creativeukaudiov2011

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About the authors

ROBIN FOSTER is an expert in media and communications policy and strategy and founder ofCommunications Chambers. He was a member of the Steering Board for Digital Britain, and led theGlobal Communications Consortium at the London Business School. Robin was one of the foundingpartners at Ofcom, where he was responsible for strategy and markets. Previously he was director ofstrategy at the ITC and the BBC.

TOM BROUGHTON is an Associate at Communications Chambers, specialising in media strategy. Hehas worked widely with broadcasters, telecommunications companies, regulators, investors and

content owners, including the BBC and Pact.COMMUNICATIONS CHAMBERS is a growing association of leading experts in the fields ofcommunications, media and technology. Its founders have all worked at senior levels in the industryor regulation, in addition to having many years of consulting experience.

The main differentiator and source of recuring revenue streams would seem to be the ownership of IP (rights to original programming). This is a very

expensive and risky investment for broadcasters to make, but seems to be the future basis of competition.

This related very well to the recent news of YouTube and Netflix investing in creating original content. This will allow them there own key differentiatos

and provide key revenue streams that can be reinvested into this key competative space.

As an aside the watermark idea could be used as a key enabling technolgy to further expliot content to gain further revenue streams - inextricably linking

content to the owners other service and product offerings.


3/39Communications Chambers l Creative UK 1

INTRODUCTION ...........................................................................................3EXECUTIVE SUMMARY ...............................................................................4

A UK SUCCESS STORY .................................................................................7

Significant economic value...........................................................................7

A world leading exporter.............................................................................8

Satisfied consumers....................................................................................12

Wider impact..............................................................................................13

Vital social and cultural role......................................................................17

Success factors ............................................................................................19

INNOVATION AND GROWTH...................................................................20

Technology innovation...............................................................................20

Content innovation ....................................................................................21

Prospects for growth ..................................................................................22

FUTURE CHALLENGES..............................................................................26

Fragmentation of audiences.......................................................................26

The search for new revenue models .........................................................26

New intermediaries....................................................................................28

Investing in the high end ..........................................................................28

Threat of piracy .........................................................................................29

A clear message ..........................................................................................30

SECURING THE FUTURE ..........................................................................31

The IP trade-off .........................................................................................31

Wider access to IP ......................................................................................32Preserving the jewel ...................................................................................33

APPENDICES ................................................................................................35

REFERENCES ................................................................................................36

CONTENTS


4/392 Communications Chambers l Creative UK

Clockwise from top left:Jamies School Dinners, Channel 4/Fresh One Productions;Got to Dance, Sky / Princess Productions;A Touch of Frost, ITV / ITV Productions.



The UK audiovisual sector is a greateconomic and cultural success story. UKbroadcasters and producers have createdand commercialised content which hasdelighted audiences and generated incomeat home and abroad. This country now hasa powerful community of creative,innovative and entrepreneurial firms,which increasingly operate across bothtelevision and the internet.

In this report, commissioned by BSkyB,Channel 4, ITV and Pact, we examine thesectors success so far and explain itspotential for significant further growth. Welook in particular at the importance of an

effective intellectual property (IP) regime inrealising that future potential. Ourconclusion: the sectors continued growthwill depend on its ability to use IP to meetconsumer demand across a much widerrange of media platforms, consumerdevices and formats than ever before.

We hope that our findings will contribute toa clearer understanding of theopportunities ahead, and the importance tothe UK of securing the sectors continuingsuccess.

Robin Foster and Tom Broughton, April 2011

INTRODUCTION

This is specific to content creation, not necessarily distribution and other 'services'.


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Overview

The UKs audiovisual sector delivers to thiscountry a unique combination of economicand cultural value:

It accounts for significant economicvalue in its own right, and is a majorsocial and cultural influence.

It supports a fast growing community ofinnovative and entrepreneurial UKbusinesses.

It has played a leading role in creativeand technology innovation.

It is successful around the world and ispoised for further growth.

To realise its full future potential, the sectormust:

Continue to successfully commercialiseits content and services across manydifferent new platforms, devices and indifferent formats and applications.

Use those opportunities to develop newbusiness models alongside existingrevenue sources.

An effective intellectual property (IP)

regime will be at the heart of any futuresuccess story for the sector, just as it hasbeen a spur to growth over past decades.

A vital economic contribution

Around 13bn flows directly into the UKaudiovisual sector each year:

This funds investment in contentproduction of around 4bn a year,which delights audiences here andaround the world.

It is the lifeblood of a dynamic and

diverse business community, with over7,000 firms ranging from world-leadingproduction companies to smallgarage-based start-ups.

It supports a host of highly-skilled jobsin distribution, marketing, technical andsupport services. Estimates put directemployment in the sector at 132,000jobs.

The sectors economic influence spreads farbeyond this direct effect:

It provides essential support for thewider creative industries, which accountfor some 6% of UK gross value-added.Londons highly-skilled post-productioncompanies, for example, rely on TV

alongside films and other media to buildthe critical mass they need forcommercial success. TV helps fund

many arts and cultural initiatives. It underpins a successful consumer

goods economy: TV receivers anddigital decoders accounted for over2bn in sales last year, fuelled bydemand for high quality content. Salesof tablets and smart-phones are in partdriven by the high quality contentproduced by the sector.

It helps stimulate consumer take-up ofbroadband services, hence improvingthe business case for investment in the

UKs communications infrastructure.High quality audiovisual content helpsdrive demand for high-speed internetconnections. It is no coincidence thatthe UK has one of the worlds highestbroadband take-up rates.

This is economic activity on a substantialscale, and an important building block forthe UKs future economic growth.

Unique cultural value

The UK audiovisual sector also plays a vital

educational, social and cultural role. Noother sector has quite such a significantinfluence on all our lives:

Supporting democracy through its highquality and independent news andcurrent affairs: 22m people watched the

Election Debates in 2010; 66% of the UKpublic cite TV as their main source ofnews.

Providing informative and entertainingfactual programming from majordocumentary series like Niall Fergusons

Civilization: Is the West History? to themany niche channels covering history,science, travel and lifestyle.

Bringing the nation together for majorevents, from theX Factor finals to topsporting occasions.

Supporting UK culture and the arts for example Skys dedicated artschannels which commission originaldrama and music and support a widerange of public arts initiatives.

4 Communications Chambers l Creative UK

EXECUTIVE SUMMARY


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A world leader

Building on its strengths at home, the UKis a leading exporter of audiovisual contentand formats:

International sales of UK TVprogrammes and associated activitiesgrew to 1,337m in 2009 a 127%increase on 2006.

Second only to the US in terms ofinternational sales, some of the biggestglobal TV brands and talent are fromthe UK.

In a typical month, audiences in the USwill be enjoying the antics of Gordon

Ramsay inHells Kitchen, while viewersin China will be voting for the winner ofChinas Got Talent. In Australia, they willbe watching their version ofCome DineWith Me, while Spanish drama fans willbe glued to the latest episode ofDownton Abbey.

Overseas companies like Time Warnerand NBC are investing in the UK tocapitalise on our advantageous mix ofexpertise and opportunity.

In parallel, UK broadcasters andproducers have established successfuloverseas production bases in the US andelsewhere to take advantage of growingexport markets.

The UK could rightly be described as theworlds leading creative R&D laboratory fortelevision:

The UKs mix of public and commercialfunding contributes to an appetite forexperimentation and innovation inprogramming.

The UK has some of the highest

consumer take-up rates in the world fordigital technologies, providing UKcompanies with an ideal environment inwhich to market test new products andservices.

On the back of these developments, theUK production sector has the chance toestablish global centres of excellence for example for 3D production.

TV and film contracts have fundedimpressive developments by UKcompanies in advanced animation,computer graphics and special effects

techniques.

Key success factors

The sectors success is no accident. Two keyfactors are healthy competition and theintellectual property framework:

The UKs commercial TV sectorcompetes fiercely for audiences andrevenues. As some 500 channels vie foraudience attention, the successfulplayers have had to show an impressiveunderstanding of consumer tastes andtrends.

To attract viewers, the main UKbroadcasters have invested significantamounts in high quality UK

originations, and in the digitaldistribution networks to reach viewersacross the country.

From the launch of 3D TV to thecreation of new global formats, thesector has shown the capacity to createnew ideas, take risks, and successfullybring those ideas to market.

Critically, ownership of intellectualproperty (IP) has played a key role inthe sectors development. TV is all aboutcreating and then commerciallyexploiting intellectual property.

