Growth in European content supply may soon reach a tipping point as streamers shift from market grabs to profitability, while resources poured into production from states, consumers and advertisers are declining

The perceived value of long-form video content is dropping as consumers pay smaller amounts for a greater volume of choice, from which they are watching less

However, factors converge to prop up the European independent model: broadcasters’ resilient financing, the public favouring ‘deep’ local fare, talent’s preference for independents, market consolidation and new EU regulation

Advertising income has been the lifeblood of commercial TV for decades, but declining linear audiences—combined with digital video alternatives—mean the TV advertising model must evolve to ensure it remains as potent a medium for brands as ever.

Lack of effective audience measurement and somewhat opaque advertiser/agency/sales house relationships are hampering linear TV advertising revenues. Both issues need resolving to underpin a healthier ecosystem overall.

Flexibility is key to this evolution. A move to audience buys across most linear and BVOD inventory would provide greater flexibility and targeting for advertisers, and would sit alongside some premium context buys. A greater onus on volume deals would give broadcasters more certainty to invest in content and their advertising propositions.

Spotify paid $5 billion in royalties last year to the music industry. Critics claim the $0.0038 per-stream average royalty rate is too low. However, this is largely due to high volumes of ad-funded listening, a core part of Spotify’s freemium model, and a defence against piracy. 

To silence the critics, the “Spotify Loud & Clear” site presents data on the distribution of industry royalties, which are heavily skewed to established artists. Only the top 5% of artists generate annual industry royalties above $1,000, though they take home less under their deals. 

The remaining 95% of artists on Spotify generate under $1,000 a year and use the platform mainly to reach fans that attend live gigs, their primary source of income, now halted by the virus. These artists’ problem is digital discovery, as Spotify’s playlists push hits rather than the midlist. 

The sector rebounded slightly in the quarter to December thanks to a seasonal improvement in the roaming drag, although the partial lockdown tempered the recovery.

We await imminent news on spectrum trading, and there may also be some licence fee reductions as a consequence of the lower prices in the recent 5G auction.

While the sector is likely to continue to struggle into Q1, the outlook is much brighter thereafter thanks to the annualisation and even reversal of some lockdown effects, and to higher price increases from the spring.

Despite relying on a narrow IP base, US content production is booming, overwhelming other markets and seeking alternative distribution to cinema.

Responding to the rise of Netflix and Amazon Prime, studios seek to shift distribution from wholesale to retail—but only Disney may succeed.

Most content is likely to remain accessed by consumers through bundles. Provided they engage with aggregation, European broadcasters can adjust to the new studio model.

The digital transition is almost complete in France, five years after the launch of DTT. After undergoing an audience share decline, TF1's share is stabilising. In contrast, M6 improved its audience share during the transition. Both groups are likely to remain dominant in the FTA TV market, thanks to the partial withdrawal of public TV from advertising sales

The advertising recovery in 2010 was strong. Thanks to its diversification, M6 is less exposed to the cycle than TF1, which is rebounding more strongly. M6 is also structurally more profitable

Pay-TV platform growth has stalled, with subscription decline at Canal+ somewhat balanced by growth of low cost packages of IPTV providers. Canal+ will benefit from the withdrawal of Orange from premium TV and a new distribution deal with Orange. Combined with the roll out of new set-tops with PVRs, we are moderately optimistic on Canal+ prospects

CPW’s European handset business had a steady quarter, with growth dipping slightly on the previous quarter but still in line with full year guidance. Smartphone sales are surging, and CPW is orientating its business towards them, but their impact is not unambiguously positive in Europe

The US handset business continued to enjoy strong growth, with this side of their business benefitting strongly from smartphone growth, and this outperformance led the company to increase its full year EBIT guidance

The UK ‘big box’ roll-out is continuing, but no sales figures or indications have been given, and the full year operating loss guidance has been increased, eating up some (but not all) of the outperformance from the US. There appears to still be much experimentation involved at this stage, and even more uncertainty about the eventual success or failure of this new business

Vivendi is close to being in a cash position to buy out minority shareholdings in SFR and Canal+, shedding the image of a ‘conglomerate’ of partly owned and diverse assets, which has weighed on valuation Acquiring Vodafone’s 44% stake in SFR (now only a question of price) would allow Vivendi to rebrand itself as a telecoms story, serving France, with Maroc Télécom and mainly Brazil’s GVT supplying the upside To fully acquire Canal+, Vivendi’s offer will need to consider Lagardère’s option of floating its 20% stake. Owning 100% of Canal+ and SFR opens the narrative of a ‘French media/telecoms champion’ – which we find less credible

CPW saw growing revenue but falling volume in its core European handset retail business, as contract handset growth outperformed prepay

We believe that this is in line with a slightly subdued market, with consumer confidence quite weak across a number of European countries

CPW’s US business did much better, growing at 30%, and it is this strength that leaves us confident in the group’s ability to have a strong full year

Subject to BBC Trust approval, Canvas looks almost certain to launch in spring 2011 after the OFT decided that it did not have the jurisdiction to review Canvas under the merger provisions of the Enterprise Act 2002. The OFT decision does not rule out complaints on other grounds, but the chances of persuading the regulators look very small

The launch of Canvas promises to strengthen significantly the free-to-air digital terrestrial platform, otherwise very limited compared with satellite and cable platforms in terms of bandwidth, but mass adoption poses numerous challenges and it is open to question whether Canvas will ever extend to more than half the DTT base

In the long term, it is hard not to see Canvas as an interim step in the growing convergence between the TV screen and the internet, raising the question of how successfully its PSB TV-centric approach can adapt to the coming challenges of the full blown digital age