TV: Trading Places in the Market

Recent upheaval in the TV industry has thrown the market's trading mechanism into question. But is there a better solution? Jeremy Lee investigates.

It would almost be trite to say that the past year has been one of the most dramatic in television history.

Aside from the Hutton Report claiming the scalps of both the BBC chairman, Gavyn Davies, and the director-general, Greg Dyke, and prompting a reappraisal of the BBC's operations ahead of Charter Review, the ITV merger forced the rest of the commercial TV companies to reconsider their futures as stand-alone broadcasters.

It was the outgoing Channel 4 chief executive, Mark Thompson, who first broke cover, revealing that he was holding talks with five about a possible merger of operations.

When Thompson returned to the BBC as the director-general, his surprise replacement at Channel 4, Andy Duncan, then announced that there were potential benefits for consolidating some of Channel 4's operations with the Corporation's. This left five's chief executive, Jane Lighting, one year into the job, exploring the possibility of five merging with her erstwhile employer Flextech TV.

With Parliamentary approval a prerequisite for any change in Channel 4's status, it is likely to be some time before we see any such change.

For the rest of the commercial broadcasters, their performance at this year's negotiation season will be key to deciding what they need to do to protect their positions.

Although the ITV merger enabled the broadcaster to achieve £100 million of cost savings, the City institutions showed their frustration with the company's previously poor performance by ousting its chairman-designate and former Carlton chief executive, Michael Green.

The position of ITV's chief executive, Charles Allen, is by no means assured and the incoming chairman, Sir Peter Burt, has promised to ensure Allen delivers shareholder value.

While headlines have tended to focus on the erosion of ITV1's market share, the re-negotiation of ITV's broadcast licences promises to deliver further savings and, with the imminent launch of ITV3, ITV at least has the beginnings of a multichannel strategy. ITV is, however, still not the 800-pound gorilla that Dyke predicted it would become when he spoke at last year's Edinburgh TV festival.

Elsewhere, the culture secretary, Tessa Jowell, finally acknowledged that 2010 was not a realistic date for switching off analogue transmission, despite 2003 seeing digital penetration breaching the 50 per cent mark, helped by the success of the Freeview platform. A delay in analogue switch-off had been widely predicted but the Government, keen to make the UK the first country with a wholly digital TV system, had been reluctant to go along with.

Last year also saw James Murdoch shoehorned in as the chief executive of Sky. Far from being presented with a sinecure, he was immediately forced to deal with a slowing in the numbers of people signing up for Sky's subscription services. This prompted a re-evaluation of previous goals set by his predecessor, such as measurement of company success based on average revenue per user, and the launch of a supplementary Freesat service as well as more targeted advertising to boost growth.

The City's response to Murdoch's decision to invest substantial sums of money in marketing Sky to digital refuseniks was not a positive one, however, and the share price fell accordingly. It was not all bad news for Sky though - sales of its personal video recorder service Sky+ took off, but fortunately predictions of it causing an early demise for spot advertising proved to be premature.

In cable, ntl and Telewest emerged from their debt restructuring and were able to take advantage of the growth in demand for broadband. While they are now in better financial shape than before and have stopped haemorrhaging subscribers, their positions as suppliers of cable TV is by no means strong and talk still centres on their long-awaited merger.

Amid all this turmoil and upheaval, the argument that there needs to be a change in the way commercial airtime is traded started to gather momentum. It's certainly not a new argument, but with Ofcom revealing that, for the first time, subscription revenues have exceeded advertising revenues, there seems to have been a re-evaluation of the commercial broadcasters' positions.

For years, the boast has been that the UK has the most sophisticated TV market in the world. With more than £3.2 billion of advertising revenue depending on it, it has been crucial for both the broadcasters and the agencies to perpetuate this industry-wide consensus for confidence to remain in the system.

While its sophistication may be open to question, it is true that the method by which the broadcasters derive advertising revenue has evolved into a system that is different from that in the US or developed European countries, with the exception of Ireland.

It is based on the station average price trading mechanism, which is accepted as the universal currency by both agencies and broadcasters.

Put simply, the SAP mechanism ensures that those television companies that produce high-rating programmes are rewarded, while those that produce failures are punished - in short, spots that can get high coverage are good, while those that simply build frequency have less value.

Its history lies in the 80s, when advertiser and agency frustration with the old trading system boiled over. Previously, airtime was sold on a spot-by-spot basis off a ratecard price but these were liable to be bumped off the schedule by agencies willing to pay a higher rate for the slot.

SAP is a simple enough equation and is worked out by dividing TV revenue by impacts. Although it was introduced when ITV still had a stranglehold on the market, it remains the currency the TV companies and the media agencies discount off and relate back to, despite the explosion in the number of TV channels.

The ITV merger and its associated cost benefits have thrown a different light on this and, with multichannel penetration breaching the 50 per cent barrier, the calls for change have been getting louder.

