INDUSTRY REVENUES & BUSINESS MODELS             March 2012
PROJECT BACKGROUNDAs part of Red Bee’s Tomorrow Calling programme, MTM London was engaged to explore the keytrends and dev...
STRUCTURE OF PROGRAMME  Stage 3 of the Tomorrow Calling programme explored industry revenues and business  models through ...
APPROACHThe project was structured around four main worksteps, completed over a three-monthperiod A four-stage approach   ...
INTERVIEWS & SEMINAR PARTICIPANTSThe project team completed depth interviews with senior decision makers across theindustr...
SUMMARYBy 2020, as a result of these (and other) developments, industry participants expect theindustry’s major revenue st...
1. THE LAST TEN YEARS                               Evolution of industry revenues                    Summary  The last   ...
The lastEVOLUTION OF BROADCASTING INDUSTRY REVENUES                                                                       ...
The lastEVOLUTION OF BROADCASTING INDUSTRY REVENUES                                                                       ...
2. EVOLUTION OF INDUSTRY REVENUES                               Evolution of industry revenues                    Summary ...
EVOLUTION OF INDUSTRY REVENUES                                                    Ads           Pay             BBCTRENDS ...
EVOLUTION OF INDUSTRY REVENUES                                                                                            ...
2. EVOLUTION OF INDUSTRY REVENUES - ADVERTISING                               Evolution of industry revenues              ...
EVOLUTION OF INDUSTRY REVENUES - ADVERTISING                                                                              ...
EVOLUTION OF INDUSTRY REVENUES - ADVERTISING                                                                              ...
EVOLUTION OF INDUSTRY REVENUES - ADVERTISING                                                      AdsIndustry participants...
EVOLUTION OF INDUSTRY REVENUES - ADVERTISING                                                                              ...
EVOLUTION OF INDUSTRY REVENUES - ADVERTISING                                                                              ...
EVOLUTION OF INDUSTRY REVENUES - ADVERTISING                                                                              ...
EVOLUTION OF INDUSTRY REVENUES - ADVERTISING                                                                              ...
EVOLUTION OF INDUSTRY REVENUES - ADVERTISING                                                                        AdsThe...
2. EVOLUTION OF INDUSTRY REVENUES - PAY                               Evolution of industry revenues                    Su...
EVOLUTION OF INDUSTRY REVENUES - PAY                                                                                      ...
EVOLUTION OF INDUSTRY REVENUES - PAY                                                                             PayIn gen...
EVOLUTION OF INDUSTRY REVENUES - PAY                                                                PayCompetition from ne...
EVOLUTION OF INDUSTRY REVENUES - PAY                                                                                      ...
EVOLUTION OF INDUSTRY REVENUES - PAY                                                                                      ...
EVOLUTION OF INDUSTRY REVENUES - PAY                                                                                      ...
2. EVOLUTION OF INDUSTRY REVENUES – LICENSE FEE                               Evolution of industry revenues              ...
EVOLUTION OF INDUSTRY REVENUES – LICENSE FEE                                                                              ...
3. INVESTMENT IN TV CONTENT                               Evolution of industry revenues                    Summary  The l...
Investment inINVESTMENT IN TV CONTENT                                                                        TV contentThe...
Investment inINVESTMENT IN TV CONTENT – PSB’s                                                                    TV conten...
Investment inINVESTMENT IN TV CONTENT – PAY CHANNELS                                              TV contentBSkyB and majo...
Investment inINVESTMENT IN TV CONTENT – INTERNET BUSINESSES                                                           TV c...
Investment inINVESTMENT IN TV CONTENT                                                                                     ...
Investment inINVESTMENT IN TV CONTENT                                                                                     ...
Investment inINVESTMENT IN TV CONTENT                                                                                     ...
4. OPPORTUNITIES, CHALLENGES & IMPLICATIONS                               Evolution of industry revenues                  ...
ChallengesOPPORTUNITIES, CHALLENGES & IMPLICATIONS                                                                        ...
ChallengesOPPORTUNITIES, CHALLENGES & IMPLICATIONS                                                                        ...
ChallengesOPPORTUNITIES, CHALLENGES & IMPLICATIONS                                                                        ...
ChallengesOPPORTUNITIES, CHALLENGES & IMPLICATIONS                                                             and        ...
