The good news for advertising agencies and television sales departments is that last year TV advertising broke the 2bn mark for the first time.
The bad news for them, and the advertisers who pay the bills, is that total TV revenue reached more than 3bn.
In other words, advertising is declining in its importance as the financial engine of commercial TV. And if this trend continues advertisers will find they soon have even less influence over the TV companies than at present.
In its first ever financial review of commercial TV, the Independent Television Commission says ads now account for only two-thirds of revenue. ITV’s share of total commercial revenue, which was virtually 100 per cent not long ago, is down to 65 per cent.
The difference can be largely accounted for by the growth of subscription TV. While TV ad revenue grew by 10.9 per cent to 2.09bn last year, subscriptions to cable and satellite services rose by 62 per cent to 542m. BSkyB took 90 per cent of this market.
But it is not just subscription TV that is whittling away advertising’s dominance. Sponsorship grew by 34 per cent in 1994 – though it is still a marginal business, contributing only 23m to the coffers of the commercial channels. A much larger source of income was programme sales, which brought in 442m – almost all of it to ITV and Channel 4.
I should point out that the bulk of this is accounted for by ITV companies selling programmes to the Network Centre. Since they pay for the centre, it is arguable that this should be regarded as an internal book transaction – unlike sales to overseas broadcasters or the BBC, Channel 4 and cable and satellite stations, which bring in additional money. However, since each ITV company competes to sell programmes to the network – and they actually get paid for them – this helps to erode advertising’s importance.
But let us not overstate the case. ITV still relies on advertising for the vast majority of its income, and advertisers still rely on ITV for most of their communication with viewers. ITV accounted for 75 per cent of TV ad revenue last year, down from 78 per cent in 1993. Channel 4 took 19 per cent, an increase from 17 per cent the year before. Cable and satellite’s share was six per cent, a rise from five per cent. To put this in perspective, 112 of the cable and satellite companies had a combined ad revenue of less than 2m.
Even BSkyB remains small fry in terms of advertising. The ITC says: “The nine BSkyB licensees combined were smaller than HTV – a medium-sized ITV company. The only other satellite licensee of any significant size in the ad market was UK Gold, which was about the same size as a smaller ITC licensee.”
Yet, when you measure the market in terms of total TV revenue, a very different picture emerges. The ITC says that total commercial revenue last year was 3.22bn and that ITV was the largest grouping, with revenue of 2.11bn.
But it goes on: “On an individual company basis, BSkyB had the highest income. The next largest, although only 70 per cent the size of BSkyB, was Channel 4. Central Television, the largest ITV company when measured by income, was less than half the size of BSkyB.”
The ITC makes no acknowledgement of the fact that Central is now part of Carlton Communications which, when Carlton TV is included, would give the group a TV income almost the same as BSkyB’s. Even so, this direct comparison of ad and subscription revenue – the first official report of its type – ought to concentrate the minds of those working in advertising and TV. If subscription is already generating more than a quarter of ad income – 542m against 2.09bn – how long can ITV and Channel 4 (or for that matter the BBC) ignore it?
The Government’s decision to allow ITV to own cable and satellite channels means ITV companies should soon be able to tap into the subscription business (Granada, as a shareholder in BSkyB, already does, and it has long-term plans for other “Granada” pay channels).
But the only way for ITV, as a unified system, to make a substantial entry into the subscription market is through digital TV, which requires a set-top decoder – such as those for cable and satellite TV – and enables the operator to charge viewers for otherwise scrambled services. The problem is that plans for digital terrestrial TV are less advanced than those for digital satellite TV. Many believe that, if BSkyB manages to establish its digital 500-channel service first, terrestrial channels will find it hard to persuade viewers to invest in another set-top box.
Last week, former BSkyB chairman and Sunday Times editor Andrew Neil added his voice to those warning of the danger that digital TV will be dominated by Rupert Murdoch before other broadcasters have had a chance to get into the market. Neil says that ITV should get together with the BBC, Channel 4 and cable companies to develop their own digital set-top box as quickly as possible. This is not entirely far-fetched. ITV and the BBC are both lobbying the Government to get the go-ahead for their digital terrestrial plans and, though they have been working separately, they are not far apart.
ITV must decide how far it really wants to move into the subscription business. Some media favour a mixed economy, others a single form of income. Most newspapers and magazines have always had two sources of revenue – readers, through the cover price, and advertisers, through the ratecard. The ratio tends to fluctuate but, by-and-large, tabloids are more dependent on readers, broadsheets on advertisers. Most cinemas get money from advertisers as well as audiences.
Poster contractors and commercial radio stations – like ITV – have always relied almost entirely on ads. By contrast, the BBC and some publications – such as newsletters, Which? and Loot – take almost all their income directly from their audience or reader (though the BBC is actively seeking to increase its commercial revenue).
The ITC report says BSkyB gets 83 per cent of its turnover from subscriptions and only 14 per cent from ads.
With advertisers and agencies hoping that increased competition will bring their campaign costs down, it must be tempting for TV companies to look for another source of income to
help them resist advertisers’ demands. When those customers are complaining about falling ratings and increased costs, as they are at present, the temptation must be even greater.
Torin Douglas is BBC Radio’s correspondent