Future of European TV Sector

What future for the
European TV
sector?
Annet Aris
TV 2010, Digital & Beyond

Copyright 2006 Annet Aris. No part of it may be circulated, quoted, or reproduced for
distribution without prior written approval from Annet Aris. This material was used by
Annet Aris during an oral presentation; it is not a complete record of the discussion.
ACT Brussels, April 27, 2006
BRU_BTM076_20050914_INSEAD Advisory Board
AGENDA
1. Impact of trends: how big is it really?
2. How are commercial TV channels responding?
3. What works, what doesn‘t work?
4. Future priorities?
1
TRENDS AFFECTING FREE TV IN EUROPE ILLUSTRATIVE
Act!
TIMING
High, Observ
soon Prepare
Ignore
Digital
HDTV
channels
User Digitization
Time shift
Generated viewers to BB
Content
Mobile TV IP-TV
Low,
later Low High
Interactive IMPACT ON FREE TV
TV Platform Operators
integrating backward
Advertsing
PVR‘s VoD
shit to BB
Source: Aris 2
TRENDS AFFECTING FREE TV IN EUROPE-AUTHORS GUESS ILLUSTRATIVE
ACT!
TIMING
High, Observe
soon Prepare
User Digital Ignore
Generated Platform Operators channels
Content integrating backward
Mobile TV
IP-TV
HDTV
VoD
Advertsing
Time shift
shit to BB
viewers to BB
Interactive PVR‘s
TV
Low,
later Low High
IMPACT ON FREE TV
Source: Aris 3
Marketshare of UK Channels by platform

Share of viewing by platform (2003)
16,4 18
total bbc 29
12,7 48,8
14,5
itv1 4,4
4,8
18,5
c4 7,8
63,2 29,5
58,3
other 35,6
12,8
five
9,1 4,4 8,8
3,3
digital digital digital cable analogue
terrestrial satellite terrestrial
no. homes (1.7m) (6.6m) (2.2m) (13.4m)
source: barb, Sept / Oct. 2003, all individuals
4
Experienced users spend less time time on newspapers,

magazines and TV Non-users
Leisure activities: Average hours per week New users (< 1year)
Very experienced users
(6 or more years)
-36%
16,0
13,2
10,2
8,6 8,8
7,8 -25% 7,4
6,4 -23%
5,1 5,3 4,9
4,2 4,0 3,5
3,0 2,6 2,4 2,0
1,3
0,5 0,9
Reading Playing Listening to Reading Reading Listening to Watching

books Video/ recorded newspaper magazines the radio television
computer Music
games
Source: The UCLA report, Surveying the Digital Future, 2003

5
BROADBAND PENETRATION IS EXPECTED TO DOUBLE UNTIL ESTIMATES

2010
percent of households
Source: Goldman Sachs Research estimates 6

GLOBAL CARRIERS ARE AGGRESSIVELY TRIALING AND NOT EXHAUSTIVE
LAUNCHING IPTV SERVICES
NA ILEC
NA Other
European
Incumbents
European
Attackers
Asian
Incumbents
Source: Literature search; Gartner; Yankee; company websites 7

European incumbents and ISPs are the major protagonists in the IP-TV market
Top 8 IP-TV Players Key service featured

Country IP-TV subscribers TV/
Telco IP-TV brand 2005 (Sept.), ‘000 VoD PVR VoIP BB
159 9 9 9 9
Italy
142
* 9 9 9
** **
20 9 9 9
France
* 165 9 9 9
123
Spain 9 9 9
UK 34 9 9 9
Belgium 10 9 9 9
* Refers to “premium” subscribers only

** Through LiveBox
Source: E-media Institute, “Top 10 European IP-TV players”, September 2005, INSEAD analysis
8
…and those who still haven’t launched it have plans for IP-TV
Telenor: owns Already launched
BT: IP-TV service cable TV, trialing
supplementing TV over DSL
Planning to
Freeview service Telia: TV over DSL
planned for ‘06 launched. 70%
coverage in ‘05
KPN: terrestrial
Eirecom: based service
no plans launched in ‘04 TDC: 40% household served
through TDC kabel, planning
to extend to TV over DSL
Belgacom: TV over DSL
service launched in May ‘05 DT: Trials for TV over DSL in
‘05 through T-Online
FT: Ma Ligne TV over
DSL launched in ‘04; Swisscom: TV over DSL trial in
competing with Free 2005, launch planned for ‘06
and Neuf Telecom
TA: AON Digital TV over DSL

launched at the end of ‘05
PT: owns
leading
cable TI: TV over DSL
operator TEF: Imagenio TV (RossoAlice) launched
TVCabo over DSL in ‘05; competing with
launched in ‘04 Fastweb
Source: Goldman Sachs, IPTV primer for media investors, INSEAD analysis
9
COMPETITION BETWEEN PLATFORMS DRIVES CONVERGENCE Very strong

