tomorrow calling revenues_business_models

INDUSTRY REVENUES & BUSINESS MODELS

March 2012

PROJECT BACKGROUND

As part of Red Bee’s Tomorrow Calling programme, MTM London was engaged to explore the key

trends and developments impacting the long-term evolution of the UK broadcasting industry’s

revenue streams, to stimulate thinking about the shape of the industry in 2020

The project was structured around a programme of depth interviews and an online survey

completed by a cross-section of senior industry participants – the research was undertaken

between December 2011 and March 2012

All interviews were completed under the Chatham House Rule – unless otherwise noted, all

quotations and survey findings derive from the industry research

The project was managed by Stella Medlicott, Matthew Neale and Lynne-Mei Lee at Red Bee

Media.

The project team at MTM London was led by Jon Watts , Caroline Rushton and Stephen Adshead.

The contents of this report draw upon the views and opinions of the industry participants who took

part in the research – however, the findings are solely those of the authors and do not necessarily

reflect the views of the individuals or companies named in this report or of Red Bee Media

STRUCTURE OF PROGRAMME

Stage 3 of the Tomorrow Calling programme explored industry revenues and business

models through to 2020

Building successful companies in a changing media market

1. Networks,

platforms and

devices in 2020

2. Changing

media audiences

3. Industry

revenues and

business models

Building

successful media

businesses

Three stages Final Report

Focus of this

report

The project was structured around four main worksteps, completed over a three-month

period

• Identify trends and developments impacting

evolution of industry revenues streams

• Gather views from wide range of experienced

industry participants

1. Industry research,

interview programme

2. Quantitative survey of

industry experts

A four-stage approach Caveats and qualifications

• Sample not census, of qualified, experienced

industry participants, selected in conjunction

with Red Bee

• Interview questions based on domain expertise

of interviewee, given limited time, with scope for

wider discussion

• Interviewees expressed individual views, based

on professional experience and expertise –

however, visibility of wider industry trends was

sometimes limited

• All views have been interpreted, cross-checked

with industry data and other interviewees (where

possible), and synthesised to produce an overall

view

• Develop clear view of market evolution, and a

picture of the shape of the industry in 20204. Analysis and synthesis

of research findings

3. Think

Tank

• Online survey of 138 senior media and

technology industry experts

• Questions on prospects for specific industry

revenue streams and business models

• Industry seminar, debating emerging findings

with cross-section of industry participants

APPROACH

The project team completed depth interviews with senior decision makers across the

industry and held an industry seminar to discuss emerging findings

Depth interviews Seminar participants

This document reflects solely the views of the authors and not of the interviewees or think

tank participants – all interviews were completed strictly under the Chatham House Rule

INTERVIEWS & SEMINAR PARTICIPANTS

By 2020, as a result of these (and other) developments, industry participants expect the

industry’s major revenue streams to look very different

Video advertising

• “The underlying trade mechanics and shares will change. We won‟t still be

trading on share deals, sponsorship and AFP will grow, we‟ll see a

converged video ad market covering multiple platforms. Today, TV and

online video ads are still sold as separate products. That won‟t be the case

in 2020 – the market will be much more integrated, with video ads sold

across different platforms through trading desks and other platforms, and a

much greater emphasis on creative partnerships”

BBC income allocated to TV

• “The BBC‟s not going to get any less important – it‟s going to be the biggest

investor in British programming. But it‟s never going to be as rich as it once

was. By 2020, it‟ll be a smaller part of the overall market – still a big

player, but more focused on doing a few big things well, rather than doing

the range of things it does now”

Pay (subscriptions and

transactional)

• “There are going to be lots of different business models and windows: TV

anywhere, DTO and DTR, SVOD, ad-funded, and so on. DVD will have largely

shifted to digital, but the revenues will be distributed across lots of

windows. I don‟t think the big pay-TV platforms will suffer much, but they

will face more competition from alternative offers”

SUMMARY

Depth

interview

findings

Quant

survey

findingsKey:

The last

10 yearsAds Pay BBC

Areas of uncertainty

SummaryEvolution of industry revenues

Investment in

TV content

Challenges

and

opportunities

1. THE LAST TEN YEARS

Overall, broadcasting industry revenues remained relatively robust between 2001 and

2010 – growth was driven primarily by subscriptions

BROADCASTING AND DVD INDUSTRY(1) REVENUES (2001-2010)

Total industry revenues, UK, real terms - 2010 prices (£bn) (2,3)

Notes: (1) Total broadcasting and home entertainment (DVD) industry. Excludes TV shopping and interactive revenues; (2) Advertising revenue includes TV NAR, online

video rolls and sponsorship; transactional revenue includes DVD retail and rental, PPV, VOD and EST

