Television is dying - so which broadcasters will survive the entertainment revolution?

Technology is changing the face of entertainment. Good news for consumers but bad news for traditional broadcasters who depend on advertising revenues. The Observer's James Robinson reports.

Samantha is 13. On the bus-ride to school, she watches a five-minute mobisode' of her favourite soap opera on her phone, supplying one of the character's lines and choosing the scene's ending. She discovered the show on Google, where it was posted by a Japanese production firm that makes tailored content for niche audiences, charging two pence for each download.

It's 2016, but the TV set is already redundant. The idea that Samantha's parents once rushed home from work to watch Coronation Street at 7.30pm, along with 15 million others, already seems hopelessly quaint. There are no TV schedules because there are no TV channels and there are no TV adverts because viewers no longer sit passively in front of their sets, watching whatever broadcasters decide they should see. The days when ITV or Channel 4 could deliver a huge captive audience to the world's biggest brands are over and millions of pounds of advertising revenue has migrated elsewhere. The commercial break has gone the way of the fly-poster.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

It sounds like the kind of doomsday scenario that keeps TV executives awake at night, but it's fast becoming a reality. Media consultancy Spectrum Strategy estimates the money generated by traditional TV advertising could fall by £284m by 2012, despite the fact that the number of TV channels is set to explode. Unilever, one of the world's biggest advertisers, has already cut the amount it spends on TV by 20%, its vice-president, Alan Rutherford, told a conference of leading TV executives last year.

The new world may not have arrived yet, but the trends that will shape it have. Sales of personal video recorders (PVRs), which record programmes and let viewers fast forward through advertisements, are growing fast. Sky Plus is in nearly one million homes, and PVRs are likely to be fitted as standard in the next generation of Freeview boxes and TV sets.

The success of Freeview and the growth of satellite and cable means 70% of UK households already have multi-channel TV. With most homes now receiving between 30 and 300 channels, audiences are fragmenting and the major terrestrial channels, including ITV1 and BBC1, have seen ratings plummet. Twenty years ago, ITV regularly won a 40% audience share. Now it averages closer to 27%. Last year, its audience share fell by 4%, losing it nearly £50m in advertising revenue.

But new TV channels are only half the problem. There are other challenges too. Devices such as 3G mobile phones are now becoming mobile TVs: 35% of 3G revenues are now generated by non-voice services. Most significantly of all, powerful broadband internet access is allowing viewers to download content online some consumers no longer use a TV set to watch television, preferring search engines, such as Yahoo or Google, to find their favourite programmes.

By 2010, well over half the country is expected to have broadband access. BT is about to take advantage of that by launching its own TV service over its souped-up phone network. This year, for the first time, the amount of money spent on internet advertising outstripped the sums spent on radio, mirroring changing patterns of consumer behaviour. In the US, teenagers now spend more time on the internet than they do watching TV.

A similar survey carried out by Google in the UK showed that the same is true over here and that the trend will accelerate as broadband access becomes cheaper. BBC director-general Mark Thompson acknowledged that TV is changing faster than anyone anticipated when he unveiled the most radical overhaul in the BBC's history this week. The BBC plans to expand its online services and launch several new brands aimed at teenagers, the licence-fee payers of the future who nevertheless watch less of the BBC's output than any other age group.

The aim is to protect the BBC's future by remodelling it as a multi-media organisation that creates content for an array of platforms, from TVs to PCs and mobile phones plus a few others that haven't even been invented yet. Its commercial rivals, who are funded by advertising rather than the licence fee, are watching enviously as they struggle to search for alternative sources of income.

Product placement is one way to replace lost revenue and the rules may be relaxed to allow TV firms to enter this market. The film industry makes millions by using Aston Martin cars in James Bond films, or strategically placing soft drinks at the centre of the screen. ITV has also asked industry regulator Ofcom to scrap rules restricting the length and frequency of commercial breaks, so viewers are less likely to know when to make a drink to avoid the advertisements.

Broadcasters are making more event TV', live shows such as Dancing On Ice and Big Brother, which people tend to watch together and rarely record. Sporting events also fall into that category, although the most popular games are often prohibitively expensive.

There have even been trials of new technology that prevents channel-surfers from switching sides during the break, but these are short-term fixes designed to delay the inevitable. In the longer term, as viewers can decide when, how and what to watch, advertisers will have to work harder to come up with new ways of reaching viewers.

Ironically for an industry that prides itself on its creativity, TV has so far been slow to provide advertisers with ways of doing so. It has been left to innovative agencies to do most of the work. Some, already worried about a world where they can no longer rely on commercials, are launching their own channels on the internet, with content that subtly incorporates brand messages without alienating viewers.

Drinks firm Bacardi has launched its own radio station, which broadcasts over the internet. In a similar move, Land Rover, the British marque owned by Ford, has created a web-based TV channel with user-generated content, in the hope that it will attract petrol-heads to the site.

But many advertising-industry executives would like to see broadcasters create more content in tandem with advertisers, an idea that's as old as TV itself. It's 50 years since the soap opera was created a concept dreamed up as a vehicle for washing-powder brands by a hard-up industry in its infancy. If broadcasters want to survive in the digital era, they will have to rediscover some of that pioneering spirit.

