Digital TV may erode incumbent channels' margins, Fitch says
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Competition for broadcast advertising budgets will multiply over the next few years as digital television stations flood the market, according to Fitch Ratings.
Although the additional channels should increase TV’s share of ad spending, the rivalry is likely to be intense, which will drive down advertising rates for free-to-air TV stations. This will affect incumbent operators significantly, as they currently benefit from high rates, which reflect the scarcity of airtime.
The National Broadcasting and Telecommunications Commission expects to license 24 commercial digital TV channels by January. They are for seven high-definition variety channels, seven standard-definition variety channels, seven news channels and three children’s channels.
The variety channels are the most attractive to new entrants as they target a wider viewership and are likely to be able to charge higher ad rates. These digital TV channels will replace the existing five commercial analog free-to-air TV channels in five years.
After the launch of digital TV, absolute ad spending on free-to-air TV is likely to increase as greater airtime is likely to more than offset the expected lower rates. Expected lower rates should encourage advertisers new to the medium to promote their products on the free-to-air TV platform. An example is small and medium-sized enterprises that have not been able to afford TV commercials.
This increase in TV’s advertising share will come at the expense of other traditional media, particularly newspapers, magazines and radio.
New digital-TV operators’ financial leverage is likely to increase as they invest in building and upgrading broadcast facilities and fund their licence-fee obligations, although the latter can be funded over a five-year period. Their margins are also likely to be affected by both start-up costs and the time it will take to build revenue bases.
The two listed free-to-air TV operators, Channel 3 and Modernine TV, are enjoying gross margins of 55-60 per cent. Their margins are likely to decline by at least 5 percentage points because of the competition from new digital TV channels, Fitch believes. However, margin deterioration will be gradual, as the new entrants will need time to establish their positions and capture market share.
Free-to-air TV is the main advertising medium, accounting for about 60 per cent of total ad income and growing by 9 per cent last year. The market leaders
are Channels 7 and 3 with a combined market share of about 60 per cent.
