Broadcasting & Entertainment on the Stock Market

Broadcasting & Entertainment on the Stock Market   

This month, we will be looking at Broadcasting & Entertainment. The broadcasting sector is familiar to us all, although we may not be aware of all the companies involved behind the scenes.

It is hard to overstate the importance of film, television and radio to our modern lives. According to the Office of National Statistics, there were 165 million cinema admissions in 2005. Whilst the Broadcasters' Audience Research Board informs us that an average of over 23 million people watched TV during peak viewing hours in 2006 (news releases: 01/10/2006, 10/08/2006).

Radio, too, continues to attract vast numbers of listeners. Radio Joint Audience Research Limited (RAJAR), the radio industry's research service, tells us that 89% of UK over-15s tune into the radio every single week (news release: 26/10/2006).

The UK broadcasting sector

The stock market Industry Classification Benchmark defines the 'Broadcasting & Entertainment' sub-sector as "Producers, operators and broadcasters of radio, television, music and filmed entertainment".

The only notable absentees from the UK Broadcasting sector are the movie theatres, which are classified under Recreational Services.

Current market factors

This is an industry dominated by technology and the ever-changing tastes of the viewing public. There are a number of factors combining to shape this industry:

·          The evolution of the online space. The Internet is making rapid progress toward becoming the dominant commercial space in the industry. Internet advertising revenues grew to £1.3 billion in 2005 - up 73% over 2004. This was almost three times the size of radio revenues (which fell 7% to £0.43 billion) and approximately a third the size of the TV advertising revenues (news release: 10/08/2006).

·          New revenue sources. In reaction to this increased competition, the TV broadcasters are seeking new income sources. Total TV revenues hit £10.6 billion in 2005 - up 4% from 2004. Much of this growth was driven by an 8.5% rise in subscriptions to Sky, NTL and Telewest (news release: 10/08/2006).

·          New restrictions on TV advertising. TV advertising revenues hit £3.6 billion in 2005 - accounting for 37% of all TV revenue. However, in November 2006, Ofcom announced restrictions on the advertising of 'junk food' to children - which could cost the industry up to £39m per year. Meanwhile, the EU announced a Draft Audio Visual Media Services Directive in 2005, which will restrict 'product placement' and the associated revenues - if it comes into force (news releases: 13/11/2006, 17/11/2006).

·          The future role of the BBC. The BBC occupies a central role in UK broadcasting - accounting for £626 million of expenditure on radio productions and a further £2.4 billion on TV. Any changes to the BBC's remit and funding will affect the whole broadcasting sector - although the current Royal Charter grants the BBC another 10 years of funding by the licence payers before the issue is next re-examined. However, the ongoing negotiations on the size of the TV licence fee mean that its mandate and size are yet to be defined for the near future (news release: 01/11/2006).

·          The move to digital broadcasting. By the end of March 2006, over 70% of UK households had access to digital TV services via satellite, terrestrial or cable. This digital "switch-over" is due for completion by 2012 - and heralds a definite end to the cosy monopoly enjoyed by the existing 5 terrestrial channels. The new digital arena allows for a vast array of new channels - and will further reduce the dominance of any single broadcaster (news release: 16/11/2006).

Analogue radio is also in decline - 55% of UK households now listen to digital radio, through any of several mediums, e.g. 21.6% of the radio listening public were accessing it though Digital TV by September 2006 (news release: 26/10/2006).

·          UK film tax relief. The Finance Act 2006 replaces the long-established regime of tax breaks for UK films with a new system, restricted to films classified as 'culturally British'. Large-scale productions such as Casino Royale, have contributed to total UK expenditure of £486 million in the first half of 2006. However, the broadcasting workers' union BECTU have expressed fears that the new rules will discourage foreign investment in the British film industry (news releases: 14/10/2005, 01/09/2006).

·          The growth of 'on demand' delivery. 'On-demand' delivery of services through digital platforms, such as the mobile phone or Internet broadband, is increasingly common among 16-24 year olds, who watch 7 hours less TV per week than the average adult. Ofcom predicts that broadcast television will have ceased to be the dominant medium for the next generation of consumers (news release: 01/11/2006).

·          Convergence. Broadcasters are increasingly seeking to deliver their content through as many different platforms as possible - which explains a lot of the recent acquisition activity, as broadcasters seek to combine fixed-line and mobile telephony, digital TV and broadband into "quadruple-play" service.

