Television industry is experiencing significant growth in the UK.

Weaknesses:

• Subscribing to the satellite TV service means buying the necessary equipment, including attaching the satellite dish to the wall of a house. This may be inconvenient and costly, comparing with cable TV. However BSkyB has been extremely successful in convincing the customer so far. BSkyB often introduces new offers, such as free equipment for those who sign up for a more expensive package.
• Most of its profits BSkyB receives from subscription fees, thus it has to constantly improve and develop its service in order to retain the existing customers and attract new ones.

Opportunities:

• In the light of the increasing popularity of the satellite broadcasting service and taking into account the high quality of BSkyB’s programming, it becomes more and more appealing for advertisers.
• The further expansion of the UK television market means the development of new programming. This will bring in the fragmentation of the audience, as the number of people watching each particular channel will reduce. This means that on one hand the competition for advertising revenue will increase, while the demand for TV advertising will reduce. In this situation BSkyB has a big advantage, as, being the most financially healthy company in the UK TV market, it will be able to offer the most attractive prices.

Threats:

• The recent trends in the development of interactive television, present some threats for BSkyB. In 2001 it has launched its Sky Active program, an interactive service through a channel interface, including messaging facilities, such as e-mail and SMS; information services, such as cinema listings. However any further development of this program by BSkyB is very doubtful, as satellite technology has significant limitations in comparison with cable in terms of the possibilities for new interactive services. Satellite technology only allows for a one-way information flow. This means, that in order to offer these additional services BSkyB has to use BT cable networks and pay fees for that. This doesn’t completely solve the problem, however, as the networks offered by BT only allow for a limited information flow, comparing with those, offered by the UK cable operators.
• According to the Key Note 2002 report on cable and satellite broadcasting in the UK, the competition authorities in the UK and Europe have always paid close attention to BSkyB's commercial activities. Changes in the regulatory environment could yet pose a serious threat to BSkyB's dominant position in the UK pay-TV market.
• The merger between Granada and Carlton, which is currently in process, may present increased competition for BSkyB.

CABLE TV OPERATORS.

NTL group ltd.

NTL group provides telecommunication and television services, including telephone, cable television and internet access. Its network reaches to 50% of the UK households. NTL is the first company to provide interactive television services which includes offering shopping, banking, gaming and entrainment facilities.

Telewest Communications Plc.

Telewest is the second largest broadband communications and media group in the UK, providing cable television, telephony and Internet access to around 1.8 million homes.

Flextech – Telewest’s content division is the largest provider of basic channels to the UK pay television market.

In May 2002 Telewest introduced enhanced TV programming in time for high-profile events, in conjunction with BBC and Channel 4. During the BBC’s coverage of the World Cup, Telewest customers were able to enjoy a number of new interactive features, including a choice of video streams and the ability to listen to the usual commentary, the crowd or the Radio 5 live.

Isle of Wight Cable and Telephone Company Ltd.

Isle of Wight Cable and Telephone Company is the smallest of the UK’s cable operators. It only employs 65 people and has a very limited area of operation: the Isle of Wight.

The UK cable TV operators SWOT analysis.

Both NTL and Telewest, being involved in the same type of television content distribution, have much in common in their SWOT analysis. Thus the analysis below represents the total cable television segment of the UK television industry.

Strengths:

• The main strength of the UK TV industry cable operators is the versatility of services they offer, including telephone, home banking, video on demand, fast internet connections. They have greater possibilities for interactive television, comparing with BSkyB.
• Another important strength of the cable operators is that they transmit very quality pictures and offer a  wide choice of programming. The later however is still less than that of BSkyB.
• With cable TV provider you don’t have to put a satellite dish on you wall.

Weaknesses:

• One major factor limiting the growth of cable television in the UK is the greater construction costs of the infrastructure: in the UK cable has to be laid underground and the costs of this are very high (Martin 2000 p.35-36).
• Cable operators have very little programming of their own. They mostly rely on the programming provided by BSkyB and have to pay for the access to it.
• The high construction costs and the dependence on BSkyB for programming contribute to the higher level of prices of cable operators, comparing to the satellite service.  
• The UK cable companies have limited possibilities in competition with BSkyB. According to Cable and Broadcasting Act 1984 cable operators not allowed to obtain exclusive rights to certain major national sporting events (Martin 2000, 35-36).

