Schroders: The future of TV: Is it just the walking dead?

How we watch today

 According to a recent Thinkbox study – a marketing body for UK commercial broadcasters – we watch TV for three reasons

 1) To escape/indulge

2) To unwind/seek comfort

3) To connect/experience

 Whilst there is an element of overlap between them, in the main each state requires a different type of programming to fulfil it. These requirements are the reasons why such different programming can be equally popular, e.g. UK soap opera Coronation Street (comfort), UK talent show Britain’s Got Talent (connect) and Netflix sci-fi series Stranger Things (escape).

These states also give us an idea as to how programming will remain differentiated on a global versus a local basis. ‘Escape’ can be the same across any culture, it just needs to be something you don’t do everyday (like selling crystal meth or visiting shadow dimensions). As such, it lends itself well to the business model of subscription video on demand (SVoD) where content is distributed globally.

“Connect” and “unwind” are different beasts. Connect relies on people watching content at the same time. You can’t vote on Britain’s Got Talent when you aren’t watching live. Unwind is primarily found in cultural familiarity (Coronation Street is one of the most popular shows in the UK but only expats watch it in the US). As a result these two states find a better home within local distribution.

While Netflix may be able to dominate in one area, it appears there will remain a need (and therefore a future) for locally generated content.

Still time for a commercial break

Whilst Netflix is growing in popularity, advertising continues to finance the majority of the TV you watch today. The reason is simple, it is a great advertising medium.

In the marketing world campaigns fall into two different buckets, “sales activation” and “brand building”. The first is generally short term and very targeted, usually achieving an effective uplift in revenue that fades quickly. The second has a broad reach focused on emotional engagement. Typically, brand building has modest results in the short-term, but long-term, can drive consumers to a brand without the need for continued repeat spend.

All companies have and will continue to employ both sales activation and brand building, but the “mass-reach” and emotional engagement required for brand building is only really currently available from traditional TV.

There is a genuine lack of alternatives out there for advertisers to meet these brand building needs. Even if traditional TV’s mass audiences are showing signs of dwindling – which itself is debatable, but an argument for another day – as they do so, the amount of advertising space that fulfils the mass-reach requirement becomes scarce. As with all demand/supply imbalances, the product of this phenomenon is price appreciation. This is positive for those broadcasters that retain large audiences, who are then able to recycle this money back into new content production.

Back to the future?

 In a world where this scarcity model drives TV advertising pricing ever higher, the question arises on if/when NetFlix and Amazon decide to join the party. As content cost soar will these two giants charge more for their products or will they move to a hybrid approach where the viewer is exposed to a limited amount of advertising.

It’s not a new model. After all, it’s simply following the lead of Hulu in the US and Maxdome in Germany, both of which have enjoyed reasonable success. Whether the heavy anti-advertising rhetoric of the Netflix allows it to launch a hybrid model in the US is yet to be seen. However, in international markets a hybrid model could just prop up revenues enough to allow Netflix to sustain its content spend in the long term.

The empire strikes back?

In the face of potential disruption to its core brand building revenues, broadcasters are fighting back. For the first time, the emergence of streaming apps has given these broadcasters data on, and direct access to, their viewers. This is a powerful combination, allowing them to serve individuals-targeted adverts just as Facebook and Google do. They can therefore gain access to advertisers’ sales activation budgets; something they have never had before.

It’s unlikely to end with TV streamed over an app either. Your set top box is a powerful bit of kit and its value in advertising is only starting to be realised. Like the app, it can be used to gather data and deliver targeted advertising. But traditionally broadcasters don’t own the set-top-box. That belongs to the distributers like Sky or Comcast, so at the moment both must share the economics and therefore it is not hugely appealing for the broadcaster.

The proposed merger of AT&T and Time Warner might be the game-changer. It has raised the spectre of platform and broadcaster mergers where value is unlocked via the ownership of both advertising inventory and the set top box. Maybe old dogs can be taught new tricks.

Five possibilities

Comcast and Disney may consider a merger or an asset deal. Culturally and strategically, this would be a great fit, but the size of the deal may ultimately prevent anything from happening. If this proves to be the case, the alternative is that Comcast looks to take just ESPN.

Platform and content integration will continue. AT&T and Time Warner will not be the last deal of this type. Addressable advertising is too tempting. Liberty Global and ITV may be next.

Netflix may struggle to grow globally and will probably look to advertising to help. The vast global ambitions of Netflix are admirable but the rest of the globe does not operate under the same dynamic as the US. Certain amounts of content can be distributed globally but its value to consumers in foreign countries is different. In order to achieve the subscriber numbers and revenue per user, Netflix is likely to need to begin advertising.

Amazon will spend a lot more on content. Its content spend has grown rapidly over the last few years and we believe it will continue to do so. Through Prime Amazon have a unique path to viewer monetisaiton and this will allow them to continue to spend big. Acquisitions are a possibility, significantly higher spend is a near certainty.

Traditional broadcasters with large content businesses and big share of viewership  will continue to operate at existing  or improved levels of profitability (e.g. ITV and CBS)