By Andy Pearch |  Written for Billetts, Christmas 2008

The end of the consumer credit and asset bubbles herald unprecedented times for Brand Owners and Media Owners. MFI and Woolworths sank, over-burdened with debt and unable to keep in step with changing consumer needs. In the US the future is uncertain for media companies Viacom and the Tribune Company (owners of the LA Times), also saddled with moribund revenues and mountainous loans. While the dotcom recession of 2001 broke many digital business models, the 2009 depression looks set to weigh most heavily upon bricks-and-mortar businesses and analogue media companies. Indeed, just as we are witnessing a remarkable political and economic power shift from the West to the East, so we are about to see media power shift irreversibly from the Analogue to the Digital media owners.

The TV and Press markets in particular look vulnerable as we enter 2009. Both suffer from powerful competitive forces which throttle growth and actually hasten their decline.

Let’s turn firstly to TV. Now, and for the first time in over twenty years, the UK TV market is facing major structural change. TV revenue is forecast to drop by between £200m and £300m in 2009, as the Crunch takes its toll on advertiser budgets. These declines will wipe out the profitability of most commercial broadcasters. TV costs will fall by as much as 15% in the first half of the year, and will probably continue to fall well into 2010. This in turn will encourage many advertisers to scale back budgets as their cost per GRP slides inexorably downwards, to avoid wastage and delivering excessive advertising weights. This presents a worrying longer-term scenario for the sector, where media planners revise their media planning costs ever downwards, as savvy advertisers maintain media weights and re-distribute cash released by lower TV airtime costs into other marketing activities.

This threatens a continuous downward spiral in TV airtime prices, which have already in 2008 hit lows of 17 years ago. Once this spiral takes hold (and some observers believe this process started back in 2006) there is a real prospect of TV airtime prices and revenues falling consistently, and the on-screen commercial TV product becoming permanently starved of innovation and investment. Unlike other media owners, regulation prevents TV broadcasters from supporting pricing and minimising revenue leakage by controlling ad volumes. As such, the TV industry inflicts self-harm and is at a competitive disadvantage to other display media.

One recent piece of research commissioned by OFCOM predicted that the TV advertising market could collapse from £3.16bn in 2007 to just £520m in 12 years’ time – a drop of 83 per cent – if some of the most dramatic predictions about competitive forces become a reality. It is perhaps surprising, then, to see OFCOM in their recent TV Advertising Review proposing to grant public service broadcasters MORE advertising minutage, when this will put further downward pressure on TV prices.

Indeed, the architects of the CRR may have to think and act very fast if the spiral of impact growth and revenue removal has already taken hold. Those crying out to perpetuate the CRR to restrain ITV’s market power may soon be choking on their words when they see the damage being done to a medium unable to contain its own pricing. It may be unfashionable to say this, but the CRR may now be inflicting damage on the broadcasting industry, and OFCOM should turn its sights on preserving quality and profitability in the sector, as opposed to extending methods of policing it.

Nick Milligan, managing director of Sky Media, has stated that broadcasters need to “find new models or we won’t be here”, but finding signs of major change is a difficult task in a traditionally conservative industry. However, from 2011 BSkyB will themselves start to challenge market conventions by offering targeted television ads, via a system that will store relevant TV spots on its PVRs which can then be inserted in commercial breaks. The system would require subscribers to “opt-in”, and then use demographic information to target ads at different market sectors.

We will also see the emergence of web-based TV trading platforms over the next few years. These vehicles provide a means for media owners to receive value for inventory they cannot sell, but also provide smaller Brand Owners and SMEs with the opportunity to buy directly from the media owners.

The success of these initiatives will encourage a more mixed TV trading economy, but more importantly they offer growth opportunities for a medium in real trouble. By 2011, of course, the nation will be digitally converted. When this happens, it is likely that every TV channel – including ITV – will be substitutable. At this point, the terrestrial channels will have lost much of their premium reach advantage, and the market will naturally have to re-adjust value equations. With the lines already blurring between commodity-traded display advertising and more bespoke branded content, the TV trading market will be forced into major change.

