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European TV advertising – will it ever be the same again?

Toby Syfret The 2009 European Television Symposium ‘TV Anytime, Anywhere’ 6th November 2009


TV advertising crisis: What crisis?

“The traditional TV industry – cable companies, networks, and broadcasters – is where the newspaper industry was about five years ago: “In denial.” Business Insider, June 12 2009 ASI TV conference Istanbul 061109 (2009-101)

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Agenda

  European overview   TV advertising crisis in the UK   TV Anytime/Anywhere threat

ASI TV conference Istanbul 061109 (2009-101)

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The digital TV (DTV) promise

  Many more channels   Device proliferation   Connectivity/convergence   Promise of non-linear on-demand TV

ASI TV conference Istanbul 061109 (2009-101)

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European digital analogue split By the end of 2008, 50% of European homes had digital reception on at least one TV set according to SES-Astra survey of 243 million homes in 35 countries, up from 39% at end of 2007

European digital TV penetration end of 2008 (%)

[Source: SES Astra, Enders Analysis]

ASI TV conference Istanbul 061109 (2009-101)

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European DTV growth trends End of year DTV homes in 35 European markets (m)

[Source: SES ASTRA, Satellite Monitors, Enders Analysis] **2004 onwards includes Bosnia and Serbia. Algeria, Morocco and Tunisia added in 2008 ASI TV conference Istanbul 061109 (2009-101)

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European analogue/digital split by platform End of 2008 split of digital versus satellite reception (%)

Satellite – 72 million HH

Cable – 72 million HH

Terrestrial – 99 million HH

[Source: SES ASTRA, Satellite Monitors; Enders Analysis] Note: Terrestrial includes TV over DSL/Optical fibre ASI TV conference Istanbul 061109 (2009-101)

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Multichannel TV already a reality in many countries End of 2008 penetration of DTH/SMATV/Cable platforms (%)

[Source: SES Astra] ASI TV conference Istanbul 061109 (2009-101)

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European DTV penetration End of 2008 DTV penetration of TV homes (%)

[Source: SES Astra] ASI TV conference Istanbul 061109 (2009-101)

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Analogue terrestrial days numbered

Country

DTT launch

United Kingdom

1998

Sweden

1999

Spain

2000/5

Completion of ASO/ DSO 2012

Country Austria

Completed Slovenia 2010

Norway

DTT launch

Completion of ASO/ DSO

2006

2010

2006

2011

2007

2009

Finland

2001

Completed Lithuania

2008

2012

Switzerland

2001

Completed Hungary

2008

2011

Germany

2002

Completed Ukraine

2008

2014

Belgium (Flemish)

2002

Completed Portugal

2009

2012

Netherlands

2003

Completed Croatia

2009

2011

Italy

2004

2012

2009

2013

France

2005

2011 Slovakia

2009

2012

Czech Republic

2005

2011 Ireland

2010

2012

Denmark

2006

Completed Russia

TBC

2015

Estonia

2006

Poland

2010

[Source: DigiTAG; Enders Analysis] ASI TV conference Istanbul 061109 (2009-101)

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Consolidation of TV advertising market share Market shares of net advertising revenue across top three commercial groups (%) January – June 2009

95%

91%

88%

87%

84% 70%

* 2008 [Source : Enders Analysis] ASI TV conference Istanbul 061109 (2009-101)

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Global economic and advertising downturn

End of year homes (000)

2007

2008

2009f

2010f

2010f v 2007

France

2.3

-4.5

-12.2

-3.4

-19.1

Germany

1.0

-2.9

-7.5

-3.4

-13.2

Italy

1.8

0.4

-5.6

-2.3

-7.5

Netherlands

6.5

4.1

-10.0

0.0

-6.4

18.5

14.9

-8.0

0.0

5.7

Spain

9.0

-11.1

-14.2

-4.9

-27.5

Turkey

12.2

-14.5

-29.4

-7.2

-43.9

United Kingdom

2.2

-4.1

-14.0

-3.1

-20.1

Western Europe

4.4

-2.8

-10.0

-2.8

-15.0

20.6

11.5

-14.2

2.0

-2.5

Poland

Emerging Europe

[Source: GroupM; Enders Analysis]. GroupM forecasts published in Summer 2009 ASI TV conference Istanbul 061109 (2009-101)

