pay-tv business planning

An analysis of Pay-TV Business Planning

Channel Operation & Economics

Management Report published by: International Marketing Reports, July 2003

Author: David Brown

4 Section – 109 pages – 42 charts & tables

Price: £495, €745 or US$745

The full report can be obtained from International Marketing Reports at www.im-reports.com or info@im-reports.com.

Executive Summary

Success Factors

Report Objectives & Structure

Contents of Report

Tables & Charts

Links

Pay-television is an important and growing market. Already worth more than €20 billion in Western Europe, it will more than double this figure by 2008. If T-commerce revenues are included the figure will triple by 2008 to over €75 billion.

This expansion is being accompanied, inevitably, by increasing competition amongst content providers. Digital technology has brought down entry barriers and the competition has intensified between channels and content producers. The cake is getting larger, but it is being divided among more players.

At the same time, there is a trend towards consolidation and vertical integration on the distribution side that has led to fewer players and more power for the leading companies. This had meant a squeeze on channel providers, already under threat from increased competition. Carriage fees paid to channels are being reduced and alternative sources of revenue, such as interactivity, have proved illusory.

It has become very difficult for smaller, weaker channels to survive and many have failed and been forced to close. The advantage is with the larger groups with several channels than can benefit from economies of scale and well-known brands. They have the power to negotiate carriage fees, though at lower levels than previous contracts.

Even they cannot afford to be complacent, however, as competitors from other areas of the media and entertainment sector enter the market. MTV, for example, is facing fierce battles across Europe with local services, not least in the UK where publisher Emap has launched several new channels and BSkyB plans to launch three music channels in 2003.

Over the past six years there have been more than 30 channel closures in the UK alone and probably around 150 channels Europe-wide. This represents a tremendous waste of resources, up to Euros 3bn for Europe and up to £450 million for the UK.

Success factors

Success has not thus been easy and there are a number of factors that are important in promoting success. The importance of content is paramount. But superlative content without distribution and without marketing to promote it will never be king. For any channel to succeed it must spend as much as it possibly can on content and on marketing to develop the brand and stand out above the crowd. Technology is important inasmuch as it eases distribution, making more channels available, and enhances the content. It will provide opportunities for new entrants, reduce distribution costs and change the competitive environment. But from the consumer perspective it is the content that is important not how it gets into the home.

At the same time other back-office costs must be kept to a minimum, which is where the bigger players have an advantage as they can benefit from shared overheads and economies of scale as well as wield greater power in negotiations with distributors.

For a new channel launching in today’s climate, it will be very difficult to make money or break into profit in the short term. Over time if it can build ratings and develop a strong brand. It can still be a good business to be in as, once established, the channel will then be able to negotiate better carriage fees, and decent ratings will generate good advertising revenues.

The key questions is how much investment will be required to break even and how long will it take. They are difficult questions to answer. There are so many factors bearing on this, but even the best managed channel with a good proposition is likely to take a few years as well as several million Euros before it starts to make a profit. The rewards of pay-television can be great, however, for those that do succeed.

report objectives & structure

What are the chances for a new channel today? What are the cost and revenue parameters for such a channel? What are the success factors, the driving forces in the market and the processes involved in launching and running a successful channel? What does a channel need to do to survive and grab a share of this growing market? What alternative sources of revenue are there?

This report aims to answer these questions. The report covers the microeconomics of the channel: the business planning and management of channels, with case studies to illustrate. This is focused on the UK, as this is the leading European pay-TV market and most of the issues raised will apply to other countries.

An introductory chapter covers the basics of pay-television, looking at the economics and strategic issues facing the sector, as well as the impact of new technologies such as delivery Digital Subscriber Line (DSL) and the development of interactive television.

The second chapter considers the process involved with launching and running a channel. It provides a practical guide to the different business models, the finance, content and distribution issues, interactivity, marketing and regulation.

In the distribution section, for example, it explains the process involved with distribution, a key issue for any channel. This includes information on the platforms, obtaining transponder bandwidth, uplinking, playout, and conditional access. In the finance section it includes a list of venture capitalists as well as the kind of attributes they are looking for and how to approach them.

Chapter 3 takes a closer look at the economics and the business of a pay-TV channel. It provides benchmark estimates for costs and revenues and finishes with draft figures for a business plan of a low cost independent channel. This chapter is followed by analysis of a number of channels, examining their strategies and distribution. It also provides a European list of pay-TV channels, their genres, the platforms on which they are broadcast, and the countries and languages in which they are received.

The appendix of the report contains details of website addresses for further information on Conditional access, UK regulation and licensing, European regulation as well as a glossary.

