The tale of the tape shows that Sky Movies boasts over double the number of UK subscribers – over 5 million – than Lovefilm currently account for in the UK, Germany and Scandinavia (2.3 million).  Having only just launched, subscription figures are not yet available for Netflix, but the heavy bets they have laid at the table in terms of purchasing content and signing up partners, indicate that they are here for the long haul, and looking to land a knockout blow to both incumbents.

Research from O&O’s latest media consumer web survey shows that online streamed television is becoming more mainstream in the UK following the rise of broadcaster’s such as BBC, ITV and Channel 4’s ‘play again’ services. Nearly one-third of respondents claimed they used broadcaster’s online video services frequently and 15% are or have paid for an online video subscription service. Clearly the strength of content deals appears to be the most important factor in attracting viewers.

Netflix signed deals with MGM, Lionsgate and Momentum, ensuring first pay TV window title availability on a par with Sky Movies US studio arrangements – traditionally within 6 months of the DVD release in the UK.  Add this to their existing US studio deals, and a host of other partners that include Miramax, All3Media, BBC Worldwide, Channel 4 and Viacom, and from a content perspective they could be considered to have the box seat.  They have also stolen a march on their competition by commissioning original content, reviving ‘Arrested Development’[3], for example, a series that first delighted and then left its cult following vexed when Fox pulled the plug on it.  And, with gaming and new TV propositions increasingly important, Netflix has also trumped Lovefilm in gaining playout on Apple TV and Wii console, and by streaming in HD at 5.1 audio.

Lovefilm responded to the Netflix launch with their own content deals – with exclusive deals with the likes of ‘Twilight’ franchise owners eOne, and StudioCanal – and by undercutting Netflix’s prices with the Lovefilm instant service. However, unlike Netflix, its deals were made for the second pay TV window rather than the first, not directly infringing Sky’s turf. And two other factors still favour Lovefilm – firstly the current perception that Netflix’s offering is restricted with minimal titles, despite great deals in place (some of them for future output only); and secondly, continued demand for physical product (DVD and Blu-Ray rental and retail), which Lovefilm provides (and Amazon continues to supply).

Concerns over the impact of subscription services on DVD retail revenues have led to problems for Lovefilm in the past.  In 2009, Universal pulled its content from Lovefilm, and subsequently saw its DVD revenues rise.  But this hasn’t deterred Warner Bros from signing an exclusive streaming deal with Lovefilm for most of its recent and future catalogue, including the ‘Harry Potter’ franchise, and ‘The Dark Knight Rises’ after its first run on Sky.  Warner Bros has pushed the window for its titles on DVD postal rental to 60 days, from its original 28 days, to allow DVD retail and VoD to develop.

Recent Futuresource research indicates that compared to US, French and German consumers, UK customers purchase the most DVDs, an average of 6.5 discs each over the last six months, and furthermore 80% of respondents said they do not pay for any online video content.  Screen Digest figures echo this, with only 36% of European TV’s connected to a pay TV platform, compared to 90% in the US.   Over 10 million UK viewers still only see films in their homes on free-TV.

So what of Sky Movies?  Year on year new subscription growth numbers are down from 140,000 in 2011, to 40,000 this year.  But unafraid of a scrap, BSkyB laid down its own strong marker on 31^st January 2012, announcing the launch of an as yet un-named internet television service in the first half of this year, targeting the 13 million UK households who do not subscribe to pay TV.  The new service will be available to non-subscribers via different packages, including a monthly payment for unlimited access to Sky Movies, or renting individual films on a simple, pay-as-you-go basis.  And all this hot on the heels of another announcement that the BBC iPlayer and ITV Player catch up services are to be available to its subscribers via the Sky Anytime+ VoD offering.

