That Sinking Feeling

December 13, 2010 World Screen

 

This article originally appeared in the MIPCOM 2010 issue of TV Europe.
 
Portugal, Italy, Ireland, Greece and Spain grapple with the euro zone debt crisis.
 
Riots in the street. Plummeting financial markets. Emergency meetings among top European leaders. And, perhaps most worrying of all, widespread speculation in news reports that the entire euro zone might splinter, shattering the single-currency market that European Union officials have long held up as their most notable achievement.
 
Such events were disturbingly common during the spring and early summer, as the crisis over the Greek government’s massive debt quickly spread like the tear gas wafting over the riot-torn streets of Athens, Greece, to Spain, Portugal, Ireland and Italy, raising fears that these governments might also have trouble servicing their debts. At the very least, analysts worried that this crisis could slow Europe’s feeble economic recovery from the financial crisis of 2008 and 2009; at worst, failure to contain the crisis could plunge the whole region into a much more severe recession—even depression—that would create enormous pressure for various governments to withdraw from the euro.
 
For the moment, those fears seem exaggerated. Even when viewed strictly through the prism of the television industry, there is little evidence that the crisis has crippled the TV business in the countries that Wall Street has offensively dubbed the PIGS or the PIIGS—Portugal, Ireland, Italy, Greece and Spain.
 
“Television is a great medium for attracting mass-market audiences and in difficult economic times, when people spend more time at home rather than outside on leisure pursuits, this is especially true,” notes Phil Stokes, PricewaterhouseCoopers’ (PwC) European entertainment and media leader.
 
PwC’s Global Entertainment and Media Outlook: 2010-2014 forecasts that TV advertising will see modest increases in several of these markets between 2010 and 2014, with Greece’s seeing a 4.9-percent annual growth rate, Ireland recovering at 2.6 percent a year, Spain growing by 0.8 percent a year and Italy increasing its TV ad spend by 0.5 percent annually in constant 2009 U.S. dollars. Only Portuguese broadcasters will see negative 0.6-percent annual growth in TV advertising during the 2010 to 2014 period.
 
In fact, some analysts believe that a number of these TV markets are actually performing better than expected. “Our forecasts for television advertising in Ireland, Italy and Portugal actually increased a bit in our most recent estimates [released in July] over the forecasts we made at the end of March,” notes Jonathan Barnard, the head of publications at ZenithOptimedia.
 
Barnard adds that ZenithOptimedia has also very slightly raised its estimates for the ad spend for Spain from its no-growth forecast issued in March to a slight 0.2-percent increase. Plus, the 9-percent drop they’re predicting for Greece in 2010 is better than most other media. “We are not expecting anything spectacular from any of those markets, but they are looking slightly better than before this recent crisis hit,” he says.
 
MULTICHANNEL GAINS
Some good news also comes from the multichannel world. While Greece, Italy and Spain have some of the lowest penetration rates for pay TV in Western Europe, and operators in Spain and Portugal have reported some subscriber losses, overall penetration of multichannel services continues to grow, thanks mostly to the growing popularity of digital terrestrial television (DTT) in markets like Italy.
 
PwC is predicting that subscription TV spending between 2010 and 2014 will increase in all of these countries, with Greece growing 10.8 percent a year from a very low base, Ireland growing by 8.6 percent despite already high penetration levels of pay TV, Italy showing a 7.8-percent annual bounce in subscription spending, Portugal seeing 7.2-percent growth and Spain increasing by 6.5 percent a year.
 
MagnaGlobal’s executive VP and director of global forecasting, Brian Wieser, also notes that television is increasing its share of the total advertising pie in all of these countries in 2010, a trend he attributes to the fact that TV advertising remains the most efficient way to reach mass audiences.
 
“TV is retaining its dominance and is capturing the larger share of advertising in less strong markets,” he explains. “The largest advertisers who were TV-centric have kept their TV budgets constant during the recession but are cutting other media [like radio, newspapers and magazines]. To paraphrase Winston Churchill’s comments about democracy, if your marketing objective is to maximize spending against reach and frequency, television is the worst form of advertising, except for all the others that have been tried.”
 
UNCERTAIN FUTURE
That isn’t to say the worries about these economies are simply another example of the mass hysteria that seems to grip financial markets from time to time, or that the so-called PIIGS will be flying high anytime soon.
 
