TV Broadcasters Will One Day Be Kicked Off The Airwaves

In developed internet markets the entire terrestrial TV broadcast industry will eventually go the way of the CD


All around us, day by day, the media sector is adjusting to a structural contraction in its cost base.

Take newspapers: it is now clear that in developed internet markets the huge costs associated with running a traditional printing press are becoming increasingly hard to justify in the face of dwindling print circulation. Music is similar: the cost of continuing to manufacture and distribute physical discs is becoming increasingly hard to justify as users increasingly get their music via digital platforms.

All of the other media industries are going through a similar upheaval: the reason is that the internet allows media content to be distributed to the user with perfect quality and almost for free. Compared with distributing the content using physical media, the internet offers a cost saving of between 5% and 10% of fixed costs, depending on the industry. The internet also represents a new retail channel and marketing platform, which offer additional cost savings.

Including public service broadcasters and ad-supported private sector players, the broadcast TV industry reaches 87% of the world’s population.

This industry has traditionally used networks of gargantuan terrestrial wireless transmitters to deliver programming to national and regional audiences.

The internet represents a new, lower-cost distribution channel for television programming: ultimately the consumer is paying for most of the cost via their broadband subscriptions and so even TV broadcasters can save money by distributing their programming over the internet. Demand for quality TV programming is actually increasing:  new digital platforms like tablets and smartphones are having the effect of increasing the number of hours per day that viewers can view content, and most viewers are indeed viewing more TV content – not less.

Driven by economic reality, there is a clear trend towards using the internet to distribute an increasing volume of TV programming.

But, as TV broadcasters distribute more and more of their content using the internet, what is the implication for their legacy wireless distribution networks? These terrestrial wireless networks use extremely valuable radio spectrum, which could be used for other purposes such as super-fast mobile.

If we look at the trends, we are led to one inescapable conclusion: eventually, the radio spectrum that is being used by TV broadcasters worldwide will be reallocated to mobile operators and TV broadcasters will have to distribute all of their TV programming via the internet.

Let’s look at a few trends:

Mobile Penetration is Racing ahead of TV

The number of individuals who owned a mobile phone exceeded the total number of TV sets four years ago, in 2010: 

Further, we project that by 2018 there will be as many smartphone users in the world as TV sets. And beyond that point, TV set penetration will start leveling off as ongoing cost reductions will allow smartphone penetration to continue to increase:

Mobile Data Revenues are Racing Ahead of TV Advertising Revenues

2014 was something of a watershed for mobile: last year, worldwide revenues from mobile data were almost exactly twice the value of worldwide expenditure on TV advertising (see below).

TV advertising revenues will continue to increase but, because the TV advertising industry is mature, the rate of increase is pegged to the rate at which the overall economy is growing – about 5% per year, although that number is far from a sure thing.

But because mobile broadband is still a growth market its rate of growth can be higher than the rate of growth of the overall economy, which explains the diverging trend pictured below: 

An even more dramatic statistic is that by 2017 service revenues from the sale of mobile broadband service will exceed all expenditure on all media.

One could say that the value that the economy is placing on mobile broadband service is already more than broadcast television service, and that this value gap will grow as the mobile industry continues to develop.

The introduction of even more advanced devices and service propositions such as those which will be enabled by wearable technologies like the Apple watch and various wearable glasses products will build even more value into the mobile broadband proposition.

The radio spectrum allocated to mobile is growing, while that allocated to TV is shrinking

It is interesting to compare the total spectrum allocated to broadcast television compared with mobile service.

To do this we have looked at the current situation in the United Kingdom where we see that a total of 594 MHz is already allocated to mobile service, compared with 320 MHz for broadcast TV - see chart below which was prepared in association with Keith Edwards from the wireless consultancy Spectrum Insight.

Some readers might be surprised to see that such a large amount of spectrum is already allocated to mobile services – but it is even more surprising when one realizes that the entire mobile industry is only about 30 years old and that the radio spectrum allocated to mobile service before this time was zero.

