The Future of Broadcasting Issue III - Accenture

The Future of Broadcasting Issue IIIStrategy Delivers By Francesco Venturini, Charlie Marshall and Egidio Di Alberto

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

A new DNA for broadcasters?

The Future of Broadcasting III 1

Our first edition1 in the Future of Broadcasting series2 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 20113, 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 sophisti-cated 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.

They are:

• Aggressively targeting fixed indirect cost bases

• Re-engineering processes to create more compelling content, leveraging local creativity but in the context of global appeal while reducing cost per minute

• Reinventing content and brand lifecycles to drive growth in expanding secondary markets and on new non-linear platforms

• Diverting resources to develop new revenue models, customer relationships and innovative distribution platforms, recognizing that traditional distribution networks, such as terrestrial or satellite, no longer provide the same barrier to entry as in the past

• Nurturing new IT skills and business capabilities to accelerate time to market and foster a new service culture

An interesting side effect accompanies this re-imagining of business and operating models. Broadcasters’ DNA is evolving to suit new environments. Consumers are at the heart of this evolution.

Broadcasters that built their success on advertising business-to-business (B2B) models are beginning to acquire business-to-consumer (B2C) characteristics in their DNA. They are moving their models online, exploring multi-device linear and non-linear services and features and recogniz-ing that in a world where access to distribution is no longer a guaranteed privilege, understanding audiences as consumers is a prerequisite to success.

On the other hand, some broadcasters were born with business to consumer DNA. Denied the privileged distribution access of their FTA competitors, they had to roll out their own distribution platforms into consumers’ homes. They are now addressing new B2C arenas that go beyond broadcasting into the wider communications space, at the core of which lie triple play and multi-device propositions. And it is their innovation that is spurring others on.

1 The Future of Broadcasting: Sustaining Shareholder Value and High Performance in a Changing Industry. 2008. http://www.accenture.com/us-en/Pages/insight-media-entertainment-future-broadcasting-share holder-value-industry.aspx

2 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.

3 The Future of Broadcasting: A New Storm is Brewing. 2011. http://www.accenture.com/us-en/Pages insight-future-broadcasting-new-storm-brewing.aspx

2 The Future of Broadcasting III

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.


Increasing spread,the differencebetween RDIC andWACC, creates value

Magnifying positivespread by growingrevenue alsocreates value

Total Returnto Shareholders(TRS)

Value of thediscounted cashflows to shareholdersor EconomicValue Added (EVA)

Spread

ROIC

Cost of Capital

Organic

M&A

Growth

Figure 1 | Accenture’s Value Creation Roadmap


The Accenture value creation roadmap is based on the core indicator of Total Return to Shareholders (TRS). TRS measures the value of stock plus dividends correlated to the efficiency of operations and the effectiveness of long-term investment decisions and strategies. With the addi-tional assessment of the ratios of current enterprise value and future enterprise value we are able to draw a picture of both the sector and specific companies’ current value and the inherent growth potential of investments in the sector.

The analysis at the heart of our perspective focuses on the period from the start of January 2011 to the end of November 2012. For benchmark purposes, we also refer back to 2007 before the economic downturn struck the media industry.

In 2012 the dispersion trend between segments had reached new heights, creating a new order among the 18 major listed broadcast companies of the peer set.

On an aggregated level the average of the peer set is at a TRS of 0.92, with the pay TV average at a TRS of 1.16 and the FTA average at 0.85. A more detailed look at the TRS shows that five out of nine companies outperforming the industry average are FTA—reflecting very mixed performance. This dispersion in industry performances arises from those businesses that are making progress in tailoring their business models to major industry themes and those that are proving slower to adapt.

The Enterprise Value trend from 2007 to 2012 shows the industry back to 2007 EV levels. Since 2008, the broadcast industry has grown at 10.9% CAGR. The average Enterprise Value per company of the peer set is back to a strong $14.3bn (January– November 2012) from $9.45bn in 2008.

TRS analysis further strengthens our view on sector recovery. The analysis of the more recent period from January to November 2012 shows an overall

improvement of TRS performance. What’s behind that? Besides a number of steps forward in pushing content online and making it accessible through multiple devices, it’s better than expected cost structure optimization.

That success in cutting costs balances the decline in advertising prices (CPM/CPP) driven by advertising budget reductions and audience fragmentation, as well as byinvestments in premium content to retain existing audiences on main channels or chase new audiences with new thematic channels. A marginal increase in OPEX to revenue ratios from 2010 to 2012 across the segment indicates that cost-cutting programs are compensating for falling revenues. Moreover, the modest increase in the overall OPEX to revenue ratios over the past three years is remarkable, as broadcasters have borne the additional costs of launching non-linear offerings online, which entail additional technical capabilities, operations and TV rights.

Value performance


2010

2011

TTM (01/2012-11/2012)

81%86%

85%

82%86%87%

83%85%

96%

Free to Air Segment Pay TV Segment Emerging Media

Figure 3 | OPEX/Revenue Ratio, 2010–2012


Source: Accenture analysis

Figure 2 | Total Return to Shareholders (TRS), 2011–11/2012

CBS, 1.81

TWC, 1.40

Virgin, 1.39

ITV, 1.27

DirecTV, 1.17

Televisa, 1.05

RTL, 1.05

BSkyB, 1.01

Pay TV Segment

Free to Air SegmentEmerging Media Segment

ProSieben, 1.00

Industry Avg., 0.92

Canal+, 0.85

Nippon, 0.83

TF1, 0.53

Antena 3, 0.44

Netflix, 0.38

Ten Network, 0.28

Mediaset, 0.27

0.8

1.2

1.6

2.0

0.4

0.0

Jan ‘11 Mar ‘11 May ‘11 Jul ‘11 Sep ‘11 Nov ‘11 Jan ‘12 Mar ‘12 May ‘12 Jul ‘12 Sep ‘12 Nov ‘12


Netflix—the whole story The SVA results for Netflix, representing the emerging media segment in our 2013 point of view, do not tell the whole story. Its stock price jumped from 56.0 $/share at 01.10.2012 to 189.37 $/share at the beginning of March 2013. This strong performance turned the poor TRS of 0.38 (as assessed in our SVA for the period beginning of January 2012 to end of September 2012) to an impressive 1.62 for the period beginning of January 2012 to beginning of March 2013.

