Abi Watson +44 (0)20 7851 0902 STV [email protected]

Jamie McGowan Stuart Pulling the levers for growth +44 (0)20 7851 0906 [email protected]

Thomas Thomson • STV has a clear pathway to reduce its reliance on +44 207 851 0903 [email protected] linear advertising by investing in production, while

pushing the transition to digital forward with a UK- Gill Hind +44 (0)20 7851 0913 wide footprint [email protected]

Tom Harrington • To that end, STV Player has some momentum and +44 (0)20 7851 0918

recent production company acquisitions, increasing [email protected]

external commissions and PSB Out of London quotas should ensure STV Studios returns to growth in 2021 14 October 2020

• Such development is imperative: COVID-19 has

accelerated structural change in viewing habits meaning now that content must not only be great, but

available widely and immersed in a smooth user

experience just to have a chance

Figure 1: Viewer mins to STV-produced shows* and STV channel (bn) Related reports:

70 65.6 ITV H1 2020 results: Clawing out of the 61.9 63.6 59.6 60.1 59.9 60.6 ravine [2020-082] 60 TV set viewing trends: 2020 lockdown and 50 full year 2019 [2020-073] 40 Broadcast : Troubling trends in 28.1 lockdown [2020-058] 30 24.3 20.0 17.8 18.6 16.7 20 14.0 COVID-19 TV impact: Permanent change

without intervention [2020-037] 10 19.4 20.7 14.0 17.8 18.6 16.5 18.4

0 Media consumption: the ‘surprising’ endurance of broadcast media [2020-014] 2013 2014 2015 2016 2017 2018 2019 Repeats of Antiques Road Trip on Really STV-produced shows* (UK viewing) *Excludes STV-only programmes. STV channel (ITV region) [Source: Enders Analysis, BARB/AdvantEdge]

If your company is an Enders Analysis subscriber and you would like to receive our research directly to your inbox, let us know at www.endersanalysis.com/subscribers STV holds the two Scotland regional Channel 3 licences—the only ones outside ITV’s ownership. Nevertheless, the two are closely linked: the vast majority of STV’s broadcast schedule is comprised of Channel 3 networked programming, while ITV sells all STV’s national linear airtime and sponsorship. This relationship presents STV with two clear advantages: • Access to a network programme budget of over £800 million at a cost we estimate of c. £40 million • The arrangement whereby in any advertising downturn, STV’s programming payment to ITV declines, while programming costs can only increase when advertising revenues do. At a time of general content cost inflation, and a difficult advertising market, the upshot for STV is material, amounting to a £3.5 million saving in H1 2020

But while STV’s fortunes are inextricably bound to the efficacy of ITV, there is still room for maneuverability and strategy through its Scottish programming, stakeholder relationships, regional advertising, production capability and control of the digital transformation of the company.

In January 2018 Simon Pitts took the helm as STV’s CEO, and five months later the company announced its new three-year growth strategy aiming “to establish the integrated producer-broadcaster as Scotland’s home of news and entertainment”. This was to be delivered through three strategic objectives: • Maximising the value of the broadcast business by delivering high quality, cost-effective news and entertainment • Driving digital growth through the STV Player by creating an ‘STV for Everyone’ • Building a world class production business

If an existing business did not fit into the new strategy, it would no longer be supported. The loss-making local TV venture, STV2, was sold in June 2018 to That’s Media, while STV ELM—which provides operational services to the charitable Scottish Children’s Lottery which launched in 2016—is to be divested.

Considering the symbiotic relationship between STV and ITV, it is perhaps unsurprising that at a high level the two share similar overarching strategies. Both aim to become less reliant on linear advertising revenues by developing their production businesses along with an emphasis on the transition to digital. Of course the same structural viewing shifts that affect all broadcasters—accelerated by the pandemic— make STV’s strategic realignment all the more urgent.

In this report we will consider each of the three core objectives and the extent to which they are being realised, before covering the impact of COVID-19 on the company. We will show that its consistent commitment to regional news, investment in internal sales teams and the launch of the STV Growth Fund to widen the television advertising base in Scotland has further cemented its already strong relationships with viewers and businesses in its home country, thereby reinforcing its status as the leading commercial broadcaster.