What is more, in response to exploding demand, the amount of spectrum allocated to mobile has been increasing steadily over the last two decades. Meanwhile, the TV broadcast industry is in the later stages of a global migration from analogue wireless technology to digital technology which allows more channels to be packed into a given slice of wireless spectrum.

These same trends can be observed in every advanced mobile market, worldwide.

TV viewing is shifting to the internet

In December last year the UK telecoms and media regulator Ofcom announced that the number of TV owning households had dropped from 20.3 million at the end of 2012 to 20 million at the end of 2013 – and it is likely that 2014 has seen a similar drop.

Separately, BARB, which is the official body responsible for auditing TV viewing in the UK has published data which shows that all of the major TV networks including satellite-based Pay-TV provider Sky are experiencing declining viewing hours on their legacy broadcast platforms.

Data published by the BBC for its iPlayer internet television service demonstrate a major shift in viewing habits away from broadcast platforms to online platforms: over the last five years there has been a steady increase in total viewing time, number of people viewing and number of programs requested. Interestingly, the BBC’s data shows a dramatic shift from PC-based viewing to viewing using tablets and smartphones.

For instance, in January 2012 the total number of TV programs requested by tablets and smartphones represented 17.1% of the total. Requests via computers (desktop PCs and laptops) accounted for 72.6% of program requests.

But by February 2014 this picture had changed dramatically: smartphones and tablets now accounted for 54.3% of program requests while PC requests have fallen to 36%. When these data are charted there is a dramatic shift away from PC to mobile devices.

Again, while we have used the UK as an example, all other developed internet markets are experiencing a similar structural shift: the US, Canada, Australia, Sweden, France, Japan, South Korea and many others.

Analysis

Mobile is on fire

With the rollout of 3G and 4G mobile technology and, in the coming years 5G, mobile network operators around the world are investing heavily in the network infrastructure required to deliver increasingly fast download services to users around the world.

There is no sign that demand is flattening off: if anything, demand for mobile broadband is increasing even more quickly than has been the case in the past.

Users want to stream music, upload videos they have shot with their smartphones, access their favourite social networking sites and purchase merchandise – all on an anytime, anywhere basis.

Over the last 20 years mobile phone vendors, component suppliers, semiconductor manufacturers and mobile network infrastructure suppliers, to name but a few, have invested hundreds of billions of dollars in order to make these use cases possible, and many more besides.

The scale of the mobile industry and the prospects of future growth continue to attract colossal investment.

Is broadcast TV going anywhere?

Compared with the dizzying rate of development in the mobile sector, broadcast television seems half asleep.

By this we would emphasise that we are focused on the television industry – the thousands of companies whose job it is to get the TV content from a distribution point to the user. We are not talking about the content itself - for which there is clear value, growing demand and no competition.

To underline the point, it is important to realise that viewers are not turning away from television as an entertainment medium. On the contrary, total viewing hours for television content are increasing every year - but users are increasingly watching their content via connected electronic devices and in particular, tablets and smartphones which are in the ascendant.

If these trends continue then the remaining broadcast TV spectrum will be placed under unbearable pressure. Eventually, government policy makers and regulators will have to start thinking about whether it makes economic sense to have such a large amount of spectrum allocated to TV broadcast service – when most people are getting that content via the Internet.

Indeed, we can already see signs of pressure building on regulators to rethink how the TV broadcast spectrum is used: in November 2015, the World Radio Communication Conference will decide whether to recommend that nations allocate more spectrum for the purposes of the mobile Internet. It is clear that the TV broadcast spectrum will be scrutinised very carefully.

It seems only a matter of time before a policy decision is made somewhere, perhaps in a market with very advanced fixed Internet infrastructure, that television programming should be distributed over the Internet and that the spectrum that was being used by television broadcasters for distributing that content should be auctioned to mobile operators for the purposes of further developing the mobile Internet.

