Sabre rattling between satellite and cable companies is likely to go down well with the Israeli television productions market. The sector currently funnels $100 million, and it is expected to grow to $250 million in 2003. The demand for television productions today is divided as follows: Channel One 49%, Channel Two 32% and cable companies 19%.
Let’s review the sector: the cable companies purchase content through ICP, which has exclusive ties with two producers, Noga Communications and JCS (Jerusalem Capital Studios) which produces the sports channel. Channel Two (Telad, Reshet and Keshet) and the cable companies are in effect the sole customers of content providers in Israel. Most productions on Channel One are in-house, financed by television license fees ($200 million a year).
This market is striding towards a mini-revolution. Alongside the positive contribution of the satellite company that will start operating in April 2000, designated thematic channels are expected on the air, such as various language channels (Arabic, Russian, Amharic), Israeli and Mediterranean music, heritage channels, and so on, another commercial television channel will be set up.
Ofek Securities communications economist Amit Tessler estimates that most of the expected growth in demand for local content is a result of the parallel increase in outlay for television advertising at the expense of other media options. To support his statement, Tessler presents an international comparison of the advertising market share: in Israel, only 25% of the advertising pie goes on television, compared to 35% in the US and Britain, countries with multiple channels.
Tessler estimates that the appearance of thematic channels and the additional commercial channel will lead to a growth in television advertising to levels similar to that of western countries. The ratings war will also make its mark and lead to demand for higher quality content and to increased revenues for content producers.
Channel Two, for example, is expected to increase its demand for local television productions. The Channel Two concessions were recently renewed, under strict conditions from their viewpoint: up to 2003, commitment to local production will stand at 43.5% of total revenue, compared to only 33% today.
In contrast, local demand to be generated by the satellite company will be quite modest. One reason is its cost per subscriber, expected to be significantly high, due to the minimum price of production studios overseas (the majors). Tessler estimates the satellite company will make do with the commitment imposed on it to purchase local productions, and not much else. This means it will not purchase expensive local productions such as dramas and documentaries.
Regarding cable companies, Tessler estimates their hands will be tied for the tiering window period, in which they are forbidden to market channel bundles as chosen by the customer. With the lifting of this restriction at the end of eighteen months to two years, cable companies will be free to invest more in content to avoid losing customers. However, Tessler determines, an international comparison is not in the cable companies’ favor - the percentage of revenues they spend on content is the lowest in the world.
Taya Communications is one of the companies standing to benefit from all the changes in content. The company deals with maintenance, management and operation of television production companies. Taya, through Herzliya Studios, offers a basket of studio services, production, editing, sound and content packaging.
Herzliya Studios, 50% of which is owned by Taya, also has considerable real estate assets: 44 dunam (11 acres), 25 dunam is utilized by the studio buildings and the remainder (worth NIS 10-15 million) can be used for residential construction. Tessler notes the fact that the studios are built in Herzliya as a relative advantage - most Channel Two stars prefer to work close to home.
In addition, Herzliya studios hold 70% of United Studios shares. The remaining 30% of capital is held directly by Taya, which sequentially accords it 65% of United Studios. United Studios is Taya’s core business, and moreover, United Studios provide studio services for Channel Two and Channel One concessionaires.
Another attractive Taya holding is Noga Communications (50%). Noga produces the popular children’s program and the science channel for cable companies. The other shares in Noga are held by a company owned by Udi Miron and Iris Hod.
Tessler notes that negotiations were recently held for Aviv Giladi Productions to enter as a partner in Noga. Aviv Giladi is a Discount Investments subsidiary (25% together with sister company PEC), dealing with production and artist representation. It is currently negotiating for the purchase of 25% of Noga from Miron and Hod, through a loan provided by Discount Investments.
Tessler believes that Discount Investments’ entry into Noga through Aviv Giladi is a move that will be welcomed by Taya Communications, for two reasons: first of all, Discount Investments’ cable company Tevel will form the basis for the creation of an Israeli cable television concern. Secondly, entry into Noga by Discount Investments will guarantee the company’s economic future in general, and its status as the producer of the children’s channel in particular.
In Q1 1999, the company reported a sharp climb profit margins to 35%, compared to 29% for all of 1998, and 28% in Q1 last year. This is thanks to the higher proportion of turnkey productions.
Tessler tries to assess the type of content the satellite company will purchase, and at which value. Since commitment to original productions (Israeli content) is imposed on DBS in terms of production hours and not in financial terms, in contrast to Channel Two concessionaires, the satellite company has no need to produce expensive documentary programs.
Tessler estimates therefore that the company will make do with cheap content, such as host and entertainment quizzes, at least until it acquires 200,000 subscribers. Taya Communications, which offers this type of content, is expected to benefit from the trend.
At a later stage, Tessler believes the DBS company will start to require more expensive productions, since content is what differentiates between satellite and cable television. Channel Two experience shows that local content creates the highest rating. Therefore, the satellite company is likely to be aggressive in the struggle over local content.
As an aside, Tessler notes that the satellite company will serve as Bezeq’s Trojan horse. The importance of the DBS venture is not necessarily in its being an independent profit center, but an instrument for transferring subscribers from cable television. The rationale is obvious: A subscriber who leaves the cables will not purchase telephony services from the in the future, and therefore, the satellite company is a means of containing the damage that will be caused Bezeq as a result of the opening of the inland calls market to competition.
Based on this scenario, DBS will be willing to absorb heavy losses through the purchase of a great deal of expensive content, if only to bring in as massive a number of subscribers as possible from cable companies.
Published by Israel's Business Arena July 19, 1999