Tellynomics 41: British broadcasters are losing the battle of the business models

The Guardian reports that UK broadcasters have cut spending on big-budget shows (those costing more than £1m per hour) to the lowest level in a decade, while the streamers plough more and more into British-made premium content. Spend by domestic operators fell by a quarter to £598m last year, while the total amount spent in the UK by the streamers grew by £600m, to £2.8bn. Part of the story is increased costs, noting that 40 fewer shows were made in total, leading to claims that UK broadcasters were being “priced out”.

Peter Kosminsky (the Wolf Hall director) has called this a “real and immediate crisis”, lamented the success of the streamers, said that PSB drama was being “squeezed out of the equation altogether” and called for a “Netflix tax”. The BBC Chair, Samir Shah, has also weighed in, arguing that the UK should be “taxing US streamers”.

There is indeed an underlying issue here and, despite it suddenly bursting into the limelight in the last few weeks, it’s been building for some time. A long-term battle of business models continues to play out, and it’s a battle the British broadcasters are losing. This is not, however, something that has been done to them, it is a function of the system the UK has built, and consistently reinforced, and the strategic choices made by the UK broadcasters themselves.

Sport was the origin story for a new business model stealing the market

Taking a step back from drama, the underlying issue of the battle of the business models is clearest, and most widely understood, in the case of sport.

Sport sat happily on free TV (funded by advertising or the licence fee (LF)) until pay TV arrived. Thereafter, it steadily became apparent that pay TV was a more efficient model for extracting value from sports rights, because it could tap into the willingness to pay of enthusiasts. This meant that pay broadcasters could outbid their free brethren and still generate a profit. Thus began the conveyor belt of sports rights migrating to pay TV.

In time, we refined this assessment, as it become clear that it was even more efficient to bundle paid sports with other paid-for content, and more efficient again to bundle with other services such as broadband. In time, even simple pay sports channels could not compete with the “platform economics” of the likes of Sky.

The sport did not all move to Sky. Other models did persist, some standalone sports channels survived, and some sport remained on free TV, largely because Sky did not want everything. There were other factors – a listed events regime for one – but also because, at times, some sports valued reach more highly than cash . As a first approximation, however, Sky had the business model to secure whatever sport it wanted, leaving others to fight over the rest.

Now it’s clear the phenomenon extends beyond sport to entertainment

For many years, this phenomenon seemed confined to sport. Entertainment programming, drama and the like, continued to be dominated by the free broadcasters. For a variety of reasons, which I won’t try to list here, entertainment was different and, despite Sky’s efforts at “originals”, advertising and the LF remained the dominant funding model. But it seems history was not finished, and the story continues to evolve.

It is now tolerably clear that the dominant business model for monetising premium entertainment content, and therefore the dominant business model for funding the creation of such content, combines the following five elements:

• a bundle of content, of a goldilocks size, not too small, not too large – we are still learning but it seems larger than a “channel”, probably larger than Peacock or Paramount+, yet perhaps not as large as “all entertainment content”

• the bundle includes a mix of new shows and strong library, with a bias towards content with an “international” flavour that can appeal across territories (see the last point below)

• offered as a paid-for proposition, but including advertising in a supplementary role, with the option to avoid the ads for an extra fee

• within the paid-for structure, a series of pricing tiers to effect a degree of price discrimination to maximise the capture of aggregate willingness to pay

• wide geographic reach, preferably global, so that the fixed cost of content creation can be monetised across the greatest possible base

If this is not your business model, you have a problem. This is not merely a strong model today, it is self-reinforcing and getting stronger. Its success drives more revenue that can feed into investment into more and better content, which drives further success.

That said, as for sport, this success will not squeeze out all other models entirely. In the UK, the BBC remains well funded – not as well funded as it would like, but well enough to continue to fund some drama and other entertainment. And the ad-funded model can still support a significant level of entertainment spend. Neither are disappearing any time soon, but nor are they growing, especially when set against rising costs and the elevated expectations of what premium entertainment should look and feel like on screen.

At the very least, there is enduring demand for entertainment with a strong local flavour that the streamers won’t make because it doesn't travel. But this safe haven provides only limited comfort: evidence suggests that demand for such content is not as strong as some would like, with younger audiences in particular drawn to a global culture, as they are for music, games and social media. In addition, the pesky streamers seem willing to create a degree of local content themselves.