Netflix seems to have regained investors’ faith in the OTT success story. That has been helped by growing broadband infrastructure and the proliferation of tablets—both positive for its business model. On the basis of these favorable circumstances Netflix has clearly understood what strategic cards to play to further grow its subscriber base. Its low-price subscription model with only one tariff for streaming customers has attracted cord-cutters and the increasing focus on original content, such as its successful TV series House of Cards and Arrested Development, further fuels this trend. This recipe has led to an additional two million US customers in Q4 2012 alone, to achieve 27.1 million US streaming subscribers in total by the end of the year. Strong international expansion has led to an additional 1.81 million customers in 2012 catering to a total subscriber base of more than 33 million in 40 countries, raising high barriers to entry for new entrants and significant economies of scale, securing competitive advantage in the race for online video profits.


While the value of the sector is back at its pre-crisis level, the road to get there has been far from straight over the last two years, suggesting that this recovery is more cyclical than structural.

The analysis of future vs. current value highlights that improvement of current operations and a focus on structural cost base efficiency have driven industry value to this point.

Financial markets and analysts expect that progress to slow.

Figure 4 | Total Enterprise Value, 2008–20124

Industry themes

CAGR 21.2%

CAGR 1.4%

‘07 ‘08 ‘09 ‘10 ‘11 ‘12

226.0

151.2

183.5

222.2

207.8

228.6


Source: Bloomberg, Accenture analysis

4. In 2007 these companies were included: Antena 3, BSkyB, Canal+, CBS, DirecTV, Dish TV*, ITV, Mediaset, Nippon Television, ProSieben, RTL, Sky Italia*, Sun TV*, Televisa, TF1, Time Warner Cable, Tokyo Broadcasting*, Netflix.

From November 2008–2012 these companies were included: Antena 3, BSkyB, Canal+, CBS, DirecTV, ITV, Mediaset, Nippon Television, ProSieben, RTL, Televisa, TF1, Time Warner Cable, Ten Network**, Virgin Media**, Netflix.

SVA Panel: Pay Segment includes BSkyB, Canal+, DirectTV, Globo, Time Warner Cable, Virgin Media. FTA Segment includes Antena 3, CBS, iTV, Mediaset, Nippon Television, ProSieben, RTL, Televisa, Ten Network, TF1. OTT Pure Players includes Netflix.

Notes: Enterprise Value = sum of market capitalization and net debt (total debt less total cash.) The below chart displays the summation of enterprise values of the peer set as on month end date and hence values may not match the previous side. Previous financial period net debt has been used for the corresponding enterprise value computation.

Future Value CAGR: 3.7%Present value of incremental cash flow expected from: • Growth of current markets • Improved market shares • New revenue streams • Major restructuring of ops • New markets

Current Value CAGR: 17.3%Present value of current cash flow perpetuity.

Calculated from: • Free Cash Flow from Operations • WACC

2008

76.2 75.0

2009

103.7 79.7

2010

126.1 94.1

2011

151.2

183.5

222.2

207.8

228.6

135.9 72.0

November 2012

142.1 86.5

0 50 100 150 200 250

Figure 5 | Current/Future Value Split, 2008–20125


With consumers continuing to favor linear TV and, for the time being, broadcasters retaining privileged access to the most attractive local and international content, the established underlying value drivers of broadcasting appear resilient in the near term. However, a number of structural trends will increasingly threaten

the dominance of traditional models. Investors’ questions remain largely unanswered. Among other things, they want to know how broadcasters will make use of online, retain large audiences, secure the right content and drive strategies to increase advertising and reduce costs. And the answers are

urgently required because the pace of change is accelerating, driven by three major themes:

1. Emerged media

2. Content’s “kingdom” grows

3. Advertising’s power shifts

Source: Bloomberg, Accenture analysis

5 Current Value: Present value of current cash flow perpetuity. Calculated from: Free cash flow from operations, WACC. Future Value: Present value of incremental cash flow expected from: Growth of current markets, improved market shares, new revenue streams, major restructuring of ops, new markets.

Notes: Values may not match due to rounding. Current Value = sum of present value of current operations, based on NOPAT divided by the WACC, NOPAT taken from latest period. Future Value = sum of enterprise value less current value.

For the majority of its existence, the broadcast industry enjoyed relative stability, with very little change to its main revenue driver—large audiences driving advertising. Subscription propositions did little to derail that certainty as they too offered specific viewing, at a specific time, on a specific channel. However, the arrival of Netflix, just a few years ago, raised some searching questions about both the long-term sustainability of traditional business models and the exact shape of those required for the future.

As Netflix’s popularity, and share price, continued to rocket, so did the growth of similar providers (e.g., LoveFilm, Hulu) who threatened to take audiences and revenue from broadcasters. While ultimate success for these comparatively small companies against the established giants of broadcasting seemed unimaginable, the experience of the music industry showed how comparative minnows could very easily disrupt a market and fatally weaken the dominance of the big fish.

