Pixels, performance and profits Why CFOs in the broadcasting industry need to build a new model of performance management for a multi-platform, digital world

Table of Contents

Executive Summary 3

The Broadcasting industry context: after the crisis, a new crisis

4

Broadcasting moving forward: what is changing and putting the future at risk?

7

The CFO role in Broadcasting transformation: the hill climb to High Performance

10

Rethinking the Broadcasting Performance Management framework

15

Conclusion 26

2

The complexity of the TV industry is increasing and the competitive landscape changing rapidly. Models for traditional performance management in broadcasting are no longer suitable to fight the ongoing erosion of margins in an evolving multiplatform world. While businesses are shaping new strategies and customer value propositions to stay relevant, remain competitive, profitable and attractive to investors, CFOs are being asked to identify the new value levers. Their role has never been more challenging.

CFOs seeking to act as business partners in transformation will have to quickly understand and overcome the limits of traditional models and rethink their performance management capabilities. First of all they will have to start from scratch to define a new approach to P&L, building a Profitability Model around the TV Product. The centrality of product should be the basis for the

development of portfolio and profitability analysis over all the meaningful business dimensions, enabling CFOs to evolve and assume a key role in the core Editorial Planning and Execution process. While rethinking the P&L dashboard, CFOs should reshape their skills and organizations in order to build strong capabilities to understand and create innovative KPIs that can explain the dynamics underlying the full exploitation and ROI enhancement of every single one of the broadcaster’s commercial and industrial assets and resources.

The first step of the journey is to set up a brand new performance management framework. This needs to address all the complexities of the broadcasting value chain through three separate but integrated models, and deliver the high visibility required to drive effective business and editorial decisions.

Executive Summary

3

Partial recovery–but worse to come?

Broadcasters have not fully recovered from the impact of the financial crisis and ensuing recession. As shown in figure 1 below, broadcasters’ enterprise values remain below their 2007 levels. The reason? Investors continue to have doubts about the sustainability of broadcast business models in the light of a volatile and fast-changing market. While advertising revenues have recovered, the projection of broadcasters’ future value is significantly lower today that it was in 2007. The macroeconomic climate is set to deteriorate. If, as many including the IMF predict, the global economy contracts in the next 12 months, spending on advertising will be hit.

The recovery of the Broadcasting industry from the 2008-2009 crisis was only partial owing to investors’ growing concern about future growth

The January 2011 edition of the Broadcasting industry Shareholder Value Analysis, uses trends in enterprise value (the sum of current and future value) to investigate the factors underlying investors’ trust in the broadcasting industry. It reveals some key issues:

• The broadcasting industry has experienced a strong but only partial recovery. In fact at the beginning of 2011, enterprise value was still around 15 percent below 2007 pre-recession levels (see figure 1).

• Analyzing 2007-2011 advertising spend (see figure 2) shows the recovery to be cyclical rather than structural, ie the bounce in advertising after the recession (TV Advertising increased 18 percent from 2009 to 2011), and the increase of TV advertising share relative to other media like print (TV share on total spending increased 2 percent from 2009 to 2011).

• The data suggests a progressive loss of confidence by analysts and investors in the sustainability of current broadcasting business models. This is further demonstrated by the current vs future value analysis (see figure 1): the bounce in the sector’s enterprise value in 2010 was entirely due to the recovery in the value of current operations, while future value, measuring expectations of growth, was at the beginning of 2011 down by 44 percent compared to 2007.

The Broadcasting industry context: after the crisis, a new crisis

Notes:1. Enterprise value = Sum of Market Capitalization and Net Debt (Total debt less total cash)2. Current value = Sum of Present value of current operations a based on NOPAT divided by the WACC, NOPAT taken from latest period3. Future value = Sum of Enterprise value less current value. Sky Italia is a private company and hence not included in Source: S&P Accenture analysis

$140 $86$226bn

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Figure 1: Enterprise Value: FY 2007-2010

$143bn$131 $12

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$180bn$117 $63

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$189bn$141 $48

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Current value Future value

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Stepping into a new macroeconomic downturn: incomes from traditional TV advertising are under attack, again.

The macroeconomic forecast provided by the World Economic Outlook (see figure 3) indicates that mature and advanced economies are expected to experience low rates of growth or recession, and this slowdown will likely result in a collapse of spending on advertising.

