State of the markets in which BBC Studios operates A report for Ofcom October 2020 Mediatique Limited 65 Chandos Place London WC2N 4HG www.mediatique.co.uk State of the markets in which BBC Studios operates Executive summary . Ofcom is seeking to better understand the state of the markets in which BBC Studios (‘BBCS’) operates, as part of the regulator’s responsibilities to ensure that the BBC’s commercial activities do not, as a result of their relationship with the UK Public Services, distort the market or gain an unfair competitive advantage. BBCS undertakes a number of activities in the media landscape, both in the UK and internationally, across four broad areas1; it - Invests in and/or produces content2 in the UK and selected countries globally; - Distributes content and format rights on behalf of the BBC and third parties in the UK and internationally; - Owns or co-owns branded TV channels (e.g., UKTV in the UK, BBC America in the US and selected brands in other international markets) and jointly owns (with ITV) the North American variant of BritBox, the subscription video on demand (‘SVOD’) service; and - Distributes physical content – e.g., digital versatile discs (‘DVDs’) – and supplies content for retail via Electronic Sell-through (‘EST’) digital stores operated by companies such as Amazon and Apple. The markets in which the BBC operates are subject to a range of dynamics in technology, consumer behaviour and competitor strategies that have effects across all relevant geographies. In particular, the pace of change in audience engagement (including take-up of connected devices and multi-platform access to content) is accelerating in most markets internationally; as a consequence, companies highly exposed to traditional (historically high margin) broadcasting, like BBCS, are facing challenges. These have been compounded by the impact of Covid-19, in ways that remain difficult to quantify at this stage. All areas in which BBCS operates have sustained short-term impacts, whether in revenue declines (particularly advertising and production), higher costs (for resumed productions under social distancing and other Covid 19-related measures) or in an acceleration of consumer behavioural trends (for example, adoption of SVOD at the expense of pay TV). In general, we expect companies to ‘trade through’ some of the difficulties; however, it is likely that some of the key trends identified in our report will be affected in more durable ways over time, particularly around accelerated digital behaviours among cohorts (older demographics in particular) that had been resistant to using online services in the past.3 . Covid-19 aside, market players have responded to increasing complexity and competition in several ways, including by merging with or acquiring other companies, consolidating existing brands, launching new services and diversifying across the value chain. The dynamics in each market vary by geography, driven by factors such as ability/willingness of consumers to pay for media products and services, technological enablement, competitor activity, regulation and business models in operation. However, virtually every market in which BBCS is active shares certain characteristics: - A decline in linear (‘live broadcast’) TV viewing share, to the benefit of non-linear consumption; - Downward pressures on TV advertising in mature markets (although somewhat mitigated by growth in digital video advertising, some of it accruing to traditional broadcasters pursuing hybrid strategies across linear and non-linear); 1 Details taken from the latest annual report of BBC Commercial Holdings for the year ended March 2020: http://downloads.bbc.co.uk/aboutthebbc/reports/reports/commercial-holdings-annual-report-2019-20.pdf 2 Largely TV content but some audio – e.g., for BBC Radio. 3 Our observations on current and medium-term trading are on the assumption that there is no second national comprehensive lockdown in the major markets in which BBCS operates. If this proves not to be the case, the prospect for further erosion in key revenue categories (production, advertising and affiliate fees) will be considerable. 1 State of the markets in which BBC Studios operates - Pressures on pay TV revenues, as a result of cord cutting/cord shaving, and the growth of alternative (smaller bundle) pay and SVOD propositions from the big global streamers4 (a few Latin American and Asian markets, at an early stage of development, are more resistant to this trend); - Rapid growth in SVOD, Broadcaster Video on Demand (‘BVOD’) and other Video on Demand (‘VOD’) revenues, at the expense of traditional categories; - The emergence of new content gateways for consumers (SVOD platforms, IPTV offerings, ‘smart’ TVs) and the potential for operating systems across TV and mobile to consolidate, potentially entrenching new gatekeepers (e.g., Amazon, Google, Apple); - Increased competition for content, reflected in higher prices paid for premium programmes (drama, comedy, high-end documentaries) – both for commissions and for secondary and international sales (at least in the short term); - A modest move by streamers into other content categories – entertainment, news, kids – but their focus has been on globally popular genres (drama foremost); - Increasingly global perspective of both producers and commissioners/purchasers of content, favouring genres (and languages) with global appeal – US and UK drama in particular; and - A continued focus on co-productions, particularly in drama (although SVOD players may over time eschew local partners to maintain global exclusivity for key content, with negative implications for domestic commissioners). In our report, we present a detailed overview of key dynamics and recent developments across the four areas in which BBCS is active, provide a view on future trends in each instance and summarise short-term and more enduring impacts likely to arise as a result of the Covid-19 pandemic and its aftermath. To give a sense of relative magnitude, we estimate that the global production and distribution market is worth around $220bn in annual revenues, with aggregation (compromising branded pay TV, SVOD and AVOD services and EST) generating around $260bn worldwide and broadcast (including TV advertising and sponsorship) responsible for a further $196bn of global revenues. The UK equivalent figures are £5.2bn for production and distribution, £9.1bn for aggregation and £3.9bn for commercial broadcast (excluding the licence fee). BBCS itself reported revenues in the financial year ending March 2020 of just under £1.4bn, of which £1.1bn was derived from production and distribution.5 UK and international production – overview and dynamics . The production sector is ultimately the foundation of value across the audio-visual (‘AV’) supply chain. Activities in this market include the origination, creation and physical production of content; this content, and the underlying rights, together drive value generation in all subsequent commercialisation (e.g., content sales, DVD sales, merchandising). The independent TV production sector in the UK, the home market for BBCS, is the largest in Europe, with total revenues reaching more than £3.3bn in 2019, excluding turnover generated by producers that are wholly owned by the public service broadcasters (‘PSBs’). Of this, most – c£2.7bn in 2019 – came from primary commissions in the UK and internationally. While UK PSBs (chiefly the BBC, ITV, Channel 4, Channel 5) remain the dominant commissioners in the domestic market, the sector has recently seen new or enhanced sources of demand, including: - Significantly higher primary investment by UK multichannel groups (e.g., Sky, UKTV); - Greater commitment to original production by international channel groups and other integrated studio players (e.g., Disney, Discovery, NBCUniversal, WarnerMedia); and 4 We use the term ‘streamer’ to denote SVOD and AVOD operators such as Netflix, Hulu, Peacock and Britbox. 5 Sources and the methodology used to categorise revenues are provided in the footnote to Figure 6 in Section 2. 2 State of the markets in which BBC Studios operates - Commissions from new-entrant streamers such as Netflix and Amazon (often seeking global rights from external suppliers), operating on an SVOD basis. The net impact of this rising demand has been positive for the production sector, offsetting a decline in expenditure by PSBs arising from pressures on advertising and the licence fee: PSB annual spend on first-run content has declined by approximately £1bn in real terms since 2004 to £2.6bn.6 . Increased commissioning opportunities in the UK production sector have had an impact on the sector’s characteristics and shape as well as its scale. The UK has become one of the central hubs for TV IP generation worldwide, with significant demand for UK production talent driving consolidation, international ownership (largely US) of production entities and a strengthening of the talent axis linking Los Angeles, New York and London. The overall number of independent production companies has remained relatively constant over the past five years, as the effects of consolidation have been broadly offset by new company launches – it is commonplace for senior executives to leave super indies and set up standalone production entities. The top ten producers (including so-called ‘super indies’ and studio-owned production brands) nonetheless generate the majority of ‘external supplier’ revenues (not counting producers controlled by the PSBs). Increasing competition