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Bye-Bye Advertising - How Generation Y will change the business model of commercial TV in Flanders


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Bye-Bye Advertising - How Generation Y will change the business model of commercial TV in Flanders

  1. 1. Bye-Bye advertising?How Generation Y will change thebusiness model of commercial TV inFlandersAuthor: Joren LemiegreStudent Number: A4040228Degree: MSc MarketingDissertation supervisor: José ScheuerDate: 27 September 2012
  2. 2. DECLARATIONThis work has not previously been accepted in substance for any degree and is not beingconcurrently submitted in candidature for any degree.Signed………………………………………………………...(Candidate)Date…………………………………………………………….STATEMENT 1This thesis is the result of my own investigations, except where otherwise stated. Wherecorrection services have been used, the extent and nature of the correction is clearly marked in afootnote(s).Other sources are acknowledged by footnotes giving explicit references. A bibliography isappended.Signed………………………………………………………...(Candidate)Date…………………………………………………………….STATEMENT 2I hereby give consent for my thesis, if accepted, to be available for photocopying and for inter-library loan, and for the title and summary to be made available to outside organisations.Signed………………………………………………………...(Candidate)Date……………………………………………………………. ii
  3. 3. Summary of dissertationTitle: Mr.Surname: LemiegreForename: JorenInstitution: London School of Business & FinanceDegree Sought: MSc MarketingTitle of Dissertation: Bye-bye advertising? How Generation Y will change the business model ofcommercial TV in FlandersSummary:This research analyses the impact of generation Y on the business model of FTA-channels inFlanders. By using both primary and secondary research, the study suggests that generation Y hasa significantly different way of TV-consumption than preceding generations. Due to theintroduction of iDTV-services in Flanders, the consumption pattern of millennials has changedeven more drastically and commercial TV channels encounter difficulties to maintain theirbusiness model. The study argues that FTA-channels will have to adopt their business model tothe needs of this new generation in order to survive. This claim is backed-up by a surveyconducted among 309 respondents aged between 15 and 30 years’ old. The data were analysedusing structural equitation modelling. The results show that millennials do not watch less TV butthat their different way of consuming TV-content does affect revenues of commercial TV. Thestudy suggests that FTA-channels will have to offer more flexibility, avoid customer lock-ins andfocus on interactivity and less traditional advertising.Keywords: FTA-channel, generation Y, millennials, commercial TV, business model, advertising,convergence, Over the top TV, second screen apps iii
  4. 4. AcknowledgementsFirst of all, I would like to express my sincerest gratitude to my dissertation supervisor, JoséScheuer, who has supported me throughout the dissertation process with her patience andknowledge. She has encouraged me to keep working on my subject while giving me the necessaryspace to approach the subject in my own way. Without her knowledge and enthusiasm, I wouldnot have been able to finish this project successfully.Very special thanks go to my student colleagues at LSBF. Whenever I had doubts or questions,they were always there to help and support me. Furthermore, they have provided a stimulatingand fun environment to learn and grow.I must also thank everybody who has helped me to spread my questionnaire and who took thetime to complete it. Special thanks go to Katrijn Ganne, Joke Bruneel, Pieterjan Boudry, LutBuseyne, Marijn Lemiegre, Lisa Buseyne and Maarten Kiebooms who have actively helped me todistribute my survey and to reach the necessary people.In my daily life, I could always count on my dearest flatmate Carlotta Quacquarelli. She may notalways have realised how much of a support she has been to me in the past year. Therefore Iwould like to say a special thanks.And last but not least I would like to thank my friends and family in Belgium for supporting methrough this venture in London. It was not easy to leave this people behind to study in London butthey were always there when I needed them the most. Thank you to my mother, my father andsister to keep supporting me during this challenging adventure. iv
  5. 5. Abstract“Bye-bye advertising? How Generation Y will change the business model of commercialTV in Flanders”Joren Lemiegre, London School of Business & FinanceThis research analyses the impact of generation Y on the business model of FTA-channels inFlanders. By using both primary and secondary research, the study suggests that generation Y hasa significantly different way of TV-consumption than preceding generations. Due to theintroduction of iDTV-services in Flanders, the consumption pattern of millennials has changedeven more drastically and commercial TV channels encounter difficulties to maintain theirbusiness model. The study argues that FTA-channels will have to adopt their business model tothe needs of this new generation in order to survive. This claim is backed-up by a surveyconducted among 309 respondents aged between 15 and 30 years’ old. The data were analysedusing structural equitation modelling. The results show that millennials do not watch less TV butthat their different way of consuming TV-content does affect revenues of commercial TV. Thestudy suggests that FTA-channels will have to offer more flexibility, avoid customer lock-ins andfocus on interactivity and less traditional advertising.Keywords: FTA-channel, generation Y, millennials, commercial TV, business model, advertising,convergence, over the top TV, second screen apps v
  6. 6. Table of contents1 Introduction 11.1 TV industry in Flanders 11.2 Research Aim 41.3 Dissertation overview 52 Literature review 62.1 Defining TV 62.2 Generation Y 62.3 Television according to generation Y 82.4 Convergence: when it all comes together 212.5 Content as the eternal king 232.6 Evolution of the current business model 252.7 Alternative revenue models 313 Research Methodology 383.1 Research philosophy 383.2 An inductive approach 393.3 Quantitative research 393.4 Research challenges 414 Results 424.1 Consumption patterns 424.2 Alternatives for the TV-set 444.3 Attitude towards advertising 484.4 Attitude towards pricing 494.5 Pricing possibilities 504.6 Attitude towards TV-channels 505 Recommendations 516 Conclusion 557 References 568 Appendix 638.1 Appendix 1: List of TV-channels in Flanders. 638.2 Appendix 2: Questionnaire 66 vi
  7. 7. List of imagesFigure 1: The main categories of the business external actors (RANGONE, Andrea and Turconi,Alessandro, 2003) 19Figure 2: Multiscreening (own chart based on (GFK, 2012) 20Figure 3: Types of industry convergence (STIEGLITZ, Nils, 2003) 22Figure 4: Broadcast value chain showing the position of cable and satellite TV based on (VRM,2011) and (MCGRAIL, Mike and Robert, Bob, 2005) 25Figure 5: The new supply chain based on (KÜNG, Lucy et al., 2008) and (BOUWMAN, Harry et al.,2008) 28Figure 6: TV advertising spending in Flanders (own chart based on (SVR, 2011b)) 30Figure 7: A comparison between evaluations and preferences with respect to conventionaladvertising and non-spot advertising (NEIJENS, Peter C. and Smit, Edith G., 2003) 31Figure 8: Theoretical model of customer engagement (VIVEK, Shiri D. et al., 2012) 34Figure 9: Use of interactive services on iDTV amongst millennials (Source: the author) 42Figure 10: Difference between men and women in the use of iDTV-services (Source: the author) 43Figure 11: Percentage of people stating to skip advertisements while using iDTV-services (Source:the author) 43Figure 12: Reasons for using other devices to watch TV (Source: the author) 45Figure 13: Differences between men and women on the use of alternatives for the TV-set (Source:the author) 47Figure 14: Attitudes of millennials towards pricing policies and piracy (Source: the author) 49Figure 15: Preferred ways of generation Y to watch TV (Source: the author) 49Figure 16: Generation Ys attitude towards FTA-channels (Source: the author) 50List of tablesTable 1: Devices used to watch TV (Source: the author) 44Table 2: Services used to watch TV among generation Y (Source: the author) 46Table 3: Public TV channels in Flanders (VRM, 2011) 63Table 4: FTA-channels in Flanders (VRM, 2011) 63Table 5: Private TV-channels in Flanders Part 2 (VRM, 2011) 64Table 6: Local TV-channels in Flanders (VRM, 2011) 65 vii
  8. 8. 1 Introduction“Traditional media are not dead, they only smell funny” (CAUDRON, Jo, 2011)This quote from Jo Caudron in his book “Media morgen” (Media tomorrow) perfectly illustrateswhat is going on in the world of TV today. For generation Y, watching TV no longer means sittingin the living room in front of the TV-set to make sure they do not miss anything from theirfavourite TV-show.Generation Y is a generation of digital natives, used to get everything they want, whenever theywant. Instant gratification is not only a fashion word; it is a way of life. According to McConvey,“generation Y expects everything to adapt to their schedules and whims, rather than the otherway around” (MCCONVEY, Joel, 2009) It is a generation that still loves TV and watches more TVcontent than ever. The traditional FTA1-channel however, is not the only way to access thiscontent anymore.1.1 TV industry in FlandersBelgium is one of the most complicated countries in the world when it comes to politics and thesame is true for the Belgian TV market. Each region has its own TV channels, main players andresponsible minister. The problems are mainly the same in both Wallonia and Flanders, butbecause of the complexity of the market, this dissertation will focus on the TV industry in Flandersonly. This does not mean that models used further on in this dissertation cannot be applied ontothe Wallonian TV-market. For the sake of clarity however only the Flemish TV-market will beanalysed.1.1.1 The beginning of commercial TV in FlandersWhen the first FTA-channel, VTM, aired back in 1989, accessing TV-content was very straightforward. There were only 2 players in the market. VMMa2, which owned VTM, and the publicbroadcasting company, BRT, owning BRT 1 (now called Eén) and BRT 2 (now called Canvas).Watching the content on this channels implied people had to sit in front of their TV-set on thetime the program started. Programs where produced in-house or bought from foreign TV-channels to be broadcast on Flemish television.VTM, as a the first FTA-channel, paid for its content with the money it collected from sellingadvertising space while BRT paid everything with the money it received from the government.Because of this business model, consumers could watch these channels for free if they had cableor satellite. The cable network was owned by Coditel (now part of Telenet) which only charged asmall yearly fee to maintain its network.In 1995, SBS3 entered the Flemish market with VT4, a new commercial TV-channel. VMMa repliedwith the launch of a new TV-channel Kanaal2 (now 2BE). In the following years, the advertisingbudget for FTA-channels grew year by year and new FTA-channels where introduced.1 FTA-channel: Free To Air2 Vlaamse Media Maatschappij3 Scandinavian Broadcasting System 1
