The information following draws primarily upon that submitted to the ITC. Apart from information relating to BSkyB's expenditure and profits, which is extracted from its Report and Accounts for 1996-97, the information is unaudited. Since the data is provided for different purposes, the reporting periods for the information used in this chapter are not always the same. Details of the development of cable and local delivery operators are to be found in the Cable and Local Delivery chapter.
Total revenue for the commercial television sector in the UK in 1997 amounted to £4,733m, an increase of 14 per cent when compared with 1996. A breakdown of total income by activity for both years is shown in Figure 1.
Advertising remains the principal source of commercial television revenue, accounting for almost 56 per cent of the total. Although there was a 9 per cent increase in advertising revenue to £2,648m, its share declined from 58 per cent in 1996. Figure 2 shows that the television advertising market is still dominated by Channel 3 with a 66 per cent share (1996: 72 per cent) followed by Channel 4 with 20 per cent (1996: 20 per cent). Channel 5 was launched on 30 March 1997 and accounts for around 3 per cent of the annual total. The satellite and cable programme service licensees experienced the biggest increase in advertising revenue, 50 per cent, and consequently their aggregate market share increased from 8 per cent to 11 per cent.
Comparing licensees, and aggregating those under common ownership in terms of advertising revenue, the Granada group (ie, Granada, LWT, Yorkshire and Tyne Tees) is the largest. The Carlton group (ie, Carlton, Central and Westcountry) is the next largest and Channel 4 is third, with the United News and Media group (ie, Meridian, Anglia and HTV) close behind. In the cable and satellite sector the largest, collectively, were the 14 BSkyB licensees which, in an overall ranking, were greater than the size of Anglia, a middle sized Channel 3 licensee, in terms of advertising revenue. CNN International, VT4 and UK Gold were the other satellite licensees of any significant size in the advertising market, being about the same size as one of the smaller Channel 3 licensees. The majority (93 per cent) (1996: 91 per cent) of the ITC's cable and satellite programme service licensees reported net advertising revenue of less than £2m each.
Subscription income, both from individual subscribers and cable operators who pay programme licensees for the right to broadcast their programme services, was the second largest source of commercial television revenue and represented 27 per cent of the total compared with 25 per cent in 1996. Total subscription income amounted to £1,296m in 1997, an increase of 24 per cent compared with 1996. This growth has slowed from the 33 per cent recorded in 1996 and 45 per cent in 1995.
BSkyB was the largest earner of subscription income with around 79 per cent of the subscription market. The importance of subscription income to BSkyB is demonstrated in its 1997 Annual Report and Accounts which discloses that 83 per cent of its turnover was from subscriptions and just 12 per cent from advertising. The share of subscription income attributable to direct-to-home subscribers (as opposed to cable operators) fell from 86 per cent to 82 per cent. Most of the other cable and satellite programme licensees were relatively small in comparison, with only 28 licensees (11 per cent) reporting subscription income in excess of £2m each. The largest had subscription income of £44m.
Total sponsorship income has increased but remains comparatively very small. It amounted to £36m in 1997, a £5m, or 15 per cent, increase over 1996. Income from the sale of goods, principally by home shopping channels, has risen significantly over the last three years, from £49m in 1995 and £80m in 1996 to £103m in 1997. The two major home shopping channels are QVC and Quantum.
Programme sales are predominantly a Channel 3 and Channel 4 activity and include the sale of own programme productions and independent programme productions commissioned by them. Programme sales for the terrestrial sector as a whole in 1997 were £496m, 10 per cent of total industry income or 17 per cent of Channel 3 and 4 incomes combined. This compares with £445m in 1996, 11 per cent of total industry income and 16 per cent of Channel 3 and 4 incomes combined. Of this, £56m was attributable to overseas sales (1996: £49m).
A breakdown of the total income of £4,733m by sector is provided in Figure 3 with comparative figures for 1996. Channel 3, with revenue of £2,306m, was the largest grouping, although its share has fallen from 54 per cent to 48 per cent. Cable and satellite had the second largest with a share of 36 per cent, five percentage points higher than last year. On a company basis BSkyB had the highest income. The next largest, at just over two thirds of the size of BSkyB when measured by income, was the Granada group of licensees, then the Carlton group which was over half the size of BSkyB. Channel 4 was just over two fifths of the size of BSkyB when measured in total income terms.