Figure 2: Net global advertising spend: FY 2007-2011

Figure 3: Global GDP growth (percent; quarter over quarter, annualized)

Source: 2011 Advertising forecast by MagnaGlobal

258.8 153.1 (37%)

2007

255.5 155.1 (38%)

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222.0 143.3 (39%)

2009

231.1 159.5 (41%)

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Figure 4: Average video consumption in EU (minutes per viewer per day)

2005 Online video data estimated to be marginal so not included into figureSource: Accenture analysis of e-Media Institute data, 2011

6

Broadcasting moving forward: what is changing and putting the future at risk?Industry in transition: new competitors, new consumers

More people are spending more time watching more video content. However, encouraging as this might sound, a detailed review of how consumers are watching reveals considerable fragmentation of habits across a wide variety of platforms. That fragmentation makes it increasingly hard for traditional linear TV broadcasters to achieve the economies of scale demanded by their traditional business models.

The difficult macroeconomic context is increasing pressure on traditional broadcasting business models.

There are two main reasons behind the perceived loss of growth potential and value creation:

1. TV business’s economies of scale continue to come under attack

Volume data from the e-Media Institute highlights how video consumption in the EU, in minutes viewed daily per capita, is increasing on average by more than 19 percent (see figure 4).

Increasing audience fragmentation is progressively compromising the ability of TV businesses to generate economies of scale and remain relevant. Despite increasing consumption of linear TV, the ratio between TV advertising spending and GDP is falling in all advanced economies (see figure 5). Growth is not expected to recover to historical levels.

2. Advertising budgets are moving online

No longer a distant threat, in some markets advertising budgets are now larger for online than for traditional media. In the UK for example, internet advertising in 2011 exceeded all other categories including linear TV and print (see figure 6). Advertisers are also looking for greater insight about the returns on their spend, and more targeted messages for specific audiences, further undermining traditional broadcast mass market models.

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0.40%1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010e 2012e 2014e

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Figure 5: Traditional TV advertising spend as a percentage of GDP

Source: Global Markets Research-European TV Sector, September 2010, Deutsche Bank AG/London

7

Users are driving the change: the new digital consumer

Changing consumer habits are responsible for driving major shifts in the market. The new digital consumer is looking for personalized, on-demand and interactive content. As they shift how, where and when they consume content they are opening doors to digitally native players with the cash and experience to make significant in-roads to broadcasters’ markets. These new

entrants are shifting the terms of the traditional debate between pay and free TV models and are instead developing new, more complex approaches that exploit the possibilities of an online and on demand environment. And they are enjoying considerable success. Netflix, for example generated an increase in total shareholder returns of 240 percent in the year to January 2011 (see figure 7).

In the face of these challenges, remaining competitive, profitable and attractive to investors requires

Figure 6: Spending on advertising in UK (Jan-Jun’08 vs Jan-Jun’11; £ bln)

Figure 7: Total return to shareholders (6/2008-1/2011)

Internet

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1,95

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1,27

Television

Press

Direct mail

Other

Internet 2,23

2,15

2,07

0,83

0,99

Television

Press

Direct mail

Other

Source: Internet Advertising Bureau H1-2011 Online Adspend Study

Source: S&P, Accenture analysis8

broadcasters to not only define a new business strategy and value proposition to consumers, but also develop an effective operating model grounded in an understanding of the value creation processes and built on insightful performance management.

Accordingly, in this paper Accenture investigates how broadcasters should look to evolve their performance management in the face of an increasingly complex and challenging business scenario.

Pay TV SegmentFree-to-Air Segment

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CBS, 3.61Sun TV, 3.07ITV, 2.83TWC, 2.75RTL, 2.71Antena 3, 2.22DirecTV, 1.93TIF1, 1.84Dish TV, 1.80BSkyB, 1.62Comcast, 1.61Televisa, 1.49Nippon, 1.45Mediaset, 1.41Canal Plus, 1.33Tokyo Br, 0.91

The role of OTT-TV in broadcasting transformationAccording to the Accenture Video-over-Internet Consumer Survey 2012, overall time spent on video is progressively spreading across internet connected devices: 92 percent of consumers of all ages and across all geographies around the world now watch video over the internet.

One of the most relevant enabling technologies fostering this trend is the spread of Over-The-Top TV services, providing a number of additional attractive features such as catch-up TV and video on demand.

The availability of OTT-TV platforms is lowering the barriers to entry in the broadcasting market and, fueled by the worldwide expected increase of internet connected devices (see figure 8), is making the audiovisual market extremely attractive for new players like content producers, cloud based and streaming video providers, telcos, content producers and device manufacturers, all challenging to increase their share of revenues along the value chain.

However, despite the scale of this threat, it also represents a major opportunity for

traditional TV through the adoption of successful multiplatform strategies. Interactivity and ease of communication - through for example social media platforms - can drive word-of-mouth recommendations that can foster the popularity of broadcasters’ linear TV content as never before.

