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The future of broadcasting issue III: Strategy delivers

The recent years of the broadcasting sector have been the most turbulent in its history.

Overview

Deep economic recession plus the rise of broadband and online video players and evolving consumer behavior has sparked a chain reaction from industry players and their shareholders. For some it’s meant decline, for others rebirth. At the core of the turbulence has been a fundamental shift in broadcasting economics. Simply put, audience numbers alone no longer necessarily translate into revenue following the traditional equation.

Advertiser-funded models are seeing budgets carved up and spread across new media, with knock-on effects on pricing. Subscription-funded models have to deliver better content and new services just to hang onto their customers and defend ARPU without huge increases in subscriber acquisition costs.

So while responses to the most difficult period in the industry’s history have redressed some deep-seated complacency by spawning new business models and sparking innovation, the challenges of the future are no less acute. A new battle for sustainability is about to start. Constant reinvention will be required.

This is today’s Future of Broadcasting.

Background

Our first edition in the Future of Broadcasting series saw the market’s clear preference for pay broadcasters’ subscription-based models over the advertiser-funded models of the free to air broadcasters. In that survey, only one pay broadcaster fell below the industry average for total returns to shareholders in 2007 (TRS) vs. seven free to air broadcasters.

By the time of our second edition in 2011, enterprise value across the sector had increased significantly (up 44% from the end of 2008 to the beginning of 2011). Both pay and free-to-air broadcasters had enjoyed something of a value recovery but, for free to air, this appeared more cyclical than the result of any structural or strategic response to market conditions.

However, what was an emerging trend then has now been roundly confirmed by our most recent Shareholder Value Analysis for the year 2012. The distinction between pay and free to air business models is becoming less and less relevant. Rather, investors are looking for all broadcasters to embrace more sophisticated strategies, adapted to an era of constant change in the quest to become more resilient, future-proofed businesses.

And so, in 2012, we have seen the greatest dispersion of value yet across business models. In our peer set, there are now more free-to-air broadcasters than pay broadcasters with TRS over the industry average. The question is why?

Simply put, whether a broadcaster is free to air or pay no longer accounts for differences in investors’ perceptions. The distinction made now is between strategies that are reinventing business and operating models and successfully embracing innovation—and those that are trying to preserve a long-gone status quo, in denial about the speed and pervasiveness of industry changes confronting them.

What we see is that strategies forged in the industry’s most difficult hour are beginning to deliver. Broadcasters pursuing a combination of radical actions are seeing light at the end of the tunnel.

Analysis

As in previous years our analysis is grounded in our Shareholder Value Analysis (SVA) of key players in the global broadcasting industry. Our work around the world with broadcasters and other media, entertainment and consumer technology companies (most of which are now in the video content space) allows us to build on the groundwork of the SVA to draw a set of ‘moment in time’ conclusions about this rapidly evolving sector.

Recommendations
Our latest Shareholder Value Analysis and analysis of industry trends show the industry’s turbulence calming. The dynamic that was causing major uncertainty is now driving change in a more positive direction.

Broadcasters that have identified the individual consumer as the target audience are now embracing more sophisticated strategies to engage an atomizing audience with new digital experiences. Investors are rewarding their efforts.

When it comes to introducing innovative TV experiences, consumers are showing renewed trust in the traditional broadcasting segment.

In our 2013 Online Video Consumer Survey conducted on an annual basis, TV broadcasters were voted the most trusted source for a video over internet service on the TV Screen.

This is a major change when compared to our 2012 Online Video Consumer Survey where telecoms and internet service providers were rated as the most trusted for introducing innovative TV experiences. The strategies and efforts broadcasters have put into bringing their innovative TV experiences to life now seem to be paying off.

The importance of the modernization of broadcasting operations and the continuing trend towards agility will grow in light of the constantly increasing complexity of the broadcasting sector. Consumption moving to an array of devices, lateral movement across the value chain from all players and the fundamental shift of digital TV platforms towards opening up will provide growth opportunities. They’ll be taken by those who can innovate on the back of a flexible but proven value proposition. For those that cannot, turbulence looks set to continue.