With YouView also on the horizon in 2012, the battle for UK entertainment consumers has never been more heated.  Seconds away, Round Three…

While Facebook may get most of the attention at the tip of a new new media investment bubble, a bubble within the bubble has grown around social television, supposedly the latest in a long line of next big social media innovations. According to a recent study by Blue Fin Labs of 20 shows in the U.S., the number of unique commenters on average grew by 362 percent. Shows like American Idol or the X-Factor now claim 7.6 and 4.3 million Facebook likes respectively.

So will social TV be different? If reports of BSkyB investing £10m for a 10% stake in Zeebox are accurate then maybe these new social pioneers are on to something. Similarly, GetGlue has a reported two million users and has attracted a further $12 million investment. Both social TV services allow users to access a “second screen” service and interact with other users directly or via Twitter around the content. IntoNow and Miso take a different approach – they use audio fingerprinting technologies to identify a programme being watched, whether live or time-shifted, from its sound signature and then enable social interaction around the content.  On the other side of the pond, US pay TV operators are a step ahead: Fios TV and Comcast have built their own social TV platforms whilst DirecTV and AT&T have partnered with Miso amongst others…

Engagement is certainly the future of on-demand TV and social TV applications and other second screen services offer broadcasters and producers the ability to understand who is watching and build a relationship with them in order to then better target advertising and programming. The latest O&O consumer research suggests that there is nascent demand for second screen content to accompany TV programmes. However, thus far there is little evidence that any of these social television services are being widely used. Further, and just like Twitter, it is not clear if there is the prospect of commercial success on a standalone basis down the line. None of these pioneers appear to have developed a compelling commercial model.

Our view is that larger scale social tools  with strong network effects i.e. Facebook, Twitter and Google + will reap the benefits of these new trends either by buying up social TV startups or developing their own in-house technology. Sky’s move buying into Zeebox was maybe less about future profits and more about hedging its bets and getting ahead of the curve in this arena.

Of course the dot com boom demonstrated that you don’t need to make profits to get rich via the next Internet fad. If social television is indeed to be the next big thing then you can be sure that Facebook are already on the case, not to mention Google and Apple…there may be a big pay day for a few savvy entrepreneurs but the majority will be left to ponder: what’s next?

TV2 was launched by the Danish government in the late 1980s as a commercial counterpart to foreign channels broadcasting into Denmark (such as TV3) and the national purely licence fee funded PSB DR.  The broadcaster had a mixed funding model and was created according to the enterprise model, only producing news, current affairs and sport in-house.

From the early 2000s one of the stated goals of the new government was to privatise and sell TV2. TV2 was restructured into a state owned PLC and put up for sale in 2004. However, long term EC court cases made this unviable and the plans to sell were put on hold.

In the meantime this meant the broadcaster was no longer receiving licence fee funding and was now competing against foreign commercial channels targeting the Danish market, licensed under more lenient advertising rules and without Public Service obligations.

TV2 suffered big losses over a number of years. In 2008 it was no longer able to obtain commercial loans or credit to finance the channel and a new strategy had to be put in place. Some of the assets were sold off (incl. radio and broadcast transmission) and a government loan assisted with restructuring.

TV2 still has Public Service obligations under the terms of the Current Public Service licence running until end 2013, but has now lost its must carry status.TV2 charges distributors DKK 10 plus VAT/subscriber (just over £1), to rise to DKK 12 plus VAT in 2013 and 2014. Distributors add on their own margin, VAT and copyright fees.

Digital switchover has already taken place in Denmark, with most viewers having access to some kind of pay TV. Only about 10% of homes have DTT/freesat. Initial take-up of TV2 as a pay channel suggests 95% of HHs have kept TV2. Either by subscribing specifically through pay DTT, or by TV2 automatically being included in basic packages on cable and satellite.

For consumers this translates into a monthly cost of DKK 35 (almost £4) on DTT (Boxer). In the majority of cable homes TV2 is placed in the basic package and the direct cost of DKK 10 is passed onto consumers without added distributor margins. For existing satellite subscribers there are currently no changes in prices.

So how does a 5% loss of HHs equate to advertising revenue loss versus increased subscription revenue?

