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

Three stages Final Report

1. Networks, 3. Industry Building
2. Changing
platforms and revenues and successful media
media audiences
devices in 2020 business models businesses

Focus of this
report

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

A four-stage approach Caveats and qualifications

• Identify trends and developments impacting • Sample not census, of qualified, experienced
1. Industry research,
interview programme
evolution of industry revenues streams industry participants, selected in conjunction
• Gather views from wide range of experienced with Red Bee
industry participants
• Interview questions based on domain expertise
• Online survey of 138 senior media and of interviewee, given limited time, with scope for
2. Quantitative survey of
technology industry experts wider discussion
industry experts
• Questions on prospects for specific industry
revenue streams and business models
• Interviewees expressed individual views, based
on professional experience and expertise –
• Industry seminar, debating emerging findings however, visibility of wider industry trends was
3. Think with cross-section of industry participants sometimes limited
Tank

• All views have been interpreted, cross-checked
with industry data and other interviewees (where
4. Analysis and synthesis
• Develop clear view of market evolution, and a possible), and synthesised to produce an overall
of research findings picture of the shape of the industry in 2020 view

INTERVIEWS & SEMINAR PARTICIPANTS
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

SUMMARY
By 2020, as a result of these (and other) developments, industry participants expect the
industry’s major revenue streams to look very different

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

• “There are going to be lots of different business models and windows: TV
Pay (subscriptions and anywhere, DTO and DTR, SVOD, ad-funded, and so on. DVD will have largely
transactional) 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”

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

1. THE LAST TEN YEARS

Evolution of industry revenues Summary

The last Investment in Challenges
Ads Pay BBC and
10 years TV content
opportunities

Areas of uncertainty

Depth Quant
Key: interview survey
findings findings

The last
EVOLUTION OF BROADCASTING INDUSTRY REVENUES 10 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) Developments from 2000 to 2010

Advertising Decrease driven primarily by economic cycle and decline in price
TV NAR, sponsorship and of TV airtime (average price down 32% in nominal terms,
internet video rolls between 2000-2010(4))

Transaction Little growth in DVD revenue across the decade: revenues grew
DVD retail and rental, strongly at first, before falling prices and volumes impacted the
PPV, VOD and EST market; digital revenues growing steadily

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

Pay-TV subscriptions and growing ARPUs at top end of the market – SVOD
and SVOD propositions also emerging, but still small scale

Average spending increased in real terms, driven by licence fee
BBC
settlements and growth in number of TV households – however,
Licence fee spending on TV
2010 settlement will see value of licence fee fall

“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”

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)

The last
EVOLUTION OF BROADCASTING INDUSTRY REVENUES 10 years

However, growth in pay-TV subscriptions and multichannel penetration is now slowing,
as the market matures
MULTICHANNEL TAKE-UP IN UK HOUSEHOLDS (2001-2010)
TV households (million):
28
26
“The PSBs have lost
24 Analogue
[audience] share as
22 terrestrial only
multichannel
20 Digital terrestrial penetration has grown,
only
18 but the transition to
16 Analogue cable digital is almost
14 complete – it‟s a more
12
Digital cable mature market and
10 they‟re not losing share
Free-to-view as fast as they were.
8 digital satellite They‟ve over the hump
6
Analogue satellite now and it‟s the
4 multichannels who are
2 Pay digital starting to see a slow-
0 satellite down in growth”
Q1 2003

Q1 2004

Q1 2005

Q1 2006

Q1 2007

Q1 2011
Q1 2001

Q1 2002

Q1 2008

Q1 2009

Q1 2010

Audience share of 5 main channels: 70% 67% 64% 61% 58% 56%

Source: Ofcom, Communications Market Report (2011)

2. EVOLUTION OF INDUSTRY REVENUES


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EVOLUTION OF INDUSTRY REVENUES Ads Pay BBC

TRENDS & DEVELOPMENTS
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

“The big trend will be a shift away
from the household as the unit of
consumption to the individual –
personal devices, personal accounts, “The market looks very stable,
recommendations, and so on” 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
“The mix is going to change, in terms integrated”
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”

