With more time available at home than ever before due to COVID-19 restrictions, people in the UK turned to their TV. But while the amount of hours watched went up, traditional advertising revenue fell sharply.
People signed up to increasing numbers of Over The Top (OTT) subscription services such as Netflix and Disney+. These services were promoted heavily and the timing of the launch of Disney+ helped it to cleverly capitalise on the growing number of hours spent at home.
As out-of-home spending opportunities were limited by lockdowns, advertisers seemingly found equally limited reasons to continue their advertising spend. Broadcast TV advertising for 2020 dropped by over 10%.
The TV advertising sector has bounced back more strongly than originally anticipated in 2021 (i.e. ITV recently announced growth of c.20%) as brands re-engage with screens. As a result, the sector has quickly recovered its lost ground from COVID-19, and is likely to return to low single digit growth rate for 2022.
As a source of future growth, TV providers will need to give advertisers increased levels of targeting and control for their campaigns. Advertisers are used to precision targeting of digital adverts, and they will come to expect the same of TV.
Sky and ITV and C4 all offer this capability, with Sky even offering targeted ads on linear TV, and we expect this segment to grow with further investment. That is not to say all TV ads will be targeted - TV remains a critically important broadcast medium - but rather to say that advertisers will plan their TV advertising campaigns across a range of broadcast and targeted objectives.
There is also increased competition from internet giants such as YouTube who in May 2021, saw 25 million people watch YouTube on their Connected TV. This is attracting advertising spend away from traditional TV channels and broadening the definition for consumers of what ‘TV’ is.
The future of funding for the BBC remains a controversial topic, with the licence fee now frozen until 2023. In the long-term the BBC may be forced by government policy to face a choice between a subscription model or an advertising model to continue offering the breadth of services it does. It’s worth noting that the BBC does already generate substantial advertising revenues through its global arm.
“For several years we’ve been witnessing a global decline in TV subscription revenues, this is especially prominent in the US. In the UK, consumers are increasingly mixing TV subscriptions with OTT subscriptions.”
Jeremy Dain, Director
In the UK, premium pay-TV subscription service providers have succeeded in slowing the rate of decline and we anticipate a reduction in revenue of just over -1% CAGR from 2022-2025.
However, there is an opportunity to keep and grow customers through building value by bundling OTT services into their platforms and delivering a better customer experience as well as to continue to offer services beyond TV such as broadband or mobiles.
They remain at risk from younger demographics who never grew up with premium-TV subscriptions and expect the flexibility that OTT providers give them. Giving those demographics the ability to ‘pick and mix’ services is a way to mitigate that risk.
One area these services still differentiate is premium sports rights, especially football. This is a crucial area where premium-TV subscriptions need to retain their rights if they are to keep customers.
Yet it’s not been straightforward. When professional football restarted in the UK, after a brief hiatus due to COVID-19, providers drew criticism for introducing pay-per-view (PPV) Premier League matches at too high a cost. The failure of PPV to take off could show that the market has peaked in terms of how much customers will pay, with rights already split across three providers.
The next round of broadcast rights is critical. Likely to be a three/four-way battle between Sky, BT/ Eurosport, Amazon and DAZN. Amazon has huge financial firepower but with Sky Sports already seeing a reduced number of televised fixtures and the loss of European competitions to BT, any further declines in coverage may see an increased rate of cancellations. This puts Sky under pressure to retain it’s rights.
2020 saw a sharp increase in growth rates for subscription based video-on-demand. As the battle for content intensified, consumers showed increased appetite for ‘stacking’ - taking on multiple monthly subscriptions. While we do expect the growth rate to slow as restrictions ease, we still anticipate a Compound Annual Growth Rate (CAGR) of c.8% p.a. from 2021-2025.
For consumers, there has never been so much choice. Yet the proliferation of services means not all will survive. We expect to see consolidation. The bigger services should look to the niche providers to help expand both their catalogues and subscriber base.
“OTT providers are experts in making the signup and cancellation processes as frictionless as possible. This appeals to younger people who crave flexibility and tempts them away from competitors with long-contract periods.”
Ashkan Fouladbakhsh, Strategy Consultant at PwC
Once scale is achieved, there is the opportunity to increase profitability. This will mean consumers see price rises. The cost of content is high and providers will need to look at upsell opportunities, subscription costs and premium options for viewing on multiple screens concurrently.
Trying to keep subscribers engaged and reducing churn is key for growth. One strategy from Netflix is to branch out into video games. Subscribers now have access to a range of mobile games, including tie-ins with popular Netflix TV shows such as Stranger Things. Adding additional value will help OTT providers increase uptake on their platforms in the long-term.
OTT providers may also find growth opportunities by focussing on content from a specific geography. The international success of non-English language programmes, such as Squid Game and Lupin, has ignited the search for content that can travel globally.
With most major players now US-owned, there may also be a gap in the market focussing on UK content (e.g. Britbox) or targeting specific consumer interest segments (e.g. Marquee TV) Key for all OTT content providers will be the need to continue to efficiently invest in appropriate content for each of their territories and customer segments.
To enable this, larger OTT content providers are taking more and more of the content value chain in-house and securing exclusive content much earlier in the process to ensure they can differentiate in the market.
Across all areas where people “watch”, there is one underlying thread to success: content. Whether to drive subscribers or advertising revenue, content is the only true differentiator between ecosystems.
The UK shines brightly in producing huge export value of British-made TV and film. Indeed, the level of continued investment is a vote of confidence in UK talent with a now confirmed £500m expansion of the famous Pinewood Studios, and a proposed £700m development for a new TV and film studio in Hertfordshire.
As consumers have shown a willingness to take multiple paid-for services and pay a premium for quality content, the winners in this space will be the ones that can excite and entertain their viewers the most. Yes, there are aspects to a service that help - flexibility, user experience and accessibility - but nothing beats owning the rights to the next Tiger King.