Online, the broadcaster seems finally to be kicking into gear with the STV Player now available on the majority of connected TVs in Scotland. Moreover, its content strategy of licensing third-party content takes the Player—minus any Channel 3 catch-up content—beyond STV’s borders. As STV sells all its Player inventory we will see significant upside in digital revenues over the next few years. Additionally, STV’s burgeoning production business—with a new management team and indie acquisitions—stands to benefit from the increasing nations and regions commitments for PSBs, which favour STV.

STV: Pulling the levers for growth [2020-099] 2 | 14

Overview of the STV business Linear spot advertising and sponsorship remains the bedrock of STV’s business, forming 75% of its total revenues in 2019. National advertising has been broadly flat since 2017, with revenues increasing at a CAGR of just under 0.1% (v. 2.5% on a UK-wide basis). As Figure 2 shows the two main drivers of STV’s revenue growth have been its regional advertising and the STV Player (‘Digital’), which we discuss in detail later in this report.

Figure 2: STV revenues, 2020 H1, 2019 v. 2017 (£m)

2020 H1 2019 2017 CAGR (%)

Broadcast 35.0 92.3 92.0 0.1%

National 28.0 75.3 74.3 -

Regional 6.0 14.9 11.0 -

Other 1.0 2.1 2.0 -

Sponsorship - - 5.7 -

Digital 5.9 13.0 8.2 16.6%

Productions 1.6 13.7 10.2 10.2%

ELM 2.2 4.8 6.6 6.6%

Total revenues 44.7 123.8 120.4 1.9%

The revenue streams STV reports have changed over the last three years—sponsorship revenues are now bundled into National and Regional revenues. Where it is not possible to identify the correct comparatives zero (-) has been entered. [Source: company reports, Enders Analysis] STV’s digital revenues have grown rapidly (albeit from a small base), at a CAGR of 17% since 2017— although we note that, on an absolute basis, STV Player is still a relatively small proportion of total revenues, c. 11% as of 2019 year-end. Far more significant is its impact on the bottom line—digital revenues have a margin of c. 50%—meaning that they contribute roughly one-third of total operating profit. STV’s operating margins have grown commensurately, up 2.1 ppts.

Figure 3: STV adjusted costs, EBITDA, and other financials, 2019 v. 2017 (£m)

2019 2017 CAGR (%)

Total costs 101.2 98.0 (1.1%)

Broadcast 72.4 76.7 1.9%

Digital 5.7 4.5 (8.2%)

Production 13.8 10.2 (10.6%)

EBITDA 27.7 21.5 8.8%

Operating profit 22.6 19.0 6.0%

Operating profit % 18.3% 16.2% -

Free cash flow* 21.0 12.2 19.8%

*2017 free cash flow was impacted by the timing of NAA/ASA offsets, as payments were received in August. Where costs have increased, CAGR has been denoted with brackets, as costs are a negative line item [Source: company reports, Enders Analysis]

STV: Pulling the levers for growth [2020-099] 3 | 14

STV’s 2020 diversification target of one third of operating profit being non-broadcast earnings has been thrown off track by COVID-19—revenues from content sales have dwindled given the freeze on most television production (see Broadcast television: Troubling trends in lockdown [2020-058])—but over the remainder of the report we discuss the developments being made along this path up until the pandemic, and how the company has reacted to the current situation.

Maximising broadcast with enhanced viewer and business engagement

Traditional TV viewing will continue its decline, but we believe that significant value will remain within STV’s broadcast business: pivotally, ITV is a reliable deliverer of a wide array of UK-originated programming that covers many genres and is of widespread, mainstream appeal. That being said, with regard to their broadcast businesses, STV and ITV have slightly differing objectives and capabilities.

ITV’s objective is couched in terms of “transforming” its broadcast business, which encompasses commissioning programmes (to reach lighter viewers and increase reach), digital investment in ITV Hub and addressable advertising, as well as developing deeper strategic and creative partnerships with advertisers (see Silver linings for TV [2020-073]).