  9. 9. At the time, alternatives to access TV-content in Flanders where mostly limited to media carrierslike VHS and data limits prevented consumers to download or watch TV-content using theinternet.1.1.2 The digital switchoverIn 2005, digital TV was introduced in Flanders. Two big companies, Belgacom and Telenetlaunched their digital TV offer almost simultaneously and made it possible for consumers to addextra paid channels to their basic package together with the possibility to rent movies and serieswithout leaving the house. Furthermore, Telenet and Belgacom started to bid on footballemission rights, thus driving up the price for traditional TV channels. (ZDNET, 2005)While Telenet is using the cable, Belgacom offers IPTV or TV over the internet. Both providershave an own set top box which decodes the digital signal and adds interactive content. Asmentioned before, one of the few methods to reach the consumer for FTA-channels is throughthe cable owned by Telenet or the satellite. In this situation, Flemish TV-channels had no choicebut to broadcast their content through Telenet and Belgacom which were now directly competingwith the FTA-channels with their own products. Especially since Belgacom and Telenet togetherserve almost 75% of the market, there is no alternative for FTA-channels. (IBBT- ILAB.O, 2011)One year later, Telenet launched its Digicorder, a decoder which made it possible to pause live TVand record TV-programs, followed by Belgacom later that year. By 2012, 15 to 20% of TV-programs (depending on the source) are not watched live anymore. 80% of people indicating theyuse TSV,4 also state they skip the ads when watching the programs. (WERBROUCK, Stefaan, 2012)In April 2012, the Flemish FTA-channels joined forces to fight against these DVR-devices.According to Christian Van Thillo, CEO of De Persgroep which owns 50% of VMMa, these deviceslead to a lower viewing share for commercials and lower prices that can be charged foradvertising space. An evolution threatening the business model of the Flemish FTA-channels.VMMa even announced to stop producing telenovela’s because too much people where watchingthese, generally early-programmed series, afterwards while skipping the ads. (DECKMYN,Dominique, 2012a)As if there was not enough pressure on this business-model, generation Y kicked in with its ownvalues and ideas about media and TV.4 TSV: Time Shifted Viewing 2
  10. 10. 1.1.3 The generation Y touchThe DVR5-devices from Telenet and Belgacom are so easy to use that everybody can use them.And they definitely speed up the process of decline traditional TV will encounter.There are however, some evolutions that will be started by generation Y that are a bigger threatfor FTA-channels than they can imagine. Christian Van Thillo states the following in an interview inthe Flemish newspaper “De Morgen”: “The set top box is a great device which is very easy to use.The mechanism behind it however, is not fair. Selling these devices brings in a lot of money forTelenet and Belgacom, but TV-channels cannot profit from this money while they account for agreat part of the success of the system” (DUMON, Pieter and Debackere, Jan, 2012)However understandable, this point of view is debatable. Van Thillo makes no distinction betweenwatching TV and TV channels. In this point of view, TV-channels are the only way for consumers toaccess TV-content which is currently not the case. This is the same mistake the music industrymade 10 years ago while they were fighting Napster and other services. In the world of digitalnatives, TV-channels are no longer irreplaceable. It was generation Y that started the shift fromCD’s to MP3’s and it will most likely be generation Y that will start the shift from a traditional wayof watching TV to a new TV-era with other powerful content providers.5 Digital Video Recorder 3
  11. 11. 1.2 Research AimThis small introduction shows the approaching change in TV-consumption. The impact ofgeneration Y on the industry cannot be underestimated and the main aim of this dissertation willbe to find out how the changing media consumption of generation Y will influence the businessmodel of commercial TV channels in Flanders.1.2.1 Research questionsIn order to be able to firmly address this problem, the following research question will be the baseof this dissertation:What is the effect of generation Y’s changing consumption of TV content on the income model ofcommercial TV channels in Belgium?This question can be divided in two sub-questions: 1. How is generation Y consuming TV content? 2. How is this behaviour influencing the business models of commercial TV channels and what are the alternatives?1.2.2 HypothesesFirst of all, the research questions are based on the hypotheses that generation Y has a totallydifferent way of consuming TV. This means that they are not only using the TV-set to watch TV,but that also other devices like laptops and tablets are becoming more important. Furthermore,this generation has been raised in a totally different way and is not as tolerant as othergenerations when it comes to advertising and linear TV-viewing. They look for alternatives tosatisfy their needs and do not consider piracy as a problem while doing so.Secondly, this will lead to a change of business model for FTA-channels. Commercial TV stationswill have to move from a linear TV-viewing experience to a more demand-driven model in orderto survive.1.2.3 ObjectivesBy solving the research questions elaborated in paragraph 1.2.1, the author of this dissertationhopes to determine how generation Y accesses TV content and what damage this causes to thebusiness model of FTA-channels.Doing this will create opportunities to identify chances for an alternative media distribution andto construct new business models for commercial TV channels. 4
  12. 12. 1.3 Dissertation overviewIn order to make this dissertation easy to read and understand, it contains four main chapters.The first important chapter is the literature review starting on page 6. This literature review triesto define generation Y and to understand their values and dreams. Who is generation Y? Why arethey important? What is important to them? Only by knowing what drives this generation, a newbusiness model for FTA-channels can be developed.Further on in chapter 2, the biggest threats for FTA-channels are listed and clarified. These threatsinclude new ways to access TV content by generation Y but also the future market players thatwill eventually compete with FTA-channels. By understanding what makes these alternativesattractive, the strengths and weaknesses of the current business model will be identified inparagraph 2.6.After this, chapter 2 discusses the importance of strong content and the convergence process.Content from different types of media is becoming more and more interchangeable.Understanding this process is indispensable to understand the future.Finally, chapter 2 analyses the current business model of FTA-channels in Flanders. This is doneusing several academic theories and models. To end chapter 2, alternative business models areanalysed. The focus lies on the current alternatives and their degree of success.The next chapter, starting on page 38, describes the research methodology. This includes theresearch philosophy, the applied approach, the research challenges and a profound explanationof the used techniques in the primary research.Another big part of this dissertation is the analyses of the results. Chapter 4 starts on page 42 andgives an overview of the most important results of the primary research. This primary research isthoroughly illustrated using charts and tables where necessary. One of the covered themes is theway in which TV-content is consumed by generation Y. Furthermore, the primary research mapsthe attitudes of generation Y towards advertising, pricing models and FTA-channels. Finally, thepossibilities to generate revenue are discussed.The final and most important chapter of this dissertation treats the recommendations for FTA-channels. Chapter 5 merges the primary and secondary research into strong and easilyunderstandable recommendations. These recommendations tend to summarise the possibilitiesand threats for FTA-channels to survive.Literature review 5
  13. 13. 2 Literature review2.1 Defining TVDefining TV used to be very simple. In the past, there was the TV-set, used to watch TV and thatwas the only way TV-content could be accessed. Nowadays, there is plethora of possibilities toaccess TV-content and watching TV is no longer the same as sitting in the living room in front ofthe TV-set.In this dissertation, TV will be used to refer to TV-content while the word TV-set will be used torefer to the traditional device or way to watch TV.2.2 Generation YOver the years, there has been a need to classify and identify different generations of people. Theclassification uses age and general cultural characteristics to describe them. This has resulted indifferent groups like baby boomers, generation X and more recently, generation Z.Generation Y is one of these categories and the term refers to those born between 1970 and1996, depending on the used source. (NEUBORNE, Ellen and Kerwin, Kathleen, 1999) (PAUL,Pamela, 2001). Generally however, generation Y is defined as those born between 1980 and 1995.(VAN DEN BERGH, Joeri, 2011) In this paper, Van Den Bergh’s definition will be used to determinegeneration Y, also often referred to as “Millennials” because they came of age during the newmillennium.“They are armed. They are dangerous. They are our children.” (Thomas Hine as cited in (HOWE,Neil and Strauss, William, 2000))In the beginning of the century, millennials where regarded as a lost generation, a generationwhich was known to be self-absorbed, pessimistic, distrustful and stupid. The future was going tobe dark and people’s own kids were to blame for it. The first real study on generation Y fromHowe and Strauss revealed the truth and opened the eyes of marketers who were targeting thisgeneration (unsuccessfully) before.Millennials turned out to be more intelligent, more sociable and more optimistic than formergenerations. (HOWE, Neil and Strauss, William, 2000) A study conducted by MTV Networks at theend of 2009 amongst 7000 youngsters in 7 European countries further confirmed these results.This study leads to “The ten commandments of youth” which are:  Have faith in yourself  Work hard to succeed but not to the  Respect your parents detriment of others  Be honest  Be tolerant of others’ differences  Take responsibility for your own life  Be happy and optimistic, even in  Live life to the full and be passionate adversity  Keep your promises  Create, don’t destroy (ROSE, Helen, 2010) 6