Ownership of IP provides the incentivefor broadcasters and producers to createnew content, fund innovative ideas,build new distribution platforms andre-invest profits in future growth.

Major opportunities ahead

The audiovisual sector now faces anexciting new world:

Digital media and the internet offer newways of distributing and charging forcontent.

Last year over 5bn videos weredownloaded over the internet in theUK, and developments like YouView a hybrid broadcast and online platform offer scope for radical new ways ofdelivering content to consumers.

Alongside broadcast release, content isbeing reformatted, diced and spliced forrelease on demand, via YouTube and inthe form of new iPhone and Androidapps.

Communications Chambers l Creative UK 5

Fairly quick in the uptake of HD, 3D TVs already a viable purchase for most

replacing their sets. Probably helped by the relative affluence of the UK population

and the popularity of TV as a main past-time.

Original content created in the

UK, and alternative digital

distribution - VoD, web, mobile.



Without the certainty provided to the UKaudiovisual sector by an effective IP regime,we could well see a vicious circle of falling

revenue, leading to reduced investment incontent and further reductions in revenue.This would hit not only establishedbroadcasters and producers, but also theentire UK creative sector.

On the other hand, consumers increasinglyhave a wealth of choice when it comes toaccessing content:

UK content players from across thesector are already re-inventingthemselves for the new connectedworld.

They recognise the benefits of makingtheir content available in a multiplicityof ways either free or at user-friendlyprices, to the benefit of consumers athome and abroad. FromX Factor toSkins, many of the major content hits ofthe recent past have had a strongonline/mobile dimension to theiraudience proposition.

They are comfortable in working withother partners to syndicate and packagetheir content. From YouTube to iTunes,UK content has never been easier tofind.

Large and small firms are working welltogether to build new businessopportunities, for their own benefit andfor the benefit of the UK economy as awhole. At the point where TV and newdigital media come together, a creativeexplosion is taking place.

The message is clear. The audiovisual sectoris already a UK success. It faces excitingnew opportunities, and the scope to buildnew revenue flows to supplement the old.With effective IP protection it will be morethan capable of rising to those challenges.In so doing, it can not only secure its owngrowth, but also through the companies itworks with and supports be a powerfulspringboard for wider UK success in digitalmedia and the internet.

New world markets are opening up. InChina and India, demand foraudiovisual content and formats is rising

fast. UK content producers are well-placed to take advantage of these newmarkets, drawing on the UKscomparative strengths and strongexport track record.

These developments are part of a clearstructural shift:

The sector is moving from a relativelysimple world in which the costs ofcontent could be recovered on firstbroadcast, to one in which investmentsonly make sense if revenues can be

generated across multiple platforms andmultiple release windows. Often, only60% of the budget for a high-end dramawill be covered by income from thebroadcast window.

At the same time, audiences aredemanding high impact content, whichrequires big and increasingly riskyinvestments. High-end dramas cost upto 1m per episode, while SkysFlying

Monsters single documentary had abudget of several millions.

New revenue sources are as yet largelyuntested, piracy is a threat, and manymore distribution deals will need to bedone with successful new contentaggregators like Apple.

In future, it will be essential for theaudiovisual sector to realise the value of itscontent across many more media platforms,devices and formats than ever before.

The importance of IP for future growth

A legitimate debate is underway in the UK

and across Europe about how best toencourage investment and innovationthrough an effective IP regime, withoutunduly restricting user access to that IP.

The current IP regime in the UK hashelped support the audiovisual successstory so far. Our view is that the risks tofuture investment of relaxing IP protectionare significant, while concerns aboutreasonable access to IP by consumers andother users are already being effectivelyaddressed.


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The UK audiovisual sector, with TV at itsheart, is one of the most dynamic andcompetitive media markets in the world.1 It

makes a substantial contribution to the UKeconomy in terms of output and jobs,supports a growing export business, andhas a huge influence on our social andcultural lives. As well as its own directimpact, it helps support a wider criticalmass of technical, production and artisticexpertise, which underpins the UKsthriving creative economy.

This success hasnt happened by accident.It is a result of a combination of a strongcultural tradition, exceptional creative

talent, supportive government andregulatory policy and a healthy commercialsector.

The main commercial players havesuccessfully exploited advertising andsubscription revenue flows, enabling themto offer both mass appeal programmingand more specialist content which caters forthe passions and interests of many differentaudience groups. An influential publicservice broadcasting sector contributes tothe range and diversity of contentcommissioned and broadcast, and helpssecure high levels of original UKprogramming across the sector.

A supportive IP framework has encouragedinvestment and helped nurture anentrepreneurial production sector. And the

sector has benefited from the UKs uniquecreative talent base two of the last threeBest Director Oscar winners, Danny Boyleand Tom Hooper, for example, were Britishdirectors who started out working in homegrown TV.

In all senses, this is an industry of whichthe UK can be rightfully proud.

Significant economic value

TV is of course an important cultural force.

But with around 13bn a year of fundsflowing through the audiovisual economy,supporting direct production to the valueof over 4bn, and as many as 132,000direct UK jobs, the audiovisual sector alsogenerates significant economic value.2

Sectors like this, which rely on the creationand exploitation of intangibles, arefrequently cited as being critical to thefuture economic success of the UK.3

Figure 1 gives an overview of the scale andscope of the sector.


A UK SUCCESS STORY

1 In this report, we use the term audiovisual sector to refer to broadcasters and producers who aremaking TV and other long-form audiovisual content such as corporate and educational videos. TV is

by far the largest part of the sector. Excluded are feature films and advertisements, but they clearlyshare many of the same inputs and draw on a similar skills base.2 Various estimates are available of the contribution of the creative sector as a whole to the UKeconomy. For example, DCMS (Creative Industries Economic Estimates published in 2010 but using2008 ONS data) estimates creative industries gross value added (GVA) to be 5.6% of total UK GVA.The TV, film and digital and electronic publishing sectors account for about half of this. The samestudy estimates that 132,000 jobs are supported by the sector across 7,700 firms. Others such as the

Work Foundation have released similar estimates. The Work Foundation (Staying Ahead, 2007)attributes 100,000 jobs to the audiovisual sector.3 For example, CBI President, Helen Alexander says The recalibration of the UK economy and the

building of robust business growth in the years ahead need our creative industries to play an activeand increasing role March 2010 Livery Lecture.


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The BBC, ITV, Channel 4 and,increasingly, BSkyB are key drivers of TVproduction spend in the UK. The mainbroadcasters also invest significant amounts

in programme support (e.g. for live outsidebroadcasts), marketing and technicalservices, as well as on rights. But others areactive, too. In addition to the mainnetworks, a wide range of channels investedaround 250m on UK commissions in2009. Independent production companiesalso contributed some 200m in fundingback into the sector.

A world leading exporter

This strong home base has helped supportexport success. Punching above its weight,

the UK is the single largest exporter of TVformats in the world and the second largest(after the US) exporter of finished TVprogramming. Relative to the size of itstelevision industry, the UK is the largestexporter of TV content (see Figure 2).


SECONDARY

PRIMARY

INCOME EXPENDITURE

UK secondary rightse.g. DVD sales, merchandise

150m

Consumere.g. subscription, licence fee, PPV

7,510m

Advertisinge.g. advertising, sponsorship

3,430m

OtherIncluding teleshopping,government grants, charitablefunding, finance, interactive

550m

International exploitatione.g. programme sales, formats

1,340m

Balancing item

(including management, marketing, channeloperations, sales costs, subscribermanagement, return on investment etc.)

6,700m

Original production First run UK programming Sports programming & rights Online & mobile

4,150m

Distribution 750m

Acquisitions, films, repeats 1,380m

12,980mTOTAL INCOME 12,980mTOTAL EXPENDITURE

Figure 1: A 13bn sector: the flow of funds through the UK audiovisual sector4

4 Communications Chambers estimates based on Ofcom Communications Market Report 2010;Independent Production Sector Financial Census and Survey 2010, Oliver & Ohlbaum for PACT;Company Annual Reports including BSkyB, Virgin Media, BBC, ITVplc and Macquarie UKBroadcast Holdings Limited. Deloitte report for the Satellite and Cable Broadcasters

Association, 2011. Details are given in the appendix.



