Over the past decade, increased competition has made content costs soar and scattered audiences across a wide array of channels and providers. TV operators now need to focus spend on what drives viewers to them: compelling content. Licensing and commissioning of content currently accounts for over 60-70 percent of their cost base and this is growing.
But what about the remaining 30-40 percent? Logically, this should be a primary focus for optimisation. Currently, broadcasters devote 20 percent of this “non-content spend” to the logistics of video. Could outsourcing be an opportunity for broadcasters to make material savings in CAPEX and OPEX?
The digital nature of video has made it more prone to being controlled, monitored and distributed instantly. Audiences and their changing behaviours and attitudes to media have enabled new business models. Billions of dollars’ worth of value has shifted from studios, networks and ad agencies to “GAFA” (Google, Apple, Facebook, Amazon). This is not without precedent. The music industry was first affected by digital in early 2000. It took a decade to wipe out 50 percent of its total market size. Apple reaped the spoils of this tectonic shift.
And now a new business order is forming in video, with TV experiences now spanning multiple devices and networks. The Huffington Post Live channel enjoys over 100 million monthly viewers without a broadcast license. The traditional television business meanwhile has remained remarkably resilient in these changing times. Until now.
Increasingly, television is one of many possible “video experiences”. But video is no longer tied to the television set. Far from it. According to Ofcom, UK viewing of traditional live TV was lowest among 16 to 24-year-olds, accounting for just 36 percent of all their viewing across all screens, including mobile and tablets. Compare this to over-65s, where live TV accounted for 83 percent of all their viewing. It is inevitable that broadcast TV will become known as ‘live video’. It is equally inevitable that the consumption device will become that which is the most appropriate means of enjoying the video at a particular time and place. The size, definition and location of the television may make it ideal for live sports but watching live news on the subway on a mobile device is equally viable. 2016 marks an acceleration of a trend toward mobile devices away from big screen TV. According to the recent Ericsson ConsumerLab report looking at TV and media usage, “The biggest shift that we have seen over the last seven years is in consumer viewing habits away from just the big TV screen toward this more mobile viewing experience”.
Broadcasters can leverage the intrinsic superiority of a fixed cost broadcast infrastructure (terrestrial or satellite) only when they program live content – ‘live’ being defined as content that a large audience wants to watch at the same time. The impetus of audiences to experience television at the same time drops dramatically when it can be enjoyed anytime. The rise of extensive Video on Demand (VOD) services and "web TV" shows has further diverted eyeballs away from traditional linear TV.
However, the alternative to broadcast, (unicast, mostly over-the-top internet-based distribution) has challenging economics as the costs to distribute the content rises with every new viewer. Appointment viewing driven by live content – for example sports or events – is therefore key for broadcasters to maintain a competitive edge. It is a strong driver behind the ratings of pay and free-to-air TV. Prices to secure the rights to live content have logically soared in recent years as a result of a fierce competition from both traditional TV broadcasters and new entrants.
The challenge is compounded by the fact that new entrants like Netflix and Amazon are offering compelling viewing experiences across a variety of content types and genres. Netflix bundles Hollywood and original programming – along with local content in some markets – managing a seamless and consistent experience from PC to tablet to TV. Bookmarks allow viewers to pick up on one device where they left off with another.
The appeal of live sports has been leveraged by several providers in France and the UK. beIN SPORTS has successfully snatched over 10% of the pay-TV market from Canal+. In the UK, Sky is bearing the brunt of BT’s successful endeavour into football with its Premier League and Champions League broadcasts. In September 2016, Discovery announced its strategy to become the “Netflix of sports”. This follows an announcement from Perform Group, a UK company, which also stated its claim to become the “Netflix of the sports world”. The ‘Netflixisation’ of content is clearly moving into the domain of traditional TV players.
The cost of content is growing significantly for all major video streaming services according to the Wall Street Journal. Consequently, many broadcasters and television networks face a double challenge: a top-line growth driven by more competition and a bottom-line stagnation hampered by increasingly expensive content and rights.
It is therefore not surprising that broadcasters are looking at new and different ways to fund content. This activity is top of the agenda but has challenges. The underlying economics are risky. A limited number of pilots will become shows; an average comedy pilot costs $2 million to shoot, while an hour-long drama costs about $5.5 million. This capital needs to come from their balance sheet or be raised in the form of debt, or equity sale. Judging from the recent stock performance of many major media companies, these options may have limited appeal.
All of the above facts point to one self-evident reality: content drives audiences.
Its consequences are less obvious. The business success of TV operators is predicated on how well and how much capital is expended on content. If there is capital that can be redirected to service this strategic agenda, it should be. 60%-70% of the cost structure of TV operators is content; anything that can be saved on the remaining 30%-40% should be redirected towards a differentiated viewer experience.
