Paying for Public Service: Paying for Public Service: Advertising revenue in a Advertising revenue in a

competitive marketcompetitive market

Jamie CowlingJamie Cowling

June 2003June 2003

Historical Bargain: Rights and Historical Bargain: Rights and ResponsibilitiesResponsibilities

• 1955-1956 – ITV1955-1956 – ITVFor-profit network granted an advertising For-profit network granted an advertising monopoly in return for public service obligations.monopoly in return for public service obligations.

• 1982 – Channel 41982 – Channel 4not-for-profit public service broadcaster.not-for-profit public service broadcaster.

• 1990 – Commercial competition begins1990 – Commercial competition begins• 1996 – Channel 51996 – Channel 5

Second for-profit commercial public service Second for-profit commercial public service broadcaster, some positive content obligations.broadcaster, some positive content obligations.

A plurality of public service?A plurality of public service?

• Assumption has been that public service Assumption has been that public service content is a cost on for-profit broadcasterscontent is a cost on for-profit broadcasters

• Has increased competition meant that the Has increased competition meant that the historical bargain is breaking down?historical bargain is breaking down?

• Assuming Government want a plurality of Assuming Government want a plurality of public service content providers how best public service content providers how best should this be achieved in the future?should this be achieved in the future?

ITV Share of Total Audience All Homes ITV Share of Total Audience All Homes against Share of Net. TV Advertising against Share of Net. TV Advertising

RevenueRevenue Source: BARB; OMD UKSource: BARB; OMD UK

ITV (+ GMTV) - Share of Total Audience Against Share of Net. Advertising Revenue

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

1996 1997 1998 1999 2000 2001 2002Date

Shar

e of

tota

l net

ad

reve

nue

(%)

0

5

10

15

20

25

30

35

40

shar

e of

tota

l aud

ienc

e al

l ho

mes

(%)

ITV (+ GMTV)Share ofrevenue

ITV (+ GMTV)Share of totalaudience

Channel 4 Share of Total Audience All Channel 4 Share of Total Audience All Homes against Share of Net. TV Homes against Share of Net. TV

Advertising RevenueAdvertising Revenue Source: BARB; OMD UKSource: BARB; OMD UK

Channel 4 - Share of Total Audience Against Share of Total Net. Advertising Revenue

15

16

17

18

19

20

21

22

23

1996 1997 1998 1999 2000 2001 2002Date

Shar

e of

tota

l net

UK

ad

reve

nue

(%)

7

7.5

8

8.5

9

9.5

10

10.5

11

11.5

12

Shar

e of

tota

l aud

ienc

e al

l ho

mes

(%)

CH4 Share ofrevenue

CH4 Share oftotal audience

Five Share of Total Audience All Homes Five Share of Total Audience All Homes against Share of Net. TV Advertising against Share of Net. TV Advertising

RevenueRevenue Source: BARB; OMD UKSource: BARB; OMD UK

Channel 5 - Share of Total Audience Against Share of Total Net. Advertising Revenue

0

1

2

3

4

5

6

7

8

1996 1997 1998 1999 2000 2001 2002date

Shar

e of t

otal

TV

adve

rtisin

g re

veue

(%)

0

1

2

3

4

5

6

7

Shar

e of t

otal

telev

ision

au

dien

ce (%

)

CH5 Share ofrevenue

CH5 Share oftotal audience

All Multi-Channel Share of Total Audience All Multi-Channel Share of Total Audience All Homes against Share of Net. TV All Homes against Share of Net. TV

Advertising RevenueAdvertising Revenue Source: BARB; OMD UK Note: Includes BBC; ITV2; E4 etc.Source: BARB; OMD UK Note: Includes BBC; ITV2; E4 etc.

All Multi-Channel Audience Share vs. Share of total Net.Advertising Revenue

0

2

4

6

8

10

12

14

16

18

1996 1997 1998 1999 2000 2001 2002

Date

Shar

e of t

otal

net.

adve

rtisin

g re

venu

e (%

)

0

5

10

15

20

25

Shar

e of t

otal

audi

ence

all

hom

es (%

) Total Sat Share of revenue

Total Sat Share of total audience

Does declining share mean Does declining share mean declining revenues?declining revenues?

• It is possible that increased supply of It is possible that increased supply of advertising space may stimulate demand for advertising space may stimulate demand for space by lowering barriers to entry and space by lowering barriers to entry and encouraging new market entrants.encouraging new market entrants.

• The ability of a commercial broadcaster to The ability of a commercial broadcaster to deliver on PSB obligations is not deliver on PSB obligations is not immediatelyimmediately linked to share of revenue but linked to share of revenue but to costs of production and total net. revenue.to costs of production and total net. revenue.