This development includes NTL's acquisitions of Telewest in 2005, of Virgin Mobile in July 2006 and its recent offer for ITV in November this year (news releases: 09/11/2006, 21/11/2006).

The UK broadcasting sector

There are 54 broadcasting firms with a primary listing on the London Stock Exchange. Two are FTSE 100 members - BSkyB and ITV. These two blue chips account for 77% of the sector's market capitalisation, whilst the 43 AIM companies together account for just 5%.

Market	Capitalisation	No. of Listings
Main Market	Large cap shares (FTSE 100)	2
	Mid cap shares (FTSE 250)	3
	Small cap shares (FTSE All-share  excl. FTSE 350 + Fledglings)	6
AIM		43

 Satellite broadcaster British Sky Broadcasting (BSkyB) is the sector's giant with over 8.2 million 'direct-to-home' customers in the UK and Ireland - equivalent to almost 1 in 3 households. And in line with the changing nature of the market, consumers can now also access Sky programming through broadband and mobile phone.

BSkyB bought Internet service provider Easynet in February 2006, introduced 'free broadband' for its pay TV subscribers in July 2006 and got involved in the bidding for ITV last month - acquiring a 17.9% stake for £940 million (news releases: 12/01/2006, 18/07/2006, 17/11/2006).

Top 10 Broadcasting Companies	Market Cap £ mil
BSKYB	9,620.33
ITV	4,180.63
EMI GROUP	2,131.50
GCAP MEDIA	351.02
CHRYSALIS GROUP	226.56
EROS INTL	209.50
UTV PLC	209.11
SMG	186.49
THUS GROUP	119.70
PINEWOOD SHEPPERTON	107.20

Source: LSE 31/10/2006

Its been an eventful year for ITV, which has struggled to keep up with a changing market. ITV reported an operating profit of £163 million (up £13 million from the equivalent period in 2005) for the six months to 30 June, but declining viewing figures for ITV1 resulted in a 4% fall in advertising revenues.

ITV hopes to tap into new revenue streams, such as its strongly performing digital multi-channel offering (news release: 09/08/2006). ITV has also appointed former BBC chairman Michael Grade as its new Executive Chairman - and charged him with revitalising the Group. ITV's share price regained some lost ground in November, edging up 5.9% (news release: 28/11/2006).

EMI has had a turbulent year. On July 27, the music company withdrew a proposal to purchase Warner Music Group (WMG) after the WMG Board rejected the offer (news release: 27/07/2006). Group profits for the 6 months to 30 September fell to £62.7 million from £86.7 million in the same period in 2005. EMI attributed this decline to an accounting fraud and to shrinking CD sales - although digital sales continue to rise (news releases: 25/10/2006, 15/11/2006).

At the end of November, EMI also confirmed having received a preliminary takeover approach from an unnamed company. Its share price gained 25.7% over the first 11 months of the year (news release: 28/11/2006).

Two other 'top ten' firms, Ulster Television (UTV) and SMG have been involved in protracted merger negotiations. UTV - a television, radio and 'new media' company - first announced that it had approached SMG in August. UTV withdrew its proposal after repeated rejections from the SMG Board - although new merger talks in early December have again buoyed the SMG share price (news releases: 18/08/2006, 20/09/2006, 11/12/2006).

Pinewood Shepperton is a film and TV production company, famous for its association with the James Bond franchise. For the half year to 30 June, Pinewood Shepperton reported profits of £1.4 million, against a loss of £114,000 in the equivalent period last year, thanks to robust income from its media park and growing demand from foreign studios (news release: 13/09/2006).

Broadcasting on AIM

Most of the UK broadcasting sector is made up of AIM-listed companies. And as is frequently the case with the junior market, these firms include some impressive performers - and some disappointments.

ContentFilm, a London-based film and television sales company, has seen its share price surge by over 500% since the beginning of the year. The Group owns or controls a significant library of film and television rights, including over 2,000 hours of television and 100 feature films. In September, ContentFilm acquired Home Video Assets and Allumination Film Works to give the Group a significant US DVD distribution operation and increased scope to exploit its library of TV and film assets (news release 30/06/2006).

Maverick Entertainment saw its share price fall 60.71% in the first 11 months of 2006. Maverick - which owns the rights to the 1950s TV character Muffin the Mule - reported paltry gross profits of £1,116 for the 6 months to 30 June, as returns on its investment in the mule failed to materialise (news release: 29/09/2006).

This goes to show that those looking to invest in the broadcasting sector should be aware, as always, of both the potential and the pitfalls inherent in AIM.