From Free-to-Air to FMCG Content Delivery How the Australian Broadcast Industry Needs to Adapt to Survive

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IntroductionThe entertainment industry is going through a period of unprecedented transformation. How we consume content is changing rapidly and dramatically, with a host of new, nimble and efficient content providers assuming the role of industry disruptors and forcing the free-to-air (FTA) networks and pay TV operators to re-evaluate their own business models and organisational structures.

There is no doubt that FTA networks face a particularly challenging future, with ratings on the wane and the ability for viewers to skip ads making them a less attractive proposition for advertisers.

This white paper will examine the shift in our viewing habits towards a multi-platform subscription-based model, the implications this has for the future of traditional free-to-air and cable networks, and how those platforms might need to develop in order to remain competitive and relevant to the viewing public.

Theshiftfromtraditionaltomulti-platformTVviewing

Until fairly recently, it was still inconceivable to many TV network executives that we would want to consume their content on anything other than our television sets. For too long, the industry discounted the notion that people would watch media on anything besides the box. Now, with the proliferation of mobile devices in our homes, such as smartphones, laptops and tablets, the opposite is true, in that it is now inconceivable to think people would not want to access content through those devices.

According to a report issued in February 2014 by Nielsen, which focused on the habits of the digital consumer, 84 per cent of smartphone and tablet owners said they use their devices as second screens while watching television at the same time.

This, of course, has a detrimental effect on the impact of TV advertising, as second screen users tend to use those devices during ad breaks to scan social media or do some other online activity, rather than paying attention to all those expensive ads.

Ultimately, the driver of that advertising spend - which the commercial FTA networks rely on to survive – is the delivery of commercial impacts, which is why advertisers have of late been shifting a lot of their TV spend to online platforms, concerned as they are with the ability of commercial TV to give them the reach they used to enjoy, with the twin forces of ad-skipping capability and second screen activity diverting eyeballs away from their ads, not to mention the fragmentation of TV, with the ever increasing choice of available channels diluting the audience share of the primary FTA networks. The Internet is therefore posing a formidable challenge to the broadcast television model. In an interview with US news channel CNBC back in 2013, Greg Maffei, president and CEO of major US entertainment distributor Liberty Media, said it's an "open question" on how this battle will play out.

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"One of the questions for the long term is 'what is the role of a broadcast network?' and are there other ways to distribute that are more efficient,” he said.

Well, we now know the answer to that. The huge success of streaming content providers, such as Netflix, in terms of being able to attract millions of subscribers whilst operating with very low staffing levels means the answer is a resounding ‘yes!’

One issue that the TV networks have had some trouble in grasping to date is that there won’t be an overarching journey to a set destination when it comes to this business transformation and remodelling. The idea that all of this technological change is a journey to a defined end-point where everything will be like broadcast television has been for the past 60 years is a fanciful one, as the changes in entertainment consumption will be fluid and evolving.

The notion that there will be a single standard, technology and platform and everybody will end up there has to change, as that’s not how things are going to unfold. Entertainment companies need to be prepared to evolve and embrace lots of different business models as they come along if they are to succeed.

The reason why things are never going to settle in one standardised format is clear - there will always be new standards and new technology because the consumer electronics industry is vastly larger than the entertainment industry, so it is they who will dictate the changes in how we consume entertainment much more markedly than the entertainment providers themselves, as they need consumers to refresh their electronic gadgets and gizmos frequently in order to stay in business.

Looking at the next five years, it’s a given that mobile will be a huge part of that. It is only just beginning to be fully realised now and is set to explode, so I’m afraid the modern curse of your companion staring intently at their mobile device rather than you is only going to exacerbate in the coming months and years.

Mobile consumption of content is also going to fragment the industry into different types of entertainment forms, with more content produced exclusively for mobile platform screen dimensions, as opposed to the traditional 16:9 aspect of the TV screen.

Thecommoditisationofcontent-FMCGTV

While a great deal of attention is starting to be paid to how to deliver content to consumers in the most convenient (and profitable) fashion, those same content providers still have a long way to go when it comes to marketing that content. The distribution of content is becoming ever more sophisticated but the promotion of that content is not, and that needs to change.

As the industry becomes more fragmented, the way media is promoted to get a return on investment is going to have to get a lot more intuitive and innovative.