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Europe overview: key points   DTV growth is proceeding very rapidly   For some countries, rapid DTV growth has brought with it rapid multichannel growth   Countries with well-developed satellite/cable reception pre 2000 have seen much less change   Oligopolies rule in TV advertising   The recession has caused major falls in TV net advertising revenue (NAR) throughout Europe, but with some big variations BUT   Is there anything more to expect?   Although SES ASTRA data show strong DTV growth, still only 2.8% of European TV homes had broadband TV over DSL at end of 2008 (max 11.2% in France)   SES ASTRA Satellite Monitors also reports:   62.4% PC ownership and 53.4% Internet access in all European TV homes at end of 2008 (74.4% PC ownership and 65.3% Internet access in Astra homes)   74 million HD ready TV sets sold since January 2005, 37 million in 2008 alone ASI TV conference Istanbul 061109 (2009-101)

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Agenda

  European overview   TV advertising crisis in the UK   TV Anytime/Anywhere threat

ASI TV conference Istanbul 061109 (2009-101)

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Special features of UK

  UK Europe’s fastest growing DTV market – at end of October 2009, BARB estimates 90.3% of TV homes with DTV reception on at least one set (representing 94.6% of individuals aged 4+)   Europe’s most heavily developed e-commerce and Internet advertising market, with online advertising spend now ahead of TV advertising spend   Other particularities:   Heavily regulated   Highest TV programming spend per capita of any country in the world   Most heavily funded public service broadcaster (BBC) with mission to be accessible for “free” across all platforms   Very strong pay-TV operator (Sky)

ASI TV conference Istanbul 061109 (2009-101)

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UK TV advertising spend in crisis Nominal TV advertising spend (£m)

Figures based on net advertising revenues (NAR) with addition of estimated 2.5% actual media commission. [Source: Enders Analysis ]

Assumptions:   Recessionary cycle ends in 2010, flat 2011   Structural changes in the economy Square-root – L-shaped recovery (no V-shaped bounceback)   Existing structural changes in the TV medium subside in course of DSO   London Olympics in 2012 provides a much needed boost ASI TV conference Istanbul 061109 (2009-101)

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UK TV advertising spend in crisis Real TV advertising spend (constant 2000 prices) (£m)

Figures based on net advertising revenues (NAR) with addition of estimated 2.5% actual media commission. [Source: Enders Analysis ]

  Real prices show a medium in decline even before the recession   Inflation based on RPI, assume 1.5% inflation in 2009, average 2.0% inflation thereafter ASI TV conference Istanbul 061109 (2009-101)

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Forces of change in TV advertising expenditure   Cyclical change in the economy  hypercyclical change in TV NAR   Structural/long-term cyclical change in the economy  Permanent downward pressures (e.g. national growth in debt, raised taxes, reduced credit, higher unemployment, higher energy costs, shift of economic power to the East, etc.)   Structural changes to the TV medium

NOW   Online advertising substitution   Analogue to digital broadcast shift   Rise of client procurement power

RISK   Shift in audiences to pay-TV FUTURE   Rise of TV Anytime/TV Anywhere ASI TV conference Istanbul 061109 (2009-101)

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Effects of past downturns Hyper cyclical relationship between changes in GDP and adspend

Total advertising spend growth vs. GDP growth (%)

2007 prices [Source: Enders Analysis based on ONS, Advertising Association]

ASI TV conference Istanbul 061109 (2009-101)

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Advertising ‘structural’ shift Decoupling from start of new millennium

GDP vs. display ad spend (1990=100)

Note: Nominal prices. [Source: Enders Analysis based on ONS, Advertising Association] ASI TV conference Istanbul 061109 (2009-101)

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How much recession/How much structural?

  Long-term real trends in total advertising expenditure correlate very highly (>0.95) with broad economic indicators   But, short-term changes show weak positive correlations:   GDP and total advertising expenditure annual growth rates (1960 and 2007) = +0.63   Y on Y % changes in GDP and total advertising expenditure (1960 and 2007) = +0.56   Even adjusting for exceptional factors short-term correlations are weak   No quick fix GDP multiplier   Little advance visibility of advertising expenditure   Our view remains that both the recession and structural change are significant in the present crisis

ASI TV conference Istanbul 061109 (2009-101)

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Structural decline in UK TV advertising

Key factors include: 1.  SAP trading – discounts based on share of budget commitments 2.  CRR remedy – has let buyers reduce commitments without any loss of discounts 3.  Commercial Impact increases - many factors, such as audience shift from analogue PSBs to digital channels   PSB channels obliged to sell 100% of their inventory, while others sell 100% to damage ITV1 under CRR 4.  Analogue to digital drift - drift of advertising audiences from more expensive to cheaper media 5.  Accountability - commercial PSBs are obliged to publish regular rate card updates 6.  Consolidation - Progressive market consolidation into fewer sales and buying points 7.  Online drift - Further deflationary pressure due to shift of spend to online