Overall, our local broadcasters are not going away any time soon, but the market feels a bit like the entertainment equivalent of sport in the early 2000s. At that point, the football had largely gone to Sky, along with some rugby, darts a few others things. This had been a shock and the power of pay TV was coming to be understood, but there were still hopes that much of what was left on free could be defended. Test cricket would surely stay free-to-air: Sky was allowed one test match, but C4 still had the rest. Similarly, The Open was quintessential free television and would never leave the BBC. And F1 was thought to need the exposure for its sponsors that only free can provide, so that would never flip to pay TV. And yet the direction of travel continued, and all these sports and more did in fact move across to pay TV in time. The business model with the superior economics won, in the UK and elsewhere.

What is the read across to entertainment? I fear it is that the current direction of travel will continue here too, the dominant model (global, paid streaming, supported by advertising) will continue to grow and take share, of both viewing and production. The ad-funded and LF funded models will persist, but they will continue to shrink and will retreat to play a subsidiary role, in the orbit of the dominant model whose gravity they cannot resist.

How has this come about? The signs were clearly there: the evidence for the power of the paid-for bundle has been apparent since 1992, and the evidence that the issue might extend beyond sport to entertainment has been building for nearly ten years.

Yet the UK broadcasters find themselves in a cul-de-sac, partly a function of the structure of the UK system imposed upon them, but largely because of the decisions they have made.

How well does the BBC measure up against the dominant business model?

How well does the BBC align with the emerging dominant business model for funding premium content? In their favour is that they operate a subscription model. They don’t like to admit it but when your core content offering is available to people who pay, and denied to people who do not, it’s hard to think of a better label.

Further, the BBC has also tapped into the growth of the pay model in the UK, through a suite of library channels (UKTV), sold to the pay TV platforms and infused with advertising. UKTV, a successful echo of the US syndication model, is one of the most significant third-party channel groups in the UK market and is now able to fund new commissions.

The BBC has also made a decent fist of monetising its content globally. The brand travels well, and a combination of content licensing, channel distribution and Britbox (now wholly owned by the BBC, with 4m paying global subscribers) has made a major contribution to the BBC’s ability to fund content at home.

But there are problems. Deep down, the BBC wants to be a universal service, not a subscription broadcaster that excludes people who don’t or can’t pay. This contributes to a world in which it is trivially easy to avoid paying – go to iPlayer and when they ask if you have paid for a LF, just say yes (they don’t check). They don’t have the heart to execute the basics of a pay model and make access to the service conditional on proof that you have actually paid.

The second problem with wanting to be a universal service, cleaving to the idea of a LF that is paid by all, because all derive value, is the BBC tries to please everyone and so spreads itself thinly. While it tries to defend a model whose time has perhaps passed, chasing youth audiences that stopped paying attention some time ago, the BBC is not able to do what other pay operators do as a matter of instinct: focus on your core audience and serve them well.

Many BBC defenders would lament successive Tory Governments for not allowing the LF to keep pace with inflation, thereby cramping BBC funding, but I’m not sure much money is being left on the table here. The share of homes paying the LF is down to 83%, with nearly 500k homes leaving each year. This suggests that a much higher LF might simply accelerate the exodus and not bring greater revenue.

The bigger barrier to the revenue maximisation efforts practised by other pay operators is that the BBC is stuck with a single price for everything, paid by all. This means the BBC is not able to segment the demand curve and price discriminate to expand revenue, as others do. The BBC cannot create smaller and larger bundles, and it can’t charge higher prices for value added elements, such as higher resolution and access on more screens or more simultaneous streams (both of which neatly induce larger households, who enjoy more value, to pay more). These are valuable weapons for other subscription players, all denied to the BBC.

Interesting to note, the BBC recognises at least part of this issue. Their solution, however, is to advocate progressive pricing – charging wealthy people more for the same thing, because they are wealthy. Perhaps they will succeed with this argument, but I expect much resistance. There are, of course, ways to extract more money from people who have more, but you tend to have to give them something that justifies their overpayment – think about first class air travel. If you just try to charge more for the same as everyone else, people tend to resist.

The big gap in the BBC model is, of course, that they are not allowed to combine their pay model with advertising. This is a major handicap versus the dominant model, and whenever the question is asked whether this restriction might be relaxed, there are howls of protest from the commercial broadcasters. It is, indeed, very likely that aggregate TV advertising revenue would expand only marginally, which means that advertising revenue accruing to the BBC would in large part come from other players and damage their prospects. We are, therefore, left with the awkward question of whether we are choosing to hamstring the BBC in a desire to maintain three commercial PSBs, and whether that might be one, or even two, too many?