  14. 14. These commandments illustrate the way in which generation Y thinks and behaves. Millennialshave a strong belief in their selves which is part of the way they were raised. “Two-thirds ofparents claim to ask the opinion of their children before making big decisions such as choosingholidays. They have raised their children as coaches with one central notion: empowerment”. (VANDEN BERGH, Joeri, 2011) That is also the reason why respect for their parents is very important intheir life.2.2.1 Generation Y as a market segment“We thought the kids would go crazy for this and the kids couldnt have cared less…. They werelike, “Who is this guy?”” (Heather Keegan, Digital Research, describing a preschool test of a Kermitthe Frog toy as cited in (HOWE, Neil and Strauss, William, 2000))Millennials are one of the biggest groups in the current population. In Flanders, there are roughly1,2 million generation Y’ers which account for 19% of the total population.(own calculation basedon (ADSEI, 2012)) The oldest ones have already settled down, owning a house and children, whilethe youngest are almost coming of age. This means that generation Y will soon be the leadinggroup of consumers, raising their own children and making decisions about their lifestyle andmedia usage. According to Nickell, generation Y has been more involved than any othergeneration in the buying decisions made by their parents. They have controlled a significantamount of spending power on their own since they were young. (NICKELL, Stephanie, 2012)Furthermore, they have been raised in a world dominated by brands and marketing and are moreaware of marketing tactics than previous generations. (HEANEY, J.G., 2007) (TSUI, B. and Hughes,L.Q., 2001) This has however not prevented that “generation Y is the most materialisticgeneration yet and forms of consumption are central to its sense of identity and the acquisition ofthe status or “cool” through this acquisition. “ (FERGUSON, Shelagh, 2011) The big difference withprevious generations according to Pitta is the fact that millennials want their buying informationfrom trusted individuals. (PITTA, Dennis, 2012) This means that consumer ratings become moreand more important and that brands have to bond with their consumers.Another big difference is the way generation Y wants their products and services. Several authorsconfirm the fact that millennials need their products and services to be adapted to what theywant. “They expect everything to adapt to their schedules and whims, rather than the other wayround.” (MCCONVEY, Joel, 2009). “They want their products and services now, they want themperfectly tuned to their taste and they want to buy them with comparatively little effort.” (PITTA,Dennis, 2012)All this combined makes millennials at the same time one of the most exciting market segmentsever and one of the most difficult market segments ever. Toggle the right buttons and one’sproduct or service will be successful. Approach them in the wrong way, and one’s product orservice will be burnt down in seconds. 7
  15. 15. 2.3 Television according to generation Y“Today’s kids believe in the future and see themselves as its cutting edge. They show a fascinationfor, and mastery of, new technologies. (HOWE, Neil and Strauss, William, 2000)This quote illustrates the danger traditional FTA-channels are in. TV-channels are now at the heartof content distribution but this can change very quickly since millennials not necessarily use thesame technologies as their parents to access TV-content. They are quick learners and technologyis no longer a barrier to create a new way of watching TV. Peter Hinssen has made a good analysisof this phenomenon in his book “The new normal”. He distinguishes digital natives and digitalimmigrants. Millennials are digital natives and grew up with technology. It is part of their life,while digital immigrants have learned to use technology while being older. He explains it using thefollowing example: “I like this simple test to distinguish between a digital native and a digitalimmigrant. You put a camera on a table and just ask “What is this?” A digital immigrant will say:“That’s a digital camera”, whereas a digital native will say: “It’s a camera”.” (HINSSEN, Peter,2010)Research from DearMedia and EHSAL management school shows that 60% of youngsters inBelgium spend 1 to 3 hours a day in front of the TV. 42% of this time however is non-linearviewing, which means that programs are not watched live and ads are skipped. More than 25% ofthe millennials participating in the research stated that they skip advertising daily. (DEARMEDIA &EHSAL MANAGEMENT SCHOOL, 2012) Thus can be stated that the way generation Y consumes TVis really different than the way their parents do.For this reason, the research in part two of this dissertation will focus on the likeliness thatgeneration Y will jump from the traditional TV-set to alternative content distribution. A shift thatis already happening very slowly. In the following paragraphs, different alternatives for thetraditional TV-set will be considered. 8
  16. 16. 2.3.1 Time-shifted viewingWhen Telenet and Belgacom released their Digicorders in 2006, millennials finally got what theyalways wanted. Convenience, flexibility and a cheap way to watch missed programs. TheDigicorder offered the consumer more freedom and the Belgian population quickly embraced thenew technology. By 2010, only 16.9% of the households in Flanders did not have a product bundleincluding digital TV. (BUSINESS MONITOR INTERNATIONAL, 2012)One of the most used features was TSV or Time Shifted Viewing. This means consumers can pausea linear program to continue watching it later or record it by pressing one button. The systemquickly became very popular and now FTA-channels are starting to see the consequences.According to Christian Van Thillo, CEO of De Persgroep, TSV already accounts for 20% of TV-programs watched. (DUMON, Pieter and Debackere, Jan, 2012) Figures from the newspaper “DeMorgen” even show that 15 to 50% of the most popular TV-programs are watched through TSV.(DUMON, Pieter, 2011). Other research from IBBt also confirms this. In this research, 28.1% ofdigital TV-owners states to record programs or movies daily while only 15.5% states never to usethis functionality.Unfortunately for the FTA-channels, there is no way back. In Flanders, the CIM6 can measurewhich programs are watched and how much are watched through TSV. This means thatadvertisers can ask for lower prices, driving the revenue of commercial TV-channels down. The oldadagio from John Wanamaker, “Half of the money I spend on advertising is wasted, I only don’tknow which half” no longer applies on TV.For this reason, VMMa has asked Telenet and Belgacom to compensate them. Belgacom hasrenegotiated its tariffs with VMMa but Telenet refuses to pay anything for a service it offers forfree to its consumers. Furthermore, VMMa has taken steps and asked the government to thinkabout it.6 CIM: Centrum voor Informatie over de Media: The Belgian institute that is responsible for TV figures 9
  17. 17. 2.3.2 PiracyPiracy is defined as the acts of producing, acquiring and/or consuming illegal copies of anauthentic product. (HO, Jason and Weinberg, Charles B., 2011). In this dissertation, piracy is allabout the consumption of TV-content in an illegal way. Generally, there are two ways TV-contentcan be accessed through piracy. Downloading and streaming.While downloading implies that content is stored locally on a hard drive or other storage device,streaming is about watching the content while it is being loaded in the memory of the device thatis used to consume the content. YouTube is a good example of a website which uses streaming todeliver content.Buying DVD or Blu-ray copies can be considered as a third way to access TV-content throughpiracy. The author of this dissertation however, assumes that since sales of DVD’s and Blu-raydropped by 44% in 2010 (ADWEEK, 2011), the impact of DVD-copies no longer has a significantimpact on the consumption of TV-content. Therefore, this dissertation will focus on streaming anddownloading.Research conducted by Lightspeed research in 2010, showed that almost 58% of people hadstreamed or downloaded TV-content in the last six months. (DAVIES, Jessica, 2010) The studyincludes legal services like BBC’s Iplayer but demonstrates the readiness of the consumer to catchup online and leave the traditional TV-set to access good content. In addition to that, a morerecent study in Belgium showed that 60% of young people in Flanders download TV-contentillegally. The main reason for doing so is the time it takes for series to be broadcast in Belgiumwhile they have already aired in other countries. (DEARMEDIA & EHSAL MANAGEMENT SCHOOL,2012)Piracy drivers“If it’s crap, it’s no money lost. If I hear about a film in the day, it’s nice to be able to go home andfind it immediately. If I like it though, I will generally have a look on Amazon and buy it after”.(Laura, 19 as cited in (ROSE, Helen, 2010))Hennig-Thurau identifies 6 drivers for piracy based on their utility. Transaction utility, mobilityutility, storage utility, anti-industry utility, social utility and collection utility. (HENNIG-THURAU,Thorsten et al., 2007)The transaction utility is an economic driver and implies that by streaming or downloadingcontent, money can be saved. This is one of the main reasons for piracy and is confirmed inseveral other studies. (SHEEHAN, Brian et al., 2010) (STOLZE, Jim, 2011) All these studies claimpeople do not want to pay for content anymore. A recent study from Viacom and MTV however,shows that generation Y wants to pay for content but that the main reason for not doing so canbe found in the fear to pay for something bad. In other words, millennials do want to pay for goodcontent but are afraid of buying something they do not like so they download or stream it instead.Generation Y shows its appreciation for good content by buying it afterwards. 10
