Healthy German TV advertising and digital transformation have fuelled revenue growth for RTL Group in H1 2015, providing an antidote to weak US TV earnings earlier this quarter and supplying evidence for the return-on-investment from strategic repositioning in the context of digital disruption. Yet mixed TV advertising recovery across European markets signals continued exposure to cyclical and structural challenges. Here are the facts:
- Total group revenue was up by 3.8% to EUR2,788m (H1 2014: EUR2,687m). EBITA was up 3.3% to EUR535m (H1 2014: EUR517m), giving an EBITA margin of 19.2%. Net profit grew by 73.8% to EUR351m (H1 2014: EUR202m).
- German operations (Mediengruppe RTL Deutschland), grew revenues by 7.3% to EUR995m (H1 2014: EUR927m). RTL TV channels outperformed a strong TV advertising market that was up 3%-4% according to RTL (IHS estimates 3.6%). This increase came despite a modest decline of the group’s aggregate audience in the commercial target group of viewers aged 14-59 to 28.7% (H1. 2014: 29.2%). Historically, the correlation between TV advertising and audience growth in Germany is weaker than in other European markets. Pricing policy is the dominant factor for advertising revenue growth in Germany, which is a market driven heavily by rebates and agency discounts. Germany is RTL Group’s most important market, generating 35.7% of group revenue (H1 2014: 34.5%).
- Revenue from digital operations was EUR219m in H1 2015, nearly doubling (up 94%) against a H1 2014 value of EUR113m. This surge reflects an acceleration of RTL Group’s digital investment strategy over the last financial year, and the first-time consolidation of key acquisitions. In H1 2014, digital revenue only grew 9.7% against H1 2013 (EUR103m). Advertising contributed 65% of all digital revenue, up from 58% in H1 2013. Digital advertising revenue grew by 102%, non-advertising revenue by 81% against H1 2014. The contribution of digital to total group revenue increased from 4% to 8% between H1 2013 and H1 2015. Digital growth is both organic and in-organic, with organic growth at 33%. RTL Group digital properties delivered 42.5bn video views in H1 2015, up 170% against H1 2014 and a 35x increase versus H1 2012. YouTube multichannel network (MCN) BroadbandTV contributed more than 50% with 23n video views, the group’s 2nd largest MCN, Stylehaul, generated 7.1bn views. Monetization of digital audiences was complemented by growth in digital production. FreemantleMedia’s digital revenue was up 149%.
- Digital investments have put RTL Group in an international leadership position on YouTube. Revenues from BroadbandTV were up 84%, Stylehaul revenues grew 112%. On YouTube, in terms of aggregate desktop video views, combined MCN’s and channels operated by RTL Group ranked first ahead of ProSiebenSat.1 (combined Collective Digital Studios and Studio 71). Across Europe (Germany, UK, France, Netherlands), RTL Group equally took the top spot ahead of Maker Studios. In the US, RTL Group trailed Maker Studios on second place. These figures exclude music services, the most popular yet distinct content category on YouTube (dominated by Vevo). In June 2015 RTL Group’s YouTube properties attracted 270m unique users, 700m subscribers, and had 45,000 channels according to ComScore. More than 200 hours of original content have been directly produced and financed by RTL Group for YouTube in H1 2015. The channels ran in excess of 180 branded content campaigns.
- Video advertising platform SpotXchange recorded 90% growth, doubling the daily ad impressions it delivers to 125m in H1 2015 (H1 2014: 60m). The company processed 4.2bn advertising decisions daily. Advertising transactions are increasingly taking place on private market places, allowing only pre-approved clients to buy. This signals maturation of the programmatic advertising market as higher valued inventory is being offered in such walled gardens compared to open marketplaces. Private marketplace usage from SpotXchange clients grew by 112%.
- Despite strong German and digital growth, advertising performance in other markets was mixed. RTL Group benefited from economic recovery in Spain, where net advertising revenue (NAR) for the TV market was up 9.9% in H1 2015. The French TV advertising market remained flat with NAR growth of 2% and RTL Group underperformed at 1.4% growth. Eastern European operations (Croatia, Hungary) were affected by a weak economic environment and were slightly down. The Dutch TV advertising remained challenging in the face of accelerating audience erosion similar to the US. In a market down 4.1%, RTL Group recorded a flat performance (0.9% growth).
