Summertime analysis: the future of the UK broadcast sector
As ITV and Sky are so well demonstrating, the UK broadcast sector is in rude health, writes Raymond Snoddy – but there is one major problem on the horizon.
ITV’s decision this week to buy a minority stake in Channel Mum, the multi-channel network launched this year by Siobhan Freegard, founder of the Netmums website, is hardly earth-shattering.
It is, however, interesting for several reasons.
It is the first time that ITV has taken a direct stake in a YouTube multi-channel network business, which could be the first of many.
The UK’s largest traditional commercial broadcaster has been wary of getting involved in such areas since it got its fingers badly burnt a decade ago when it agreed to pay up to £175 million for Friends Reunited and later sold for £25 million.
As a result, ITV’s online performance has tended to lag behind rivals until now.
In terms of the larger picture the deal is another example of ITV using some of its £250 million a year in free cash flow in acquiring new production companies both in the UK and abroad.
In June ITV agreed to pay up to £280 million to acquire the British independent Twofour Group, the company behind programmes such as Educating Yorkshire, The Jump and Hotel Inspector.
More than £800 million has been spent in recent years on production companies, mainly in the unscripted genre, before ITV turns its attention increasingly in future to owning more drama production capacity.
The bolstering of ITV Studios is an important factor in the long planned move away from near total dependence on cyclical advertising revenues.
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It is also a sign that the UK’s biggest commercial broadcasting players – ITV and Sky – are expanding rapidly in tune with the end of recession and growth in the UK economy.
ITV’s recent interim results for the six months to the end of June showed an 11 per cent rise in external revenue – excluding intra-company trading with TV Studios – to £1.35 billion.
Net Advertising Revenue was up by 5 per cent to £838 million and is expected to outperform the advertising market for the whole of the year.
Online, pay and interactive revenues rose by a creditable 27 per, albeit it from a small base, to £85 million.
Chief executive Adam Crozier can, with considerable justification, claim to have made considerable progress at the end of his five-year plan – not least in the growth of the share price during his tenure from 50p to the current figure of around 280p.
Compared with a business that was once wholly UK-centric more than half the near £500 million revenues of ITV Studios for the half-year came from outside the UK.
The long-term Holy Grail of creating a company that is only 50 per cent dependent on fickle television advertising is still an ambition for the future but ITV is clearly heading in that direction.
The only fly in Crozier’s ointment is ITV’s 7.7 per cent drop in share of viewing over the past five years and indeed there was a 4.6 per cent drop in the past 12 months.
As competition for eyeballs intensifies the number of ITV shows attracting an audience of at least 5 million has fallen significantly.
Enders Analysis notes that over five years the number has fallen from 432 in the first half of 2010 to 369 in the current first half.
Ironically the falling share of viewing has led a lower level of advertising inventory, resulting in increased rates, at least in the short term. Naturally Crozier has dedicated himself to halting the fall in viewing share.
Overall it would be churlish to carp about Crozier’s performance over five years.
ITV will move into the autumn viewing season in a strong and confident position – a business with scale and scope.
It is a position matched by Sky Group in the very different market of subscription television.
A recent statement outlining Sky’s annual financial figures was headlined with some justice: “Outstanding Results In A Year Of Transformation.”
The sheer scale of the numbers following the successful merger with Sky Deutschland and Sky Italia were truly mouth-watering.
Group revenues were up by 5 per cent to £11.28 billion with an 18 per cent rise in operating profit to £1.4 billion.
Even more tellingly, 973,000 new customers signed up, 45 per cent more than the previous year with churn under 10 per cent in all three Sky Group markets.
The UK and Ireland remain the main driving force, where the rise in new subscribers took the total past 12 million for the first time.
By comparison in Germany and Austria revenues grew by 9 per cent but only to £1.37 billion and although losses were much reduced there were still losses of £11 million. In Italy revenues totalled £2 billion and there was a significant rise in profit to £65 million.
Overall it is difficult not to be impressed by both the scale and scope of the Sky Group business and the potential for further growth in future.
For good measure Channel 5 is showing signs of new life and competitiveness under its new owners Viacom and Channel 4 is starting to bounce back from planned losses that came from extra investment in programming.
It is possible to pause for a moment of smugness, if not complacency, to note how well the UK broadcast sector is doing, including the creative forces of the independent production sector.
Looking across the horizon there is only one major problem – the BBC…or more precisely the Government’s attitude to the BBC.
There have of course been the usual self-inflicted wounds at the Corporation, the unnecessary and unjustified arrogance and a prolonged failure across the generations to tackle bureaucracy in an effective way.
But why against the background of such growth and confidence in the commercial broadcasting sector should a Government be apparently so determined to examine the scale and scope, or to pick up the refined version – the purpose and scope – of the BBC.
This is of course a euphemism for cutting down the size of the BBC and with it the amount of money available to the creative sector, including the Indies.
The reality is that with every year that passes, a BBC which has been saddled with a frozen licence fee for six years and required to pay for additional activities such as the World Service and the Welsh Fourth Channel, is shrinking in relative size compared to its broadcast rivals. And that is before taking in account the never-ending rise of Google, or Alphabet, and Amazon.
Recently in the context of the Government’s Green Paper plans proposals for the BBC the former Conservative Cabinet Minister, Lord Patten, also a former chairman of the BBC Trust, described his Conservative colleague Culture Secretary John Whittingdale as “a teenage ideologue.”
Lord Patten was right – and ITV and Sky, if they paused for a moment’s thought, might just possibly agree.