1,337m589m

549m

294m

2006 2009

0m

125m

386m

11m

41m

+127%

63m

185m

45m

119m

56m51m

Figure 2: Hours of TV exports per m TV industry income 5

5 Source: Ofcom International Communications Market Report 2010, TRP Rights of Passage 20076As explained in Rights of Passage, TRP for Pact, 20087 Source: UK Television Exports 2009, TRP for UKTI / PACT8 We note that from the Pact Independent Production Census that one of the most substantialrevenue streams from export sales is from overseas commissions. Of the 439m total independentexport revenues in 2009, 296m was from primary international commissions (more than 67%).

Figure 3: UK television exports, 2006 vs 2009 8

Despite a low number of episodes per runand a shortage of long term returningseries, British TV continues to enjoy

significant global appeal. UK companies arepioneering new ways of opening upoverseas markets (through theestablishment of local productioncompanies for example) and areincreasingly focused on formats andco-productions with overseas partners.6

As Figure 3 shows, the international sale ofUK TV programmes and associatedactivities grew to 1,337m in 2009, a 127%increase on 2006.7

The US and Australasia, along with otherEuropean countries, are the UKs mainexisting markets. Even as quintessentiallyBritish a show as Coronation Street has soldin over 40 countries including Australia,Canada, Ireland, Taiwan, Somalia,Morocco, New Zealand, South Africa,Estonia and Poland.

UK companies have been especiallysuccessful in breaking into the highlycompetitive US market, which nowaccounts for around one third of alloverseas commercial income. Their abilityto compete successfully with US studios intheir home market underlines the potentialof the UK sector and its capacity to deliverquality, consistency and value to customers.

Particular success in the sale of formats now worth almost 120m means that theUK now accounts for more than half of allexported English-language format hoursworldwide. Export success hasencompassed services like Sky News, as wellas individual programmes and formats.

Export to similar cultures, there may be a cultural divide,that limits the export appeal to countries with strong culturalidentities clearly different to the west (China, India etc).These are massive markets and provide excelent opportunityfor local producers and distribution.



Case Study: Downton Abbey

ITVs recent costume dramaDownton Abbey, broadcast onITV1 in autumn 2010, received huge critical and ratingssuccess. Written and created by Oscar-winning writer JulianFellowes, produced by Carnival Films and NBC Universal, itwas the most successful drama launched on any channel in theUK since 2003. ITV has commissioned a second series to bebroadcast in 2011.

On the back of its UK success, NBC Universal has licensed

Downton Abbey to more than 100 international territories.These include Albania, Australia, Belgium, Croatia, Denmark,Finland, Germany, Iceland, Ireland, Israel, Japan, theNetherlands, New Zealand, Norway, Poland and Sweden andthe United States.

Downton Abbeys launch in Spain in March 2011 delivered3.2 million viewers, (a 17% audience share) for Antena 3,and it became the hottest trending topic on Twitter in Spainafter it was broadcast.


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Figure 5: The power of television in the UK: timespent on media by day (minutes) 10

Satisfied consumers

UK consumers cant get enough ofbroadcast TV. TV consumption remainshigh, even though more people arespending time with other media andcommunications activities as well. Ofcomdata shows how average viewing per headper day has remained robust in recentyears being 3.75 hours in 2009 comparedwith 3.7 in 2004.9 We are watching moreTV than at any time in the last five years.

As Figure 6 shows, popular TV still has thepower to bring large audiences together forimportant shared experiences. In turn,

these programmes attract advertisers whoneed to reach large audiences as efficientlyas possible. High quality content whichattracts good ratings still offers advertisersan effective tool for building brands andcommunicating with large audiences. The2010 series ofX Factor on ITV, for example,was the most watched ever. Alongside this,pay TV adds an important extra dimensionto consumer choice. Pay services haveattracted a large subscriber base of thoseviewers who like the range and choice ofchannels offered, and who are happy to pay

directly for content they especially value from premium sports to high quality arts.

Entertaining and well made content is thekey to this success. It is sometimes arguedthat in an online world, characterised byabundant choice and a plethora of newproviders, high quality content fromtraditional providers becomes irrelevant.However, analysis of BBC iPlayer usagesuggests that even when viewers haveaccess to a much wider range of content(the long tail) the hit shows becomeeven more important. For example, asshown in Figure 7, the top 10 programmeson the BBCs iPlayer in January 2011accounted for around 11% of all views.


Figure 6: ITV1 programmes still bring the nation together11

9 Source: Ofcom Communications Market 201010 Source: Ofcom Communications Market 201011 Source: BARB, Communications Chambers analysis

People are stillwatching TV as muchas they ever were, andadvertising is still viable.The main shows are stillwhere the peak audiencestune in, and access online.


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For the BBCs linear TV channels, it was

just 4.6%. Likewise, YouTube statistics showthat the majority of the all-time mostpopular channels are run by well-established content providers. Six of the 10most popular channels in June 2010 wereassociated with TV.

Wider impact

Although difficult to quantify, TVseconomic influence is felt even more widely.We can see it all around us. High quality

TV content plays a key role in driving thesales of TV sets, recorders and otherconsumer devices, contributing to asuccessful retail economy. The sale of TVsets and digital decoders alone is worthover 2.2bn a year.13


12 Source: BBC iPlayer stats; YouTube statistics June 2010, Ofcom Communication Market Report 201013

Source: ONS Family Spending Survey, 201014 In 2010, for example, Channel 4 worked with over 300 television and digital productioncompanies across all parts of the UK, many of them SMEs

Case study: supporting the growth of small independent producers

Broadcasters have a strong track record of supporting andgrowing independent production companies. On suchcompany is Maverick, which began in 1994 as a smalltelevision production company based in Birmingham. Someof Mavericks staff started out in the Birmingham Film andVideo Workshop, a community based media organisationsupported by Channel 4.

When Maverick was established, Channel 4 commissionedcommunity films, including titles such as Wingnut and the Sprogfrom the nascent company. Maverick grew and diversified,working with Channel 4 to make single films and educationprojects, and Channel 4 also supported the companys

strategic diversification into features programmes andsubsequently series-based production.

Now part of All3Media, they are one of Channel 4s biggestsuppliers, with hit series such as How To Look Good Naked,10 Years Younger and Embarrassing Bodies. Their formats have

been sold internationally, they are a major media employer inthe region and they have developed an award-winning digitaldivision responsible for some of Channel 4s most innovativedigital content.

Mavericks expertise in providing engaging health informationon digital platforms, developed through series such asEmbarrassing Bodies, has enabled them to expand beyond

broadcast media, last year winning a 15m contract with theNHS to build a broadband medical service.

And TV of course helps support a largenumber of businesses engaged in allaspects of production, post-productionand distribution many of them SMEs.Broadcasters like Channel 4 have longcultivated strong relationships with awide range of independent producerswho often produce the most innovativeprogramming ideas.14 TV contracts help

support a multitude of smaller firms whowork across the UK creative sector.London is a world-leading hub for post-production skills used in TV, films, andother types of content, which could notsurvive on the same scale without TVcommissions. The audiovisual sectorhelps support a large number of SMEsengaged in developing contentapplications for tablets and mobile phonedevices.

Figure 7a: Hit shows matter: Proportion of viewsaccounted for by top 10 programmes on iPlayer vs.linear TV

Figure 7b: Top UK YouTube channels by number ofviews (ms) in June 2010 12



Pre-production

Post-Production

Training

Education

Wider creative industries

Music, Film, Advertising

Consumer products

Televisions, Blu-ray, HD

Consumer media

Magazines, Websites, Newspapers

Broadcasting,Commissioning

Wider impact

of audiovisualcontent

Broadband deployment

Device manufacturing

Figure 8: The audiovisual sector sphere of influence



Case study: Sky support for Technical Resource Companies

Skys investment has helped companies which supply the technical resources to TV likeTelegenic which has worked closely with Sky in developing live 3D broadcasts, includingthe design and build of the worlds first purpose-built multi-camera 3D unit.

Telegenic started with one scanner. They expanded their production technology bybuying a VTR truck, two digital facility units and finally a HD capable scanner which inits first six months provided SD facilities for Rugby League, Rugby Union andPremiership Football. In 2005 Telegenic enhanced the capability of its latest scanner toprovide HD live transmissions with Dolby Surround Sound. Since then they have addedtwo further HD Units.

In November 2009 Telegenic worked with Sky exploring the concept of 3D HighDefinition Television. During six months of testing the worlds first live 3D Television

Broadcast was transmitted by Sky in January 2010 with Telegenic providing the facilities.This test phase culminated in the design and build of the worlds first purpose builtmulti-camera 3D unit. Commissioned by Sky and managed by Telegenic, it was used tolaunch Skys commercial 3D channel in April 2010. Another was rolled out in Septemberat the Ryder Cup in Wales . Transmitted in HD and 3D this flagship event launchedSkys domestic 3D service and was the biggest single Outside Broadcast that Telegenichave been involved with to date, supplying facilities for Skys output both in 3D and HDacross three trucks manned by over 100 crew.