Achieving this transformation requires a deep review of the performance model (in terms of its dimensions, KPI, logical cost allocation) in order to be able to monitor performance generated by new strategies and business models.

Figure 8: Evolution of connectable devices installed bases in the world (2011 - 2015) - Mln Units

Source: Digital Home Market Database, IDATE, Sept 2011

0 1000 2000 3000 4000 5000

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The CFO role in Broadcasting transformation: the hill climb to High Performance CFOs will play a key role in transforming broadcasters’ strategies and value propositions. They will be in charge of supporting and driving the business to develop a detailed understanding of new value creation dynamics. The main challenge they are expected to face is to strengthen their performance management capabilities, focusing on the relevant success factors, value levers and strategic assets in both current and future broadcasting environments.

As the industry becomes more complex, so, too, do the parameters of performance management. Put simply, the traditional models of the past founded in the relative simplicity of the mass audience are no longer able to support effective performance management in the emerging and increasingly complex multiplatform world (see figure 9).

A quick look at the past: supporting audience maximization

In the past, the broadcasting industry’s sustained revenues and strong profitability arose from high barriers to entry and the absence of open content delivery platforms. Enhancing audience and market share was the most important performance driver. Performance management was consistent with this goal, and accordingly focused on broad measurement of the broadcaster’s performance, such as market share, brand awareness and audience.

At the same time the limited pressure on margins led to relatively unsophisticated operational and capital expenditure control, with budgets predominantly driven by, and

in line with, revenue trends (ie a top-down approach).

Traditional Performance Management facing the Margin collapse: the risk of a Catch-22

The outlook today is very different. In the context of falling revenues and high operating costs, broadcasters are looking to prevent margin erosion. Performance management should therefore be enabling business decisions to enhance profitability. However, the persistence of traditional approaches means many broadcasters lack the capabilities they need to do that. There are three main areas in which the nature of performance management needs to change:

Maximise audience and market share

High

Industrycontext complexity

Medium

Low

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Performancemanagementfocus

• Audience• Market share• Brand awareness

• P&L by nature• Dynamics of the main business• Content costs

• Products performance• Multiplatform strategy effectiveness• Efficiency/ROI of assets

Present Future

Prevent the margin erosion

Achieve High Performance in a multi-platform environment

t

Figure 9: Broadcasting imperatives and performance management focus

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1. Traditional performance management does not breakdown profitability using a commonly understood product dimension

Broadcasters are not culturally familiar with a product profitability approach, and organizations lack a common understanding of the meaning of TV product. A typical broadcaster’s value chain (see figure 10) will variously define product as a program (self produced, acquired or commissioned), a TV genre (eg drama, news, sport, documentaries), a channel/schedule, service (linear and not linear) or a time slot (eg prime-time, day-time…).

The lack of a common product definition has arisen from the different objectives of departments involved in the value chain. For example, channels and editorial teams are normally measured against a program’s audience (not necessarily a measure of revenues), while production teams are typically measured against cost of production per unit and advertising departments on overall revenue streams.

This situation, (aside from resulting in suboptimal decisions across each area), has led traditional performance management to rely on mono-dimensional models (typically the

cost/revenue line item in the P&L) for controlling profitability. This clearly prevents a detailed analysis of profitability by product.

2. Economies of scale mask the need for attention to content’s and assets’ ROI

Traditional broadcast business models dictate that larger audiences led to greater revenues that in turn delivered higher profits. Naturally enough, focusing on the largest market share meant little attention was paid to the profitability of individual items of content. Today,

Figure 10: The Broadcasting Value Chain

• Self produced, acquired or commissioned program• TV genre (e.g. drama, news, sport, documentaries,..)• .....

• Channel/Schedule• Service (linear vs not linear)• .....

• TIme Slot (e.g. prime time, day time....)• Subscription• .....

Product

Main Actors Involved

Production & Acquisition

Packaging & Setup Delivery Sales

Library Management

• Authors• Executive Producers• Content Buyers• .....

• Rights managers• Content Managers• .....

• Channel managers• Emission responsibles• Quality controllers• .....

• Technology officers• Network operators• IT responsibles• .....

• Commercial Directors• Area Managers• Dealers/Agents• .....

Staff & Support Processes

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with margins to protect, broadcasters are very limited in the levers they can pull to influence the efficiency of a specific production or an acquired right. This lack of focus in performance management is now critical. And there are two main areas that need to be addressed:

Rights procurement and management: the need to increase ROI from acquired rights is frustrated by the absence of strategic planning models that are capable of driving procurement activities toward the need to compose schedule effectiveness (ie coherence between contract values and expected revenues) and a forward-looking approach (ie availability of the appropriate content on the corresponding platforms).