Sources: (3) Ofcom, Communications Market Report (August 2011); BFI, Statistical Yearbook (2011); IAB-PWC, Online Adspend Study (2010); and MTM analysis; (4) Oliver

& Ohlbaum, A comparison of international television advertising markets (August 2011)

“Subscription has been the big change in the UK market – it accounts for

the biggest share of the industry‟s profits, it‟s matured and throws off a lot

of cash. It creates the opportunity to make some big bets and to spend

more on content and new products”

Developments from 2000 to 2010

Decrease driven primarily by economic cycle and decline in price

of TV airtime (average price down 32% in nominal terms,

between 2000-2010(4))

Little growth in DVD revenue across the decade: revenues grew

strongly at first, before falling prices and volumes impacted the

market; digital revenues growing steadily

Strong growth driven by growth in penetration of pay-TV services

and growing ARPUs at top end of the market – SVOD

propositions also emerging, but still small scale

Average spending increased in real terms, driven by licence fee

settlements and growth in number of TV households – however,

2010 settlement will see value of licence fee fall

Advertising

TV NAR, sponsorship and

internet video rolls

Transaction

DVD retail and rental,

PPV, VOD and EST

Subscription

Pay-TV subscriptions

and SVOD

BBC

Licence fee spending on TV

PA

Y

The last

10 yearsEVOLUTION OF BROADCASTING INDUSTRY REVENUES

However, growth in pay-TV subscriptions and multichannel penetration is now slowing,

as the market matures

MULTICHANNEL TAKE-UP IN UK HOUSEHOLDS (2001-2010)

70% 67% 64% 61% 58% 56%

0

2

4

6

8

10

12

14

16

18

20

22

24

26

28

Q1 2

001

Q1 2

002

Q1 2

003

Q1 2

004

Q1 2

005

Q1 2

006

Q1 2

007

Q1 2

008

Q1 2

009

Q1 2

010

Q1 2

011

Analogue terrestrial only

Digital terrestrial only

Analogue cable

Digital cable

Free-to-view digital satellite

Analogue satellite

Pay digital satellite

TV households (million):

Audience share of 5 main channels:

Source: Ofcom, Communications Market Report (2011)

“The PSBs have lost

[audience] share as

multichannel

penetration has grown,

but the transition to

digital is almost

complete – it‟s a more

mature market and

they‟re not losing share

as fast as they were.

They‟ve over the hump

now and it‟s the

multichannels who are

starting to see a slow-

down in growth”

The last

10 yearsEVOLUTION OF BROADCASTING INDUSTRY REVENUES

2. EVOLUTION OF INDUSTRY REVENUES

Depth

interview

findings

Quant

survey

findingsKey:

The last

10 yearsAds Pay BBC



Investment in

TV content

Challenges

and

opportunities

There appears to be a strong consensus across the industry that the collision of

broadcasting with broadband will define the next decade

A DECADE OF CHANGE AHEAD

“In 2020, the notion that we‟ll be able to point at something called the broadcasting

industry, with distinct revenue streams, simply won‟t hold. As the underlying platforms

evolve, broadcasters are going to face competition for their traditional revenue

streams and are going to diversify into new areas”

“The mix is going to change, in terms

of market share – the big display

platforms, like Facebook and Google,

will keep on growing. The weaker

parts of the TV market are going to

get hit”

“The big trend will be a shift away

from the household as the unit of

consumption to the individual –

personal devices, personal accounts,

recommendations, and so on”

“The market looks very stable,

superficially – we don‟t see huge

change on the surface, but the

underlying mechanics and shares will

change. Today, video ads are still

sold as separate products. That

won‟t be the case in 2020 – the

market will be much more

integrated”

Ads Pay BBCEVOLUTION OF INDUSTRY REVENUES

TRENDS & DEVELOPMENTS

Many industry participants are positive about the prospects for the industry – however,

there are concerns about economic conditions

MACROECONOMIC CONTEXT

• The economic downturn has already had a

significant impact on industry revenues, especially

TV advertising and transactional revenues

• Going forwards, many industry participants believe

that low economic growth and pressure on

disposable incomes (e.g. through increased

taxation, rising commodity prices) will impact the

growth prospects for the market

Note: (1) Survey response to question: How positive are you about the prospects for the UK‟s broadcasting industry to 2020?