ITV resolutely defends the mechanism. "Station average price is very fair and transparent - you know the impacts and the revenue," Andy Bagnall, the director of knowledge management at ITV Sales, says.

Flextech started the debate in earnest with the publication of a book called The New Medium of Television at the beginning of the year. This called for a fundamental shift in the way that non-terrestrial TV is considered by advertisers and agencies, because multichannel TV is targeted TV, providing niche and loyal audiences.

The criticism is that while the Barb panel measures the quantity of impacts for a target audience delivered to a channel (which is the currency for agencies to work from when planning TV campaigns), it doesn't measure its quality.

Shortly after the publication of the Flextech book, Sky announced it was creating its own audience viewing panel, which is bigger than Barb's, and is designed to measure the lifestyle and purchasing habits of its subscribers. While Sky has been at pains to point out that it is not a replacement for the Barb panel, it would not take an enormous leap of faith to see such data being used as part of the negotiation process.

There's a two-fold reason why Sky's decision seems timely. As well as providing qualitative data on its audiences, there is evidence that using ITV SAP as the benchmark for trading is causing problems.

In the past, discounting off ITV SAP was a sensible policy - ITV's prices seemed guaranteed to fall as audience levels fell. But as the ad recession hit and ITV's advertising revenue dried up, its prices have fallen. Thus Sky has found itself offering discounts off a falling price over which it has no control.

Channel 4 operates its own airtime pricing structure, loosely based on its own internal station price, albeit one that compares with ITV. Five and the rest of the commercial broadcasters trade off the ITV SAP for the majority of their trading audiences except children, which are sold off an industry-wide fixed price due to their erratic viewing habits.

Paul Curtis, the managing director of Viacom Brand Solutions, which sells airtime for channels including MTV, VH1 and Nickelodeon, is among those keen to see changes but thinks it is the agencies that are holding things back.

"Planning and implementational planning needs to come into the 21st century. The agencies need to get away from the mindset that coverage is good and frequency is bad," he argues.

He argues that the environment that the spot is transmitted in is more important than its performance against a nominal Barb audience panel.

This is a view echoed by Kerry Wilkinson, who is in charge of the Discovery channels at Sky Media. "Consumers with shared interests have similar psychographic profiles and are more likely to behave in similar ways. If advertisers can tap into environments where the viewers are emotionally charged, they may be more likely to be influenced by the advertiser message. This may then beg the question of whether adults delivered in certain environments are of higher value, and trading purely on unit cost may be failing to recognise true brand value," she says.

The problem that needs overcoming is the agency deal, which, according to Curtis, may be efficient for both the agencies and the broadcasters to administer, but is not necessarily effective for the communication needs of the advertisers.

Fraser Riddell, the director of international media at MediaCom, agrees.

He thinks that part of the problem is vested interest among the broadcasters and agencies; SAP is easier for agencies and broadcasters to administer.

"When you reach a point where the rest of the market is bigger than ITV, there should be change, but inertia is not going to allow it," he says.

There is also an international dimension to factor into the equation.

While predictions that US bidders would come out of the woodwork and bid for ITV following the Communications Act have failed to materialise, the spectre of foreign bidders buying or expanding further into the UK market has once again appeared.

With the worst of the advertising recession behind us, expansion appears to be back on the cards. With the UK commercial broadcasters, most notably ITV, in no position to exploit this, there could be the prospect of foreign bidders coming into the UK TV market and, with this, the potential for a change in the way that commercial airtime is traded.

With the French channel TF1 recently announcing that it was considering European expansion, a change could come from the Continent. So if a foreign bidder did emerge from Europe, what changes could be made?

Well, you could argue that the continental experience is incompatible with the UK's.

In Germany, for instance, TV buying continues to be dominated by ratecard prices. These are issued in the August of the previous year, with a deadline for agencies to approve advanced bookings of the end of September - a little like the way the US networks sell in the upfronts.

Commercial airtime is sold discounted off this published ratecard to a fixed price - the bigger the commitment then the bigger the discount - and agencies buy the spots that they want rather than a package of airtime.

The situation for the French broadcasters is also similar to that of its German counterparts. This was not always the case - French media negotiations were, until the 1993 Loi Sapin, murkier and based largely on existing relationships. The law changed this and negotiations have become more opaque, with TV airtime prices dominated by discounts off a ratecard price based on share.

Despite also trading off a ratecard price, the French TV stations recently attempted to auction off a percentage of its airtime by a process similar to that in the UK. However, the experiment failed and the French TV stations have reverted to the old system.

It looks likely then that any change in the UK's trading mechanism in the foreseeable future is a pipe dream. Agency intransigence and vested interest will keep the status quo while there is little that can be learned from Europe. In fact, in the emerging markets of the "new" Europe - Central and Eastern European nations - the much-maligned SAP system is now being adopted as normal practice.

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