STV is only responsible for commissioning its programming for Scotland and does not have the same relationships with national advertisers as ITV. As it can neither influence the majority of its schedule nor controls most of its ad revenues, its broadcast objective relates to areas where it effectively retains autonomy. Thus, STV is seeking to “maximise” the value of the broadcast business, which it aims to do in two main ways: 1. Investing in a distinctive future-facing news organisation 2. Maximise share of the advertising market

The intention, and necessary driver of completion of these objectives, is to bring STV closer to the of the community it serves, being its viewers and businesses within Scotland. This is no easy task, given that STV is perennially limited by its reliance upon ITV content and the ensuing identity that that relationship forms. Having said that, STV benefits from having had longstanding access to some of the most loved programming in the UK on very favourable financial terms.

1: Maximising audiences to Scotland’s news programming

Scots watch more television than the rest of the UK does: 28 minutes more each day in the first three quarters of 2020, up from 20 in 2019 (Q1-Q3). Nine of those additional minutes are to STV, which overtook BBC One in 2019 to become the most-watched peaktime channel in Scotland. As with all Channel 3 regions, entertainment formats and soaps aired across the network make up the bulk of STV viewing (see Figure 4). However, it is as a source of news and current affairs in particular that STV outperforms ITV’s licences. 2020 did not start this trend, but it has certainly exaggerated it.

STV: Pulling the levers for growth [2020-099] 4 | 14

Figure 4: Channel 3 viewing by genre, H1 2019-20

100%

23% 26% 80% 28% 30%

60% 43% 43% 44% 40% 45%

20% 32% 25% 21% 27% 0% Scotland Rest of UK Scotland Rest of UK H1 2019 H1 2020 News/current affairs* Entertainment/docs Drama/soaps/films Sport Other *This Morning classified as current affairs in both 2019 and 2020. Note: Consolidated viewing for STV's licensed regions v. all other ITV regions. [Source: Enders Analysis, BARB/AdvantEdge]

STV’s news performance is underpinned by its local output, as required by its two licences (STV Central and STV North). Each week these must provide at least 5 hours 30 minutes of local programming, with 4 hours of news and 33 minutes of current affairs. Both licences require at least 25 weekly minutes of sub- regional news programming: and for Central, and and for North. This type of local programming, unique to a Channel 3 licence, performs especially well in Scotland. In terms of viewing in H1 2020, it represents 8.0% of STV hours, second only to Northern Ireland’s UTV at 10.6%. ITV’s Yorkshire licence is lowest at 5.3%. Just before the pandemic, ’s News Consumption Survey showed that while STV and BBC One were the most-used news sources in Scotland (by 42% of adults), for those in Scotland accessing news about Scotland, STV was top (34%) with BBC One in second (24%). For the equivalent local news in England, BBC One (38%) exceeds ITV (24%).

Since March, STV’s reputation in news has remained strong: according to Ofcom’s news consumption surveys, 83% of STV news viewers said they trusted it in late March, consistent with the 84% recorded in early September. For comparison, the same proportion of BBC TV news viewers across the UK trusted it in March (83%), but this had fallen by September (72%). To put STV’s performance in perspective, its trust levels are only exceeded by official health and government sources, and not by any other broadcast or online news media.

Average audiences for the STV News at Six now exceed BBC One’s (Figure 5). While , STV’s late night current affairs programme, made the most of its new primetime Thursday slot to attract record audiences despite lockdown limiting the show to one weekly broadcast. It peaked at 435k for a Coronavirus Q&A with the First Minister. Although other programming made for STV’s non-news, peaktime quota (39 local hours) has been restricted in 2020, it is normally another of the channel’s strengths. 2019 audiences for Sean’s Scotland and Hayman’s Way, two series made for STV, outperformed their slot average, and therefore the usual network content, by 18% and 11% respectively.

STV: Pulling the levers for growth [2020-099] 5 | 14

Figure 5: Average audiences* for early evening Scottish news programmes (000)

600 521 500 517 423 400 417 300

200

100

0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2020 2020 Q1 Q2 Q3 STV News at Six Reporting Scotland (BBC One, 18:30) *In STV's licensed region. Note: Programmes broadcast between 17:59-18:59, Monday to Friday (min. 10 minutes duration). [Source: Enders Analysis, BARB/AdvantEdge]

2: Maximising advertising revenues

STV sells all advertising across the STV Player but also sells linear spots to advertisers in Scotland. Recognising potential for growth for its linear inventory, the company has made a point of investing in its internal sales team and in May 2018 launched its Growth Fund, the objective of which is securing advertising revenue from a wider advertiser base. This fund makes TV advertising affordable (e.g. through gifted airtime, matched funding or media-for-equity) for Scottish businesses. And it smoothens the path for businesses who may not have previously contemplated advertising on television, with STV’s in-house creative able to produce the ads, while its research panel tracks their performance. Since launch, STV has brought in over 200 new advertisers across its linear inventory.