Rights management processes are also likely to be poorly supported, particularly where performance management is not structured to monitor key metrics such as the correct exploitation of available rights, in terms of frequency and placement within the schedule, and the appropriate sizing/turn-rate of the rights inventory.

Content production: where broadcasters have adopted an operating model with internal content production facilities, performance management faces an additional issue.

In these cases CFOs are now required to address the endemic misalignment between production capacity needs and available internal capacity caused by seasonal swings in demand. This results in huge costs to acquire additional external capacity in peaks during high season, and underutilization of in-house assets during the low.

The effects of this endemic inefficiency can also be made worse by the limited diffusion of structured product lifecycle management models and processes within the broadcasting

industry, generating a further lack of coordination between scheduling, operational planning, procurement and content production processes.

3. Models are predominantly focused only on dimensions that are relevant for the traditional main business

Most broadcasters have maintained unchanging business models (ie advertising-based linear TV or subscription-based pay TV) and with linear TV as the only way to deliver content to their customers.

Performance management practices in this context are now being challenged by a rapidly changing and increasingly multiplatform broadcasting environment.

The absence of the performance management capabilities needed to make detailed business decisions about specific products may lead to a catch-22 whereby cutting investment generally in content production and rights acquisition leads to a decline in quality output and a further contraction of audience and revenues. The lack of granular analysis to support decision making leads to traditional P&L approaches, whereas the focus needs to be on the performance of specific content.

The future of Performance Management: supporting the achievement of High Performance Business in a multiplatform environment

Performance management is going to have to do more than prevent margin erosion. It will also be required to support broadcasters to shape their business strategies and value propositions to remain relevant and help achieve high performance in the future multiplatform environment.

In Accenture’s view, performance management needs to be shaped by three main objectives:

1. Provide a clear and detailed view of product profitability. Broadcasters should adopt a portfolio approach to profitability. They will need to target tactical and strategic business and editorial decisions at the level of single products and items of content. From a performance management perspective, this means that broadcasters’ models and processes will be required to fully explain the costs, revenues and investments of each item in the portfolio of products/contents and clearly highlight its ROI and contribution to overall profitability.

2. Support maximization of broadcasters’ assets and efficiency of investments. Broadcasters will be required to define targeted and appropriate cost enhancement programs, without compromising their ability to attract audience and remain relevant in the market. In order to effectively support this, performance management will be required to be more focused on the identification of all the areas of inefficiency that can be recovered, rather than on the extent of each cost and investment line item within the P&L.

The CFO’s role in the future should be to fully understand and monitor all the dynamics of the broadcaster’s operating leverage, spreading a new culture of resources optimization to all levels of the organization, encouraging the full exploitation of assets and efficient capital allocation.

3. Understand the future multiplatform broadcasting business.Performance management should provide an accurate and near-real time control of the effectiveness of platforms used by broadcasters to deliver content (eg linear and non-linear) and the revenue streams they generate.

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The lack of a ROI focused approach: the case of TV ProductionA deep dive into the TV Content Production highlights just how hard the challenge of Performance Management is to keep Broadcasters costs under control

In order to support ROI, manage the costs of production assets and improve the use of resources (eg studios, editing/cutting facilities, executive producers, ENG/EFP crews, etc), performance management will be required to manage several complexities (see figure 11):

A. Broadcasters tend to view the inefficiency arising from seasonality of audiences as inevitable, and this results in

procurement of external capacity in high season and underutilization in low season. Only advanced production planning capabilities could help to demolish this belief by the timely quantification of potential savings achievable, for example, through:

- The increase of production techniques’ flexibility (eg moving facilities addressing simultaneity of production in peak periods)

- The identification of alternative operational planning scenarios (eg Made To Stock production of contents).

B. Where there is not a strong focus on costs, it is highly probable that the transfer price for internal resources and assets will exceed the market price. On the other hand, incentives to executive producers are typically linked to

the total cost of the content, with no rewards for the use of internal capacity. Both these conditions often result in an uncontrolled acquisition of external services, even in the presence of internal spare capacity.

C. The appropriate level of resources required for content production is not easy to define, as during budgeting processes all the characteristics of TV products are not clearly identified. The exclusive attention of traditional performance management on the difference between actual and budgeted costs may result in planned needs that are structurally higher than actual. In fact, producers are required to budget costs by project, consequently during the budgeting phase they tend to overestimate costs in order to create unstated contingency.