Sub fees are unlikely to bring in much more than DKK 25m (in the region of £3m), possibly rising to DKK 30m as sub fees are set to rise by 20% in 2013. The loss of advertising revenue as fewer HHs are reached is likely to be at least DKK 50m.

So at the moment it looks like subscription fees would have to rise significantly to make up for loss of advertising. If this was the case this would likely mean having to move TV2 into a higher tier pay package, which again would lower the reach.

One of the sources of the current CPT premium is the reach of “light” homes. TV2 is one of the few PSBs that have managed to retain share with multichannel audience fragmentation.

The question is whether TV2 is going to lose any of its CPT premium from smaller reach and a possible loss of audience share with more competition in packages. This could further worsen any loss of advertising revenue.

Is it likely that Public Service obligations can be kept on a pay TV channel?

Would the channel be able to afford to keep the same level of programme spend and investment in content creation?

So what might the broader impact be on the Nordic broadcasting landscape?

The EC ruling in spring 2011 cleared TV2 of having to pay a fine for illegal state aid, but as the aid was not reported to the EC before it was given, there may still be significant penalty rates payable.

TV2 lost in court against Viasat/SBS on illegal advertising discount practices. If they can prove they have suffered a financial loss as a consequence of the practice, TV2 will be liable for damages.

TV2’s past problems has made it unattractive to potential buyers and would be unlikely to be put up for sale again until these matters have been settled.

If TV2 does go up for sale there could be interest from some of the media groups operating across the Nordic market such as Egmont (TV2 in Norway), Bonnier (TV4 in Sweden and MTV3 in Finland) who have all been linked with rumours of a Pan-Nordic consolidation of commercial PSBs.

To get an answer to whether the internet increases news plurality Ofcom (in its current study of the issue for the Secretary of State) needs to look at the news supply chain and the quality/investment in news provision not simply the headline number of providers or the headline number of different named news services used.

In the on-going debate about media plurality, the internet is usually deemed to be hugely beneficial – increasing the number, range and depth of news sources that consumers can access.  However, we believe the effect of the internet is not uniformly positive. Certain high spend / high quality mediums like 24 hour news channels, and traditional broadsheet newspapers could well disappear, whilst the internet will effectively increase the number of news services a consumer uses rather than the actual supply of news itself.

Wider use of internet news sources will only accelerate the decline of dedicated television news channels.  24 hour TV news had its moment in the sun –literally – in 1990 Kuwait, and has been riding on the back of increased multichannel penetration in every major global market ever since.  But in a world of smartphones, tablets, internet access at work and home and OTT services and apps to the TV, will any news consumer watch a dedicated TV news channel?  If the news is important enough to watch now rather than wait for the main bulletin, why would you wait 30 minutes for the next news cycle?  (To draw a parallel, we can’t see many people continuing to use near-video on demand services such as Sky BoxOffice once true on demand from Sky, Lovefilm, Netflix and others become pervasive).

We’re not predicting the death of TV news – the flagship bulletins, with top talent presenting and reporting, will remain, and video content will be integral to internet offerings.  But the endless repetition of 24 hour news will mercifully draw to a close.  The braver news organisations will embrace this change – think of saving the costs of 24 hour transmission, the cost of two dedicated anchors repeating the same story every fifteen minutes – and the correspondent out in the field, torn between actually finding out what is happening and the requirements of having to continually “go live”.  The result might actually be a better, deeper, more cost effective service.

Of course, there are stories that need rolling coverage.  But the very biggest stories – those that the nation needs to know – have always and still get the networks cleared for them.  If all that remains for 24 hour news is to help cover those stories which are big, but not big enough, isn’t there a better way?

Similarly, while the internet may mean national newspapers reach a global audience and encourage people to sample news from a number of newspaper providers online (O&O’s own research suggests people still loyal to a specific print title in the physical world will typically use 2 to 3 different traditional newspaper web sites in a given week), won’t it eventually undermine the traditional newspaper business model forcing some of them out of business and others to reduce their investment in original investigative reporting (the legal kind that is !).

