD households refer to all broadband homes able to receive VOD services to the PC less those able to receive TV VOD services. [Source: Enders Analysis]

VOD households (m)

  Total UK TV homes population c26 million. Roll-out will be slow   Figures include both cable TV and IPTV VOD   Figures relate to existing cable or broadband services (e.g. Virgin Media, BT Vision)


Changing balance in the funding mix

[Source: Enders Analysis, based on industry data]

  Post 2013, we expect maintenance of status quo between three principle sources of funding and slow build-up from other sources

  The big issue for the advertising-funded channels is the extent to which they can compensate for structural decline in advertising revenues with growing share in Other revenues


TV Anytime – IPTV/VOD opportunity

  Demand for IPTV to the TV or PC remains niche and hard to monetise

  TV VOD still only estimated 3% of total viewing in Virgin Media TV homes

  Consumption of TV video content to the PC still tiny next to TV (c.0.5% of total viewing for long-form content and 4% for all non-pirated video content)

  Monetisation of PC video problematic and use largely generated via user-uploaded content sites

  Little structural impact on TV NAR in next ten years


TV advertising crisis: No need for tears

The future is flexilinear

european tv advertising –will it ever be the same again?

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