2 Television. Higher definition through new channels. Summary

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1 Higher definition through new channels Summary The Dutch television market is going through a number of changes. The cable industry is consolidating, telephone companies are providing television service, public broadcasters reconfigured their programming and will receive enhanced funding, high definition television (HDTV) will become a permanent fixture, and mobile television is poised to enter the market. Cable, the leading platform in the Netherlands at 91 percent penetration (highest in Western Europe) is now dominated by Ziggo and UPC. Ziggo acquired the Dutch cable holdings of Cinven and Warburg-Pincus, principally Casema, Multikabel to become the largest operator in the Netherlands, surpassing UPC. Cable operators are upgrading to digital to help them retain subscribers, to provide HD channels, and to offer video-on-demand (VOD). Despite these efforts, cable is facing subscriber erosion as telephone companies enter the market with Internet protocol television (IPTV). Digital IPTV offerings from Tele2 and KPN are gaining subscribers, lured by video-on-demand and triple play packages that combine broadband Internet with telephone and television. The entrance of telephone companies into the television market is in large part to counter the inroads into the telephone market achieved by cable operators through their triple play bundles. KPN is also competing in the television market through Digitenne, its digital terrestrial television (DTT) service. Digitenne offers 25 television channels and 16 radio channels. The television market is also serviced by digital direct-to-home (DTH) satellite services from CanalDigitaal. CanalDigitaal is distributed via the Astra 1 and Astra 3 satellites. Subscribers must have a Netherlands address to receive the service. The availability of four categories of service cable, satellite, DTT and IPTV make the Netherlands the most competitive television market in Western Europe and the market with the highest subscription penetration. In 2007, percent of television households in the Netherlands subscribed to one of these services, reflecting the fact that some households subscribe to more than one service. Cable is the dominant platform, accounting for 85 percent of subscribers. DTH accounted for 9 percent of subscribers, with subscription DTT at 5 percent, and IPTV at 1 percent. The Netherlands also was the first country in Western Europe to discontinue analog broadcasting, having done so in December Distribution of subscription Households, 2007 (%) Cable subscription DTH Subcription DTT IPTV With the market already saturated, gains in one category must inevitably come at the expense of another. We expect that the ability to offer video-on-demand will be a decisive factor in determining which categories do well during the next five years. Cable and IPTV can offer video-on-demand while satellite and DTT cannot. Consequently, we expect that expansion in IPTV will principally cannibalize the satellite and DTT markets. Collectively, we project that they will lose 18 percent of their subscribers during the next five years. Cable will also experience erosion but we estimate that it will be only about 3 percent of their subscriber base. In, cable s share will have fallen to 79 percent and the IPTV share will have risen to 11 percent, together comprising 90 percent of subscription households. 38 PricewaterhouseCoopers At the dawn of new traditions 39

2 7 3 Distribution of subscription Households, (%) Cable DTH Subcription DTT IPTV Further augmenting the market will be the entrance of mobile television services. Early 2008, the European Union (EU) selected the digital video broadcast-handheld (DVB-H) technology developed by Nokia as the mobile TV standard for Europe. The drive to select a single standard was probably motivated by the wireless telephone market where the selection of a single standard is considered to be the principal reason for the high wireless penetration rate in Europe. With all wireless phones operating on the global system for mobile communications (GSM) technology, handset and network providers benefited from economies of scale as they did not have to develop and support equipment for various standards. Costs were initially lower than in other regions, and the wireless market accelerated faster in Europe than elsewhere. DVB-H was selected over MediaFLO, the technology developed by Qualcomm and adopted by AT&T Mobility and Verizon Wireless in the United States, and the digital mobile broadcasting (DMB) technology adopted in South Korea and other countries. Backers of the DMB technology argued that the selection of DVB-H limits flexibility and will impede the initial development of the market because DVB-H operates on UHF frequencies, which will remain in scarce supply in a number of countries until the switchover from analog to digital television occurs. This will not be an impediment in the Netherlands though, which already has switched to digital. KPN is launching a DVB-H service using the Samsung P960 and the LG KB620 handsets. The service featured Euro 2008 coverage as well as coverage of the Beijing Summer Olympics. KPN also has a deal with RTL to distribute a mobile TV channel. A television version of