Opportunity Report

Opportunity Management

Organizationally, we have fulfilled all the requirements needed to guarantee that the risk situation is presented and handled transparently, that potential losses are limited and that action is taken early. ProSiebenSat.1 Group has also implemented effective processes to identify and manage opportunities.

In ProSiebenSat.1 Group, the management of opportunities is centrally organized and controlled by the “Strategy & Operations” department. The department is in close contact with the individual operational units; it thus gains a detailed insight into the business situation. In addition, market and competitive analyses and the exchange of knowledge with external experts serve as important sources for identifying growth potential for ProSiebenSat.1 Group.

Opportunity management is part of the intragroup management system: The defined opportunities are summarized in the strategy plan and incorporated into the planning process during the annual strategy meeting. Relevant opportunities are prioritized, specific objectives are derived, and measures and resources for operational target attainment are determined.

We have already incorporated growth opportunities in our targets for 2016 or in our medium-term planning for 2018 whose probability of occurrence we consider very high. Further information is available in the Company Outlook. There are also opportunities that have not yet been budgeted for and could consequently result in a positive deviation from forecasts or targets. In particular, this potential can arise from a change in general conditions or our market position. Strategic decisions can also promote additional growth that has not yet or not yet fully been budgeted for. We report on this additional growth potential below.

Further Opportunities from Development of General Conditions

The reach of TV as a medium and the development of ProSiebenSat.1 stations’ audience shares form an important basis for advertising customers’ decisions on budget allocation. In 2015, we increased audience shares in all German-speaking TV markets and consolidated our leading position in the core market of Germany. Since it was founded in 2000, ProSiebenSat.1 Group has pursued a multi-station strategy and now covers nearly all demographic target groups. We therefore expect to continue consolidating our position.

The advertising industry’s investment behavior is also significantly influenced by external factors, especially macroeconomic developments: The advertising market grew solidly in 2015. Low unemployment rates and rising real incomes created positive stimuli in private consumption. These factors in turn encouraged the advertising industry to invest and stimulated prices for TV advertising. The external environment is also expected to continue developing positively, so we again based our budget planning for the German TV advertising market in 2016 on a low single-digit percentage growth rate. Since our target attainment correlates closely with the development of the TV advertising market, a deviation from this important planning assumption could accelerate our profitable growth significantly.

In addition to macroeconomic data, ProSiebenSat.1 Group also considers structural developments in its calculations. In the wake of digitalization, advertisers are increasingly shifting their budgets from print to video advertising. In this context, ProSiebenSat.1 has identified total market potential of EUR 2.7 billion. Video advertising on TV or online platforms can create a strong emotional connection to a brand. At the same time, the multi-sensory appeal through images and sounds makes the brand more memorable than print advertising does, for example. TV advertising is proven to have the highest and most sustainable return on investment (ROI), since TV spots build up high reach within a short space of time. With usage of 46 %, TV is the most important mass medium in Germany.

Television is continuously growing in relevance as an advertising medium, but it has not fully capitalized on its reach so far: 34 % of advertising budgets were allocated to print in 2015, although only 6 % of the total media usage time accounts to print. In contrast, TV advertising’s investment volume — on the basis of data from Magna Global — amounted to 23 %. In many other countries, the budget allocation is reversed; in the US, for example, the majority of advertising investments are already allocated to TV. A similar structural change to the one in the US is also emerging in Germany. According to Nielsen Media Research, TV has increased its advertising market share by 4.1 percentage points gross in the last five years, while print has lost 7.7 percentage points. The high proportion of advertising via digital media in Germany, at around 30 %, is already similar to that in the US. Nonetheless, TV still has a lot of catching up to do as an advertising medium. National peculiarities such as the high reach of free TV in Germany increase the relevance of the television category further.

We assume that a gain in advertising market share of one percentage point for TV could increase our net advertising revenues by EUR 60 million. We are actively using this growth potential and acquired numerous new customers for the medium of TV last year (2015: 139). The Group conducts extensive market research studies and in particular analyzes which program environments are not yet occupied for print advertising customers in the television market. In connection with this, ProSiebenSat.1 has expanded the TV portfolio with target-group-specific stations such as sixx, SAT.1 Gold and ProSieben MAXX. ProSiebenSat.1 will carry on pursuing this multi-station strategy: For fall 2016, the start of a purely free TV documentary station is planned which will broadcast documentaries and reports on various topics. Thus, the station addresses older male viewers who are interested in history, politics, nature, and technology.

Another important lever for acquiring advertising customers, especially companies that have previously relied mostly on print media, are models for regionally adapted or customized advertising. The technical capability to modulate TV advertising regionally is supplied by “Hybrid Broadcast Broadband TV“ (HbbTV). The availability of the technical standard is developing dynamically. According to GfK, over 16 million HbbTV-ready sets have been sold in Germany since 2011. In the medium term this figure is expected to rise to over 25 million. The quality of TV systems has been enhanced by integrating Internet functions, which has given the advertising market new opportunities to approach customers via HbbTV, for example. As well as providing greater opportunities to address target groups more precisely, HbbTV combines the advantages of television with the interactive possibilities of the Internet viewers can order the advertised products directly via their remote control. Large HD screens are also contributing to the fact that TV is becoming increasingly attractive. The number of HD households is rising steadily. In 2018, ProSiebenSat.1 expects around 9 million households to pay for an HD program package. If HD spreads more rapidly than expected, this would positively affect our target attainment. By 2018, we want to increase consolidated revenues by a total of EUR 1.85 billion to EUR 4.2 billion; revenues of around EUR 155 million are to come from distribution, especially of HD. We are extending our reach via cooperation agreements with distributors as well as via additional platforms and forms of exploitation for our content.