Playout and media management functions drive meaningful capital outlays. Getting a high quality image on air or on the internet is now well mastered. There is good evidence that it can and should be secured at a lower price point by resorting to outsourcing.
In this instance, Europe is well ahead of the curve. This scenario has played out already in several markets across the continent, and in the UK in particular. ITV, BBC, UKTV, Channel 4 are all major broadcasters who have outsourced in the UK. Given the cost pressures experienced by networks in the USA, it is just a matter of time before that reality plays out in North America as well.
ESPN has a long history of building in-house capabilities for content production and distribution. With shrinking audiences and challenging pricing, Disney concluded that ESPN should acquire more rights and use Major League Baseball Advanced Media (MLBAM) for its streaming needs. It agreed a major transaction with MLBAM taking a 33% stake in company for $1 billion. Most of the value can be attributed to the transfer of sports rights. The likelihood is that MLBAM will deliver ESPN's internet video streaming. One can only surmise that they are better off doing it that way rather than to build and operate a similar service internally. They have the benefit of scale and access to capital to devote to their core business, which is video distribution. Arguably, technology operations is not ESPN’s core business. The direct impact of Disney’s investment is to lower ESPN’s OPEX and in turn improve its EBITDA. Ultimately, we can surmise that Disney’s main goal is to improve market capitalisation. Reducing OPEX has direct and meaningful impact on EBITDA.
Turner and AT&T have also made moves to bring technology in-house. AT&T acquired Quickplay and Turner bought iStreamPlanet. Irrespective of the means, the moves are driven by the same rationale: bring a technology in-house and improve EBITDA. The expected benefits include speed to market and control of the technology roadmap. Reaping the upsides of these acquisitions can prove tricky and quite expensive. Retention of key people, culture, technology obsolescence all play against the acquirer. Disney’s move to secure a minority stake in MLBAM may prove a more fruitful approach albeit less controlling. All three of these examples are very capital-intensive and out of reach for many media companies.
Taking the European market as an example, where similar competitive pressures have shaped the landscape, a few reasonable predictions can be made. In Europe, only a few cash-rich TV operators have kept all their operations in-house. Lacking the scale that exists in the US market, most TV operators outsource their operations to varying degrees. This has become an accepted practice for decades.
The fact that being “on air” is mission critical does not mean it needs to rely solely on internal capabilities. The BBC can hardly be taxed of complacency when it comes to security and on-air availability, yet the service has been outsourced for many years. It has achieved its renowned ironclad levels of reliability, all the while delivering good value for money. BT Sport has also opted to rely on an outsourced model to launch and operate its successful sports channels. It managed to be the first European sports broadcaster to launch a 4K channel, proving that outsourcing can actually deliver flexibility and speed.
If technology for media management, distribution (OTT and linear) is deemed to be strategic by CTOs, the driving principles for CFOs and CEOs are quite different. Is the business deriving good value for money? Is the capital well spent and furthering the company’s growth? With limited intimate understanding for media lifecycle management and technologies, challenging the costs of video services can be complicated.
One approach is to look into simple ratios. Financial ratios can be difficult to establish but simpler ratios can be derived with relatively rudimentary information. Understanding the level of staffing required to deliver a specific service, defining the ratios between managers and operators, estimating the volume of content handled by an operator will start to construct a picture that is quite telling. A comparison with best-in-industry ratios will measure the level of improvement or savings that might be derived from a rationalisation effort.
Some level of improvement can be achieved without resorting to outsourcing. However, an internal improvement programme can typically attain only 25% of the possible savings. Reductions achieved by an internal initiative are structurally capped by the scale of the business, in addition to the fact that a benchmarking exercise can be tricky with limited external references. In addition, capital expenses will remain the same without an ability to share the investment across different users.
An outsourcing path, on the other hand, can leverage scale, standardisation, access to benchmarks, constant improvement and buying power. Outsourcers possess structural superiorities over internal options.
For example, a Master Control Room (MCR) is needed in any video distribution operation. It is typically a shared cost in the case of an outsource service as it is utilised across many channels and syndicated across several clients. The same advantage is present for disaster recovery capabilities; one site can be syndicated across several clients. Clearly the management structure needed to operate 100 or 120 channels does not change materially.
Outsourcers typically enjoy better terms and conditions with vendors because of the volume they carry. In addition, technology learnings and optimisations are a core focus. Constant improvements are a necessity. This translates into an ability to attain much higher levels of optimisation for outsourcers. The list is long and amounts to the fact that the operational efficiency of an outsourced service is structurally superior. The degree of savings can be assessed quickly and effectively at a high level.
At a time of profound disruption, objectively analysing the capital allocation and operational spend is a healthy and smart thing to do. This ratios-based approach can rapidly inform a CFO on the decision of running a full financial baseline exercise. The clear intent being to redirect operational and capital resources where they matter most at a critical time.
By Martin Guillaume, Head of Strategy & Business Development, Broadcast and Media Services, Ericsson