Positive about the industry’s prospects(1) … … but cautious about the economic outlook

Positive

78%

Negative

6%

Neither

16%

“Total discretionary

spend on video

entertainment isn‟t

going to grow much,

overall”

“I think we‟re going to

see a decade of

slowing change –

consumers aren‟t

going to adopt new

things as quickly”

“I‟m really positive about the

prospects for the industry –

consumers will have more choice

and control and more

opportunities to consume great

content”

Ads Pay BBCEVOLUTION OF INDUSTRY REVENUES

TRENDS & DEVELOPMENTS

2. EVOLUTION OF INDUSTRY REVENUES - ADVERTISING

Depth

interview

findings

Quant

survey

findingsKey:

The last

10 yearsAds Pay BBC



Investment in

TV content

Challenges

and

opportunities

Most industry participants expect the TV ad market to face significant challenges –

potentially leading to considerable change

KEY CHALLENGES INCLUDE:

Limited change in ad

formats – spot ads

dominate

Slow change in trading

mechanisms

Concentration of supply /

sales points

Link between TV ad

revenues and economic

growth

Historic characteristics Challenges to 2020

Limited economic growth

Rapid pace of internet ad

innovation

Proliferation of

competing video

platforms

Growth of ad spend

outside of current share

deals

• Poor outlook for economic growth and consumer spending – for example, high street

retail and entertainment are expected to be low growth sectors and may decline

• Rapid pace of change and innovation in internet ad formats, platforms and sales

mechanisms is changing expectations of advertisers and agencies: “Advertisers want to

see similar platforms and innovations in TV”

• Increasingly complex and competitive TV and video advertising market – online video

aggregators and video ad platforms proliferating onto screens, potentially creating

competition for TV ad spend

• “The grey market is going to grow: sponsorship, product placement, creative

partnerships, AFP. These deals happen outside of share deals. And as they grow, the

share deals will become less relevant. It will eventually break down”

“It‟s clear that TV advertising isn‟t dying, but the TV spot market has struggled to grow and develop –

there‟s going to be a lot of change during the next ten years, which will create big challenges”

EVOLUTION OF INDUSTRY REVENUES - ADVERTISING Ads

There is a strong consensus that the TV and video advertising markets will become

increasingly complex and competitive

SUPPLY OF ADVERTISING

PSBs core channels

Examples of

competitors:

Linear TV advertising Non-linear video advertising

Multichannels Catch-up services Online video aggregators

PSBs

Multichannel broadcasters Platforms’ on-demand services Online video aggregators

“The number of TV shows that can attract

mass audiences has clearly declined. It will

continue to decline. We‟re going to see

increased polarisation between big live

shows and fragmented channels that will

attract advertising targeted by audience,

rather than content”

“The mix is going to change, in terms of

market share – the big display platforms,

like Facebook and Google, will keep on

growing their share. They benefit

enormously from the explosion of data,

hugely powerful computing platforms, the

growth of online media consumption,

auctions, trading desks, and so on”


Industry participants expect the commercial PSBs to defend their share of the TV ad

market – however, smaller multi-channels will face growing competition

SHARE OF ADVERTISING REVENUES

PSBs Multi-channels Video aggregators

• Industry participants expect that

PSBs will defend their share of UK

TV advertising revenues

• Smaller multi-channels may

struggle to generate reach in a

more fragmented market

• Video aggregators are expected

to grow their share of video

advertising revenues


Original content and innovation will help PSBs defend their share of audiences and

advertising revenues, but growth is likely to be limited

AD REVENUES – PSBs


Large-scale investment in

original content

Delivery of high reach

(increasingly scarce)

Development of new

approaches

“There is a risk that if you lose the scale of the big

broadcasters (and their ability to cross-subsidise big

programmes), then no-one will be able to afford really

expensive content that attracts mass audiences”

By 2020, half of survey respondents predict there will be far

fewer advertising spots on linear television that are capable

of reaching mass live audiences (5 million or more)

“We are working on major innovations that can give us

additional and complementary data about our audiences,

which will further strengthen our long-term position in the ad

market”(1)

Source: (1) David Abraham Royal Television Society speech (2011)


Many industry participants believe that smaller multichannel broadcasters will come

under increasing commercial pressure during the decade

AD REVENUES – MULTI-CHANNEL


Audiences are concentrating

around big programmes

Competition from on-demand

offerings is growing

Limited scale and leverage

“The big multichannels currently make a healthy margin, but have struggled to

create break-out programmes that really rate. We‟re seeing a consolidation of

viewers around big programmes, and there aren‟t very many of them. They‟re

going to come under pressure – I‟m sure they‟ll have to cut down on the number

of channels they offer”