Weak
Indepen-
Possibility Opportuni- dency of
Number of to offer ties to quality
TV broad- Return "triple provide Video-on- from
cast channel play" local demand external Mobility /
channels capacity services content capabilities factors** Coverage portability
Terrestrial TV *
broadcast
Satellite TV *
broadcast
Cable TV
broadcast
IP-TV via
xDSL
* Need for telephone connection as upward channel

** Simultaneous user number, weather conditions
Source: McKinsey analysis 10
CABLE PROMISES MEET REALITY: THE TRIPLE PLAY

Percent, EU cable example
100% = all cable subs
January 2002 March 2005
BB BB
6
5
7
8
15 1
35
5
2 6
67 5
22 18
Phone
Phone
TV TV
Source: McKinsey analysis 11

PVR's AD-SKIPPING IMPACT CALLS FOR EXTENDED ALTERNATIVE

ADVERTISING
Loss of "minutes of
PVR penetration x % ad-skipping per PVR =
viewed ads"
Forecast PVR penetration Ad-skipping behavior(1) Effect
(%HH)
50% 100%
12%
45% No PVR
loss
40%
PVR
35%
30%
25%
46%
20%
15%
10% 26%
5% 15%
0%
'03 '04 '05 '06 '07 '08 '09 '10
USA UK Ad exposure Ad attentiveness
(1) 70% watched TV in time-shifted form (VCR: only 3%); however: first users of technology usually make more use of it, forecast for rest more conservative
Source: Jupiter Group, Mercer Managment Consulting, Forrester Research 2004; Forrester Research; INSEAD analysis
12
DIFFERENT STAGE OF DEVELOPMENT IN MOBILE TV ACROSS

THE WORLD; JAPAN AND KOREA ARE THE CLEAR
INNOVATORS
Source: INSEAD analysis

13
HDTV: ASIA AND US IN THE LEAD
HDTV services are being provided across several platforms:

¾ Satellite – US, Japan, Korea and Europe
¾ Terrestrial – US, Canada, Australia and Japan
¾ Cable – primarily the US

14
VIDEO USER-GENERATED CONTENT MOVING TO VIDEO BLOGS
Yahoo! Movie Reviews e-Bay Feedback Ratings
Seller information
selling2u-half ( 256 )
Feedback Score: 256
Positive Feedback: 96.0%
Member since Nov-15-01 in United States
Blogs
Source: INSEAD analysis 15

DISRUPTIVE MODELS WILL CONTINUE: IP VIDEO – FOR FREE?
Open Media Network (OMN)
• Founded by Silicon Valley Veteran

Mike Homer
• Free Service to View and Publish
• Employs a Grid Network … Bit

Torrent on Steroids
• Lot's of Cult / Niche Media Today

– Movies
– Pod Casts
– VideoBLOGs
Source: INSEAD analysis 16

„OLD“ BUSINESS MODELS COLLAPSING AS REVENUES SHIFT TO NEW

OFFERINGS
New
Business
Model
Consumer
Percentage adoption
Advertsiser
adoption
Technology
roll-out
Old
Business
Model
Contribution
Margin
Time
Source: Annet Aris 17

AGENDA
18
FIRST RESPONSES TV BROADCASTERS
1. Increased cost efficiency
2. Vertical and horizontal growth
3. Launch niche channels
4. Alternative advertising models
5. New revenue sources
6. Digital innovations: VoD, HDTV, Mobile TV, iTV
19
EUROPEAN BROADCASTERS HAVE HAVE SIGNIFICANTLY IMPORVED

THEIR COST EFFECTIVENESS OVER THE PAST YEARS
• Process improvements in back office and TV

production
• Programming for profits: from market share

maximization to margin optimization
Measures to
improve cost
effectiveness
• Introduction of yield management techniques in
advertsing sales
• More „cost efficient“ programmes: reality shows,

talent searches, soaps..

