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ITV - the implosion of ad-funded broadcast TV

We’ve just watched the ITV results webcast and we’re still sat shaking from post-traumatic-stress-disorder. Fundamentally, the current ITV business model is a pure leveraged play on advertising spends. The scars may remain in the minds of investors even when the current economic cycle ends - basically the old way of ITV doing business is completely broken. And this is before the pressure of the continual shift to the plethora of choice - whether via cable & satellite penetration, or online. A comparison with the success of BSkyB in implementing a two-sided platform is instructive to say the least. We’ll be discussing some of the issues in this post at Telco 2.0 in Nice, 6th-7th May, and they are at the heart of our all-new Online Video Distribution Market Study.

Anyway, here are the key lowlights:

1. Advertising revenue in 2009

These are 17% down from the 2008 comparables (and outside the financial reporting period). Even worse, the spending by sector is down nearly completely across the board with the biggest spender, Retail (19%) being down 23%. The UK Government’s spend is up by 11%, but its speciality in “we are spying on you”, “grass-up your neighbour” and “nanny-state tells you today to…” advertising only accounts for 3% of the total.

ITV, with its huge fixed costs, debt and pension fund liabilities, cannot survive this downturn without taking the axe to costs.

2. Network Programming Spend

Network spend in 2008 - £1,125m, 2011 - £950m: a 16% drop.

This sums up the scale of the problem facing ITV - they are having to cut spending on content drastically when some competitors (ie BBC and BSkyB) won’t be. One can only assume this will lead to a drop in audience, and soon thereafter a further drop in advertising revenue. It is going to be really tough to break out of this descent into a vicious circle of decline.

Nowhere is this going to be seen more than in premium content/talent acquisition. It was noted that there is a provision on the Champions League/FA (FA Cup & England games) of £50m. Effectively, ITV are saying that they can’t monetise these rights. The recent PL (Premier League) auction highlight that the BBC and BSkyB are going to maintain their investment in crucial “hits” rights.

If ITV struggle in future auctions for the hits side of programming, the circle of decline could accelerate. To be fair, ITV said that they are going to focus upon peak-hour viewing, which sounded slightly strange given that there is an inexorable shift to personalized viewing driven by both PVR & Online.

The saddest news is the planned close of the old Yorkshire TV studios in Leeds - ITV’s glory years were built on the creativity and viewer (and advertiser) intimacy of the regional centres, which both competed to create compelling content for the national network and co-operated to run it. An output dominated from London with some token gestures thrown towards Manchester is frankly a completely empty gesture given the ITV heritage.

3. Online - scaled back

We always thought that ITV Local was doomed - so the closure of this and sale of Scoot is no surprise. Regional advertising, whether highlighted by the decline of print newspapers or local cinema advertising before them, is completely dead in the current market. We are sure the plethora of startups based upon location-based ad. funded models are doomed - just because they suffer the same economies of scale issues. Even Google might struggle with real local contextual economies of scale - think of national chains dominating.

The lesson for targeted ad insertion is less clear - apart from saying that people are only interested in a specific audience. There is a big probability that you get a huge premium for a small percentage of the audience and nothing for the rest, but you have to have the rest available - the dark side of the long tail. Our gut feel is that in the wash, targeting may end up with a smaller overall CPM - but a better service for the advertisers. Of course, if the service really is better there ought to be value in it.

The Friends Reunited “up-for-sale” sign should surprise no-one, and in fact we’ll be surprised if ITV realise anything for yesteryear’s social-networking tool (who remembers that socnets were invented in Britain?), which had an interesting subscription model, which ITV in their infinite wisdom broke.

Basically, ITV’s online ambitions are scaled back to low margin/cost on-demand replays of network programming. It looks as if the revenue run-rate is approximately £1.5m/month split evenly between video & standard banner advertising. They claim CPM’s of £35-£50 for video ads compared to the broadcast CPM’s of £4. To be honest, we’re dubious about the £4 broadcast CPM, because that is an average over 24-hours of ITV broadcast over a variety of channels. We’ll take a punt that the “hits” such as Champions League, Coronation St, and Emmerdale are way, way above the £4.

(Did we mention that out of those three, Coronation Street originated from Granada Studios in Manchester and Emmerdale from Yorkshire TV in Leeds, which was also ITV’s centre for sport?)

In fact, if we were personally selling advertising, we’d be moving towards more of a bundled approach where the access to the hits is conditional upon advertising with the turkeys. But we’re sure that ITV are way ahead of our beginners’ theories.

4. Summary

ITV, like many other ad-funded businesses, is going to emerge from the current business cycle in a much worse position than the payTV/subscription companies. The BBC is payTV imposed on every household in country by government mandate; BSkyB, Virgin and BT are payTV by consumer choice. The big variable is of course whatever schemes are being drawn up in Lord Carter’s Digital Britain bunker.

Lessons Learned

  • Media companies: Reliance on home-market advertisers and regulatory protection is not enough.
  • Online Video: all the “hits” are going to end up being controlled by either the original content owners, or aggregators who have bought them for a premium.
  • Telcos: the video market is a mine-field - better to sell platform services
    that help content owners deliver and monetise. Advertising revenue on its own is a poor alternative
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TV Media Owners have a large degree of freedom on how they fulfill the requirements (demographics, reach, frequency, budget) of any given advertising campaign. Constraints exist in the form of the yearly 'Agency Deals' negotiated with the Media Agencies. And there will be robust daily negotiation if the agency thinks their client is getting poor spot placement or the audience under-performed expectations. TV's yield management in the form of capacity control (i.e. optimal spot placement) is actually very sophisticated: at least 20 demographic segments, many hundreds of brands per month and minute-by-minute BARB audience data from the panel of 5100 households. ITV aren't the best at it, but they are not the worst either.

"Government's spend is up by 11%, but its speciality in "we are spying on you", "grass-up your neighbour" and "nanny-state tells you today to..." advertising only accounts for 3% of the total."

An output dominated from London with some token gestures thrown towards Manchester is frankly a completely empty gesture given the ITV heritage.

This analysis would benefit from a tougher focus on business metrics and less wading into political and content issues. The off-hand ideological and cultural biases evident don't enhance my perception of Telco 2.0's otherwise well-researched reports.

Thanks Boris. Point taken...

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