The development of the European digital TV market, in particular the mass-market uptake of free-to-air digital services, is threatening the existing business models of broadcasters and channels. The pressure on carriage fees and advertising revenues combined with a still increasing number of channels, is leading to an unsustainable situation, with many smaller channels likely to merge or close...
Over half of Western European households are expected to have digital TV by the end of 2007, compared with 19% at the end of 2002. The uptake of digital TV has been accompanied by a dramatic increase in the number of channels available, vastly increasing the competition for audiences and leading to a shifting balance of power in the broadcast sector.
Traditional free-to-air (FTA) channels, such as ITV in the UK and TF1 in France, face an accelerating loss of overall viewing share as audiences shift to multi-channel services. In the UK from 1998 to 2007 the audience share of the five terrestrial channels will have fallen from 87% to 66% with serious consequences for advertising-focused business models.
However, while their combined share of viewing is increasing rapidly, the already fierce competition between multi-channel services is intensifying with new channel launches by broadcasters and pay-TV operators. As a result, the audience is fragmenting across an ever-increasing range of channels, now numbering in the hundreds on some digital platforms.
At the same time, pay-TV operators need to exploit their position as gatekeepers for much of the TV audience to maximize revenue generation and economies of scale across all elements of their business. This is bringing them into direct competition with many existing broadcasters, while their growing control across the value chain places mounting pressure on both advertising and carriage-fee-funded broadcaster business models.
Traditional FTA broadcasters' advertising income threatened
Historically, the small number of channels granted analog terrestrial licenses in markets such as the UK, France and Spain were in an extremely powerful position, with almost complete control over the TV environment due to the scarcity of bandwidth. Mass-market digital uptake dramatically changes this situation.
From 2002 to 2007, advertising on traditional FTA channels is likely to grow at an average rate of 4% (compared with 15% for multi-channel services), however competition for audiences will lead to programming spend increasing faster than advertising revenues, seriously affecting profitability.
In order to compete in the multi-channel environment, traditional FTA broadcasters will be forced to launch new channels, such as ITV2 and TF6, however even if they were able to maintain their overall viewing share, advertising income would still suffer. The increased competition among channels to attract advertising spend is likely to lead to a loss of broadcasters' pricing power, lowering tariffs except for truly mass-audience events which will become increasingly rare.
Multi-channel broadcasters' carriage fees under pressure
Many multi-channel broadcasters have suffered something of a reversal of fortunes in the few years since the launch of digital pay-TV services on cable and satellite. While digital operators were focusing on rapid growth, they were highly dependent on carrying a large selection of big-name channels. However, having established large subscriber bases and with a greatly increased channel choice in most genres, operators are now in a far stronger bargaining position regarding carriage fees.
As a result leading multi-channel broadcasters such as MTV and Nickelodeon may now have to accept up to 50% reductions in per subscriber carriage fees, while smaller broadcasters may lose their income from carriage fees entirely. This makes multi-channel broadcasters more dependent than ever before on advertising revenues, however channel proliferation has resulted in an excess of advertising space, depressing tariffs, and an extremely fragmented and therefore inefficient media sales market.
The pressure on carriage fees and advertising revenues combined with a still increasing number of channels, is leading to an unsustainable situation on many digital cable and satellite platforms, with numerous smaller channels likely to be forced to merge or close.
Strategy evolution towards integrated content brands
As both traditional free-to-air and multi-channel broadcasters face mounting pressure on their core revenue streams, they will need to exploit ever-greater scope and scale in order to remain competitive. By moving beyond channel-focused business models to operate as integrated content brands, they will benefit from more predictable cash flow, improved brand strength, greater operational efficiencies and the ability to cross-promote content and provide bundled packages to key advertisers.
As viewing behavior becomes far less dependent on channel schedules and more based on individual programs, even the largest channels are no longer able to count on captive audiences. Instead, broadcasters such as the BBC and Discovery are now focusing on building audience awareness and attracting and retaining viewers to their content brand as opposed to individual channels.
The development of content brand strategies will play an important role in enabling broadcasters to provide greater value to advertisers, helping them to run increasingly targeted and sophisticated campaigns. However, this will require that broadcasters improve their understanding of the behavior and demographics of the audience.
As a result, broadcasters must look to maximize the involvement of the audience with individual programs and the broader content brand through all available media, using fixed-line and mobile telephony and Internet services in addition to interactive TV itself. As well as providing the broadcaster with detailed information about the audience, this will be vital in differentiating their services, enhancing the brand and therefore driving audiences and viewer loyalty.