In Ireland, Dermot Horan, RTÉ’s director of broadcast and acquisitions, explains that the real-estate crash and subsequent financial crisis affected Ireland earlier than some of the other economies and that the Irish government moved quickly to address its deficits by cutting spending and increasing taxes.
 
“In one fell swoop taxes went up and those who were employed ended up taking home less money,” Horan recalls. “Unemployment went from 4 percent at the beginning of January of 2009 to 14 percent and this had a very significant effect on all the broadcasters. RTÉ is half funded by advertising and our advertising went down more than 30 percent in 2009, which means that we are effectively trading at advertising levels we enjoyed back in 2002 and 2003.”
 
Horan thinks the Irish economy and the television industry have “hit the bottom of the barrel. I don’t see any more declines. But down at the bottom of the barrel it is murky. It is hard to see what is going to happen and it is slippery down here. It won’t be easy to get out. There won’t be any quick recovery where we suddenly bounce back to where we were in 2006 and 2007.”
 
The long-term impact of the crisis can be seen in some of the debt levels. By the end of 2010, gross debt in Greece will stand at 124.9 percent of GDP, and it will hit 118.2 percent in Italy, levels that economist Fabian Zuleeg of the European Policy Centre (EPC) called “unsustainable” in a recent major report. High government debt levels can also be found in Portugal at 85.8 percent of GDP, a level the report also called “unsustainable,” and in Ireland at 77.3 percent and Spain at 64.9 percent, which the EPC study described as “in danger” of reaching unsustainable levels.
 
DEBT CONCERNS
This debt also poses risks for euro-zone banks that could slow or imperil economic growth throughout Europe, creating worries that a severe banking crisis could erupt if one of these governments has trouble paying its debts or borrowing more money. At the end of 2009, euro-zone banks held a whopping €1.2 trillion worth of government debt from Greece, Ireland, Portugal and Spain, and another €744 billion worth of private debt to residents of those countries, according to the Bank for International Settlements (BIS). Much higher numbers would be cited if the study had included banks from the U.K., which are not part of the euro-zone, or if BIS had included Italy in its figures.
 
Even if these debts are repaid in full, the impact of the collapse of the real-estate markets, high levels of consumer debt and the cost of bailing out insolvent banks and financial institutions will weigh on consumer spending and the television industry for years.
 
“Ireland is a market of just 4.2 million people, but bailing out the banks from the collapse of the real-estate market and the financial crisis will probably cost €60 billion to €70 billion,” Horan notes. “Ireland isn’t in the same category as Greece, but we will have to pay that money back over 10 or 15 years. So the recovery may be happening, but it will be slow and fragile.”
 
Better-than-expected TV advertising performance predicted by a number of analysts will still translate into some poor numbers. MagnaGlobal is projecting that TV ad revenues in 2015 will still be below pre-crisis levels in Greece, Ireland, Italy, Portugal and Spain.
 
That is likely to affect programming budgets and acquisitions for years to come. Horan notes that RTÉ has had to cut salaries and programming budgets, but has worked to avoid heavy cuts to domestic programs in prime time. “It is what really sets us apart,” he explains.
 
The broadcaster has also acquired several new U.S. shows and is looking to continue acquisitions, though perhaps at lower prices, at MIPCOM. “We are still looking to source material and do the best deals we can,” he says. “Even though we’ve encountered very significant falls in revenue we still have to fill the channels we have.”
 
AND THEN THE GOOD NEWS
Wide variations in these markets are also important to consider. The Greek economy has been the hardest hit and ZenithOptimedia is predicting advertising will drop by 9 percent this year, following a steep decline of 17 percent in 2009.
 
But even amid this depressing prognosis, there are some grounds for optimism. MagnaGlobal has taken a more bullish view, predicting 3.5-percent growth in TV advertising in Greece in 2010 and declaring that broadcasters are holding up better than other media, which are seeing serious declines, notes MagnaGlobal’s Wieser.
 
Since the start of the crisis, Alpha TV’s position has been shored up by the RTL Group, which acquired 66.6 percent of Alpha Media in late 2008. Since the acquisition, Alpha has been beefing up its programming, an investment that much improved ratings during the 2009-10 season. Its target audience in the 15-to-44 demo increased by an impressive 43.1 percent during the season, giving it a 17.6-percent share of the demo.
 