Fast forward a few years, and while the likes of Netflix, LoveFilm and Hulu have not taken over the industry, they have become established players, achieving economies of scale and carving out a clear niche in the video space. As the future of broadcasting continues to evolve, it is unlikely that a global set of stand-alone OTT providers will emerge as a significant competitive threat because the broadcast-ers’ reaction to such propositions has been fast and decisive. However, the impact of these new players has nonetheless been transformational: they have played a critical role in changing the rules of the game and spurning innovation in what had become a complacent industry.

As broadcasters have sought to avoid the fate of their music industry counterparts, they have accelerated delivery of their own online propositions and fundamentally altered their strategies to suit a fast- changing marketplace. Not only have the majority of broadcasters launched their

own online services—in Italy, Mediaset has more than one million subscribers for its on-demand service and Canal+ has launched a standalone service on top of its on-demand OTT offering for subscribers—but they have also explored more pronounced departures from their traditional core business:

• The BBC6—the original linear broad - caster in the UK—is releasing some programming online before it is broadcast on traditional channels— a radical departure.

• ITV, also in the UK, is seeing the majority of its revenue growth from online, pay and interactive activities (up 26% vs. 2011), exceeding the £100 million mark7.

• Launch of YouView in the UK, which is a hybrid TV service providing access to Freeview television as well as on-demand content delivered via a broadband connection.

Industry Theme 1

Emerged media


Netflix streamingHulu Plus

-1 -0.5 0 0.5 1 1.5 2 2.5 3 3.5

Q4-11

Q1-12

Q2-12

Q3-12

TOT YoY+1.5 (+138%)

+3.3 (+16%)

Figure 6 | Net growth trends in USA of Hulu Plus and Netflix streaming subscribers (millions and %)

Source: e-Media Institute on Hulu and Netflix data. Note: Net growth of full-subscriptions (excluding free trials).

6. 2013 40hrs of programming will be released through online iPlayer before its linear broadcast [Radio Times, 8 Feb 2013].7. e-media, 11 March 2013.

• Now TV—Sky UK’s internet and OTT TV service—will now offer premium soccer on the platform on a pay- per-view basis. This is the first time premium soccer has been made available without requiring a Pay TV subscription.

New entrants are not the only ones impacting the competitive landscape for incumbent broadcasters. With distribution networks no longer a barrier to entry, non-traditional players are also getting in on the action. Google is investing heavily in YouTube8 and has plans to launch its first pay-per-view content in 20139. Telcos are also investing in video. Orange, for example, has acquired Dailymotion, the world’s second largest online video portal.

Broadcasters’ new non-linear strategies are having a positive impact on share-holder value. However, the rise of emerging media players continues to fuel fears of “cord cutting”—where viewers permanently

sever ties with high-cost subscriptions in favor of cheaper (or free) online alterna-tives. While this phenomenon is still nascent, figures from the US show a marked decrease in households with cable subscriptions (see Figure 7) and low growth in satellite subscriptions (+1%) against double-digit growth for IPTV and other streaming services10.

While broadcasters have been able to effectively respond to the emerging media threat, they cannot rest on their laurels. They must continue to innovate, especially as even larger players (e.g. Google, Apple) are targeting the increasingly powerful viewer and their impact could be even more disruptive. Simply replicating library VoD propositions is not going to keep the viewer sufficiently engaged. New services, new features, new access propositions will.

The key to broadcasters’ long-term success will be to boldly go one step forward, leveraging their newly acquired confidence

in understanding and managing the online world and its rules. This additional step requires them to make the online Over-the-Top proposition an intrinsic part of their core business, blurring the boundaries between traditional TV and on-demand services. Seamlessly integrating on-demand linear and non-linear viewing into a single “entertainment” proposition will mean providing consumers with a redefined entertainment service—one that combines the power of broadband and traditional broadcast networks.

Operationally, this will require significant effort to develop new B2C capabilities and accelerating time to market. It will also accelerate experimenting with new advertising and monetization models without the fear of compromising traditional advertising revenues. The latter is especially important as it becomes increasingly apparent—as we explore in Industry Theme 3—that linear advertising volumes are unlikely to return to historical levels.

50

55

60

65

70

65.4 65.4 65.4 64.9 63.762.1

59.858.0 56.8

45

40

2004 2005 2006 2007 2008 2009 2010 2011 2012

Figure 7 | Total cable video customers in USA (millions)


Source: NCTA–SNL Kagan

8. http://nofilmschool.com/2012/11/youtube-original-content-venture/9. e-media, 8 February 2013.10. e-media, 11 January 2013.

Where broadcasters once held power, with exclusive command over the viewing experience, consumers now rule. They want to be in control of what they consume and when they consume it— creating their own new digital experiences across channels and devices, planning their own entertainment schedules, and finding new ways to interact with content itself. When you combine this viewing flexibility with the sheer volume of programming now available, consumers’ ability to be more selective about what they are watching has dramatically increased.

As viewers dismiss less compelling fare, “super premium” content pulls further ahead, providing its owners with a competitive edge. Examples include the Twilight film franchise, whose fan base scoops up whatever merchandise they can get their hands on, the global success of television formats (e.g. The Voice, X Factor, and America’s Next Top Model), or the telenovela “Avenida Brasil” which commands 65% market share in its viewing slot (and also happens to be exclusively aired on linear television)11.

Discovery and Viacom are industry players that have successfully delivered on strategies developing both content and channel brands. Their combined Enterprise Value (EV) has grown by a CAGR of 23.2% from December 2008 to November 2012 and both companies’ total enterprise value has more than doubled over the past four years.

