- Fragmented market
- International growth opportunities
Escapism is a lucrative business. Bloomsbury’s (BMY) chief executive, Nigel Newton, told the Financial Times this month that people had “had too much reality” and were “turning to books as an enjoyable form of escape from quotidian worries”. At the risk of sounding like Mr Wormwood in Matilda, television can be a good alternative to reading – and UK companies want a piece of the action.
ITV (ITV) and its Scottish counterpart STV (STVG) are strongly associated with traditional broadcasting. Coverage of the companies tends to focus on the outlook for advertising and, as a result, 2023 is looking lacklustre at best. ITV’s ad sales are expected to fall by between 10 and 15 per cent year on year in April, and STV is similarly pessimistic.
However, both companies have a side that is often overlooked: production. They don't just screen programmes, they also make them and sell them to the likes of the BBC, Netflix (US:NFLX), Amazon (US:AMZN) and Disney (US:DIS). In a good year, broadcasting should generate plenty of cash, but producing new content is crucial for future growth. In 2022, for example, ITV’s studios division grew its adjusted Ebitda by 22 per cent to £259mn, while its media and entertainment arm saw profits fall by the same amount.
STV Studios is far less established, but the signs are also positive. Although timing issues caused revenue to fall by 11 per cent in 2022, adjusted operating profits still crept up by 6 per cent to £1.4mn. Management claims 2023 will be a “breakthrough year” with £50mn of commissions already secured for delivery, more than double 2022 levels.
But there are still doubts about whether UK groups have the budgets, talent and resilience to compete against the US streaming giants.
Local appeal
Analysts are optimistic. “Can STV compete with Netflix in doing a global, multi-part series such as The Crown on their own books? No,” said Jonathan Helliwell, an analyst at Progressive Equity Research. “They’re not putting that much of their budget into a single programme. But the video market is huge, $200bn (£165bn) plus. And people don’t only want to watch binge-worthy series. The market is big and diverse, and there are lots of different price points, so there’s room for STV, ITV and hundreds of others.”
STV’s regional focus could also work to its advantage. The BBC is often accused of being too London-centric and is under legislative pressure from Ofcom to cater for a range of audiences. As a result, it is increasing the amount it spends outside the M25. This, together with the Spring Budget – which increased tax breaks for the UK television industry – should prove helpful for regional production companies. Government tax breaks are key for this industry given the competition from other countries.
"To give even more momentum to this critical sector I will introduce an expenditure credit with a rate of 34 per cent for film, high-end television and video games and 39% per cent for the animation and children’s TV sectors," chancellor Jeremy Hunt said in his Budget speech.
Looking further afield, it’s important to remember that Netflix, Amazon and Disney are not necessarily rivals when it comes to content creation – even if they are luring viewers away from traditional TV schedules. “Streamers wouldn’t be able to produce enough content themselves to fill their screens,” said Shore Capital analyst Roddy Davidson. “It’s not like a sausage machine – you’ve got to have the creative talent.”
This is holding true so far: the percentage of ITV Studios' revenue from streaming platforms jumped from 13 to 22 per cent last year, while STV has been commissioned to produce a “returnable” crime thriller for Apple TV.
Producing profits
Returnable series are key, as they promise revenue visibility and better margins (the first series of anything is often the most expensive). STV’s Glaswegian crime drama Taggart is a shining example of this. First aired in 1983, it generated £135mn of revenues at an aggregate profit margin of 30 per cent over the following 27 years.
Predictability is often scarce in television, however. “The tricky part of any content business is that it’s partly hit-driven,” said Davidson. “You can get it commissioned but don’t know how successful it will be.”
Margins aren’t huge when you are making a programme from scratch – production margins are typically between 8 and 12 per cent, according to analysts. Scripted shows, with their long lead times, are particularly expensive to make and can suck in cash during production.
This is a particular threat to STV, which has a smaller pool of cash and less experience under its belt. It also has a far smaller back catalogue of shows than ITV, meaning the lucrative secondary market – which producers can sell into when programme rights revert back to them after five years – is harder to access.
Cost pressures are also high, as scriptwriters, actors and directors don’t come cheap. “This has been going on long before the recent cost of living pressures,” said Helliwell. “There has been long-term growth in the TV production market and a shortage of skilled staff.”
Nevertheless, the change of direction signalled by ITV and STV remains intriguing. Their production businesses won’t solve their advertising woes and/or lure more people back to linear television. However, they could prove to be an important source of growth that the market has so far overlooked.
