IABM Index shows industry in flux

The IABM has been conducting a biannual End-User Survey for some time now in order to gauge market sentiment and future trends.

This year, IABM introduced a companion piece of research – the newly published End-User Index – to look at the actual performance of broadcast and media organisations.

Read together they provide a unique quantitative and qualitative overview of the end-user business - where it is now and where it’s heading.

On the surface the End-User Index makes positive reading: overall revenues for broadcast and media companies grew by 9% between 2015 and 2016 (at constant exchange rates).

Put that alongside the findings of the April 2017 End-User Survey, where 74% of respondents were either quite or very positive in their outlook for the next three years, and we see a healthy, optimistic industry.

Looking behind the headline numbers though shows an industry that’s also in flux – while revenues were up by 10% for media networks and 8% for pay-TV operators, only the latter are growing their profits – by 9% - while media networks’ profits actually fell by 9%.

Since media networks account for 75% of the market, this gives an aggregate decline in profits of 7% between 2015 and 2016.

So what’s going on? IABM calculated all the companies’ profit margins and divided them into groups according to their profit margin. Accordingly, 7% of companies are in loss, 20% have an operating profit margin that ranges 0-10%, 51% with a margin of 11-30%, and 22% with a margin greater than 30%.

An analysis of individual companies’ profit margins shows that most new media operators are either in the loss-making or the 0-10% groups. This indicates that online delivery of content is based on a considerably smaller-margin business model than traditional broadcasting.

Since its advent in the first decade of the 2000s, OTT has changed the economics of content delivery; the new online video providers’ business models are radically different from the “one-to-many” distribution of traditional broadcasting. The “one-to-one” model advocated by OTT providers is based on a more personal relationship with viewers, who can watch content on-demand whenever (and wherever) they like. This relationship is made possible by a fundamentally different technology infrastructure which allows for more flexibility and dynamism at the expense of the higher margins of traditional one-to-many broadcasting.

Competition from online media outlets such as Netflix, Hulu and Amazon has triggered a process of revenue diversification at traditional broadcasters. This diversification to include more online activities may be behind the profitability erosion highlighted by IABM figures. The media business is still healthy from a financial perspective – 93% of companies were in profit – but delivery is moving online, explaining the 7% decline in profits.

“Online delivery of content is based on a considerably smaller-margin business model than traditional broadcasting” - Lorenzo Zanni

This process not only involves the launch of new media offerings to complement existing linear broadcasting activities, but also the increased collaboration with social media platforms to reach younger audiences. For example, both CBS and Scripps Networks, two major US media networks, have publicly stated that they are partnering or considering partnerships with social media operators.

Scripps Networks Chief Executive Kenneth Wayne Lowe says: “How can we partner, how can we go beyond our core audiences to younger audiences that are not necessarily on linear television?

“And the real way to do it is to partner with Snapchat, with Facebook, on and on and on. And we think it will pay off in the long term. And I think sometimes we just don’t get the credit for some of this expanding beyond the core linear television business, because it doesn’t show immediate payoff on the bottom line. It’s not about the money, it’s about the amount. Everything we do and you can call it early stage experimentation or partnerships, is always with the point of view that this eventually is going to be a profit centre for us.”

While broadcasters are launching new media offerings, what they want from suppliers is technology that makes their online operations more efficient and thus, profitable.

In the meantime, some broadcasting organisations may continue to prioritise their traditional offerings.

In fact, according to Belden Chief Executive John Stroup, some broadcasters are investing much more in their linear broadcasting businesses than their online offerings because the former still makes them more money:

He says: “Our traditional linear playout continues to grow. And I think that’s because broadcasters recognise that although OTT is important it’s still a relatively small percentage of their revenues and a very small percentage of their advertising. Therefore, making investments in their linear playout is important.”

Broadcasters that continue to invest in linear broadcasting activities may be playing a dangerous game by prioritising short-term benefits over long-term success; it is clear that audiences are shifting to online platforms.

The erosion of profits highlighted by the IABM End-User Index data may be inevitable; traditional broadcast organisations need to continue to make their operations increasingly efficient to allow for a smooth transition to the new business models of online content delivery – moving from reliance on broadcasting dollars to harvesting digital pennies.