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Figure 11: Potential issues in production assets and resources exploitation

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Rethinking the Broadcasting Performance Management frameworkA performance management framework represents the conceptual design of controlling objectives, dimensions of analysis, KPIs and management reporting that CFOs should adopt in order to provide the most effective representation of business performance and to understand the key levers to generate value.

In Accenture’s view, a single performance management model cannot address all the complexities of the entire broadcasters’ value chain. Instead, Accenture believes three specific models should co-exist within an integrated framework (see figure 12)

1. A profitability model: to explain the dynamics underlying the broadcaster’s profitability, showing the correlation between revenues and costs over an unambiguously defined TV product and other dimensions relevant to business and editorial decisions;

2. A revenue and commercial assets model: enabling rapid and effective control of each revenue stream’s commercial margin and of the main KPIs underlying sales and customer management processes;

3. An industrial assets model: a set of ad hoc models, each built to focus on the metrics measuring the efficiency and effectiveness of each of the

strategic assets used to conceive, procure/produce and deliver content over multiple channels and platforms.

The profitability model represents the link between the revenue streams, the commercial assets model and the industrial assets model, linking both revenues and costs and pinpointing cost allocation rules that are able to provide different sets of margin indicators for the company P&L.

The following sections explain how in Accenture’s view broadcasters should address e the two most critical areas: the profitability model and the industrial assets model.

1. Profitability model

Broadcasting value chain

2. Revenue streams and “Commercial Assets’

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3. “Industrial Assets” model

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Figure 12: the Broadcasting Performance Management Framework

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1. The profitability model

Business and editorial decisions in broadcasting traditionally follow a budget driven approach. Estimated revenues/audience drive the top-down definition of the total target amount of costs and investments to be allocated to the industrial dimensions (eg library, production facility). Subsequently, this target total amount of costs and investments is the main element driving editorial planning activities, with little visibility of the levers controlling underlying performance (see figure 13).

Traditional performance management models do not allow CFOs to drive this process, but typically only to coordinate top-down planning activities and build company P&L budget as an output of editorial decisions.

In order to support the editorial planning process effectively, CFOs should define a profitability model build around TV Product profitability and enabling performance analysis over all the relevant business

dimensions (eg channel, genre, time slot). This in turn will allow CFOs to run product portfolio analysis that can drive decisions grounded in considerations of profitability and the centrality of individual TV products (see figure 14).

With this approach the CFO will be able to play a central role, providing the inputs required to perform editorial planning and execution processes effectively.

The design of an effective profitability model requires the unambiguous definition of both the TV product and the set of additional controls and entities that together provide an integrated and consistent breakdown of overall performance.

This paper does not intend to provide a unique understanding of TV Product or define a representation of profitability that applies to all broadcasters. In fact, even if in many ways the program can be considered the true TV product, the business models of each broadcaster can lead

to different choices (eg channel, genre, time slot, pay TV bundles, linear and non-linear services).

The Profitability Model itself is not exhaustive of all the business dynamics, but receives inputs from the Commercial Assets Model and the Industrial Assets Model, respectively focused on the effectiveness of commercial processes and levers to improve operational efficiency.

Obtaining a reliable and significant valorization of product portfolio analysis and of the profitability model management reporting views will require the definition of a detailed Allocation Model.

Definition of the Allocation Model: shared and clear rules

The allocation model represents the set of rules that should be defined to allocate revenues and operational and capital expenditures on the TV product and on other identified dimensions of analysis, enabling control of profitability and ROI.

Figure 13: Traditional high-level process for editorial planning and execution

Strategic Planning

Audience/Revenue planning

Editorial planning

Company P&Lbudgeting

Company P&L monitoring and forecasting

ExecutionTop-down costs and investments planning

The CFO role:Process Owner Involved Not Involved

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In Accenture’s view, CFOs that have already adopted multi-dimensional profitability models should now consider a revision of allocation models according to the following guidelines:

• In order to provide a product profitability KPI that clearly reflects value levers under the control of content/channel managers, the allocation of internal assets and resources should rely on standard/target unit transfer prices, rather than actual average unit costs. In fact, the allocation on the basis of average unit costs could result in overestimating or underestimating the total cost of the product

• TV product cost evaluation is not typically associated with a fixed bill of materials but allocation rules, unitary costs and business logic should be based on assumptions. In order to verify that everyone involved takes decisions based on the consideration of profitability, the business logic should be defined, and revised as needed, in order to be fully

understood and shared at all levels of the organization.

• The costing model should rely on quantitative and measurable drivers, thus allocation procedures should as much as possible use timely information from corporate and operational systems (eg time-sheets, resource scheduling systems, etc).

The representation on the next page outlines for illustrative purposes the main elements of a Free to Air broadcaster. (see Figure 15).