“The lower quality multichannel offerings – with lots of library material and deep

repeat patterns – do look vulnerable, as catch-up services proliferate on

connected TVs. There‟s going to be more competition for viewers – and more

options for advertisers”

“It‟ll be the mid-tier of multichannels who

will suffer – they‟ve not got much

leverage in their negotiations and

platforms will look to drive down fees to

pay for the „must have‟ channels. This

will drive consolidation in the mid tier”

“The smaller channels will suffer – they don‟t

own much content, give away lots of value to

platforms, and struggle to invest. If they‟re part

of a bigger international network, like Discovery,

they‟ll be ok – but the small standalones will

find it very tough”


Video aggregators are expected to grow their share of advertising revenues, as online

viewing increases and their ad offer improves

AD REVENUES – VIDEO AGGREGATORS


Sources: (1) Survey response to question: Which companies will be most successful in growing their share of UK video advertising revenues, between now and 2020?

Who will grow their share of video ad revenues?(1)

67%

53%

41%

33%

Online video aggregators

Pay-TV platform owners

Multichannel broadcasters

Commercial PSBs

“The mechanics of sales will become much more

complex – exchanges, networks, data-driven

offerings. The role of the agency and the sales

house will be hugely disrupted, around non-

premium offers. There will be more price

competition, more transparency around what works

and what doesn‟t. Do broadcasters understand

auction-based mechanisms?”

“It‟s going to create opportunities for technology

companies and agencies to gain share and

reposition themselves in the market –

someone‟s going to lose out”


“We‟ll see a converged video ad market covering

multiple platforms. Today, video ads are still sold

as separate products and the process of ad

insertion is still very manual. That won‟t be the

case in 2020 – the market will be much more

integrated, with video ads sold across different

platforms through trading desks and other

platforms”

PC VOD

TV VOD

Convergence

Online advertising market

TV advertising market

“Trading platforms will be common in all media –

including TV. It‟s a huge, massive change. Lots of

cost will be taken out of traditional media. It will

fundamentally change the commercial models in

traditional media, which is mostly a commodity

sell. There will be one converged market for

traditional display media”

“TV and online will be a hugely powerful

combination for video – the two media will

converge. The investments that the agencies are

making in their trading desks, the stakes that

agencies are taking in new tech – the market will

be transformed”


By 2020, these changes should result in a more converged market – however, there are

uncertainties over the rate of change

ADVERTISING SALES CONVERGENCE

There are also considerable uncertainties about the prospects for TV VOD advertising

and addressable advertising on existing platforms

ADVERTISING – UNCERTAINTIES

TV VOD advertising Addressable advertising

“I‟m sceptical about the prospects for VOD

advertising, even by 2020. There‟s some

evidence that catch-up viewing has already

peaked, though connected TVs will deliver

some growth. But it‟ll be fragmented

across various broadcasters and I don‟t

think there‟s going to be that much volume

of VOD inventory in the market”

“TV and online are a hugely powerful

combination for video – the two media

will converge. TV VOD has been slow to

grow – the technology hasn‟t moved

fast enough and the platforms are sub-

scale. The energy is all in online – TV

VOD will be there, but it might be much

smaller than we think”

• Systems providing addressable advertising on linear TV services (e.g.

Sky AdSmart) are emerging, but have gained limited traction to date

because of:

− challenges in developing workable business models that provide

incentives for broadcasters, advertisers and platforms

− ingrained TV ad trading system that rewards reach rather than

targeting

− technology challenges around TV platforms (versus online and

mobile)

− privacy issues relating to the collection and use of consumer data

for targeting

“Targeted TV advertising is going to be a long

time coming – the systems aren‟t cheap, it‟s

not clear what value it will add for lots of TV

advertisers, and the market is going to be

very fragmented. It‟s why big aggregators

are so important – but who‟s going to

aggregate enough”


2. EVOLUTION OF INDUSTRY REVENUES - PAY

Depth

interview

findings

Quant

survey

findingsKey:

The last

10 yearsAds Pay BBC



Investment in

TV content

Challenges

and

opportunities

The pay-TV market is expected to become more competitive and complex, with a

greater range of offerings competing across different platforms

CONVERGENCE OF TRANSACTIONAL AND SUBSCRIPTION

DTV

platforms:Free: Hybrid: Hybrid: Pay:

Subscription:

Transactional(1):

OTT

services:

A more complex and competitive market

Possible

providers

of new

offers:

Note: (1) Transactional = DTO and DTR services.