What about the commercial PSBs (channels 3, 4 and 5)?

The central problem for the commercial PSBs in keeping pace with the new dominant model is that they have rejected the paid-for approach – they are free-to-air to their bones, far more so than the BBC, and so fighting with one arm behind their back, or worse.

Despite 35 years of accumulated evidence of the growing power of the paid-for model, these three have taken every opportunity to turn away and double down, again and again, on the wholly ad-funded alternative. In part this is a response to the UK system that still wants television to be free, like it was in the good old days, and continues to dole out rewards to players who align to that vision. But it also seems to reflect the genuine and conscious rejection of the paid-for model, deep in the culture of the commercial PSBs, persisting through successive generations of leadership.

I’ve never quite understood this. I guess it’s natural to focus where you are strong, but there has also been a sense of rejecting pay early on – because it was grubby, it was satellite-dishes on council houses, it was what Rupert Murdoch did – and then it’s hard to change tack, even as the evidence mounts.

They have dabbled, to be fair. ITV pursued an ONdigital strategy for a few years, but this seemed to be motivated more by a desire to damage Sky, to benefit the ITV1 mothership, rather than reflecting a genuine belief in the pay model. As a result, the strategy was misconceived and soon collapsed.

Subsequently, there was further dabbling, with occasional bursts of PSB digital channels (such as ITV3 and E4) being sold to Sky (and others) for their pay bundles. But all were converted to free channels in the end. Presumably this was preferred because advertising was considered the better opportunity and, indirectly, pulling the channels from pay would damage the pay sector and boost Freeview, thereby benefiting the ad-funded model further.

I thought the strategy was flawed, but I can see why they believed. TV advertising was highly differentiated from other forms of advertising, it grew roughly in line with the economy and the PSBs faced little competition within their bubble. It was a limited model, unlikely ever to grow very much, but it was significant and felt safe. At least it did until the economy stopped growing, and until advertisers started to think there might be other reasonably ways to spend some of their money that used to go on TV.

In response, the PSBs doubled down. They built their streaming options, with the emphasis on free (of course), and sold BVOD advertising. This was exciting and modern and, keen to show growth and their digital bona fides, they deployed “streaming exclusives” and more generally sought to drive audiences across from linear services to their streaming options. This was a bold choice, shifting audiences from a highly differentiated advertising model which they dominated, towards a model which monetised less well and where they were more exposed to competition. Further, along the way they argued that a BVOD view was just as valuable as a linear TV view, which suited their short-term ends but also opened the door to others. Now the chickens are coming home to roost.

I note in passing that ITVX – the streaming option for ITV – includes a paid-for option, but is their heart really in it? The most recent ITV release mentions that paid subscribers fell by 23% to 1m, which was OK because they were focused on the free version. No surprise there, I guess, and they are only likely to continue down this path with full episodes of ITV shows now being pushed to YouTube (more on that strategy below).

Recent news provided a stark warning of the BVOD challenge in the form of BARB data for January, showing the state of play in commercial BVOD, measured by total viewing minutes on a TV set. ITV will have been happy to see ITVX ahead of the other British players with 20.6% of total commercial BVOD viewing minutes (versus Sky/Now on 13.9%, Channel 4 on 10% and Five on 4.4%). But perhaps they were nervous (alarmed?) to see ITVX beaten by the Prime Video Ad Tier on 21.6% and by Netflix with Ads on 22%. This should ring alarm bells. Despite claims of PSB BVOD success, despite the streamers having only recently started to engage with advertising and their ad tiers, the streamers are learning fast. The PSBs have abandoned their cosy private pool (linear TV advertising) and are now swimming with the sharks.

Undeterred, the PSBs have doubled down on the free model once again, with Channel 4 and now ITV electing to put full episodes of major TV shows on YouTube. This also seems bold, supplying a competing service, and encouraging further migration of viewers to a platform where YouTube retains a significant share of the ad revenue, although perhaps not as much as the 50% faced by some others.

You can guess the logic – let’s put our content where the people are – reminiscent of the thinking that drove newspapers initially to throw all their content on the internet for free. But they are again driving their viewers away from a favourable monetisation environment to a less favourable one. Because it’s hard to chase without exacerbating the issue.

In a recent press release, Channel 4 touted success with this strategy, claiming better performance than its British rivals and 2.3 billion views in 2024, up 5.5% yoy. A variety of additional data points were offered for views of key shows, for youth audiences, for growth in TikTok viewing, etc. It all sounds great, big numbers (a billion of anything must surely be good?) and big annual growth. The niggle I have is that it’s all volume metrics.

