TURNING DIGITAL. The Future Can't Wait. Annual Report XVI Edition

TURNING DIGITAL The Future Can't Wait Annual Report XVI Edition October 2018

Billion Executive summary The TV market in 2017 The global TV market revenue in Western Europe reached 98.7 billion at the end of 2017, a 0.5% increase compared to 98.3 billion in 2016. Indeed, this small growth is a decrease in real term, considering an average inflation rate of 1.4% in 2017 in the WEU countries. While it continues to show great differences on country by country basis, the traditional market of broadcast TV, as a whole, does not grow anymore, since entertainment consumption is moving to broadband services and more revenues go to the internet online sector. TV market revenues in WEU, 2007-2017 ( Bln) 100 95 90 88,9 89,7 86,9 91,7 94,3 95,1 95,5 97,0 97,7 98,3 98,7 85 80 75 70 65 60 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: 2018 ITMedia Consulting

3 Pay-TV increase remains the one constant factor in the market, driven by several converging factors, such as evolving consumer demand, more attractive contents that also increasing production costs, falling barriers to entry and growing competition from a wide range of players, offering attractively-priced and readily-available paid content packages. It still represents the largest part of the market revenues, even if the increasing competition from native internet operators, aggressive discounting and cheaper triple and quadruple-play prices in the more mature and developed markets pose a great challenge to this growth. Despite this threat, the pay-tv industry remains successful and its proposition is still the most valuable for millions of customers in many WE countries, hitting in 2017 46.3 billion of revenues, +2.7% compared to 2016. In the UK, the biggest and most developed European country for television with 6.5 billion revenues in 2017, pay-tv records a daunting -2.7% YoY. The sector continue to evolve and heavily change, seizing the opportunities in the new rapidly converging post-ott landscape. VOD subscription services like Netflix and Amazon Prime Video are overtaking traditional pay-tv and becoming more and more important for family consumption. People are supplementing live broadcast TV viewing with broadcasters on-demand and streaming services, recorded TV and paid-for streaming services, which are increasingly popular. TV advertising reached 30.8 billion, with a 2.4% loss on the previous year. This situation is a consequence of the shift of resources from traditional media to the internet online market in recent years. As always, the situation is quite different depending on country basis, and in some markets, where even newspaper and magazine advertising experienced a moderate increase in 2017, TV advertising is still growing. In terms of media mix, online advertising has surpassed TV advertising in Western Europe. The pendulum is swinging to online, but the market shows more proof that, in some countries, TV advertising drives business growth and outperforms all other forms of advertising. TV is still a proven, trusted, high quality environment for brands in less digitalized markets, but looking at the most developed countries there are clear signs of replacement effect for digital adv over traditional media, with

4 online strengths and unique assets that have been thrown into even sharper relief recently and loss of trust in some areas of traditional advertising. Italy is still leading for daily TV viewing: almost 4 hours on average, but is also the most decreasing, by almost 13%. Spain follows closely, while at the bottom of the spectrum are Germany and France, where viewers consume 25 minutes less than in Italy. Market trends The erosion of traditional pay-tv is continuing but when a realistic broadband Internet alternative becomes available, the erosion may become the outbreak. Even as traditional pay-tv providers form partnerships with former OTT rivals to retain customers, cord-cutting continues to outpace projections. Largely due to the spectacular rise of online video and the arrival of OTT platforms, in recent years, merger and acquisition activity in TV broadcasting and distribution has been heating up. Consolidation in these industries basically follows a cyclical pattern, with economic and regulatory conditions accelerating or slowing down this phenomenon. A number of broadcasters have made a strategic shift to content production, generating revenue from international licensing deals and global/local syndication. This has provided protection from slowing growth in advertising revenues and rising costs of premium content. The trend can be seen globally with investment in content leading to the creation of new content kingdoms. The broadcasting industry is therefore undergoing big changes also in this sector. Investment in original content implies a pre-financing model: the investor (usually the broadcaster) provides a significant amount of money but has less visibility over the content than when it purchases (often international) programmes or sports rights. Roughly half of the of money on TV programming in the EU is devoted to original national content (including news), with the balance between in-house and independent production varying from one EU Member State to another. The remaining 50% is spent on sports rights and imports of purchased programmes.