• Industry participants expect free and pay offerings to continue

competing strongly to 2020 – free catch-up services will spread

across new platforms, while pay offerings also proliferate

• Hybrid platforms (e.g. YouView, BT Vision) will blur traditional

distinctions between free and pay platform

• A proliferation of OTT offers are expected to provide mainly library

content at low prices:

• There are also strong expectations of disruptive new offerings,

brought to market by major technology and internet businesses

“It‟s a battle

between free and

pay. The big

question is: how

attractive will the

free offer be in

2020?”

“YouView will

lead to a whole

new tier of pay

offers, many

offered by free

broadcasters”

“The cost of

entry has

plummeted and

prices will fall:

look at Netflix

and LoveFilm,

competing to

offer more for

less”

PayEVOLUTION OF INDUSTRY REVENUES - PAY

New SVOD offers will grow the market (illustrative)

2010

Pe

ne

tra

tio

n o

f TV

ho

use

ho

lds

2020

Pay-TV

Pay-TV and SVOD

SVOD

0%

100%

“Consumers will ask – are

we satisfied with just the

free offer – increasingly,

the answer will be no”

“The £40-50 price bucket

won‟t grow much, but lower

priced packages will grow

substantially – at £5-10”

“The shift from the

household as the unit of

consumption to the

individual will drive some

growth in the market – but

not that much”

70% of respondents believe that a much greater proportion of UK households will pay to subscribe to some form of film or TV service in 2020

53% of respondents believe that a significant proportion of UK households will subscribe to pay offerings from more than one pay provider


In general, industry participants do not expect low-priced SVOD offers to cannibalise

existing pay-TV offers – instead, overall penetration will grow

GROWTH IN PAY PENETRATION

Competition from new pay entrants is expected to increase, but many expect incumbent

pay-TV platforms to remain resilient

PROSPECTS FOR PAY COMPETITION

Pay-TV platforms OTT Transactional

• Industry participants expect major

pay-TV platforms to defend their

position

• OTT players will grow but there

are significant uncertainties

about their long-term prospects

• Low-cost, flexible services will

proliferate, creating a complex

ecology of transactional offers


Pay-TV platforms are expected to defend their position, helped by the strength of their

content and the introduction of new services

PAY COMPETITION – PAY-TV PLATFORMS


Key competitive

advantages expected to be

maintained

… and pressure on carriage

fees

Overall, most expect pay-TV

businesses to be resilient

However, more competition

in film …

“There‟s a big difference between first-run content and library

material … the ability to offer first run content remains critical –

live sports, first run US content, films, original production. It‟s

expensive and hard to do”

Only 24% believe that ARPU for the major pay-TVplatform operators will decline significantly from current levels

On average, respondents expect pay-TV revenues to increase by 27% from 2010 to 2020(1)

“The film market is clearly going to be a lot more competitive. It‟s

a very international space, pan-regional deals are becoming more

common. Consumers are going to have a lot more choice”

“The big pay-TV platforms are going to face lots of margin

pressure, which will put pressure on carriage fees – and some

big brands will start thinking about going free-to-air or direct to

consumer”

“I think the major pay platforms will be stable – Virgin and Sky offer

great services, with lots of value. Consumers like the bundle of content,

technology and services. Most consumers aren‟t going to subscribe to

lots of different offerings – and most services are already available

across different platforms”

Notes: (1) Relative to Ofcom data for total 2010 pay-TV revenues including Sky, Virgin Media, Talk Talk TV, BT Vision, ESPN, and Top Up TV.


OTT offerings are proliferating, with activity from major new entrants – but there remain

significant uncertainties about their prospects

PAY COMPETITION – OTT


• There is consensus that major internet competitors will

launch major new propositions into the market…

• …but uncertainty about their prospects, especially in meeting

local market needs

Ability of standalone OTT competitors to sustain investment

and to reach critical mass?

Prospects for major new entrants – internet companies,

technology businesses?

“There is only so much appetite in the UK for pay services,

because of the strong offerings provided by the BBC, ITV,

C4. Catch up services are going to become more widely

available and are already on many different platforms. It‟ll

limit demand for the SVOD offers. I‟m not convinced that

OTT will do as well in the UK, as it has in the USA”

“It is unsustainable from an

economic perspective… The

new acquirer will struggle to

make a return, give up the

rights or not renew”

“Netflix will struggle to

capture a significant share

of the market, unless they

are planning to throw

astronomical amounts of

money at it”

“Google and Apple are the 800lb players. They have

the cash flow, the scale, the ability to invest in

technology and content across every platform”

“They can outbid local competitors [for rights]…

but it is difficult for the big players to be good

at local content”


As DVD revenues decline, a new and more complex ecology of DTO, DTR and SVOD

services is expected to emerge

PAY COMPETITION – TRANSACTIONAL


Two-thirds of respondents believe that sales of physical TV and film DVD will be almost entirely replaced by digital distribution methods by 2020

Complex emerging ecology of DTO, DTR and SVOD

£2bn

£0bn

20202010

Growth of DTO,

DTR & SVOD?

