Commercial TV funded by advertising is an astonishingly scalable business. You can look at the richest territories in the world such as the USA and note that when it is fuelled by $70bn in TV advertising, the TV industry can produce a service that occupies 34 hours a week of leisure time for the average adult. Then look at Serbia, with a TV ad spend that is about 1% of the USA and, you guessed it, they keep the average Serbian adult busy 34 hours a week. I know this ignores other revenue like subscription but you get the point. With a business model that scalable you’d have thought the UK TV industry could absorb a reduction in advertising revenue of a few percent without all the talk of the sky falling-in.
So why all the gloom? Here is how I imagine it works – If you are a TV company emerging in a primeval TV market, the first thing to worry about is what I’ll call the ‘cultural fit’ of your programming. Cultural fit is how well your programming represents the hopes, fears, morality, culture and aspirations of your host nation. A cheap programme with a good fit will easily beat an expensive one with a poor fit. Eventually, all the surviving broadcasters have achieved a high level of cultural fit and they are driven to try to out-spend each-other because once the cultural fits are all balanced, the biggest spender will win the most ratings. The TV production business will absorb all the money available to it – There is no point at which it will ever have ‘enough’ money. Hence TV (and film) production costs rise to excruciating levels and stay there. There is a ratio to be worked out here if you had the time, but I’d guess it is something like every £1 you spend on ‘fit’ is worth £10 on other production costs. That is why the best writers, directors and producers are so well remunerated – they can spot a poor fit and hopefully correct it before your blow your production budget on a turkey.
So in a mature market you’d expect a handful of broadcasters to have almost exactly the same degree of cultural fit in their programming and for them to be at the very limit of what they can afford on production and acquisition. What happens to our terrestrial commercial stations in a recession then? In theory, they could all just reduce their spending a few percent and have perfectly healthy profit-margins. We know this is true because lots of TV markets spend a heck of a lot less than we do and have just as much overall viewing. But what if your major competitors include BBC and Sky – both of whom have an income that looks pretty recession proof? Well, the outcome of dropping your production costs is likely to be a disproportional loss of viewers followed by further drop in revenue and you face the spectre of ‘spiralling down’ to some much lower level. If my mental picture of ‘cultural fit’ being of paramount importance by something like 10:1 over production costs is correct, we can expect them to fight back with programming that is cheaper but that reflects the hopes, fears, morality, culture and aspirations of the average Brit even more closely than they managed before. Is that possible? I assume the whole purpose of the public service remit has always been to prevent that very thing from happening. So yes, it is possible but not with the current burden of public service. If the public service leach is loosened you can expect more paranormal, studio-based, live, confrontational, reality game-shows than before.
This way of thinking can help to understand what happens in the international programme market. The cultural fit of American TV programming in the UK is not perfect but the production cost of the best stuff is so high that it can win decent ratings against UK originated programming. The same is true of US programming in almost every market.
The ‘cultural fit’ 10:1 model would predict that we should import almost no programming from territories that spend the same or less than we do on programming – and sure enough, we don’t. It would also predict that we should have great difficulty selling our programming to the main US networks where they spend much more per hour on domestic programming than we do but we might succeed better with major channels in territories like Australia that have a similar culture and spend less per hour on their own content – both true.
Hollywood films have such massive budgets that they can bludgeon their way past the cultural fit problem. Every now and again a low budget film is the first to spot that the cultural fit has changed and that the mainstream studios have failed to notice. They can exploit this observation and beat more expensive productions hands-down, Easy Rider is the most obvious case I can think of. Punk rock would be the music business equivalent.
What about older UK programming? Here is a surprise. The cultural fit of domestic programming declines steeply over time even in its home territory so programming from the past becomes rather like material imported from another country. This is because the very best programming matches the current profile of cultural fit so well that even a year or two later it has lost it’s edge and it’s appeal is fading compared to newer productions. As production costs rise, older programming also does not have the benefit of what were considered high production values at the time, so it gets a ‘double whammy’ in terms of damaged commercial value.
Even worse news for older programmes – humans seem to be programmed to seek out the ‘new’ so anything perceived as ‘old’ has a disadvantage for irrational reasons. That is a triple whammy so far and a fourth ‘whammy’ is on the way. The combined effort of the worldwide TV production and film businesses is producing good new content faster than you can watch it. If your Sky+ is like mine, it is like a magic beer glass that re-fills faster than you can drink it. With what feels like an oversupply of good new stuff there is no point giving something a second chance some years later. Your Sky+ hard drive is effectively a personalised VOD service that benefits from the combined programme budget of every broadcaster on the platform. For a new TV series to get my attention it would have to be better than, LOST, Desperate Housewives, Heroes, Scrubs, Battlestar Galactica, Ross Kemp in Afghanistan, Country House Rescue, Grand Designs, Russia A Journey..… I could go on. All these fantastic programmes are backing-up on my Sky+ faster than I can watch them.
The closer to origin date that you consume material the more value you attribute to it. Even with new material on my Sky+ the chances of me ever watching it must half every week I postpone viewing it. This seems to be an unconscious and unavoidable human trait. You cannot prevent yourself from feeling privileged when attending a premier. The TV and film industries structure themselves to move the moment of consumption ever closer to the point of production. As a producer, the speed with which you can get your content in front of all its potential viewers influences the value you can extract from it. The faster the value is realised, the more of it there will be.
Where does this leave an ‘on demand’ TV services with a ‘long tail’ of archive material? It should have surprised nobody that ‘on demand’ would end-up meaning ‘catch-up’. The winning services will always be the ones that offer the fastest access and easiest way to watch the newest, most expensive, best fit material. The engineers might not have known that but surely the TV executives did?
What is clear is that even in the most ardent TV homes, viewers only have so many hours in the day to watch television. If consumers are increasingly able to use new systems to find their favourite big shiny shows, they will have less time and inclination to drift down the channel line-up in search of something to view.
TV companies used to be able to schedule the ‘least worst’ programming at any point in time and be guaranteed a decent share. In homes that have all these systems available, the middle order of multi-channel broadcasters, particularly those that are merely deliverers of archive programming, could (and should) be decimated. The quality of past TV programming is seen through the distorting lens of memory until you actually try watching some of it. The few gems you remember distort your recollection of the whole. In reality 9/10ths of it is not as good as current TV and you have no need to ever re-visit it.
In this world, we could easily lose 200 TV channels, and the consumers would still be better off. Because of the new functionality, viewing is going to re-aggregate around the output of a smaller number of bigger, better, functionality rich channels, because they are the ones that make the high profile, new content that drives the TV market. Decipher calls this ‘multi-function TV’ and once again, for media planners it will bring both questions and opportunities.