Some time next year, American viewers will be treated to Britain’s latest TV obsession: Love Island. The wildly popular reality show centers on the exploits of a bunch of good-looking 20-somethings, who spend two months canoodling their way around a Majorca mansion. PBS Masterpiece it ain’t.
ITV Plc, the show’s maker, has sold a U.S. version to CBS Corp. On the glitzy surface it’s potentially a big win for Carolyn McCall, the new CEO of Britain’s biggest free-to-air commercial broadcaster, as she does battle with the streaming giants Netflix Inc. and Amazon.com Inc.’s Prime Video.
McCall has stressed that international sales of ITV’s U.K.-made shows and formats are key to its future, especially as TV advertising revenues disappear to the internet. The company’s studio business has been expanding steadily for years, and contributed 43 percent of its sales last year, according to Bloomberg data. Most of that was from international markets.
And, in turn, the lion’s share of that global revenue comes from making reality formats such as Hell’s Kitchen, Queer Eye or indeed Love Island for overseas audiences. Less than one-quarter is from already produced shows (largely scripted dramas) to be re-aired.
There’s a reason why production companies love reality TV. Whereas the average cost of a scripted U.S. cable show is about $3.5 million per episode, non-fiction shows require just $550,000, according to Bloomberg Intelligence analyst Geetha Ranganathan.
Those costs mean there’s less upfront risk. If you score a hit, it will be rewarded with international licensing and production contracts. Meanwhile, reality shows are – like football and soccer – that rarest of things: a TV event that secures a live audience, which is manna from heaven for eyeball-starved advertisers. Love Island has been licensed to seven countries outside the U.K.
And yet, there’s a problem with this dependence on reality formats, and it’s not just the Love Island-inspired trend for young British men to shave their chests. The over-investment in unscripted shows jeopardizes another pillar of McCall’s vision for ITV, which is to expand the broadcaster’s own digital subscription service and better rival Netflix.
Reality shows can bring an audience, and therefore advertisers, to live television. But once the series ends, there won’t be many return viewers. People are unlikely to start binge-watching this past season of Love Island in a year’s time. That can’t be said for Netflix shows like the sci-fi drama Stranger Things. And re-syndicating dramas tends to boost long-term profit margins. ITV Studios’ Ebita margin was a relatively underwhelming 15 percent in the first half of the year (though, in fairness, this has been held back by its ramping up investment in scripted drama.)
This isn’t to rain too hard on McCall’s Love Island parade. If it proves a stateside success to rival ABC’s The Bachelor, then it could send revenue ITV’s way for a decade. “If you are not making money in year one but you are starting to claw back some money in year two and have created a 15-year franchise, then that’s the Golden Goose,’’ says Credit Suisse analyst Simon Baker.
But it’s essential that ITV reinvests those proceeds in scripted dramas and comedies that will lure viewers to its Netflix-style subscription service. McCall has at least indicated that growth in spending on scripted shows will outpace the amount spent on unscripted. That will hurt short-term profitability but should lead to expansion in a few years’ time.
ITV needs to foster a long, tender romance with its audience. Not some quick fumble in a Spanish villa.
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Alex Webb is a Bloomberg Opinion columnist covering Europe’s technology, media and communications industries. He previously covered Apple and other technology companies for Bloomberg News in San Francisco.
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