by Gary Knight

Greetings good people of these fair Isles. I hope the days have treated you all well. In this month’s blog I am returning to the Court of our Sun Queen, Dame Carolyn McCall, to see how her plan for ITV has been developing. She has been in the CEO role at ITV for just over a year now and most of you would have seen the headlines around their 2018 full year results. But let’s dig a little deeper into the sand and unveil any hidden treasures in her chamber. Most of the journalists focused on the proposed UK launch of Britbox, and I will delve into this ‘sleeping leopard’ later, however one must not ignore the nitty-gritty elements that underpin the business.

 Carolyn made much of the re-balancing of the business between the Broadcasting side of life and the Studios division. From a gross revenue perspective this is absolutely the case, with Studios now contributing £1.67 billion of total external revenues of £3.21 billion. Thus, Studios is delivering over half of the revenues. However, when we examine profits, we find that Studios delivers only £255 mill of EBITA. The Broadcast area is still responsible for 68.5% of total profits. This is not a surprising position as the margins on the two units are very different, with Broadcasting delivering a 25% margin and Studios a 15% margin. As I have stated before these are very impressive results and most other businesses would die to get anywhere near these margins (just ask the Grocers or Car Manufacturers). That being said, the fact remains that Broadcasting and thus advertising revenues will remain the primary component in driving ITV’s bottom line performance for the foreseeable future. The push to grow Studios portfolio is vital in an ever content hungry ecosystem but the likelihood is that production margins will decline and will struggle to maintain the impressive current state. Why? It is simply the realities of the market ,unless you have major, global killer content and such a stable at scale. Gazing at the ever-important advertising market then we note that ITV grew at 1% in 2018, whilst being warned that Brexit et al. could see a 3>4% decline in the first half of 2019. Looking at the remaining months of 2019 could see a continuation of this trend, particularly if Brexit leads to ever low confidence amongst UK clients. The real worrying position is revealed when one examines the advertiser category breakdown Dame Carolyn highlighted:
> Retail: -8% yoy, Food:  -7% yoy,  Cars:-3% yoy, Cosmetics: -4% yoy
Now remember that these are 2018 figures and things are going from bad to worse for brands in these categories, so the high probability is that these sectors figures will show an even greater downturn this year. The problems in these category areas are even more worrying for ITV as they represent a major chunk of ITV’s total advertising cake and as mass consumer brands, they have historically been strong supporters of ITV. So, although she made a song and dance in relation to digital led company’s revenues with ITV increasing by 10% yoy, this sector is tiny compared to the big guns. In my humble opinion advertising revenues will come under increased pressure but ITV will still remain highly profitability on this side of the business as their £1.1 billion programme budget is still delivering good audiences (+3% in 2018) and good 16>34 audiences (although massively dependent upon Love Island’s future health).
Turning our attentions to Direct to Consumer revenues, now circa £81 mill, and areas such as Data/Addressable advertising then I really feel this is all too little, too late to have any real future facing impact. It really is just window dressing. To be fair to our Sun Queen this is hardly her fault as previous management just refused to spend any cash supporting this place whilst the rest of the market rushed ahead. Even with Facebook’s current trials and tribulations, their advanced advertising offering with data linkage is light years ahead of ITV. She may be the Queen of Brand building but in the data sector her ship has sadly left these shores and I do not see it finding strong currents or favourable winds that will bring her to new lands. ITV, in theory, has over 40 million customers and she could have been a data rich empire but, alas, that battle was never fought.
Another area of concern is ITV’s marketing budget. Although £10 million has been pumped into a new brand image, ad campaign and a quest to find 15 million elusive light viewers, then this represents a very paltry amount given the sheer scale and size of her competitors in the Premium Content market. Traditionally ITV used the power of her own on-screen promotional airtime to launch her shows, in theory a £300 mill war chest. With viewers bombarded with so much choice ,then this strategy is nowhere near enough to win victories. Finding brilliant new creative formats is hard enough but even when you have them in your hands then the even more challenging task awaits, i.e. how to let your customers know the show is there. From my viewpoint this is a vital call. Given ITV is primarily an ad funded business, then it is still odd that she is not a big advertiser in her own right? Previous management had always been highly reticent in spending any cash in this zone, mainly to protect bottom-line profits. Although improving upon the previous regime’s efforts, I am still somewhat disappointed in our Sun Queen’s efforts to date in this area. Surely this needs to change in the near future? 