1. Increasingly sophisticated management methods for

free channels
6. Digital innovations: VoD,HDTV, Mobie TV, iTV

21
SOME KEY BROADCASTERS IN EUROPE STRENGHTENED THEIR

CAPABILITIES THROUGH SIGNIFCANT INVESTMENTS IN CONTENT
GENERATION/PRODUCTION AND/OR PLATFORMS
ITV’s acquisition
of Granada
In addition…
BSkyB enters
Broadband Comcast’s bid for Disney
GE’s acquisition of VUE
RTL’s acquisition of Sony’s bid for MGM

Fremantle Media Bronfman Group’s acquisition
of Warner music
4 Telefonica’s
acquisition (and
Media Capital’s sale)of Endemol
acquisition of
NBP
Source: Citigroup, INSEAD analysis
22
RTL has become a true Pan European Television Broadcaster
Recent
Recentaquicisition
aquicisitionof
of
30% stake of REN TV
30% stake of REN TV
1) RTL Televizija launched on 30th April 2004, average audience share

2) among private broadcasters
Source: RTL 23
24
U.S. NICHE TV CHANNELS ARE LESS PROFITABLE

THAN MAINSTREAM CHANNELS; 1999
Cash flow "Must carry"

USD millions channels
E.g., ESPN Key messages
600 (sports),
Nickelodeon • Criticial subscriber mass is
500 (kids), MTV about 35 million
• Profitability of niche
400 channels is relatively low
300
• "Must carry" mainstream
Niche channels channels are paid by cable
E.g., Discovery operators, while niche
200 channels have to pay to be
Health, BET Jazz,
ZDTV carried by operators
100
Number of
0 subscribers
0 20 40 60 80 100 Millions
-100
-200
Source: Kagan Associates, McKinsey 25

EUROPEAN THEMATIC CHANNELS LACK CRITICAL Main revenue

source
MASS TO ATTRACT ADVERTISERS
Total revenues Thematic channels have

Percent grown significantly in recent
U.S. Europe Latin America years:
Subscription
fees
40 90 - 95 90 - 95 • Only a few formats generate
enough reach/frequency
+
Revenues Advertising 55 5 - 10 5
• Depend still too heavily on
subscription revenues rather
+ than advertising in the short
term
Other 5 0-5 0-5
• Only top tier is profitable
provided very low costs
Source: Idate, "Economic of Basic Cable Networks 2000"; Paul Kagan Assoc., "Economics of Basic Cable Networks 2001" 26
27
SPECIAL FORMS OF ADVERTISING ARE CHANGING

THE MEDIA LANDSCAPE
From ... To ...
Classic commercials
U-WB 14 15 10
Identification
number Special advertisement forms
Time code
(3 pm)
Price category
Commercial break Sponsoring Individual ads Split screen
Label Sponsoring Advertainment Countdown
Event Sponsoring Telepromotion Diary
Trailer Sponsoring Spotpremiere 7x7
Competitions Ad in/out
Game shows Split break
Source: Sevenonemedia 28
ADVERTISING FORMATS WILL BE ADAPTED DEPENDING EXAMPLES

ON ADVERTISING GOAL
TV On-line Teletext Events Merchan-
Direct
dizing
Branding dimension
• Short com- • Banner, pop- • Poster blitz, – Depends on a product and budget –
Awareness munications up, power- Earspace
layer pop-up
• Long spots, • Streaming, • Classic • Sweep- • Merchand.

excl. sports flash adver- event stakes for events
Image advertain- tising, e.g., sponsoring
ment pop-ups
• Classic spots • Web-event • Advertising- • “Open • Distribution • Merchand.

with response with back- site with house", of product for events
Consideration elements, ground background Events at samples
telepromo- information information POS
tions
• Telepromotion • “Bargain tip" • Advertorial • “Open • Mobile: • Merchand.
• Interactive TV, • Market place: house" push-infos for events
Purchase teleshopping teletext/ • Events at
shopping tips POS
• Spots, ad- • Web event: • Advertising • Classic • Call center • Merchand.

vertainment, service func- site event as consultant for events
Loyalty programming tionalities, sponsoring • Individual
e.g., "pollen- (depending mobile
Info" (also on size of services
per SMS) budget)
Source: McKinsey, SevenOne Media 29

30
NON-ADVERTISING REVENUES STILL REPRESENT A VERY

LIMITED CONTRIBUTION TO MEDIA COMPANIES
Contribution of advertising to total revenues in 2004