Expected decline in DVD revenue – illustrative

“PPV growth will depend on windows. If there‟s a well-

protected pay transactional window, it could do okay – but

it‟s not clear how it will happen”

“The technology and infrastructure underpinning EST will

become more advanced, with common standards, locker

technologies and so on, but it won‟t replace lost DVD revenue”

“EST and VOD will grow, especially as technologies improve

to make the proposition as compelling as for music, but it is

likely that they won‟t replace DVD”

“Subscription will be a more important feature

of the market than DTO or DTR – people are still

resistant to one-off purchases, if the technology

isn‟t right. But subscription will be

concentrated – there aren‟t going to be many

big businesses”


2. EVOLUTION OF INDUSTRY REVENUES – LICENSE FEE

Depth

interview

findings

Quant

survey

findingsKey:

The last

10 yearsAds Pay BBC



Investment in

TV content

Challenges

and

opportunities

Industry participants expect the BBC to remain under pressure, with spending on TV

decreasing in line with the licence fee settlement and new commitments

PROSPECTS FOR BBC INCOME ALLOCATED TO TV

• 2010 settlement froze licence fee at £145.50 to 2016/17, with additional commitments

costing £345m p.a. by 2014/15(1)

• Impact may be mitigated by growth in UK households (c. 1% p.a.(2)) and increasing income

from BBC Worldwide

• But still likely to result in a 17% real terms decrease(3) to the BBC’s income by 2016-17

• Most industry participants expect BBC

income to come under further pressure, in a

tough economic climate and challenging

commercial market

Sources: (1) House of Commons Culture, Media and Sport Committee, BBC Licence Fee Settlement and Annual Report (May 2011); (2) Department of Communities

and Local Government, Statistical release: Household projections (2010); (3) MTM London analysis (note: value highly sensitive to inflation forecasts)

• Prospects for next Charter renewal process

and licence fee settlement uncertain:

“there‟s going to be a lot of debate about

the role and size of the BBC”“Low economic growth and

pressure on the public finances

will put real pressure on the

licence fee. You just can‟t see it

growing much, and there will be

more pressure to share”

Less certainty after 2016-

17 …

2010 settlement – a

significant decrease

… but industry participants

expect further pressure

EVOLUTION OF INDUSTRY REVENUES – LICENSE FEE BBC

3. INVESTMENT IN TV CONTENT

Depth

interview

findings

Quant

survey

findingsKey:

The last

10 yearsAds Pay BBC



Investment in

TV content

Challenges

and

opportunities

There is a consensus that the PSBs will continue to be the major funders of UK original

TV content – however, growth will primarily come from other areas

SPEND ON ORIGINAL UK PRODUCTION

PSBs Sky and multi-channels Internet businesses

• Industry participants expect that

PSBs will continue to be the

major funders of UK original TV

content

• BSkyB and major multichannel

broadcasters are expected drive

the majority of growth in

expenditure on original UK

programming

• Industry participants also expect

investment in original content by

internet businesses to grow

INVESTMENT IN TV CONTENTInvestment in

TV content

The PSBs are expected to maintain their high levels of investment in original content –

however, commercial pressures will limit overall growth

ORIGINAL PRODUCTION SPEND – PSBS


“I just don‟t think there‟s going to

be much change. The big

terrestrial broadcasters will

definitely still be the biggest

funders”

“It‟s unlikely that it will decrease

significantly. There is too much

competition in the private sector for

any other player to replicate the

BBC‟s activity – it‟s going to remain

important”

“It will be very difficult to grow

BBC spend – and net

advertising revenue, C4 and ITV,

is a declining model”

“Public service broadcasters are going

to invest more in commissioning and

reduce their spend on acquisition. It‟s

about owning their own content,

supporting their brands,

regionalising/localising their own

content”

INVESTMENT IN TV CONTENT – PSB’sInvestment in

TV content

BSkyB and major multichannel broadcasters are also expected to commission more

original UK programming, although there are doubts over sustainability

ORIGINAL PRODUCTION SPEND – PAY CHANNELS


59% of respondents believe that by 2020 Sky’s expenditure on original UK TV production will exceed that of ITV

“Sky is the big growth area –

they‟re commissioning huge

volumes… 12 months ago I

would never have guessed it”