In addition, many of the extra news services that the internet enables are aggregators or syndicators of others’ material.  Even mainstream news brands (particularly newspapers) routinely embed video from other suppliers.  And in turn that footage can often be from a single agency.  So is this plurality?  Should the debate focus on supply, rather than the number of sites a consumer uses?  Do we want the same car in a hundred different colours, or do we actually want a choice of cars?

Lastly, much of the more UGC style blogging news sites offer a variety of opinion, sometimes from big names, but perhaps less in terms of new hard evidence or insight.

We first decided to put on this event back in 2008 as we were frustrated at presenting at other people’s conferences which were often a combination of ill directed and unchallenged discussion and corporate press releases. We were also disappointed at the existing crop of consumer surveys often commissioned to support a particular corporate initiative, or if truly independent, were often poorly constructed or unfocused.
O&O prides itself in providing clients with deep and considered insight on consumer and business trends and the resulting strategic implications for their businesses, and this event is an important part of that mission.

This year our consumer survey covers more areas than ever before as all media and entertainment sectors converge on the same devices and screens. It takes us at least 3 weeks to design and test a survey that has all the right questions in the right order, and another 3 weeks to analyse the dizzying array of answer combinations it provides, and then another two weeks to boil down the key findings for the event – where people only see the tip of a very large iceberg. However, the research we don’t use at the event does not go to waste, it helps us provide key insights on a number of client projects throughout the subsequent year.

Our review of the medium term prospects for the UK media and entertainment sectors – this year presented by David Cockram and Nick Beazley of O&O – is a chance to absorb all the new market information, new product launches and revenue trends across TV, radio, press, film, music, games etc that we track throughout the year, and then update our house views of where consumers, money and profits are heading. This means that when clients ask us to do work over the next 12 months, we always come with a considered view of the important issues of the day – and so we can also make some unsolicited suggestions on what they should be thinking about before their rivals do.

Last but not least, this event is a chance for the O&O team to meet all our clients face to face and for our clients to meet all the people behind the advice and the numbers – the consultants and associates – Sean McGuire, Alan Ogston, David Cockram, Jeremy Michaels, Theresa Vimmerslev, Nick Beazley, Reef Read, Duncan Gray and Laura Morris – and the commercial team – Victoria Flemington, Andrea Toth and Chris Humpherson, who do so much to support our advisory work and who go beyond the call of duty each year to make our annual event work so well.

And over the next couple of weeks we will be blogging and tweeting some of our insights to a wider audience for the first time, although only our clients will receive the full benefits of our current wisdom of course!

Most analysts focus too much attention on the speed of the shift from physical to digital formats and not enough on the endgame: will the shift online shrink or expand consumer spending? And who is most likely to control consumer access to the content? Between pay TV incumbents like Sky, online ordering groups (Lovefilm–Amazon, Netflix) and aggregators (YouTube, iTunes), physical retailers like Tesco–Blinkbox, and the studios themselves, the stakes are high. As the myriad deals in the last few weeks have shown, the battle has begun in earnest.

At O&O we project that total consumer spending on TV and film content in the UK though Blu-ray, DVD, video on demand (VoD) and subscription video on demand (SVoD) is likely to shrink over the next five years. More importantly, we believe that the battle for the DVD market – as it moves online – will be the first major skirmish between organisations currently vying to control large proportions of UK entertainment and media spend in the web 2.0 era. In the end it’s not about how it’s sold, but who sells it.

O&O thinks while there will be some shift from linear TV schedules to on demand play lists, current evidence from homes that have access to on demand content suggests linear channel based TV still has a lot of life left in it.

