ITV’s (LSE: ITV) share price has ticked up over the past few weeks, in common with many UK-orientated stocks that have risen on hopes of a resolution to the Brexit impasse. But the commercial broadcaster’s longer-term performance has been woeful, mirroring the falling ratings of its one-time star show The X Factor, with the stock more than halving in price since July 2015.
There are two reasons for this. Firstly, ITV has been hit by economic headwinds. The uncertain political outlook has affected business confidence, causing a slowdown in advertisement sales.
Secondly, it is facing acute structural pressure. Advertisers have shifted part of their television budgets into online video on platforms such as YouTube and Facebook, while at the same time viewers have been tempted away from traditional TV channels by streaming platforms such as Netflix and Amazon Prime Video.
The pressure on ITV from streaming platforms is only going to get worse, with new subscription video-on-demand (SVOD) services being launched in the coming months by the likes of Disney, Apple, WarnerMedia and Comcast.
Joining forces with the BBC
Not to be outdone, ITV is also launching its own SVOD service, BritBox, before the end of 2019. ITV owns 90% of BritBox; the BBC owns the remainder, with an option to raise its stake to 25% in the future.
BritBox will cost £5.99 per month in high definition (HD) television and show ITV and BBC series such as Love Island, Gavin & Stacey, Gentleman Jack, Victoria, The Office and Broadchurch. New programmes will also be made specially for BritBox, with the first arriving next year. ITV argues that there is a gap in the market for a service offering quality British content. The broadcaster also points out that UK households are increasingly open to subscribing to more than one SVOD service.
With this in mind, can the BritBox offering change the widely held assumption among investors that ITV is a mature, but declining, broadcaster. Can it take on the deep-pocketed US streamers?
Few think so. Sarah Simon, an analyst at investment bank Berenberg, notes that ITV is investing around £25m in BritBox in 2019 and £40m in 2020. BritBox, she says, is too little, too late. “With what looks like a very limited content budget, we struggle to see how BritBox can meaningfully compete against the premium streaming offerings that are emerging from leading Hollywood players.”
ITV, she adds, will also have to sustain a strong line-up of content on its main channels, so BritBox “is competing with itself to some extent”. The BBC has also begun to prioritise its iPlayer platform to compete with the streamers, and has recently won permission from regulator Ofcom to keep its programmes on the service for 12 months (at present, viewers can typically “catch up” with a BBC programme for a month). It means the BBC shows on BritBox are “going to be pretty vintage”, says Simon.
ITV Digital all over again?
Simon compares BritBox to ITV’s attempt to take on Sky in the late 1990s with its ill-fated ITV Digital service. “While there are clearly many differences between that platform and BritBox, we see similarities in the David versus Goliath set up, and remain sceptical as to the future prospects of this latest move by ITV into mainstream paid-for services.”
If BritBox manages to achieve 10% household penetration by the end of 2025, implying 2.9 million subscriptions, it could have revenues of £159m in 2025, according to Berenberg’s calculations.
This, however, looks optimistic given that Netflix reached that level of penetration in the US market after four years but had no SVOD competition to speak of at that stage. The £159m figure is also small within the context of the total revenues of £3.2bn that ITV recorded in 2018.
Jonathan Broughton, lead analyst at research group Broadcast Intelligence, is also cautious about the prospects for BritBox. He describes it as “an interesting experiment” that will “likely remain niche” given the restrictions placed on it and the competition it faces.
He expects that revenues from ITV’s existing catch-up service, ITV Hub – which viewers can watch for free with advertisements or can pay for to avoid the commercials – will have a much greater impact on the business than BritBox. He calculates that ITV Hub’s revenues could reach £300m by the end of 2023. Broughton also thinks that BritBox’s impact on ITV’s revenues will be dwarfed by growth in the broadcaster’s production business, ITV Studios.
Don’t expect a big bounce
ITV has prioritised the growth of its production division in recent years as it has sought to diversify away from its reliance on advertising. The revenues for ITV Studios, which produces international hits such as Love Island and Bodyguard, stood at £1.7bn for the 2018 financial year, up 6%. Set against this, BritBox’s potential to change ITV’s business looks limited – something that ITV has implicitly acknowledged.
Speaking at the Edinburgh International Television Festival this summer, ITV’s director of television, Kevin Lygo, stressed that BritBox shouldn’t be seen as a direct rival to Netflix and Amazon, but as a way to put the back catalogue of ITV and the BBC to best use. The subscription service, he said, was all about ITV “looking for a new revenue stream that doesn’t cannibalise advertising revenue”. So BritBox is more about diversification than transformation for ITV. And that’s why many analysts, such as Berenberg’s Simon, deem the stock a “hold” rather than a “buy”.