ASI TV conference Istanbul 061109 (2009-101)

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Impact of online display on TV advertising expenditure Top Ten online display categories – growth on internet versus TV, 2004-2008 (£m)

TV

Internet

Entertainment & media

-32

58

Telecoms

-129

53

Finance

-56

47

Travel & transport

6

35

Business & industrial

3

26

-76

23

8

15

Retail

-12

11

Online retail

12

9

Computers

18

8

-258

284

81

25

-172

309

Motors Government/political/social

Total Top 10 Internet growth categories Other categories Total all categories [Source: Enders Analysis based on Nielsen]

ASI TV conference Istanbul 061109 (2009-101)

  Online display advertising trends indicate significant negative impact on TV   The top ten growth categories in online display accounted for 95% of total online display advertising spend in 2004 and still held 94% share in 2008   The top 10 online display categories also represented 53% of TV advertising expenditure in 2008   The other 47% of TV advertising expenditure includes all the FMCG sector   The negative structural impact of online display on TV display spend shows in the sharp contrast between the negative overall growth in TV advertising spend across the top ten online categories (-£258 million) and the positive overall growth in TV advertising spend across all the other categories that saw least online advertising growth (+£81 million) 23


TV viewing by age: 2003 – End of June 2009 Younger losses compensated by older gains, trends stabilising Average daily viewing index (2003=100)

[Sources: InfoSysTV/BARB, Enders Analysis – 2008 is indexed on 2003 Jan-Nov] ASI TV conference Istanbul 061109 (2009-101)

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TV commercial impact (CI) delivery Ever more advertising spot eyeballs just another deflationary pressure

UK commercial impacts Index (2003=100)

[Source: BARB/InfoSysTV; Enders Analysis]

ASI TV conference Istanbul 061109 (2009-101)

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Drift from higher priced to lower priced media   ITV1 and Channel 4 average price premium of c65% over rest since 2003, but adult 16+ commercial delivery share fell from 59.2% in 2003 to 43.4% in 2008   All else equal, migration of spend from more to less expensive media has entailed average 1.9% annual decline in TV NAR revenues per thousand impacts since 2003   In hypothetical case below, unit costs per thousand impacts per channel stayed constant and only the CI delivery profile changed, resulting in a lowering of the overall average 2003 adult 16+ Commercial impact (CI) delivery profile (%)

2003 NAR per 000 impacts (£)

2008 adult 16+ CI delivery profile (%)

2008 Hypothetical NAR per 000 impacts (£)*

Decrease in total NAR per 000 impacts due to profile change (%)

Actual 2008 NAR per 000 impacts (£)

100.0

4.9

100.0

4.4

-9.4

4.2

42.7

5.8

30.0

5.8

5.3

2.9

3.2

2.2

3.2

3.3

Channel 4/S4C

16.5

5.9

13.4

5.9

5.9

Five

11.1

3.5

8.5

3.5

4.1

Total terrestrial analogue PSB

73.1

5.4

54.1

5.4

5.2

Other digital

26.9

3.6

45.9

3.6

3.1

Year on year growth (%)

Total broadcast ITV1 GMTV

* Hypothetical NAR values assume the same in 2008 and 2003 for individual TV channels, resulting in a different overall average owing to the different profiles of commercial impact delivery [Source: BARB/InfoSysTV; GroupM; Enders Analysis]

ASI TV conference Istanbul 061109 (2009-101)

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Changes in media revenue

Sector and company revenue growth rates Index 2003=100

Google

Note: BBC reporting year runs from April to March, such that 2007 entry applies to the year April 2007-March 2008 [Source: Enders Analysis, Advertising Association] ASI TV conference Istanbul 061109 (2009-101)

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PSB TV: Trends in programming spend Growing funding gap ďƒ¨ Risk further loss in commercial PSB NAR shares

Group spend on TV programming (ÂŁ000)

Note: BBC reporting year runs from April to March, such that 2007 entry applies to the year April 2007-March 2008. Commercial PSB figures exclude STV and UTV. [Source: Broadcasters; Ofcom; Enders Analysis] ASI TV conference Istanbul 061109 (2009-101)

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Changing balance in the funding mix ď Žâ€Ż Pay revenues are climbing fast with boost of HD, licence funds assigned to television rising steadily while spot advertising revenues fall