By focusing upon on demand TV programmes’ total share of viewing people, may have missed the most important implication of connected TV – the changed nature of the engagement with audiences and advertisers. Connected TV ushers in audience tracking and profiling for advertisers and dual screen/social programme interaction plus programme recommendations for viewers. Its potential to enhance the value of live/linear TV watching may end up being more important than its capacity to take people away from the shared live TV (or near live) programme experience.

O&O has long believed that true on demand consumption will only account for 5-10% of all viewing in the medium term, with a further 10-15% of all viewing being time-shifted via PVRs. Even early adopters of Virgin Media’s Tivo device (who are likely to be the biggest fans of on demand TV functionality) are only spending 25% of their viewing time away from the standard linear TV EPG offering.

However, while non-linear viewing of TV content is likely to account for little more than 20% of all TV viewing in total, O&O has forecast that around two thirds of all viewing (including linear/live viewing) will be via a broadband connected TV set, set-top box or other connected device by 2020 (see diagram).

There are potentially significant implications for traditional broadcaster business models when a critical mass of viewing is via connected devices. Mass viewing, even of linear/live content, via connected TV sets and other devices provides the ability to collect granular data relating to individual viewing trends. This data could then theoretically be used to inform better scheduling and targeting of programmes while also ushering in the ability to deliver targeted advertising when combined with other information on household lifestyle profiles, store purchasing and internet behaviour. And as this advertising becomes directly relevant to a household it will in turn make ad skipping less likely.

Connected TVs will also enable the dual screen interaction currently being explored by many broadcasters to be better synchronised with the linear broadcast. Channel 4’s The Million Pound Drop game show was played 505,000 times by 76,000 unique players during the show’s Tuesday, May 25th 2010 broadcast, demonstrating the potential reach of such services and their ability to enhance the viewer experience. This potential will be enhanced when all viewers of the programme can be made aware of second screen functionality during a live programme, and when the results of any such second screen activity can be fed back to individual viewers in their living rooms in real time.

Far from the digital world destroying traditional linear commercial broadcasting business models, the opportunities exist to make it more powerful than ever, for both viewers and advertisers.

Figure 1

If you would like to know more please contact:
david.cockram@oando.co.uk

O&O thinks when judging which is the best UK based TV production group from an investor’s perspective it is better to review some more important fundamental underlying trends reflecting their ability to generate and sustain new IP development. O&O has developed a five part scorecard for all leading UK production groups measuring: refreshment, stickiness, longevity, stability and transferability. These yield a very different ranking from those based on turnover and profitability. Can you guess which production group comes top?

As UK based independent television producers continue to find themselves the targets of mergers and acquisitions, the metric with which their success is judged becomes ever more important. Production companies have tended to be assessed by the size of their turnover and profits. Rankings, most notably by Broadcast magazine, are compiled on annualised figures of UK based turnover and profits, with actual commissioned output only considered in the event of matching revenues. Occasionally, peer group and/or commissioner views are also added.

However, these survey based rankings do not show the whole picture in terms of a producer’s recent performance and true position in the market. Differing financial reporting times as well as the influence of mergers and acquisitions can distort the impression of a company’s recent success and produce artificially high or low positions against its peers. One or two very successful programmes developed many years ago and the products of a previous management team can also lead to a misleading assessment of a company’s future growth prospects. Peer group reviews often reflect who is currently best at coming up with new hit shows, but tend to undervalue companies with a long term strong track record or those doing particularly well overseas.

In doing work for potential investors in large UK based independent production groups O&O prefers to assess companies by their ability to create and sustain IP. We use detailed analysis of audience performance and hit rates to come up with a five part assessment of the strength of these companies (See Figure 1).

• REFRESHMENT - % of commissions that are new – this illustrates a producer’s ability to bring new ideas to the market
• STICKINESS - % of new programmes in 2009 recommissioned in 2010 – highlighting success of recent strands
• LONGEVITY - Number of long term strands – shows a producer’s historic ability to generate big hit shows
• STABILITY - % of long term strands performing above channel slot averagei – displays how good a producer is at keeping their long run hits at the top of their game
• TRANSFERABILITY - Number of UK titles with international versions in major overseas TV markets – shows a producer’s ability to create exportable programme formats

This commission-led ranking can give a clearer indication of how a producer is performing compared to previous years, where it lies compared to its peers, and highlights those that are dependent on a few long-running programmes with large dedicated audiences.