DAG, the news service provided by PCM, will have a mobile version in KPN is charging 10 per month for mobile television, which initially includes Dutch channels, MTV, the Discovery Channel and Nick Toons. Premium channels are expected to be offered in the future. A common standard should help the mobile TV market as manufacturers have to produce for only a single standard, which will reduce development costs. Cooperation among content providers is crucial. An attractive array of program options will make mobile TV appealing. If mobile programming is limited, however, interest will wane. We expect that 2008 will be an important year for mobile television as high profile international sports should drive interest. If it does, the market is in a position to take off. With respect to programming, in late 2006 public TV channels restructured themselves along lifestyle and demographic lines in an effort to stem audience losses. Nederland 1 is now a broad-based family-oriented channel; Nederland 2 provides cultural programming; and Nederland 3 is a youth and experimental channel. Although their audience share continued to decline in 2007, the 0.9 percentage point decrease was less than in prior years despite facing increased competition from commercial television. A turnaround in funding and the launch of HD channels should help public broadcasters during the next five years Percentage Point Share Loss for National Public Channels 0 3,4 In the commercial market, Tien, the free-to-air channel launched with great fanfare in late 2005 by Endemol, was sold to RTL in Tien did not prove to be popular with viewers despite having spent lavishly on sports rights and high profile programming. Separately, Endemol teamed up with Ericsson to develop Me-On-TV, an interactive service that allows users to upload their own programming using mobile phones. Endemol will distribute Me-On-TV. The television market in 2007 expanded by 7.7 percent. Improved advertising growth and a turnaround in government support of public television, and an accelerating VOD market offset slower growth in subscription spending. With virtually all households already subscribing to a paid service, subscription household growth will be low. However, increases in average revenue per user (ARPU) stemming from shifts from analog to higher-priced digital services that deliver more channels will keep growth at high single-digit rates even as subscriber growth drops to an average of only 0.8 percent compounded annually. 1,1 0, Sources: NPO, PricewaterhouseCoopers LLP, Wilkofsky Gruen Associates spending will remain the principal driver of the overall television market during the next five years, accounting for 62 percent of the projected increase with a 7.8 percent compound annual advance. An expanding video-on-demand market will propel pay-perview/video-on-demand at a 23.4 percent compound annual rate. The migration to HD will make television more appealing and will provide a better platform for advertisers. We expect television advertising to outpace economic growth with a projected 5.4 percent compound annual increase. We expect government contributions to public television to increase at a 4.0 percent compound annual rate, reflecting a major shift in the government s attitude toward public broadcasting. The overall market will expand at a 7.3 percent compound annual rate to 4.6 billion in from 3.2 billion in The Netherlands share an spending increased to 4.7 percent in We expect it will edge up to 4.8 percent in 2008 and remain at that level during three of the subsequent four years. 40 PricewaterhouseCoopers At the dawn of new traditions 41

3 Television Market ( Millions) Netherlands Advertising ,020 1,045 1,105 % Change ,204 1,370 1,554 1,719 1,867 2,018 2,176 2,349 2,531 2,715 Spending % Change Pay-Per-View/Videoon-Demand % Change Government Contribution to Public Television % Change Total 2,337 2,595 2,799 3,008 3,240 3,494 3,738 4,028 4,301 4,615 % Change Television Cable, the dominant subscription service with 6.58 million subscribers in 2007, is aggressively expanding its HD capabilities. As of 2009, Ziggo will carry HD simulcasts of Nederland 1, 2 and 3 on its digital tier for no additional cost. UPC and other cable companies are expected to do the same. UPC is also adding Voom HD, History Channel HD and MGM-HD in 2008, joining National Geographic HD, Discovery HD, Film1 HD and Sport1 HD. UPC also plans to launch an HD digital video recorder service in Ziggo is further promoting HD by offering 2 million to organizations that supply programming to NPO to help them produce shows in HD. More than 1 million HD sets are expected to be sold in As the HD market develops, cable will be well positioned. Cable also benefits from the appeal of its triple play services and from the introduction and expansion of video-on-demand. Operators have invested significant sums in upgrading their plants to provide these value-added services. Nevertheless, cable is beginning to face meaningful competition from telephone companies, which have their own triple play and video-on-demand offerings. The IPTV market more than doubled in 2007 to an average of 140,000 subscribers, with more than 200,000 subscribers at year-end The DTT market added 80,000 net new subscribers in 2007, raising its total base by 28.6 percent. KPN is putting resources