The ad outlook in key W.

European TV ad markets is poor

W.Europe is still what matters to many European providers. Although the proporti
on of revenues from this area has fallen, it is still 64/50% respectively. But a
s this region continues to generate average lease rates 2-3x higher than elsewhe
re, the contribution of W.Europe to earnings is >80%.
Hence, while the weak ad outlook in W.Europe means both groups are heavily expos
ed to reduced numbers of new channel launches from broadcasters facing stagnant,
or declining ad income.
As shown below, advertising decline is worsening in Spain and Italy has also sli
pped into a major advertising downturn. In Northern Europe, the UK and France ar
e unlikely to show positive ad spend despite the positive Olympic and Euro2016 c
atalysts and we expect further declines. While German macro is solid, it is also
seeing tepid ad growth this year and we expect flat next year.
With the weak macro outlook likely to persist for the medium term in S.Europe an
d major uncertainties over the N.European growth outlook, we expect the broadcas
ters to be even less inclined to launch new channels and channel closures among
smaller broadcasters to accelerate.
State funded channels also facing budget cuts
Fiscal austerity measures are now starting to impact the major W.European broadc
asters. We have seen license fee and state funding cuts for the BBC in the UK of
16% over the next five years, cuts for RTVE in Spain of 20% in FY13 alone and R
AI in Italy cutting production spend by 40%. After contributing to transponder d
emand growth through new digital channels, HD launches and 3D trial broadcasts,
these budgetary pressures will inevitably lead to lower channel launches going f
orwards.
Superficially, there appears a case for EM rescuing video transponder demand gro
wth. Some of the pressures we have so far highlighted will be concentrated in de
veloped markets only and especially in W.Europe. These include IPTV pressures (t
ime-shifted channel shutdown, more content online/less linear channel launches),
HD surge being over and the HEVC compression threat.
Meanwhile, pay-TV subs in EM have the potential to grow significantly, simply fr
om population growth in EM, and increased pay-TV revenues should mean more chann
el launches. HD penetration can grow further and should justify growth in channe
ls.
There problem with this EM case are
EM is 25-27% of revenues for Eutelsat and SES, but due to higher transponder leas
e rates in W.Europe, it is <20% of profits.
The disparity in transponder lease rates mean 2-3x new transponders are needed
in EM to offset one lost in W.Europe. We are expecting a slowdown in video trans
ponder demand growth in W.Europe and US from >3% historically to 1% going forwar
d. So EM demand needs to accelerate by 600bpts to offset this.
But the most rapid period of EM pay-TV sub growth has actually passed and rec
ent sub data suggests net additions are now slowing in LatAm, Russia/CEE , S.Asi
a and MENA. As EM pay-TV markets mature, consolidation amongst multiple satellite
platforms is likely. Every major developed pay-TV market outside of Japan has c
onsolidated down to a monopoly or duopoly structure.
As shown below, the average revenue per transponder is 2-3x higher for Europ
e than emerging markets. This is where the high barriers to entry play their rol
e; these companies own the key orbital positions for Europe, where demand for sa
tellite TV is very high (cable levels on average below US levels and multiple na
tional pay-TV markets each with their own operator(s).