Investors value Discovery and Viacom for their ability to grow future cash flows. The future value of these companies has grown at 103.2% CAGR from December 2008 to November 2012. As of November 2012, investors attributed nearly 60% of Discovery’s value to its future value. This confidence stems from Discovery and Viacom’s ability to create global program brands that translate into local programs.

Industry Theme 2

Content’s “kingdom” grows

Figure 8 | EV Discovery + Viacom, 2008–11/2012


11. www.forbes.com/sites/andersonantunes/2012/10/19/brazilian-telenovela-makes-billions-by-mirroring-its-viewers-lives/

2008

2009

2010

2011

26.6

40.5

48.4

48.2

60.2November 2012

0 10 20 30 40 50 60 70

Enterprise Value ($bn) CAGR: 23.9%


The power of the right content is also highlighted by some of the big bets now being placed. For example, Netflix has invested in content deals estimated at $2.5bn in 2013, up from $300m in 201012 and, more importantly, developing original content, with four productions to be released in 2013. Hulu’s video offer has increased by 40% from 201113 with 60,000 episodes spanning 2,300 television series now available. In the UK, BT has acquired rights for 38 English Premier League

games (at a cost of £736m) and recently announced its acquisition of ESPN’s TV channels business in the UK and Ireland. The bidding war with Sky for Premier League games resulted in a 70% increase in revenue vs. the previous package14.

While airing popular programs has always been a key success factor in the broadcast industry, changes in viewing habits and increases in supply have meant ownership of appealing local and international content becomes even more critical.

Our recent Online Video Consumer Survey15, shows a growing appetite for local content (see Figure 10). Therefore the ability to transmit it to viewers on whatever platform they choose (whether proprietary or a third party) will separate leaders from laggards in the industry. For those not in a position to play at similarly high stakes, success will hinge on very focused management of the content assets they do possess, as highlighted in the content optimization section below.

Figure 9 | Current/Future Value Split-Discovery, 2008–11/2012

International online video servicesLocal/national online video services

2012

37% 63%

2013

40% 60%

Source: Accenture Online Video Consumer Survey 2013

12. Netflix’s sky-high stock the real House of Cards, Globe and Mail, 5 February 2013.13. e-Media Institute, 1 January 2013.14. BT to buy ESPN UK and Ireland Channels, BBC News, 25 February 2013.15. Accenture Online Video Consumer Survey 2013.

Figure 10 | What online video services do you use more often?


Future Value CAGR: 132.2%Current Value CAGR: 11.5%

2008

7.1 0.6

2009

6.7 9.2

2010

8.7 11.7

2011

7.7

15.9

20.5

19.1

26.3

10.2 8.9

November 2012

10.9 15.4

0 5 10 15 20 3025

Future Value CAGR: 132.2%Current Value CAGR: 11.5%

2008

7.1 0.6

2009

6.7 9.2

2010

8.7 11.7

2011

7.7

15.9

20.5

19.1

26.3

10.2 8.9

November 2012

10.9 15.4

0 5 10 15 20 3025


Industry Theme 3

Advertising’s power shifts


While major broadcasters in Western Europe saw advertising revenues rebound in 2010, after significant decreases in 2008 and 2009, estimates for 2012 and 201316 point toward further erosion in traditional television advertising.

However, when looking at total media advertising spend in Western Europe— forecast to grow by 2.6% in 2012 and 0.6% in 2013—it is clear that spend is being shifted to different channels, most significantly to online video. On a global scale, the numbers contrast even more starkly. Emerging markets are set to push growth in global advertising spend to 4.5% in 2012 and 3% in 201317.

While the shift in advertising spend could also arguably be correlated to operational issues, such as poor sales effectiveness, ineffective commercial product packaging and pricing pressures—one of the industry

key indicators, “the power ratios,” for the major broadcasters remain flat over the same period. This reinforces the view that broadcasters face an ever-decreasing structural advertising market and that advertising dollars are being diverted to more effective and engaging media propositions.

Although broadcasters cannot rely on traditional advertising for future revenue growth, the shift in spending pattern does present an opportunity and stresses the importance of developing meaningful online, multi-device propositions. How-ever, to maximize their ability to attract this spend, broadcasters will need to update their commercial offers to create comprehensive and sophisticated advertis-ing packages that span both linear and non-linear viewing.

Initially, much of the advertising revenue that migrated online came from print and other relatively low-reach media. While TV audiences fragmented as a result of the greater availability of more video from more sources, TV’s share of revenues remained constant—though subject to greater competition. Slightly increased power ratios and wider channel propositions in response to fragmenting audiences helped broadcasters to maintain revenues. However, the impact of the financial crisis reduced the overall size of advertising budgets and all broadcasters’ revenue declined as a result. That cyclical downturn will only improve slowly. What’s more, advertising budgets will increasingly flow online away from mainstream TV. The net impact is that even with the same audience and power ratios, broadcasters’ revenues will face further decreases, so power ratios will not be sufficient to protect broadcasters from wider and structural industry changes.

