Behind the showbiz hullaballoo of ITV’s annual showcase for advertisers at the London Palladium, the company’s chief executive, Adam Crozier, is facing his stiffest test since successfully leading the broadcaster out of the previous recession after taking the helm in 2010.
The red carpet event last Thursday came as Brexit jitters left ITV facing its worst run-up to Christmas for advertising revenue since 2008.
Crozier has spent the six years since the most recent major advertising recession investing more than £1bn in building an international TV production powerhouse to steel the broadcaster against just such a downturn.
However, investors are starting to question whether ITV Studios – which makes and sells shows including Victoria, Mr Selfridge, Come Dine with Me and Coronation Street – is starting to lose its glitter.
Investors took fright when ITV Studios reported a 9% fall in organic revenues, which excludes the revenue from recent acquisitions such as The Voice maker Talpa Media, and Poldark and Parade’s End maker Mammoth, for the first nine months of the year.
This followed a 34% decline in revenues at its US production operation in the first half of the year. The US has been Crozier’s main market for international expansion, with hundreds of millions of pounds spent buying the makers of shows including Duck Dynasty, Pawn Stars and Cake Boss.
ITV prompted further concern by saying profit growth at ITV Studios, which has increased from £91m in 2009 to an expected £250m this year, will flatline in 2017.
ITV, which took the unusual step of organising a call with analysts to reassure investors, brushed off concerns by blaming factors including the “lumpy” nature of broadcasters’ timing of when to air shows. For example, Hell’s Kitchen, ITV’s biggest global franchise judged by the number of countries to which it has been sold, is not airing this year, but has two series scheduled in 2017.
Sarah Simon, an analyst at Berenberg, said of ITV’s need to organise a special call: “It is a bit of a giveaway [that there really is an issue] if you feel it needs to be discussed. The pitch about [expanding] ITV Studios in the beginning was that there is structural growth, a demand for high-quality content, and that it is not cyclical like advertising. People who thought this was a steady growth business need to revise expectations and expect volatility.”
Crozier has spent £1.2bn acquiring 15 production companies, a figure that could rise to nearly £2bn by 2021 if the former owners reach their earn-out targets, triggering further payments.Crozier said ITV Studios had experienced a blip, and new and returning dramas would help fuel a return to organic revenue growth next year.
“We remain very confident in the outlook for ITV Studios,” he told analysts earlier this month. “We’ve got a really good, strong pipeline of new and returning dramas.”
He told investors that profit would be flat in 2017 as ITV Studios focused on major investment in finding new hit shows.
“We do think it is the right thing to do to invest in our studios business,” he said. “I don’t think we would be doing the right thing for the business if we didn’t continue to invest in that long-term success. That’s absolutely the right thing for us to do.”
Investment in ITV Studios has been the most successful part of Crozier’s three-pronged diversification plan.
Online and pay revenues, such as through video advertising and Sky pay-TV channel Encore, have more than doubled to £188m in the past five years, but still account for only 6% of ITV’s £3bn-plus total revenues.
A senior executive at a rival TV company said the ITV Studios strategy may have peaked and its foray into the US market had not yet worked out.
Despite the huge investment in the US, at least 80% of ITV’s total revenues come from the UK, and up to 70% of these are from advertising.
“The general view is that it has been a great short-term strategy,” the executive said. “They wanted a transformational story and to say they increased profits. No doubt it worked and drove share price. The problem is they seem to have overpaid for some assets in the UK, and especially the US.”
A wider issue facing ITV, and all traditional broadcasters, is the rise of the deep-pocketed digital upstarts.
Netflix, which has a $7bn (£5.6bn) TV and film content budget next year, is investing heavily in shows such as royal drama The Crown, its first UK production, which cost an average of more than £5m per episode.
Amazon’s signing of the former Top Gear presenters to make three series of the recently launched The Grand Tour has a reported £160m price tag.
The more budget-conscious ITV, which spends about £1bn per year on programming, spends closer to £1m an episode for a select few top-flight dramas, such as Victoria.
ITV’s share price has climbed from 55p when Crozier was appointed in January 2010 to 280p in 2015.
However, ITV has wobbled in the past year and, exacerbated by the economic fallout from the EU referendum, the broadcaster’s share price has fallen by one-third to less than 170p.
In September, Crozier sold £1m of shares at £2 apiece, a move investors took a dim view of, sending shares tumbling.
Alex DeGroote, an analyst at Peel Hunt, said: “Directors selling is very rarely viewed as a positive, because nobody knows the company’s prospects better than executive management.”
DeGroote questioned whether the ITV Studios stumble, and the uncertain economic environment and fall in the value of the pound following the Brexit vote, could derail Crozier’s plan and make the broadcaster a takeover target.
“This was a very sure-footed management team that has executed seamlessly on the recovery story since 2009,” he said. “But Brexit has changed the rules of engagement. Working through the course of the year, I have become progressively more disappointed in the ITV story.
“With the pound so weak, you won’t get a better chance to buy if you are a dollar buyer. If people aren’t looking at it now, they never will be.”
ITV Studios’ biggest global hits
1. Hell’s Kitchen: 196 countries
2. The Voice: 180
3. Victoria: 155
4. Poldark: 154
5. Endeavour: 152