“A lot of the multichannels are also

commissioning more – it‟s big

multi-territory multichannels

commissioning big budget,

standout programmes”

“How effective will Sky‟s

investment be? It won‟t

generate much viewing. It‟s

mainly for brand purposes”

INVESTMENT IN TV CONTENT – PAY CHANNELSInvestment in

TV content

Industry participants also expect original content investments by internet businesses to

grow – but from a small base

ORIGINAL PRODUCTION SPEND – INTERNET BUSINESSES


Half of respondents believe that by 2020 YouTube will spend more than £100m on commissioning original video in the UK

“To become a really significant

commissioner of content in the UK, you

need critical mass. Sky has reached it in the

UK, Netflix, Hulu and YouTube have it in the

USA. How many more companies are going

to achieve that kind of scale in the UK?”

“Hulu, Netflix and YouTube will all

throw money at original

production… You have to go in big

to have any prospect of success”

“A lot of the video inventory on new

platforms will be very low value –

there‟s just not that much compelling

content around, so the big businesses

are having to do deals with

broadcasters and rights holders – as

well as investing in their own content”

“The big opportunities are in niche

content – cycling, chess, angling –

that can be monetised, aggregating

lots of small audiences across

multiple territories”

INVESTMENT IN TV CONTENT – INTERNET BUSINESSESInvestment in

TV content

At top end of the market, industry participants expect intense competition to lead to an

increase in the prices of premium content rights

SPEND ON PREMIUM CONTENT RIGHTS

• Major device manufacturers and global internet competitors

(focused on international film content)

− “For premium rights holders, it‟s all good news. New

platforms and aggregators will bid up the costs of rights –

they‟ve got no legacy platforms or customer bases, so

they need the eyeballs to drive viewing and subscription –

and they will pay top dollar for rights. It will increase the

costs for incumbent providers – and creating price

pressures”

• Major international media companies (with greater

propensity to acquire local rights)

Source: (1) MTM survey of 138 senior executives in media and technology companies, February 2012.

• “There‟s a huge bubble, driven by pay-TV and OTT providers.

Studios are selling content at extortionate rates.”

• “There are always new sources of money coming into the

media market – Al Jazeera, Setanta, Netflix. It‟s almost

always unsustainable, from an economic perspective. The

big pay-TV platforms lose rights to a non-economic bidder, a

small number of subscribers churn, but most don‟t. The new

acquirer struggles to make a return, they give up the rights

or don‟t renew, the world goes on.”

Potential for well-funded new entrants to bid for rights… …but is this investment sustainable?

57% of respondents believe that a major internet or technology company (e.g. Google, Apple, Samsung) will successfully acquire the rights to at least one package of live Premier League football games 1

72% of respondents believe that competition for premium film, TV and sports content will intensify dramatically, with a greater number of companies seeking to acquire rights


TV content

The industry is positive about the prospects for UK programming overseas, with

anticipations of strong growth

INTERNATIONAL SALES OF UK PROGRAMMING

Source: (1) Survey response to question: Over the next decade, which regions do you think will be the most important export

markets for UK television formats and content?

Most important markets for exports (1)

59%41%

21%

49%*

30%

10%

17%

31%

27% 44%26%

*Total Europe

West (36%), North (29%),

Central / East (18%),

Southern (7%)

19%

“The trend is away from fully funding programming, especially in some genres. I can‟t think of any big dramas that have been fully funded recently – and that means they‟re going to be made by big international production businesses that can afford to take risks and can sell internationally”

55% of respondents believe that by 2020 revenues from the international sale of UK television programmes and associated activities (estimated by Pact at £1,418m in 2010) will exceed £2.5 billion


TV content

However, industry participants expressed uncertainty over possible value destruction in

the transition to digital, and over future rights windows

CONTENT – UNCERTAINTIES

• “Total discretionary spend on video entertainment isn‟t going

to grow much, overall. More people will pay for content and

they may buy more units, but per unit prices are going to

come down. In some industries – music, publishing – digital

has been deflationary. Games are different – digital has

driven lots of new business models. Which way will film and

TV content go?”

• “There are going to be big adjustments in the price of film and

TV rights. The major studios are still adapting their models

and windowing strategies – they‟re not always that joined up,

so it takes time”

• “There‟s not much potential to play around with the

windowing structures for TV because you start at the free end

– unlike film. However, TV audiences are fragmenting – there

may be opportunities to charge for things like the freedom to

watch whenever, wherever. Free catch up windows are going

to come under pressure though!”

Will the transition to digital destroy value in film and TV?How will content producers structure and price rights

windows?

?