Fortunes within the Studios division looks healthy from the bird’s-eye view, with Love Island being sold into ever more markets and shows such as I am Celebrity NGMOOH  producing massive ratings. ROW revenues at £516 million are up by 32% yoy, but worryingly US revenues (still the biggest programme market on Earth) are down 21% at £245million (which makes ITV a miniscule player there).My belief is that EBITA margins of 15% will come under increasing pressure as Broadcasters/ Platform owners have to pay ever spiralling prices for primary rights and will seek to reduce tariffs on all other product. First run series for the bulk of shows make little money on their first outing, many runs at a deficit. The hope is that you can go to a second series to unlock format/finished tape sales and then on to real financial success. However, in this abundant content market, finding hits is getting rarer and rarer. With Broadcasters increasingly reluctant to fully fund shows, then the pressure is really ramping up and is even effecting areas such as ‘development pots’.  You will need to invest ever-increasing amounts in R&D activities to uncover that elusive ‘hit’, which will decrease margins. On the plus side this is definitely a golden age for Producers with a seemingly insatiable demand for content as every device opens up for business, but the fact remains that making a decent profit from all of this is extremely tough.

Finally, we turn to Britbox, a topic on which every journo cast their eyes. Consensus appears to be along the lines of ‘great idea, but way too late’. I was part of the original Project Kangaroo gang (some 9 years ago) in which ITV, BBC and Channel 4 would launch a ‘Best of British’ VOD platform. The regulator, Ofcom, ditched this on restrictive competition grounds. What a ludicrous decision at the time! The result was the Americans wandered into our market, totally unregulated, and stole the ground from under our own noses. Thanks to Ofcom and DCMS the likes of Netflix and Amazon Prime came to dominate the market. Now, almost a decade later, our British hopes lie in the new venture, but a bridge too far I believe. People are prepared to sign up to more than one SVOD service (many customers have a dual Netflix, Amazon position). But how many more do they need or want? What USP is Britbox going to bring to them? Archive box sets of yesteryear? The odd new commission? An extension of the window in which you can watch any series you have missed?  With the iPlayer, the ITV Hub and All4 already providing plenty of catch-up fodder, pre-Broadcast opportunities and some original content, then I believe the average Brit is already well served. Even if the venture does reasonably well, then it will not be revolutionary in terms of ITV’s bottom-line profits.
So where does this leave our Sun Queen and her future vision? As I have stated before, I am a big fan of Dame Carolyn; she is a robust and dynamic CEO, but I still believe she is playing a cautious rather than a bold game. ITV will remain a nice and profitable UK business for several years to come. The EBITA margins may well come down a little as the years totter on, but there are no signs of collapse, even if the ad market weakens and ITV’s share within this continues to decline. ITV is on firm financial footings. Great profit to cash position of 88%, a minimal pension deficit and still paying a very handsome dividend of 8p to shareholders. This is the lens from which we should view the company. Conversely, we should not view their future as a major global player, as they have neither the scale nor real ambition to reach these dizzy heights. Just consider the current competitive landscape in terms of company stock market values:
> ITV: £5.2 bill
> Netflix: £151 bill
> Comcast: £172 bill
> Disney/Fox: £168 bill
> Amazon: £788 bill

ITV cannot compete against these giants on the international content stage.
ITV will remain a very important element in the UK Broadcast market, with good profit margins and still producing some great product. As for our Sun Queen, I am slightly saddened that she has not got Cleopatra’s thirst to rule even more lands. Perhaps though, unlike her predecessor, Adam Crozier, she will succeed in finding a buyer for ITV that will finally link our favourite Broadcaster into a global network that has the muscle to compete in the toughest arenas.
Namaste x  

Gary Knight
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