The CFO role:Process Owner Involved Not Involved

Figure14: Innovative high-level process for editorial planning and execution

Editorial planning

Strategic Planning

Product portfolio analysis

Products profitabilitybudgeting

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New New

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Revenues and sales costs: the model should rule the allocation of revenues and selling costs from commercial dimensions (ie the bundle of advertising windows) to the specific advertising windows that are placed in each program.

Costs of editorial and production structures: management reporting views of the costs of editorial and production are typically structured by organizational department. That is largely owing to the need to assign organizational responsibilities for budgets. Enabling a product-driven view of profitability and ROI requires a new approach. Costs should be allocated to each editorial and production structure in line with the consumption of specific assets and resources and these should be priced at the standard hourly rate for each asset and resource.

Allocating cost with a target/standard hourly cost enables both the timely allocation of costs for each item of content and the identification of the costs of unallocated structures, due to the variance between quantities (eg difference between needs and availability) and price (eg difference between the standard/target and average actual price of each asset and resource).

Rights investments: while the cost of rights are typically associated with a single item of content, investment in rights usually refers to the licensing of multiple runs of the same content over specific platforms. The impact on the P&L typically does not refer to the run’s actual utilization but rather to depreciation according to local and international accounting standards. Since performance and revenues are generated by each run within the schedule, Accenture’s recommendation is to define a rule that can associate every single run with a standard cost, weighted on the basis of the ability of the run to generate revenues through advertising (ie the first run could represent 50 percent of the right’s value, the second 20 percent, third 15 percent and so on). Using this approach to evaluate the cost of both used and unused runs, beyond providing a meaningful managerial representation of the breakdown of a right’s entire profitability (ie its ROI), can also reveal the cost of library underutilization.

Technology costs: Technology costs and investments for a FTA TV business primarily covers playout (eg the technology operating centers’ schedule assembly and quality control activities)

and delivery network management processes.

A similar criteria to that defined for editorial and production structures can be followed to allocate the costs of content playout activities and technologies. That means using the program’s duration, multiplied by the standard/target hourly price of assets and resources required for playout.

The costs of network management processes can be similarly allocated, using the hourly standard/target price of the bandwidth required for signal broadcasting (eg cost per Mbit/h).

Channel, content management and staff costs: once product profitability has been calculated using content-specific costs, it should then be possible to calculate the total, high-level profitability of each channel and family of content by calculating the sum of all potential channel/content management costs (eg including salary of channel managers/content area managers).

General and administrative overheads and staff costs are not meaningful for the control of profitability for specific channels or content. They should only be taken into account when monitoring the broadcaster’s entire P&L.

Figure 15: Example of Allocation model for Free-to-air business

Legend Direct Attribution Cost Allocation

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2. Industrial Assets Model

The design of high-level management reporting views and allocation models enables deeper control of the broadcaster’s performance and better support for high performance business and editorial decisions. But it only partially addresses the need to maximize the overall profitability and ROI.

In fact, as shown in figure 16, the Profitability Model is focused on the “portfolio analysis view” of industrial assets costs and investments, ie the representation of the contribution of each asset and resource to TV product performance, obtained through PxQ-based allocation models.

Beyond supporting the definition of the appropriate products mix, broadcast performance management will be required to achieve another main objective: supporting efficient capital allocation and the full

exploitation of all the industrial assets, from editorial factors to delivery networks.

To achieve this second main objective Accenture recommends defining a set of specific performance management models. Each of them should be tailored to the quantitative and economic dynamics underlying operational and capital expenditure on each asset, thereby overcoming the traditional attitude to controlling internal processes according to organizational responsibilities.

CFOs should focus on understanding the cost of under/over-utilization of each asset and resource, that cannot be effectively and fully explained simply through traditional price/quantity variance analysis models. In Accenture’s view, the breakdown of the budget vs actual variance of PxQ values should therefore be analyzed across the following dimensions (see figure 17):

Structural quantity variances: the cost of under/overcapacity that can be identified during the planning phase, defined as the difference between the cost of total available capacity (eg hours/days of production facilities, available bandwidth, library rights runs available) and the cost of saturation expected according to budget capacity needs (eg production planning, schedule planning,).

Operational quantity variance: the cost of under/overcapacity that can be monitored within content and services production processes, defined as the difference between the cost of saturation expected according to budgeted capacity needs and the cost of actual utilization of internal assets and resources.

Price variance: defined as the total cost of the difference between budget unit costs and actual unit costs of internal assets and resources.