Mediaset

2010 2011 2012 2013e

Audience share 37.6% 36.3% 35.5% 34.5%

Advert share 63.2% 62.5% 59.5% 58.0%

Power Ratio 1.68 1.72 1.68 1.68

ProSiebenSAT1

2010 2011 2012 2013e

Audience share 28.5% 28.9% 28.4% 28.5%

Advert share 46.4% 47.4% 47.5% 47.7%

Power Ratio 1.63 1.64 1.67 1.67

16. Company Data, Morgan Stanley Research, 8 January 2013.17. Media & Internet, Morgan Stanley, 8 January 2013.

ITV

2010 2011 2012 2013e

Audience share 22.9% 22.8% 22.8% 22.8%

Advert share 45.9% 46.3% 46.7% 46.3%

Power Ratio 2.00 2.03 2.05 2.03

TF1

2010 2011 2012 2013e

Audience share 24.5% 23.6% 22.7% 22.1%

Advert share 44.3% 42.5% 42.0% 41.9%

Power Ratio 1.81 1.80 1.85 1.90

Revenue diversificationtransmission vs. distribution vs.

extension

Business platformsTV vs. non-TV

Consumerssubscribers vs. viewers

vs. users

Access platformsproprietary vs.

third party

Delivery platformsbroadcast vs.broadband

Brandschannels vs. programs

vs. characters

Intellectual propertiesfinished programs vs.

formats vs.talents

Source of contentproduction vs.

commissioning vs.acquisition

From Television to Video

Scope of businesslocal vs.

international

Video serviceslinear vs. non-linear,

placeshifting,portability


Broadcasting Moves Forward

Drivers of future value

Figure 11 | From television to video


A testament to the speed of change in the industry is how the categories we have looked at in our previous analyses in the Future of Broadcasting series (FT vs. PAY, Linear vs. Non-linear), are no longer a reliable guide to longer-term performance. If that is the case, it’s useful to look at what high performers have done or communicated to the market over the last few years that might account for their success. While they all cook with different recipes, they use some of the same staple ingredients:

They are creating and/or aggregating more compelling content, leveraging local creativity while increasing operating margin per broadcasted minute

• Building families of complementary FTA channels to maximize reach while fully utilizing content rights and minimizing cannibalization

• Fully monetizing FTA reach through innovative advertising formats and targeting regional shares of the total TV advertising market

• Generating carriage revenues from packages offered by distributors

• Activating additional revenue streams through basic pay channels distributed through third-party platforms

Reinventing content and brand lifecycles to drive growth in secondary markets and on new non-linear platforms

• Growing their international production business to capture scale efficiencies and to secure essential content rights to: defend against technology attack- ers, internationally diversify the revenue mix, facilitate online strategies as online exploitation rights are easier to secure for own content

• Accurately planning the use of broadcasting windows to increase the value of third-party brands and regulate terms of trade in ways that maximize their share of third-party party producers’ distribution and extension revenues

• Using content rights in adjacent businesses (like games, live shows, sponsorships), and leveraging TV brands and unsold advertising inventory to cross promote

Launching innovative forms of content distribution to provide traditional viewers and customers with modern and enhanced user experiences based on the “TV-as-YOU-like” principle

• Investing in sophisticated, linear and non-linear multi-device broadband platforms

• Creating powerful local brands associated with a clear value proposition that stimulate adoption and, most of all, loyalty to the service (YouView, SkyGO, Premium Play, to name a few)

• Developing partnerships with device manufacturers to build new services and explore new digital platforms (e.g., Samsung SmartTV, Microsoft Xbox), in the attempt to maximize the reach of new digital services, making them an integral part of common user behavior and ultimately protect their business from emerging media.

Nurturing new IT skills and B2C capabilities to accelerate time to market and foster a new service culture

• Harnessing analytics to build consumer insights and detailed understanding of customer behavior and preferences

• Designing and creating user interfaces that enhance appeal and maximize services’ stickiness

• Creating new offering and pricing models (e.g., Sky’s Now TV) to target new groups of consumers while avoiding cannibalization of the traditional and mainstream TV services’ customer base

• Developing digital customer interaction through, for example, self-care online chat and social networks (mostly Facebook and Twitter)

High performers will focus on a subset of those growth themes, largely determined by their core capabilities. However, what they have in common is a formula to reinvent their role in TV. They are reverting to the basic concept of television, which is not broadcasting per se but providing entertainment. In doing so, they are creating new shows, stories and characters. From those, they are building relevant brands and experiences that fit consumers’ lifestyles—delivering them seamlessly through leading-edge technologies and business services.

The idea of television is being stretched in multiple directions. New approaches are picking apart and rebuilding traditional vertically-integrated business models based on one distribution technology (antennas) and one device for access (TV set). As a result, industry value drivers will be a much more articulated set of variables than in the past.

With an understanding of the drivers of future value, the next challenge for broadcasters is to identify the operational changes required that will help deliver on the promise.

We examine these in the Value Themes section that follows.


In the new, consumer-driven world, access to content, rather than distribution, will become the critical differentiator. Content is the most complex and essential asset on broadcasters’ balance sheets. Complex because of the number of options for its use; essential because it is a lever for differentia-tion and a barrier against competitors.

Already the most expensive asset, trends suggest content will become even more expensive. Premium content, such as US movies, will become scarcer as major studios’ output falls. Online disrupters are shifting the focus to TV products such as series—both back catalogues and original programming—increasing the degree of competition and therefore the price.

What this means is that the way content use is planned, executed and controlled will make a big difference to value creation. The alignment and integration of TV rights management and financial planning and control (content performance management) will therefore be key to preserving the

balance between capital invested in content and its returns.

Content performance management covers three related aspects: A. profitability model, B. planning and control cycles and C. how responsibilities are managed. Each requires specific activities:

A. Introduce product/rights centric profit-ability models with a hierarchy of program/channels/genre P&L’s that add up into the company’s P&L and define a set of consis-tent rules to allocate costs and revenues, reflecting the impact of each revenue and cost line item.

B. Analyze the profitability of the product portfolio to drive editorial decisions. Product-centric profitability analyses over actual data from the recent past should feed strategic and editorial planning. P&L budgeting should then be informed by a product profitability budgeting phase and result from the application of P&L structure and allocation rules mentioned above.