  18. 18. The mobility utility focuses on the portability of content. Hennig-Thurau’s study mainly deals withmotion pictures but the same portability problem can be applied on TV-content. Just like peoplecannot watch Blu-ray movies on the move, it is currently very difficult to watch TV on the go inFlanders. There are no portable DVB-T devices available, there are no services which support itand the content providers are not ready to do so. The only way for consumers to watch TV ontheir tablet or smartphone is to download the desired program and watch it while being on themove. Just like people downloaded motion pictures to transport them, people download orstream TV to watch it on the train, in the bus or in the park.The storage utility is less applicable on watching TV. It implies that the storage space needed forphysical products boosts piracy. This utility does not apply on TV and will further not beconsidered.The anti-industry utility is all about the feeling people have about content-providers and TV-channels. Advertising clutter is one of the main drivers for this anti-industry feeling. Clutterdescribes the level of advertising and other non-programming material within a medium. (SPECK,P. and Elliott, M., 1998). According to Speck and Elliott, an increase in advertising clutter increasesad avoidance which, on its turn, results in lower prices paid for advertising space. Instead oflowering the amount of clutter however, “it appears that the advertisers’ “solution” to audienceavoidance of their messages is to increase the number of messages, so even effort of commercialavoidance becomes a source of audience frustration.” (ROTFELD, Herbert Jack, 2006) This leads toan anti-industry feeling that motivates consumers to look for alternatives that do not make theconsumer feel like a milk cow.Another important utility is the social utility. Having the knowledge to watch TV programs for freecompared with the ability to talk about the watched programs, enables consumers to “establishsocial links with relevant others”. (HENNIG-THURAU, Thorsten et al., 2007) As mentioned before,generation Y relates on its peers to buy or consume a product. Being the one that knows all aboutpiracy or TV programs easily enables millennials to become the centre of their peer group.Combined with the instant-share culture, this makes the social utility very relevant.The last utility as defined by Hennig-Thurau, is the collection utility. Piracy enables people tocollect large amounts of TV programs, movies and music without having to pay for it. No matterhow rich people are, they can collect these things without any effort. Some people just downloadto have a collection and do not even watch or listen to this collection.These piracy drivers are confirmed by several other studies. Jim Stolze for example, identifies 5piracy-drivers. These are: instant access, a wide product offer, low price (free), ease of use andthe freedom to choose what you want, whenever you want. (STOLZE, Jim, 2011) Another sourcemerges the different piracy drivers into three main categories which are ‘Price’, ‘Immediacy’, and‘viewing channel’. (HO, Jason and Weinberg, Charles B., 2011) 11
  19. 19. Content availability and advantagesBut what exactly is available through piracy on the internet and what are the advantages ofaccessing content on the internet for generation Y?The first question is rather easy to answer. Almost everything is available on the internet after ithas been released in one or another way. This means that a TV-show airing for the first time todayat 7 P.M can be available online by 9 P.M. The so-called release-groups have thousands ofvolunteers who record episodes of their favourite TV-program just to release them on theinternet. Every bit of content which has a consumer, is suitable to be uploaded and shared on theinternet. Up-loaders and release-groups don’t earn any money by uploading this content to theinternet but social acceptance and anti-industry attitudes are the main drivers to upload content.(SHEEHAN, Brian et al., 2010)Virtually everything is available online which partly answers the second question of what theadvantages of piracy are for generation Y. No matter if the consumer likes TV-shows from theseventies or the newest episode of “Dexter”, it is right there and can be watched at the exactmoment desired by the consumer for free. De Kosnik identifies eight advantages of pirating TV. - Single search - Simple indexing - Uniform software and interface - File portability - Access to global TV - Freedom of pre-empting - Personal archives - Low-cost and commercial-freeEach one of these advantages can easily be linked to the piracy-drivers identified by Hennig-Thurau. Low-cost for example, links to the transaction utility while commercial-free, links to theanti-industry utility. 12
  20. 20. 2.3.3 Online streaming TVPiracy has always been a threat for the traditional FTA-channels but more recently, legalalternatives are starting to pop-up. In contrary to illegal streaming websites, most services chargea monthly fee to pay the content-owners a fair price. Netflix for example, enables consumers towatch as many series and films they want for £6 a month. Other websites like Direct Movie, rentmovies and series for a fixed price. In this way, they offer a cheap and convenient alternative forlive TV and give the consumer a legal alternative for illegal streaming and downloading.Even consumers who prefer to watch content on their TV-screen can be satisfied by using theseservices. Today, Netflix can be accessed using several devices that are very common in everyfamily. This includes the Xbox, the PlayStation and several set-top boxes and media streamers. In2011, 72% of families owned a game console in Belgium. (OIVO, 2011) That means that almostthree quarters of the Belgian population can access this content on their TV without the need tobuy new hardware.Research from Nielson shows that, in the past year, the number of homes in the U.S withtelevision sets dropped. Partly because of millennials watching TV content on their computers ormobile devices. “Forget about cord-cutting. These are people who never paid for TV -- or evenowned a television -- in the first place. Theyre accustomed to watching their favourite shows onHulu, Netflix, YouTube and other online video platforms.” (ADWEEK, 2012)There are however, some problems that need to be solved for these services to become morepopular. In his research paper “Piracy is the future of Television, De Kosnik lists several problemsof these legal services. These include standardisation, global offers, premium service and pricesbased on usage. (DE KOSNIK, Abigail, 2010) Especially the global offer is a problem. Moststreaming services are still not available in Flanders. Netflix, Lovefilm and Hulu all announced tocome to Belgium but at the moment of writing this dissertation, they are not offering theirservices in Belgium yet. Considering the success of the launch of Spotify in Belgium which reached300,000 users in merely three months’ time (DECKMYN, Dominique, 2012b), the assumption canbe made that these legal services will put even more pressure on the business model ofcommercial TV channels in Flanders.As for the standardisation, this could be a good solution to attract more customers on a whole.For generation Y however, technical problems are less common than for older generations.According to Howe, this generation is more tech-savvy and more prepared to try something new.(HOWE, Neil and Strauss, William, 2000) Still, these services are improving every day and canattract a larger public in the future. 13
  21. 21. 2.3.4 Video on demand on iDTVSince the introduction of digital TV in Flanders, consumers are able to watch missed programsthrough video on demand or VOD. Research shows that the most important reasons for watchingVOD amongst digital natives are the possibility to watch missed programs, the opportunity towatch a program without advertising and the ability to watch whenever they want. (DEARMEDIA& EHSAL MANAGEMENT SCHOOL, 2012) In 2011, a Belgian family spent on average 12.7 EUR ayear on VOD-services. That is 21% more than in 2010 and the VOD-market continues to grow.(IVF, 2012)While this provides a new way of earning money for FTA-channels in the first place, it is also athreat for the same FTA-channels. Consumers can not only catch up with their favourite soapfrom their preferred TV-channel, they can also rent movies and series which are offered on thedigital TV platforms of Telenet and Belgacom. In this case, instead of watching a TV program fromany commercial TV station, consumers spend their time on watching VOD which can affect theviewing figures from these TV channels. In 2011, 6% of watched TV-programs were VOD.(DEARMEDIA & EHSAL MANAGEMENT SCHOOL, 2012) There can be concluded that VOD accountsfor a small amount of TV-time but time spent on watching VOD is increasing year by year.2.3.5 Second screen appsSince the introduction of the Ipad in 2010, tablets have found their way to the living room.Together with smartphones, they are used more and more to consume media on the go. Thesedevices are often referred to as the second screen and introduce a new way of watching TV. InBelgium, 13.1% of consumers own a tablet while 40.4% of the population owns a smartphone.(IBBT- ILAB.O, 2011)One of the possibilities of watching TV on these devices is mobile TV. Mobile TV is defined as “TVon mobile devices that provides the same content as seen on traditional TV. In addition to live TV,mobile TV also includes on-demand video that can be downloaded or can be broadcast to anumber of users. There are two forms of mobile TV: streamed mobile TV and broadcast mobileTV.” (BAYARTSAIKHAN, Khulan et al., 2007). While streamed mobile TV uses the internet tostream content to the consumers’ devices, broadcast mobile TV uses a technology based on DVB-T7 to deliver content.In Flanders, the two biggest distributors, Belgacom & Telenet, are both offering an app that makeswatching TV on smartphones and tablets possible. Telenet’s “Yelo” and Belgacom’s “TV overal”offer live streamed mobile TV and both have the possibility to watch video on demand. At themoment, it is not possible to use these apps outside of the distributors’ networks. For Telenet,this means that watching TV out-of-doors is impossible while for Belgacom, only the distributorsown mobile network, Proximus, can be used.7 DVB-T: Digital Video Broadcasting-Terrestrial: Technology used to distribute a digital TV-signal over the air. 14
  22. 22. Telenet is still testing its app and offers this service for free to consumers. As a result of theproblems with VMMa, it is not possible to watch the VMMa-channels on Yelo. Belgacom incontrary has made a deal with VMMa and offers its service to all its consumers for 5 EUR a month.This is the same price as is charged by Mobistar, a third provider of mobile TV which enables itsown customers to watch TV-on-the go for 5 EUR a month. Mobistar Mobile TV however, is morelimited. It cannot be used on tablets, it offers less channels and it does not offer any VOD-services.Exact figures of the use of these services are not yet available but Telenet claimed that merelytwo months after its launch, more than one million programs had been watched on Yelo.(TELENET, 2011) A clear sign that people are ready for a new TV experience. It is very likely thatthe raise of the use of these apps will help consumers to watch less normal TV and use morealternatives.2.3.6 Over the top TVOver-the-top is a general term for services that are used over a network that is not offered by thatnetwork operator. Its often referred to as "over-the-top" because these services ride on top of aservice people already get and dont require any business or technology affiliations with thenetwork operator. (ITV DICTIONARY, 2012)In terms of over the top TV, it means that consumers can watch TV programs without interferenceof different content providers, distributors or aggregators. In the specific case of the FTA-channels, it refers to the fact that consumers can watch TV programs bypassing the traditional TV-channel. Piracy and online streaming video as mentioned above are all OTT8-services but thecatagory is very wide and this section will focus on other players competing with the Flemish FTA-channels by offering OTT-services.BBC Iplayer and similar services“If we dont make content available, viewers will find it despite us. At the moment the global roll-out is a pilot service to test proof-of-concept and explore demand.”( Jana Bennett, president ofworldwide networks and global iPlayer at BBC Worldwide as cited by (OSBORNE, Magz, 2011))For the Flemish FTA-channels, competition by OTT is not limited to services like Netflix or Hulu.Foreign TV-channels are also threatening their business model. This is because of the dependencyof Belgian FTA-channels on foreign programs to complete their offer. According to Jo Caudron,buying foreign programs is way cheaper than producing local programs. When the BBC decides tomake their programs available worldwide, it means that consumers can watch these programsonline without needing a Belgian FTA-channel.8 OTT: Over The Top 15