Other examples of companies benefitting from Skys investment are: Aerial Camera Services: who provide remote cameras for rugby and football coverage Alston Elliott: which has become a world leader in on-screen graphics technology

Case Study: Channel 4 support for the digital media sector

Demonstrating the role that broadcasters can play in supporting new digital companies,Channel 4 last August announced a 1m investment in Dundees digital media sector.This has benefited a range of companies, including:

DYNAMO GAMES who were commissioned to create a new Facebook game, BeautyTown, which promotes positive body image, a theme covered in many of Channel 4sTV shows.

TAG GAMES who are working with Channel 4 to produce interactive games and appsaround some of its most successful brands such as Come Dine With Me and Peep Show.

Both Dynamo and Tag have also received co-funding from the Digital IP Media Fund,managed by Creative Scotland on behalf of Scottish Enterprise, and they will also be ableto develop their own IP alongside their work for Channel 4. Alongside this, Channel 4also commissioned independent producer Headlight Scotland to make a TV seriesexploring the Dundee games sector, focusing on the DareToBeDigital game designcompetition.

In addition to the above, Channel 4s Convergent Formats Fund, worth 2m in 2011,will invest in ideas, apps, and creative concepts for the next generation of connected TVservices, like YouView.


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As noted by Ofcom and the BroadbandStakeholder Group among others, highquality content is a significant driver of

demand for high speed broadband, hencecontributing hugely to the success of theUKs internet economy:15 Globalcommunications firm Cisco forecast lastyear that video would account for 40% ofglobal internet traffic by the end of 2010and increase fourfold between 2009 and2014. They say that video is quickly

becoming the killer app of all IPnetworks.16 Our own analysis of usage datasuggests that around 5% of UK fixed

broadband and mobile network incomecould be attributed to video downloads and

streaming roughly 1bn last year.

TV also provides those topics of nationalconversation which are so important to thesales of newspapers and magazines imagine the Sun newspaper or Heatmagazine without TV news and gossip.

Companies which supply the technicalresources to TV benefit, too, and thispattern is now being replicated in newdigital media, as the longer established TVcompanies seek new expertise, fresh talentand the partnerships they need to help

break into new markets.


Case study: ITV partners with Candyspace Media

Candyspace is a mobile and multi-channel digital agency.Started in its current form around four years ago with twopeople operating from a garage, it now employs around 20people, and works for a range of clients in the media, gamesand marketing sectors. Candyspace provides the creative,production and technology expertise to support content andmarketing strategies on mobile, tablet and website platforms.Clients have included Virgin and Momentum Pictures(producers of CSI).

For ITV, Candyspace has designed and developed a numberof key mobile applications. The company has been responsiblefor all stages of the process from interface design and the look

and feel of the application, through to technology, set up andtesting.

Tom Thorne, CEO of Candyspace, recognises that, in hiswords, it was a big leap of faith (for ITV) to go with a small

business of only 20 people for help with new revenuestreams, and emphasises the importance for small firms ofwinning business from bigger blue chip firms like ITV: Itsgreat to see the big blue chip companies supporting smallinnovative companies In his view, this sort of relationship iscrucial for smaller companies looking to build their businesses.He also credits ITV for treating their relationship withCandyspace very much as a partnership, and for helping thecompany to be in a position to win other contracts as new

opportunities arise.

15 Sources: Ofcom, Future Broadband Policy approach to next generation access, 2007, p62; BSG,Pipe Dreams? Prospects for Next Generation Broadband Deployment in the UK, 200716 Cisco: Visual Networking Index Forecast, June 2010


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Vital social and cultural role

Alongside this important economiccontribution, TV in the UK continues toplay vital educational, social and culturalroles. Arguably, no other economic sectorhas such a significant impact on how we liveour lives.

TV contributes to making the UK a moreopen and informed society, making this

country a good place in which to live andwork, and acting as an ambassadorworldwide for British culture and values.UK viewers benefit from high quality newsand political debate including the Sky Newschannel, the main news bulletins on ITVand Channel 4 and specials such as thetelevised Election Debates in 2010.

Wide-ranging factual programmes such asJamies School Dinners and Hughs Fish Fighton Channel 4 attract audiences andchallenge viewers to see the world

differently. ITVs high quality dramas encompassing a spectrum fromcontemporary soap to period drama capture the nations attention and reflect itsculture. Skys dedicated arts channels play avaluable role in commissioning originaldrama and music and supporting a widerange of public arts initiatives.

It is the sectors financial viability drivenby the variety of funding models andopportunities for commercial exploitation which makes possible the range anddiversity of content available.

And in an increasingly fragmented andcompetitive world, broadcast TV is one ofthe few media which has the scale andreach to break innovative new services.

Case study: TVs role in breaking innovative digital services

Landshare, an innovative digital service launched by KeoFilms, brings together people who have land to share withthose who need it for cultivating food.

Since featuring in Keos River Cottage TV show on Channel 4in 2009, Landshare has grown into a thriving community ofalmost 60,000 growers, sharers and helpers. It has raisedawareness of important issues relating to health, wellbeing andthe environment, brought people together and provided anew way for the elderly to keep their gardens tidy.

Landshare has since won a number of awards, widespreadpraise in the mainstream media and was one of WiredMagazines 25 Big Ideas for 2011. An iPhone app has beenlaunched which allows users to map vacant land across theUK, and Landshare continues to recruit new membersincluding an increasing number of corporates, public bodiesand hospitals.

The symbiotic relationship between TV and online was

fundamental to Landshares success around 20,000 userssigned up after its mention on River Cottage. Without thereach and impact of TV, it is unlikely that Landshare wouldhave gained the audience it needed to engender publicity andwider support.

Since building its UK presence, Keo have begun to white labelLandshares technology for use internationally, with an

Australian equivalent launching in December 2010, anddiscussions ongoing with five other countries. They have alsopartnered with SharedEarth.com in the US to increasehome-growing around the world and contribute to reducingglobal carbon emissions.




17 Sources: BARB; The audiences view on the future of Public Service Broadcasting, Ipsos Mori;News News Future News, Ofcom; Guardian; Communications Chambers analysis


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Success factors

A combination of factors has helped drivethis success story, but two key influenceshave been competition and the IP regime.

Competition, in the form of a battlebetween channels for viewing shares,between platforms, and (in the commercialsector) for revenue is intense. Over 90 percent of households in the UK have access tomore than the 5 terrestrial channels, andthe 41 per cent which have chosen satellitecan select from around 500 channels. By2010, the UKs 5 main networks accountedfor 58 per cent of viewing, down from

74 per cent five years earlier. This level ofcompetition has helped fuel the search fornew ideas and formats, as channels havetried to differentiate themselves from theirrivals.

Against this background, the industry haslearned to think hard about consumertastes and preferences, and how to giveconsumers what they want at affordableprices. It has become a trulyconsumer-facing sector.

IP has also been a key and growinginfluence. In televisions early days,broadcasters had few opportunities toexploit their content rights beyond theprimary broadcast. As new distributionwindows emerged, however, content rightsbecame a more important part of theaudiovisual economy, enabling new incomesources to be developed. Over the lastdecade, the growth of UK independent TVproducers has provided a prime example ofhow IP can help create a virtuous circle ofinvestment, growth and re-investment inhigh quality content and formats.

Ownership of IP has providedindependents with the incentive to seeknew ways of exploiting their content athome and abroad, and has helped themraise finance to grow their businesses in theUK and internationally. More widely, IPcan fairly be described as the engine ofgrowth for the whole sector.

As a result of these influences, the UK nowhas a unique mix of large and smallcompanies, of integratedbroadcaster/producers and independent

production companies, and of creative andtechnical skills. Together these players arecapable both of sparking new ideas andsuccessfully bringing them to market.


Case study: The success of the UK Independent Production Sector

Originally supported by the establishment of Channel 4 as apublisher/broadcaster, the independent sector was given ahuge boost by the 2003 Communications Act, which usheredin a regulatory regime in which producers were able to ownand re-use the IP rights to their programmes. Broadcasterswould license certain rights from the producers, but theproducer retained secondary and overseas rights.