Opportunities:

• As new services such as video on demand, multimedia and fast internet connections become a reality the versatility of the fibre-optic cable networks will become increasingly valuable. The satellite and terrestrial broadcasters will remain dependant on old copper-wire telephone technology for interactivity. In most cases BT will be acting as ‘gatekeeper’ (Key Note 2002).
• Advertising, as a source of profit, haven’t been exploited so far by the cable operators, as they have limited programming. Developing their own content means a new source of profit for cable operators. Moreover they can use the time allocated to them by most program suppliers (aprox. 2 minutes per hour).
• A merger between Granada and Carlton presents more possibilities for cooperation between the UK content providers and Cable operators, as both parts have been strongly reliant on each other for the content and channels of distribution. This cooperation will give the companies more strength to withstand the satellite TV competition and expand in the market.

 

Threats:

• The financial health of the cable operators is very dubious. Their net debts are nearly £20bn.
• According to the information, provided by Key Note (2002), cable operators receive 50% percent of their revenues from telephone charges. These are, however. decreasing due to constraints by Oftel (the telecommunications regulator). This may present new financial difficulties to the cable operators.

The UK digital terrestrial television operators SWOT analysis.

The UK DTT operators include BBC, Channel Four, Five and ITV. The main owners of ITV are Granada and Carlton. The current merger between Granada and Carlton, will result in a new company – ITV plc. All these companies are vertically integrated, which means that they are both the providers of content and its distributors. However with the development of satellite and cable television, their role as distributors of content becomes limited, as DTT becomes less and less popular. These companies now distribute their content through satellite and cable operators. They play a more important role as content providers now. Information on these companies can be found in ‘The UK television content providers’ section of this report.

BBC’s profit comes from the license fee. Other free-to-air operators get their profit from advertising.

Strengths:

• DTT is a free-to-air service, which means that you don’t have to buy all the equipment, necessary for receiving cable and satellite service.
• DTT service is cheaper than that of satellite and cable operators.

Weaknesses:

• Problems with reception may be experienced by subscribers to the DTT service.
• There is a very limited amount of programming on DTT service, comparing to that of cable and satellite operators.
• There are strong technical limitations for introducing interactive television.

• Though DTT service is cheaper, than that of satellite and cable broadcasters, the difference is not big. Monthly license fee is approximately £9.7. For just £12.50 a month you can subscribe for BSkyB
• package, which includes 102 channels, including some 90 free-to-air channels. This package will also offer some interactive services and a very high quality picture.

Opportunities:

• The only opportunity for DTT is the extension of market. But it is very doubtful that the digital terrestrial television will be able to withstand the competition from cable and satellite operators, due to the weaknesses, described earlier and the threats (see next paragraph).

Threats:

• The increasing popularity of interactive services presents a big threat for DTT, as most subscribers will go for BSkyB or NTL and Telewest packages.
• The fragmentation of advertising market means less advertising revenues for Channel Four, Film Four, Five, etc.
• The increasing competition from satellite and cable operators.
• The increasing quality and versatility of the content offered by the cable and satellite operators.

The UK television content providers.

The largest content provider in the UK television industry is currently BBC. The second position is occupied by Granada and the third – by Carlton. The upcoming merger between Granada and Carlton will reshape the current situation in the UK TV content production market. BBC and ITV plc. (the new merged company) will occupy about 65% of the total turnover of the UK program supply market, with BBC and ITV plc. responsible for approximately 40% and 25% respectively.

Sky is not included here, as much of its content is imported from the US. However, among the UK top ten channels on multichannel television (satellite and cable) the 2003 Sky occupies 5 positions (see table 1).

The British Broadcasting Company (BBC).

BBC was the first company to start broadcasting in the UK. Today it provides a wide range of programs and services. They include television, radio, national, local, children’s, educational, language and other services for key interest groups. The BBC is financed by a TV license paid by households. It does not have to serve the interests of advertisers, or produce a return for shareholders. The annual color TV license currently costs £116. The license includes 8 national BBC television channels.

ITV plc.

