How do you solve a problem like...network TV?
The post COVID bounce back in TV advertising in 2021 may have helped owners of commercial TV networks around the world (from ITV to CBS to RTL) to temporarily ignore the prospect of long-term decline, but since then the current deep recession in TV advertising in many markets has made some think the much-predicted end to their business model is at hand.
More likely is that neither thought is wholly correct; but the free to air business model definitely faces some serious challenges in the next few years. Recent O&O research suggests that the long-held assumption that fickle, web savvy viewers in their 20s would grow up to be lean-back, couch dwelling linear viewers in their 30s and 40s as family and job responsibilities bite, is no longer true. In fact, evidence suggests those 40 to 60-somethings are becoming almost as web savvy and fickle as their children and grandchildren, as so much of their lives move online. This means the threat to free network TV’s audience reach and advertising premium is accelerating, not flattening out.
There are four main – not mutually exclusive – go-it-alone response options for national commercial network TV operators to this existential challenge: (1) acquire / merge with free to air network rivals, (2) change the airtime business model, (3) expand into adjacent activities and/or (4) diversify through core capabilities, audience and IP resonance or brand values.
None of these provides a total solution and each has its own execution issues. But over and above these four response options, commercial networks are going to have to learn to partner with each other and those outside their usual orbit in order to achieve the scale with which to maintain their place alongside global SVOD players and tech platforms. And playing nicely with the others is something they have not traditionally been very good at.
Merge and Buy Yourself another decade
The first and simplest go-it-alone response option is to acquire (or more diplomatically merge with) other free to air network businesses – either within national markets or across markets.
Unfortunately, as RTL has found in France and the Netherlands, despite the decline in national network TV advertising markets, regulators still see TV as separate from the larger digital advertising market dominated by the tech platforms. Regulators believe giving any one organisation more than 50 per cent of the national TV advertising market to be potentially too damaging to advertisers. In most cases the current competition policy framework doesn’t even take into account the potential harm to viewers of having two or more poorly funded national network providers versus one or two well-funded ones. That means they don’t even consider how a merger might yield viewer benefits that counter any harm from higher advertising prices feeding through to higher consumer prices.
In the USA, the problem is even more stark, there being a specific prohibition on any one organisation owning two networks – which tends to make WBD the favourite to eventually buy CBS, if not its parent Paramount Global, rather than Comcast, whose ownership of NBC would be a barrier.
If national market mergers are off the agenda for now, what about cross border mergers? As long as TV advertising is still mainly bought nationally, and national tastes and territorial content rights deals still dominate, the synergies involved with such mergers are limited. Regulators might look more kindly on such mergers and they might buy the network business model a bit more time, but the benefits are not enough to make the required difference.
Improve the Free to Air Business Model
With large scale mergers ruled out or difficult to monetise, the favourite response option is to improve the economics of free to air ad funded TV – higher revenue yields or better revenue to spend ratios. Many hope the move from linear, non-connected viewing to IP streamed, on-demand and connected devices will increase ad yields and maybe reduce costs. But it’s far from clear this is the case. It’s certainly true that advertising yields for on demand viewing can be higher, but this is often correlated with the softening of yields from linear viewing. The total TV advertising pie probably isn’t growing, leaving each network provider running to stand still in a race to transfer linear to non-linear viewing faster than their rivals.
In addition, the technical, platform and UI costs of keeping up with consumer expectations in a streaming age aren’t cheap – €50m to €70m a year if you go-it-alone. Even worse than this, if connected advertising is turned into addressable advertising (each viewer type seeing different ads) this can actually allow some leading advertisers to achieve their campaign frequency and reach objectives with lower amounts of spend - with no guarantee they will direct these savings back into TV spend for more campaigns. Connected TV can lead to money coming out of TV advertising.
What about alternative airtime related revenue to the traditional advertising sales revenue model? Call-in quizzes and games were very lucrative at the turn of the century but have become more highly regulated in recent years due to high profile abuses. Airtime-for-equity schemes then followed, with new products and services highly dependent on early stage marketing to achieve critical mass being allowed to award small equity stakes to the commercial networks in lieu of charged advertising. This has led to networks such as Channel 4 and Prosieben.Sat1 building up small stakes in a large number of early stage businesses, some of which have been sold at high multiples, but most of which fail – as with any venture capital type fund. However most shareholders in commercial networks don’t like this strategy, as it’s really a move into venture capital, which many feel is better left to the venture capital industry.
Shoppable TV is the latest idea, with IP TV based viewers able to click to buy the goods in the adverts, or even those shown in the programmes. This is one step beyond previous moves by free to air networks into traditional home shopping in non-prime schedule slots or on smaller spin off channels. It brings free to air networks into direct competition with Amazon’s move into TV advertising and Meta’s moves into e-commerce. It’s a further move by TV into transactional marketing with direct and quantifiable ROI for advertisers, and away from the brand building role of prime time. It may provide useful incremental revenue and profits but it’s unlikely to transform the fortunes of commercial networks.