New distribution models such as the distribution of programs via the HD+ platform offer us substantial growth opportunities, as we generate recurring revenues independently of the economy here. Since 2011, the Company has taken a share in the technical service fees that viewers pay to distributors for HD quality television. At the same time, willingness to pay for attractive additional offers such as video-on-demand is growing. The number of pay-VoD subscriptions is expected to increase by 140 % by 2018; this equates to a market volume of EUR 575 million. This trend will benefit from broadband Internet access with high data transmission rates and the rising use of mobile devices. Nearly 80 % of Germans are already online; 65 % have a smartphone.

The general data described paint a positive picture overall. If the relevant market conditions or our competitive position develop better than expected, this could be additional stimulus for the growth of the Group. The Group is the leading video marketer for TV and online advertising in Germany and has also established an attractive offering in the video-on-demand segment with maxdome. ProSiebenSat.1 will also pursue strategic measures in all growth areas in the future in order to actively promote the digital trend and to build on its market position. In 2015, ProSiebenSat.1 Group acquired the first customers for regional advertising via HbbTV and increased its reach via platforms such as the 7TV app; other important steps included the acquisitions of SMARTSTREAM.TV and Virtual Minds. The companies are pioneers in the field of digital advertising technology: SMARTSTREAM.TV for digital video advertising products; Virtual Minds has an AdTech ecosystem for the automated real-time delivery of digital advertising inventory. We have thus laid the foundations for automated, data-driven display and video marketing in Germany.

The regulatory environment also yields opportunities; for example, additional revenue sources could result from a reduction of advertising offered by public broadcasters. Due to a change to the Interstate Broadcasting Treaty, a sponsorship ban already came into force at the start of 2013, which applies on public television on workdays after 8 p.m. and on Sundays and public holidays, with the exception of large sports events. The Broadcasting Commission of the German Federal States is currently negotiating further changes in view of the current development of fees. A decision is also to be made on the issue of a general advertising ban and other structural modifications. The additional volume resulting from a ban on advertising for the public broadcasters could amount to up to EUR 300 million a year for private operators.

 Further Opportunities from Corporate Strategic Decisions

The digital transformation is shaping the media sector more than most other industries. The options for receiving television are much more diverse than they were just a few years ago; television is being watched on different screens. At the same time, second screens such as tablets and smartphones are changing consumer behavior: More and more people are ordering products online while they watch television. Nearly half of all Germans have now purchased a product directly online because of TV advertising. The impulse from TV prompting an online search has proven particularly strong for brands that have their own online shop. For this reason, e-commerce firms are increasingly shifting their advertising budgets from online to TV.

The e-commerce market is growing dynamically and has high potential; in Germany, around EUR 1,200 per online shopper per year is spent for online purchases. ProSiebenSat.1 Group is expanding its portfolio with e-commerce firms in a targeted fashion and has identified various sectors as strategically relevant. The Group is pursuing various M&A approaches. Key investment criteria include prospects for profitability and potential synergies. Synergies are based on the potential to pool resources efficiently. In addition, ProSiebenSat.1 generates value increases from the prospective investments’ strong affinity with TV as an advertising medium and the highest possible interconnectivity with the existing digital portfolio.

While ProSiebenSat.1 has expanded its portfolio primarily through smaller investments or the media-for-equity and media-for-revenue-share business models in recent years, the Group made larger acquisitions in 2015. The acquisition of etraveli serves as an example here. The objective of the transaction is to expand the Travel Vertical internationally. ProSiebenSat.1 sees great growth prospects in this sector; the online market for air travel alone was worth EUR 9 billion in 2015. Internet travel offerings address a broad audience and particularly lend themselves to video advertising because of their theme. This is an important cornerstone of the Group’s M&A strategy. Using TV and online advertising, ProSiebenSat.1 can rapidly raise awareness of brands and thereby also increase the revenue growth of the companies in question at a relatively low cost and without high cash investments.

The Group will continue to use this competitive advantage in the future for the expansion and internationalization of its portfolio. Consolidation effects from M&A measures are only recognized in the budget once the transactions are concluded, so they entail a great degree of additional potential. The Group has already budgeted for profitable revenue growth of over EUR 200 million in 2016 in connection with the expansions of the scope of consolidation. In addition to etraveli, the full consolidation of Verivox in particular will have a positive effect on our revenue performance. Our growth targets for 2018 include the recently acquired majority interests; further major acquisitions would result in additional potential. ProSiebenSat.1 Group has not only achieved its medium-term growth targets since 2011, but repeatedly exceeded them. The Company most recently raised its 2018 targets in fall 2015; ProSiebenSat.1 grew faster or more significantly than originally expected in all segments.