“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”

EVOLUTION OF INDUSTRY REVENUES Ads Pay BBC

TRENDS & DEVELOPMENTS
Many industry participants are positive about the prospects for the industry – however,
there are concerns about economic conditions
MACROECONOMIC CONTEXT
Positive about the industry’s prospects(1) … … but cautious about the economic outlook

• The economic downturn has already had a
Neither significant impact on industry revenues, especially
Negative 16% TV advertising and transactional revenues
6%

• Going forwards, many industry participants believe
that low economic growth and pressure on
Positive
78% disposable incomes (e.g. through increased
taxation, rising commodity prices) will impact the
growth prospects for the market

“I‟m really positive about the “I think we‟re going to
“Total discretionary
prospects for the industry – see a decade of
spend on video
consumers will have more choice slowing change –
entertainment isn‟t
and control and more consumers aren‟t
going to grow much,
opportunities to consume great going to adopt new
overall”
content” things as quickly”

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

2. EVOLUTION OF INDUSTRY REVENUES - ADVERTISING


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10 years TV content
opportunities


Depth Quant
findings findings

EVOLUTION OF INDUSTRY REVENUES - ADVERTISING Ads

Most industry participants expect the TV ad market to face significant challenges –
potentially leading to considerable change

KEY CHALLENGES INCLUDE:
Historic characteristics Challenges to 2020

Link between TV ad • Poor outlook for economic growth and consumer spending – for example, high street
revenues and economic Limited economic growth retail and entertainment are expected to be low growth sectors and may decline
growth

Limited change in ad • Rapid pace of change and innovation in internet ad formats, platforms and sales
Rapid pace of internet ad mechanisms is changing expectations of advertisers and agencies: “Advertisers want to
formats – spot ads
innovation see similar platforms and innovations in TV”
dominate

Proliferation of • Increasingly complex and competitive TV and video advertising market – online video
Concentration of supply / aggregators and video ad platforms proliferating onto screens, potentially creating
competing video
sales points competition for TV ad spend
platforms

Growth of ad spend • “The grey market is going to grow: sponsorship, product placement, creative
Slow change in trading partnerships, AFP. These deals happen outside of share deals. And as they grow, the
outside of current share
mechanisms share deals will become less relevant. It will eventually break down”
deals

“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”


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

SUPPLY OF ADVERTISING

Linear TV advertising Non-linear video advertising
PSBs core channels Multichannels Catch-up services Online video aggregators

Examples of
competitors:

PSBs

Multichannel broadcasters Platforms’ on-demand services Online video aggregators

“The number of TV shows that can attract “The mix is going to change, in terms of
mass audiences has clearly declined. It will market share – the big display platforms,
continue to decline. We‟re going to see like Facebook and Google, will keep on
increased polarisation between big live growing their share. They benefit
shows and fragmented channels that will enormously from the explosion of data,
attract advertising targeted by audience, hugely powerful computing platforms, the
rather than content” 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 • Smaller multi-channels may • Video aggregators are expected
PSBs will defend their share of UK struggle to generate reach in a to grow their share of video
TV advertising revenues more fragmented market 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

“There is a risk that if you lose the scale of the big
Large-scale investment in broadcasters (and their ability to cross-subsidise big
original content 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
Delivery of high reach fewer advertising spots on linear television that are capable
(increasingly scarce) of reaching mass live audiences (5 million or more)

“We are working on major innovations that can give us
Development of new additional and complementary data about our audiences,
approaches 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

“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
Audiences are concentrating viewers around big programmes, and there aren‟t very many of them. They‟re
around big programmes 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
Competition from on-demand connected TVs. There‟s going to be more competition for viewers – and more
offerings is growing options for advertisers”

“It‟ll be the mid-tier of multichannels who “The smaller channels will suffer – they don‟t
will suffer – they‟ve not got much own much content, give away lots of value to
leverage in their negotiations and platforms, and struggle to invest. If they‟re part
Limited scale and leverage platforms will look to drive down fees to of a bigger international network, like Discovery,
pay for the „must have‟ channels. This they‟ll be ok – but the small standalones will
will drive consolidation in the mid tier” 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

Who will grow their share of video ad revenues?(1)
“The mechanics of sales will become much more
complex – exchanges, networks, data-driven
offerings. The role of the agency and the sales
Online video aggregators 67%
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?”
Pay-TV platform owners 53%

Multichannel broadcasters 41%
“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”
Commercial PSBs 33%

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?