  23. 23. This is the most extreme form of OTT-TV. In this case, the content producer and distributor areone and the same. It delivers its content straight to the consumer, eliminating all the middlemenin the process. This model is only possible when the content producer can deliver an easy to useplatform. Another example of this type of content distribution is HBO Go. HBO produces its ownseries and distributes them immediately to the consumer using their own online platform. AnHBO subscription is all it takes.In the past, the impact of the worldwide introduction of BBC’s Iplayer would have been lesssignificant because of language barriers and data limits. Research from ESLC however, shows thatthe knowledge of the English language of young people in Flanders improves year by year. In2012, Flemish students shared the first place with Sweden and Malta in the “European Survey onLanguage Competences”. (VLAAMSE OVERHEID, 2012) This means that language is no longer abarrier for millennials to watch content using alternative channels.As language barriers were disappearing, consumers were also calling ISP’s9 to remove data limitson broadband connections. Just like on the TV-market, the broadband market in Belgium isdominated by two large ISP’s, Telenet and Belgacom. The reason for this is their business modelwhich implies selling triple play packs to consumers including TV, internet and phone calls. SmallerISP’s cannot compete with this offer and are less attractive for consumers. Furthermore,Belgacom and Telenet both own their own network, and at the moment, only Belgacom has toshare its network with other ISP’s.For long, this led to a very rigid market with very small data limits. That didn’t change until 2009,when Microsoft complained about the data limits which prevented consumers from rentingmovies using Microsoft’s’ Zune platform on Xbox 360. (STOFFELS, Bart, 2009a) The case wasimportant enough for the Belgian minister of economics, Vincent Van Quickenborne, to ask thecompetition commission to look into it. (STOFFELS, Bart, 2009b) In 2010, both Belgacom andTelenet replaced data limits by a FUP10, implying people could download as much as they wantedas long as they were not abusing the network. (TIBAU, Frederik, 2010)As a result, Telenet reported in June 2012 that streaming video was responsible for about 40% ofinternet traffic, double the amount of traffic used in 2010. By 2015, Telenet expects to processmore than 33.6 billion hours of streaming video a year. (GROMMEN, Stefan, 2012) A firm proofthat streaming video is becoming more and more important and that there is something movingin the TV market.9 ISP: Internet Service Provider10 FUP: Fair Use Policy 16
  24. 24. From content producer to the consumerWhile BBC and HBO are both TV channels making their own products available through theinternet, so-called core content producers are also eliminating the middlemen. These contentproviders are agencies specialised in producing TV programs which are sold to FTA-channels to bedistributed. In Flanders however, two big content producers are taking their own products to thescreen.This is the case for Studio 100 and Woestijnvis. Studio 100 is one of the largest producers of kidsprograms in Belgium, The Netherlands and Germany. The company owns 5 theme parks in Europeand is constantly looking to expand. Its TV products are sold to public TV channels and FTA-channels but the company became big through merchandising. In 2008, Studio 100 launched theirown TV channel together with Telenet, later followed by Junior Channel which is availablethrough pay-tv in Germany, Austria and Switzerland. (STUDIO 100, 2012)This evolution is also affecting FTA-channels. Studio 100 is an example of a strong contentprovider starting its own TV-channel. Not only this content is very valuable, the fact that Studio100 is distributing this content by itself is bad news for commercial TV-channels. It means thatthey will have to look for high quality kids’ entertainment elsewhere while it becomes moredifficult to differentiate themselves from competitors with unique content. VMMa has alreadypartly solved this problem by partnering with Studio 100 for its own kids channel: VTM Kzoom.(STUDIO 100, 2012) Yet the question remains whether Studio 100 will keep producing content forother TV channels or will focus on its own channels.While Studio 100 introduced one TV channel, Woestijnvis is even taking it further. Ask 10 Flemishpeople which content provider they know and the answer will be “Woestijnvis” in 9 out of thencases. The content provider has built an image of quality, humour and good TV with inventive andunique programs. When SBS was selling its TV channels in 2011, the holding owning Woestijnvisbought VT4 and VijfTV, making Woestijnvis the new owner of SBS Belgium. (DE MORGEN, 2011)The impact of this acquisition cannot be analysed before the launch of the renewed channels“Vier” and “Vijf” at the end of September, but the assumption can be made that it will influencethe remaining Belgian FTA-channels in every possible way. 17
  25. 25. Apple vs. Google: the final stepProbably one of the biggest threats for FTA-channels on the long term however, is theintroduction of the TV-platforms from Apple and Google. These platforms, based on ITunes(Apple) and Play Store (Google), offer exactly what millennials are looking for and are the ultimateform of over the top TV. This is because they integrate all OTT-services under one interface and inone small box that can be connected to the TV-screen. Hempel has picked up this evolution andexplains it as following: “Thanks to streaming video services like Hulu and Netflix and new portabledevices such as the iPad, weve begun to expect that TV should be more like the web itself: social,mobile, searchable, and instantly available.” (HEMPEL, Jessi, 2011)And this is exactly what these services are. GoogleTV for example enables consumers to watch TVfrom several content providers. All consumers need is a set top box or media centre whichsupports GoogleTV. It integrates Google’s own Play store with Netflix, Amazon’s video store, BBCIplayer, YouTube and many more. People owning GoogleTV or AppleTV don’t need their cablesubscription. They can watch what they want, whenever they want with little effort and for anaffordable price. It offers them the freedom to have a product completely tailored to their needs.Jo Caudron illustrates the danger of these services in his book by composing his perfect TVpackage using Google TV: - BBC Iplayer for documentaries and series - HBO-app for top series - Netflix for movies and series - Studio 100 app for his kids - Free app of the public broadcasting company to watch the news (CAUDRON, Jo, 2011)At the end of the month, this will cost him about 40 EUR. This package is completely tailor-madeand enables him to cancel his cable subscription and see everything he wants without the hassleof traditional TV channels. However, at the moment, most of these services are not yet availablein Belgium and the question is how fast the Flemish consumer will be prepared to drop its cablesubscription in favour of other paid-services. Generation Y will definitely impact the speed ofadoption and the research conducted for this dissertation will help to see the possibilities.The final step in this process is the creation of an own network for Google or any othermultinational. Google has taken its first steps in the United States with its own network calledGoogle Fiber. It integrates every possible TV channel with unlimited access to Netflix, gigabitinternet, online storage and unlimited internet access. (SCHIEVINK, Bauke, 2012) For 120 dollar amonth, Google delivers the ultimate entertainment experience, eliminating all otherintermediates in the process. While this project is still in a test phase, it might come to Europe inthe future and it will most likely blow away all existing TV business models in Europe. 18
  26. 26. 2.3.7 An endless listWhile this chapter has focused on the main threats for FTA-channels, there are many moredangers to be considered. There are so many external actors in the TV-business and each of themcan become a danger in the future. Rangone and Turconi have made a model which identifies themain players in the digital TV-market. Each of them has the possibilities and means to become apotential competitor.Figure 1: The main categories of the business external actors (RANGONE, Andrea and Turconi, Alessandro, 2003) 19
  27. 27. 2.3.8 Stimulus-junksNot only the channels millennials use to consume TV-content are different. Generation Y thinksand processes information totally differently from their predecessors. According to Prensky,“digital natives are used to receiving information very fast. They like to parallel process andmultitask. They thrive on instant gratification and frequent rewards” (PRENSKY, Marc, 2001)This way of processing information, also influences the TV-viewing behaviour of millennials.Instead of leaning back while watching TV, this generation is constantly busy doing other things.Figure 2 shows that almost three quarters of TV viewers are browsing the internet or checkingtheir e-mails while watching TV. This means that people are less attentive and even moredistracted from TV when advertising starts. This simultaneous viewing of different devices, knownas second screening, is perceived to be an extra barrier to reach consumers. (GFK, 2012)Since knowledge about this phenomenon is widespread, advertisers are less prepared to pay foradvertising space because of the low attention rate during commercial breaks. While people usedto go to the bathroom in the past, checking e-mails or Facebook has become the new distraction.There are however, some opportunities in the use of this second screen which will be explained inchapter 3.7. Use a tablet computer 20% Use social networking sites 51% Use a mobile phone/smartphone 59% Use a laptop/computer 72% Browse the internet/check, send e- 74% mails 0% 10% 20% 30% 40% 50% 60% 70% 80% Figure 2: Multiscreening (own chart based on (GFK, 2012) 20