By James Robinson, media correspondent of The Observer

How the big providers are facing up to change

ITV

The days of lucrative advertising revenues thanks to audiences of 15 million are long gone. ITV chief executive Charles Allen, one of the City's great survivors, has kept the Square Mile happy by squeezing significant savings out of regulator industry Ofcom in recent years. But as more households sign up for multi-channel TV, ITV1 will continue to lose viewers.

Allen has launched a portfolio of digital channels in a bid to counter that trend with some success. But he will have to roll out new services to achieve his stated aim: generating 50% of revenue from outside ITV1. The company is making significant sums from interactive quiz shows screened in the graveyard slot', sharing the revenue generated with phone companies. But that hardly constitutes a new media strategy.

Broadcasting a special edition of Coronation Street on third-generation mobile phones was an interesting experiment, but there is more money to be had from making existing programmes available online and there has been little progress on that front. The company has dipped a toe in the dotcom waters, buying Friends Reunited to establish an online presence, but it is far from clear what it plans to do with it. Former BBC director-general Greg Dyke failed to buy the company last month, but the prospect of another bid is the only reason to hold on to ITV's shares.

British Telecom

The prospect of BT becoming a cutting-edge TV company would have been laughable a few years ago and some City analysts are still suppressing a snigger. But few companies illustrate the transformative potential of the internet more dramatically than the former state-owned monopoly. It has spent huge sums upgrading its fixed-line phone network in an attempt to stave off intense competition from rivals offering cheap calls, and is now the country's biggest broadband internet supplier.

But it is being undercut in that market too, and chief executive Ben Verwayeen has decided its future depends on reinventing itself as a media company. It is about to launch a TV service, BT Vision, which will allow customers to download programmes over the internet to watch on PCs or TV. There will be no monthly subscription fee customers will receive Freeview free of charge and pay for extra programmes individually. As well as video-on-demand, additional services, such as interactive gaming and home shopping, will be rolled out over time.

On paper, that is a compelling proposition, providing BT can get the pricing structure right and improve its patchy customer-service record. Most observers doubt it can; BT TV is a gamble that few expect to pay off.

WPP

WPP chief executive Sir Martin Sorrell took WPP into China and India long before many other media companies had identified their potential, and now the firm is reaping the rewards. Sorrell has predicted that his operations in the two countries will double in size. China currently accounts for 4% of the total group, while India accounts for about 3%. It is still difficult for television and newspaper groups to gain entry into China particularly without a local partner but media agencies are now being encouraged to set up there. China is maturing rapidly, but there is still plenty of momentum left, and WPP is well placed to benefit.

BSkyB

It's never a good idea to write off BSkyB, but the company is facing a difficult few years, as CEO James Murdoch attempts to hit an ambitious subscriber target. BSkyB has told investors it will reach the ten million mark by 2010, after narrowly achieving its previous goal, crawling over the eight million mark at the end of last year.

But the battle for viewers is set to intensify. Freeview remains a compelling alternative to Sky, and NTL's tie-up with Virgin will allow it to add a fourth service to its triple-play' offer of broadband, TV and fixed-line phone calls. More importantly, it will give NTL access to the marketing clout of the powerful Virgin brand. BT could also poach Sky customers when it launches its TV service and the internet could ultimately allow viewers to download TV shows free of charge.

But the European Union's determination to ensure Premiership football is screened by more than one broadcaster poses the most serious threat to Sky's business model. Its executives may deny it, but Sky remains heavily dependent on football and an EU ruling means some matches must be shown on other channels when the next contract is awarded. That shouldn't be a problem, providing Sky retains most of the matches, but it may have to pay handsomely to do so.

In the longer term, Sky is insulated from any structural advertising downturn just 8% of profits come from commercials and Sky's personal video recorder (PVR) service, Sky Plus, means it is likely to benefit from industry trends. The service is expensive, but gives the company a head-start over competitors. If the ten-million target begins to look unattainable, expect Murdoch to give the boxes away no matter what the cost.

GCAP Media

Ralph Bernard, the GCAP Media chairman who masterminded the merger of GWR and Capital, is a new media evangelist and a digital-radio pioneer. But strong sales of digital radios have failed to boost the company's share price, or improve its immediate prospects.

The market for radio advertising is dire and shows no signs of recovering; advertisers are now spending more money on the internet which allows them to run carefully targeted campaigns aimed at specific demographic groups. Radio advertisements seem clumsy by comparison.

This sharp cyclical decline prompted drastic measures at GCAP: Bernard decided to run fewer advertisements to win back listeners reducing the number of advertising minutes without changing rate-card rates. It's a bold gamble, but if ratings increase, Bernard will be vindicated.

In the meantime, he has to embrace the internet and work out how to make money from podcasts, a phenomenon that may give one of the oldest mediums a new lease of life. The problem is that listeners who download content can fast forward through the advertisements, which hardly makes for a viable business model. Until Bernard cracks that conundrum, Capital shares are best avoided.