Over the past 15 years, the ITV (LSE: ITV) share price has been dead money – it has produced a total return of just 1.5% a year annum since 2007, underperforming the FTSE All Share index by 3.5%.
We don’t have to look far to understand why the company has struggled to attract investors. ITV’s market share has deteriorated as streaming giants such as Netflix (NASDAQ: NFLX) and Disney (NYSE: DIS) have drawn eyeballs away. Disney alone is set to spend $33bn (£27bn) on content in 2022. That’s enough to buy ITV ten times over.
The UK-based company is never going to be a global streaming powerhouse; its competitors are too far ahead at this stage, and their content libraries are growing every day. So ITV is having to reinvent itself and play to its own strength.
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The “more than TV” strategy is repositioning the business
When the company’s CEO, Carolyn McCall, joined the business in 2018, she quickly set about trying to establish what ITV wanted to be, and its place in the 21st century media landscape. The result was the “more than TV” strategy, an ambitious plan to expand the company’s footprint and to be a leader in UK streaming as well as a “global force in content” by 2026.
There are two prongs to this strategy. The first is production; ITV cannot compete with Disney and Netflix on content spending, but it does have a vast amount of experience making TV programmes. Its production arm, ITV Studios, has grown to account for around 50% of the firm’s revenues, and it continues to expand. Studios revenue was up 23% at £458m in the first quarter of 2022, and the business has agreed an impressive slate of future productions with most major streaming platforms, including Netflix, AppleTV+ and Starzplay.
The second part of the company’s strategy is content. ITV plans to roll out its ITVX platform, a hybrid of its existing offering, in the fourth quarter. Viewers will be able to watch content free of charge but with advertising, or pay for a subscription service. The company will also be premiering much of its new content on ITVX first.
This seems very similar to ITV’s traditional service, so why is the company investing so much time and money in the new initiative?
ITV knows the media landscape has changed. Consumers are no longer willing to sit in front of the television for hours on end waiting for a show to start or killing time. And they’re certainly not prepared to wait for a week to see the next episode of their favourite series.
Instead, consumers have multiple streaming platforms and jump from service to service to choose what they want to watch. ITV has been adapting to this “new normal” with its existing digital platforms, ITV Hub and ITV Hub+, but these are accessories to the traditional business model; they’ve not been developed for an online-first world.
Building a digital service from the ground up provides a better platform for the company to build on, even if it follows the same template. Most importantly, a digital-first platform allows ITV to offer advertisers a tailored package. To that end, ITV launched an advanced advertising platform, Planet V, a couple of years ago, which allows advertisers to optimise and monitor their campaigns in real time, 24 hours a day, every day of the year.
One of the reasons digital advertising has become such a massive market in recent years is the fact that advertisers can target specific audiences. It’s not easy to do the same with traditional advertising channels, such as billboards and TV. With its new digital-first platform, ITV should be able to address these issues.
Indeed, management is aiming for digital revenues to hit £750m by 2026, up 100% from current levels – and ITVX is a core piece of this ambition.
The strategy already appears to be paying off. Total advertising revenue across the group rose 16% for the three months to the end of March 2022. However, digital advertising revenue grew even faster, jumping 27% in the period. Total streaming hours on ITV Hub, ITV Hub+ and BritBox UK were up 8%, with digital revenues growing 24% overall.
For the quarter as a whole total external revenue was up 18% at £834m.
The ITV share price looks cheap despite the company’s challenges
For this strategy to continue working, ITV needs to continue to produce content, and the prospective costs are spooking investors. Content spending is expected to increase to £1.35bn a year in 2023, up from £1.23bn in 2022. These costs will weigh on ITV’s profitability.
The business also faces other challenges. The pension scheme is in deficit to the tune of £252m, and the company is also carrying £435m of debt. Further, growth may slow in the coming months due to tough advertising comparatives (last year the it broadcast the UEFA European Football Championship) and growing economic uncertainty.
Still, government plans to help ITV and other public service broadcasters compete with global streaming giants do help the firm’s cause, and the fact that advertising revenues are still expanding is impressive, especially as Netflix starts to struggle.
Based on Refinitiv broker estimates, the stock is trading at a forward price/earnings (p/e) multiple of 4.9. Analysts are also projecting a dividend of 5.16p per share for 2022, implying a dividend yield of 7.7%.
ITV is facing some big challenges, but if management can pull off the digital transformation over the next few years, the stock looks cheap at current levels.
Disclosure: Rupert Hargreaves owns shares in ITV.
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