By 2020, these changes should result in a more converged market – however, there are
uncertainties over the rate of change

ADVERTISING SALES CONVERGENCE

PC VOD Online advertising market
“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
Convergence
platforms through trading desks and other
TV VOD TV advertising market platforms”

“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
“TV and online will be a hugely powerful fundamentally change the commercial models in
combination for video – the two media will traditional media, which is mostly a commodity
converge. The investments that the agencies are sell. There will be one converged market for
making in their trading desks, the stakes that traditional display media”
agencies are taking in new tech – the market will
be transformed”


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
• Systems providing addressable advertising on linear TV services (e.g.
Sky AdSmart) are emerging, but have gained limited traction to date
“I‟m sceptical about the prospects for VOD
because of:
advertising, even by 2020. There‟s some
evidence that catch-up viewing has already − challenges in developing workable business models that provide
peaked, though connected TVs will deliver incentives for broadcasters, advertisers and platforms
some growth. But it‟ll be fragmented − ingrained TV ad trading system that rewards reach rather than
across various broadcasters and I don‟t targeting
think there‟s going to be that much volume
of VOD inventory in the market” − technology challenges around TV platforms (versus online and
mobile)
− privacy issues relating to the collection and use of consumer data
for targeting

“TV and online are a hugely powerful
combination for video – the two media
“Targeted TV advertising is going to be a long
will converge. TV VOD has been slow to
time coming – the systems aren‟t cheap, it‟s
grow – the technology hasn‟t moved
not clear what value it will add for lots of TV
fast enough and the platforms are sub-
advertisers, and the market is going to be
scale. The energy is all in online – TV
very fragmented. It‟s why big aggregators
VOD will be there, but it might be much
are so important – but who‟s going to
smaller than we think”
aggregate enough”

2. EVOLUTION OF INDUSTRY REVENUES - PAY


Ads Pay BBC and
10 years TV content
opportunities


Depth Quant
findings findings

EVOLUTION OF INDUSTRY REVENUES - PAY Pay

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
• Industry participants expect free and pay offerings to continue A more complex and competitive market
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 Subscription:
distinctions between free and pay platform OTT
• A proliferation of OTT offers are expected to provide mainly library services:
content at low prices: Transactional(1):

• There are also strong expectations of disruptive new offerings,
brought to market by major technology and internet businesses DTV
platforms:
Free: Hybrid: Hybrid: Pay:

“The cost of
“It‟s a battle entry has
between free and “YouView will
plummeted and
pay. The big lead to a whole
prices will fall:
question is: how new tier of pay
look at Netflix Possible
attractive will the offers, many
and LoveFilm, providers
free offer be in offered by free
competing to of new
2020?” broadcasters” offers:
offer more for
less”

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


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

“Consumers will ask – are
New SVOD offers will grow the market (illustrative)
we satisfied with just the
free offer – increasingly,
the answer will be no”
100% 70% of respondents
believe that a much greater
proportion of UK
Penetration of TV households

households will pay to “The shift from the
subscribe to some form of household as the unit of
film or TV service in 2020
SVOD consumption to the
individual will drive some
growth in the market – but
Pay-TV and SVOD not that much”
53% of respondents
believe that a significant
proportion of UK
Pay-TV households will subscribe
to pay offerings from more “The £40-50 price bucket
than one pay provider won‟t grow much, but lower
0% priced packages will grow
substantially – at £5-10”
2010 2020