Parallels can be drawn with ’s Commercial Growth Fund, launched in June 2015, whose media- for-equity investments have paid dividend over the years (its investment in Eve Mattresses pre-IPO grew three-fold in nine months). However, this does not appear to be STV’s primary aim (at least in the short term), as the vast majority of clients received matched funding.

While regional advertising has seen steady growth over the past few years it has been boosted by these initiatives. Regional spot-advertising is now significantly outperforming its national counterpart with regional revenue up 42% between 2017 and 2019, growing from £11 to £14.9 million.

STV for Everyone: catching up in digital integral to growth

ITV’s player, the Hub, sits very much within its broadcast business, with advertising sold alongside linear (and now grouped as a single revenue stream), while data learnings drive viewing via recommendations and allow for optimising marketing investment. In contrast, ITV does not sell advertising on STV Player as this is under the control of STV. Therefore, creating a separate dedicated Digital division within STV, that has its own P&L and KPIs and that is in total control of its development and revenues, should help give the STV Player the focus it requires in an environment of radically-shifting viewing habits.

STV has the full catch-up rights in Scotland for all programmes aired across the Channel 3 network (exc. ITV Breakfast content), while ITV Hub has the rights across England, Wales and Northern Ireland. Currently, the STV Player contributes a disproportionate amount of operating profit to the company, making up one third of operating profit in 2019 on just 10.5% of total revenues (c. 12.8% of advertising

STV: Pulling the levers for growth [2020-099] 6 | 14 revenues). For comparison, ITV’s Hub is now around a fifth of total broadcast revenues, and growing. We believe there is only likely to be upside in this division over the next few years (even in spite of COVID- 19) given an improved consumer experience, and development of its nascent content and UK distribution strategy.

Improved consumer offer: playing catch-up

The STV Player has lagged behind the other PSBs in terms of viewing, even though it has 3.6m registered users in Scotland (4 out of 5 adults). Between H1 2019 and H1 2020, under 20% of these users watched the service monthly, lower than the 24% All4 achieved in 2018. However, the new STV Player growth strategy has paid dividends. The proportion of active users is now nearing 30% and its share of total STV viewing is picking up, too (Figure 6). This can be attributed to two factors: better technology and improved availability across platforms in Scotland.

Figure 6: BVOD share of total viewing, H1 (%)

14% +33% YoY 12% 10% 8%

6% +65% YoY 12% +9% YoY 9.0% 4% 7.7% 2% 3.0% 2.9% 3.1% 1.5% 1.8% 2.4% 0% STV Player ITV Hub BBC iPlayer* Note: Includes live streams. 2018 2019 2020 *FY data for 2017/18, 2018/19 and 2019/20. [Source: Enders Analysis estimates, BARB/AdvantEdge, company reports]

The better the consumer experience, the stickier any OTT service will become, and while we recognise that STV cannot invest anywhere near the same amount in tech as its competitors, it cannot fall too far behind what is fundamentally expected of a streaming service. While the STV Player has carried addressable advertising since 2017 and has thus been slightly ahead of the curve, it is only since last year that it has carried standard VOD features such as recommendations, autoplay, personalisation and favourites lists.

The vast majority of BVOD viewing is done on the TV screen and not mobile screens. STV Player became available in Virgin homes in Scotland in December 2018, and then on Sky in October 2019 in Scotland. Effectively this doubled the reach of STV Player on connected TVs, which would provide a significant boost to viewing—pre-lockdown about one third of all STV Player views were through the Sky platform. Accordingly, connected TVs made up 71% of STV Player H1 streams in 2020, up from 58% across FY 2019.