ChallengesOPPORTUNITIES, CHALLENGES & IMPLICATIONS                                                                        ...
CONTACT INFORMATIONFor more information on Tomorrow Calling, please contact:Stella Medlicott, email: stella.medlicott@redb...
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Tomorrow calling revenues_business_models

  1. 1. INDUSTRY REVENUES & BUSINESS MODELS March 2012
  2. 2. PROJECT BACKGROUNDAs part of Red Bee’s Tomorrow Calling programme, MTM London was engaged to explore the keytrends and developments impacting the long-term evolution of the UK broadcasting industry’srevenue streams, to stimulate thinking about the shape of the industry in 2020The project was structured around a programme of depth interviews and an online surveycompleted by a cross-section of senior industry participants – the research was undertakenbetween December 2011 and March 2012All interviews were completed under the Chatham House Rule – unless otherwise noted, allquotations and survey findings derive from the industry researchThe project was managed by Stella Medlicott, Matthew Neale and Lynne-Mei Lee at Red BeeMedia.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 tookpart in the research – however, the findings are solely those of the authors and do not necessarilyreflect the views of the individuals or companies named in this report or of Red Bee Media
  3. 3. 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 audiencesdevices in 2020 business models businesses Focus of this report
  4. 4. APPROACHThe project was structured around four main worksteps, completed over a three-monthperiod 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 for2. Quantitative survey of technology industry experts wider discussionindustry 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 (where4. Analysis and synthesis • Develop clear view of market evolution, and a possible), and synthesised to produce an overallof research findings picture of the shape of the industry in 2020 view
  5. 5. INTERVIEWS & SEMINAR PARTICIPANTSThe project team completed depth interviews with senior decision makers across theindustry and held an industry seminar to discuss emerging findingsDepth interviews Seminar participantsThis document reflects solely the views of the authors and not of the interviewees or thinktank participants – all interviews were completed strictly under the Chatham House Rule
  6. 6. SUMMARYBy 2020, as a result of these (and other) developments, industry participants expect theindustry’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”
  7. 7. 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 QuantKey: interview survey findings findings
  8. 8. The lastEVOLUTION OF BROADCASTING INDUSTRY REVENUES 10 yearsOverall, broadcasting industry revenues remained relatively robust between 2001 and2010 – growth was driven primarily by subscriptionsBROADCASTING AND DVD INDUSTRY(1) REVENUES (2001-2010) Total industry revenues, UK, real terms - 2010 prices (£bn) (2,3) Developments from 2000 to 2010Advertising Decrease driven primarily by economic cycle and decline in priceTV 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 servicesPAY 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 feeBBC 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 ESTSources: (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)
  9. 9. The lastEVOLUTION OF BROADCASTING INDUSTRY REVENUES 10 yearsHowever, growth in pay-TV subscriptions and multichannel penetration is now slowing,as the market maturesMULTICHANNEL TAKE-UP IN UK HOUSEHOLDS (2001-2010)TV households (million):2826 “The PSBs have lost24 Analogue [audience] share as22 terrestrial only multichannel20 Digital terrestrial penetration has grown, only18 but the transition to16 Analogue cable digital is almost14 complete – it‟s a more12 Digital cable mature market and10 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)
  10. 10. 2. EVOLUTION OF INDUSTRY REVENUES Evolution of industry revenues Summary The last Investment in Challenges Ads Pay BBC and 10 years TV content opportunities Areas of uncertainty Depth QuantKey: interview survey findings findings
  11. 11. EVOLUTION OF INDUSTRY REVENUES Ads Pay BBCTRENDS & DEVELOPMENTSThere appears to be a strong consensus across the industry that the collision ofbroadcasting with broadband will define the next decadeA 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 broadcastingindustry, with distinct revenue streams, simply won‟t hold. As the underlying platformsevolve, broadcasters are going to face competition for their traditional revenuestreams and are going to diversify into new areas”
  12. 12. EVOLUTION OF INDUSTRY REVENUES Ads Pay BBCTRENDS & DEVELOPMENTSMany industry participants are positive about the prospects for the industry – however,there are concerns about economic conditionsMACROECONOMIC 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?