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A well placed Twitter feed can be more effective than producing a million dollar movie trailer, so the adoption of intelligent placement of media using predictive market research algorithms is essential if entertainment companies are going to let people know where their content is and how to consume it, in order to secure the audience numbers they need to survive and thrive.

Currently, the media companies gather audience data after an event, but moving forward they are going to have to get a lot better at performing predictive analytics on how the content is going to be consumed, and who is most likely to want to watch it. Should they choose not to adopt this approach, their ROI models are going to be very difficult to forecast.

If, for example, an entertainment provider has a film it wants to show, the use of predictive algorithms in order to determine where best to place the promotion tools to support the release of that film will take on great importance. They will have to be able to predictively work out the consumption model so they can determine whether it will be worth the initial investment in the product.

FTA networks and pay TV providers also need to become frictionless in terms of how they deliver their content to market.

Streaming content providers, such as Netflix, are excellent examples of frictionless companies, in the sense that they have a frictionless supply chain, meaning they can get their products to market a lot quicker, easier and cost effectively.

The barriers to distributing content around the world in terms of rights and accessibility have all but vanished. Netflix can set up in Australia and go to market with fewer than a hundred staff because they have a frictionless supply chain, whereas the commercial FTA networks in Australia all have several thousand employees.

In the face of this new threat, TV networks need to start thinking more about their own supply chains. One of the main reasons that they employ thousands of staff is because they have so many people assigned to the administrative side of getting the programming out there – valuable resources that could instead be diverted into producing more quality content.

On the other hand, companies like Netflix think like FMCG (Fast Moving Consumer Goods) companies, where they treat their content like a fast moving consumer good, such as washing powder or toothpaste, and their goal is to get it onto whatever ‘shelf’ makes money and shift as many ‘units’ as possible. They also market their content and experiment with branding like FMCG companies.

This is the future of entertainment delivery. Call it FMCG thinking if you will – frictionless, fast moving, R&D based, multi-shelf strategies for content. Old Spice is a great example of how media companies should be thinking. It was a tired old brand that was going to be retired but they marketed it very cleverly, using multiple social channels and creating entertaining, highly shareable content. This got it back on the shelves and it’s now one of the biggest selling ranges of male grooming products in the world.

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The media companies that tend to fail are those that don’t think like FMCG companies. They overinvest in a friction-filled supply chain and underinvest in the development of the product itself. Conversely, those who do think like an FMCG company and have frictionless supply chains and marketing plans and a multi-shelf policy, can pour their money and staff resources into producing the best content that people will buy.

If media companies don’t employ this FMCG approach, they will always be late to market and they won’t be able to adapt, but if they start thinking of digital as an opportunity to place their product on a shelf, make it easy for themselves to do it and for the consumer to access it, they will be able to make more compelling content, as they will have the resources to do so.

TV networks see themselves as transmission companies but they’re not; they are product development companies that need very light supply chains to distribute, and in the next 10 years, the companies that can think like that, like an FMCG company, are the ones that are going to survive. The ones that don’t will die. It’s now all about how light you can be in distribution, how opportunistic you are to a new ‘shelf’, and how clever are you at investing in and promoting product.

Networks need to stop protecting their existing supply chain and bolting smaller supply chains on the end of it. They need to be on multiple shelves and accept that those shelves are going to change. Platforms also change and something else will usurp Netflix. It will happen because it’s easy to do. Hollywood just wants to get its content out there.

If people want to buy it and take a risk on making money from it, they’ll sell it to them, no question. Good product, a sophisticated marketing strategy and a frictionless supply chain are the key ingredients to success in this new market paradigm.

Well-placed social media distribution is a key element of promoting content nowadays. By seeding the market with little clips in this fashion, which can be shared through social networks, an audience can be built very quickly with minimal financial outlay.

Networks need to utilise avenues like this more effectively, particularly when promoting big budget productions that have incurred a considerable financial outlay to bring them to the small screen. The usual network ads, radio appearances and a cocktail party launch are no longer enough. Networks need to have a sophisticated 360-degree marketing strategy.

Thelean,nimbledisruptorsshakinguptheindustry

"We're engaged in a state of war. Google has declared war on the ad industry. As an industry if we're unaware that we're at war, we're going to lose. The war is much bigger than any one industry. They're after our business, our advertisers, our content, our viewers.”

That rallying call to raise awareness of the threat of online players to traditional broadcast revenues was issued by Mark Aitken, Vice President of Advanced Technology at Sinclair Broadcast Group, at an industry event in October 2014.