Content strategy: much more than catch-up

STV Player boosts its Channel 3 catch-up content with a significant amount of exclusive UK-wide third- party licensed content, a strategy very different to that of the Hub: the recent half-hearted efforts of which to build a browsing library now abated by the necessity to make BritBox look comparatively desirable. The company has licensing arrangements with large production companies such as Banijay/Endemol and distributor DCD Media. As of September 2020, STV had c. 1500 hours of both licensed content and back-catalogue. This includes:

STV: Pulling the levers for growth [2020-099] 7 | 14

• Crime dramas, both licensed and back catalogue boxsets, including The Bridge, Grace Point alongside STV’s own classic dramas, and Rebus • STV’s back catalogue of Scottish historical documentaries, soaps and travelogues. Relatively niche in appeal, they comprise over half of non-Channel 3 network minutes available • Cooking formats and true crime series sourced from licensing deals with Australian broadcasters. Aimed at a more general audience. These comprise 12% of non-Channel 3 minutes on STV Player • US true crime series/lifestyle/food series, some of which can also be found on UK, making up 11 % of non-ITV minutes • The remainder is made up of children’s programming from STV’s own archive and its deal with Hopster, and some other food programming

Of course, the perennial popularity of the biggest soaps such as and or entertainment formats such as ’m A Celebrity…Get Me Out of Here! are always going to form the bulk of viewing. At the start of the year, non-Channel 3 shows accounted for over 85% of available content on STV player, but less than 15% of viewing.1 Nonetheless, this just emphasises the fact that, past a certain point, the volume of content on a given platform ceases to matter given the function of recommendation engines—the vast majority of users will never be aware of anywhere near the full range of content available (see : Looking towards 2025 [2020-057]). Far more important drivers are the exclusivity and quality of key, promoted content available. STV is aware of this: in its recent results call it noted that drama boxsets have been a driver of consumption, and its focus going forward is to regularly add new drama series, ideally one or two new series per month. Regularity should allow a smooth increase in viewership and its pipeline with third-party distributors and companies will allow it to become choosier as it goes forward.

We understand that the deals that STV strikes with each licensee are based on a revenue share. As STV is responsible for generating advertising revenues on its Player, any viewing to this licensed content goes to the bottom line.

Distribution: catch-up in the UK

Building up a sufficiently large catalogue of UK-wide licensed content alongside STV’s own productions serves a greater purpose than just super-serving viewers in Scotland. While STV Player cannot show any Channel 3 network programming outside Scotland, viewers are able to watch all the third-party and non- catch-up STV-owned content. This has allowed STV to pass a critical threshold in its aspirations, expanding the STV-player UK wide, with carriage agreements struck with Freeview Play (the fourth connected TV platform the Player is automatically installed on outside of Scotland), in August 2020— following UK-wide expansion on YouView, and . The expansion to Freeview Play increases STV’s total addressable market considerably, enlarging its reach to around 20 million connected TVs—around half of the UK’s 42m connected TVs—so there is scope for even further growth.

It is a little early to discuss how much growth the player has seen so far outside Scotland as a result of these new distribution deals. No guidance was provided for the expected uptake, which isn’t really surprising, given that the player has only just launched UK-wide in earnest. Our expectations for UK-wide household penetration are relatively modest, given the weakness of the STV brand outside of its home country. That being said, the sheer magnitude of the deals relative to Scotland’s addressable market and the strong uptake of exclusive content within Scotland means that it is likely to be significant in relation to its existing user base. To double the number of registered users, it needs penetration outside Scotland of c. 4%—which seems achievable, more so if they were to strike further distribution deals. If only a small

1 During lockdown in June when the ITV schedule was severely impacted, over half STV Player viewing was to third-party content (company reports, Adobe/Freewheel). We believe that non-Channel 3 content is now taking a higher share of viewing than at the start of the year.

STV: Pulling the levers for growth [2020-099] 8 | 14 absolute number of viewers outside Scotland register with the platform, this will still represent a significant percentage increase.2 Moreover, unlike its linear advertising, STV controls all of its VOD inventory—so the greater volume of content, the greater revenues STV can generate. A UK-wide expansion provides plenty of upside, with little extra cost.

In February 2019 STV dipped its toes into the paid-for market, with the launch of its ad-free STV Player+ service for £3.99 per month on Apple devices and online. STV does not have a sufficient library to develop a direct-to-consumer SVOD proposition such as BritBox, and thus, Player+ was always intended as a low- risk, complementary digital income stream, which will grow with further rollout planned for 2021.