  28. 28. 2.4 Convergence: when it all comes togetherIn order to fully understand the radical change of the television business, knowledge about theconvergence process is indispensable.Baran defines convergence as “the erasure of distinctions among media” (BARAN, Stanley J. andDavis, Dennis K., 2011). Lind approaches convergence from the technical side and describes it as“a discontinuity, a market and/or industry redefinition related to technological change.”Digitalisation of cable TV, watching TV on a cell phone, the use of IT in telecom, it can all benamed convergence. (LIND, Jonas, 2005) In 2004, Bill gates gave a speech at the CES where he announced that convergence was finallyhere. “Convergence doesn’t happen until you have everything in a digital form that the consumercan easily use on all the different devices. So, if we look at the three types of media of greatestimportance—we look at photos, we look at music and we look at video—the move toward givingpeople digital flexibility on them is pretty incredible on every one of them. It’s been discussed for along, long time. And now, it’s really happening.” (Bill Gates as quoted in (BARAN, Stanley J. andDavis, Dennis K., 2011))It took a while before his vision became truly possible but today, because of mobile internet,media are ubiquitous. Radio, internet, newspapers, TV and magazines are all available anytime,anywhere on almost any device. In this context, Baran and Davis start wondering about the futureof all these media. They are asking “what becomes of the distinction between newspapers,magazines, radio, and television when all can be accessed anywhere, anytime on a singlehandheld device and when each medium can combine graphics, video, printed text, sound, music,and interactivity to satisfy your entertainment and information needs?” (BARAN, Stanley J. andDavis, Dennis K., 2011) It is very probable that some of these media will merge into one singlemedium, possibly supported by different niche media.2.4.1 Types of convergenceAccording to Küng, there are three different forms of convergence. Network-focusedconvergence, product & service-focused convergence and industry focused convergence. (KÜNG,Lucy et al., 2008) Network-focused convergence uses the technological approach from Lind andimplies that every network is able to deliver any content to any consumer. This is partly the casein Flanders where the cable network and (mobile) phone network are all able to transport TV,Radio and newspapers (using the internet). There are however still limits to the “any consumer”-part since these networks are still not available for everybody at every moment.These limits do not exist in the mind of the consumer. For the consumer, convergence is alreadythere. A tablet owner can now access radio, TV, newspapers, internet and magazines all from onedevice. The fact that these media are delivered using several technologies does not make anydifference. This is called “product and service focused convergence”.Finally, industry focused convergence is all about IT-companies starting to get involved in content-creation and transmission. 21
  29. 29. Stieglitz approaches convergence from another point of view and suggests a model with fourtypes of convergence. The first type of convergence is “convergence in substitutes” and it meansthat one technology can replace another. The second type of convergence is “convergence incomplements”. In this case, two different technologies work better together than they wouldwork separately. On the other side of the matrix, Stieglitz has added technology and productbased convergence. In this way, he produces a matrix with four different types of convergence.(STIEGLITZ, Nils, 2003)Figure 3: Types of industry convergence (STIEGLITZ, Nils, 2003)The first type of convergence is technology substitution which is all about new technologiesreplacing old technologies. A good example of this is the transition from Edge to 3G which mademobile internet really useful for data transmission.The next type of convergence is technology integration. In this case, two technologies worktogether to become a new consolidated technology. An example of this is the digital TV-platformfrom Telenet which integrates internet and TV in one new technology: iDTV.11Product substitution is the third type of convergence and happens when two products fromdifferent industries complete each other and eventually merge. In Belgium this is taking place inthe market for mobile internet and internet at home. Because of the constant need to access theinternet everywhere, the distinction between mobile internet and internet at home is vanishing.Mobistar, initially an MNO12, now offers packages which bundle internet on mobile devices andinternet at home so the consumer does have internet access no matter where he goes.Finally, the fourth type of convergence is product complementarity. This is the case when twoproducts can both deliver the services from the other product without the need to incorporatethe same technology. (LIND, Jonas, 2005) Examples of this are the PC and the smartphone whichcan both deliver the same services while using a different technology. This technology, however,is more and more coming together so in the future, this might become an example of productsubstitution.11 iDTV: Interactive Digtal TV12 MNO: Mobile Network Operator 22
  30. 30. 2.4.2 The role of millennials in the convergence processGeneration Y is more technology-driven than any generation before. (Cfr. Infra) They are thegroup that speed up the process of convergence and desire more tailor-made TV.In the first seven months of 2012, market research agency Gfk reported a growth of 244% intablet sales compared to the first months of 2011. Furthermore, more than 50% of mobile phonessold in Belgium were smartphones. (GFK RETAIL AND TECHNOLOGY BENELUX, 2012) While theseevolutions may seem fairly unimportant for TV, they show how fast new technologies get adoptedby young people and how different their behaviour is from other people.In the process of convergence, millennials will be the first ones to consume TV content on theirtablets and smartphones. In fact, a survey from iBBT-iLab shows that 19% of respondents arealready using their smartphone regularly to watch TV. 34% of respondents in the same surveystate they use their smartphone to watch movies. (IBBT- ILAB.O, 2011) Knowing that half of allsmartphone owners had a data subscription in 2010, convergence of services is closer than ever.According to Küng, this implies that media companies will have to adapt their content to be usedon several devices. Smartphones demand a different screen resolution and technology than theclassical TV-set. Next to this technological barrier, the format of advertising will have to beadapted to these new standards. (Küng as cited by (BERTE, Katrien, 2010)) On the long term, thiswill create new advertising opportunities but will also generate additional costs for the –alreadystruggling- FTA-channels.2.5 Content as the eternal king“Very few people buy technology per se; they buy it because of what that technology can do forthem. And they buy technology they don’t particularly like if it allows them to access certaincontent. “(Lucy Küng as quoted by (HEGEDUS, Nathan, 2010))While the former chapter shows how generation Y will change the future of TV, there is oneimportant fact that cannot be neglected. Notwithstanding the evolution of the way in which TVcontent is consumed, the content itself remains king. A distribution channel without attractivecontent is most likely doomed to fail. According to Mugullavalli, content is still the key-driverbehind the profits of content distributors. (MUGULLAVALLI, Satish, 2011) This is why good contentproviders will remain important for the success of FTA-channels. A small amount of good contentis more likely to attract consumers than a large amount of bad content. Furthermore, researchshows that local content is still more appreciated than imported content. (BERTE, Katrien, 2010)Proof of this can be found in the top100 of most-watched TV-programs in Flanders. The firstforeign program that can be found in this list is ranked at place 25. (CIM, 2011)This is good news for the Flemish FTA-channels. It provides them with a way to bond theconsumer to their favourite TV-channel. Local content however, is more expensive to produceand not always a guarantee for success. (BERTE, Katrien, 2010) In 2010, the cost of producing onehour of TV content averaged 27,284 EUR. (VRT, 2010) Furthermore, some local content is soimportant for TV-channels that it becomes even more expensive. Football emission rights forexample are very important to attract consumers. In Flanders, VMMa has partnered with Telenetto buy these emission rights. The importance of this content is invaluable for FTA-channels andprices break records, year by year. 23
  31. 31. Another evolution in the content-landscape is the rise of public content. The way content iscreated, has slightly changed, and today, everybody with a good camera can make a great TV-show without a large budget. An example of this is the film “Paranormal activity”. The film cost nomore than 15,000 dollars to produce but was aired worldwide in cinemas after 1 million peoplevoted for the movie on (HAMPP, Andrew, 2009) In this case, the film got distributedin cinemas, but there is no need for TV or cinema to distribute content. Nowadays, alternativedistribution channels like podcasts, YouTube or other video websites enable everybody to publishand watch content for free. No more content distributors, TV channels or intermediaries neededto share content with the whole world in one click. 24
  32. 32. 2.6 Evolution of the current business modelIn 1989, the first FTA-channel, VTM, aired in Flanders. It was the first broadcasting companywhich was responsible for its own income which it generated by selling advertising space toadvertisers. This business model was very linear as shown in Figure 4 which shows a supply chainbased on Porter’s theories. Each part of this supply chain is a different market player with its ownvalue chain. The different players in this chain add value to the product and if the overall value ofthe product exceeds the sum of its parts, the company generates profit. (PORTER, Michael E.,1985)The first step in this process was content creation. Content creation was the work of independentproducers and Hollywood studios. They created the content and produced it together with theproduction companies. These companies sold their content to the cable networks which bundledit to send it to the network operators. The network operators on their turn transmitted thecontent to the consumer.In this model, there were two main income providers: consumers and advertisers. Advertiserspaid the cable networks and broadcast networks to distribute their advertisements and reach thedesired target group. This money was used to pay content creators and production companies.On the other side, consumers paid the network providers a very small amount to access to theirnetwork. In that way, all costs were covered. (VRM, 2011) Independent Cable producers networks TV-set Advertisers Hollywood Broadcast studios networks TV User Content creation Production Packaging Distribution End user interface Production companies Cable providers Sattellite providersFigure 4: Broadcast value chain showing the position of cable and satellite TV based on (VRM, 2011) and (MCGRAIL,Mike and Robert, Bob, 2005) 25
