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Euro TV Giants Discover the 'X Factor' as Production Boom Counters Weak Ad Trends

2010: Fox Finalizes U.S.
FOX

As traditional ad revenues slide, content from the production arms of big Euro broadcasters is driving growth.

LONDON - It's the content, stupid! That's what the CEOs of big European TV companies must have been thinking in reporting their most recent set of financials.

Major networks across Europe reported mostly weaker ad sales for the third quarter and first nine months of 2012 as the economic crisis continues to pull down much of the continent. Things weren't helped by the Summer Olympics in London and the European Soccer Championships in Poland and Ukraine – both of which were ratings hits and both of which aired on public broadcasters in Europe in direct competition with commercial nets.

But there was a silver lining for Euro broadcasters: content. The TV production arms of Germany's RTL and ProSiebenSat.1 or ITV in Britain stood out as key growth businesses – a validation for firms that have focused on diversifying their operations to become less dependent on ad revenue.

In Britain, ITV said its TV ad revenue through the end of September was flat but ITV Studios, its content production arm, posted a 20 percent jump in sales to $798 million (£498 million) for the first nine months of the year, or nearly a third of total revenue for the commercial broadcaster. Revenue as a whole were up just 4 percent, illustrating the importance of content production for the group's bottom line.

"In difficult economic conditions and with a broadly flat television advertising market... The momentum we are building in our non-net advertising revenues has helped grow group revenues." said ITV CEO Adam Crozier. “ITV Studios has performed strongly as our strategy of investing in the creative pipeline and talent again shows through in our results."

For the full year 2012, ITV predicted ITV Studios, whose productions include I'm a Celebrity...Get Me Out of Here! - a hit reality format in the U.K. and several international markets - and drama series such as Agatha Christie's Poriot and Jeremy Piven-starrer Mr. Selfridge – both of which sold to PBS in the U.S., - would boast increased profits of more than $160 million (£100 million). Much of the growth is driven by ITV Studio's U.S. operation, which produces such shows as Hell's Kitchen and Nanny 911 for Fox, CBS' Eleventh Hour and MTV's Room Raiders.

Said Crozier: "The number of new commissions and recommissions already secured for 2013 gives us confidence that there will continue to be good underlying growth in the studios business."

Similarly, strong growth at  production powerhouse FremantleMedia – whose formats include global hits X Factor, American Idol and Got Talent - helped parent company RTL Group counter the sharp advertising downturn in several European markets. Overall company revenue over the first nine months was up 4 percent at RTL.

"This mainly reflects higher revenue from (German operations) RTL Deutschland and FremantleMedia," the company said. "In an increasingly tough economic environment, almost all TV advertising markets across Europe decreased during the third quarter."

ProSiebenSat.1, RTL's main European competitor, has also seen stronger revenue at its TV production and distribution business, centered around production division Red Arrow Entertainment Group, make up for weakness elsewhere. Its content revenue tripled for the first nine months of 2012 to $70.6 million (€54.4 million). Operating cash flow swung to a slight loss of $2.5 million (€1.9 million) though due to what the company said were "start-up costs" for investments in newly acquired production companies, such as U.S. production firm Left/Right.

"In the last few years, we have consistently invested in new growth markets. This is paying off today," said ProSiebenSat.1 CEO Thomas Ebeling.

ProSieben management predicted "a continuation of the dynamic revenue growth" in its content production and sales segment "beyond the current year."

Red Arrow productions include The Taste and Mob Wives. The company controls several boutique production operations, including L.A.-based Fuse Entertainment, producers of Burn Notice on USA Network.

Analysts have been cautious abbot continuing weak TV ad trends in Europe, particularly at free-to-air TV networks. Said Sanford C. Bernstein analyst Claudio Aspesi: "Even cost discipline does not change the fact that extreme cyclicality is hurting their business model badly at present."

But observers have lauded production arms. Said Aspesi abbot ITV's continued content push: "ITV Studios has a bright present and even brighter future," he said after the company's latest financial update.

The success has led to talk about further acquisitions. "We have seen [ITV] purchase some smaller production houses, such as Graham Norton's production company So Television," said Nomura analyst William Mairs. "ITV is an interesting case, because its sitting on a lot of cash at the moment. So it would have the firepower to do a big production acquisition if it wanted to, but I don't think they will and management has indicated they are not looking to do a big deal and instead favor smaller indie houses."

ProSieben has also been buying up production houses to further diversify its revenue streams. "But they are coming from a smaller base and are tending to buy just majority stakes in production houses - 70 percent-plus equity stakes - in order to leave people in the production houses with skin in the game so they don't leave," Mairs said.