RTL Group accompanied its results with a declared change in self-perception. Its weekly newsletter, released in conjunction with the financial results, brands RTL Group as “transforming into […] a global force in video production, aggregation and monetization”, shedding the classic TV-centric connotation of a broadcaster towards a platform-agnostic positioning. ITV has recently begun to use a similar language, signalling a general turning point in broadcaster strategy to combine content and channel assets in new ways that reflect changes in media consumption driven by digital disruption. RTL Group acknowledges that this is more of a vision statement than reflection on the status quo, given that digital is only 8% of total group revenue to date. Despite impressive numbers for its digital operations, expressed in statistics that reference millions and billions, exposure to cyclical and structural challenges of linear TV advertising (macroeconomic, audience erosion) remains high.
Yet even without digital, this exposure is lower than at peer-group broadcasters such as Mediaset, TF1, in particular due to strong production assets (FreemantleMedia revenue was up 10.7%), further diversification such as radio, and retransmission fees. A Pan-European footprint and forays into Asia also ensure that local TV advertising challenges can be mitigated by other markets. Despite sector-typical strong exposure to its legacy business, IHS believes that RTL Group, together with ProSiebenSat.1, is among the most advanced European broadcasters in terms of digital transformation. We see a strong upside for RTL Group looking forward due to the complimentary nature of its digital assets. RTL Group’s acquisitions and investments in digital have been video-centric, extending its audiovisual expertise to new channels (e.g. YouTube) and parts of the value chain (e.g. advertising technology). The creation of the RTL Digital Hub, a central steering unit for its digital operations, allows a more agile and organized integration of assets and exploration of new investment opportunities. The video-centric digital strategy stands in contrast to competitor ProSiebenSat.1, which focuses on a more distributed approach incorporating both pay and free video, e-commerce, digital travel, gaming and weather - activities that are high-growth but further afield from its core business.
Looking forward, RTL Group’s digital success will depend on aligning consumption and revenue growth. Digital advertising is cheap and highly commoditized. Millions of video views and billions of ad impressions do not translate into revenues of the same magnitude. At IHS, we believe that the integration of advertising and content production assets will be key to overcoming this challenge. Tellingly, RTL Group referenced the number of branded content campaigns it delivered on YouTube in its results. With low video CPMs on YouTube, growing consumer resistance to interruptive advertising and rising consumer acceptance of brands, branded content offers a high-value alternative for YouTube monetization. YouTube is important for broadcasters rooted in national markets because it provides global scale. Amidst a globalization of consumer taste, in particular among young audiences, YouTube facilitates building a global media content brand. Yet despite the strong growth potential on YouTube, digital monetization needs to extend beyond the platform. Over-reliance is dangerous. Google is increasingly becoming a closed shop, recently barring third party ad tech providers from plugging into the YouTube ecosystem. A key strategic objective for RTL Group will be how to export this global scale beyond YouTube, and how to integrate its digital content assets with SpotXchange as a monetization platform.
More widely, the RTL results provide an antidote amidst concerns for the future of the TV advertising business in Europe on the basis of weak US results. Audience erosion remains a major threat to broadcasters, but at IHS we believe that at large, Europe is less exposed than the US due to the less fragmented TV market and broadcasters’ strong relationships in the local ecosystems. The Nordic markets and the Netherlands with traditionally low TV advertising shares and high digitization are more exposed than others. Its reliance on Germany speaks in favour of RTL Group. While the German TV advertising market is mature (we forecast single digit growth over the next five years), irrespective of audience, it remains more robust. Germany is a market driven by discounts and rebates to media buying agencies. This has constrained broadcasters’ growth in the past as the gap between ratecard and net CPMs has steadily increased. Now it has become a blessing in disguise. The agency business model globally is under pressure due to margin squeezes and increased transparency in digital. The immediacy of digital advertising also means that hedging advertising buys upfront and selling them on at a higher price in a futures market – an established agency strategy – becomes increasingly difficult. German agencies are reluctant to give up on the high discounts they get from TV. Despite an abundance of metrics and measurement, advertising markets are not rational markets. In Germany, and other markets where discounts are an agency cash cow, audience erosion will have a delayed and more contained impact on the share of advertising budgets allocated to linear TV.
Note: IHS will be hosting a panel discussing the future of TV at Medientage, Germany’s leading media conference taking place in Munich 21-23 October. For more details, see: http://www.medientage.de