Our analysis gives a higher ranking to 3 of the top 7 UK producersii, lower places for 3 companies and only 1 matches its position based on turnover. Can you guess who the top large UK based producer is, based on our ranking (Producer A)? (NB: the list includes all the largest UK indie groups and ITV Studios, but not BBC in-house).

Figure 1

If you would like to know more please contact:
nick.beazley@oando.co.uk 

i.If the programme is ever-present in the slot all year (e.g. soaps), then channel peak time average is used

ii.Based on 2011 Broadcast magazine rankings

O&O thinks despite challenging economics, truly local TV can start to develop in the UK without the need for direct government support if we drop preconceived notions of what it might look like, how it might be delivered and who might end up providing it.

The interim report from the Shott Review, set up by Secretary of State Jeremy Hunt after the general election to assess how local TV could be made to work commercially, has rather unsurprisingly come to the same conclusions which Ofcom reached about 18 months ago – the economics of local TV in the UK, even in the largest urban areas, look precarious at best.

However, while the conclusions have not changed, the context has altered radically. When Ofcom reported the then Labour government’s main concern was to find a replacement for ITV regional news (albeit with more focused local TV news opt outs if possible). The then government was also minded to make some of the BBC’s “surplus” licence fee available to provide an initial subsidy to such services. Eighteen months on, and the new coalition government has decided that any licence fee “surplus” should either go back to licence payers or be used to help achieve universal broadband access in the UK. The coalition government also sees local TV plans not as merely a solution to an ITV problem, but as part of a broader agenda to revitalise local politics and local economies across the UK.

The problems for commercially funded local TV are by now well known. The UK’s local advertising market is small by international comparisons (the US has 12 times more local advertising spend per head than the UK). The UK’s population distribution and economy is dominated by London, its population being five times the size of the next largest city in the UK (See Figure 1). UK TV advertising spend is driven from London, with few truly devolved local advertising budgets within national brands and retailers. While national advertisers are happy to weight their campaigns by UK region they can achieve this through national channels; they don’t need local TV stations to achieve this end.

Nevertheless despite all these problems, O&O believes that local TV could be made to work commercially in the UK if one, first, drops many preconceptions of how to run a TV station, and, second, one ensures any potential structural and regulatory barriers to its success are removed. O&O’s own modelling of local TV in the UK suggests that such stations could be made to work in the UK’s 10 to 15 largest urban areas if:

1. annual running costs can be kept to £3m to £4m,
2. audience share of 1.5 per cent can be achieved (about 23 minutes per week on average) with a weekly audience reach of 30 per cent or more; and,
3. transmission hours are kept to about 6 hours a day at most while achieving the necessary audience share.

Local TV beyond the top 15 urban markets (typically populations of 300,000 to 400,000 people) could work, if:

1. annual running costs can be kept at £1m or less,
2. audience share of at least 1 per cent can be achieved (with 25 per cent weekly reach),
3. transmission hours kept to about 3 hours a day while achieving the audience share necessary; and,
4. coverage areas can be found that deliver minimum “wastage” for local advertisers (which will help keep advertising prices approaching those achieved by local newspapers).

To keep to these cost levels, local TV will have to make significant use of voluntary staff, make judicious use of user generated content, and work closely with existing community groups.

