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									Broadcast revenue models

            he TV industry in Europe
            and the US is facing
            unprecedented structural and
                                               A new model for
cyclical changes that have profound
implications for all players in the value
chain. The emergence of devices such
as PVRs, the increasing penetration of         How can the TV industry sustain
broadband, and the proliferation of multiple   profits in turbulent times, asks
media platforms is giving viewers unlimited
                                               Ari Iso-Rautio
flexibility. Consumer behaviours are
undergoing a dramatic move towards time-          The result is a very challenging financial   the mid-1990s onwards removed the
shifted and on-demand content.                 outlook with falling real term TV revenues.     bottleneck in analogue spectrum capacity
   It is a paradox in broadcasting today       These developments have far-reaching            and resulted in a substantial increase in the
that, while consumers have increasing          implications for the fundamentals of the TV     number of TV channels available. In the UK,
choice and flexibility in their viewing, the   industry. Traditional models of content         for example, the number of channels
money entering the TV value chain is           commissioning, distribution and exploitation    doubled between 2002 and 2007. The
decreasing. Spot advertising revenue is        will need to be overhauled in order to          second phase of digital TV penetration is
falling sharply and evidence from the last     maintain profitability and develop new          characterised by the successful launch of
downturn suggests that there will be no        revenue streams.                                new services that enable flexible viewing
bounce-back when GDP starts to recover.                                                        such as PVRs, catch-up TV and VoD. By the
Pay TV revenue growth is slowing down          Consumers are adopting more flexible            middle of 2008, over 20% of UK TV
and the current recession is depressing        viewing patterns                                homes owned a PVR; we at Capgemini
overall consumer spending, further limiting    The first phase of digital TV take up from      forecast this figure to exceed 70% by
future growth prospects.                                                                       2012. Another indicator of the increase in
                                                                                               flexibility is the emergence of catch-up
                                                                                               services such as the iPlayer from BBC.
                                                                                                  As more people have access to time-
                                                                                               shifted services, the amount of non-linear
                                                                                               viewing is also increasing. For instance,
                                                                                               year-on-year online video viewing in the UK
                                                                                               increased 50% to 85 minutes per week
                                                                                               between 2007 and 2008. Going forward,
                                                                                               we estimate that the total time spent on TV
                                                                                               viewing could increase slightly in the UK
                                                                                               over the next five years as time-shifted
                                                                                                viewing increases faster than
                                                                                                cannibalisation of linear viewing. Linear
                                                                                                viewing is likely to decline over the same
                                                                                                period, dropping to 80% of overall
                                                                                                viewing by 2013, down from 98% in
                                                                                               2007. By that time, PVR and VoD viewing
                                                                                               could account for 12% and 8% of all
                                                                                               viewing, respectively.

                                                                                               Money entering the TV industry
                                                                                               is falling in real terms
                                                                                               The relationship between TV net
                                                                                               advertising revenue and GDP shows that,
                                                                                               prior to 2002, advertising tended to grow
                                                                                               faster than GDP in periods of economic
                                                                                               expansion and decline more rapidly than
                                                                                               GDP in times of recession. After 2002

page thirty two                                               Cable & Satellite International   july-august 2009
                                                                              Broadcast revenue models

however, the relationship between TV               “The root causes of revenue decline
advertising revenue and GDP no longer              in the music industry go beyond
appears to hold. In the UK, for example,           piracy and reflect major structural
advertising did not recover even after GDP
growth resumed in 2003 and it actually             shifts that have parallels in today's
dipped again in 2006 at a time when GDP            TV landscape.”
was still growing. In other words, TV
advertising has been a slow growth sector          online advertising is estimated to have             The recorded music industry experienced
since 2000. In the US, national TV                 overtaken TV advertising in 2008.                the rapid adoption of digital formats driven
advertising revenue has been consistently             Furthermore, contrary to past recessions,     by players from outside the industry, such
growing slower than the GDP since 2004.            the current slowdown appears to be having        as iTunes, that capitalised on the online
   In the last decade, pay TV revenues have        a direct impact on overall consumer              distribution model and new consumer
been steadily increasing across markets;           spending - total personal expenditure            behaviours. Furthermore, the industry saw
however, they now appear to be reaching            growth reached a 30 year low in the US in        its business model change in just a few
saturation levels. In countries like France,       Q3 2008 compared to the previous                 years from being based on a single
for instance, penetration of pay TV                quarter. This, combined with increasing          revenue source - the CD - to several
households has been decreasingly slowly.           competition for the consumer's media             smaller revenue flows with higher degrees
The reasons for this gradual decline are           wallet with newer media formats such as          of uncertainty. Similar structural shifts are
largely attributable to the rising popularity      gaming, could have an impact on pay TV           evident in the TV industry today.
of free digital terrestrial services. Similarly,   subscriber numbers and average revenue              There may be useful lessons in the way
in the UK, net additions for digital pay TV        per user (ARPU).                                 that the music industry at first struggled to
subscriptions have been showing clear                 The result is a very challenging              address these fundamental issues, and how
signs of a saturated market. The pressure          financial outlook, with total real terms         business models are now being re-invented
on subscription revenues has already been          revenue entering the TV industry likely          to drive growth and profitability. Initially the
visible in select geographies.                     to fall significantly between 2008 and           music industry focused on fighting piracy,
                                                   2010, and revenues not likely to recover         which shifted attention away from
New era of no growth                               to 2008 levels in real terms before              monetising the nascent digital
Going forward, structural factors will             2014. Companies are entering a new               opportunities. Furthermore, there was
continue to negatively affect TV advertising       era in which traditional business models         limited investment in understanding
revenues. The increase in multi-channel            may no longer work; they need to adopt           consumers and lack of innovation in
penetration will likely continue to reduce         radical new approaches as top line               products and consumer marketing.
commercial networks audiences. The                 growth becomes increasingly difficult.
audience share of the thematic channels            Those businesses with the sharpest               The way forward: creating a new
taken as a whole will also increase as more        focus on maintaining profit margins in           model
households migrate to multi-channel. Since         their core business, while developing            For most commercial TV networks,
advertising minutes per hour is higher on          new revenue streams beyond core                  programming costs typically represent
those channels, the supply of commercial           activities, will be the winners.                 between 60% and 70% of the overall
impact will increase substantially in the next                                                      cost base. In an analogue world with few
few years. Lower cost per minute on                Lessons from the music industry                  channels, the cost of content could be
thematic channels will contribute to               Broadcasting is not the first media industry     recouped from advertising sold in the live
deflationary pressures on the price of TV          to experience the radical impacts of digital     broadcast window. This traditional
advertising. The ongoing shift to time-            technology and associated shifts in              commissioning model may no longer
shifted viewing is another structural issue        consumer behaviour. Recorded music               work; but while broadcasters are earning
facing broadcasters and advertisers.               industry revenues declined by a massive          lower revenues from the first broadcast,
   Along with these structural and macro           25% between 2004 and 2007 across the             the range of revenue streams has
factors, competition from online players is a      US, the UK, France and Germany. At the           diversified - with new revenue sources
significant challenge to TV operators.             same time, consumption of music grew by          from on demand distribution and
Television’s share of overall advertising is       10% a year with piracy often cited as the        download-to-own; strong growth in
falling in most countries. In Spain for            main driver. However, the root causes of         international sales of built programmes
example, the TV share of overall                   revenue decline go beyond piracy and             and formats; and increasing value realised
advertising fell three percentage points to        reflect major structural shifts that have        by producers and talent outside of the
43% between 2006 and 2007. In the UK,              parallels in today's TV landscape.               broadcast window.