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 • OTT players will grow but there • Low-cost, flexible services will
pay-TV platforms to defend their are significant uncertainties proliferate, creating a complex
position about their long-term prospects 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 “There‟s a big difference between first-run content and library
material … the ability to offer first run content remains critical –
Only 24% believe
advantages expected to be live sports, first run US content, films, original production. It‟s that ARPU for the
maintained expensive and hard to do” major pay-TV
platform operators
will decline
“The film market is clearly going to be a lot more competitive. It‟s significantly from
However, more competition a very international space, pan-regional deals are becoming more current levels
in film … common. Consumers are going to have a lot more choice”

“The big pay-TV platforms are going to face lots of margin On average,
pressure, which will put pressure on carriage fees – and some respondents expect
… and pressure on carriage pay-TV revenues to
fees big brands will start thinking about going free-to-air or direct to increase by 27%
consumer” from 2010 to
2020(1)
“I think the major pay platforms will be stable – Virgin and Sky offer
Overall, most expect pay-TV great services, with lots of value. Consumers like the bundle of content,
technology and services. Most consumers aren‟t going to subscribe to
businesses to be resilient
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

Ability of standalone OTT competitors to sustain investment Prospects for major new entrants – internet companies,
and to reach critical mass? technology businesses?
• There is consensus that major internet competitors will
“There is only so much appetite in the UK for pay services, launch major new propositions into the market…
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 “Google and Apple are the 800lb players. They have
limit demand for the SVOD offers. I‟m not convinced that the cash flow, the scale, the ability to invest in
OTT will do as well in the UK, as it has in the USA” technology and content across every platform”

• …but uncertainty about their prospects, especially in meeting
“Netflix will struggle to local market needs
“It is unsustainable from an capture a significant share
economic perspective… The of the market, unless they “They can outbid local competitors [for rights]…
new acquirer will struggle to are planning to throw but it is difficult for the big players to be good
make a return, give up the astronomical amounts of at local content”
rights or not renew” money at it”


As DVD revenues decline, a new and more complex ecology of DTO, DTR and SVOD
services is expected to emerge
PAY COMPETITION – TRANSACTIONAL

Expected decline in DVD revenue – illustrative Complex emerging ecology of DTO, DTR and SVOD

“PPV growth will depend on windows. If there‟s a well-
£2bn protected pay transactional window, it could do okay – but
it‟s not clear how it will happen”
Growth of DTO,
DTR & SVOD?
“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”
£0bn

2010 2020
Two-thirds of respondents believe that “Subscription will be a more important feature
sales of physical TV and film DVD will of the market than DTO or DTR – people are still
be almost entirely replaced by digital resistant to one-off purchases, if the technology
distribution methods by 2020 isn‟t right. But subscription will be
concentrated – there aren‟t going to be many
big businesses”

2. EVOLUTION OF INDUSTRY REVENUES – LICENSE FEE


Ads Pay BBC and
10 years TV content
opportunities


Depth Quant
findings findings

EVOLUTION OF INDUSTRY REVENUES – LICENSE FEE BBC

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
2010 settlement – a costing £345m p.a. by 2014/15(1)
significant decrease
• 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

• Prospects for next Charter renewal process
Less certainty after 2016- and licence fee settlement uncertain:
17 … “there‟s going to be a lot of debate about “Low economic growth and
the role and size of the BBC” pressure on the public finances
will put real pressure on the
licence fee. You just can‟t see it
• Most industry participants expect BBC growing much, and there will be
… but industry participants income to come under further pressure, in a more pressure to share”
expect further pressure 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)

3. INVESTMENT IN TV CONTENT


Ads Pay BBC and
10 years TV content
opportunities


Depth Quant
findings findings

Investment in
INVESTMENT IN TV CONTENT TV content

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 • BSkyB and major multichannel • Industry participants also expect
PSBs will continue to be the broadcasters are expected drive investment in original content by
major funders of UK original TV the majority of growth in internet businesses to grow
content expenditure on original UK
programming

Investment in
INVESTMENT IN TV CONTENT – PSB’s 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

“It‟s unlikely that it will decrease
“I just don‟t think there‟s going to
significantly. There is too much
be much change. The big
competition in the private sector for
terrestrial broadcasters will
any other player to replicate the
definitely still be the biggest
BBC‟s activity – it‟s going to remain
funders”
important”