When the newspaper business was confronting digital options in the 2010s, an oft-repeated comment was that when you saw a press release full of volume metrics (impressions, unique users, etc), it was a sure sign they weren’t making much in the way of actual revenue, because if they were, they would be telling you. And if the press release was all about revenue, they weren’t making any profit, because if they were, they would be telling you. So my thought for Channel 4 is: great volumes, but are you making any money, and even if you are making some, would it have been even better to leave the viewing in the BVOD environment, or even linear?

On the positive side for the commercial PSB world, there is the shining light of ITV Studios (ITVS). Through investment and acquisition, ITV has built a strong content production business which looks like a sensible response to the growing dominance of the paid streaming model. It is ironic (but the Brits do irony well), but the ITVS business taps into the growing success of the dominant business model that ITV itself has rejected for itself. Which makes me wonder how these two cultures sit together in the same building?

The market approves, to a degree that is almost embarrassing. Amid recent speculation about a combination with All3Media, analysts have suggested that ITVS could be worth £3 billion. At the current share price, after the recent bump following news of cost cutting (the market has never met a cost-cutting plan it did not like), ITV has a market capitalisation of c£2.8 billion, and with debt of c£500 million, this means an enterprise value of c£3.3 billion. If ITVS is worth £3 billion, then the broadcast business seems to be worth £300m (and if it retained all the debt, would be under water). Admittedly, there might be some froth in the analyst claims about the value of ITVS, but the general market verdict is clear. ITV gets top marks for building a business that leverages the growth of the increasingly dominant business model operated by others, but less good marks for its own business model choices.

Two further problems shared by all UK PSBs

Two further problems have prevented the UK PSBs as a group from being able to align better with the dominant business model for funding premium content.

The first is scale. The UK, of course, starts at a size disadvantage compared to the US, although less so than many other countries, and also enjoys the benefit of the UK-US cultural and linguistic overlap. But we have also shot ourselves in the foot. A combination of regulatory intervention (the blocking of the Kangaroo plan) and more recent outright stubbornness and an inability of the parties to agree, has ensured that the domestic scene remains fragmented, with all services sub-scale.

The second problem is access to finance. The likes of Netflix owe their success in part to funding that tolerated them losing money for years, because enough people believed they would eventually be successful and profitable. To a degree this reflects a moment in time, a period of cheap money, but it is also a function of the US capital markets. In the UK (and perhaps Europe more generally) there is less enthusiasm for a business plan that loses money for years as scale is built, with a vague promise of jam tomorrow. This inevitably limits how ambitious a UK player, beholden to the UK markets, could ever be. And this lack of enthusiasm extends to the public sector as well, with the BBC and Channel 4 structurally limited in their ability to invest to build scale.

Something must be done?

In summary, it has always been a battle of business models, certainly for the last 35 years, and it’s one the British broadcasters are losing.

This is not new news, it has been building steadily for many years. The are many causes, including external factors like the UK capital markets. The UK TV system is also part of the explanation, with its structural preference for television to be free. But a major factor has been the strategic choices made by the UK broadcasters, over many years. Again and again, in the face of mounting evidence, they have eschewed alternatives and doubled down on one idea, an idea that seems to be gently running out of road.

What, then, are we to make of the idea that something must be done? The call to tax the American streamers is ironic (but, as I say, we are good at irony). In days gone by, when the Europeans first lamented the influx of US TV shows, all the talk was of forcing them to operate services with a threshold level of local content. Well, they are doing that now, and it seems we don’t like that either. So what is the criteria for who is to be taxed?

Are we to tax them simply because they are American? Perhaps the BBC Chair has not been watching the news recently, but this seems like a very brave proposal indeed. I won’t speculate on how this would be received by the current US administration and how they might retaliate, but I don’t think it would end well.

Or are we to tax them simply because they are successful, because they have made good economic choices and seem to be winning? The Americans would regard this as a very British idea, taxing those who have invested and made smart choices, to prop up those who have not. I don’t think this a good policy generally and is a dangerous message to be sending, but I also suspect it would end in roughly the same place as a tax based on nationality.

Better, perhaps, to reflect on the underlying economic issues and ask if we might need to make changes to the UK system and its incentives, if we want different outcomes. Either that or just accept that we have made choices as a nation, about the nature of the domestic television sector we want, and that, in a global market, such choices have consequences.