Cable & Satellite International       july-august 2009                                            page thirty three
Broadcast revenue models

                                                                                            recognising that a proportion of the
                                                                                            value that they create is earned outside
                                                                                            of the broadcast value chain. For
                                                                                            example, the careers of actors and
                                                                                            presenters can be 'made' by appearing
                                                                                            in a successful TV series; they may then
                                                                                            go on to earn substantial sums through
                                                                                            their career.
                                                                                                There may be partnership opportunities
                                                                                            where broadcasters, with their reach to
                                                                                            domestic audiences and their international
                                                                                            distribution, can work with new talent to
                                                                                            develop and exploit commercial
                                                                                            opportunities in a way that is beneficial to
                                                                                            both. In the music industry, companies
                                                                                            such as Live Nation are pioneering this
                                                                                            approach by securing access to live
                                                                                            concert and merchandising revenues.
                                                                                                4. Change the mindset. Success
                                                                                            of the new business models will
                                                                                            ultimately depend on TV players' ability
   Broadcasters need to recognise that the      2. Re-draw commissioning models.            to put in place the key enablers within
key to survival in light of the changed      New commissioning models will be               their organisations. TV companies will
dynamics is to adapt. Capgemini              needed to recoup the full cost of              need to ensure that their operating
recommends an integrated, four step          production. The challenge for                  model, processes and capabilities are
approach to improve margins in the core      commissioners and producers is to              aligned to support the transition to the
business, while driving revenue uplift on    identify the business principles               new business model. They will need to
new growth opportunities outside the core.   on which new forms of engagement               recognise and appreciate the
   1. Focus on margins in                    should be based, and then to work              importance of collaboration and
commissioning. Currently, the bulk of        together to define the new approach.           partnerships in driving future growth.
commissioning is carried out by              The elements of a new business model           From organisations that have been used
networks who produce internally, or          are likely to include tighter control of the   to organic growth, they will need to
commission from external producers.          inputs and outputs in the production           morph into agile players that partner
Creative considerations are often the        process, a greater sharing of the initial      with upcoming and established players
main driver of commissioning decisions.      investment risk, and a partnership             to ensure they maximise the
In these tough economic conditions,          approach to maximise exploitation in           monetisation potential.
however, there is a need to increase the     secondary windows and internationally.             However, the most important enabler
focus on profitability in the                   There is unlikely to be a 'one size         that will determine the success or failure
commissioning process.                       fits all' solution. Instead, new business      of TV players in these changed times
   Networks will need to put in place        models will need to be flexible to ensure      is that of the mindset. TV firms will need
a rigorous financial analysis on a           that the returns to each player are            to effect a change of mindset to shift
programme-by-programme basis across          consistent with the amount of risk that        thinking focused on the primary linear
linear and non-linear windows to ensure      each is able to take on. Joint innovation      window to a more balanced view of the
that they derive the maximum margin          will play a part - for example, the music      revenue opportunities across the content
uplift. Including non-traditional revenue    industry is becoming more proactive            lifecycle. They will need to clearly
streams, such as merchandising and           with partnerships and new monetisation         understand the trade-offs in terms of
events, is a key part of this content        models such as music games, music              content and spend that may be required
lifecycle analysis. The metrics need         embedded in devices and wider                  to maintain margins during this period of
to go beyond volume indicators - an          collaboration with brands.                     declining revenues. CSI
example from the music industry would             3. Actively explore 360º deals.
be to track the profitability of a song      Another way in which commissioning             Ari Iso-Rautio is vice president, TME
or album alongside its chart position.       broadcasters can improve margins is by         Consulting Practice, Capgemini

page thirty four                                              Cable & Satellite International     july-august 2009

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