  13. 13. 2. EVOLUTION OF INDUSTRY REVENUES - ADVERTISING Evolution of industry revenues Summary The last Investment in Challenges Ads Pay BBC and 10 years TV content opportunities Areas of uncertainty Depth QuantKey: interview survey findings findings
  14. 14. EVOLUTION OF INDUSTRY REVENUES - ADVERTISING AdsMost industry participants expect the TV ad market to face significant challenges –potentially leading to considerable changeKEY 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”
  15. 15. EVOLUTION OF INDUSTRY REVENUES - ADVERTISING AdsThere is a strong consensus that the TV and video advertising markets will becomeincreasingly complex and competitiveSUPPLY OF ADVERTISING Linear TV advertising Non-linear video advertising PSBs core channels Multichannels Catch-up services Online video aggregatorsExamples ofcompetitors: 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”
  16. 16. EVOLUTION OF INDUSTRY REVENUES - ADVERTISING AdsIndustry participants expect the commercial PSBs to defend their share of the TV admarket – however, smaller multi-channels will face growing competitionSHARE 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
  17. 17. EVOLUTION OF INDUSTRY REVENUES - ADVERTISING AdsOriginal content and innovation will help PSBs defend their share of audiences andadvertising revenues, but growth is likely to be limitedAD REVENUES – PSBs PSBs Multi-channels Video aggregators “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)
  18. 18. EVOLUTION OF INDUSTRY REVENUES - ADVERTISING AdsMany industry participants believe that smaller multichannel broadcasters will comeunder increasing commercial pressure during the decadeAD REVENUES – MULTI-CHANNELPSBs Multi-channels Video aggregators “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”
  19. 19. EVOLUTION OF INDUSTRY REVENUES - ADVERTISING AdsVideo aggregators are expected to grow their share of advertising revenues, as onlineviewing increases and their ad offer improvesAD REVENUES – VIDEO AGGREGATORS PSBs Multi-channels 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?
  20. 20. EVOLUTION OF INDUSTRY REVENUES - ADVERTISING AdsBy 2020, these changes should result in a more converged market – however, there areuncertainties over the rate of changeADVERTISING 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”
  21. 21. EVOLUTION OF INDUSTRY REVENUES - ADVERTISING AdsThere are also considerable uncertainties about the prospects for TV VOD advertisingand addressable advertising on existing platformsADVERTISING – UNCERTAINTIESTV 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”
  22. 22. 2. EVOLUTION OF INDUSTRY REVENUES - PAY Evolution of industry revenues Summary The last Investment in Challenges Ads Pay BBC and 10 years TV content opportunities Areas of uncertainty Depth QuantKey: interview survey findings findings
  23. 23. EVOLUTION OF INDUSTRY REVENUES - PAY PayThe pay-TV market is expected to become more competitive and complex, with agreater range of offerings competing across different platformsCONVERGENCE 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.
  24. 24. EVOLUTION OF INDUSTRY REVENUES - PAY PayIn general, industry participants do not expect low-priced SVOD offers to cannibaliseexisting pay-TV offers – instead, overall penetration will growGROWTH IN PAY PENETRATION “Consumers will ask – areNew 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
  25. 25. EVOLUTION OF INDUSTRY REVENUES - PAY PayCompetition from new pay entrants is expected to increase, but many expect incumbentpay-TV platforms to remain resilientPROSPECTS 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
  26. 26. EVOLUTION OF INDUSTRY REVENUES - PAY PayPay-TV platforms are expected to defend their position, helped by the strength of theircontent and the introduction of new servicesPAY COMPETITION – PAY-TV PLATFORMS Pay-TV platforms OTT Transactional 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.