Lastly, with flat nominal revenues likely, commercial networks need to look at costs. Developing more cost-effective schedules - through changes to genre mix or rights windowing – can help. But as viewing moves to on demand, what would have been used as filler content in a linear schedule is less useful. On demand requires high impact programming that viewers will seek out. Outside programming costs, outsourcing technical activities, sometimes by separating out such activities into a trading subsidiary or using AI and delayering management tiers can all help reduce operating costs.
Expand into TV Content and Pay TV
With growth and merger prospects of the core business challenged, most operators have looked to expand into two adjacent activities – pay TV and global content creation and exploitation. Pay TV has proven difficult to execute and a challenge culturally. Those who run free to air networks want to maximise audiences and overall reach which become the currency of executive success and progress. Pay TV by contrast deliberately excludes some of the potential audience. Programming commissioned with the aim of getting the largest audience possible across the population or a specific target demographic may not be the programming that generates the most consumer value –i.e. audience size multiplied by intensity of interest in the programme. Not surprisingly there has been no pay TV business of lasting significance developed by a free to air broadcaster group in the developed world (there have, however, been pay TV and content based groups who have created successful free to air channels).
Moves into pay TV by free to air groups have so far tended to be reversed or are deliberately left small in scale – offering ad free versions of the main channel and catch up services or a bundle of niche channels for a small incremental fee. And that way they complement rather than undermine the reach maximising core aim and ad market offering of any free to air group. Recent more successful moves by RTL to bundle TV, music and ebooks into a pay proposition come from its owner Bertelsmann’s control of publishing and music assets as well as TV content and networks – attempts to do it in TV alone were less successful.
Moves into content creation and exploitation have been more successful, with two of the largest global production groups based in Europe owned by commercial free to air networks – Fremantlemedia and ITV Studios. But the success of these groups tends to be as a result of running them completely separately from the broadcasting operations. Any attempt to give the broadcaster a “first look” at the best ideas or skew the content making to the types of programming the broadcaster might need, tends to be counterproductive for the content business. Returns from content making also tend to be lower than free to air broadcasting – typically 10 per cent EBITDA margins versus 20 to 25 per cent for broadcasting. Lower returns and no real operating synergies lead shareholders to wonder if there might be a better owner for the content grouping with persistent pressure for a break-up of the two activities as the way to release full value.
Diversify through Capabilities, IP resonance or Brand values
With core activities hard to grow, pay TV always small scale, and uncertain synergies from content creation, free to air groups have looked at diversification. The easiest diversification tends to be through third party sales of core capabilities such as ad sales, sponsorship sales, ad tech, talent management or studio complex hire. Broadcasters have tried to apply these both within the TV sector to other providers and also to service other sectors ranging from consumer brands and ad agencies, to corporate marketing and PR activities, digital publishing, film, audio and even sports franchise marketing with varying degrees of success.
Harder to execute diversification focuses on taking intellectual property or brand resonance on the one hand, with audience loyalty on the other and developing it in another form of media or entertainment.
The most obvious form of this has tended not to work – taking TV channel brands, loyal audience groups or specific TV programme titles and exploiting via radio stations, audio streaming or podcasts. While commercial audio shares many of the same capabilities as TV broadcasting and streaming – programming, ad sales, digital distribution – it has proven harder to make brands, IP or audience loyalty carry across the two types of media. And when it does work it tends to be audio IP being converted to TV content rather than the other way around.
Turning TV based IP into live entertainment experiences, games, merchandising, theme park rides may be more promising but needs very different capabilities from broadcasting and content production. Focusing in on specific niche audience/interest groups and super serving them across media – so called “passion verticals” like gardening, music, cooking – has been tried by many but with limited success so far beyond specialist magazines which are themselves challenged by digital transformation.
Using brand values – such as trust, quality and innovation or more general audience loyalty among certain demographics or lifestyle groups and making it into a sustainable business beyond TV is probably the hardest task of all. TV’s appeal to broad demographic/lifestyle groups makes it less able to make this work than say more specific lifestyle/attitudinal based newspaper and magazine groups such as the New York Times, the Guardian or the Telegraph. The BBC’s move into computers in the 1980s or Sky’s recent move into home insurance being rare examples of brand value extensions – notably neither is a commercial free to air broadcaster.
The Importance of Learning to Partner – O&O can help
With the most interesting but hard to execute growth prospects for free to air TV groups coming from diversification, or from trying to make more from free TV without major mergers, partnerships in order to achieve scale are likely to loom large in 2024. This will require its own new capability from players used to being effective in their own narrow sector silo where the daily competition for ratings comes more naturally than co-operation.
O&O has helped several free to air groups review expansion and diversification options as well as looking at ways of improving the core business – increasingly within partnerships. O&O often plays a role introducing the partners as well as structuring the partnerships and making them work for all the parties.