ITV plc. will be a result of the merger between Granada Media plc. and Carlton Communications plc. As the merger haven’t been completed yet, the information in this report is given on Granada and Carlton separately.

Granada Media Plc.

Granada Media encompasses a range of terrestrial and non-terrestrial television businesses, including Granada Television, 25% of GMTV, 50% London News Network, 10,8% stake in BSkyB, etc. Granada Sky Broadcasting is the company’s non-terrestrial joint venture with BskyB, offering various channels as part of the Sky multichannel package. Granada is a leading ITV franchise holder, ahead of Carlton communications.

Carlton Communications Plc.

Carlton is the second largest ITV franchise holder, accounting for around 40% of income in the commercial terrestrial sector. It has interests in commercial free-to-air and pay-TV content creation and media services. Carlton currently broadcasts to 26 million people.

Channel 4.

Channel 4 transmits across the whole of the UK, except some parts of Wales which are covered by the Welsh language S4C. It is available on all digital platforms as well as through conventional analogue transmission.

It is publicly owned. Unlike the BBC, Channel 4 receives no public funding.  It is funded entirely by its own commercial activities. Four gets 66% of its content from independent content providers.

Five.

Channel Five was established in 1997. It is very much alike Channel 4. It is publicly owned, but receives its profits mainly from advertisement. It is available from DTT, cable and satellite operators. In 2002 Five received 86% of its content from independent content providers.

Independent production companies.

Independent producers of content currently occupy about 38% of the market. They can distribute their content through BBC, ITV, Channel Four and Five. The proportions of independent producers on BBC, ITV, Channel 4 and Five in 2002 were 25%, 30%, 66% and 86% respectively. The problem is that these channels only provide 6.1% of the total content in multichannel homes. The figures for the terrestrial broadcasting are significantly higher, as they provide 74.9% of content here. However the terrestrial broadcasting in the UK is only responsible for 14% of the UK television industry. Thus, BBC, ITV, Channel 4 and Five provide 15.6% (including the content of independent providers) of the total content in the UK television industry. According to the Broadcasting Act 1990 these companies have to give 25% of their broadcasting time to independent content suppliers. The proportions of independent content suppliers on this channels are currently higher, as it was already noted above. However, if these channels reduce it to the share, stated in the Act, the proportion of the independent producers in the total UK television content will only be 3.9%.

Independent production companies in the UK include: Talk Back Productions, Pearson Television, Jim Henson Productions, Planet 24, etc.

The UK TV content providers SWOT analysis.

Strengths:

• The UK content providers offer a big variety of quality content, which is able to compete with BSkyB.

Weaknesses:

• The UK TV content providers are reliant on satellite and cable operators for distribution of their content. They only have control of digital terrestrial television, but this has little popularity today and its share is constantly declining (for more information see DTT SWOT analysis section). The failure of ITV Digital in May 2002 shows just how far behind the established pay-TV operators the traditional free-to-air broadcasters are.
• They have limited financial resources, comparing with BSkyB, which means that they have limited possibilities of acquiring rights for some content, such as major sporting events.

Opportunities:

• The growth of the UK television market means there will be an increasing demand for quality programming.
• The merger between Granada and Carlton means they will be able to better compete with the content, provided by BSkyB.
• An interest of cable operators in the development of their own content presents more opportunities for close cooperation between the UK TV content providers, especially ITV plc. (a result of the merger between Granada and Carlton), and cable companies. This cooperation will give more strength to withstand the competition of BSkyB for both of them.

Threats:

• A significant part of TV content in the UK is provided by BSkyB. Moreover BSkyB is able to distribute its content through both satellite and cable channels of distribution.
• The merger between Carlton and Granada is a threat to the smaller content providers, as it presents them a new, even stronger competitor.
• As the number of program hours transmitted continues to rise, the number of people viewing each hour of programming is diminishing. The effect of this is not an increase in average viewing hours; instead, each channel is left with an ever-smaller share of the audience. As a result marketers won’t be able to reach a mass audience and will either start using a different medium or demand that the price of advertising airtime is reduced to reflect its reduced reach.

The profiles and SWOT analyses of the main companies in the UK TV industry allow to see the complete picture of the current situation in the industry, the trends and forecast the near future.