Total Real Terms NAR UK Total Real Terms NAR UK 1996 – 2002 1996 – 2002

(£ millions – 2001/2002 Market Prices)(£ millions – 2001/2002 Market Prices)

0

1000

2000

3000

4000

1996 1997 1998 1999 2000 2001 2002

Date

Total UK Real Terms NAR £ millions (2001/2002 Market Prices)

ITV (+ GMTV) – Share of ITV (+ GMTV) – Share of Total Audience all homes Total Audience all homes

against Real Terms NAR against Real Terms NAR Source: BARB; Source: BARB;

OMD UKOMD UK

ITV (+GMTV) - Share of Total Audience against Real Terms NAR (2001/2002 market prices)

15001600170018001900200021002200230024002500

1996 1997 1998 1999 2000 2001 2002

Date

NA

R (£

mill

ions

)

2022242628303234363840

Sh

are

of

To

tal

Au

die

nce

all

ho

mes

(%

)

ITV (+ GMTV)Net ad revenue

ITV (+ GMTV)Share ofaudience

Channel 4 – Share of Total Channel 4 – Share of Total Audience all homes against Audience all homes against Real Terms NAR Real Terms NAR Source: BARB; OMD UKSource: BARB; OMD UK

Channel 4 - Share of Total Audience against Real Terms NAR (2001/2002 Market Prices)

500

520

540

560

580

600

620

640

660

680

1996 1997 1998 1999 2000 2001 2002

Date

NA

R (

£ m

illi

on

s)

56789101112131415

Sh

are

of

To

tal

Au

die

nce

all

ho

mes

(%

)

CH4 Net adrevenue

CH4 Share ofaudience

Five – Share of Total Audience Five – Share of Total Audience all homes against Real Terms all homes against Real Terms

NAR NAR Source: BARB; OMD UKSource: BARB; OMD UK

Five - Share of Total Audience against Real Terms NAR (2001/2002 Market Prices)

0

50

100

150

200

250

1996 1997 1998 1999 2000 2001 2002Date

NA

R (£

mill

ions

)

0

1

2

3

4

5

6

7

Sha

re o

f tot

al

audi

ence

%

CH5 Net adrevenue

CH5 Shareof audience

Total Multi-Channel – Share of Total Multi-Channel – Share of Total Audience all homes against Total Audience all homes against

Real Terms NARReal Terms NAR Source: BARB; OMD UKSource: BARB; OMD UK

Total Multi-Channel - Share of Audience against Real Terms NAR (2001/2002 Market Prices)

0

100

200

300

400

500

600

1996 1997 1998 1999 2000 2001 2002

Date

NA

R (

£ m

illi

on

s)

0

5

10

15

20

25

Sh

are

of

tota

l au

die

nc

e

all

ho

mes

(%

)

Total Sat Net adrevenue

Total Sat Shareof audience

Summary 1Summary 1

• Demand for advertising space on Demand for advertising space on massmass broadcasters broadcasters is closely linked to the state of the wider economy.is closely linked to the state of the wider economy.

• Declining share is important but it is important to Declining share is important but it is important to remember for advertisers this is relative.remember for advertisers this is relative.

• The expansion in supply of advertising space has The expansion in supply of advertising space has increased number of advertisers by lowering barriers increased number of advertisers by lowering barriers to entry thereby enlarging the advertising cake.to entry thereby enlarging the advertising cake.

• Niche services compete with each other for Niche services compete with each other for advertising as much as, if not more than, they advertising as much as, if not more than, they compete with mass broadcasters.compete with mass broadcasters.

Summary 2Summary 2

• IfIf demand will meet supply, where is the demand will meet supply, where is the problem?problem?

• It is possible that a glut may form in a period of It is possible that a glut may form in a period of general economic downturn. This should lead to a general economic downturn. This should lead to a reduction in supply of advertising space.reduction in supply of advertising space.

• However, it is possible that the expansion of However, it is possible that the expansion of supply may lead to a lower advertising price supply may lead to a lower advertising price equilibrium, particularly among channels equilibrium, particularly among channels exhibiting similar characteristics.exhibiting similar characteristics.

Summary 3Summary 3

• There may well exist a tipping point beyond which There may well exist a tipping point beyond which there is no longer a mass audience premium.there is no longer a mass audience premium.

• This, alongside profitability, should be used to This, alongside profitability, should be used to determine how onerous psb obligations should be.determine how onerous psb obligations should be.

• It is possible that in the future with universal It is possible that in the future with universal digital availability another broadcaster may digital availability another broadcaster may consider making the investment necessary to consider making the investment necessary to develop a mass channel. This would seriously develop a mass channel. This would seriously affect the commercial psbs ability to deliver psb affect the commercial psbs ability to deliver psb content.content.

Potential Policy SolutionsPotential Policy Solutions

• Raise and lower psb obligations according to share Raise and lower psb obligations according to share of audience and net revenue. (proportionality)of audience and net revenue. (proportionality)

• Extend psb obligations to any channel reaching Extend psb obligations to any channel reaching the psb threshold. (fair competition)the psb threshold. (fair competition)

• Fund broadcasters so they don’t reach the tipping Fund broadcasters so they don’t reach the tipping point from taxation.point from taxation.