into its Digitenne service, looking to expand its market. At year-end 2007, KPN had 500,000 subscribers to Digitenne and Interactive TV, its IPTV service formerly known as Mine TV. New DTT and IPTV services began to cut into the cable universe in 2007, which declined by 0.6 percent. As IPTV becomes available in more areas, the increased competition from telephone companies will further cut into the cable market. By, the cable household universe will drop to 6.39 million subscribers, a 0.6 percent compound annual decline. Notwithstanding these declines, cable will remain the dominant provider, with a household penetration rate of 84.7 percent. The subscription satellite market had been expanding through 2006, serving areas not reached by cable, but it began to decline in 2007, dropping to above 700,000 in With cable and telephone companies introducing triple play options and VOD, satellite will be at a disadvantage as it cannot deliver video-on-demand and cannot on its own offer triple play options. We project the number of subscription satellite households to fall to 600,000 by. In 2007, KPN expanded its DTT service by making Digitenne available to the entire country. The DTT market rose from 10,000 subscribers in 2003 to 360,000 in We expect that figure to begin to decline in 2008 as gains in IPTV cut into the DTT market because DTT cannot offer VOD. We project the number of DTT subscribers will fall to 270,000 by. The IPTV market jumped from 60,000 subscribers in 2006 to an average of 140,000 in 2007, led by Tele2, which had more than 200,000 subscribers by year-end KPN entered the market in 2007 and is now packaging its IPTV service with Digitenne. IPTV is catching on where it is available. We expect the market to expand to 850,000 subscribers by, a gain that will cannibalize each of the other distribution services. The overall subscription household universe will increase from 7.78 million in 2007 to 8.11 million in, a 0.8 percent compound annual increase. penetration of TV households will remain at approximately the same level as in With the Netherlands already fully penetrated, subscription household growth will be slower than in virtually all other countries in Western Europe. The Netherlands share s subscription household total was 9.8 percent in 2007, down from 10.3 percent in We expect this share to continue to fall during the next five years, dropping to 7.8 percent in. 42 PricewaterhouseCoopers At the dawn of new traditions 43

4 Households Netherlands Cable Households % Change Cable Penetration of TV Households (%) Satellite Households % Change Satellite Penetration of TV Households (%) DTT Households % Change DTT Penetration of TV Households (%) IPTV Households % Change IPTV Penetration of TV Households (%) Total Households % Change Penetration of TV Households (%) Digital in double digits There were more than 3 million digital households in the Netherlands at year-end By, virtually all homes in the Netherlands will be digital. Digital distribution significantly enhances channel capacity, allowing for new services as well as HD, which requires more bandwidth than standard definition television. The ability to offer more channels allows distributors to charge higher fees. Thus, despite a highly competitive market, subscribers have been paying more to get more channels. Average monthly spending per subscriber rose 7.2 percent in 2007 to 20. We expect that new channels, including new HD channels, will lead to a further price escalation during the next five years. Spending ( Millions) Netherlands Households % Change Average Monthly Spending ( ) % Change ,204 1,370 1,554 1,719 1,867 2,018 2,176 2,349 2,531 2,715 Spending % Change We project average monthly spending to grow to an estimated by, a 6.9 percent compound annual increase. Overall subscription spending will increase at a 7.8 percent compound annual rate, from 1.9 billion in 2007 to 2.7 billion in. The Netherlands share an subscription spending was 7.3 percent in 2007, down from a peak of 7.4 percent in During the next five years, with subscription households projected to grow more slowly in the Netherlands than in Western Europe, the Netherlands share of subscription spending will decline. We expect the Netherlands share to fall to 6.2 percent by. 44 PricewaterhouseCoopers At the dawn of new traditions 45

5 Pay-Per-View and Video-on-Demand Pay-per-view (PPV) uses dedicated channels to show films at scheduled intervals. VOD, by contrast, operates through a server and enables viewers to access a program at any time. VOD requires a large server capacity but can be accessed through a single channel. PPV does not require a server but does require a large number of channels to give viewers a wide enough selection to be effective. Because digital platforms allow for more PPV channels than analog platforms, PPV buy rates tend to be substantially higher on digital platforms than on analog platforms. During the past four years, rising penetration of digital television fueled PPV growth. PPV revenue nearly doubled during the past four years, rising from 33 million in 2003 to 60 million in After advancing at double-digit rates during each of the past five years, we expect that as of 2008 PPV growth will drop to mid-to-low single-digit increases, reflecting the growing availability of VOD and a shift in share away