Over the past decade, increased competition has made content costs soar and scattered audiences across a wide array of channels and providers. TV operators now need to focus spend on what drives viewers to them: compelling content. Licensing and commissioning of content currently accounts for over 60-70% of their cost base and this is growing.

But what about the remaining 30-40%? Logically, this should be a primary focus for optimisation. Currently broadcasters devote 20% of this “non-content spend” to the logistics of video. Could outsourcing be an opportunity for broadcasters to make material savings in CAPEX and OPEX?

In this two part blog we will look at the history of video, the impact of new players such as Netflix and Amazon, and what the future holds for media CFOs.

With history as our guide

The digital nature of video has made it more prone to being controlled, monitored and distributed instantly. Audiences and their changing behaviours and attitudes to media have enabled new business models. Billions of dollars’ worth of value has shifted from studios, networks and ad agencies to “GAFA” (Google, Apple, Facebook, Amazon). This is not without precedent. The music industry was first affected by digital in early 2000. It took a decade to wipe out 50% of its total market size. Apple reaped the spoils of this tectonic shift.

And now a new business order is forming in video, with TV experiences now spanning multiple devices and networks. The Huffington Post Live channel enjoys over 100 million monthly viewers without a broadcast license. The traditional television business meanwhile has remained remarkably resilient in these changing times. Until now.

TV?

Increasingly, television is one of many possible “video experiences”. But video is no longer tied to the television set. Far from it. According to Ofcom, UK viewing of traditional live TV was lowest among 16 to 24-year-olds, accounting for just 36% of all their viewing across all screens, including mobile and tablets. Compare this to over-65s, where live TV accounted for 83% of all their viewing. It is inevitable that broadcast TV will become known as ‘live video’. It is equally inevitable that the consumption device will become that which is the most appropriate means of enjoying the video at a particular time and place. The size, definition and location of the television may make it ideal for live sports but watching live news on the subway on a mobile device is equally viable. 2016 marks an acceleration of a trend toward mobile devices away from big screen TV. According to the recent Ericsson ConsumerLab report looking at TV and media usage, “The biggest shift that we have seen over the last seven years is in consumer viewing habits away from just the big TV screen toward this more mobile viewing experience”.

Broadcasters can leverage the intrinsic superiority of a fixed cost broadcast infrastructure (terrestrial or satellite) only when they program live content – ‘live’ being defined as content that a large audience wants to watch at the same time. The impetus of audiences to experience television at the same time drops dramatically when it can be enjoyed anytime. The rise of extensive Video on Demand (VOD) services and “web TV” shows has further diverted eyeballs away from traditional linear TV.

However, the alternative to broadcast, (unicast, mostly over-the-top internet-based distribution) has challenging economics as the costs to distribute the content rises with every new viewer. Appointment viewing driven by live content – for example sports or events – is therefore key for broadcasters to maintain a competitive edge. It is a strong driver behind the ratings of pay and free-to-air TV. Prices to secure the rights to live content have logically soared in recent years as a result of a fierce competition from both traditional TV broadcasters and new entrants.

Double Trouble
The challenge is compounded by the fact that new entrants like Netflix and Amazon are offering compelling viewing experiences across a variety of content types and genres. Netflix bundles Hollywood and original programming – along with local content in some markets – managing a seamless and consistent experience from PC to tablet to TV. Bookmarks allow viewers to pick up on one device where they left off with another.

The appeal of live sports has been leveraged by several providers in France and the UK. beIN SPORTS has successfully snatched over 10% of the pay-TV market from Canal+. In the UK, Sky is bearing the brunt of BT’s successful endeavour into football with its Premier League and Champions League broadcasts. In September 2016, Discovery announced its strategy to become the “Netflix of sports”. This follows an announcement from Perform Group, a UK company, which also stated its claim to become the “Netflix of the sports world”. The ‘Netflixisation’ of content is clearly moving into the domain of traditional TV players.

The cost of content is growing significantly for all major video streaming services according to the Wall Street Journal. Consequently, many broadcasters and television networks face a double challenge: a top-line growth driven by more competition and a bottom-line stagnation hampered by increasingly expensive content and rights.

It is therefore not surprising that broadcasters are looking at new and different ways to fund content. This activity is top of the agenda but challenging. The underlying economics are risky. A limited number of pilots will become shows; an average comedy pilot costs $2 million to shoot, while an hour-long drama costs about $5.5 million. This capital needs to come from their balance sheet or be raised in the form of debt, or equity sale. Judging from the recent stock performance of many major media companies, these options may have limited appeal.

In the second part of this blog, we will look at how CFOs should be spending their capital wisely, what the future holds, and the options for CFOs.

Martin Guillaume, Head of Strategy & Business Development, Broadcast and Media Services, Ericsson

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