The evolution of the TV content production sector A discussion document Prepared for Ofcom by Oliver & Ohlbaum Associates Ltd September 2014 The TV content production sector CONFIDENTIAL Introduction Definitions and caveats Data on the UK external and UK independent production sector The data on the UK indie production sector includes data for non-qualifying independents, i.e. previously independent productions groups who are now owned by broadcasters (such as Shed, Shine and Carnival). This is to maintain consistency between data sources over time and the available breakdown of data from public sources. The indie data does not include external production by traditional broadcaster production units for other broadcasters (such as ITV Studios, BBC Production) The report uses the following definitions and distinctions for external content production: External production Output produced both by indies and by a broadcaster related production house for another broadcaster (NBCU, Sony, Discovery, ITV etc) Non-qualifying independent Previously independent super indie production groups now part of a broadcaster related group (Shed and Shine) Future non-qualifying independent Recently purchased super indie production groups that will now be part of a broadcaster related group (All3Media, Endemol) Programmes made within 2 years of being commissioned retain independent status if an independent production company loses its qualifying status after commissioning has taken place 2 Contents The evolution of the UK TV content production sector Appendix - Main trends in originated output - The UK external sector - Terms of Trade 3 The TV content production sector CONFIDENTIAL The evolution of the UK TV content production sector The independent sector has experienced a significant increase in revenues The UK indie sector showed strong growth up until 2008. The recession put pressure on UK commissioning budgets with indies relying on international revenues. UK commissioning bounce back in 2012 boosted total sector income Independent producer TV-related revenues* REVISED METHODOLOGY CAGR £ million 2004 - 07 2008 - 13 3,000 6.9% 6.6% 2,779 OTHER UK (23.0%) (9.0%) 4014 PRE-PRODUCTION 2,588 39.0% 1.1% 2 2,500 41 OTHER INT’L 13.0% 22.0% 2,227 755 INCOME* 2,145 18 670 27 25 2,016 1,999 26 2,000 22 17 - 1,867 INT’L SALES OF UK 38 32 156 20.0% 21 495 652 FINISHED PROGRAMMES* 1,732 43 279 152 16 369 147 UK RIGHTS INCOME* 4.7% 6.7% 1,527 32 310 63 185 107 87 1,500 46 351 70 28 115 119 16 118 154 215 36 165 107 103 1,000 PRIMARY UK 1,668 5.5% 2.0% 1508 1,539 COMMISSIONS 1347 1395 1,356 1,247 1,147 1191 500 0 2004 2006 2007 2008 2009 2010 2011 2012 2013 (2005 (2007 (2007/2008 (2010 Census (2010 Census (2011 (2012 (2013 (2014 Census) Census) Census) - restated) - restated) Census) Census) Census) Census) *Definitions: ‘Other international income’ - revenue from companies overseas operations and any primary commissions received from non-UK broadcasters; ‘Int’l sales of UK finished programmes’ - sales of first run UK programming sold as finished product abroad; ‘UK rights income’ – UK secondary sales, publishing, formats, DVD sales etc. 4 Source: Oliver & Ohlbaum analysis, Pact census The TV content production sector CONFIDENTIAL The evolution of the UK TV content production sector TV exports have seen significant growth Following the introduction of Terms of Trade there was an initial significant boost to TV exports followed by healthy growth in more recent years. Index (1998 = 100) 2008-2012 CAGR 9% 593 600 570 523 Terms of Trade 500 Introduced 464 425 400 2004-2008 CAGR 22.2% 340 300 277 230 1998-2003 CAGR 12.6% 191 200 181 139 148 121 100 108 100 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: BTDA / TRP / UKTI / PACT, Oliver & Ohlbaum analysis 5 The TV content production sector CONFIDENTIAL The evolution of the UK TV content production sector There has been some consolidation of mid-tier indies There was some consolidation into mid-tier indies up until 2010/11. The distribution of companies has remained stable in more recent years Per cent Distribution of number of indie companies by turnover brackets – 2008-2013 100% . Some consolidation of smaller companies into mid tier 90% . Small amount of consolidation at top 80% end of the sector 50% 50% 50% £1-5m 55% 53% 52% 70% 60% 50% 15% 15% £5-10m 40% 16% 19% 21% 21% 30% 20% 22% 22% £10-25m 20% 17% 12% 15% 10% 6% 6% 7% 9% 9% 9% £25-70m 5% 5% 5% 4% 4% 4% £70m+ 0% 2008 2009 2010 2011 2012 2013 #Indies* 140 141 122 137 152 152 *In addition to the companies above, we estimate there are circa 500 small prodcos with a turnover of less than £1m Source: Broadcast Magazine, Oliver & Ohlbaum analysis 6 The TV content