from PPV. PPV will expand at a 4.0 percent compound annual rate, rising to 73 million in. Pay-Per-View/Video-on-Demand ( Millions) Content becomes flexible VOD launches by cable operators and penetration advances in IPTV, which feature VOD, will fuel the market for video-on-demand. VOD gives the user greater flexibility with respect to starting times compared with PPV while providing the pause, rewind and fast forward features of DVDs. As VOD becomes available on a widespread basis, we expect spending to jump. We project that VOD will overtake PPV in 2009 and rise to 202 million by, a 41.2 percent compound annual increase from 36 million in Combined spending will total 275 million in from 96 million in 2007, a 23.4 percent advance compounded annually. The Netherlands has a more developed PPV market than most countries in Western Europe although it lags in VOD. As the VOD market begins to take off in the Netherlands, it will offset slower growth in PPV. During the next two years, the Netherlands share will fall to 6.2 percent from 6.7 percent in Beginning in 2010 as VOD expands, the Netherlands share will rebound, increasing to 7.2 percent by. Netherlands Pay-Per-View % Change Video-on-Demand % Change Total % Change Advertising Television advertising in the Netherlands rose 6.9 percent in 2007, the largest increase since Increased spending by automotive, energy, and cosmetics companies contributed to the 2007 advance. The television advertising market appear to be unaffected by growing penetration of digital video recorders and by increased competition from Internet advertising and from increased time spent online and playing video games. The market was helped by the growing audience share for Dutch commercial channels. Commercial channels are more reliant on advertising than the public broadcasters and have been aggressive in selling advertising. Audience share gains for these channels translate into rising advertising revenues. Between 2004 and 2007, the audience share for Dutch commercial channels rose by 4.5 percentage points Source: NPO Audience Share for Dutch Commercial Channels (%) 49,0 52,1 53,3 53, The HD appeal The launch of HDTV channels should have a positive impact on advertising. In 2008, Nederland 1 HD will have a temporary launch from June 2nd to August 24th, providing HD broadcasts of Euro 2008 and the Beijing Olympics. In early 2009, each of the national public channels will launch permanent HD services. Ziggo s payments to public broadcasting organizations to encourage HD production should accelerate the shift from standard definition to HD. Cable networks have upgraded their infrastructure to increase their HD offerings. HD is also expanding on satellite. CanalDigitaal introduced a new HD package in 2007 and will also carry Nederland s HD coverage of the European Championship and the Olympics in The showcasing of HDTV in 2008 should further stimulate interest and boost set sales. Declining prices of HD receivers will facilitate market expansion. In 2007, there were approximately 200,000 households in the Netherlands capable of receiving HD programs. We expect that figure to jump to 1.2 million in 2008 as more HD programs become available and as Blu-ray videos gain penetration. Virtually all sets now being sold are HD-capable. We expect that the HD-capable universe will increase to 4 million households by, at which point a majority of TV households in the Netherlands will be HD. In countries where HD has been available, ratings for HD programs are generally higher than for standard channels. As HD penetration expands, television will be better able to hold onto their audiences in the face of growing competition from other media. Improved audience retention should lead to improved advertising growth. The evidence in other media suggests there is a relationship between quality and advertising that should also apply to TV. In home video, for example, the introduction of DVDs with their higher picture quality boosted sell-through sales and color TV sets increased the appeal of television. Similarly, the expansion of HDTV will make television more appealing to viewers. 46 PricewaterhouseCoopers At the dawn of new traditions 47

6 HDTV Households Netherlands HDTV Households HDTV Household Penetration (%) We expect HD to help television retain viewers despite increased competition from other media. HD also provides advertisers with a more attractive platform and we expect that HD will improve the appeal of television for advertisers. Late 2007 the European Parliament approved the Audiovisual Media Services Directive that updates the Television Without Frontiers Directive. Under the new rules, commercials during movies, childrens programs and news programs will be permitted at 30-minute intervals instead of 45-minute intervals, and at 20 minute intervals for other programs. Although the limit of 12 minutes of commercials per hour remains, the increase in frequency should make television ads more effective, which should provide a modest boost to the market. The new Directive also permits product placement advertising, which had been banned under the original Directive issued in Under the new Directive, product placement advertising would be legalized for programs other than news, documentaries, current affairs and childrens programs. An announcement would be