TV content

Depth

interview

findings

Quant

survey

findingsKey:

The last

10 yearsAds Pay BBC



Investment in

TV content

Challenges

and

opportunities

4. OPPORTUNITIES, CHALLENGES & IMPLICATIONS

Over the next 10 years, industry participants expect the competitive dynamics of the

broadcasting industry to change significantly – competition will increase

IN SUMMARY …

• “The big shows will get bigger, but everything else is going to get much smaller –

look at Youtube: it‟s a lot of long tail content and it‟ll be on your TV”Fragmentation of audiences

• “Barriers to entry are falling across the value chain – it‟s going to make

everything more competitive – and change will happen more quickly”Decreasing barriers to entry

• “It‟s hard to create great content, so lots of companies will look to buy it”Increasing premium rights

costs

• “Scale will be much more important – you need to invest at scale and to have some

sort of negotiating leverage – and not many UK companies have real scale”Increasing importance of

scale

• “The big international internet players and technology businesses have got funding

from other markets and lines of business – and will be looking for growth

opportunities”

Major international

competitors

Challenges

and

opportunitiesOPPORTUNITIES, CHALLENGES & IMPLICATIONS

Many industry participants believe that the growing power of new digital gatekeepers

will be their most important challenge

HIERARCHY OF CHALLENGES FACING THE INDUSTRY THROUGH TO 2020

17%

34%

36%

43%

45%

49%

50%

55%

55%

64%

Growing threat of piracy

Competition from new entrants

Increased costs of content rights and talent

Growing revenues in a competitive market

Poor outlook for the UK economy

Fragmentation of digital services

Rights management across platforms

Disruption by new media technologies

Changes to consumer behaviour

Growing power of new digital gatekeepers

Note: % of respondents saying the following are important challenges facing their company

“The big internet and

technology businesses are

going to get more

powerful in the UK

market. What will Apple

do? How big will Facebook

and Google get?”

Challenges

and


However, the industry is also excited about new opportunities – to exploit new

platforms and develop new revenue streams

AREAS OF OPPORTUNITY INCLUDE:

“The industry is going to be a lot more diverse – it‟ll be a very creative time, with lots

of new models and products and opportunities”

“There are going to be lots of

exciting opportunities to distribute

content and develop really strong

programme brands – going direct to

consumer in a way that wasn‟t

possible before”

“Product innovation will become

much more important and exciting

– with twin-screening, apps – all of

the new technologies – we‟ll be able

to do a lot more around

broadcasting”

“I see lots of new transactional

opportunities – and opportunities to

sell our content to platforms. The

bubble will burst, but it will grow”

“Creative partnerships – all of the

non-traditional ad models – will

grow. It‟s a really exciting

opportunity for creative companies

and brands”

Challenges

and


Going forwards, industry participants believe that the priorities for different categories

of industry participant vary significantly

PRIORITIES INCLUDE:

• Build revenues around key brands in pay-TV windows, while optimising

the pay-free balance in portfoliosMultichannel

broadcasters

• Maintain large-scale investments in quality content, leveraged across

multiple platformsPSBs

• Develop cross-platform services to retain existing subscribers, attract

new customers and maintain/grow ARPUPay-TV operators

• Build international presence and diversify revenues: AFP, direct-to-

consumer, transactional, merchandising and licensingUK producers

Challenges

and


However, four factors stand out – for successful companies, during the remainder of the

decade

KEY SUCCESS FACTORS

Create or acquire great

content …

• “Big hits will capture a growing share of returns – you need great, cut-through content, strong

brands that can grown and develop over time – you‟ve either got to make it or buy it”

… efficiently …

• “Everyone‟s going to have be much more efficient. There will be real pressure to re-evaluate

anything that doesn‟t directly add value – and technology will drive a lot of change”

… distribute it …

• “Multi-platform distribution will be the norm – by 2020, there won‟t be single platform

experiences – you‟ve got to follow the audience and adapt the experience”

… and monetise it

effectively

• “We‟ll need to be much more flexible about how we make money – look at the music industry or

the games industry: we won‟t be able to rely so strongly on one business model or revenue

stream”

“The best companies will do really well – but everyone else needs to worry …”

Challenges

and


CONTACT INFORMATION

For more information on Tomorrow Calling, please contact:

Stella Medlicott, email: [email protected]

Matthew Neale, email: [email protected]

Red Bee Media

Broadcast Centre

201 Wood Lane

London

W12 7TP

Tel: +44 (0)20 8495 5000

Fax: +44 (0)20 8495 5015

www.redbeemedia.com

[email protected]

mailto:[email protected]


http://www.redbeemedia.com/


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