By this time, there may be just three (or four) major media buying groups, commanding over 80% of commercial revenues. It is no exaggeration to predict that the fate of more than one TV broadcaster will sit in the hands of these mega-groups by this time, and that the regulators will start to spend a bit more time thinking about protecting vulnerable media owners from the powerful agencies, rather than protecting vulnerable advertisers from the powerful media owners…

All in all, the next three years promise much turbulence and much change for the UK TV market.

Let’s now turn to the Press market. According to ad monitoring companies in the US and the UK, it is the newspapers which have seen the largest fall-off in demand since September’s “Upshares-Downshares”. This is in part because much of Print’s revenue dependency comes from the retail, automotive and technology sectors, and all are set to post double-digit declines in spend in 2009.

According to Enders Analysis, the Press display market could fall by as much as 20% in 2009. This will have a number of consequences, including inevitable consolidation within both the national press quality and popular markets, dramatic restructuring of the regional news industry and a raft of magazine closures. Most electronic versions of offline print product are still unprofitable and reliant on display growth, but this revenue stream is slowing too, dampening down prospects of revival in the sector.

Evidently, the print media are in retreat as available growth is instead soaked up by the digital media companies. To illustrate this point, US newspaper revenues for the Top Media Companies last year plunged $2.3 billion. By contrast, the top digital player, Google, saw net US media revenue jump by almost the same amount – $1.9 billion. It is clear that digital substitution is a real threat to the Press media and as digital companies continue to grow and fund their own development, the rate of substitution will accelerate from now on.

Digital customer acquisition costs will continue to become cheaper in comparison to Print media as their circulations continue to fall (again at an accelerated rate) and edition sizes contract, while digital content and penetration continue to expand inexorably. The economic climate is accelerating the flow of money away from awareness and consideration channels, towards preference and loyalty channels. The notable success of digital coupons and email marketing this Christmas are further evidence of this switch in advertiser objectives.

Never before has there been such a surfeit of media availability, driven in the main by digital, married with such a dramatic decline in demand. Media proliferation inevitably brings market share leakage from the established media, which are unable to increase units to sell at the same rate as their digital competition. This means price deflation is not just a temporary event – it is a permanent fixture in the UK media landscape. Even if the economy were to recover at the end of 2009, it is not clear that the TV and Press economies will.

So, in a market suffering from over-capacity, chasing audiences and readers is a lost cause for these players, as there is no uplift in revenues in sight and the digital media are insuperable in a price battle. So what is the route back to profitability for the analogue media? Ownership de-regulation and market consolidation must surely follow, with market leaders and low cost providers the most likely survivors as the “second tier” media owners are gradually dismantled by market forces. Entry costs for advertisers must remain low to compete for and attract new investment. Market leaders must re-inforce their exclusivity and value to maintain advertiser loyalty and premia.

This process will not only play out in the media industry, it is also underway in the automotive industry, the financial services industry and the retail and travel industries. By understanding and acting on the forces at work, media owners can retain a smaller, diminished but still profitable place in the new media era.

We propose the following five steps should be taken as a matter of urgency by regulators and government in order to preserve the fragile ecologies of the TV and Press markets:

• OFCOM should commission an urgent review into the short, medium and long-term health of the commercial broadcasting model

• Plans to expand advertising minutage of Public Service Broadcasters should be shelved

• The currency for CRR should switch from impact delivery to share of viewing for 2010

• The government should urgently review existing cross-media ownership rules, specifically pertaining to regional print, digital and broadcast media

• Given the yawning gap emerging between the funding models for the commercial broadcasting sector and the BBC, the debate over the future remit and sizing of the BBC must now come back on the agenda

Posted Thursday 11th December 2008