Televisions have taken pride of place in Western homes for the better part of the past century. They connect us to events taking place around the world, providing an unparalleled means to celebrate accomplishments or mourn tragedies, amuse and educate ourselves or escape from drudgery. Families have crowded around the telly to share unforgettable moments: Apollo 11 touching down, Diana, Princess of Wales tying the knot, the attacks on the World Trade Center and Barack Obama’s election. Audiences’ appetite for televised content remains insatiable, but the way content is delivered and consumed has changed dramatically. That has created new challenges for companies in the industry and fresh opportunities for investors.
(For a visual analysis of the sector and further details on the growth, income and value of the TV shares we've featured, click here).
Watching the box is gradually becoming an individual, tailored experience rather than a communal activity. Family members who previously gathered around one big screen are being left to their own devices. Smartphones and tablets are rapidly becoming the go-to media for people to catch up on news and watch TV shows and films, often in isolation. Advances in mobile hardware, cheap and ubiquitous wireless connectivity and a slew of online video platforms are fuelling that shift. Services such as Netflix (US:NFLX) and Amazon Instant Video (US:AMZN) – which offer access to vast libraries of films and TV series for less than £10 a month – are in many ways superior to conventional television. They can analyse subscribers’ viewing habits to make personalised recommendations and to help them decide which content to commission, minimising the chances of a flop. Indeed, they are spending more and more on original and exclusive programming – such as House of Cards and Transparent – to stand out from both incumbents and digital rivals.
Audiences’ interest in scheduled content is “ebbing away” as we move to an “on-demand” world, says Jack Wetherill, an industry analyst at FutureSource Consulting. Netflix has already amassed over 62m subscribers worldwide and Juniper Research expects global subscriptions to video ‘streaming’ services to more than triple to 333m between now and 2019. The upshot is that Nielsen expects the global video-on-demand market to grow around 17 per cent annually to reach $45.3bn (£28.6bn) in 2018.
Migration to mobile devices and the surging popularity of online video pose serious threats to the TV industry establishment. While many content producers are happily licensing out their content to the digital upstarts, broadcasters have scurried to launch competitive on-demand services. Examples include Channel 4’s 4oD, ITV Player and Hulu, which is jointly owned by US titans Disney (US:DIS), Comcast (US:CMCSA) and 21st Century Fox (US:FOXA).
Manufacturers of TV sets, meanwhile, have responded by rolling out ‘smart’ or internet-connected TVs. But their market is also under attack: Apple (US:AAPL), Google (US:GOOG) and other technology companies have launched TV set-top boxes and dirt-cheap ‘dongles’ – the size of a stick of chewing gum – that connect televisions to the internet and offer a host of news, gaming and streaming apps.
Television companies in the UK have raced to embrace these trends. For example, ITV (ITV) has upgraded its ITV Player and made it available on more platforms. It also launched ITV Encore, its first pay-TV channel. Its efforts drove online, pay and interactive sales up 31 per cent in the first three months of 2015. Other priorities include producing original content and tapping into overseas markets. It has strengthened its fledgling studio division with a quartet of international acquisitions, including US producers DiGa Vision and Leftfield Entertainment and Netherlands-based Talpa Media, the creator of televised singing competition The Voice). Its strategy has reduced its reliance on cyclical and unpredictable advertising: its first-quarter non-ad sales rose 13 per cent to £319m, or 48 per cent of external group revenue.
UTV (UTV) has also made acquisitions, but the Irish broadcaster’s core growth driver is UTV Ireland. The new flagship channel drove the group’s TV sales up a quarter to about £12m in the first quarter of 2015 – or from 34 to 40 per cent of total revenue – offsetting flat turnover at the radio GB division, which is home to talkSPORT. But management expects the channel to show an £11.5m loss this financial year due to delays in signing up advertisers and building audiences.
Scottish broadcaster STV (STVG), which drew a peak-time monthly audience of 3.6m for its main television channel in 2014, has prioritised production and invested in both digital and local content. Rolling out its on-demand platform to more devices drove first-quarter digital sales up a third and management expects growth of 40 per cent in the five months to the end of May. The group has also launched local channels for Glasgow and Edinburgh – which helped it attract more than 100 new advertisers in 2014 – and it has secured licences to introduce similar offerings in Aberdeen, Ayr and Dundee. It also won commissions for several productions including The Link on BBC One and Catchphrase on ITV.
Strong international demand for TV shows helped to offset a weak box office at Entertainment One (ETO) in 2014. The group, which licenses out film and TV distribution rights to more than 500 broadcasters, has made higher-margin content production a key priority going forward. Indeed, it bought reality TV studios Paperny Entertainment and Force Four in 2014 and took a majority stake in The Mark Gordon Company – producer of medical drama Grey’s Anatomy – in January. The upshot is that it expects to release 850 half-hours of new programming this financial year – a 48 per cent rise.
Entertainment One’s progress hasn’t come at the expense of its core business, though. It continues to cash in on Peppa Pig as it owns the global distribution rights to the animated TV property. The piglet garnered over $1bn in retail sales in the year to March, finished the year with over 600 licensing deals and its merchandise is now sold by US retail giants Target (US:TGT) and Walmart (US:WMT). Its gains fuelled a sharp rise in profits at the company’s TV division. Entertainment One also posted strong digital growth as it signed a multi-territory deal with Amazon Instant Video.