Another Greek broadcaster, Antenna Group, or ANT1 as it is known in the market, sold its stake in Bulgarian broadcaster Nova Televizia in 2008 for €620 million, providing it with a hefty pile of cash that should help it ride out economic problems. Management has also said it would like to make some significant international investments, a move that could lessen the company’s reliance on the Greek market. To that end, Antenna was part of a failed bid for the broadcaster Channel 5 in the U.K. this summer.
 
Mega TV, which was the first commercial broadcaster to launch in Greece and is generally the highest-rated station, continues to invest heavily in new programming. Its Secrets of Eden series has become one of the few Greek series that has been widely exported outside the market and it is currently spending around €150,000 an episode to produce The Island, based on the bestselling international book by Victoria Hislop for the 2010-11 season. That will make the show the most expensive series in the history of Greek TV, according to local press reports.
 
Italy has debt levels nearly as high as Greece’s, but in sharp contrast was able to easily issue new bonds this summer and its television industry is probably the strongest of the group. ZenithOptimedia is predicting a 3.9-percent increase in advertising this year and the commercial broadcaster Mediaset’s results for the first half of 2010 beat analysts’ expectations with profits increasing by 33.6 percent to €241.6 million and revenues from its Italian operations growing by 11.3 percent.
 
The decision by the Italian government, led by Prime Minister Silvio Berlusconi, whose family controls Mediaset, to limit advertising on pay-TV channels and the popularity of the digital terrestrial television have, however, hurt the dominant pay-TV operator Sky Italia. Its subscriber numbers actually declined in the last quarter of 2009, the first such losses since News Corporation took control of Sky Italia in 2003. That has forced the pay platform to cut prices for its premium channels and to step up its efforts to get regulatory approval for the launch of a DTT offering.
 
For broadcasters, however, the popularity of DTT, the launch of which was massively funded by Italian government subsidies that European authorities subsequently found illegal, has been a boon. In the short run, the popularity of the relatively limited DTT offering has limited audience fragmentation and, in the longer run, it could produce significant pay-TV revenues for Mediaset, which launched a pay-DTT package in 2007 that includes popular on-demand sports and movies. The offering has already seen significant uptake, cutting into Sky Italia’s growth and Mediaset is expecting the service to break even this year.
 
Commercial broadcasters are also looking stronger in Spain, thanks largely to the government’s decision to remove all advertising from public stations at the start of 2010. While total TV ad spend for the market will remain virtually flat this year, the new regulations have boosted prices for ads on the commercial broadcasters by as much as 25 percent, according to ZenithOptimedia’s Barnard. “The fact that advertisers are willing to pay those prices illustrates the value of television,” he notes.
 
WINDS OF CHANGE
Even so, the market has seen some significant changes. The heavily indebted Prisa Group was forced to sell its free-to-air channel Cuatro to Spain’s leading private channel, Telecinco, in April. As part of that deal, Telecinco also acquired a 22-percent stake in Prisa’s satellite platform, Digital+. That could lead to a complete ownership change and a potential shakeup in the pay-TV landscape that might introduce more competition, some analysts note. In the meantime, however, PwC is predicting relatively stagnant growth, with subscription-TV penetration in Spain growing from only 26.7 percent this year to merely 28.3 percent in 2014.
 
While PwC sees a slight decline in TV ad spend in Portugal between 2010 and 2014, ZenithOptimedia is predicting a 4 percent hike in TV advertising in Portugal in 2010 to $673 million and further growth to $771 million in 2012.
 
PwC and other analysts also see healthy growth in the increasingly competitive multichannel landscape. PwC is predicting IPTV penetration will grow from about 2 percent of all Portuguese homes this year to 10 percent by 2014 and that overall pay-TV penetration will grow from 61 percent to nearly 72 percent of all homes in 2014.
 
The market research firm Dataxis Intelligence reported that while the Portuguese TV market remained flat in 2009, the decrease in free-TV revenues was offset by growth in the pay-TV market. Furthermore, the advertising market in Portugal appears to be on its way to recovery, as free-TV revenues increased 6 percent during the last three months of 2009.
 
During the same period, Impresa, Portugal’s leading media company and owner of the channel SIC TV, saw its advertising revenue grow, while revenues remained flat throughout the year for the public broadcaster RTP.
 
So will PIIGS fly anytime soon? No. But even though they have to dig themselves out of difficult times, it doesn’t seem they will be stuck in the mud.