Just under half of the income for commercial television as a whole was devoted to the production, commissioning and acquisition of programmes. The proportions are 53 per cent for Channel 3 and 58 per cent for Channel 4, with the percentage for BSkyB being somewhat lower at 45 per cent. The proportions are higher compared with last year where both Channel 3 and Channel 4 were 51 per cent and BSkyB, 42 per cent. (Little information on expenditure is available for the other cable and satellite programme service licensees.) The cost of the programmes shown on Channel 3 in 1997 was £822m, an increase of £12m, or 1 per cent, compared with 1996. Over 88 per cent of this expenditure, or £731m (1996: £746m), was spent on programmes produced or commissioned by Channel 3. Network programmes (excluding acquired) and ITN accounted for the majority of this expenditure and amounted to £551m, an increase of 2 per cent on 1996. However, the average cost per hour for network schedule programmes, excluding news, was, at £158k, slightly lower than 1996 as a result of a corresponding increase in the number of programme hours. Drama remained the most expensive category, with a slightly lower cost per hour than in 1996, with repeats and daytime the least expensive categories.
Some £170m was spent on producing and commissioning regional programmes which comprise 60 per cent of total broadcast output by Channel 3 regional licensees in 1997, 6 per cent higher than in 1996. The average cost per hour for new productions was £16.8k in 1997 compared with £15.6k in the previous year. As might be expected, given the difference between regions in terms of geography, audience profile, licensees' size and regional programme obligations, there was a considerable variation around this average. Seven of the fifteen regional Channel 3 licensees had regional programme costs between £10k and £16k per hour, whereas Granada and the two London licensees, Carlton and LWT, had substantially higher costs per hour.
Independent productions comprised 21 per cent of total Channel 3 programme transmission expenditure and about 13 per cent of total transmission hours. (These figures relate to programmes of all types unlike the statutory independent quota which excludes certain programme categories such as the news and repeats.) Channel 3 network programmes made by independent producers totalled £154m, a decrease of £9m on 1996, with the value of regional programmes made by independents decreased to £27m, from £30m in 1996.
For commercial television as a whole, the cost of transmitting programmes, selling and marketing of airtime and subscriptions, and overheads, was £831m, 12 per cent higher than in 1996, and 18 per cent of income. There was a 3 per cent decrease in Channel 3's non-programme costs and other overheads between 1996 and 1997, and an increase of 1 per cent in those of Channel 4. BSkyB's non-programme costs increased by 18 per cent, with marketing expenditure increasing by some 34 per cent and transmission and administration costs rising by 24 per cent. These increases need to be looked at against the growth in BSkyB's business. The total number of subscribers (both direct to home and cable) increased by 17 per cent from just over 5.0m to 5.9m.
Figure 4 shows the distribution of income for commercial television as a whole. The 14 per cent growth in income was contrasted by a 7 per cent fall in pre-tax profits and a 20 per cent growth in programme expenditure. These changes were due, in part, to the inclusion of Channel 5 in its first nine months of broadcasting.
BSkyB's operating profits rose by £59m to £374m, or by 19 per cent. Its operating profit margin, at 29 per cent, was less than the margin for Channel 3 as a whole. A 1 per cent increase in Channel 3's operating profits, to £753m, resulted in its operating profit margin being maintained at 33 per cent. Individually, five Channel 3 licensees had margins higher than the average for Channel 3 on this basis. Channel 4's operating profit fell, with its profit margin decreasing from 26 per cent in 1996 to 22 per cent in 1997.
BSkyB achieved an improvement (£57m) in profits on a pre-tax basis. Pre-tax profits of £314m in 1997 (1996: £257m) represented a margin of 25 per cent (1996: 26 per cent). The increase in Channel 3's operating profits was partly offset by a rise in tender payments from £402m to £410m, but the payment made by Channel 4 to Channel 3 helped to offset this, rising from £87m to £90m. Channel 3's pre-tax profits (ie, profit after tender payments, the Channel 4 transfer, exceptional items and interest) at £432m were equal to those in 1996, and provided a margin on turnover of 19 per cent (1996: 19 per cent). This average conceals a wide range of profit margins for the individual licensees, with the highest profit margin at 27 per cent and the lowest margin at 11 per cent loss. Channel 4's pre-tax profit margin (after the payment to Channel 3) was 6 per cent, a reduction from the 10 per cent margin last year.
The number of people employed either on a permanent, contract or freelance basis by commercial television licensees increased by 6 per cent in 1997 to 12,800. (People employed in related businesses such as airtime sales houses and some Channel 3 programme production companies are excluded.) Forty-four per cent of the total worked in programme areas. There were increases in the number employed by Channel 3 licensees (289 staff), Channel 4 (32 staff), and there was an increase of 375 staff, principally in subscriber management, at BSkyB.
 
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