C. Establish a new profitability mindset for content decision makers, making managers responsible for asset utilization and price/cost variance.

To maximize content performance, rights management needs to be consistent and tightly integrated with improved financial performance management. And rights management has a critical role to play across the lifecycle of all content. It can support editorial planning by optimizing the match between content requirements and acquisition. Early involvement of rights management can help drive an end-to-end brand strategy for each program that would help broadcasters better identify, manage and plan for all revenue stream opportunities. Integrated commercial, editorial, financial and procurement planning can help allocate capital for content sourcing consistently with planned cost structures and revenues.

The rights management function can also help adopt consistent contractual frameworks that align with revenue generation opportunities associated with the release window for any content.

Value Theme 1

Content optimization

BroadcastChannels

BB Channels& Access

CustomerInteraction Video Commercialization

Multichannel,targeted advertising

Programs and formats

TV brands

Business Analytics

TV Distribution and Marketing

Production and Commissioning

Rights Procurement

Content/Editorial Planning

Strategic Planning

Righ

ts M

anag

ement Financial Control

Financial Planning

B2C: Viewers/Subscribers/Users B2B: Advertisers/Broadcasters/Non-TV Businesses

Content Performance Management

Figure 12 | Emerging Value Levers


The Enterprise Value/Invested Capital ratio, shows that investors have increased the premium on invested capital for those companies that have downsized their operations (iTV, Pro7, RTL, Televisa). A major initial move in this direction has been the disposal of non-core assets (also visible in the decrease of the good-will/revenue ratio, from 2009 to 2012). Examples include ITV’s sale of Friends Reunited and Screen Vision and Prosieben’s series of divestments following a previous phase of international M&A activity.

The second major move towards becoming more agile is cost reduction. Opex ratios in the broadcasting industry have remained relatively stable in the period between 2011 and 2012. In a context such as the broadcasting industry, characterized by high operating leverage, this means that important cost transformation and optimization programs have been carried out, targeting both direct and indirect costs.

However, going forward, focus and strategic attention need to shift from direct costs, which are the easiest compo-nent to tackle, and content costs (which need to take place in the context of a more profound content optimization program as outlined above) and switch to operations costs. And that will require a more profound change in operating models.

Value Theme 2

Becoming an agile enterprise

Figure 13 | Invested Capital vs. Enterprise Value/Invested Capital Ration—Free-to-air, 1/2011–1/2012

1.0

2.0

3.0

4.0

5.0

0.0

0 2,000 4,000

2

Peer Avg.(Latest) ~ 1.7x

Peer Avg.(Latest) ~ 3,632

Enterprise Value Thresholds (USD bn)20 40

6,000 8,000

Antena 3

RTL Televisa

Ten Network TF1 ITV Nippon Mediaset ProSieben



There are a number of areas that will need to be addressed to drive that transformation.

Streamline advertising salesAdvertising sales operations will transform by consolidating online and traditional sales forces and integrating commercial packages. Technology will also be critical to integrate with media agencies in order to better exploit real time inventory sales and decrease high back-office costs arising from processes such as order management, invoicing and reconciliation.

Consolidate Engineering and ITEngineering and IT are, in most broad-casters, treated as separate departments tasked with different business objectives. However, the increasingly IT nature of the traditionally more hardware-based arena of production engineering (especially in the areas of asset management, newsroom systems and playout) and the increased importance of new distribution networks (broadband) and services (OTT) is driving a profound change. It highlights the importance of service-oriented architecture to increase time-to-market, requiring IT to gain experience of broad-casting environments and engineering to equip itself with more IT skills.

Modernize operating modelsBroadcasters’ operating models have remained substantially unaltered for years. But change in the industry means a new approach is needed. Developing a new approach will require attention to:

Production

The traditional equation between audi-ence shares and advertising revenues is being challenged. Hefty cuts to content budgets clearly present a catch-22, and in a new world where content offers are becoming richer and more pervasive, the need to maintain local creativity and differentiation becomes a vital source of competitive advantage. Local production is key but it has to achieve new levels of efficiency and productivity to lower cost per minute. Both technology and better operational planning present opportuni-ties to increase asset utilization (labor and studios), reduce idle and downtime and minimize the recourse to external capacity to manage peaks.

An industrial approach to all non-core, back-office

(HR, finance and administration, some areas of technology). Costs can be reduced through partnership with specialized providers regulated by clear service level agreements, or in some cases (i.e., large conglomerates), using a shared service model to capture economies of scale and scope.

Adopting cloud technologies

Experimentation and the ability to launch, trial, retire or extend new services quickly without committing to significant upfront investment is increasingly important. That means adopting cloud technologies, software as a service and data center virtualization to decrease capex and opex and focus on time to market and agility.

Make customer operations more responsive to both customer and company needs The customer operations function is at the heart of customer interactions and accounts for between 3% (leaders) to 10% (laggards) of ARPU and has a substantial impact on SAC (Subscriber Acquisition Costs). Becoming more agile in customer operations means changing the approach so that the need for customer interaction is reduced rather than making the interactions themselves more efficient. The focus therefore needs to be on the end-to-end process rather than increasing the efficiency of specific activities. Furthermore, outsourcers’ incentives should be aligned by moving from a price-per-call to a price-per-cus-tomer model, so that the outsourcer bears the risk of rising call volumes. Finally, customer operations can be improved from the outset by deploying predictive analytics to increase the relevance of sales activity. More targeted offers that respond to specific customer preferences and behavior will help to drive offers that are “right first time” and will require much lower levels of expensive ongoing support.