Like the shift from analogue to digital technology, such a major shift would take decades, but we should expect that the starting gun will be fired in the next few years. 

Implications

These changes will have major consequences. Here are a few examples:

Commercial television broadcasters would have to compete head-on in the online ad market

Today, ad-supported commercial television broadcasters make almost no money from online advertising. Almost all of the advertising revenue comes from selling ad inventory to advertisers who want to place ads on TV. The Internet is seen as a new distribution channel for their existing television programming, which is why we are seeing most, if not all, commercial television broadcasters in developed Internet markets introducing Internet TV services over the web or via apps that are installed on tablets, smartphones, games consoles or connected TV sets.

The broadcaster’s main website sometimes does carry advertisements but these contribute minimally to the top line.

If the market reaches the point where their television programming will have to be distributed over the Internet (because they will have no spectrum to distribute over the airwaves) then this will present advertisers with a problem: is this new form of Internet television TV advertising or Internet advertising?

This is a very important question because the CPM rates achieved by online publisher sites, including those which are experimenting with inserting video ads into long form professionally-produced filmed entertainment, are significantly lower than what TV broadcasters enjoy.

It will simply be unfeasible for a television broadcaster to use ad-targeting technologies that are used on network TV in an online setting. The companies that are at the leading edge of the online ad market today are using very rich data about their audiences and how their audiences interact with the content, and each other to develop very sophisticated ad products and services (e.g. retargeting, real-time bidding, demand-side and supply-side platforms, and more).

This means that commercial television broadcasters will be operating at a competitive disadvantage as they move their business models online.

So not only will commercial TV broadcasters have to manage with structurally lower CPM rates, they will also be operating at a competitive disadvantage compared with rivals such as Google and others who are expert in the fast changing field of digital advertising which will mean that their inventory will not be worth as much as their competitors, thereby suggesting a double-whammy of a problem.

The TV broadcast equipment market will undergo a massive, structural contraction

The TV broadcast equipment market consists of a diverse range of companies that provide the products and services required to distribute a television broadcast signal from a single injection point to a nationwide audience.

To most people, the only visible sign of this vast infrastructure are the gigantic television transmitters that are seen atop high ground and tall buildings which allow the television signal to be broadcast across hundreds of square kilometres.

This massive global infrastructure is in many ways the equivalent of the parts of the Internet that allow digital music, television programming and other forms of rich media content to be distributed over the Internet.

If we are saying that the Internet will in the future be the primary means of distributing television programming then what is to become of this legacy infrastructure which has remained largely unchanged for decades?

The answer is it will become redundant.

Companies that presently supply television antennas, broadcast transmitters, relay equipment, test and measurement equipment, facilities services, operational support, transmission equipment and more will all experience severe contraction.

The only exception to this rule will be in market situations where broadband Internet infrastructure is insufficiently developed and, in these geographies, broadcast television will remain a viable means of distribution.

But in the long term even these market segments will be placed under pressure as well: in practically every country powerful economic forces are driving a mass migration of the population from rural to urban environments, which is where broadband Internet is strongest.

We think that those who work in this part of the television industry should begin thinking now about re-purposing their products, services and business models so that they can serve the growth markets of the future because their core business will be placed under increasing pressure in the coming years.

Governments will receive a windfall as they auction off TV spectrum to the highest bidder

The prospect of auctioning off increasingly large chunks of spectrum to very well funded and intensely competitive telecoms groups will be very appealing to governments around the world.

Whilst it is extremely unlikely that the revenues realized from the auction process will be in the same league as was experienced around 2000 when European governments received over $120 billion, the proceeds will still be very attractive.

All together, these trends will have at least two implications:

  • Broadcast TV networks should be planning now for a future when they have to distribute their content exclusively over the internet, their spectrum having been sold off to mobile network operators; 
     
  • Those working in the TV broadcast equipment market should be making long-range plans to exit their current business altogether.

This will not be a quick transition by any means, but nor was the process that saw the end of photographic film.