Morton's Fork for commercial TV

On the face of it, the funding of commercial TV in the UK has been straightforward. The majority of revenues from advertising are invested in producing or acquiring content, which engages audiences. They in turn tacitly agree to watch some advertising in return for free television and consequently buy products or services, which generates advertising budgets, which in turn enables the broadcaster to attract further advertising revenues which funds the sourcing of more content to help sell more advertising and so on. It's a model which has been in place in the UK since 1955 and now accounts for over £1.8bn being spent by TV broadcasters on commercial programming in this country alone.

The supply side of this model is in rude health, commercial TV audiences increase by over 5% a year for the past 5 years. And the consequence is that TV advertising prices are as cheap as they were in 1990.

Perversely, the free to air commercial television model is in peril and won't survive an extended period of deflation, possibly losing £325m in revenue in 2009 alone! The media sections of newspapers are dominated by conjecture on a Channel 4/five merger, driven by loss of revenue and ITV are changing their schedule to remove more expensive location based content and replacing it with cheaper ‘shiny floor' studio based programmes.

Why is this happening? Firstly, declining costs means committed advertisers can buy the same for less. Secondly, sectors like automotive and financial are decimated because of the recession. Thirdly, and more worryingly, television enjoyed a dominant share when there was little choice; the advent of digital has pegged this back.

The principle is fine, advertising spend naturally flows to the areas that generate the best return. But the funds that are flowing into digital media are not being used to create content. Which leads to the single biggest issue facing the TV industry;

Can TV companies continue to invest in content to fuel audience growth now that their revenues are in massive decline?

We believe, as it currently stands, the answer will be no. The main free to air broadcasters are struggling and the model is not sustainable if revenue continues to fall.

We think this is a fundamental social issue. Without doubt the most popular source of public entertainment is “free” television, it's become something that defines and unites the nation. It's enjoyed both by rich and poor and the fact that everyone has access is socially invaluable. However, this could disappear in 5 years.

Attitudes to commercial television are perverse. Its regarded as dangerous and is consequently over regulated and the contribution that the advertising industry has made by funding it largely ignored, but there will be a massive outcry if it no longer free. But the nub of the problem is that it is commercial, companies that make it, do so to make a profit If advertising can't fund it they have limited options; charge a subscription, make less expensive programmes or find other ways of transmitting content, all of which are probably socially unacceptable.

So what next? Commercial television certainly will need to look at new funding models. The reliance on the ad break as the main source of revenue is over. There will, probably, no longer be one industry funding model.

Broadcasters might have hoped the rush to watching more TV content online will help extend the potential return from existing content, but with BBC's i-player dominating, the Competition Commission foolishly putting the blockers on Kangaroo and the advertising model for iPTV still immature, it will be some time before the likes of Channel 4 and ITV turn these online revenues in to being business critical.

Secondly, the over regulation will need to be checked. It's based on principal that commercial television is an insidious force that will pollute the population if unchecked. It's not, it's a force for the good of society that could easily disappear if not helped. Sure, the television industry could help itself, the production and airing of advertising is overly complex and expensive, but legislating by the Government not allowing Kangaroo to develop as an ad funded alternative to iPlayer is short-sighted in the extreme.

So it's Morton's Fork for commercial TV right now, as the choice for them is a choice between two equally unpleasant alternatives. They can't exist in the status quo, but the alternative of subscription funding is unpalatable as a mass broadcast medium. UK commercial free to air television needs help to survive, advertisers can provide that help, but the whole funding model will need to be turned on its head and the attitude of regulators and stakeholders will need to fundamentally change.