Optimize content systematically As we’ve seen, the right content has never been more important. It is fuelling competition and high prices. So proactively managing content cost and returns is key to value creation. Agile organizations are those that instill content optimization as a systematic series of processes and activities. They innovate workflows to tightly integrate commercial, editorial, production, procurement and financial planning so they can react quickly to external discontinuities and lessons from perfor-mance analysis. Agility in managing content requires some searching questions, for example:

Is the extent of commissioning to third-party producers consistent with profitability targets? Commissioning very often turns into the localization of costly, tried and tested international formats. High performers are moving to a more efficient use of creative and production resources to shift the balance of internal productions over total broad-cast time (excluding news and sport programs), from 30/40% to 50/60%.

Is the rush to acquire rights and prevent online disrupters from securing exclusive content consistent with capital efficiency targets? Our SVA suggests that this approach might be counterproductive. The “Net other Asset/Revenue” ratio has grown significantly from 2010 to 2012 as a likely conse-quence of over-acquisition of TV rights. At the same time, the stability of the amortization/revenue ratio, where revenues are stable, suggests that all such content remains, on average, largely underutilized and confirms the risk of overdependence on acquisitions.

What is the optimum shape and size of the product portfolio? Profitability may rely on just a few programs from two or three genres, raising the question about what to do with the low-margin (if not loss-making) part of the portfolio. What is essential and warrants subsidizing?

How many brands generate value after the local broadcast window (distribution and extension)? Is this in line with potential?

In summary, becoming agile means being stronger, leaner and smarter:

• Integrating the digital world into core TV functions (advertising, engineering),

• Smart use of resources (saturated production, shared back-office, responsive customer operations, “virtualization”— more services, fewer assets); and

• Constant attention to content performance.


Value Theme 3

Distribution: Breaking down the barriers

Forces creating turmoil in the broadcast industry are also the value drivers of the future. Distribution is moving from proprietary networks to a more open set of (IP-based) Over-the-Top standards. Consumption is moving from a narrow set of devices to an array of large and small screens. The game for operators—new and established—is simultaneously to move with the times and protect core models.

Lateral movements are taking place across the value chain. Operators like Netflix are extending up the chain to enter the professional content business. Telecom businesses like Verizon are building

broader capabilities and services than just voice and broadband, to create high-speed communications platforms that bring a wealth of possibilities to consumers and content providers alike. Free-to-air broadcasters, like the public service broadcasters in the UK, are forming consortia to build—and control—new IP-based aggregation services (YouView). Meanwhile, established pay TV operators, like Comcast, are battening down the hatches—by rolling out new services on new platforms at breakneck speed—in an attempt to preserve the sanctity of their vertically integrated “one-stop-shop” models.

In such a fast-moving market, pinning strategies on a focused outcome in the medium term is increasingly difficult. One of the major obstacles to certainty is determining what the TV platform— or platforms—of the future will look like.

The most urgent question to address is the degree to which platforms will be “open”—i.e., platforms on which third-party content and service providers can forge their own relationships with consumers—or “closed”—i.e., where content and service providers still sell to the platform owner, who controls all retail and consumer activity. This question lies at the very heart of integrating linear and non-linear in the new world of broadcasting.

Value Chain

ContentCreators

RightHolders

NetworkOperators

AccessProviders

DeviceManufacturers

UsersContentAggregators

Right Dealers

Program Packagers

Includes music, movies, news, sports, television programs, and video production and adoption to web video (user generated and professional)

• Content management• Content aggregation• Content scheduling• Content transcoding• Content presentation• Standards conversion

Provides the video distribution network:• DTT/Cable/IPTV/IP• Satellite• Next-gen wireless• 4G. LTE

Render content:• 2-way IP communication• Integrated media ingestion • (OTT TV/Linear) through • consumer electronics

Market Segments & Strategy

Incumbent Digital OperatorsBecome the best “one-stop-shop” platform for consumers and contentproviders (E.g., Sky Communications, Virgin Mobile, DirecTV, Canal+)

Traditional ContentProtect existing business models; Continue experimentingon new (E.g., Disney, Discovery Network, iTV, HBO)

New Content Entrants and PlatformsTake rapid, global advantage(E.g., YouView, YouTube, Apple, Netflix, Amazon)

Next-Gen DistributorsDevelop strategy for premium content distribution (E.g., Vodafone, EE)

Content distributors may not have contentas a core business.

Digital Operator ChallengesBecome a “new platform”: flexible, valued-led propositionfor consumers; better services for third parties (content and services providers) (E.g., BT, TalkTalk, Verizon, Telstra)

Existing player, core area Existing player, core for some New entrant, core area New entrant, core for some

Figure 14 | Lateral movements across the value chain


There are a number of scenarios along the spectrum of “open to closed,” including:

Perfect competition at the platform services layer and barriers to entry on proprietary devices Controlled devices (e.g., proprietary set top boxes) preserve a sophisticated user experience but open up competition for content provisioning by having a standards-based platform where onboarding of content providers is a service differentiation.

Perfect competition on devices and barriers to entry on proprietary platforms Making life easy for consumers to access by being present on all main third-party party devices but restricting the experience to a single-party content proposition.

Additional platform questions include:

• Will it be hardware-based—like the set-top box estate that dominates today’s pay TV world—or software/ applications-based—like the Over- the-Top models that are emerging in content and internet services?

• Will it still be predominantly about entertainment content or will a new raft of services emerge that enable activities, such as managing household energy consumption and personal finances, and/or focused more heavily on new forms of social and gaming entertainment?