Audiences have a greater choice of programming – and more ways to tune in – than ever before. That has prompted the BBC, ITV and other UK channels to focus on securing larger-scale, bigger-budget television dramas and live events that they hope will be irresistible to mass audiences. Annual spending on TV programming in the UK has risen about 16 per cent to £5.8bn over the past five years, according to the British Film Institute. That has set the stage for studio Pinewood (PWS), which provides facilities and ancillary services to filmmakers and TV producers. The storied group, which hosts blockbusters such as Avengers: Age of Ultron and TV shows such as National Lottery, suffered a sharp slump in TV sales in the half-year to September 2014. That reflected capacity constraints, restructuring and certain shows not being recommissioned. But the group has now raised about £29m to fund the first phase of an expansion programme that will add new stages, workshops and production offices. Management also expects a second-half sales boost from the return of shows such as Would I Lie To You and hopes a new studio in Wales will attract high-end TV dramas.
The changing face of television has also affected hardware suppliers. Aim-traded Amino Technologies (AMO), which sells internet-connected TV set-top boxes, recently bought cloud-TV specialist Booxmedia to help it deliver television to many more devices. The deal promises to broaden its market from fixed-line telecoms to mobile operators, streaming platforms, media distributors and broadcasters. Amino has also expanded its product range to widen its appeal: a subsidiary of Cable & Wireless Communications (CWC) is launching its main A150 set-top box across several Caribbean islands, while a pared-down version has proven popular in Albania and Serbia and the pricier Live Advanced Media Platform caters to growing interest in home media hubs.
Pace (PIC), which makes set-top boxes for over 200 cable, satellite and broadband companies including AT&T (US:T) and Comcast, has faced fierce competition and struggled with the shift to smart devices. True, its takeover of Aurora, which modernises broadband companies’ networks to deal with surging volumes of voice, data and video traffic, has helped to offset weakness elsewhere. But the real saviour may be US rival Arris (US:ARRS) after Pace’s management accepted its takeover offer.
Innovations in television have given software companies a greater role. Vislink (VLK) enables broadcasters to transmit live, high-quality video from the football pitch to the broadcast studio or between cops on the ground and police choppers overhead. The software group inked a public safety contract with the Home Office in early 2014 and later partnered with US-listed video delivery specialist Harmonic (US:HLIT). And it is now working with GoPro (US:GPRO) to enable the wearable camera specialist’s HERO4 product to transmit top-quality ‘point of view’ footage. The deal promises to transform how people watch sport by providing a view from the player’s perspective.
The television industry is also under assault from telecom providers. Operators are racing to offset plunging demand for landlines by bundling fixed-line telephony with mobile, broadband and TV services. They can charge a premium for those ‘quad-play’ packages and signing users up to multiple services makes it less likely they will change providers. Perhaps the best example is BT (BT.A); the telecoms giant is seeking approval to buy UK mobile market leader EE and its BT Sport channel is gaining ground on pay-TV giant Sky (SKY). In response, Sky plans to roll out mobile services. Mobile providers O2 and Three are also looking to tie the knot. Those developments are piling pressure on Vodafone (VOD); the mobile titan has responded by introducing fixed-line and broadband services and is expected to add television into the mix later this year. And it has reportedly offered to buy a 39 per cent stake in Sky from 21st Century Fox.
The telcos’ television battle is far from over. BT continues to strengthen its TV offering: it already has live broadcasting rights to top-tier European football and around 40 Premier League matches a year and just secured exclusive rights to content from US network AMC, home to Mad Men, The Walking Dead and other hit TV dramas. Its efforts fuelled a 16 per cent rise in TV and broadband sales in the year to March, which buoyed its key consumer division. But a key risk is ballooning content costs: BT is paying about 6 per cent more a year for each Premier League match.
Television’s new paradigm has centred on granting greater flexibility and autonomy to viewers. That is most evident in the US, where growing numbers of consumers are ‘cutting the cord’ or rejecting pricey bundles of cable TV channels in favour of online and bespoke services. Sky has addressed the trend; instead of solely offering long-term contracts for its pay-TV service, it has begun selling daily, weekly and monthly subscriptions to Now TV, its new on-demand service. The strategy fuelled a 27 per cent rise in TV users in the nine months to March, which helped it grow its total customer base by 5 per cent to 20.8m. The group also took control of its Italian and German subsidiaries last November, which has expanded its customer base and created more opportunities to sell bundles of services. And it continues to invest heavily in high-quality programming: it has secured the rights to Game of Thrones until 2020 and inked an 18-month exclusive deal with ITV Encore.
Content is king: the popularity of programmes such as Game of Thrones and Mad Men show that having attractive content is vital to winning new subscribers
Small-screen scrappers
There are a raft of smaller UK-listed companies that operate in the television industry.
Netplay TV (NPT), which operates SuperCasino.com, Jackpot247.com and other interactive gaming services, markets and delivers them primarily through television, including a dedicated Sky channel. Independent producer Ten Alps (TAL) – founded by musician and philanthropist Sir Bob Geldof – recently sold its My Shakespeare series to Sky and Ebola Frontline to BBC Panorama. Audio-visual interaction group Mirada (MIRA) enables Sky and Virgin Media customers to purchase digital content on multiple platforms. DQ Entertainment (DQE), a specialist in TV and film animation, has adaptations of Robin Hood, Peter Pan and Pinocchio in the works. Global Invacom (GINV) makes satellite equipment and electronics for the likes of Sky and US satellite-TV giant Dish Network. The BBC uses software from Zoo Digital (ZOO) to subtitle, caption and dub its worldwide content. Finally, Motive Television (MTV) helps clients such as Italian broadcaster Mediaset to deliver on-demand and catch-up TV services at low cost on myriad devices.
