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ADVERTISING INCOME PENALIZES RADIO AND TV POSITIVE SIGNS IN 3Q 2020 HIGHER INCOME FROM STREAMING Sky is the leading operator in Italy by total sales, but Rai was the only group to post growth in 2019 Pay TV declining, growth in OTT continues Milan, 3 February 2021 The Mediobanca Research Area has unveiled a new edition of its report on the media and entertainment sectors, analysing the industry at both the global and Italian levels, before and after the crisis. For the first time the world’s leading private players have also been included in the report. The publication also consists of a focus on streaming services, and a comparison between the largest European state-owned television broadcasting groups. The report is completed by an analysis of the most recent and future trends at global and national level. The presentation is available for download from website www.mbres.it. ****** The Italian radio and television sectors in 2019, with a glance at 2020 as well1 In 2019, the Italian radio and television sector, which is responsible for 0.5% of the national GDP, reported aggregate turnover of €8.7bn, down 3.1% on 2018. The reduction involved both free-to-air (total sales of €4.8bn; down 0.5%), and especially pay TV (total sales €3.2bn; - down 8.1%); turnover generated by the radio industry by contrast rose by 2.1%, to €0.7bn. The Italian market remains concentrated, with the three leading television operators (Rai, Mediaset and Sky Italia accounting for almost 85% of the national television revenues. Considering the revenues earned by the seven leading television broadcasters headquartered in Italy, including their operations both within Italy and elsewhere, the figure rises to €9.5bn, down 5% on 2018. The reduction is attributable primarily to the lower income from pay TV (down 13.6%) and the decrease in advertising revenues (down 4.9%), offset by the rise in TV licence fees (up 2.3%). The only operators to post an increase in turnover were Rai (up 2.9%) and Discovery (up 0.8%). The majority of the television revenues were generated by Sky (€3.1bn), followed (if non- Italian revenues are included), by Mediaset (€2.9bn) and Rai (€2.6bn). The situation changes if only Italian-generated revenues are considered: in this case Sky remains in first place, but Rai, with €2.6bn, overtakes Mediaset which ranks third with sales of €1.9bn. Mediaset is the only international operator of the Italian groups, generating one-third of its revenues outside of Italy. Several Italian players are owned by US groups: their aggregate turnover amounts to €3.9bn (down 3% on 2018), while the Italian-owned operators in this segment reported turnover of €3bn (down 13%). Of the US-owned groups, the largest player is once again Sky, followed by Disney with €412m. The reduction in 2019 recorded by the pay TV segment is due to the huge decline in advertising revenues (which were down 24.5% Y.o.Y.), plus the reduction in income 1 Sources: AGCOM, Nielsen, Mediobanca Securities, Mediobanca Research Department. from subscriptions (down 6.6%). However, these figures conceal differing trends: whereas advertising revenues and income from subscription for traditional TV players reduced due to the Mediaset Premium services being discontinued, those from streaming were up 39.6%. Sky leads the way in terms of number of TV channels, with three FTA and forty pay TV channels, ranking ahead of Mediaset (fifteen FTA and seven pay TV. The competition has now transferred to the streaming platforms, where all the leading Italian operators now possess at least one VOD platform for using contents via broadband. In general, in the 2015-19 period, industrial profitability decreased (from 4% to 2.5%), but some companies continue to stand out for their Ebit margins: Discovery (14.8%), Mediaset (12.3%) and ViacomCBS (5.9%). There were clear improvements by Discovery (up 10.4 p.p.), ViacomCBS (up 9.2 p.p.), La7 (up 7.0 p.p.), and Mediaset (up 5.5 p.p.). In employment terms, in 2019 the sector headcount was virtually unchanged from that in 2018. Sky recorded the highest increase in workforce during the 2015-19 period. The figures for 1H 2020 confirm the sector trend, with a 10.7% reduction in revenues (to €3.9bn) versus the same period the previous year. The decline in revenues principally affected the radio broadcasting industry, where sales were down 29.4% on 1H 2019, followed by free-to-air TV (down 14.8%) and pay TV (down 0.8%). This result is due to lack of advertising revenues, down 24.4% on 1H 2019. There are, however, positive signs: advertising revenues in November 2020 show a recovery (up 3.5%), even though the year-on-year reduction versus 2019 is expected to be in the region of 12%. Again in November 2020, advertising revenues reflect year-on-year improvements for the following individual operators: 8.8% for La7, 7.3% for Rai, 5.1% for Mediaset, and 5% for Discovery, whereas Sky is the only player to show a negative performance at the top-line level (revenues down 8%), although this too is improving. Growth also continues in the digital segment (OTT and other sectors), up 8.4%. Television is still one of the main sources of information in Italy, even though the digitalization process and distribution of contents via the internet has led to new media consumption models becoming more widespread. Rai and Mediaset confirmed their positions as the leading operators in Italy, with market shares of 35.2% and 32.1% respectively on an average day in 2020, and the gap between the two continuing to reducing, dropping from 4.1 p.p. in 2019 to 3.1 p.p. in 2020. Rai 1 is still the most watched television channel by Italians on an average day (with 16.4% of the share in 2020), ahead of Canale 5 (15%), and the 8.00 p.m. Rai news programme TG1 is still ahead of its counterpart TG5. In the radio industry, the Mediaset group has confirmed its leadership position, with its five broadcasters holding almost one-fifth of the market (17.5% of the share in an average quarter of an hour in 2020). After Mediaset in the rankings come the GEDI group (11.4%) and Rai (11.1%). The largest global M&E players In 2019, the turnover generated by the leading international private operators amounted to €277.8bn, approx. 85% was generated by US-based players. In the 2015-19 period, the giants of the private television sector grew their revenues on average by 3.3%, due largely to the continuing development of streaming platforms. The performances of the leading “Over-The-Top” players is particularly impressive in this respect, with Netflix (revenues up 31.3%) reflecting a CAGR some 10x higher than the average for 2 traditional broadcasters; of the top five operators ranked by growth in revenues, four are US- based while only one is European, German company ProSiebenSat (up 6.1%). And the impact of Covid-19? The pandemic has been a genuine stress test for the sector’s resilience, in view of the massive growth in demand, in particular for Video on Demand services. In the first nine months of 2020, the leading international M&E companies reported a 9.9% reduction in revenues (to €185bn) versus the same period in 2019, 86.5% of which was generated by the US operators; the only one of the traditional broadcasters to report growth was Fox (up 8.1%), but still way below the growth reported by Netflix which continues to take ground, after its revenues increased by 24.9%. The crisis triggered by the pandemic had a differing impact on the 9M 2020 revenues posted by the M&E companies. The most affected were the ones impacted by the closure of theme parks, revenues from which were down 66.2% on the same period in 2019; while income from content distribution was down 16.3% and advertising revenues down 12.2% (which together account for more than 40% of the total sales). There were, however, positive signs from TV subscriptions (up 7.9%), but with opposite trends in streaming (which posted double-digit growth) and pay TV (which declined due in part to the cancellation and/or rescheduling of major sporting events). At the industrial profitability level, the first nine months of 2020 reflect an Ebit margin of 14.6%, down 4.3 p.p. vs 2019; the highest margins were reported by Fox (30.3%), Discovery (27.5%) and AMC Networks (24.8%), with Fox and Mexican group Televisa the only players to report growth in Ebit margin (of 3.3 p.p. and 0.2 p.p. respectively), whereas all the others posted reductions, with Walt Disney reporting a double-digit decrease (down 13.3 p.p.). During the same period Netflix delivered an Ebit margin of 19.8%, up 5.2 p.p., the best performance of all the international operators. The European television market and the licence fee Germany has the state-owned radio and television broadcasting service reporting the highest turnover, generating €8.7bn in 2019, which is three times the amount generated by the Italian public broadcaster (€2.6bn). Second- and third places went to the United Kingdom (€7bn) and France (€3.7bn). Italy reported the highest increase in turnover, with revenues up 2.9% on 2018, despite also having the lowest per capita revenues of all public TV operators included in the European survey: €44 for each resident, as against €105 in the United Kingdom, €104 in Germany, and €55 in France.