Academic journal article The McKinsey Quarterly

A New Era for European TV

Academic journal article The McKinsey Quarterly

A New Era for European TV

Article excerpt

Margins have been cut in half Schedule profitability versus ratings Operational skills are becoming key

Europe's commercial television broadcasters are learning to their cost that structural advantage is not all it was once cracked up to be. VTM, the leading Flemish broadcaster, announced an operational deficit for 1996 equivalent to a return on capital employed of minus 15 percent. Similarly, HMG of the Netherlands announced a sharp fall in profits last year, and Spain's Antena 3 TV had to make deep cost cuts to keep out of the red.

These and many other "free"(*) commercial operators once found it relatively easy to make money because they dominated their national advertising markets. They were textbook examples of the traditional strategic theory that companies with structural advantage are likely to earn high returns. But more recent management theory has warned that structural advantage can prove short lived, leaving those that rely on it dangerously exposed once entry barriers to their markets fall.(**) Unless a company also has strong operating skills, it will have difficulty protecting itself against new competitors.

This is largely what has happened in the European television industry in recent years. For free commercial broadcasters, strong operating skills means the ability to squeeze maximum profit from the cost of program schedules with the income generated by advertising or program sponsorship. Unfortunately, these skills have been in short supply among broadcasters accustomed to operating in regulated markets. Many have suffered as a result. And given the emerging forces at work in the industry, their suffering is likely to intensify.

On the supply side, deregulation is prompting new entrants, including public channels in some countries, to compete for the advertising revenue that was once the preserve of the established commercial stations. At the same time, digitalization offers the prospect of hundreds of new channels vying for viewers. On the demand side, the amount of time people spend watching television has probably peaked, while advertising agencies find themselves in an increasingly powerful position to extract value for money from broadcasters.

All of this adds up to a potentially severe squeeze on broadcasters' revenues. The key to avoiding such a fate is operating skills. Case studies suggest that efforts to improve them would be handsomely repaid: return on capital employed could rise by as much as 10 percentage points.

Eroding monopolies

Most of Western Europe's public television broadcasters began to lose their grip on the market in the mid-1980s. Only Switzerland, Austria, and Ireland continue to operate state television monopolies [ILLUSTRATION FOR EXHIBIT 1 OMITTED].

Elsewhere, public channels' audience leadership has been under pressure from commercial operators. Sweden's commercial station TV4 and Norway's TV2, for example, built audience shares of almost 30 percent in less than five years of terrestrial operation. In Europe as a whole (including Eastern Europe, where television remains largely state controlled), the number of private broadcasters holding market-leading positions nearly doubled in the first half of this decade. Between 1992 and 1994, meanwhile, public broadcasters lost 15 percent of their market share on average [ILLUSTRATION FOR EXHIBIT 2 OMITTED].

For a time, the new private operators were in an enviable position. Although regulations vary from country to country, public broadcasters have often been restricted in their freedom to carry advertisements or interrupt prime-time viewing with advertising breaks. The Swedish station SVT still does not carry commercials, while in the Netherlands, NOS is restricted to six minutes of advertising an hour compared with nine for the HMG channels RTL4, 5, and Veronica. It is hardly surprising that the new private operators have made profits quickly: the lower the level of competition, the higher their share of advertising revenue. …

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