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ITV under pressure to grow content as COVID-19 speeds TV ads decline — analysts

ITV PLC's pivot to on-demand, digital content cannot come quick enough for the broadcaster, as analysts warn that TV advertising spend may never return to pre-pandemic levels.

The company was knocked out of the FTSE 100 in September, following a record 43% decline in its April to June advertising revenue. It last dropped out of the index following the 2008 financial crisis — but analysts say it will be even harder to recover from the coronavirus pandemic.

Advertising sales were hit hard by the economic impact of the virus, with a 41% drop among European broadcasters in the second quarter.

ITV was no exception, seeing a 54% drop in adjusted profit after tax in the six months to June 30. Ads revenue contributed 46% of the total in the period.

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The company declined to update guidance during its first-half earnings call Aug. 6, although CEO Dame Carolyn McCall said there was a "marked improvement" in ad spend in July, including from the retail, automotive and publishing sectors.

But some analysts are tempering their expectations as regional coronavirus cases rise again. They warn that COVID-19-induced economic uncertainty could dampen hopes for a short-term recovery after U.K. GDP growth slowed to 2.1% in August.

Expectations are also muted due to the seasonal nature of advertising. ITV's third quarter is historically its weakest in terms of ad revenue, and could be made worse due to the absence of its headline reality show "Love Island," which was canceled this year because of COVID-19, John-Paul O'Sullivan, an analyst at Kagan, a research division within S&P Global Market Intelligence, said.

A lack of major sporting events compared to last year, which coincided with the Rugby World Cup, is also contributing to year-over-year declines, O'Sullivan said.

Changes to U.K. government wage support schemes in November could lead to a spike in unemployment, causing consumer spending to dip in the lead-up to the busy Christmas shopping period. ITV’s ad revenue is usually strongest in the fourth quarter, which coincides with the holiday season.

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The pandemic has also fast-tracked changes to the sector that ITV may not be able to overcome, according to Matti Littunen, a media analyst at Sanford C. Bernstein & Co. After years of ad price growth, ad buyers are refusing to pay a premium for TV spots due to a drop in viewership, he said.

Linear TV is unlikely to return to its ad glory days due to popular streamers eating into average daily viewing times, particularly among younger generations, Littunen explained.

While both traditional TV and streaming saw an uptick in viewing time during coronavirus lockdowns, only the likes of Netflix and Amazon are seeing sustained increases.

"Our estimate is that the television advertising market will never return to 2019 levels," Littunen said.

Last year, free-to-air U.K. ad sales dropped to £2.86 billion after three years of declines, according to data from Magna Global, a subsidiary of Interpublic Group of Cos. Inc. By 2024, the figure is expected to drop to £2.14 billion as part of an incremental downward slide.

Despite the diminishing returns, ITV's ad offering is set to remain a strong proposition for brands drawn to the trust and safety TV provides, Roddy Davidson, an equity research analyst, media, at Shore Capital, said. Neither is it facing competition from popular streamers for advertising cash as those platforms have thus far resisted ads in favor of monthly subscription payments, he added.

ITV’s in-house streaming efforts include ITV Hub, a popular free-to-use service. It also has a premium ad-free tier, Hub+, and a subscription platform in BritBox, a joint venture launched with fellow public service broadcaster the British Broadcasting Corp.

The broadcaster's video-on-demand targeted advertising platform, Planet V, accounted for over 35% of its streaming inventory in July, with plans to reach 100% by the end of the year once major agencies are on board.

ITV said Oct. 19 it is restructuring its business units "to reflect changing viewing habits." Broadcast and on-demand content will be spit into separate divisions, with the latter focused on digital product development and invest in technology and content, including original productions.

Though it boasts a strong programming lineup, ITV lacks the content budget to compete with the likes of Netflix, Davidson said. Littunen described its streaming investment as the equivalent of "bringing a cake knife to a gunfight."