  33. 33. 2.6.1 Content scarcityThis model was based on content scarcity. Programs ran once, in real-time with a possibility forreruns months, or even years after the first airing. Viewers only had one chance to watch a givenprogram and advertisers only had one chance to deliver advertisements to these viewers. (SELES,Sheila, 2009) This offer of linear viewing resulted in a healthy balance between advertisers andFTA-channels which were able to survive on the money they received from adverts. If theywanted to be sure to see the whole program, consumers had to watch the full TV block includingads.Küng also identifies three additional factors which helped to maintain this business model. (KÜNG,Lucy et al., 2008) First of all, the strong regulatory framework prevented new players to enter themarket. Secondly, the European market is dominated by strong national players. In Flanders forexample, the public broadcast company, VRT, has a market share of 43 % (including Eén, Canvasand Ketnet). (SVR, 2011a) On average, public broadcasting companies in Europe have a marketshare between 30% and 35%. (EXPRESS.BE, 2012)Finally, there was a stable technological base. The technology needed to distribute TV-signals wasalmost the same for cable, satellite or antenna. All these factors contributed to the contentscarcity in the TV landscape. Following this strategy of scarcity, advertisers had no other choicethan to advertise on a limited amount of FTA-channels to reach consumers2.6.2 From content scarcity to content abundanceExplosive growth of TV-channelsAs mentioned in the introduction, until 1995, VTM was the only FTA-channel in Flanders. In thatyear, SBS introduced VT4 followed by VMMa which introduced Ka2 (now 2BE). The TV-offer inFlanders now included seven channels offering local content. This was further completed by acouple of foreign TV-channels offering their own content like BBC1 or RTBF.By September 2012, the number of TV-channels offering local content has grown to a whopping73. (SVR, 2011a) A full list of these channels can be found in Appendix 1. This explosive growth ofFTA-channels in Flanders was mainly caused by the introduction of digital TV. This new technologyenabled distribution companies to offer more channels, using the same bandwidth. (BOUWMAN,Harry et al., 2008)Now consumers are offered a wide range of TV-channels which included niche-channels tailoredto everybody’s wish. This evolution can be explained using the long tail theory. In “the long tail”,Chris Anderson describes Amazon’s strategy in selling a very wide range of different books. Thesebooks are not sold in large numbers but nevertheless account for a big part of Amazon’s profit.(ANDERSON, Chris, 2010) Just like the hundreds of books that are only sold to a couple ofconsumers, small FTA-channels appeal to very specific consumers making it a profitable business.Opposed to large FTA-channels appealing to a wide range of different people, it might be moreinteresting for advertisers to run commercials on more focused channels. 26
  34. 34. New market players influencing the value chainIn chapter 2.3, the potential entrants and substitutes in the commercial TV market have alreadybeen carefully discussed. Therefore, this paragraph will not focus on the abundance of newmarket players, but on their effect on the value chain of the traditional FTA-channels.There are two main movements which can be identified in the value chain of commercial TV. Firstof all, there is a movement of disintermediation. (KÜNG, Lucy et al., 2008) This means that there isa certain amount of fragmentation in the market which leads to the removal of certain companiesin the supply chain. An example of this can be found in Netflix, where content providers eliminatecable companies and TV-channels by offering their content to the consumer using the internet.At the same time, the Netflix example also applies to the second movement in the value chain:reintermediation. In this case, content providers have a large catalogue of content they want tooffer to the consumer. This content however, is not easily searchable and Netflix offers theplatform to make that possible.This makes the value chain less linear than it used to be. The value chain still includes differentintermediaries but they can easily be skipped or replaced by another one. For the end-consumer,the product (TV) still remains the same, but the way in which it is delivered differs drastically. 27
  35. 35. This has also an effect on the financing of TV as a whole. In the old model, advertisers paid the TV- channels while consumers paid the network providers. In the new model, advertisers pay whoever they need to distribute their message. On the consumers’ side, consumers pay whoever they need to access their beloved content. Or in the case of piracy, they don’t pay for the content at all, but only pay for the network access. Considering the different challenges, of all players in the supply chain, FTA-channels have the weakest position. The packaging part of the supply chain is where competition will be the strongest. Figure 5 clearly shows that the packaging stage can easily be removed or replaced. Furthermore, the money flowing to this stage is split between the traditional players in this segment and new entrants. Cable Advertisers networks Independent Cable producers Broadcast providers networks Hollywood Satellite studios providers TV-set Packaging User Content creation Distribution End user interface Google Netflix Apple User … PC Internet generated providers Mobile content devices MNO’s ….Figure 5: The new supply chain based on (KÜNG, Lucy et al., 2008) and (BOUWMAN, Harry et al., 2008) 28
  36. 36. 2.6.3 Power to the consumerThe introduction of digital TV in 2005 not only caused an explosion of TV-channels, it also gavemore power to the consumer. Technologies like VOD or TSV enable consumers to actively managetheir TV-watching behaviour.That is very different from the original business model of scarcity. In the past, TV-networks useddifferent strategies such as counterprogramming13, tent-poling14 and hammocking15 to attractaudiences and keep them tuned in for an entire block of programming. (SELES, Sheila, 2009) Inthat way, consumers where stimulated to keep watching one channel instead of switchingchannels.With TSV, a consumer now can pause a live stream and continue watching it later. In that way, theconsumer does not need to miss anything from his favourite program while he can still do otherthings while the program is running. Combined with the video recording function on set top boxesand VOD, the consumer has more power on what he watches and when he watches it than ever.This new way of watching TV has a positive effect on the time Flemish people spend in front ofthe TV. In 2010, the average Flemish viewer, daily watched 9 minutes more than in 2009, totallingat 2 hours and 57 minutes. (VRT, 2011) This evolution however, does not mean that there are alsomore people watching adverts. Because of the possibilities to fast forward programs, adavoidance has never been so strong. 80% of people using TSV, state to skip advertisements.(WERBROUCK, Stefaan, 2012)In the past, ad avoidance used to be a lot more difficult. Speck and Elliot identify three differentad avoidance strategies. The cognitive strategy, the behavioural strategy and finally themechanical strategy. (SPECK, Paul S. and Elliott, Michael T., 1997)The cognitive strategy implies that people can avoid a TV commercial by not paying attention toit. Related to this is the behavioural strategy where people can for example leave to room or starttalking to their neighbours. The most advanced of these strategies is the mechanical strategy. Inthe past, this involved switching channels but nowadays, it also includes fast-forwardingcommercials while using VOD or TSV.13 Counterprogramming: A technique used to attract viewers from another TV-station which is airing amajor event14 A programming technique where an established show is scheduled between two less successful shows.15 A programming technique where an unpopular program scheduled between two popular programs 29
  37. 37. 2.6.4 Pressure on revenueThe shift from content scarcity to content abundance results in new challenges for FTA-channels.While in the past only a couple of private TV channels competed for advertising money,advertisers now can spend their money on tens of different channels, each focused on a specifictype of consumer.This is a big advantage for advertisers which can now better target their core consumer. Morechannels also mean more available advertising space and cheaper prices. Figure 6 shows thatfrom 1993 to 2010, advertising spending on TV has grown from 185.8 million EUR to 941.2 millionEUR. Unfortunately for the FTA-channels, this amount of money now has to be shared betweenmore different market players.Furthermore, these figures do not only include advertisements, but also alternative forms ofadvertising like product placement or interactive content which may be more expensive to apply. Amount (million EUR) 1000 941,2 900 787,1 820,1 800 744,1 689,8 700 605,3 623,3 615,6 600 545 489,2 509,8 500 420,4 441,3 400 321,3 300 248 264,1 185,8 210,8 200 100 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Figure 6: TV advertising spending in Flanders (own chart based on (SVR, 2011b))2.6.5 A necessary shiftThis chapter has clearly indicated that FTA-channels will have to change the way they earn moneyif they want to survive. Pressure on revenue has never been bigger than today and alternatives towatch TV require FTA-channels to become more flexible than ever.Furthermore, the base of the business model, content scarcity, no longer applies becauseconsumers have never had so much means to do their own programming. If the generation Y-factor is added to this situation, it looks even worse. Therefore, chapter 2.7 will focus on possiblealternatives while the research in chapter 4 will help to determine what really is possible. 30
  38. 38. 2.7 Alternative revenue modelsThe former chapters suggest that it will become very hard for large FTA-channels to survive ontraditional spot-advertising. Niche channels may be able to survive but the largest players willhave to find alternative funding. This chapter will list the most important alternatives and identifythe opportunities.2.7.1 Non-spot advertisingKarrh defines non-spot advertising as “the compensated inclusion of branded products or brandidentifiers, through audio and/or visual means, with mass media programming.” (KARRH, James al., 2001) Neijens and Smit narrow it down to TV and describe non-spot advertising as“sponsoring of television programs with the aim to make the message of the sponsor betterknown via the programs.” (NEIJENS, Peter C. and Smit, Edith G., 2003) In other words, it includesall forms of TV-advertising except commercials.Non-spot advertising is an interesting alternative for commercials since the commercial messagedoes generally not interrupt the program. Because the product is integrated in the program, italso means that FTA-channels cannot loose advertising money of consumers skippingadvertisements.Research conducted in The Netherlands shows that non-spot advertising has a positive effect onsponsor recognition. On average 7% of the viewers, can name the sponsor spontaneously while33% recognises the sponsor when it is presented to them. (NEIJENS, Peter C. and Smit, Edith G.,2003)The same research also shows a generally positive attitude towards non-spot advertising. In thestudy, 42% of respondents had a negative perception of conventional advertising opposed to only16% of respondents who had a negative perception of non-spot advertising.Figure 7: A comparison between evaluations and preferences with respect to conventional advertising and non-spotadvertising (NEIJENS, Peter C. and Smit, Edith G., 2003)This study is backed by other studies conducted in other countries. In a study from Nebenzahl andSecunda conducted among American college students, 70% of participants answered positively onthe open-ended questions. (NEBENZAHL, ID and Secunda, E, 1993) Another study from Ong andMeri shows the same image. On a 7-point scale, with 1 = I totally agree and 7 = I totally disagree,the average score for the proposition “I am opposed to product placement” equaled 5.1, showingthat most respondents did not have strong feelings against product placement. 31