  27. 27. EVOLUTION OF INDUSTRY REVENUES - PAY PayOTT offerings are proliferating, with activity from major new entrants – but there remainsignificant uncertainties about their prospectsPAY COMPETITION – OTTPay-TV platforms OTT TransactionalAbility 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”
  28. 28. EVOLUTION OF INDUSTRY REVENUES - PAY PayAs DVD revenues decline, a new and more complex ecology of DTO, DTR and SVODservices is expected to emergePAY COMPETITION – TRANSACTIONAL Pay-TV platforms OTT 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”
  29. 29. 2. EVOLUTION OF INDUSTRY REVENUES – LICENSE FEE Evolution of industry revenues Summary The last Investment in Challenges Ads Pay BBC and 10 years TV content opportunities Areas of uncertainty Depth QuantKey: interview survey findings findings
  30. 30. EVOLUTION OF INDUSTRY REVENUES – LICENSE FEE BBCIndustry participants expect the BBC to remain under pressure, with spending on TVdecreasing in line with the licence fee settlement and new commitmentsPROSPECTS 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 marketSources: (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)
  31. 31. 3. INVESTMENT IN TV CONTENT Evolution of industry revenues Summary The last Investment in Challenges Ads Pay BBC and 10 years TV content opportunities Areas of uncertainty Depth QuantKey: interview survey findings findings
  32. 32. Investment inINVESTMENT IN TV CONTENT TV contentThere is a consensus that the PSBs will continue to be the major funders of UK originalTV content – however, growth will primarily come from other areasSPEND 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
  33. 33. Investment inINVESTMENT IN TV CONTENT – PSB’s TV contentThe PSBs are expected to maintain their high levels of investment in original content –however, commercial pressures will limit overall growthORIGINAL PRODUCTION SPEND – PSBSPSBs Sky and multi-channels Internet businesses “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”
  34. 34. Investment inINVESTMENT IN TV CONTENT – PAY CHANNELS TV contentBSkyB and major multichannel broadcasters are also expected to commission moreoriginal UK programming, although there are doubts over sustainabilityORIGINAL PRODUCTION SPEND – PAY CHANNELSPSBs Sky and multi-channels Internet businesses “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”
  35. 35. Investment inINVESTMENT IN TV CONTENT – INTERNET BUSINESSES TV contentIndustry participants also expect original content investments by internet businesses togrow – but from a small baseORIGINAL PRODUCTION SPEND – INTERNET BUSINESSESPSBs Sky and multi-channels 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”
  36. 36. Investment inINVESTMENT IN TV CONTENT TV contentAt top end of the market, industry participants expect intense competition to lead to anincrease in the prices of premium content rightsSPEND 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 1Source: (1) MTM survey of 138 senior executives in media and technology companies, February 2012.
  37. 37. Investment inINVESTMENT IN TV CONTENT TV contentThe industry is positive about the prospects for UK programming overseas, withanticipations of strong growthINTERNATIONAL 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 billionSource: (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?
  38. 38. Investment inINVESTMENT IN TV CONTENT TV contentHowever, industry participants expressed uncertainty over possible value destruction inthe transition to digital, and over future rights windowsCONTENT – 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!” ?
  39. 39. 4. OPPORTUNITIES, CHALLENGES & IMPLICATIONS Evolution of industry revenues Summary The last Investment in Challenges Ads Pay BBC and 10 years TV content opportunities Areas of uncertainty Depth QuantKey: interview survey findings findings
  40. 40. ChallengesOPPORTUNITIES, CHALLENGES & IMPLICATIONS and opportunitiesOver the next 10 years, industry participants expect the competitive dynamics of thebroadcasting industry to change significantly – competition will increaseIN 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
  41. 41. ChallengesOPPORTUNITIES, CHALLENGES & IMPLICATIONS and opportunitiesMany industry participants believe that the growing power of new digital gatekeeperswill be their most important challengeHIERARCHY 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
  42. 42. ChallengesOPPORTUNITIES, CHALLENGES & IMPLICATIONS and opportunities However, the industry is also excited about new opportunities – to exploit new platforms and develop new revenue streamsAREAS 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 lotsof new models and products and opportunities”
  43. 43. ChallengesOPPORTUNITIES, CHALLENGES & IMPLICATIONS and opportunitiesGoing forwards, industry participants believe that the priorities for different categoriesof industry participant vary significantlyPRIORITIES 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
  44. 44. ChallengesOPPORTUNITIES, CHALLENGES & IMPLICATIONS and opportunitiesHowever, four factors stand out – for successful companies, during the remainder of thedecadeKEY 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 …”
  45. 45. CONTACT INFORMATIONFor more information on Tomorrow Calling, please contact:Stella Medlicott, email: stella.medlicott@redbeemedia.comMatthew Neale, email: matthew.neale@redbeemedia.comRed Bee MediaBroadcast Centre201 Wood LaneLondonW12 7TPTel: +44 (0)20 8495 5000Fax: +44 (0)20 8495 5015www.redbeemedia.cominfo@redbeemedia.com

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