Figure 16: Industrial assets model framework

Editorial Factors

Artists

Production plants

Rights management

Delivery network and technologies

Under/over utilization(efficiency/inefficiency)

Price variance

Product 1

Product 2

Product 3

....

Allocation model

Profitability model

Quantity variance

“Structural” quantity variance

“Operational” quantity variance

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Each one of these metrics could serve as objectives for those involved in the supply chain and their ability to drive performance, since they should allow CFOs to:

• Correctly identify, through the structural quantity variance, the cost of under/overutilization that should be used to set targets for C-suite and Content Area Heads’ that will drive strategic planning towards enhancing the use of internal assets and resources and reducing the need for external capacity.

• Avoid distortions and inefficiencies (eg lower productivity, higher quantities of resources charged to contents/products) that, in the case of internal overcapacity, could be caused by setting the overall saturation as the same unique target for all those involved in content/services realization.

• Set the operational quantity variance, together with process productivity, as a target for executive producers and channel/service managers (ie those responsible for product realization), in order to drive appropriate use of both internal and external assets and resources.

• Identify in the price variance the most effective target for rights managers, heads of production facilities and CTOs (ie those responsible for each industrial asset), in order to drive asset management towards process excellence regardless of the level of utilization (ie fulfillment of capacity needs at the lowest price).

The increasing difficulty of accessing finance and the relative increase in the cost of capital means it is important to evaluate performance of industrial assets not only in terms of

economic/operational measures but with respect to potential impacts on finance and capital demands.

Accordingly, each industrial asset control model will have to provide an integrated view of investment, cash payouts and profitability for each economic dimension. These will have to be integrated by their consumption of working capital and cash requirements.

Figure 17: Price/Quantity variance

Budget Actual

Asset budget cost

Cost of capacity needs

“Structural” quantity variance

“Structural” quantity variance

“Operational” quantity variance

Price variance

Asset actual cost

Cost of utilization

(I.E cost allocated on

contents/products)

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In addition to this common objective, the performance management models of other industrial assets consist of:

Editorial and artists costs model

The objective of the editorial and artists model is to monitor editorial departments’ costs and investments (eg content area managers, executive producers, etc), with particular focus on the definition and implementation of contractual agreements and full exploitation of both internal and external artists and professionals within the content production processes.

Production studios model

The main objective of the production facilities model is to monitor the costs and investment associated with both internal and external production assets (eg stages, studios, cutting/editing facilities, etc) and resources (eg directors, ENG/EFP crews, grips, etc) and explain the dynamics underlying under/over-utilization.

Rights management model

A rights management model should be setup to control procurement, library management and exploitation activities for movies, series, documentaries and other content licensed from third parties. The model should be focused on both library right-sizing/working capital and metrics explaining the proper utilization within the schedule (eg ROI, procurement prices aligned with industry benchmarks, etc)

Delivery network and technologies model

The objective of the delivery network and technologies model is to control the costs, investments and level of utilization of all technical facilities, assets and resources involved in the processes required to deliver content to the final consumer (eg. schedule assembly, payout quality control, live connections, delivery network and technical infrastructures management).

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Assets and resources efficiency: performance management key questionsEditorial department and artists model

• Are the values of contractual agreements with artists consistent with the performance requirements planned for self-produced contents?

• What’s the level of effective usage of the artistic resources?

• What’s the relationship between unit cost and total average cost of the available/delivered performance of artistic resources?

• Are the artistic resources efficiently employed within the schedule (eg single performance cost vs standard cost of a certain channel/time slot)?

Production studios model

• What’s the average hourly cost of self-produced content?

• Is the available internal capacity correctly sized in comparison to demand for self-produced content (eg HC/workload analysis of production personnel, etc)?

• Does the operational planning of the production correctly address the demand seasonal periodicity?

• Is the actual level of utilization of internal capacity in line with forecasted needs?

• Is the purchasing of external services and capacity consistent with the level of productivity of internal resources and assets and aligned with target prices?

• What’s the ratio between the average purchasing price of external capacity and the average hourly cost of the internal assets and resources?

• What is the ROI of investments in the production process in terms of increased efficiency?

Rights management model

• Is the purchasing price of each right consistent with industry benchmarks for the corresponding content rating?

• Is the rights library, and the corresponding impacts on the working capital, correctly sized?

• What’s the cost of library underutilization, in terms both of unused runs at the end of the licensed period and the difference between actual utilization (ie estimated on the basis of managerial criteria) and income statement depreciation?

• Are the rights correctly used within the schedule, in terms of runs by channel/time slot?

• Is the expected ROI of the rights coherent with the effective profitability and the ability to attract audience/contacts?

Delivery network and technologies model

• What’s the utilization level and the eventual spare capacity cost of the contents delivery infrastructure?