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Sinclair Broadcast Group is one of the largest and most diversified television broadcasting companies in the US. It owns and operates, programs or provides sales services to 161 television stations, and its television group includes affiliations with major US networks ABC, CBS, FOX, and NBC.

Aitken said that while broadcasting companies have a track record of doing things better than most, the landscape has changed, with content migrating to Internet, satellite, cable and wireless. He also acknowledged that content creators are doing the right thing in searching out the best outlets for their product.

"The broadcast industry has to unite, at least in a virtual sense, to look at what we can do to become a viable competitor or ten years from now it will be a sorry state of affairs."

At no other time in the history of broadcasting has it had to face as many issues as it faces today, which is a reflection of the rate of growth and development and the rate of growth of consumer consumption on other devices.

Increasingly, ISPs are bundling streaming services in with their broadband and telephony offerings, either offering free or discounted subscriptions to streaming services, or providing unlimited download access to a streaming service that does not count towards a customers’ monthly download cap.

In the US, the rise of streaming content services has resulted in a steady decline in pay TV subscribers, as viewers cherry pick what they want to watch rather than having to pay for bundled channel packages.

Australia is going through the same process, with Foxtel recently reducing the price of its subscription packages in order to stem the flow of viewers away from the service.

But for many consumers this does not go far enough, as they are now demanding more customized television packages that enable them to include only the channels they actually want to watch, rather than having to pay for a host of channels they have little or no interest in.

This is why streaming services such as Netflix, Pronto, Hulu and Stan have established strong subscriber bases in Australia in a relatively short space of time, as they give viewers what they want to watch at a very reasonable price point, typically in the region of $10 a month, and mostly with no lock-in agreements so you can cancel the service any time you want without incurring penalty fees, unlike Foxtel.

It seems inevitable that at some point, Foxtel will have to let its customers create their own micro bundles of channels that they actually want to watch in order to remain in the market.

There is, however, one key area where pay TV and the FTA networks have it over the streaming services, and that is the provision of access to live television, particularly newscasts, sporting events and other major events such as the Academy Awards.

This is why FTA networks and pay TV invest huge amounts of money in news and sport in

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particular, as without it they would lose any advantage they had in attracting and retaining viewers.

Foxtel in particular, would be under threat of obsolescence were it not for the vast array of sport it has to offer, which is why Rupert Murdoch was so opposed to a super fast National Broadband Network in Australia, as if consumers had access to that, they could simply stream any sporting event they want to watch rather than paying for Foxtel, which is possible now, albeit with a significant degradation in picture quality, which would be eliminated with a high speed NBN.

Howcantheexistingnetworksandbroadcastersadapt?

It is important to note that FTA networks play an important societal role as well as providing entertainment, as consumers from lower socio-economic groups who cannot afford to pay for subscription television still rely on the FTA channels as their only source of information and entertainment.

A strong FTA market also fosters innovation amongst pay TV providers, as they strive to justify the outlay of buying a subscription by providing services and functionality not available on FTA.

FTA television networks also have a role to play in mitigating the risk of having a powerful gatekeeper by preventing any individual or organisation gaining too much control of the media landscape and potentially restricting the route to market for certain channels, or indeed restricting access for viewers to a diverse range of viewpoints that do not match their own outlook.

It is, however, imperative that FTA networks (and cable and satellite TV providers) keep up with innovation in their space in order to maintain consumer engagement, and continue to evolve in terms of the range of content they offer, as well as the means in which they provide access to that content. Fortunately, this evolution is already taking shape, with catch-up services like Freeview Plus, ABC’s iView and SBS On Demand now available, which allow viewers to watch their favourite programs whenever they want to, rather than only when they are aired.

The networks are also muscling in on the subscription-based Internet streaming service market. The Seven Network and Foxtel co-own Presto, while the Nine Network has STAN, which is co-owned by Fairfax Media.

These services were in part introduced to counteract the impact of the launch in Australia of US streaming service giant Netflix, which has signed up 57 million customers around the world and plans to spend $3 billion this year on content. Viewers are no longer willing to accept merely watching whatever happens to be on at any given time. They want to be able to search for content that is appealing to them, and even receive recommendations based on their viewing habits and personal tastes. Internet connectivity is enabling this to occur.

