ITV takes on the streaming giants

Britbox, ITV’s new subscription video-on-demand service, will compete with Netflix and Amazon.

The X Factor has lost its wow-factor

ITV's (LSE: ITV) share price has ticked up over the past few weeks, in common with many UK-orientated stocks that have risen on hopes of a resolution to the Brexit impasse. But the commercial broadcaster's longer-term performance has been woeful, mirroring the falling ratings of its one-time star show The X Factor, with the stock more than halving in price since July 2015.

There are two reasons for this. Firstly, ITV has been hit by economic headwinds. The uncertain political outlook has affected business confidence, causing a slowdown in advertisement sales.

Secondly, it is facing acute structural pressure. Advertisers have shifted part of their television budgets into online video on platforms such as YouTube and Facebook, while at the same time viewers have been tempted away from traditional TV channels by streaming platforms such as Netflix and Amazon Prime Video.

The pressure on ITV from streaming platforms is only going to get worse, with new subscription video-on-demand (SVOD) services being launched in the coming months by the likes of Disney, Apple, WarnerMedia and Comcast.

Joining forces with the BBC

BritBox will cost £5.99 per month in high definition (HD) television and show ITV and BBC series such as Love Island, Gavin & Stacey, Gentleman Jack, Victoria, The Office and Broadchurch. New programmes will also be made specially for BritBox, with the first arriving next year. ITV argues that there is a gap in the market for a service offering quality British content. The broadcaster also points out that UK households are increasingly open to subscribing to more than one SVOD service.

With this in mind, can the BritBox offering change the widely held assumption among investors that ITV is a mature, but declining, broadcaster. Can it take on the deep-pocketed US streamers?

Few think so. Sarah Simon, an analyst at investment bank Berenberg, notes that ITV is investing around £25m in BritBox in 2019 and £40m in 2020. BritBox, she says, is too little, too late. "With what looks like a very limited content budget, we struggle to see how BritBox can meaningfully compete against the premium streaming offerings that are emerging from leading Hollywood players."

ITV, she adds, will also have to sustain a strong line-up of content on its main channels, so BritBox "is competing with itself to some extent". The BBC has also begun to prioritise its iPlayer platform to compete with the streamers, and has recently won permission from regulator Ofcom to keep its programmes on the service for 12 months (at present, viewers can typically "catch up" with a BBC programme for a month). It means the BBC shows on BritBox are "going to be pretty vintage", says Simon.

ITV Digital all over again?

If BritBox manages to achieve 10% household penetration by the end of 2025, implying 2.9 million subscriptions, it could have revenues of £159m in 2025, according to Berenberg's calculations.

This, however, looks optimistic given that Netflix reached that level of penetration in the US market after four years but had no SVOD competition to speak of at that stage. The £159m figure is also small within the context of the total revenues of £3.2bn that ITV recorded in 2018.

Jonathan Broughton, lead analyst at research group Broadcast Intelligence, is also cautious about the prospects for BritBox. He describes it as "an interesting experiment" that will "likely remain niche" given the restrictions placed on it and the competition it faces.

He expects that revenues from ITV's existing catch-up service, ITV Hub which viewers can watch for free with advertisements or can pay for to avoid the commercials will have a much greater impact on the business than BritBox. He calculates that ITV Hub's revenues could reach £300m by the end of 2023. Broughton also thinks that BritBox's impact on ITV's revenues will be dwarfed by growth in the broadcaster's production business, ITV Studios.

Don't expect a big bounce

Love Island

Bodyguard

Speaking at the Edinburgh International Television Festival this summer, ITV's director of television, Kevin Lygo, stressed that BritBox shouldn't be seen as a direct rival to Netflix and Amazon, but as a way to put the back catalogue of ITV and the BBC to best use. The subscription service, he said, was all about ITV "looking for a new revenue stream that doesn't cannibalise advertising revenue". So BritBox is more about diversification than transformation for ITV. And that's why many analysts, such as Berenberg's Simon, deem the stock a "hold" rather than a "buy".

Recommended

Has passive investing created a stockmarket bubble?
Sponsored

Has passive investing created a stockmarket bubble?

Over the past two decades, investors have been switching from buying actively managed investment funds to buying passive funds that simply track a mar…
28 Sep 2021
Ensign Group: profiting from US private care
Trading

Ensign Group: profiting from US private care

Nursing and care-home specialist Ensign Group should thrive as Americans age. Matthew Partridge picks the best way to play it.
28 Sep 2021
Invest in a promising new chapter at RIT Capital Partners
Investment trusts

Invest in a promising new chapter at RIT Capital Partners

The long-standing chairman of the RIT Capital Partners investment trust stepped down in 2019, but the new team are doing very well, says Max King.
27 Sep 2021
How to profit from India’s high-tech recovery
Share tips

How to profit from India’s high-tech recovery

Professional investor David Cornell of the India Capital Growth Fund, selects three of his favourite Indian stocks to buy now.
27 Sep 2021

Most Popular

A nightmare 1970s scenario for investors is edging closer
Investment strategy

A nightmare 1970s scenario for investors is edging closer

Inflation need not be a worry unless it is driven by labour market shortages. Unfortunately, writes macroeconomist Philip Pilkington, that’s exactly w…
17 Sep 2021
What really causes inflation? Here’s what prices since 1970 tell us
Inflation

What really causes inflation? Here’s what prices since 1970 tell us

As UK inflation hits 3.2%, Dominic Frisby compares the cost of living 50 years ago with that of today, and explains how debt drives prices higher.
15 Sep 2021
The times may be changing, but don’t change how you invest
Small cap stocks

The times may be changing, but don’t change how you invest

We are living in strange times. But the basics of investing remain the same: buy fairly-priced stocks that can provide an income. And there are few be…
13 Sep 2021