[Source: Enders Analysis, based on industry data]

ASI TV conference Istanbul 061109 (2009-101)

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Agenda

  European overview   TV advertising crisis in the UK   TV Anytime/Anywhere threat

ASI TV conference Istanbul 061109 (2009-101)

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Where have we heard it before? ‘”Television is passive entertainment. We’re betting people want to interact, choose different paths and get feedback from the machine about what they have really learned” (the PC). Bill Gates, 1985 “What is driving the "telefuture" is not any convergence of films and TVs, consumer electronics and publishing, computers and games. What is driving the change is the onrush of computer technology invading and conquering all these domains. The computer industry is converging with the television industry in the same sense that the automobile converged with the horse, the TV with the nickelodeon, the word processing program with the typewriter, the computer-aided design program with the drafting board and digital desktop publishing with the Linotype machine and the letterpress.” George Gilder, November 1995 “It is not yet clear at what point technology and users will cross over from an environment where content is consumed passively through the linear schedule to one where content is consumed actively through search and on-demand. Measures in this Report will accelerate the not-distant point when that occurs.” (Bold italics ours) Digital Britain Final Report, June 2009 ASI TV conference Istanbul 061109 (2009-101)

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The non-linear IPTV growth challenge

  Linear TV works well   TV Anytime comes in a variety of forms – non-linear IPTV is only one example that must compete with others   Non-linear IPTV overlaps considerably with the PVR   Mass viewing of non-linear TV requires delivery to the TV set – PC not enough   Even then current viewing levels are very low   Success of non-linear IPTV dependent on quality of navigation and EPG instruments   Economics and monetisation a major challenge:   Network distribution costs   Consumer unwillingness to pay and low tolerance of ads in on demand environment   Division of spoils between participants

ASI TV conference Istanbul 061109 (2009-101)

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Linear TV works really well

  Famous   New   Quick and easy to find   Effortless and relaxing, just right at the end of the day   Does not require too much choice   To discuss with friends the next day

ASI TV conference Istanbul 061109 (2009-101)

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TV Anytime: Variety of forms TV Anytime takes a variety of forms including linear as well as non-linear applications

Anywhere

Networked devices

Sales DVD

Mobile

Rental

TV

Timeshift PVR

Pull VOD Push VOD

PC

Downloads

Staggered+1 Repeats

Internet Streaming ASI TV conference Istanbul 061109 (2009-101)

Linear TV

PPV 34


Consumer appetite for VOD   There is a growing body of evidence about the audience potential of VOD and other forms of TV Anytime. The following summarises some key points made in the conference organised by LBS/ACB (Actual Consumer Behaviour) and held at the London Business School on 7th July 2009 – The Future of Converged and On-demand Television: Early Evidence from Actual Consumer Behaviour*   Main TV set use is growing its share of TV viewing in the home (now c88%), reflecting:   Enhanced quality of viewing experience to the main TV set (large screens, HD reception capability and PVR adoption)   Greater substitutability of secondary set viewing among younger viewers by PC use   We have drawn the following key points from the conference presentations:   Non-linear VOD represents a relatively minor use of the TV set and the growth of on demand audiences will be gradual over the next ten years   Although VOD use has seen robust growth over the past two years, we expect rates to slow significantly in the next two years, as much recent growth reflects post-launch uptake of BBC, ITV and Channel 4 catch-up TV services   VOD consumption is largely substitutable by PVR use, with rapid PVR adoption expected to dampen VOD growth prospects   Broadband developments over the next five years will improve the opportunities for both internet VOD and TV VOD via hybrid broadband/broadcast platform reception   But, the current audiences of Virgin Media’s VOD services suggest limited room for growth   Our one caveat is that navigation and EPG design make a major difference to the user experience – this is the most important area to address if VOD is to achieve its potential ASI TV conference Istanbul 061109 (2009-101)