“It will be very difficult to grow
“Public service broadcasters are going BBC spend – and net
to invest more in commissioning and advertising revenue, C4 and ITV,
reduce their spend on acquisition. It‟s is a declining model”
about owning their own content,
supporting their brands,
regionalising/localising their own
content”

Investment in
INVESTMENT IN TV CONTENT – PAY CHANNELS 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

“Sky is the big growth area – “A lot of the multichannels are also
they‟re commissioning huge commissioning more – it‟s big
volumes… 12 months ago I multi-territory multichannels
would never have guessed it” commissioning big budget,
standout programmes”

“How effective will Sky‟s 59% of respondents believe
investment be? It won‟t that by 2020 Sky’s expenditure
on original UK TV production will
generate much viewing. It‟s
exceed that of ITV
mainly for brand purposes”

Investment in
INVESTMENT IN TV CONTENT – INTERNET BUSINESSES TV content

Industry participants also expect original content investments by internet businesses to
grow – but from a small base

ORIGINAL PRODUCTION SPEND – INTERNET BUSINESSES

“To become a really significant “Hulu, Netflix and YouTube will all
commissioner of content in the UK, you throw money at original
need critical mass. Sky has reached it in the production… You have to go in big
UK, Netflix, Hulu and YouTube have it in the to have any prospect of success”
USA. How many more companies are going
to achieve that kind of scale in the UK?”

“The big opportunities are in niche
content – cycling, chess, angling –
“A lot of the video inventory on new that can be monetised, aggregating
Half of respondents lots of small audiences across
platforms will be very low value –
believe that by 2020 multiple territories”
YouTube will spend more there‟s just not that much compelling
than £100m on content around, so the big businesses
commissioning original are having to do deals with
video in the UK broadcasters and rights holders – as
well as investing in their own content”

Investment in

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

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

• Major device manufacturers and global internet competitors • “There‟s a huge bubble, driven by pay-TV and OTT providers.
(focused on international film content) Studios are selling content at extortionate rates.”
− “For premium rights holders, it‟s all good news. New • “There are always new sources of money coming into the
platforms and aggregators will bid up the costs of rights – media market – Al Jazeera, Setanta, Netflix. It‟s almost
they‟ve got no legacy platforms or customer bases, so always unsustainable, from an economic perspective. The
they need the eyeballs to drive viewing and subscription – big pay-TV platforms lose rights to a non-economic bidder, a
and they will pay top dollar for rights. It will increase the small number of subscribers churn, but most don‟t. The new
costs for incumbent providers – and creating price acquirer struggles to make a return, they give up the rights
pressures” or don‟t renew, the world goes on.”
• Major international media companies (with greater
propensity to acquire local rights)

72% of respondents believe that 57% of respondents believe that
competition for premium film, TV and a major internet or technology
sports content will intensify dramatically, company (e.g. Google, Apple,
with a greater number of companies Samsung) will successfully
seeking to acquire rights acquire the rights to at least one
package of live Premier League
football games 1

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

Investment in

The industry is positive about the prospects for UK programming overseas, with
anticipations of strong growth

INTERNATIONAL SALES OF UK PROGRAMMING

Most important markets for exports (1)

“The trend is away from fully funding
programming, especially in some
genres. I can‟t think of any big
21%
30% dramas that have been fully funded
recently – and that means they‟re
49%*
59% going to be made by big
17%
41% international production businesses
that can afford to take risks and can
10%
sell internationally”
27% 26%
44%

*Total Europe 19%
West (36%), North (29%), 31%
Central / East (18%),
Southern (7%)

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

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?

Investment in

However, industry participants expressed uncertainty over possible value destruction in
the transition to digital, and over future rights windows

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

• “Total discretionary spend on video entertainment isn‟t going • “There are going to be big adjustments in the price of film and
to grow much, overall. More people will pay for content and TV rights. The major studios are still adapting their models
they may buy more units, but per unit prices are going to and windowing strategies – they‟re not always that joined up,
come down. In some industries – music, publishing – digital so it takes time”
has been deflationary. Games are different – digital has
• “There‟s not much potential to play around with the
driven lots of new business models. Which way will film and windowing structures for TV because you start at the free end
TV content go?” – 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!”