Seven structural and regulatory changes are needed to give local TV a chance to work commercially:

1. allowing cross ownership by existing local media groups,
2. ensuring due prominence and free carriage on all relevant TV distribution systems (satellite, DTT, cable, IPTV and web based TV),
3. giving free access to DTT spectrum in most areas while ensuring the transmission coverage areas chosen guarantee minimum advertiser “wastage”,
4. relaxing sponsorship rules,
5. requiring significant cross promotion of the local TV service on at least one leading commercial PSB TV network (ITV or C4),
6. encouraging cross ownership of multiple local stations in contiguous areas; and,
7. auctioning the London local TV licence – which would include DTT spectrum access, due prominence on TV distribution systems and cross promotion by a commercial PSB network in the London area (using the proceeds to help fund stations in smaller UK local markets).

While none of the above will guarantee local TV works everywhere in the UK, it will give local TV its best chance of commercial success over the next 5 years. Then, and only then, would the government need to assess the need for larger subsidies, by which time changes in local politics and local economies plus a general economic recovery might have helped take subsidies off the agenda.

Figure 1

If you would like to know more please contact:
sean.mcguire@oando.co.uk

O&O thinks internet news consumption is not a straight substitute for traditional print readership (many people continue to do both) and that multiple consumer offerings, with different levels of quality and price points will eventually lead to a healthier multi-platform national newspaper sector than today, investing more in new content generation – not less.

Analysts are always keen to point out that an internet based national newspaper reader (whether one with free access or one paying to get behind a paywall) is worth much less than a traditional print newspaper reader – typically only one fifth to one tenth the value.
They, therefore, conclude that as internet news consumption continues to grow and print circulations continue their long term and accelerating decline (see Figure 1), the national newspaper market will shrink, forcing newspapers to reduce the scale and scope of their offering and/or forcing some players out of the market, with serious consequences for market concentration and plurality.

This diagnosis is based on several implicit assumptions, most of which do not stand up to proper scrutiny. The first assumption is that internet news consumption is a straight substitute for print consumption – it is not. While it is true that online access to news content (first via the PC and now via a host of portable devices) does get a proportion of print newspaper buyers/readers to stop paying, for many readers internet access is a very different, and largely complementary, activity to the daily flick through their favourite paper.

Research by O&O suggests internet users tend to snack on news across a large number of different sites (newspaper, TV and news aggregator sites) with many users remaining loyal to their favourite newspaper in print form.

The second implicit assumption is that there is no link between the erection of paywalls and future rates of print circulation decline. In so far as some readers do see print and online access as substitutes, a move to paywalls on the internet should help slow circulation decline. Indeed, any assessment of the benefits of a move from free access to paywalls on the internet must include the impact on print circulation. While paywalls may yield less in direct consumer income than the loss in online advertising they can still be beneficial to the extent they arrest circulation decline and support print cover prices.
The third assumption is that average online revenue yields will remain at their current low levels, or even fall – they will not. The growth of iPad/e-reader applications will offer publishers the chance to offer electronic access to high quality, picture/video rich electronic newspapers, which can be differentiated from their free/low cost basic internet offering. Such offerings should get some consumers and advertisers to pay a lot more than they currently do for electronic access. While the loss of classified advertising to specialist internet portals may never be replaced (which is much more of a problem for local newspapers than national newspapers), the prospects for display ad revenue and consumer spending across print, iPad and basic online access combined are likely to improve as owners learn to price discriminate better to both advertisers and readers (as News International is currently trying to do).

The fourth assumption is that there are limited additional cost savings to be had in running a newspaper. But, the same technology that spreads news across the internet can also be used to reduce newsgathering, editing and management costs. Should high penetration of iPad/e-reader technology eventually provide the basis for mass distribution of newspaper content without the need for paper (perhaps a stronger medium term possibility for “broad sheets” than the “tabloid” market), newspapers’ most fixed and erratic costs respectively – printing and paper – will have been eradicated.

National newspapers do have to go through a very painful and difficult transformation from being a single outlet, single price, fixed proposition, physical product to a multiplatform, price differentiated, real time updated, electronic product. But O&O still believes there may well be more national “newspapers” in 2025 than 2010, and that many of them will still be making healthy profits.

Figure 1

If you would like to know more please contact:
alan.ogston@oando.co.uk