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Appetite for VOD: PVR vs. VOD An important constraint on VOD use is PVR timeshift 1.  Non-linear VOD use overlaps greatly with and is largely substitutable by PVR timeshift 2.  Among the similarities:   Top linear hits, especially drama and other popular entertainment feature prominently in both PVR timeshift and VOD use   Catch-up is the dominant form of both PVR timeshift and VOD use   Main consumption of long-form video content is in the peak evening slots, slightly edging towards later peak – PVR timeshift and VOD use both serve to reinforce the main TV programme brands 3.  Among the differences:   PVR timeshift use is significantly heavier (current c.17% viewing share in the 31% of UK homes equipped with PVRs) than VOD use in homes with access to VOD (we estimate c.3-4% average monthly viewing share across all Virgin Media cable TV homes, or 7% in the c55% of Virgin Media homes that watch VOD content in a given month)   PVR adoption is most pronounced among adults aged 24+, while PC VOD use is biased towards younger adults   PVR content is generally easier to find, quicker to use, more personalised, offers higher quality than internet VOD especially, is less restricted (i.e. not confined to the catch-up lists of accessible programmes) and allows users to create their own collections   PVR features favour the capture of popular series, while VOD comes more into its own when it: -  ‘Extends’ a hit programme (e.g. Inbetweeners on Channel 4 or the Susan Boyle clips on YouTube surrounding Britain’s Got Talent on ITV) -  Gives access to recent films, adult and other premium content, as well as to archive (though low demand for long-tail content) or catch-up content that users failed to record/ missed ASI TV conference Istanbul 061109 (2009-101)

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DTV trends: 2004-2018 Nearly digital already: End of June 2009 – 87% of homes, 92% of individuals with digital reception on 1+ TV sets

TV household penetration, 2004-2018 (%)

[Source: Enders Analysis] ASI TV conference Istanbul 061109 (2009-101)

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Flexilinearity the actual dream

Linear TV

Flexilinear TV

Non-linear TV ASI TV conference Istanbul 061109 (2009-101)

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Preserving channel brands - NDS FluenTV

Scroll right to get the day’s schedule, catch-up and see in advance offer

ASI TV conference Istanbul 061109 (2009-101)

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Online activities   Email, browsing/research and social networking services are the three most popular online activities – however, rising broadband penetration is facilitating growing use of audio and video content   Nearly half of all internet users regularly make online purchases Internet activities undertaken within the last three months, March 2008 (% of internet users)

Top 3 activities

Selected activities

Base: 16+ internet users Use of social networking sites for March 2009 [Sources: ONS and comScore]

ASI TV conference Istanbul 061109 (2009-101)

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Virgin Media: leading UK TV VOD supplier        

VMed is leading TV VOD supplier. Half its TV homes use VOD at least once a month VOD consumption is growing, but is still less than 4% of viewing Free catch-up TV, principally BBC (iPlayer launch in Q2 2008), main driver Direct revenues from VOD remain small. Main benefits indirect, e.g. encouraging switches to higher tier packages and improving customer retention

Average VOD views per VOD using home per month

VOD users were 52% of VMed DTV base in Q4 2008 versus 43% in Q1 2007. [Source: Virgin Media] ASI TV conference Istanbul 061109 (2009-101)

VOD viewing as a proportion of total TV home and individual viewing (%)

Note: We have employed a simple 75% scaling factor to convert homes viewing figures into individual viewing figures. [Source: Enders Analysis based on comScore, InfoSysTV/BARB] 41


UK non-linear IPTV: Addressable market   Total UK TV homes population c26 million. Roll-out will be slow   Figures include both cable TV and IPTV VOD   Figures relate to existing cable or broadband services (e.g. Virgin Media, BT Vision)

VOD households (m)

TV VOD households include digital cable TV households and IPTV-enabled households (satellite, DTT hybrid and pure IPTV). Internet VOD households refer to all broadband homes able to receive VOD services to the PC less those able to receive TV VOD services. [Source: Enders Analysis] ASI TV conference Istanbul 061109 (2009-101)

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Changing balance in the funding mix   Post 2013, we expect maintenance of status quo between three principle sources of funding and slow build-up from other sources   The big issue for the advertising-funded channels is the extent to which they can compensate for structural decline in advertising revenues with growing share in Other revenues

[Source: Enders Analysis, based on industry data]

ASI TV conference Istanbul 061109 (2009-101)

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TV Anytime – IPTV/VOD opportunity

  Demand for IPTV to the TV or PC remains niche and hard to monetise   TV VOD still only estimated 3% of total viewing in Virgin Media TV homes   Consumption of TV video content to the PC still tiny next to TV (c.0.5% of total viewing for long-form content and 4% for all non-pirated video content)   Monetisation of PC video problematic and use largely generated via useruploaded content sites   Little structural impact on TV NAR in next ten years

ASI TV conference Istanbul 061109 (2009-101)

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TV advertising crisis: No need for tears

The future is flexilinear ASI TV conference Istanbul 061109 (2009-101)

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European TV advertising –will it ever be the same again?  

European TV advertising – will it ever be the same again?

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