?

4. OPPORTUNITIES, CHALLENGES & IMPLICATIONS


Ads Pay BBC and
10 years TV content
opportunities


Depth Quant
findings findings

Challenges
OPPORTUNITIES, CHALLENGES & IMPLICATIONS and
opportunities

Over the next 10 years, industry participants expect the competitive dynamics of the
broadcasting industry to change significantly – competition will increase

IN SUMMARY …
• “Barriers to entry are falling across the value chain – it‟s going to make
Decreasing barriers to entry everything more competitive – and change will happen more quickly”

• “The big international internet players and technology businesses have got funding
Major international from other markets and lines of business – and will be looking for growth
competitors opportunities”

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

• “The big shows will get bigger, but everything else is going to get much smaller –
Fragmentation of audiences look at Youtube: it‟s a lot of long tail content and it‟ll be on your TV”

• “Scale will be much more important – you need to invest at scale and to have some
Increasing importance of sort of negotiating leverage – and not many UK companies have real scale”
scale

Challenges
opportunities

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

Growing power of new digital gatekeepers 64%
Changes to consumer behaviour 55%
Disruption by new media technologies 55%
Rights management across platforms 50%
Fragmentation of digital services 49%
Poor outlook for the UK economy 45% “The big internet and
technology businesses are
Growing revenues in a competitive market 43% going to get more
powerful in the UK
market. What will Apple
Increased costs of content rights and talent 36% do? How big will Facebook
and Google get?”
Competition from new entrants 34%
Growing threat of piracy 17%

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

Challenges
opportunities

However, the industry is also excited about new opportunities – to exploit new
platforms and develop new revenue streams

AREAS OF OPPORTUNITY INCLUDE:

“Creative partnerships – all of the
non-traditional ad models – will
grow. It‟s a really exciting
opportunity for creative companies
and brands”

“Product innovation will become
much more important and exciting
– with twin-screening, apps – all of
the new technologies – we‟ll be able “There are going to be lots of
to do a lot more around exciting opportunities to distribute
broadcasting” content and develop really strong
programme brands – going direct to
consumer in a way that wasn‟t
“I see lots of new transactional possible before”
opportunities – and opportunities to
sell our content to platforms. The
bubble will burst, but it will grow”

“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”

Challenges
opportunities

Going forwards, industry participants believe that the priorities for different categories
of industry participant vary significantly

PRIORITIES INCLUDE:

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

• Build international presence and diversify revenues: AFP, direct-to-
UK producers consumer, transactional, merchandising and licensing

• Develop cross-platform services to retain existing subscribers, attract
Pay-TV operators new customers and maintain/grow ARPU

Multichannel • Build revenues around key brands in pay-TV windows, while optimising
broadcasters the pay-free balance in portfolios

Challenges
opportunities

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

KEY SUCCESS FACTORS
• “Big hits will capture a growing share of returns – you need great, cut-through content, strong
Create or acquire great
brands that can grown and develop over time – you‟ve either got to make it or buy it”
content …

• “Everyone‟s going to have be much more efficient. There will be real pressure to re-evaluate
… efficiently … anything that doesn‟t directly add value – and technology will drive a lot of change”

• “Multi-platform distribution will be the norm – by 2020, there won‟t be single platform
… distribute it … experiences – you‟ve got to follow the audience and adapt the experience”

• “We‟ll need to be much more flexible about how we make money – look at the music industry or
… and monetise it
the games industry: we won‟t be able to rely so strongly on one business model or revenue
effectively
stream”

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

CONTACT INFORMATION

For more information on Tomorrow Calling, please contact:

Stella Medlicott, email: stella.medlicott@redbeemedia.com
Matthew Neale, email: matthew.neale@redbeemedia.com

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
info@redbeemedia.com

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