THE CURRENT SITUATION IN THE UK TV INDUSTRY.

The current situation in the UK TV industry is characterized by the following facts:

• There has been significant consolidation in the industry during the last decade and today it is dominated by several large companies, including BSkyB, BBC, ITV plc (the result of merger between Granada and Carlton), NTL and Telewest.
• BSkyB provides satellite television and has 59% percent in the UK multichannel TV market. It is a vertically integrated company and provides a significant share of the UK TV content. BSkyB is the mast financially healthy company in the UK TV industry. Most of its revenues come from subscription.
• NTL and Telewest provide cable services and account for the 26% of the market. They have a very limited programming of their own and are largely dependant on BSkyB and other content providers.
• BBC, Channel Four, Channel Five, Carlton, Granada traditionally broadcast their content through analog and digital terrestrial services. Analog will be stopped by the year 2010. Digital terrestrial is supposed to be a substitute for the analog terrestrial television, but it is rather unpopular now with only 14% of the multichannel television market, thus there is a move of terrestrial broadcasters into the non-terrestrial market.

THE MAIN TRENDS IN THE UK TV INDUSTRY.

Several trends can be outlined:

• There is an overall slowdown in the UK economy.
• There has been significant growth in the industry in the last decade and the growth is continuing (see ‘the forecast of the future’ section for further details).
• The popularity of digital television is increasing (for more details see ‘Growth’ section) while analog services are steadily moving to the end.
• The popularity of cable and satellite services is increasing, while digital terrestrial television is becoming less and less popular.
• The popularity of different interactive TV services is increasing.
• There is a move towards even further consolidation of the industry, which is vividly illustrated by the Granada Carlton merger.
• There is an audience fragmentation trend in the UK TV advertising market, caused be the increasing amounts of programming.

THE FORECAST OF THE FUTURE OF THE UK TV INDUSTRY.

Even though the average levels of yearly economy growth in the UK are currently rather slow and there is an overall economic slowdown, this most certainly won’t affect the growth of television market in the UK, as consumers have come to rely heavily on multichannel television services for home entertainment. This means that it is unlikely to be discarded as part of domestic cost-cutting.

Digital television will finally dislodge the analog service by the year 2010. According to the ITC (September 2003) forecast, the penetration of digital television should reach a figure between the 58% (in the lower scenario) and 78% (in the upper scenario) by the year 2007.

The important question to answer, however, is which of the three rival formats — satellite, cable and digital terrestrial — will be the most successful in the long term. It is extremely difficult to answer that question with any degree of certainty.

Digital terrestrial television will experience a number of significant threats. While the popularity of cable and satellite television will be growing, DTT won’t be able to offer any competitive advantage. DTT has very limited possibilities in terms of interactive TV. The licence fee is not much cheaper then that of the satellite and cable operators, while the difference in the amount of content and the versatility of the services is obvious. The fact that there is no special equipment needed for receiving its services doesn’t give a big advantage to DTT, as other companies offer most of the necessary equipment free. Moreover DTT service (except for BBC, which is funded by licence fee) will be strongly subject to the overall reduction of advertising fees, caused be the fragmentation of the TV advertising audience and the fact that advertisers will be willing to pay less as a result of the slow tempo of the economic growth in the country.

The reduction of advertising profit won’t strongly affect BSkyB and the cable operators, as cable operators have a very limited amount of their own programming, and BSkyB gets most 70% of its profits from subscriptions.

On the contrary, the reduction of advertising profit will cause strong difficulties for independent content providers. The smaller of them are also presented by a threat of the merger between Granada and Carlton, as it will result in even a stronger competitor for them – ITV plc. These two factors may lead to even further consolidation of the industry and there is a possibility for new mergers and acquisitions in the independent content production sector.

Granada and Carlton, who have already once experienced a failure in with Digital Terrestrial Service, will more likely to concentrate their joined forces on cooperation with cable operators, rather than further development of DTT. Both the cable operators and ITV plc. (the company, resulting from the Granada Carlton merger) are interested in this type of cooperation. The reason for that is that ITV plc. doesn’t have its channels of distribution (except for the ineffective and unprofitable Digital Terrestrial Broadcasting) and cable operators have a very limited amount of their own content, which presents the companies with a strong disadvantage towards BSkyB. This cooperation will lead to an increased pace of growth of cable operators.

