ITV and the subscriptions game
It’s odd that City investors are so unmoved by ITV's growing subscription activities, writes Dominic Mills
Forgive me for starting this piece by repurposing an old and lame joke.
Q: How do you make a small fortune in ITV?
A: Start with a large one and invest it in ITV shares.
Terrible, I know, but that is the painful truth for many ITV shareholders (and quite a few employees too, not that we’re shedding any tears for them) who have seen the value of their investment fall substantially over the last few years. A year ago, it stood at about 172p. Four years ago it hit a peak of 280p.
So far this year, it has languished in the 105p-126p range. As of last week, shortly after it announced its half-year results for the period to June 30, it stood at 110p.
Share prices are, if not quite a law unto themselves, often subject to short-term movements that defy the logic of ordinary people. Over time, however, they generally tell a broadly accurate story.
Last week, for example, ITV shares registered an uplift, albeit a small one, on the half-year results which, on the surface, looked poor: ad revenue down 5%, ITV studio revenue down 6%, total viewing down 6%. In advertising, some mainstay categories took a hit — retail (-8%), entertainment and leisure (-23%), food (-10%) and cosmetics/toiletries (-18%). You can get the flavour here.
None of this looks great, but it didn’t stop the City giving the shares a bounce of 6% or so (ok, ok, off a low base), notwithstanding the ongoing impact of Brexit uncertainty, which has hit ITV before. Why?
Here are some reasons.
First, the drop in ad revenue was less than anticipated, and against the comparator of the World Cup last year. Some of the same goes for overall audience.
Second, online revenues were up 18% and online viewing up 13%.
Third, it is getting some traction with 16-34s, with share of viewing on ITV2 among this cohort up to 6.5%, and 81% of the total 16-34 universe registered with its VOD platform, The Hub.
And fourth, investors reading the small print may be encouraged to hear that its new addressable proposition (remember the deal with Amobee, signed in April) is at last coming to fruition, with the roll-out starting in Q4 and due for completion in Q1 next year. The small print suggests — well, it’s how I read it — ITV is putting £15-£20m of capital expenditure behind it this year, the sort of commitment (about bleeding time, too) the City has been longing for. In a rising market, and allied to a good data proposition, this may give online revenues a substantial charge.
Love Island x2 is not just an opportunity to grab more of those valuable light-viewing 16-34s, but an opportunity to flog more personalised water bottles and the like from the shop.
And, boy, do the viewers like to buy this stuff. And boy, do brands want to grab some of this non-screen action. ITV disclosed last week that merchandising and sponsorship revenues were £8m more this year than last. No wonder ITV wants to milk the bountiful cow while it can. It’s also an indicator of the future direction of ITV as it rebalances revenues away from pure advertising.
Contrast that share reaction then with the one the week before when ITV announced BritBox. Here was the news we were all waiting for. But the share price reaction was, if anything, a damp squib: basically nothing on the day of launch, and down approx 3% on the first trading the day after.
Weird, huh? While we might expect the industry reaction to be muted — anyone watching BritBox isn’t going to be watching commercial TV — here at last was a plucky broadcaster (ok, two of them) taking on the mighty foreign invaders. And, moreover, fighting back with a well thought-out, competitive and differentiated proposition. And the City reaction was... ‘meh’.
Yet, and this is the key point investors seems to be missing, ITV’s two steps into the murky pond of subscription appear to be bearing fruit. Since BritBox UK depends on this, it is worth looking at in more detail.
The first is The Hub+, an ad-free version of the The Hub. Here, without much fanfare, ITV reports that it now has 500,000 + subscribers, each paying £3.99 a month. This is approximately double the year before.
I confess to surprise. I keep forgetting The Hub+ even exists, and I am unaware of any marketing promotion of it. Details are thin on the ground. We don’t know what the churn rate is; we don’t know what the conversion rate from the free trial is; we don’t know how much discounting goes on; we don’t know whether Hub+ subs represent a net gain in revenue after any consequent loss of ad revenues; and we don’t know how, or if, Hub+ viewing habits differ from standard Hub viewing.
And the second is the performance of BritBox in the US, where subs have now hit the 650,000 mark, again a substantial increase on the previous year.
Clearly, the lessons learned from both these subscription activities will be applied to BritBox in the UK.
In absolute levels, the numbers might be neither here nor there, but as an indicator that a) ITV viewers are prepared to pay for content and b) that ITV is getting to grips with subscription models, they are a decent place to start from. It’s odd, though, that City investors either aren’t paying them attention or are unmoved by them.
Disclosure: I too am feeling the pain of the moribund share performance, my small stake having lost more than 40% of its value. Come on, ITV people...pull your fingers out.