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Nine Network CEO, David Gyngell was born into television, as it was his father Bruce who famously said “Good evening, and welcome to television,” when introducing Australians to the small screen when it was first switched on here back in 1956.

In an interview with the ABC’s Media Watch programme in April 2015, Gyngell acknowledged that his network and the other FTA networks in Australia really needed to lift their game in the face of increasingly intense competition for viewers.

“I look across the spectrum of free-to-air television at the moment, and I’m not particularly over-excited at what we’re putting up. Are we giving them want they want?’ Because they’ve got choices to go and find lots of different things so we’re going to have to adjust as people in the industry to provide the consumer with what they want, because they’re not going to tolerate mediocrity anymore”

Australian viewers certainly are spoilt for choice at the moment. In addition to the main FTA commercial networks – Seven, Nine and Ten - they also have access to a further 11 digital channels of commercial free to air TV, as well as four channels on the ABC and another four on SBS. There are also many more on Foxtel, although they of course incur a subscription fee. On top of all that, they also have the aforementioned catch-up services and subscription-based streaming services.

During her speech at ACMA’s (Australian Communications and Media Authority) Radcomms event in Sydney last September, Free TV Australia’s CEO, Julie Flynn, left delegates in no doubt that the FTA television was under threat. “We are at a crossroads. We face competition from many players, not just Foxtel. There are new (streaming) services already here or on the near horizon, and of course online services such as YouTube. On top of that, there is the broader threat to advertising posed by digital.”

Flynn also highlighted one of the restrictions in the government’s spectrum allocation that is serving to prevent broadcasters from providing a service that a lot of Australian viewers are demanding – to see more sporting events in HD.

Given that the huge range of sporting coverage available on Foxtel can be seen in HD (as long as you pay an extra $10 a month for the HD versions of its sports channels), this is a particular bugbear for those viewers who have Foxtel subscriptions, as they come to expect that quality of viewing experience when watching sport, and the degradation in picture quality when watching in SD is very evident.

“One of the most common complaints television broadcasters receive from viewers is why can’t they see more sport in HD. Under the current regulatory framework, broadcasters are forbidden to show their primary channel in HD, and under the antisiphoning rules, listed sports must be on a primary channel unless you get permission to do otherwise.

“So the first step which we think is absolutely a no-brainer, and can be done simply and quickly, is to get rid of the regulation in Schedule 4. Deciding whether or not to run your primary channel in HD should be a commercial decision for television broadcasters,” argued

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Flynn.

This makes a lot of sense, as each broadcaster currently only has a limited 7MHz in a licence area, which enables them to offer only one HD channel and up to four SD channels.

As we touched upon earlier, sport is a critical element of Foxtel’s offering and is the reason why they are willing to pay billions of dollars to acquire the rights to screen live sport.

Some sports rights holders see the value of balancing the sale of screening rights between FTV and pay TV operators, so that their product reaches the widest possible audience and helps grow the sport, whilst others, such as the English Premier League, simply auction the rights to the highest bidder, which means that EPL games can now only be seen on pay TV in the UK, as the FTA networks cannot compete with the riches the pay TV operators can provide.

In Australia, the antisiphoning laws mean that a range of premier sporting events (such as Ashes test matches and the NRL and AFL Grand Finals) are ring fenced and therefore must be made available to see on free to air television, and given the fact that sport is a national obsession in Australia, it would be a brave (or foolhardy) government that seeks to change those protections.

Still on Foxtel, the innovation they have been trumpeting this year to combat the advances of the streaming services is its latest set top box – the iQ3.

The new box enables you to record three shows at once while watching a fourth, a small improvement on the iQ2, which allows you to record two shows simultaneously while watching a third. But the key differentiators from the previous model are the functions it calls Start Over, which enables you to go back to the start of any show, and Look Back, which allows the user to stream any show that had aired in the previous 24 hours via the IPTV connection.

In an interview with tech website Gizmodo earlier this year following the launch of iQ3, MikeIvanchenko, Director of Product at Foxtel, said the new device fulfilled the demands of today’s viewer to be able to enjoy their favourite shows whenever they choose.