required at the beginning and end of a show that contains product placements and every 20 minutes a signal would notify viewers that a program contained product placements. Tobacco and alcohol product placements would still be banned. Non-spot is hot Approximately 10 percent of television advertising in the Netherlands in 2007 consisted of in-program ads. With the growth in DVR penetration, in-program advertising is becoming more important. Consumers can now acquire codes that enable them to skip even the recording of commercials. In-program advertising is expected to be an expanding component of the market. Another development is sponsored programming in which a show is presented by a sponsor or company. This way, the company becomes more closely associated with a program, supporting the advertising message. Television remains a critical component of an advertiser s budget because it reaches so many people on a daily basis. In general, companies establish an advertising budget that incorporates a number of media in a unified campaign. These budgets are affected by product launches, which lead to a temporary jump in advertising, as well as by the economy and by sales of a company s product line. It is not unusual for companies to make adjustments to their advertising budgets over the course of the year, depending on these and other factors. Companies with holdings in more than one medium are establishing cross-media initiatives in which they sell advertising in more than one medium in a package. Television broadcasters, for example, are selling ads in their on-air programs as well as on their Web sites, giving spot advertisers an incentive to buy ads on television by giving them increased exposure online. The Internet, of course, is also a competing advertising medium and more recently has become a distribution channel for television programs. Programs shown on the air are often posted online, giving viewers access to these programs without having to watch them on television. In some cases, the broadcasters themselves are making their shows available on their Web sites. In many other cases, however, these shows are available on social networking sites without commercials. Thus, a broadcaster s own programs shown online compete with on-air broadcasts, possibly cutting into the potential audience and advertising for those shows. We expect the growth in availability of free content to dampen on-air advertising during the next five years. As targeted advertising becomes more important, themed channels will become more prominent since they provide an environment which offers more personalized advertising geared to a viewer s tastes and interests. We may even see Television Advertising ( Millions) advertisers provide their own branded content and offer their own branded channels. In addition to these trends, the market will be affected by advertising associated with major sporting events. We expect above-average growth in 2008 stemming from advertising associated with the European Championships and the Beijing Olympics. In 2010, the FIFA World Cup and the Winter Olympics will enhance spending, and the London Olympics in will provide an added boost that year as well. During the next five years, growth will average 5.4 percent compounded annually from 850 million in 2007 to 1.1 billion in. The Netherlands share of Western Europe s television advertising will increase to 3.6 percent in from 3.3 percent in Advertising per TV household will increase from 118 in 2007 to 147 in, a 4.5 percent advance compounded annually. Netherlands Television ,020 1,045 1,105 Advertising % Change Advertising Per TV Household ( ) % Change Sources: SPOT, PricewaterhouseCoopers LLP, Wilkofsky Gruen Associates 48 PricewaterhouseCoopers At the dawn of new traditions 49

7 Government Contributions to Public Television Up to and including 1999, all TV households were required to pay a license that supported public broadcasting. These fees were eliminated in 2000 but the government continues to fund public television from general tax revenues. As of 2004, the government began reducing its contribution to public television. Between 2003 and 2006, funds were reduced by a cumulative 8 percent. This decrease prompted the reconfiguration of the national public channels. We project the government contribution to public television to rise to 520 million in, a 4.0 percent compound annual increase from 427 million in The Netherlands share of public TV license fees in Western Europe fell from 3.2 percent in 2003 to 2.6 percent in 2007, reflecting the cut in contributions. With government contributions now projected to grow, the Dutch share will increase, rising to 2.9 percent by. In early 2007, the Christian Democratic Alliance, the Labor Party, and the Christian Union reached an agreement regarding public television. The agreement cited the importance of a free, pluralistic, accessible and high-quality public broadcasting service and the intention to make public broadcasting less dependent on fluctuations in advertising. An additional 50 million will be allocated to public broadcasting (including radio) during the next three years and an additional 100 million as of Government Contribution to Public Television ( Millions) Netherlands Government Contribution % Change PricewaterhouseCoopers At the dawn of new traditions 51