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Will Britbox save ITV?

Updated: Mar 18, 2019

When Carolyn McCall, former head of Easyjet UK, first jetted in as CEO of ITV last year she set out how she believed video on demand (VOD) would be at the heart of ITV's strategy for growth.

She set out how ITV would be making a major announcement about its VOD plans by the end of February 2019.

Sticking to the flight plan Captain McCall bookended ITV's year end February financial statement with her vision of expanding Britbox, the US & Canada based subscription video on demand (SVOD) service, to the UK and make it the jewel in the crown of ITV's business.

In the US Britbox is seen as a bit of success considering it went from a standing start two years ago to about 0.5m subscribers in the USA. That's half a million customers paying around an average of $70 a year for a best of UK BBC & ITV service including soaps and series but no movies or sport.

That adds up to a revenue of $35m a year, perhaps a bit more if you assume some of the subscribers may pay the slightly more expensive monthly rate, say $40m a year revenue.

$40m a year may sound like a lot of money and I would certainly like to own a business with this type of turnover. Unfortunately in terms of viable international TV businesses it is alas rather tiny. To put it in context Netflix in the US alone made $7.6billion revenues from which it made $2.5b profit.

Before you rush off and buy Netflix shares please remeber lots have people have done this already and they are some of the priciest stocks on the market. Also the profit is not real as it excludes a lot of things that are really quite necessary for the business to continue - like servicing their massive debt pile and making new programmes for which they have to borrow even more money.

But back to Britbox in the US and what kind of profit they make. Say they have the same type of return that Netflix has in the US and can return about 30% in profit. That's at best $12m based on a business split between ITV and BBC. Or $6m for each party before you take off any taxes or interest for debt or any investment for new programmes.

So even on the best possible numbers Britbox in the US makes no money. And this is based on them making a margin of 30% which is almost certainly too high, as Netflix's margin is only 30% in the US where it has the economies of scale set up. It's margin for international markets is 8.5%. So all in all I would be surprised if US Britbox wasn't loosing quite a bit of cash at the moment. And this is meant to be an example of a successful service.

Looking at Britbox in the USA from the point of view of subscribers and its success is equally questionable. It's 0.5m subs compare to 58m US subs for Netflix. Of course they haven't been going as long as Netflix or aggressively marketed and still and their growth has doubled in 12months. So again, 0.5m sounds like a lot but in terms of the 125m US TV homes this is not a blip yet. It's business model is completely unproven and there's no evidence that it can scale up significantly from where it is as it's ultimately a niche product. Not that many people in the USA want to watch Corrie, ponderous psychopath procedurals or sanitised costume dramas.

So I'd take McCall's statements about SVOD with a major pinch of salt. Clearly she needed to have some big idea as the new incoming boss and developing Britbox was the best proposition available. But there is clearly no way Britbox however successful stands a chance of denting the strategic direction of ITV - which has to stay the same. It's an old-fashioned TV advertising model (2/3rds of the income) with a healthily growing production business on the side providing the rest of the revenues.

If McCall has made a mistake it's not to come out shouting more about the benefits of this old model. How it actually works brilliantly at making money and will growth because of not despite the structural changes in the industry. ITV's jewel in the crown is hiding in plane slight.

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