Contents of Report

Executive Summary

Objectives & Scope

Section 1. Pay-TV Economics

Channel closures

Television Economics

The characteristics of broadcasting

Pay-TV Structure and the Value Chain

Strategic issues in pay television

Key Success Factors

Driving Forces

The future

Channels and TV programming

Section 2. Managing Pay- TV

Launching a new channel

Key factors: Content & distribution

Business Plan

Alternative business models

Pay TV Market

Basic subscription channel

Free-to-air channels

Premium channels

Pay-Per-View

Interactive

Revenue streams

Finance

Content

Localisation of services

Promotions and presentation

Distribution

UK carriage deals

European Satellites

European Platforms

The Process

Sky Conditional access

Interactivity

Financial returns

Marketing

Branding and Positioning

Marketing strategy

Distributor Marketing

Regulation

UK Regulation

European cross-media ownership regulation

EU Regulation

Section 3. The Business of Pay-TV channels

Revenue Streams

Carriage fees

Premium channels

Advertising & Sponsorship

Other revenues sources

Total revenues

Costs

Content

Distribution

Marketing

Administration and staff

Total costs

Model business plan

Section 4. Pay-TV Channels

Premium channels

Artsworld

FilmFour

Basic pay channels

Discovery Europe

Fox Kids

Hallmark

Music channels -MTV

UKTV/ Flextech

Health channels -Channel Health

Appendices

1. BSkyB Conditional Access charges and conditions

2. UK licensing & legislation

ITC Licence Documents & Application Forms 1

ITC Codes & Guidance Notes

ITC Programme Code

ITC Advertising Standards Code

ITC Code of Programme Sponsorship

ITC Rules on Amount and Scheduling of Advertising

3. European legislation

Television Without Frontiers Directive

4. Glossary

Tables & Charts

Chart 1: The Virtuous Circle ofProfitabi1ity

Chart 2: The pay- TV value chain

Chart 3: BSkyB and Canal+ integrated activities

Chart 4: Key elements of a business plan

Chart 5: BT's services for broadcasters

Chart 6: BT's Multiplex service

Chart 7: Eurobird footprint

Tables

Table 1: Some UK Channel closures 1997 to 2003

Table 2: Some recent UK channel launches

Table 3: European pay- TV's key sports rights

Table 4: European pay-TV's studio movie rights

Table 5: Windows in different territories -European Programme Rights

Table 6: European demographics and adspend

Table 7: European DTT

Table 8: Internet households in Europe 2002

Table 9: Venture Capital contacts

Table 10: BBC programme costs 2001/2002

Table 11: Pan European network figures

Table 12: ITC licence 2002 fees

Table 13: European Commission regulation

Table 14: Fees paid by terrestrial broadcasts

Table 15: Content costs

Table 16: UK Distribution costs

Table 17: Overall channel costs

Table 18: Channel revenues

Table 19: Overall channel profitability

Table 20: Business Plan -Summary

Table 21: Business Plan -Sales

Table 22: Business Plan -Costs

Table 23: Business Plan -P&L

Table 24: Business Plan -Cash Flow

Table 25: Discovery's European distribution

Table 26: Fox Kids European distribution

Table 27: Hallmark's European distribution

Table 28: MTV's European distribution

Table 29: Flextech and UK TV distribution

Table 30: Channels on Astra

Table 31: Pan-European channels on Astra

Table 32: Central European channels on Astra

Table 33: Channels on Eutelsat

Table 34: Channels on Thor

Table 35: Channels on Hispasat

Links

BSkyB Conditional Access Charges and Conditions

From the BSkyB website – www.sky.com

BSkyB Corporate site

http://www.corporate-ir.net/ireye/ir_site.zhtml?ticker=bsy.uk&script=11931&item_id='home.html'

Conditional Access Charges

http://www1.sky.com/corporate/sssl.htm

Access Control Charges

http://www1.sky.com/corporate/sssl2.htm

UK Licensing & Legislation

ITC Licence Documents & Application Forms

http://www.itc.org.uk/itc_publications/licence_applications/index.asp

ITC Codes & Guidance Notes

http://www.itc.org.uk/itc_publications/codes_guidance/index.asp

ITC Programme Code

This version of the Code was effective from January 2002.

http://www.itc.org.uk/itc_publications/codes_guidance/programme_code/index.asp

ITC Advertising Standards Code

Issued September 2002

http://www.itc.org.uk/itc_publications/codes_guidance/advertising_standards_practice2/index.asp

ITC Code of Programme Sponsorship

http://www.itc.org.uk/itc_publications/codes_guidance/programme_sponsorship/index.asp

ITC Rules on Amount and Scheduling of Advertising

Issued December 1998

Contents:

http://www.itc.org.uk/itc_publications/codes_guidance/rasa/index.asp

European Legislation

Television Without Frontiers Directive

http://europa.eu.int/smartapi/cgi/sga_doc?smartapi!celexapi!prod!CELEXnumdoc&lg=EN&numdoc=31989L0552&model=guichett

Council Directive 89/552/EEC of 3 October 1989 on the coordination of certain provisions laid down by Law, Regulation or Administrative Action in Member States concerning the pursuit of television broadcasting activities
- original title –

Preamble – Consolidated Provisions

http://europa.eu.int/eur-lex/en/consleg/pdf/1989/eu_1989L0552_do_001.pdf

http://europa.eu.int/eur-lex/en/consleg/main/1989/en_1989L0552_index.html

ITC Notes on European legislation

http://www.itc.org.uk/itc_publications/itc_notes/index.asp

Other EU Directives

The European Directive on the use of standards for the transmission of television signals (95/47/EC) was adopted on 24 October 1995.

http://europa.eu.int/eur-lex/en/lif/dat/1995/en_395L0047.html.

Further References

Europe’s Liberalised Telecommunications Market – A Guide to the Rules of the Game, EU Commission Staff Working Document.

http://europa.eu.int/ISPO/infosoc/telecompolicy/en/userguide-en.pdf.

The full report can be obtained from International Marketing Reports at www.im-reports.com or info@im-reports.com.

Last revised: August 2003