“This platform will allow us to deliver on the promise of what you want, where you want, when you want it, and that includes things like starting in one location, finishing in another, being able to share content with family and people who are part of your subscription.” While it is certainly a step in the right direction for Foxtel, it remains to be seen whether it will be enough to arrest the decline in subscribers, as not only is it whacking its subscribers with a $150 fee for the new box (if the customer installs it themselves, or $200 if they want Foxtel to install it for them), but despite discounting its packages it has not yet addressed the fundamental problem many customers have with Foxtel – the fact that you cannot chose and pay for the few channels you want but instead have to subscribe to multiple bundles full of channels you’ll never watch in order to get access to the few that you do want to watch. Foxtel made a lot of money at a time when it was protected but it’s going to have to change

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in order to maintain relevancy because they simply do not have the ability to go to market with new offerings quickly enough in the current environment.

Also, the likelihood is that free to air television channels are also going to have to become part-subscription services if they are going to maintain long-term viability.

Theinteractiveimperativeformodernaudienceengagement

With the use of mobile devices whilst watching TV now being so prevalent, it is no surprise that the next logical step from that is the use of those devices to engage and interact with the shows. For a few years now, viewers have been able to use their mobile devices to vote contestants in or out of talent shows, but that level of interaction is fairly benign and one-sided.

A more engaging use of this capability is being seen in sports discussion shows, where viewers are often asked to tweet or email questions for the guests, as well as give their opinions on the sporting topics of the day.

But arguably the best example of home viewer participation we have seen in Australia to date (and one of the most visible) is ABC’s popular weekly political panel discussion programme Q&A, which is broadcast live and gives home viewers the opportunity to send comments via Twitter on the topics being discussed that evening, using the #qanda hashtag. Those comments are then displayed using a ticker across the bottom of the screen throughout the show.

This year, with a new set, which features a more prominent display of the show’s Twitter hashtag, the number of Tweets the show receives during the hour long show has jumped up from an average of just over 20,000 per episode to around 40,000. Plans are afoot to develop this further, with panelists to be asked questions that come in via Twitter during the show, and viewers to be asked for their opinions on what the panelists are saying during the show.

Not only does this increase viewer engagement, it also has the potential to change the behavior of the panelists, as if they give a response to a question then the show asks viewers on Twitter whether they are happy with that response or they think they are being avoidant or evasive, the host than then go back to the panelist with the results of that poll and try to get a more direct answer, or the panelist might just take it upon themselves to (gasp!) give a straight answer in the first place, in the knowledge that they’ll be called out on it by the Twittersphere if they don’t.

Another benefit for the producers from having a strong social media component is that it prolongs the discussion of the show after it has ended, and can draw in more viewers for the following week’s show. As mentioned earlier, it is live broadcasts that are the jewels in the crown for FTA networks and pay TV operators, particularly major events, and these events are increasingly being used by broadcasters to draw audiences online where they can show

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sponsors’ messages during audience interactions, such as when asking them to give their opinion on what should win Best Picture at the Academy Awards or who their man of the match is in the AFL or NRL Grand Finals.

Another potentially huge market for broadcasters to tap is the use of interactive technology to enable the viewer to purchase products they see during their favourite shows using their remote control. This is already occurring but it is set to become much more commonplace in the years ahead.

What was once a one sided activity, watching television has now become a two way street, with mobile devices and Internet connectivity meaning that we are now engaging with what we watch more than ever, and even having a major influence on the outcome of certain shows. Such is the level of audience interaction that it has started to spawn a whole new genre of show – the fan show.

An example of this type of show is Thronecast, a fan show which discusses all things related to each episode of the series Game Of Thrones, as well as offering a behind the scenes look at the show, previews of what’s to come, cast members answering fan questions, and so on.

Not only do these types of show build viewer engagement with the series, it also enables the network to produce another popular show for a fraction of the cost of the show it’s discussing.

SummaryMore television is being consumed than ever before, just not in the traditional format. Mobile is here to stay and is a key focal point, as is social media. They key is putting those elements together into a multi-faceted user experience. Media companies need to look at what platforms they put their product on. If it sells, put it there. Those media companies need to be agile enough to capitalise not only on the platforms available to them now, but also new avenues for delivering their content that come into being in the future.

Sinclair Broadcast Group’s Mark Aitken hit the nail on the head when he said, “We have an opportunity uniquely at this time for broadcasting to reinvent itself. It's about a future where we operate as an industry and present opportunities to the marketplace, as a conveyor of uniquely wireless, unconnected bits to billions of devices. I think that's in our future and that's what I'm working towards.” It is also what every other broadcaster in the industry should be working towards.