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Brexit ‘will hit UK media and ads’

The UK referendum on membership of the European Union results triggered an unprecedented drop in the value of the pound. This drop is a reflection of the prevailing views of the majority of economists and financial institutions of the impact an EU exit would have on the UK economy. Forecasts have varied in severity, reports Ampere Analysis, but an economic downturn or periods of reduced growth have been widely predicted.

The effects of a downturn vary considerably across sectors, with businesses reliant on discretionary consumer and business spend particularly vulnerable to cut-backs. In the last recession, physical media sales (sales of books and videos, for instance) and the advertising market were areas particularly badly hit. Advertising is especially vulnerable to loss of confidence in growth as it represents not only a discretionary business spend and an easy cost to cut, but also suffers from the fact that consumer cut-backs on spending impact conversion rates – consumers are less likely to purchase products after seeing a commercial, affecting advertising’s effectiveness.

This two-fold effect has serious repercussions for businesses primarily reliant on advertising funding. In the last recession, nominal GDP growth dropped on an annual basis by less than 1 per cent. UK advertising revenue plunged by 12 per cent. Of the traditional media companies, broadcasters were some of the more resilient groups, but even so TV broadcasting adverting revenue dropped by over 10 per cent. ‘Legacy’ ad-funded businesses such as newspapers and radio, already vulnerable due to declining circulation and audiences, saw a 20 per cent drop year-on-year.

Subscription businesses such as pay-TV are also likely to be impacted. Traditionally the impact of economic downturn has had a delayed impact on the pay-TV business in the UK. While homes tend not to completely desert either communications services like broadband and telephony or pay TV, there is a noticeable impact on pay-TV growth with a roughly one year time lag post an economic downturn. The lag is in part a consequence of long-term (12 month) contracts in the pay TV and broadband business.

But the impact of UK EU exit vote on the UK media sector goes beyond the immediate financial effects on turnover. Many international media businesses base their European operations in the UK to take advantage of the EU’s freedom of trade rules, as well as some of the UK’s more relaxed broadcasting regulations – broadcasting out of the UK to other EU markets. The future for these companies’ ability to base themselves in the UK is now likely to depend on the trade agreements the UK is able to put in place with the European Union upon exit. Additionally, given that the UK will now sit outside the European single market, there are also implications for rights costs. Proposed changes under the EU’s Digital Single Market initiative will likely now not apply to the UK, meaning UK customers may not gain the benefits of content portability or access to more open trade online. The UK may now stand alone in Europe in maintaining strong geographic licensing arrangements in pay TV, potentially benefiting the large US studios and sports rights owners, but with likely cost implications for customers.

Policy-makers in the UK will now have to work hard to mitigate the loss of confidence which financial markets and businesses have already suffered, convincing them that the UK will remain a stable economy over the next few uncertain years. Retaining this market confidence will be the crucial short-term factor for UK media businesses over the next few months.

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