Whatever its direction, we believe that the fundamental nature of the TV platform is shifting. As the market becomes more crowded, TV platforms will tend, at varying speeds and extents, towards opening up.

We also expect to see platforms become more focused on service provision. That means both to content providers (such as CRM, analytics engines, advertising platforms) and to consumers (such as seamless integration across devices and more advanced search and curation services). This shift will need to be managed carefully—with the devil residing in the detail of implementation.

Figure 15 | TV Platform as a Service

TV Platform as a Service

Pay TV Channels

Content and Services Consumption Layer

Free TV Channels Social ApplicationsNext GenerationOTT Providers

InteractiveServices

The ConsumerAccess to easy-to-find TV content that they wantto watch, when they want to watch it, where theywant to watch it.

• Aggregated content across linear and OTT• Seamless integration and content ubiquity• Content discovery and curation services

The Content ProviderRapid access through wholesale/retail agreementsto a growing subscriber base with all of the associatedbenefits of an established TV broadcaster.

• Customer relationship management and billing• Content delivery network• User analytics and feedback• Business services


24 The Future of Broadcasting III The Future of Broadcasting III 25

Conclusion

When it comes to introducing innovative TV experiences, consumers are showing renewed trust in the traditional broad-casting 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 (see Figure 16). 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.

Emerging media is bringing innovation and a renewed sense of mission to the industry. But it is also responsible—in part—for a shrinking traditional advertising market and decreasing subscriber numbers. Broadcasters have reacted well to innova-tive players like Netflix by launching their own on-demand offers, leveraging their core strength: content. Now broadcasters

need to continue down this challenging path to build loyalty from future genera-tions of consumers and therefore future targets for advertisers. But creating compelling traffic on new VOD platforms requires going one significant step further: seamlessly integrating linear and non-linear content as the core of new customer experiences.

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.


Figure 16 | Preferred internet provider for TV video service

20132012

Traditional TV broadcaster

Telecoms/ISP/ broadband company

A brand new Internet brand/company

TV or gaming console manufacturer

32%53%

43%29%

12%12%

13%5%

Source: Accenture Online Video Consumer Survey 2013

26 The Future of Broadcasting III The Future of Broadcasting III 27

Driving this continuous change agenda opens up the opportunity to redefine what is core and non-core for broadcasting operations, and shifting operational focus to broadcasting’s strategic core dimensions. Our analysis shows that investors value those broadcasters that are investing in content as a lever for differentiation and a barrier against competitors. But managing the content proposition is becoming more complex, competitive and costly. Traditional distribution networks no longer provide a barrier of exclusivity. Content performance management will therefore be key to preserving the balance between content investments and returns. Furthermore,

integrated commercial, editorial, financial and procurement planning can help allocate capital for content sourcing consistently with planned cost structures and revenues. Capital and operational efficiency around content is all to the good—but for long-term value, broadcasters must get bolder with commissioning decisions and seek to exploit the increasing power of content both globally and locally. And while the magic of creating powerful content will remain an art more than a science, better management information and subsequent decision-making can de-risk investments that previously relied more on luck than design.

While we see a growing number of broadcasters taking a more holistic approach to content management, there is also a set of players undertaking continuous cost transformation and optimization programs, targeting direct and indirect costs by integrating and optimizing advertising sales, consolidating engineering and IT departments and streamlining non-core functions. These transformation efforts will not only compensate for flagging revenue but also free up capital for content production and innovation.

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.


Francesco Venturini [email protected]

Francesco is the global broadcast lead within the Media and Entertainment (M&E) business practice of Accenture’s Communications, Media & Technology (CMT) industry group. A broadcasting trendsetter with more than 15 years industry experience, Francesco is known for shaping transformational strate-gies enabling major broadcasters to compete more effectively in the fast changing landscape in the multiplatform digital era. From content creation to distribution, he helps clients develop strategies for digitally convergent products and services. A Communications, Media & Technology industry stalwart with strong financial acumen, he has been instrumental in shaping cutting-edge financial deals within the media industry.

Charlie Marshall [email protected]

Charlie is Accenture’s Management Consulting Lead for Media and Entertainment in EALA. He is based in London and works across several of our key broadcast clients in the UK and globally. His recent work has covered many aspects of strategic, operational and technology transformation in broadcasting.

Dominik Michaelis [email protected]

Dominik is a Senior Manager in Accenture’sMedia & Entertainment industry practice.He has more than 10 years’ experienceworking with commercial and publicbroadcasters. His focus is on end-to-end digital transformation ranging from media sales optimization to distribution strategy development. Dominik also works closelywith clients from the print, e-Commerceand collecting society segments inGerman-speaking countries.

Egidio Di Alberto [email protected]

Egidio is a Senior Manager in Accenture’s Strategy practice. He has over 10 years of experience working with clients across the Media & Entertainment industry, including public and commercial broadcasters, pay TV’s and publishers. His primary focus has been “transformational” projects, mainly pursuing business evolution in response to the “digitalization” trends and opportunities offered by emerging markets, to help clients remain market leaders.

Bouchra Carlier [email protected]

Bouchra is a Senior Manager within Accenture Research, a global organization devoted to Business and Strategic analysis. Bouchra leads Media and Entertainment high performance research globally. She has more than 15 years’ experience within the Communications Media & Entertainment industry.

Jennifer Watson [email protected]

Jennifer is a Manager in Accenture’s Strategy practice. She has experience working with clients across the Media & Entertainment industry, including television, print, and radio. Her primary focus has been in helping clients develop growth strategies—specifically new product development & launch, pricing and bundling strategies, as well as profitability optimization—to remain market leaders.

Contacts


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The Future of Broadcasting Issue III - Accenture

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