• Is the balance between the cost of technologies and the workload capacity involved in assembling, releasing, quality control, warehouse management and broadcasting processes coherent with the available technology equipment?

• Is the return on investments, in terms of efficiency of the technologic processes, of the infrastructure evolution in line with expectations?

• Is the effort required for delivery consistent with to economic/strategic relevance of the contents?

• What’s the ROI of innovation/automation initiatives in terms of process efficiency?

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In light of the emerging business context outlined in the first chapters of this paper, CFOs are now being asked to support and drive the ongoing transformation of business strategy and value proposition to consumers, by deploying a deep and accurate understanding of the new dynamics of value creation. Unfortunately, the limited complexity, sustained growth and strong profitability that were hallmarks of the broadcasting industry in the past, did not drive the need for sophisticated performance management models. Their limitations are now being exposed.

So, how should CFOs reshape their performance management capabilities in order to enable the evolution of their role within the ongoing broadcasting industry transformation?

Conclusion

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Accenture’s view is that CFOs should build a brand new performance management framework, enabling the achievement of three key success factors.1. Develop and leverage on product portfolio analysis to effectively drive editorial decisions

The absence of detailed visibility of profitability dynamics is no longer acceptable. Sub-optimal understanding of these dynamics can result in poor and costly decisions about content and rights cost-cutting, further eroding already pressured margins. In order to prevent this catch-22, CFOs should now:

- unambiguously define the meaning of TV product according to their business model and peculiarities of their market context.

- build a profitability model around this TV product and all the meaningful business dimensions, enabling the development of detailed product portfolio analysis.

By doing so, CFOs will not only increase the accuracy

and depth of control, but will be able to enhance their role, making consideration of profitability a core element of editorial planning and execution process.

2. Reveal all the levers underlying the efficiency and ROI of assets and resources

At the same time as delivering an accurate understanding of broadcasters’ profitability, CFOs will also have to focus on improving their ability to identify all the opportunities to enhance the efficiency and ROI of internal assets and resources. CFOs will therefore be required to build a set of controlling models, each one focused on the business dimensions and KPIs measuring the cost of under/over-utilization of every specific asset and revealing the underlying dynamics that drive its performance.

3. Foster the establishment of a new organizational mindset with reliable, fully understood and widely adopted models

Establishing a new mindset for all those involved in making profitability oriented decisions will require CFOs to design from scratch new models that actors responsible for the broad range of products and processes involved in the

broadcast value chain can use to manage their performance and set individually appropriate targets, each one aligned to overall company objectives. This model should provide clear definitions and parameters that can be fully understood and shared at all levels of the organization in order to drive adoption and engagement. It should provide target-oriented KPIs and be based on quantitative and measurable drivers within allocation rules, enabling all relevant personnel to achieve a clear and distinct understanding of their contribution to both revenues, the full cost of the product and the effectiveness of asset procurement and management processes.

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Authors:

Francesco VenturiniGlobal Broadcast Leadfrancesco.venturini@accenture.com

Francesco Venturini is the global broadcast lead within the Media and Entertainment (M&E) business practice of Accenture’s Communications, Media & Technology (CMT) industry group.

A broadcasting trendsetter with more than 15 years industry experience, Francesco is known for shaping transformational strategies enabling major broadcasters to compete more effectively in the fast changing landscape in the multiplatform digital era. From content creation to distribution, he helps clients develop strategies for digitally convergent products and services. A Communications, Media & Technology industry stalwart with strong financial acumen, he has been instrumental in shaping cutting-edge financial deals within the media industry.

Significant contributions from:

Matteo Pagliardimatteo.pagliardi@accenture.com

Andrea Ciminiandrea.cimini@accenture.com

About Accenture

Accenture is a global management consulting, technology services and outsourcing company, with more than 246,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$25.5 billion for the fiscal year ended Aug. 31, 2011. Its home page is www.accenture.com.

About Accenture Media & Entertainment Industry Group

Accenture’s Media & Entertainment industry practice works with the world’s largest and most innovative media content enterprises in an increasingly complex digital environment.

We help clients in one of the world’s most dynamic industries find new ways to engage the digital consumer, seamlessly distribute digital assets via a multi-platform digital supply chain, optimize global operations and generate new revenues. Our deep industry knowledge, dedicated innovation centers and Global Delivery Network enable us to invest in forward-looking assets, solutions and services that help our clients drive profitable growth and deliver high performance.

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This document is produced by consultants at Accenture as general guidance. It is not intended to provide specific advice on your circumstances. If you require advice or further details on any matters referred to, please contact your Accenture representative.