In part one of my blog, we looked at the history of video, and how new players such as Netflix and Amazon have contributed to changes in video consumption over time.
In part two, we’ll take a look at how media CFOs should be spending their capital wisely, and what the future holds.
Spending capital wisely
All of the above facts point to one reality that is self-evident: content drives audiences.
Its consequences are less obvious. The business success of TV operators is predicated on how well and how much capital is expended on content. If there is capital that can be redirected to service this strategic agenda, it should be. 60%-70% of the cost structure of TV operators is content; anything that can be saved on the remaining 30%-40% and redirected towards a differentiated viewer experience should be.
Playout and media management functions drive meaningful capital outlays. Getting a high quality image on air or on the internet is now well mastered. There is good evidence that it can and should be secured at a lower price point by resorting to outsourcing.
In this instance, Europe is well ahead of the curve. This scenario has played out already in several markets across the continent, and in the UK in particular. ITV, BBC, UKTV, Channel 4 are all major broadcasters who have outsourced in the UK. Given the cost pressures experienced by networks in the USA, it is just a matter of time before that reality plays out in North America as well.
ESPN has a long history of building in-house capabilities for content production and distribution. With shrinking audiences and challenging pricing, Disney concluded that ESPN should acquire more rights and use Major League Baseball Advanced Media (MLBAM) for its streaming needs. It agreed a major transaction with MLBAM taking a 33% stake in company for $1 billion. Most of the value can be attributed to the transfer of sports rights. The likelihood is that MLBAM will deliver ESPN’s internet video streaming. One can only surmise that they are better off doing it that way rather than to build and operate a similar service internally. They have the benefit of scale, access to capital to devote to their core business which is video distribution. Arguably, technology operations is not ESPN’s core business. The direct impact of Disney’s investment is to lower ESPN’s OPEX and in turn improve its EBITDA. Ultimately, we can surmise that Disney’s main goal is to improve market capitalisation. Reducing OPEX has direct and meaningful impact on EBITDA.
Turner and AT&T have also made moves to bring technology in-house. AT&T acquired Quickplay and Turner bought iStreamPlanet. Irrespective of the means, the moves are driven by the same rationale: bring a technology in-house and improve EBITDA. The expected benefits include speed to market and control of the technology roadmap. Reaping the upsides of these acquisitions can prove tricky and quite expensive. Retention of key people, culture, technology obsolescence all play against the acquirer. Disney’s move to secure a minority stake in MLBAM may prove a more fruitful approach albeit less controlling. All three of these examples are very capital-intensive and out of reach for many media companies.
So what’s next?
Taking the European market as an example, where similar competitive pressures have shaped the landscape, a few reasonable predictions can be made. In Europe, only a few cash-rich TV operators have kept all their operations in-house. Lacking the scale that exists in the US market, most TV operators outsource their operations to varying degrees. This has become an accepted practise for decades.
The fact that being “on air” is mission critical does not mean it needs to rely solely on internal capabilities. The BBC can hardly be taxed of complacency when it comes to security and on-air availability, yet the service has been outsourced for many years. It has achieved its renowned ironclad levels of reliability, all the while delivering good value for money. BT Sport has also opted to rely on an outsourced model to launch and operate its successful sports channels. It managed to be the first European sports broadcaster to launch a 4K channel, proving that outsourcing can actually deliver flexibility and speed.
Benchmarks CFOs can ask for
If technology for media management, distribution (OTT and linear) is deemed to be strategic by CTOs, the driving principles for CFOs and CEOs is quite different. Is the business deriving good value for money? Is the capital well spent and furthering the company’s growth? With limited intimate understanding for media lifecycle management and technologies, challenging the costs of video services can be complicated.
One approach is to look into simple ratios. Financial ratios can be difficult to establish but simpler ratios can be derived with relatively rudimentary information. Understanding the level of staffing required to deliver a specific service, defining the ratios between managers and operators, estimating the volume of content handled by an operator will start to construct a picture that is quite telling. A comparison with best-in-industry ratios will measure the level of improvement or savings that might be derived from a rationalisation effort.
The CFO’s options
Some level of improvement can be achieved without resorting to outsourcing. However, an internal improvement programme can typically attain only 25% of the possible savings. Reductions achieved by an internal initiative are structurally capped by the scale of the business in addition to the fact that a benchmarking exercise can be tricky with limited external references. In addition, capital expenses will remain the same without an ability to share the investment across different users.
An outsourcing path, on the other hand, can leverage scale, standardisation, access to benchmarks, constant improvement and buying power. Outsourcers possess structural superiorities over internal options.
For example, a Master Control Room (MCR) is needed in any video distribution operation. It is typically a shared cost in the case of an outsource service as it is utilised across many channels and syndicated across several clients. The same advantage is present for disaster recovery capabilities; one site can be syndicated across several clients. Clearly the management structure needed to operate 100 or 120 channels does not change materially.
Outsourcers typically enjoy better terms and conditions with vendors because of the volume they carry. In addition, technology learnings and optimisations are a core focus. Constant improvements are a necessity. This translates into an ability to attain much higher levels of optimisation for outsourcers. The list is long and amounts to the fact that the operational efficiency of an outsourced service is structurally superior. The degree of savings can be assessed quickly and effectively at a high level.
At a time of profound disruption, objectively analysing the capital allocation and operational spend is a healthy and smart thing to do. This ratios-based approach can rapidly inform a CFO on the decision of running a full financial baseline exercise. The clear intent being to redirect operational and capital resources where they matter most at a critical time.
Martin Guillaume, Head of Strategy & Business Development, Broadcast and Media Services, Ericsson