production sector CONFIDENTIAL The evolution of the UK TV content production sector The sector has attracted external investment, now consolidated in trade buyers There has been a much higher concentration into non-qualifying ownership than vice versa. Prior to 2008 most consolidation did not affect indie status as this was indies buying other indies, creating the so called “super indies” SONY Victory Television, Left Bank Pictures* DISCOVERY DISCOVERY/LG Betty TV All3Media NON- ITV QUALIFYING ITV So Television, Big Talk**, 12 Yard The Garden Productions 21 CF 21 CF/Apollo Shine Endemol TIME WARNER Shed SKY Love Productions Programmes made within 2 years of being commissioned retain indie status NBCU NBCU if an indie prodco loses its qualifying Carnival Films Monkey Kingdom, Working Title, status Lucky Giant, Chocolate Media 2006 2007 2008 2009 2010 2011 2012 2013 2014 RTL Fremantle All3Media QUALIFYING BBCWW Cactus TV Left Bank Pictures*, Hardy & Sons, Cliffhanger Productions, Clerkenwell Films, Baby Cow, Big Talk**, Sprout Pictures Source: Oliver & Ohlbaum analysis *BBCWW retains a smaller minority share in Left Bank Pictures after it was sold to Sony 7 **BBCWW sold stake in Big Talk 2013 when purchased by ITV The TV content production sector CONFIDENTIAL The evolution of the UK TV content production sector Revenue is concentrated among the biggest indies The top 6 indie production companies represent almost 45% of total revenues Total indie revenue £bn Indie revenues by turnover band – share of revenue and number of companies - 2013 3.5 3 <£1m £1-5m 2.5 £5-10m £10- 25m 2 £25-70m 1.5 1 £70m+ 0.5 0 Number of indie companies Source: Broadcast Magazine, Oliver & Ohlbaum analysis 8 The TV content production sector CONFIDENTIAL The evolution of the UK TV content production sector Increased share of UK commission spend, smaller indies are claiming more share The largest indies’ share of UK commission spend has declined over the last year, i.e. the so called “super indies” with more than £70m in turnover. The indies in the £25-70m turnover bracket have gained the most from this shift in spend Share of spend on UK externally produced primary commissions turnover band of producer, 2008 to 2013 Percent Less than £1m 100% 0% 0% 0% 0% 0% 3% 3% 4% 6% 6% 4% £1-5m 5% 4% 7% 2% 3% 6% £5-10m 90% 10% 13% 11% 16% 14% £10-25m 80% 29% 70% 36% 32% 60% 33% 29% 40% £25-70m 50% 23% 40% 30% 47% 46% 44% 46% 20% 40% 37% £70m+ 10% 0% 2008 2009 2010 2011 2012 2013 Note: *Primary commissions expenditure data excludes all expenditure on news and sports programmes and rights but includes expenditure on all regional and nations and regions programmes Source: Ofcom Communications Reports, BARB, Company reports, O&O / Pact Census, Oliver & Ohlbaum analysis 9 The TV content production sector CONFIDENTIAL The evolution of the UK TV content production sector Indies have been able to generate secondary revenues on rights retained Indies (including currently qualifying indies and current and future non-qualifying indies) generate approximately £300m in content rights from UK commissions. Indie revenues from UK content rights by category - 2013 Illustrative revenue windows for UK content rights £303m 100% REPEAT USE OF PROGRAMMING 1% 3% OTHER MERCHANDISING 90% 14% OTHER* MOBILE 80% 0% 1st TX 5% FORMATS 5% NEW MEDIA 70% 1% PUBLISHING 3% DVD & VIDEO SALES Primary licence commercial holdback (typically 2 years, can be longer) 7% DISTRIBUTION ADVANCE 60% DTO (from TX+7; May be TX+1 in some cases) 50% DVD release (tends to be seasonally driven) SVoD release 40% INTERNATIONAL FINISHED UK secondary release 51% PROGRAMME SALE 30% 20% 6 12 18 24 36 Months 10% 9% UK SECONDARY TV SALES 0% * ‘Other’ includes advertising, PRTS, and other activities such as music publishing, live events, gambling, product integration, ancillary & digital rights and cable relay 10 Source: Pact census, Oliver & Ohlbaum analysis The TV content production sector CONFIDENTIAL The evolution of the UK TV content production sector Indie sector profitability has seen some recovery, but remains challenging Sector average net margins improved only slightly in 2013 Net margins, 2004 to 2013 Percent 14% 13.0% 12% 10% 9.3% 8.4% 8.5% 8.0% 8% 7.0% 6.7% 6% 5.3% 5.0% 4% 2% 0% 2004 2006 2007 2008 2009 2010 2011 2012 2013 Source: Pact census, Oliver & Ohlbaum analysis 11 Contents The evolution of the UK TV content production sector Appendix - Main trends in originated output - The UK external sector - Terms of Trade 12 The TV content production sector CONFIDENTIAL Trends in originated output Growth in spend on UK content has been modest in recent years There has only been modest growth in spending on UK content since 2009.