BSkyB’s pace of growth will more likely to remain the same for approximately the next 3 years. The current Granada Carlton merger and the possible cooperation between ITV plc. and cable operators won’t affect BSkyB much for the first 3 years, as it has many other advantages towards these companies, including the high variety of quality programming, cheap prices, etc. Moreover Granada and Carlton will need time to make use of their merger and the possible cooperation with cable operators.

The future of the merger still remains uncertain. Though, according to the information provided by Standard & Poor’s ComStock Inc. the shares of both Carlton and Granada have been rising in price since the merger was approved, their current level is still below the one in May 2002, when ITV digital collapsed. Since then the share prices of both companies have been steadily declining until the October 2003. The current advice by analysts is to hold the shares, rather than sell or buy, which means that the situation is rather uncertain. The advice for those, interested in BSkyB’s shares is “moderate buy”, which means that there is some confidence in the growth of the company.

The main disadvantage of BSkyB is little possibility for interactive services. These are however not really popular now, as many of them remain inconvenient (a person, who have ever tried writing an e-mail on the screen of his/her TV using his remote control will unlikely do it again). The development of these services time and their increased popularity will affect the growth of BSkyB in approximately 3 years time. That’s when the large excessive funds of BSkyB that can be spend on marketing will become useful.

The picture in the public sector television (BBC, Channel Four, Channel Five) won’t change much, except for the fact that the decreasing popularity of DTT might mean hard times for BBC, which is funded from the license fee. At the same time it shouldn’t affect Channel Four and Five, as they have already been reliant on satellite and cable operators for the distribution of their content for some time and the receive their profits from advertising. Channel Five and Four will however be affected by the reduced advertising revenues and the increased competition from ITV plc., which has already been mentioned earlier.

CONCLUSIONS.

On the basis of what was said in the previous section, several conclusions can be made about the future of the UK television industry.

• The industry will continue growing, with the increasing number of households signing up for digital services.
• The digital terrestrial television platform share will be declining, which means hard times for BBC.
• BSkyB will remain the leader in the industry, with the same pace of growth for approximately the next 3 years, after which it’s growth may slow down slightly.
• The growth tempo of the cable operators will increase, as a result of close cooperation with ITV plc. It will however remain slower than that of BSkyB for at least the next three years. Moreover, the growth of the cable operators share will only be profitable to BSkyB, as it provides most of the content for cable operators. This will continue until the cable operators won’t become less reliant on BSkyB for the content. This may result from the cooperation between cable operators and ITV plc.
• There will be even more consolidation of the industry, especially in the independent production sector, which will start experiencing hard times.

RECOMMENDATIONS FOR AN INVESTMENT BANK.

The current situation in the industry leaves no place for the new entrants in nether of the industry sectors. The content distribution sector is dominated by just three strongly established companies BSkyB, NTL and Telewest.

It could be possible to invest in some new business in the independent production sector, but the future situation in this sector doesn’t look optimistic. Moreover this kind of business will doubtly be successful as it is almost impossible to find a new niche in it. There are almost 400 different channels available in the UK, which present an extremely versatile content.

It is only possible to profitably invest in existing companies. The investment in the independent production sector is unlikely to bring any profit. The companies, that will most certainly be profitable in future are BSkyB, NTL, Telewest and ITV plc. Investing in BSkyB is more likely to bring profits in the short term (i.e. within the next 3 to 5 years). Other companies are unlikely to bring high return in this period. However they will bring high returns in the long-term (i.e. 10 years), as they will most certainly outrun BSkyB by 2013. ITV plc. is more likely to bring higher profits, comparing with that of NTL and Telewest, as the UK cable operators have very large debts, which means that they will have to cover them when they start receiving profits

Thus the companies, that are worth investment are BSkyB and ITV plc..

The average brokerage recommendation on the shares of BSkyB, Carlton, Granada and Telewest (NTL is not included as it is a limited company) is moderated buy, hold, hold and moderate sell respectively.

In order to reduce risk it would be sensible to make a portfolio investment in both the companies.