  39. 39. In the next paragraphs, some of the most popular forms of non-spot advertisement will bepresented.Product placementProduct placement is a form of non-spot advertising where products are featured during aprogram. A good example of product placement in Flanders is the highly popular TV series“Witse”. In this series, the main character drives a Lexus which is shown several times during theprogram and even in the TV theme.In Flanders, product placement used to be forbidden but has now been legalised. According to theVRM, product placement is allowed in films, series, sports programs and entertainment programs.It is not allowed to use PP in kids programs and informative programs. (VRM, 2012) Furthermore,PP has to be communicated to the viewers by showing a logo.In-script sponsoringIn-script sponsoring is a more developed way of product placement. It is also known as productintegration and in this format, a brand or product is an integral part of the program. It is not just acar that can be replaced by any car brand, but it is completely integrated in the story.Advertising funded programmingAFP is the most extreme form of product placement. In the case of branded entertainment, thewhole program focuses on one product or brand. An example of such a program was “Onderhoogspanning (Under high voltage), a program designed by Ogilvy to promote the Belgian powersupplier Electrabel. The program focused on energy consumption and how to use less energy.(TEMMERMAN, Wouter, 2007)BillboardingBillboarding is an advertising format in which the name and/or logo of a sponsor is shown at theend or the beginning of a program. Generally the product or brand has a clear link with theprogram and a billboard can be both static and dynamic.Title sponsorshipLess frequently used than billboarding is title sponsorship. This happens when a TV programincorporates the name of a product or brand in its name. An example of such a program inFlanders is the “Jupiler Pro League”, the national football competition, which is very popular andairs on TV.OverlaysOverlays are commercial messages that can be shown during the program and they arecomparable to banners used on websites. (BERTE, Katrien, 2010) The banner is shown while theprogram is running and can promote any product. At the moment, this format is not very popularin Flanders but if advertisers want to, they can use it anytime. 32
  40. 40. 2.7.2 Second-screen appsWhile second-screening is considered to be a threat for FTA-channels in chapter 2.3, it also offersa lot of opportunities. This is illustrated by Matthew Kershaw from Bartle Bogle Hegarty: "Thereality is that if 30% of tablet usage takes place whilst people are watching TV, this means thatthey are not watching TV. On the one hand, it is a silent killer. On the other hand, it is a massiveopportunity because TV advertising is incredibly powerful in terms of moving people and shiftingemotions." (Matthew Kerhshaw as cited in (MCCLELLAND, Stepehen, 2012))According to GFK, consumers want a more “engaging and immersive” consumer experience. (GFK,2012) They want a unique viewing experience and second screen apps are perfectly fit for the job.Second-screening can differ from using a twitter hashtag, over voting for someone’s favouritecandidate, to actively participating in a TV-quiz. Possibilities are sheer endless and the market isonly starting to grow. With 75% of TV-viewers stating to surf the internet while watching TV (GFK,2012), it should not take too much effort to involve people in a second-screen experience.In September 2012, “VT4” transformed into “Vier” and not only the name changed. Vier is activelyusing second-screen apps to engage viewers. During the commercial break of “De slimste menster wereld”, a highly popular quiz, they stimulate consumers to watch the commercials by makingthem participate in a small quiz. After each advertisement, the viewer is asked a question whichcan be solved on a tablet or smartphone. In this way, the viewer has to watch the commercials ifhe or she does not want to miss the questions. At the same time, the app stimulates people towatch live TV since it does not work with TSV. At the end of the program, the fastest player wins aprize. Future opportunities can lie into forming alliances with partners to produce second screenapps and earn more money through these apps. This can be done by selling products that appearin the program, but also by special offers tailored to the consumer.The biggest risk in the use of these second-screen apps lies in the fact that the second screen caneasily turn into the primary screen. (CASTILLO, Jose, 2011) While receiving more informationabout a TV-show, people are easily distracted from the TV-show itself. The biggest challenge forcontent providers will be to merge both screens while directing the consumers’ attention to thedesired screen. Next to the risk of distracting viewers, these second screen apps are alsoexpensive to produce. Research in the UK shows that play along gaming attracts 12% of the TVaudience on average in developed market. (MCCLELLAND, Stepehen, 2012) It is still not sure ifthat is enough to justify the costs.Even so Vier has just started with second-screening, the advantages are immediately visible. Inthis case, consumers are motivated to watch the advertisements and stay focused on the TV-screen. This enables Vier to charge higher prices for advertising space and keep earning moneyusing a refurbished business model.Furthermore, customer engagement can make the bond between viewer and TV channelstronger. Chances are that the research in chapter 4 will show that millennials are more loyal tocontent than to TV-channels. Engaging viewers and offering them a unique viewing experiencecould solve this problem. 33
  41. 41. Figure 8 shows Vivek’s theoretical model of customer engagement. Figure 8: Theoretical model of customer engagement (VIVEK, Shiri D. et al., 2012)In his research, Vivek identifies several advantages of customer engagement that can be appliedto the situation of FTA-channels.First of all, actively engaging with the consumer will lead to a higher perceived value for theconsumer which on his turn, will get more involved and will participate more with the offering oractivity of the company.Secondly, customer engagement enables the consumer to build a strong engagement with thecompany or brand. The more engaged consumers are with a company, the bigger the chance theywill pass along positive word of mouth.Another advantage of this connection is the increase of the likelihood of a positive behaviouralresponse toward the brand or organization (Jacoby and Chestnut 1978 as cited in (VIVEK, Shiri al., 2012)). It means that consumers will become more loyal to the brand when activelyengaged. Since FTA-channels will have to keep their consumers close, this could be a winner.Finally, second screen apps can help to build and maintain a brand community. The same researchfrom Vale shows that engaged consumers are more likely to join a brand community and tobecome brand advocates.So while second screening is still an unexplored area, the advantages for both the consumer andFTA-channels are already there. Future research will hopefully deliver more insights about theeffect of second screen apps on advertising effectiveness. 34
  42. 42. 2.7.3 Video on demand servicesNear linear TVWhile second screen apps can motivate people to watch more live TV and make them more loyalto TV-channels, they do not offer a solution for people who want to watch programs whenever itsuits them.In that case, near linear TV could offer a solution. Near Linear TV is all about the flexibility to viewTV programs earlier or later than they are programmed. (CAUDRON, Jo, 2011) As an alternative tooffering a rigid programming, FTA-channels could offer their programs to be watched in a certaintimeframe. Instead of waiting until 10 PM, one’s favourite series can then be watched a couple ofhours before or after 10 PM.In this way, TV-channels are still responsible for the programming while consumers have theflexibility to choose when to watch their desired program. Instead of driving away consumers,FTA-channels with good content can attract consumers who otherwise would watch a recordedprogram while skipping the advertisements. In short, FTA-channels can make viewers more loyalby offering them more flexibility without losing the advertising money.According to Jo Caudron, ads could be removed from the programs if consumers pay for theservice of near-linear viewing. In Flanders however, this is probably not going to work sincepeople are already accustomed to recording programs. It offers them the same service for freewhile they can skip the ads.TV on the goIn chapter 2.3.5, Telenet Yelo, Belgacom TV Overal and Mobistar’s TV Everywhere have beendiscussed as platforms which enable consumers to watch TV on the go. At the moment, onlyTelenet offers this service for free but that is probably going to change.The revenue from these applications however, is mainly for the distributors and not for the FTA-channels whose programs can be watched using these apps. An evolution that has already causedVMMa to prevent people from watching their TV-stations on Telenet’s Yelo.In the current market, these apps are a threat for traditional FTA-channels. However, nothingprevents these channels to make a paying app offering the same service themselves. While thedistributors have a very strong position when it comes to the distribution of FTA-channels on thecable and IPTV, they cannot prevent commercial TV channels from distributing their contentthrough alternative channels.That is exactly what the three major players in the Flemish TV-market are planning to do. At theend of august VRT, VMMa an SBS announced they are going to offer a new mobile TV platformcalled Rumble. The service will enable consumers to watch all TV programs from the big threewhen and where they want up to three days after the program has aired. (DECKMYN, Dominique,2012c) Furthermore it will also offer life TV without any interference of distributors. 35