These fuelled an IP market, enabling producers to sell theserights around the world as well as to new digital services inthe UK.

They have been able to build globally successful business on

the back of that exploitation. As growing businesses, they hadan incentive to exploit these rights to the full, seeking newdomestic and overseas opportunities to do so. Rightsownership also gave these companies a valuable asset theycould use when seeking financial backing, making them trulyindependent from their main broadcaster customers.

The result has been impressive. In 2008, independentproduction in the UK was worth over 2.2bn, a 169% increaseon 10 years earlier. International revenues accounted for439m, a 28% growth on the previous year. And in 2010,almost half of expenditure on originated content went toindies (up from 40% in 2005). Pact reports that for someUK-based independents, more revenues are now generatedvia their US offices working for US networks than fromthe UK.

Independent producers are also re-investing a substantialproportion of export revenues back into UK production, withincome from rights exploitation and co-productionrepresenting a significant share of the 200m that the sectorinvests each year in UK content creation


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But is this success story of interest only tohistorians? After all, broadcast television hasfor some time been characterised as old

media. Digital and internet-basedtechnologies and services are the moreglamorous new. In fact, steadily andlargely successfully, the audiovisual sector inthe UK has been re-inventing itself to bringtechnology and content together, servingboth old and new media.

Technology innovation

The UK has already been a leadinginnovator in the development and roll-outof a range of digital technologies.

Companies like BSkyB and Virgin haveinvested heavily in new technologies andadapted them for mainstream use ensuring that they work, are consumer-friendly, and expertly marketed. As a result,as shown in Figure 10, 91% of householdsnow have digital television, and 37% own atleast one digital video recorder. The firstSky high definition (HD) channels launchedin 2006, and now there are around 60 HDchannels across the sector. Sky now has over3.5m HD subscribers a third of its totalcustomer base and almost 60% ofhouseholds in the UK have an HD readytelevision set.

In fact, as Figure 11 shows, the UK hassome of the highest penetration rates ofemerging technologies in the world,providing a test bed for new ideas to betaken to market, in turn ensuring contentcreators are able to design for the latesttechnologies. Channel 4 and BSkyB, forexample, both led the way to makingcontent available on an on-demand basis inthe UK with the launch of 4oD and SkyPlayer as long ago as in 2006.


INNOVATION AND GROWTH

Digital TV HD Ready TVDigital Video

RecordersOnline TV

81% 91% 83% 57% 59% 48% 32% 39% 31% 22% 24% 19%

USFR

US

US

US JP FRIT

18 Source: Ofcom International Communications Report 2010. HD-capable households refers tohouseholds with a HD-enabled set.19 Source: Ofcom International Communications Report 2010

Figure 11: The UK and emerging technologies Take-up in the UK vs. France, Germany, Italy, USA and Japan 19

Figure 10: Take-up of emerging technologies in the UK over time 18

With the UK being at the centre of the uptake of new technology Snell

is well positioned to try new ideas out in the UK market, and/or build aliences

with the smaller innovative companies in the UK where commercial opportunities

may exist in a relationship.


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Looking ahead, exciting new developmentsinclude hybrid broadcast and IPTV servicessuch as YouView, an increasing variety of

mobile apps, and full commercialdevelopment of 3D. YouView, a consortiumincluding the BBC, Channel 4, Five andITV, will seamlessly combine digital TVwith catch-up, on-demand services andinteractive applications. It will contain arange of content that could previously onlybe found via a PC, and will operate on anopen platform basis, allowing all types ofcontent providers to reach audiences viatheir TV set.

Content innovation

The UK audiovisual sector is also a leadinggenerator of new content ideas andformats. In 2009, for example, almost half(47%) of the UKs main network output wasfirst run original UK commissions,20 withonly 6% of output hours being first runacquisitions from overseas considerablylower than other European countries. In atypical year, around half of all programmescommissioned from independent producersare new rather than returning series.21

Audiences have benefitted from a series ofinnovations over the years. Sky, forexample, brought innovative approaches tonews and sport, Channel 4 opened itsschedules to edgy and ground-breakingideas from the independent productionsector. The best of US drama and sitcomshave stimulated UK producers to competeon level terms with high-production-valuematerial.

The UK could rightly be described as theworlds R&D laboratory for audiovisualcontent, offering broadcasters and

producers the scope to try out more newideas across a wider range of genres than ispossible in other similarly-sized markets.US networks are increasingly looking toUK formats for both reality and scriptedTV to reduce their own investment risks.

Reflecting this, a number of US studioshave invested significant sums inaudiovisual content production in the UK


for instance Time Warners acquisition of

Leavesden Studios in Hertfordshire, andthe decisions by US networks to acquireleading UK production companies such asShed (acquired by Time Warner) orCarnival (acquired by NBC Universal). Inparallel, UK companies, such as ITVStudios US operation, have successfullyproduced versions of UK programmes such asHells Kitchen andFour Weddings for US networks and cable channels.

20 Source: Ofcom Communications Market Report 201021 Pact: Financial Census and Survey, 2010

Case study: The 3D story: innovation at work

BSkyB has been at the forefront of investment in technologyand services which improve the viewing experience. Sky+represented a step forward in personal video recordertechnology, with easy to use interfaces and a market-leadingEPG. HD has become a broadcast standard for high valuecontent in the UK with over 3.5m Sky HD subscribers. NowSky is leading the way with 3D.

There were some 125,000 3D sets in the UK at the end of2010, ahead of industry expectations, and around 70,000subscribers. Sky is now producing around 2-3 live events in 3Deach week, including Premier League matches but also outsidebroadcasts of opera, ballet and rock. Original 3D programme

commissions are being increased, with last ChristmassFlying Monstersbeing the most lavish so far.

What Sky has done is take 3D for broadcasting from a conceptto practical implementation in little over three years. This hasinvolved working with the TV receiver manufactures to ensuresets were capable of accommodating Skys selected technicalapproach (they had previously been focused on Blu Ray) andwith producers of the broadcast equipment, to simplify andadapt technology invented initially for big budget movies. Allthis had to be done within the constraints of Skys existing settop box designs. Sky has also set up master classes for theindustry in 3D production skills, and produced its owntechnical guidelines for the sector.

As a result, the UK is now among the world leaders indeveloping 3D for broadcast to the home. The UK has achance to be a global centre of excellence in 3D production,and a number of production and post-production houses havealready worked with Sky to produce 3D content, using acomplex array of computer animation and visual effects. Theexperience gained will be transferrable to projects around theworld as demand for 3D content grows.


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Prospects for growth

Prospects for future growth areencouraging, particularly in two key areas.Firstly, exploiting the opportunitiespresented by digital media and theinternet. Secondly, continued exportsuccess.

Digital media and the internet

Consumers now demand access to contentacross media and on new devices. Thiscreates new markets for content and opensup additional revenue sources. In response,the audiovisual sector has been quick to

experiment with new ways of makingcontent available to consumers, examplesinclude:

Time-shift and thematic channels

On-demand services which are triallinga mix of pay and advertiser-fundedmodels

Hybrid broadcast and internet services

Mobile and smartphone services andapplications

Content available via the internet e.g.via search engines or aggregators suchas YouTube.

No-one yet knows which of theseapproaches will appeal most to consumersor make commercial sense, but it isimpossible to argue convincingly thatcontent is now in some sense being heldback from the market.


Case study: New approaches to established genres

MILLION POUND DROP The UK is a world leader in gameshow formats. This brand new entertainment format forChannel 4, from Endemol, was a live show stripped acrossseveral nights, and achieved a peak time audience of 3.4m forits second series. The live element, which included questionsbased on events that had taken place on each day of the showgave it a topical feel, and the title became a number one globaltrending topic on Twitter. An accompanying play-along gamebecame one of Channel 4s most successful online projectsever, with the second series attracting more than 100,000players a day and 7% of the programmes audience alsofollowing it online. Channel 4 broke new ground in combiningtelevision and online experiences in this way, and further two-

screen experiments will be increasingly important in future.

THE INBETWEENERS The UK has a great track record indeveloping new comedy, which then travels around the world.The third series of Channel 4s comedy show The Inbetweeners,from small indie Bwark Productions, had a record breakingaudience on E4, with 4.1m viewers: the highest rated showever on the channel. It also generated a lot of interest online,with over a thousand Facebook pages about the show, andachieved nearly 8m views on channel4.com alone across theyear. Earlier, series 2 demonstrated the increasing importanceof on-demand and repeat viewing. Each episode of series 2was watched by another 2m viewings aggregated over repeatson E4 and Channel 4, and almost 1.5m on-demand streams ofeach episode were initiated on 4oD. The series won a string ofawards and is now being developed into a feature film.