Production: Stepping up producer-broadcaster ambitions

Historically, STV’s production performance has been volatile, reflecting a weak pipeline and lack of returning series. STV introduced a raft of reforms in the wake of its strategic update in May 2018, including: • Focus on returning series for terrestrial and SVOD players, with one-offs phased out • Investing in strengthening the in-house creative team and expanding and overhauling the creative pipeline across the genres • Establishing creative partnerships with producers, writers and IP owners to expand STV’s creative pipeline Figure 7 below outlines the key appointments and acquisitions made over the last two years. Recently rebranded STV Studios, STV is moving towards realising its aspirations of becoming an integrated producer-broadcaster (COVID-19 notwithstanding), with seven production labels now operating under STV ownership.

Figure 7: STV Studios timeline (calendar year)

June 2019 May 2018 February 2019 April 2019 August 2020 Josephine Brassey appointed Strategic update Two-year co-production Craig Hunter appointed as Rebrand to STV head of entertainment announced agreement signed with Creative Director, Factual Studios development from Primal Media Productions

June 2019 September 2020 Acquisition of majority Partnership with September 2018 stake in Primal Media, February 2019 Barefaced TV, David Mortimer unscripted producer Signed with WME for producer of formats appointed MD of STV representation, January 2020 like Snog Marry Avoid? Productions, previously developing dramas and Acquisition of a 25% stake in and Naked Beach senior VP of Factual & formats for UK and Two Cities, drama producer Entertainment at NBC international audiences based in London and Universal Northern Ireland

Appointment Acquisition Other event [Source: Enders Analysis, company reports, press releases]

Growth has been fuelled by an overhaul of in-house development as well as acquisition. Alongside its three recently rebranded in-house labels (STV Drama, STV Entertainment and STV Factual), it has a partnership with Tod Productions to develop and co-produce drama, and it acquired a majority stake in

2 Based on access being rolled out across all UK connected devices, less share in Scotland.

STV: Pulling the levers for growth [2020-099] 9 | 14

Primal Media, an unscripted producer, in 2019 and a 25% minority stake in Patrick Melrose creator, Two Cities Television earlier this year, with an option for full ownership over three years. A new factual entertainment label, Barefaced TV, which has a strong track record of creating younger-skewing entertainment formats (headed by Rosie Bray and Lucy Golding, co-creator of formats like BBC3’s Snog Marry Avoid? and Channel 4’s Naked Beach) was added in September.

The opportunities in production are twofold for STV. Last year, as part of a wider impetus to spread the benefits of the UK’s strong broadcasting sector, Ofcom tightened the criteria that define ‘out-of-London’ programmes, from 2021.3 These changes were made to ensure greater compliance with PSB quotas for hours and spend in the nations and regions.4 As such, the proportion of non-London PSB spend looks set to increase from the 48% seen in 2019. As a producer with a ‘substantive base’ outside the M25, STV stands to benefit, with offices in London, Glasgow, and with the addition of Two Cities, Northern Ireland. As of 2019, only 5% and 2% of qualifying network spend of all PSBs was made in Scotland and Northern Ireland respectively, so there is significant room for growth.

Current plans for monetising content internationally revolve around the studios business, maximising the value of its IP and archive. International secondary revenues have grown at a CAGR of 20%, from £1.2 million in 2013 to £3 million in 2019, accounting for one-fifth of total revenues. Shows sold to multiple markets have generated significant income in recent years, particularly high-end dramas. The Victim was sold to Britbox US last year, whilst BAFTA-winning Elizabeth is Missing is launching on PBS in the US in January 2021.

Thus far, its expanded business appears to be performing well. As can be seen in Figure 1 on the first page, STV is increasing the amount of minutes shown across the UK, while for the year-to-date, STV has seen eight new commissions and four recommissions, with STV currently producing shows for nine different networks. A new returnable prison drama, Screw, has been commissioned by Channel 4 off the back of the success of Elizabeth is Missing and The Victim, and Landmark was commissioned by Sky from STV majority-owned Primal Media. There are another 140+ programmes in active development (65 scripted and 75 unscripted).

STV’s revenue guidance for 2020-21 ranges from £15 to £20 million, based on commissions secured for 2021, some of which have already been committed and publicly announced. It is unclear what proportion of guided revenue relates to delayed-2020 productions that have been pushed into 2021, which would inflate these figures. Nonetheless, it would mark a significant increase on full-year 2019 of anywhere between 10-50%.

