Economic analysis of the TV advertising market

December 2004

Multi-channel services to drive growth in TV advertising revenues over the next decade, according to PricewaterhouseCoopers report for Ofcom.

Following lean years post the bursting of the Internet bubble, TV advertising revenues are set to achieve significant real growth over the next decade, but little, if any, of this growth will come from the traditional commercial channels (Channels 3, 4 and 5). Instead, the new multi-channel services will drive growth, as they increase their share of viewing.

The report, compiled by PricewaterhouseCoopers, was commissioned by Ofcom and published on December 9, 2004.

Key findings:

• Multi-channel advertising is increasingly a competitive constraint on, and substitute for, traditional advertising.
• Audience fragmentation does not have a significant impact on total TV advertising revenues, but revenues are set to shift from the traditional commercial channels to the new multi-channel services as multi-channel increases its share of viewing.
• Loss of audience to the BBC (as a result of the launch of new BBC channels, or through the BBC acting more commercially and drawing more viewers) will have an impact on TV advertising revenues for both traditional and multi-channel services. However, it will have a relatively greater impact on the revenues of multi-channel operators, due to the higher estimated price elasticity of multi-channel as compared with traditional channel advertising.
• Producing robust long-term forecasts of TV advertising revenues is challenging, given recent structural changes in the TV advertising market and future uncertainty around issues such as digital penetration. However, the report provides two scenarios for advertising revenue growth to 2014, based on scenarios for digital TV penetration. These scenarios demonstrate that future growth in TV advertising revenues is likely to be derived entirely from multi-channel services, with traditional channel revenues remaining broadly flat in real terms.

The PricewaterhouseCoopers report combines the latest quantitative economic modelling techniques with industry thinking and expertise to define the TV advertising market in the UK.

The results update and supplement the pioneering work of Professor David Hendry on TV advertising elasticities, published in 1992. Given the fundamental changes to the TV advertising market since Hendry's work, this updated model will be of critical importance to future analysis of the TV advertising market.

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