TALENT SHOWS TV talent shows have also been re-inventedfor the 21st Century.

Britains Got Talent, a variety talent competition, launched onITV1 in 2007, has proved a huge hit with viewers. The winnerof each series receives 100,000 and is given the opportunityto perform at the Royal Variety Performance. Susan Boyles2009 performance of I Dreamed a Dream sparked anInternet sensation and 19.2 million viewers went on to watchthe final live on ITV1.

Launched on ITV1 in 2004, The X Factor is a singingcompetition contested by singers drawn from public auditions.The winner of the competition is awarded a recordingcontract with Syco in association with Sony MusicEntertainment. The 2010 series was the most watched ever,with the final peaking at 19.5m and a 61% share. Video viewsfor the series totalled 31.5m with catch-up viewing continuingto grow up 78% year on year.

BothBritains Got Talent and The X Factor are produced byTalkback Thames and Syco and both have become successfulglobal formats following their success on UK television.



Case Study: An explosion of access choices

Over the last couple of years, consumers have been able tofind the TV content they want across a rapidly expandingrange of media, and via new content packagers.

ON-DEMAND

All the major broadcasters have their own VoD services:iPlayer, ITV Player, 4oD and Sky Anytime, offering streamedand downloaded content, free at the point of use toconsumers. ITV has over 40,000 hours of its content (25% ofits archive) already available or ready for exploitation on UKVoD platforms.

New content packagers, like LOVEFiLM and Blinkbox offer agrowing range of UK and international TV programmesonline for a small rental fee.

BT Vision and Virgin, as part of their wider TV services,feature their own on-demand programmes alongside access toexisting broadcaster players. BTs top TV download in March2011 was The Inbetweeners.

Broadcasters and content providers are making clips andwhole programmes available via YouTube and other internetsites. According to Comscore, some 5.5bn videos were viewedonline in the UK (Feb 09-10), of which about half were onGoogle sites.

Thanks to the syndication of 4oD, YouTube users have accessto 3,000 hours of full length programming from Channel 4scatch-up and archive at any given time. Thousands more clipsare available on YouTube including popular programmes fromall broadcasters.

Apple iTunes offers an expanding range of UK TVprogramming for download, for relatively modest prices.

MOBILE AND OTHER MEDIA

All major UK content providers are already making content

available or preparing to do so on smartphones, tablets andgames consoles such as Xbox and Playstation 3.

All Sky news and sports feeds are carried through mobile TVapplications on iPhone and by mobile network operators.Launched on March 17, Sky News in tablet format is a servicewhich combines touch and video in new ways to tell newsstories of the day.

ITV Player is available on PS3. Channel 4s 4oD catch-up hasbeen launched on PS3 and, shortly, will be available via a 4oDapp on the iPad.

Some of the most successful mobile apps are based onsuccessful TV programmes ranging from versions of populargame shows like The Cube, to voting in talent shows.


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Case study: The Only Way is Cross-media (or Essex)

The ITV2 hit series, The Only Way is Essex, produced byAll3Media, is one of ITVs fastest growing brands online.Broadcast in autumn 2010, the first series was hugely

successful online. For the second series, broadcast in spring2011, ITV is tapping into the social media interest around theshow in new and innovative ways.

A music video premiered on-air before the first full episodewas broadcast. An interactive version of this video, whichallowed viewers to click the video to find out more aboutcharacters and features, is available for download on ITV.com.

Also new for this series are online only episodes, availableeach Wednesday - the day after the main episode has aired.Users will be able to sign up to access these exclusive onlineepisodes on ITV.com. These episodes will also be available to

purchase on iTunes every Thursday.Facebook fans will be able to place themselves in the show,using the The Only Face is Essex app. The app will useFacebook data to put fans in the centre of the action in ashort-form episode.

The ITV.com/essex site will also carry a wealth of additionalmaterial, including a continuously active social media feed viaTwitter and Facebook.

The technology used to make the video fully interactive wasprovided by UK start up wireWAX, and digital creative agencyRalph worked with ITV to make the Essex Facebook

application.



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Export success

Looking to the future, television

consumption continues to grow around theworld. Viewers will watch 140bn morehours of television in 2011 (to 4.5 trillionhours), and 40m more viewers will beadded (to a worldwide audience of 3.7bn).22

Local broadcasters have a growing appetitefor well-produced narrative and factualcontent, and successful formats. Inparticular, there is a growing demand forcontent in the BRIC countries and otherexpanding markets.

Television in China is growing rapidly and

is rich in advertising revenues. Increasedcompetition for viewers has led to a searchfor new shows, especially talent and realityshows. Although many formats have beenborrowed, Chinas larger broadcasters arebeginning to import programme formatsunder licence including the UKs GotTalent format, and JapansHole in the Wall.Television is also a key sales driver of retailsales, such as childrens toys. Thomas theTank Engine is the number one Westernpre-school toy in China and Japan.24

In parallel, digital media will enable UKcontent broadcasters and packagers toreach some audiences around the worlddirectly. BBC Worldwide has led the wayhere, with BBC branded channels inEurope, North America, Asia andAustralasia. The internet could support afurther stage of this strategy withcommercially funded on-demand services.

0

100

200

300

400

500

600

700

800

2005 2006 2007 2008 2009 2010 2011F 2012F 2013F 2014F

Russia

Brazil

India

China

Figure 12: Increasing importance of TV in BRIC countries (no. ofhouseholds, ms)23

22 Source: TMT Predictions 2011, Deloitte23 Source: PwC Global Entertainment Report: 2010 - 201424 Source: http://uk.finance.yahoo.com/news/Hit-Entertainment-circled-US-tele-1442879324.html?x=0&.v=3




Despite these success stories, there are stillsome major challenges ahead. A majorstructural shift is taking place.

In the story so far, an effective IP regimehas played a growing role in the sectorssuccessful development. In the next stageof development, IP will assume evengreater significance as the sector squares upto these new challenges.

Fragmentation of audiences

The big shows still bring in big audiences.But although overall TV viewing has heldup well, it is increasingly spread acrossmore channels and new forms ofdistribution. This entails a radical shift inthe audiovisual landscape and how costs ofcontent production are recovered.

In the not too distant future, it is likely thatwe will see a marked shift in the pattern ofconsumption and hence revenuegeneration. While live broadcast channelswill retain their primary role, a much largershare of consumption will be accounted forby the many different ways in whichaudiences will have access to content: catch-up, archive on-demand, shared content via

Facebook, downloads from iTunes and soon.

The search for new revenue models

Future growth will therefore depend onfinding new sources of revenue tosupplement those which have funded thesector so far. As Figure 13 illustrates, whilenew sources of revenue will increase,primary broadcast income will almostcertainly decline. This rebalancing ofrevenue sources has dramatic implicationsfor the role of IP and its importance to

content suppliers.

The business case for content investmentwill increasingly depend on expectations ofrevenue flows from this range of differentsources not just the initial broadcast.Figure 14 shows how the sector dependseven now on a multiplicity of revenuestreams. This inevitably brings moreexposure to risk. Many of the potentialnew sources of income are still uncertain.Effective IP protection is vital to helpdevelop these new revenue sources wherethey offer promise, and also to protect

more conventional revenues while theyremain important.

FUTURE CHALLENGES

Before(2000)

Today(2010)

Future?(c2020)

Revenuefrom

primarybroadcast

Other

Revenuefrom

primarybroadcast

Otherrevenue

Revenuefrom

primarybroadcast

Otherrevenue

Figure 13: The growing importance to the sector of secondary and newmedia income25

25 Communications Chambers estimates, illustration of possible future trends



26 Pact: Financial Census and Survey, 2010

Figure 14: Total income across multitude of revenue sources exploited by independent production26

Figure 15: Opportunities for content syndication following first broadcast

A good example of this is Supernanny, areality TV show about parents struggling tocope with their unruly children. It was firstcommissioned by Channel 4 and producedby Ricochet, part of the Shed Media Group,who have successfully developed its incomepotential across many different markets.

As shown in Figure 15, Supernanny is nowavailable on DVD, on digital download andto stream online, and has been broadcastin, and adapted for, countries includingBrazil, Indonesia, Romania, China andPoland.

ncome for independent production, not

broadcasters. While this probably does

nclude some broadcasters this is the

ncome directly attributale to the content,

otherwise license fees, subscriptions and

advertising would be here also.