5 The popularity of viewing big events such as the football World Cup and the Olympic Games online means that live-streaming is now a major part of new mainstream TV offerings. Sports broadcasts were once the last thing standing in the TV industry, the only broadcasts that proved able to stand against the ongoing migration of viewers from linear TV to nonlinear video-streaming on-demand. In the last few months, however, even sports have proven vulnerable. Recent 2018 FIFA football World Cup has long been cited by the tech industry as a major staging post in live streaming going global. Live sports streaming is still far from becoming mainstream and available for massive fruition, for the time being. But, even if TV broadcasting should be safe in the short term, the scenario can be different in a few years. YouTube and Facebook on this respect showed the way, providing extensive clips and highlights rights from both FIFA and via broadcast partnerships. The FIFATV YouTube channel had global highlights of every game and posted 33 highlights videos with more than 10 million views each, the most popular being Portugal versus Spain with 58 million views. In this rapidly evolving environment, Blockchain is one of the most disruptive technologies. Basically, Blockchain is a secure and encrypted digital database shared by all parties in a distributed network. Any transaction that occurs in the network is recorded, verified and stored in the database and visible to all participants, creating an unalterable transaction log. With the rise of the liquid multiplatform consumer, subscription services are emerging as the primary choice, changing the nature of content creation. Blockchain can improve transparency and grant creators more control over their content. It can also enable new business models in content distribution and advertising. Blockchain has the potential to disrupt the way content is produced, aggregated, distributed and consumed acting as a catalyst for change in the transforming digital content industry. It helps in many aspects of media business with cost-effective and trustworthy ways. It provides a space where marketers and broadcasters could share consumers data to build and execute addressable video advertising campaigns to Pay-TV customers and streaming device users. The overall goal is to make data-driven video advertising more efficient and consumer data more secure. If the

6 platform gains ground, the use of programmatic marketing in media could become much more widespread, particularly on television. As the demand for super-large TV displays grow, the need for higher resolution is set to increase. Just as with 4K, video content might get the ball rolling ahead of both streaming video and TV broadcasting. What makes the difference with 8K is the resolution. An HDTV has a resolution of 1,920x1,080, or about 2 million pixels. A 4K TV has a resolution of 3,840x2,160, or about 8.3 million pixels. That s four times as many pixels as an HDTV (doubled in both the vertical and horizontal rows and columns), all crammed in the same amount of space, no matter the screen size, that s a much higher pixel density, and it is meant to offer a sharper picture. An 8K TV has a resolution of 7,680x4,320 for a mindbending total of about 33.2 million pixels. That s four times as many pixels as 4K, and 16 times as many as HDTV. With TV screens getting larger and larger, sitting closer, to get that immersive viewing experience, the pixels on 1080p and 4K screens can become a visible distraction. However, with 8K, the screen needs to be extremely large to expose the visible picture structure. 8K offers a stronger sense of presence and reality to viewers, and with the amount of detail that 8K provides, even if getting closer and closer to large screen as 70-inches or more, the image appears to be pixel-less in an immersive. 8k is going to be the next big thing in TV, as it looks as inevitable, valuable and exciting.

7 Table of contents Preface... Table of contents... Index of tables and figures... Executive summary... The TV market in 2017... Market trends... The TV market in 2017... Market overview... License fees... TV Advertising... The advertising media mix... Pay-TV... The multichannel television market... Multichannel advertising... Fragmentation in TV audience... Market Trends... Sector consolidation, strategic alliances and new services... The Sky case... The rise of production investments... World Cup strains to reverse sports-viewing: audience heats up... Blockchain: a catalyst for change in digital media... Royalty distribution and management... Rights management... Content Resale... Moving to 8K...