% 100 1 4 5 5 8 10 11
18 18 92%
Weighted ave-
rageg
80
60
99 96 95 95 92 90 89
40 82 82
20
Non-advertising
Advertising
0
Antena 3 Tele 5 MediaSet ITV Antenne
Grece
RTL ProSiebenSAT1 SIC SBS

Germany Impresa
Source: Companies annual reports; INSEAD analysis

31
HOWEVER, SOME GROUPS ARE EMERGING AS BEST PRACTICES IN

DEVELOPING STRONG DIVERSIFICATION OPPORTUNITIES
Contribution of advertising to total revenues in 2004

• Tele Shopping
• eTF1 – Internet businesses
• Co-production of events
• Portal and downloads
• Merchandising
58 42
• Home Shopping (24h)

• Co-production of theatre
plays and concerts
49 51 • Publications and DVDs
• Music
• Web portal
• Retail collections
• Corporate events
• M6 Webcam
0 20 40 60 80 100 % • Many others
Non-advertising
Advertising
Source: TF1 and M6 2004 annual reports and websites; INSEAD analysis
32
SOME MEDIA GROUPS ARE EMERGING AS CLEAR

LEADERS IN REVENUE DIVERSIFICATION
Type of revenue
generation Revenue sources Examples of analyzed companies
1. Books, Music and Multimedia

Consumer goods/
retailing 2. Home Shopping
3. Collection series and
merchandising
Online content 4. Downloads and games
5. Music
6. Auctions
Interactive
activities 7. SMS and Phone calls
8. Webcams and MMS
9. Voting with prizes

Production
10. Content (DVDs, CD)
11. Theatre plays and Concerts
Branded 12. Corporate Events

products
13. Mobile phones and Webcams
33
14. Credit cards
34
MEDIASET | The Big “Serie A”, until 2007
Juventus Milan Inter Roma Sampdoria Atalanta Messina Livorno Siena
79.5% of Italian Football Supporters
“Serie A” MEDIASET LAUNCH TRIAL OFFER

FERRARI CHALLENGE
152 matches in a season, 38 “DIRETTA
Worldwide presentation new F1 car (F2005)
PREMIUM”
6 Ferrari “360 Challenge” Races
3€ per match
3€ per race
9€ and 18€ cards
Source: Mediaset, Eurisko, Sinottica 2004-1, Makno 2004; Nielsen, Monitor Calcio 2003-2004 | 35
| 35
35| |

SO MUCH TO DO,
SO LITTLE TIME/RESOURCES!!!
36
AGENDA
37
STAND ALONE ATTRACTIVENESS OF STRATEGIES FOR COMMERCIAL

BROADCASTERS
Value Creation Ease of Value Creation Ease of
Potential „analogue“ implemenataion Potential „digital“ implemenataion
Cost Launch Digital

effectiveness Channels
Vertical ? VoD
Integration offerings
Growth HDTV
abroad
Alternative
Mobile TV
advertising
models
New
Revenue
iTV oferings ?
Sources
User
Generated ?
Source: Annet Aris Content 38
WHAT HAPPENS WHEN ALL START DOING THIS?
Potential effect of industry dynamics...
One starts, all other follow

The lemming effect…..
without really knowing the
benefit..
Everyone starts doing the same:

Grasshopper phenomenon..
over-saturation and profit
destruction
Prisonners dilemma.. No real benefits, but cannot afford

to stay behind..
The winner takes it all… Only the most succesfull player(s)

benefits, all others lose
Self reinforcing positive cycle Togehter critical mass is

developed for new demand
WHAT HAPPENS WHEN ALL START DOING THIS?
Potential effects of industry dynamics... Examples
Newspaper: shift to tabloid?

The lemming effect…..
Cheap formats, alternative

Grasshopper phenomenon..
revenues, digital channels
Prisonners dilemma.. Vertical Integration, HDTV?
The winner takes it all… Increasing advertsing time
Self reinforcing positive cycle Roll-out of set top boxes,

interactive offerings, mobile TV
ATTRACTIVENESS OF STRATEGIES FOR COMMERCIAL BROAD-