Impact of COVID-19

Viewing

As we have written about elsewhere (see Broadcast television: Troubling trends in lockdown [2020-058]), television viewing has been affected by the pandemic with—initially and unsurprisingly—large boosts to news programming. STV’s share of viewing has traditionally been greater than that of ITV, with its share deviating from ITV’s most significantly during the STV News at Six and on weekday mornings. This trend has consolidated this year. While YoY weekday hours for the STV News at Six are up by almost a quarter in H1 2020, they have nearly doubled for This Morning in Scotland.

3 Ofcom, Review of Regional TV Production and Programming Guidance, 19 June 2019. 4 Currently 50% of all BBC TV hours and spend must be from outside London, with 8% from Scotland specifically. The quotas for the commercial PSBs’ main channels range from 10% for Channel 5 to 35% for ITV and Channel 4—although the latter has a voluntary target of 50% by 2023.

STV: Pulling the levers for growth [2020-099] 10 | 14

In fact, the overall increase seen in STV viewing during the first three quarters of 2020—up 13% per person YoY—has mostly come from increased daytime viewing. Primetime STV hours (18:00-22:59) were up 4% per person YoY, whereas the rest of the day was up 26% YoY. The Chase and Tipping Point, as well as This Morning, were amongst the biggest winners. This was even more extreme for 35-54s, who watched 50% more STV outside of primetime, and just 8% more during it. The uptick speaks to STV’s core strength in broadcast: its balance of popular local programming and established ITV formats.

Figure 8: Channel 3 viewing in Scotland (solid) and the rest of the UK (dotted), Q1-Q3 2010-20 (daily mins per person)

70 64 67 60 63 59

50 46 43 40 39 30 27 20 23 12 10 11 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

16-34s 35-54s 55+ Note: Consolidated viewing for STV's licensed regions v. all other ITV regions. [Source: Enders Analysis, BARB/AdvantEdge]

Revenues

Advertising

As of H1 2020, total advertising income was down 20% year-on-year, although this has improved materially post-period, with June down 33%, July down 7% but August up 1%. During this period STV has benefited from the National Airtime Agreement (NAA) with ITV which de-risks STV during downturns in the national advertising market, as income derived from national linear spot advertising is effectively a sizeable annuity.5

Regional advertising was down 18% year-on-year in H1 2020—it would have been worse but for the Scottish Government’s health messaging campaigns, with government expenditure on television spots totalling £1.8 million.6 STV was a key partner and while the precise amount that accrued to STV is uncertain, it was likely a substantial proportion of STV’s regional income in this half-year set of results. Regional advertising will be sustained until the end of the year, as the Scottish government’s marketing continues, as it focuses on its new campaigns: We are Scotland, FACTS and Test & Protect.7

Across 2020 we forecast STV’s advertising revenues to be down between 10% and 20%, with the re- opening of the economy and a return to a recognisable programme schedule.

5 As of 2014, this was c. £20m pa, per Edison Research Group. STV Group: On the front foot. 6 Covid-19 pandemic media advertising and public information spend: FOI release, July 2020. 7 Coronavirus (COVID-19): Scotland’s Route Map – supporting evidence, August 2020.

STV: Pulling the levers for growth [2020-099] 11 | 14

Digital and Production

STV’s digital revenue growth has slowed to 5% during H1 2020, but the advantage of expanding its total addressable market in mid-year is that digital will enjoy relatively easy prior-year comparatives during results season—it will benefit both this year, and next year—the first full year in which the Player will be available UK-wide.

STV’s production income declined by 17% during H1 to £1.6m, as production closed down across the sector. Revenue was sustained by particularly strong secondary sales of c. £1 million, a sales figure driven by licensing unscripted shows (e.g. Antiques Road Trip) and the demand of other channels and services to fill their own content shortfalls with third-party content. Several factual and entertainment programmes were delivered during lockdown, through innovative approaches and existing IP, to Channel 5 and ITV respectively (The Royals vs the Tabloids and Catchphrase Catchiest Moments). All STV programmes are now back in production under new safety protocols, however revenues are likely to be depressed across the full year, due to the general lag between production and payment.