Figure 16 further demonstrates thechallenge. It shows a stylised example fromITV of the potential return on investmenton a well performing high quality UKdrama. For this type of production,broadcast revenues typically account for60% of the overall production budget.Without effective IP protection, makingthese big investment calls would become

even more risky, and much less attractive.Against this background, the so-called longtail of content made available on theinternet could play a vital role in makingthe difference to content providers betweenbreak-even and profits.

New intermediaries

Broadcasters have long relied oncontrolling most stages of the value chain from commissioning content to deliveringdirectly to their viewers via their ownchannels and distribution platforms. In thenew world, however broadcasters andproducers will increasingly need to dealwith new intermediaries contentaggregators such as Apple or Google. Theseintermediaries will provide an alternativeroute for consumers to find the contentthey like, but in doing so will expect a shareof the value generated by such content either in the form of consumer payments(e.g. iTunes) or a share of advertisingrevenues (e.g. YouTube).

This poses new business challenges for the

audiovisual sector. New deals can be done,

but where there are only a few powerfulgatekeepers, scope for striking a fair dealmay be compromised. If high value contentcannot earn a fair return, then the longterm supply of that content will bethreatened.

IP can play a vital role here in influencingthe competitive dynamics in this new

market, helping ensure that contentsuppliers have sufficient leverage whendoing deals with powerful gatekeepers tosecure a fair return for their content.

Investing in the high end

Rising competition for audience attention athome and abroad means that contentproviders must continually strive toproduce something exciting, new anddifferent to attract audiences. High valueproductions are an important means ofdifferentiating TV content from the vastvolumes of user generated content availableon the internet.

Often this means investing more in content,not less. More lavish production budgetsfor dramas, costly location filming fornatural history films and expensive talentfor entertainment shows. It may mean thatmore programmes have to be piloted, atgreater cost, to find those elusive successes.For every stand out hit, likeDownton Abbey,there are several others no less expensive,which fail to make their mark with

demanding audiences.

27 Source: ITV Submission to the Hargreaves Review of IP and Growth

204

-1,000

579

10943

65

170 186

-1,000

-800

-600

-400

-200

0

200

400

Cost B'castrevenue

Tier 1 TVsales

Tier 2 TVsales

Tier 3 TVsales

Co-pro DVD Total

ROI: 19%

Profit: 186k

Figure 16: Stylised economics of strong performing ITV UK drama (000) 27

There is a relationship here with the pressure of expenditure and content being the

key differentiator for broadcasters, and high value content needed to differential

from the multitude of on line user generated content. This is expensive, and

broadcasters need to expand across a number of platforms involving other

companies in the supply-chain taking their share of the revenues. This supply

chain needs to be profitable to ensure the reinvestment back into content creation.

So, just another example of increasing presure on broadcasters to reduce the costs

where possible - particularly in their linear broadcasting chain since this is not longer

their only contact to customers or income generation.

...and YouTube is now investing

in content creation of its own!

Is there a conflict of interest here?



As budgets rise, so production fundingincreasingly needs to be found from anumber of different investors rather than

just one commissioner. TV funding, at thetop end, now resembles film industryfinancing much more than ever before.Instead of a single passionate commissionerprepared to take an artistic risk and withaccess to funding internally, producers mustnow persuade one or more co-producers tocome up with the funding. Their decisionswill be made on the basis of a simplerisk/reward calculation. IP underpins thatassessment.

Threat of piracy

On top of these challenges is the threat ofpiracy, which will increase as broadbandpenetration and speeds grow. For obviousreasons, good data on the true extent ofpiracy are hard to come by. An Ipsos surveyin 2007 found that 32 per cent of UKadults had engaged in some form of film orTV piracy, which, they estimated could becausing losses to the sector of around500m. Even if this was at that time at thehigh end of possibilities, there is still clearlya potentially significant future problem. InSouth Korea, which has one of the worldshighest take-ups of high speed broadband,the problem has already been recognised,but solutions are proving problematic.

Case study: The role of deficit funding

FILM4

In 2010, 6 feature films with 3.6m of Film4 investment werereleased theatrically in the UK, including the criticallyacclaimedFour Lions and Mike LeighsAnother Year. These filmsattracted a further 54m of co-production funding resulting ina total film production budget worth 16 times Film4s originalinvestment. Co-financing partners included US studios,UK distributors and public funding bodies.

Illustration of financing of UK independent feature film:

As well as investing in production, Film4 currently spendsbetween 1.5-2m a year on development finance. Only a smallproportion of such projects convert into actual production, butsuccessful films can bring both financial and creative rewards Film4 backed productions have won 12 Oscars over the lastfive years.

PRODUCING FOR THE US

A typical scripted drama for the US networks would cost4.5- 5m for the pilot episode and perhaps 2m an hour ifcommissioned. In both cases, the US network will pay around50%. The producer will need to find around half of the costsitself or from other investors. Cost recovery and subsequent

profits depends on how successfully the title can be syndicatedin the US and sold around the world.

28 UK Piracy Study, Ipsos, 2007


32/39

The story of the impact of piracy on theUK music sector is well known. Theimmediate threat to audiovisual content

may be less apparent AV content is oftenmade available free to audiences (funded byadvertising) and so stands to lose lessinitially through pirated versions ofcontent. As the revenue mix shifts moretowards various forms of pay, however, andpiracy reduces measurable audiences foradvertiser funded content, then the painbecomes increasingly acute.

Piracy is not only a problem for domesticconsumption, but is also an increasinginternational challenge. In China, for

example, the internet is used to downloadpirated versions of the latest US TV showsoften just a few hours after they arebroadcast in the US. As noted earlier,formats are often simply borrowed oradapted by the main broadcasters thererather than licensed.

A clear message

One clear message shines through all thesedevelopments. The content sector is in theearly stages of a major rebalancing ofrevenues which will affect funding forcontent across traditional and new sources.While broadcast distribution will remainkey to future success, it will no longer beenough on its own to guarantee the fundsneeded to support high production valueinvestments. A range of newrevenue-generating mechanisms will beneeded as well. Success in developing thesenew sources will determine the long termfuture of content investment in the UK.


Case study: South Koreas experience with video piracy

In many markets the music industry has suffered badly fromonline piracy. South Korea shows that the AV industry can facethe same problems once high speed broadband is in place.

South Korea has aggressively pursued high speed broadband,and today approximately half of all households haveconnections offering speeds of 100Mbps or more.

Such speeds allow the rapid downloading of large video files.This, in combination with lax attitudes to intellectual propertyrights, has enabled an explosion of video piracy 85% of thosewith high speed connections were believed to be illegallydownloading movies.

DVD sales fell by 62% between 2002 and 2008 (vs. 86% growthin the US). As of 2008, Paramount, Universal, Buena Vistaand 20th Century Fox had all closed domestic operations inSouth Korea.

Pirated versions of new movies are typically available for freeor for KRW400 (22p, with fees charged to the users mobilephone), compared to a typical DVD price of KRW20,000(11.17).

In recent years the South Korean government has beenincreasingly energetic in tackling the problem, via education,cutting off repeat downloaders, prosecuting pirate websitesand even subsidising content acquisition costs for legitimatesites. Nonetheless, piracy remains a serious problem in Korea.



At the heart of the response to all of thesechallenges is the need for an effective IPframework. The current IP regime has

worked well so far in enabling the UKaudiovisual sector to adapt to change andto build new revenue sources. It hasunderpinned the success story set out inthis report. Nevertheless, there is alegitimate debate underway in the UK andacross Europe about how best to securecontinued investment in IP, while allowingconsumers and other users reasonableaccess to that IP.

The IP trade-off

IP policy ultimately must be informed by atrade-off between the long term benefits ofcopyright protection in this case in theform of a greater supply to consumers ofinnovative and high quality content andthe potential short term costs forexample, reduced access to content, oraccess for a price. Our view is that the

balance of benefits and costs in this case isclearly in favour of retaining the keyfeatures of the current framework.

Certainty about IP rights will allowproducers to decide whether or not to takea risk in investing in content. It will allow

broadcasters and distributors to determinewhether or not they will make enoughincome across different media to cover theircosts. Above all, it will provide incentivesfor continued investment in a wide range ofhigh quality content which can be madeavailable across many different media indifferent ways, to the benefit of both theindustry and consumers and the economyas a whole. Moreover, its effectiveness will

be even more important in the future. Ifthe IP regime were to be weakened, the

costs could be high, with the risk of avicious circle of declining revenues, leadingto declining investment, leading to furtherdeclines in audiences and revenues.