CASTERS FROM AN INDUSTRY PERSPECTIVE
Value Creation Potential „old“ Value Creation Potential „new“
Stand alone Combined Stand alone Combined
Cost Launch Digital

effectiveness Channels
Vertical ? VoD
Integration offerings
Growth HDTV
abroad
Alternative
Mobile TV
advertising
models
New
Revenue
iTV oferings ?
Sources
User
Generated ?
Content
AGENDA
42
IMPLICATIONS FOR COMMERCIAL TV CHANNELS
1. Avoid digital actionitis: being there too is not

enough!
2. Refocus on brands to create consumer oreintation in

overwhelming digital world
3. Create digital offering palette around brands

LIBELLE HAS DEVELOPED INTO A MULTIPURPOSE BRAND
Magazine Licenses
Internet Special editions
Consumer
events Books/
Agendas
Articles Books/
Syndication
Agendas
Examples:
• Articles: Libelle duvets and pillows, Libelle pots and pans
Together
• Consumer events: Libelle Zomerweek, yearly event with responsible for ca.
75,899 visitors in 2003 15% of Libelle
• Internet: Successful website www.libelle.nl revenues
• Many special Libelle editions published yearly
Source: Sanoma WSOY 44

IMPLICATIONS FOR POLITICIANS AND REGULATORS
1. Allow media comapnies to build multi media

brands
2. Create boundary conditions for commercial TV channels to

earn money in the digital world, otherwise content quality will
deteriorate!
3. Focus on class rather than mass, e.g.:

• More lenience in advertsing forms rather than
more advertising time
• Use spectrum for HDTV rather than more digital
channels

EVERYTHING ELSE YOU WANT TO KNOW CAN BE FOUND IN:
46

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What future for the

TV 2010, Digital & Beyond

1. Impact of trends: how big is it really?

2. How are commercial TV channels responding?

3. What works, what doesn‘t work?

TRENDS AFFECTING FREE TV IN EUROPE ILLUSTRATIVE

TRENDS AFFECTING FREE TV IN EUROPE-AUTHORS GUESS ILLUSTRATIVE

Marketshare of UK Channels by platform

Experienced users spend less time time on newspapers,

Reading Playing Listening to Reading Reading Listening to Watching

Source: The UCLA report, Surveying the Digital Future, 2003

BROADBAND PENETRATION IS EXPECTED TO DOUBLE UNTIL ESTIMATES

Source: Goldman Sachs Research estimates 6

GLOBAL CARRIERS ARE AGGRESSIVELY TRIALING AND NOT EXHAUSTIVE

LAUNCHING IPTV SERVICES

Source: Literature search; Gartner; Yankee; company websites 7

Top 8 IP-TV Players Key service featured

* Refers to “premium” subscribers only

TA: AON Digital TV over DSL

COMPETITION BETWEEN PLATFORMS DRIVES CONVERGENCE Very strong

* Need for telephone connection as upward channel

CABLE PROMISES MEET REALITY: THE TRIPLE PLAY

January 2002 March 2005

Source: McKinsey analysis 11

PVR's AD-SKIPPING IMPACT CALLS FOR EXTENDED ALTERNATIVE

USA UK Ad exposure Ad attentiveness

DIFFERENT STAGE OF DEVELOPMENT IN MOBILE TV ACROSS

Source: INSEAD analysis

HDTV: ASIA AND US IN THE LEAD

HDTV services are being provided across several platforms:

Source: INSEAD analysis

VIDEO USER-GENERATED CONTENT MOVING TO VIDEO BLOGS

Yahoo! Movie Reviews e-Bay Feedback Ratings

Source: INSEAD analysis 15

DISRUPTIVE MODELS WILL CONTINUE: IP VIDEO – FOR FREE?

Open Media Network (OMN)

• Founded by Silicon Valley Veteran

• Free Service to View and Publish

• Employs a Grid Network … Bit

• Lot's of Cult / Niche Media Today

Source: INSEAD analysis 16

„OLD“ BUSINESS MODELS COLLAPSING AS REVENUES SHIFT TO NEW

Source: Annet Aris 17

1. Impact of trends: how big is it really?

2. How are commercial TV channels responding?

3. What works, what doesn‘t work?

FIRST RESPONSES TV BROADCASTERS

1. Increased cost efficiency

2. Vertical and horizontal growth

3. Launch niche channels

4. Alternative advertising models

5. New revenue sources

6. Digital innovations: VoD, HDTV, Mobile TV, iTV

EUROPEAN BROADCASTERS HAVE HAVE SIGNIFICANTLY IMPORVED

• Process improvements in back office and TV

• Programming for profits: from market share

• More „cost efficient“ programmes: reality shows,

Source: Annet Aris 20

FIRST RESPONSES TV BROADCASTERS

1. Increasingly sophisticated management methods for

2. Vertical and horizontal growth

3. Launch niche channels

4. Alternative advertising models