• Establish a psb “pot” available to all channels Establish a psb “pot” available to all channels above the psb threshold and remove psb above the psb threshold and remove psb obligations from commercial public service obligations from commercial public service broadcasters. (fair competition)broadcasters. (fair competition)

Selected BibliographySelected Bibliography• Cottrell A. (1997) ‘Keynes, Ricardo, Malthus & Say’s Law’ Discussion Cottrell A. (1997) ‘Keynes, Ricardo, Malthus & Say’s Law’ Discussion

Paper History of Economics Society Meeting June 1997 CharlestonPaper History of Economics Society Meeting June 1997 Charleston• Erickson G.M. (2003) Erickson G.M. (2003) Dynamic Models of Advertising Competition Dynamic Models of Advertising Competition (2(2ndnd

ed.) Dordrecht: Klumer Academic Publishersed.) Dordrecht: Klumer Academic Publishers• Hendry DF (1992) ‘An Econometric Analysis of TV Advertising in the Hendry DF (1992) ‘An Econometric Analysis of TV Advertising in the

UK’ UK’ Journal of Policy Modeling Journal of Policy Modeling 14(3): 281-31114(3): 281-311• HM Treasury (2003) HM Treasury (2003) GDP Deflators at Market Prices 2001-2002 GDP Deflators at Market Prices 2001-2002

Available: Available: http://www.hm-treasury.gov.uk/economic_data_and_tools/gdp_deflatorshttp://www.hm-treasury.gov.uk/economic_data_and_tools/gdp_deflators/data_gdp_fig.cfm/data_gdp_fig.cfm

• Masih R. (1999) ‘An Empirical Analysis of the Demand for Commercial Masih R. (1999) ‘An Empirical Analysis of the Demand for Commercial Television Advertising’ Television Advertising’ Applied Economics Applied Economics 31(2): 149-16331(2): 149-163

• Nilssen T. & Sorgard L (2000) Nilssen T. & Sorgard L (2000) TV Advertising, Programming TV Advertising, Programming Investments and Product Market Oligopoly Investments and Product Market Oligopoly Discussion Paper 06/00 Discussion Paper 06/00 Norwegian School of EconomicsNorwegian School of Economics

• Richards B., I.MacRury & J. Botterill (2000) Richards B., I.MacRury & J. Botterill (2000) The Dynamics of The Dynamics of Advertising Advertising Amsterdam: HarwoodAmsterdam: Harwood

FTSE 100 against Total UK FTSE 100 against Total UK NARNAR

FTSE 100 against Total Real Term s UK NAR (2001/2002

Market prices)

0

1000

2000

3000

4000

5000

6000

7000

8000

1996 1997 1998 1999 2000 2001 2002Date

FT

SE

10

0 (

fina

l

qu

art

er)

0

500

1000

1500

2000

2500

3000

3500

4000

To

tal U

K N

AR

(£

mill

ion

s)

FTSE 100

Total UK NAR

ITV (+GMTV) Real Terms ITV (+GMTV) Real Terms NAR against FTSE 100 NAR against FTSE 100 Source: OMD UK; Source: OMD UK;

Financial TimesFinancial Times

ITV (+GMTV) Real Terms NAR (£ millions - 2001/2002 Market Prices) against FTSE 100

500

1000

1500

2000

2500

1996 1997 1998 1999 2000 2001 2002Date

NA

R IT

V (

+GM

TV

) (£

mill

ion

s)

010002000300040005000600070008000

FT

SE

100

(fi

nal

q

uar

ter

per

an

nu

m)

ITV (+GMTV)FTSE 100

Channel 4 Real Terms NAR Channel 4 Real Terms NAR against FTSE 100 against FTSE 100 Source: OMD UK; Financial TimesSource: OMD UK; Financial Times

Channel 4 Real Terms NAR (£ millions - 2001/2002 Market Prices) against FTSE 100

500

550

600

650

700

1996199719981999200020012002

Date

NA

R C

han

nel

4

(£ m

illi

on

s)

0

2000

4000

6000

8000

FT

SE

100

(fi

nal

q

uar

ter

per

an

nu

m)

C4

FTSE 100

Five Real Terms NAR against Five Real Terms NAR against FTSE 100 FTSE 100 Source: OMD UK; Financial TimesSource: OMD UK; Financial Times

Five Real Terms NAR (£ millions - 2001/2002 Market Prices) against FTSE 100

0

50

100

150

200

250

1996 1997 1998 1999 2000 2001 2002Date

Fiv

e N

AR

(£

mill

ion

s)

0

10002000

30004000

5000

60007000

8000

FT

SE

100

(fi

nal

q

uar

ter

per

an

nu

m)

C5

FTSE100

Total Multi-Channel Real Total Multi-Channel Real Terms NAR against FTSE 100 Terms NAR against FTSE 100

Source: OMD UK; Financial TimesSource: OMD UK; Financial Times

Total Multi-Channel Real Terms NAR (£ millions - 2001/2002 Market Prices) against FTSE 100

100150200250300350400450500550

1996 1997 1998 1999 2000 2001 2002Date

NA

R T

ota

l Mu

lti-

Ch

ann

el (

£ m

illio

ns)

01000

200030004000

50006000

70008000

FT

SE

100

(fi

nal

q

uar

ter

per

an

nu

m)

Total Multi-ChannelFTSE 100

Forecast Digital Television take-upForecast Digital Television take-up Source: ITCSource: ITC