SECURING THE FUTURE

Case study: IP and the UK audiovisual sector: benefits outweigh the costs

The economics of IP are relatively straightforward. EconomistChristian Handke explained how it works in his paper for theUK Strategic Advisory Board for IP.30 On the one hand,without IP, fewer creative works would be supplied than would

be socially desirable. On the other hand, copyright entailscosts, by restricting consumer access and use for follow-upcreation. A trade-off has to be made.

Often, this entails a trade-off between short term costs (interms of costs of access for consumers, and possibly monopolyprofits for suppliers) and long term benefits (in terms ofgreater incentive for the production of creative works, moreinnovation among suppliers). The risk to follow-on innovation

is often hardest to quantify.

How should this trade-off be made? In the case of the UKaudiovisual sector, the answer seems reasonably clear: the longterm benefits are likely to outweigh the short term costs.

The long term value to the UK of a healthy audiovisual sectoris high. Huge consumer benefits flow from continuinginvestment in high quality audiovisual content. That much isevidenced by consumer willingness to pay for high valuecontent and a healthy demand for all forms of TV. But thereare also significant social, cultural and economic benefitsassociated with the availability of a diverse range of audiovisualcontent, which are well recognised in UK audiovisual policy.

On the other hand, the short term costs of effective IPprotection for the audiovisual sector are likely to be pretty low.The competitive environment in the UK market means thatmonopoly rents for rights holders are unlikely to besustainable. And content is increasingly being made widelyavailable on the internet at or soon after its first release at arange of price-points. The signs are that the audiovisual sectoris learning one big lesson from the music sector that is, todevelop models which do allow consumers wide access tocontent at affordable prices, so reducing incentives for use ofpirated content. Much content is provided free to air(advertising and licence fee funded) or at relatively low prices

via new internet on-demand models.31

30 The Economics of Copyright and Digitisation, Handke, SABIP, 201031 The practice of releasing content in different release windows, over different media and at

different prices can bring significant consumer benefits. Consumers who value the content most willpay the highest price for immediate release; while others who attach less value to the content will beable to pay less if they are prepared to wait a little. Such price differentiation can be shown to be anefficient way of recovering fixed production costs while enabling more consumers to access thecontent than would be possible with a single price.



On the other hand, consumers are alreadyincreasingly benefiting from high levels ofaccess to the content they wish to consume,

across many different media and platforms.As this report has shown, it would be hardto argue convincingly that UK content isnot now widely available across old and newmedia. Avoiding the early mistakes of themusic industry, UK television companieshave set about exploiting new distributionchannels and formats with a vengeance, tothe benefit of millions of consumers.

There is scope for incrementalimprovement to the current IP regime,however. A sensible and informed debate

should be had, for example, about enablingaccess to IP for appropriate private andeducational use. In the end, the publiclegitimacy or credibility of any IP regimewill depend not just on the content itencourages to be made, but also on theextent to which consumers feel they havefair access to that content. Such debateshould be informed by a full understandingof the trade-offs described above, andshould as far as possible be based on clearlyidentified fair dealing exceptions.

Piracy problems also warrant further focus,as set out in the accompanying case study.

Wider access to IP

A residual concern arises around thequestion of follow-on innovation and inparticular access to audiovisual IP by awhole new generation of hopeful internetentrepreneurs. Should they have easieraccess to content so that they can use it tohelp create new businesses? Can theirneeds be accommodated while securing thecontinued success of our unique audiovisual

sector?

The answer, we contend, is partly to befound in recent history: the independentproduction success story.

The dynamic growth of the UKindependent TV production sector wasimmensely helped in its early days by thefunding, business advice and support fordevelopment provided by their maincustomers the broadcast networks. Theindependents then used IP to build their

businesses at home and abroad.

Case study: Action on piracy

One obvious threat to the future success of the audiovisualsector is the impact of piracy. Here, there are two key areas inwhich government and industry need to work together to helpensure that potential growth can be realised.

EFFECTIVE ACTION AT HOME

The UK audiovisual sector is making great progress, asdescribed in this report, in improving access to its contentacross multiple media with a range of free and paymodels. This should go some way towards encouraging morelegitimate use of content in the UK. Nevertheless, furtheraction may be needed to deter those consumers who are still

illegally downloading large amounts of high quality content.The Digital Economy Act sets out a staged process for rightsholders to take action against those making unlawful use of IPprotected material, especially where there is mass copying anddistribution for commercial reward.

ENCOURAGING RESPECT FORIPRINTERNATIONALLY

As we have explained, the UK audiovisual sector is a majorexporter of TV formats and finished programmes around theworld. Continued success here depends on an effective IPenforcement regime that can work well in important emergingmarkets. The UK government could help here by encouragingthe relevant international copyright institutions such as WIPOto take a more robust approach to copyright challenges inmajor global markets.



Looking forward, it seems to us that theappetite and incentive is there for the key

broadcasters and producers to work with

SMEs and new internet entrepreneurs inthe UK along the lines of the successful casestudies described earlier in this report.

Our final case study is another goodexample of how this is already working inpractice.

Preserving the jewel

The UK audiovisual sector is a jewel in oureconomic crown. Although not on the scaleof oil or finance, its influence throughoutthe economy is more significant than directfinancial data alone would suggest. It isdelivering real and growing value now, notthe distant prospect of development in thefuture. It is a field in which the UK excelsinternationally and which has the potentialto grow further. It generates importantsocial and cultural benefits for the wholeUK. It can help support a new generationof entrepreneurial small firms to prosperand grow.

Case study: Flying Monsters: a network of creative innovation

Sky commissionedFlying Monsters for broadcast in 2010, as aflagship 3D factual programme. The film, about the life ofpterosaurs, was written and presented by Sir David

Attenborough, and produced by London-based factualproduction company, Atlantic Productions. It uses an amazingmix of 3D, computer animation and special effects to createthe world in which these long gone creatures lived. Flying

Monsters illustrates many of the points made in this paper. Itcost several millions of pounds to make, a prime example ofthe growing importance of high value, high impactprogramming. Sky jointly financed the production withNational Geographic Entertainment, sharing the IP, and thefinished film has been shown in Imax cinemas as well as on

TV, hence tapping into new revenue sources.

Atlantic, who made the show, employs around 50 people in theUK, and has made programmes for audiences in over 40countries. It specialises in bringing history, science and otherfactual programming to life with imaginative and innovativevisual approaches. As well as its work for television , Atlantichas successfully developed multiplatform and web-basedcontent for example its Ueverest.com site which allowed aglobal audience to follow the progress of an expedition to thesummit of Everest moment by moment, through video feeds,photos, biometric data, online diaries and blogs. Content fromthe expedition was also seen on a specially branded channelon YouTube.

In the course of its production ofFlying Monsters, Atlanticworked with a wide range of dynamic young companies in theLondon post-production sector, all of whom are workinginternationally as well as in the UK. They included Zoo andCVFX (computer animation and special effects), On Sight(latest HD and 3D production and post productiontechniques), Vision (3D specialists) and Molinare, (one of thelongest established UK post-production specialists).Collectively these are as good an example as any of thestrengths of the UK audiovisual content sector, and its scopefor innovation and growth.

A combination of funding, profile andbusiness expertise provided by successfulUK audiovisual companies, alongside theskills and ideas of new internet-basedcompanies, will position the UK to takeadvantage of the opportunities presented

by both. For this to work, we need an IPframework in which all participants

broadcaster/producers and internetentrepreneurs can be certain they will beproperly rewarded for their efforts.

If we get the balance right, this will benefitboth the sector itself and the UK as awhole.



Acknowledgements

The authors would like to thank all those at BSkyB, Channel 4, ITV and Pact whoprovided support and information for this report. We would also like to thank all thosefrom the sector who provided information for our case studies, and also our colleaguesfrom Communications Chambers, Rob Kenny and Aileen Dennis, for their input andadvice. The interpretations and opinions in this report are, however, entirely our own.

For further information

If you would like to discuss any of the issues raised in this report, please contactRobin Foster or Tom Broughton at:

[email protected]

[email protected]

The report is available at the Communications Chambers website: www.commcham.com


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Sources

1. Ofcom CMR 2010, Fig 2.28

2. Ofcom CMR 2010, Fig 2.28, Ofcom PSBAnnual Reports

3. Ofcom CMR 2010, Fig 2.33

4. Screen Digest

5. I

Documents

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