8 Index of tables and figures Figure 1. GDP in Western Europe (% change YoY)... Figure 2. TV market revenues in WE 2007-2017 ( Bln)... Figure 3. Breakdown of TV market revenues ( Bln)... Figure 4. Advertising vs. pay-tv revenues, %... Figure 5. TV market revenue breakdown in Western Europe, %... Figure 6. License fee revenues in Western Europe ( Bln)... Figure 7. TV advertising revenues in Western Europe ( Bln)... Figure 8. TV advertising trends in the Big Five countries, 2015-2017... Figure 9. The advertising media mix in the UK... Figure 10. TV advertising investments in the Big 5 ( Mln)... Figure 11. The advertising media mix in Germany... Figure 12. The advertising media mix in France... Figure 13. The advertising media mix in Italy... Figure 14. The advertising media mix in Spain... Figure 15. Pay-TV revenues in Western Europe ( Bln)... Figure 16. TV households by platform in Western Europe (Mln)... Figure 17. Pay-TV penetration in Western Europe, %... Figure 18. Pay-TV penetration in the Big 5, %... Figure 19. Pay-TV revenues in UK ( Mln)... Figure 20. Subscription of SVOD households in UK (Mln)... Table 1. Pay-TV offer in the UK in 2018... Table 2. Sky UK and Ireland key metrics 2015-2017/18... Figure 21. Pay-TV revenues in Germany, including cable ( Mln)... Table 3. Sky Germany and Austria key metrics 2015-2017/18... Figure 22. TV channels by business model in Germany... Figure 23. Breakdown of Pay-TV channels in Germany by genre (2018)... Figure 24. Pay-TV revenues in France ( Mln)... Table 4. Pay-TV offer in France in 2018...

9 Table 5. Quadruple-play offer in France in 2018... Figure 25. Pay-TV revenues in Italy ( Mln)... Figure 26. Breakdown of TV revenues in Italy by business model... Figure 27. Platform penetration in Italy, %... Table 6. Sky Italy key metrics 2015-2017/18... Figure 28. Pay-TV revenues in Spain ( Mln)... Figure 29. Evolution of pay-tv subscriptions in Spain (Mln HHs)... Figure 30. Pay-TV subscriptions in Spain... Figure 31. Evolution of pay-tv subs in Spain, by operator (Mln HHs)... Figure 32. Breakdown of pay-tv market by platform in Spain... Figure 33. TV market revenue breakdown, %... Figure 34. Multichannel TV revenues breakdown... Figure 35. Advertising revenues breakdown... Figure 36. Breakdown of TV ads investments in the UK... Figure 37. Breakdown of TV ads investments in France... Figure 38. Breakdown of TV ads investments in Italy... Figure 39. Breakdown of TV ads investments in Spain... Figure 40. Big 5 TV viewing times (Min/day)... Figure 41. Average total TV daily viewing in UK, by age... Figure 43. Proportion of viewing across TV in UK, by genre... Figure 44. TV channels: audience market share in Germany, 2017... Figure 45. TV audience market share in France, 2017... Figure 46. TV audience market share in Italy, 2017... Figure 47. TV audience market share in Spain, 2017... Figure 48. Converged ICT-based services... Figure 49. Pay-online streaming video services subscriptions... Figure 50. Western European PSB vs. OTT revenues (US$ Bln)... Figure 51. Consolidation of Media and acquisition of companies... Figure 52. General framework of video services... Figure 53. The effect of megamergers on content spend...

10 Figure 54. Spend on content for major broadcasters/platforms (US$ Bln)... Figure 55. Video providers revenues vs. content costs... Figure 56. Sky s programming and operating costs ( Bln)... Figure 57. Amazon vs. Netflix content spending ( Bln)... Figure 58. Percentage of Netflix original series, by region... Table 7. European FIFA World Cup 2018 TV viewers... Figure 59. Worldwide World Cup Finals viewers... Figure 60. FIFA World Cup 2018 Global reach... Figure 61. Blockchain at the core of the innovative technologies... Table 8. Blockchain features... Figure 62. Blockchain evolution... Figure 63. Blockchain use cases... Table 9. Blockchain opportunity areas... Table 10. Media Industry Value-chain... Figure 64. How Mediachain works... Figure 65. BRAID: the first movie funded by cryptocurrencies... Figure 66. Panel resolution comparison... Figure 67. 60-inch and larger TV panel shipment by resolution... Figure 68. HD and UHD net bit rate requirements... Figure 69. 8K roadmap... Table 11. HD and UHD net bitrate requirements... Follow us on