STV’s programming costs (c. 60% of total broadcast costs),8 are largely out of management’s direct control. Contributions towards the aforementioned National Airtime Agreement (NAA), are linked to national airtime sales—locking in the margin on national linear spot advertising revenues. This reduces the marginal profitability on the upswing, but cushions STV from revenue declines. Given the drop in advertising this has meant that in H1 2020 it has saved STV £3.5 million. Further additional cost savings were made through reductions in the regional programme budget, technology expenditure and discretionary expenditure.

Cashflow management

STV has taken a number of steps, including the reductions in expenditure noted above, to mitigate the impact of the pandemic on its working . These include deferring VAT and pension payments from Q2 until the end of the year, and also extending its banking facilities (from £60m to £80m) and, crucially, the £16m raised through a rights issue in June.

STV has a relatively large pension deficit that acts as a drag on its free cash flow, with payments totalling £10.5 million in 2019. The most recent triennial pension review as of 31 December 2017 resulted in a deficit of £127 million on a pre-tax basis, and the agreed 12-year recovery plan requires a base annual contribution of £9 million per annum (plus contingent payments subject to outperformance against STV’s net cash flow).

Looking forward: well-positioned in the face of structural headwinds

STV is moving forward at a rate to match its ambitions. However, that is not to say that there aren’t headwinds facing the broadcaster—there are internal challenges to be addressed, and other external forces to be mitigated.

While STV’s broadcast arm is laudably cash generative, it faces the same forces of structural erosion common to all PSBs. The decline in linear television viewing is set to continue, albeit offset by the fact that the British population is skewing older.

As a broadcaster, STV can rely on its balance of trusted local news and ITV entertainment juggernauts, two of the more resilient broadcast genres. The recent growth of 35+ viewing speaks to this resilience.

8 As of 2019 year end.

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Yet under-35s in Scotland are moving away from broadcast TV at a faster rate than the rest of the UK, despite higher levels of overall TV set use (Figure 9). STV’s popular content mix can slow these declines, but there is ultimately little scope for sustainable improvement within broadcast for the under-35 audience.

Figure 9: Daily TV set use by demo and region, H1 2020 (daily mins per person)

450 412 383 400 33 350 311 43 35 300 267 43 81 250 215 189 204 79 200 165 42 150 119 35 329 113 107 297 100 96 22 23 180 147 50 15 13 55 50 67 68 0 Scotland Rest of UK Scotland Rest of UK Scotland Rest of UK Scotland Rest of UK 4-15s 16-34s 35-54s 55+

Live Timeshifted 0-7 days Timeshifted 8-28 days Unmatched TV set use Note: Consolidated viewing for the BBC Scotland region v. all other BBC regions. [Source: Enders Analysis, BARB/AdvantEdge]

STV’s strategic shift to also prioritise production and digital distribution is therefore a sensible strategy for the longer term. For all three objectives there is clear upside. STV Player revenues have continued to grow, up 5% year-on-year, despite the slowdown in the advertising market. The movement to a UK-wide STV Player expands STV’s total addressable market from c. 2.4m connected TVs to 21m. As 2.5% of commercial impacts are in digital, but one third of profits, small changes will have a material impact on STV’s bottom line. STV’s recently rebranded production arm, STV Studios, has undergone a spate of acquisitions in the last 18 months, swelling to seven production labels and moving closer towards its aspiration of becoming an integrated producer-broadcaster like ITV, and is well-positioned to take advantage of the recently adopted nations and regions quotas.

There are internal niggles to be addressed: its pension deficit is certainly a drag on free cash flow, a burden that will be present for some time, as STV is only two years into its twelve year recovery plan, following the December 2017 triennial valuation. Furthermore, in the near term, Brexit will further impact the economy, while the potential for a second Scottish referendum looms. Ahead of the first independence referendum in 2014, STV sought and received assurances from the Scottish Government that its licences would be respected whatever the outcome. There is no reason to see this changing, as whatever the result of another referendum, it is clear that STV cannot survive in its current form completely separate from ITV, and thus the contractual relationships are likely to remain.

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About Enders Analysis Enders Analysis is a research and advisory firm based in London. We specialise in media, entertainment, mobile and fixed telecoms, with a special focus on new technologies and media, covering all sides of the market, from consumers and leading companies to regulation. For more information go to www.endersanalysis.com or contact us at [email protected].

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