Development of ProSiebenSat.1 Group’s relevant Business and Market Environments

Advancing digitalization and growing use of the Internet have changed media usage and consumer behavior as a whole. This is resulting in additional growth areas for ProSiebenSat.1 Group as well as new opportunities for addressing target groups and marketing. The Group has strong consumer brands — in both the entertainment and commerce businesses — and is consistently expanding its portfolio. At the same time, it is increasingly connecting its TV offering with digital offerings in order to respond to new competitors and the changes in user behavior in general.

Entertainment

Never before have people around the world had the opportunity to consume entertainment via such a wide range of channels as they do in the digital era. These days, content is available no longer just as linear programming on TV or the radio or in traditional print products such as magazines and books, but also in digital form. New forms of use such as streaming services, e-books, live video via the Internet or on-demand, via smart TVs, smartphones, tablets and many more are firmly integrated into our everyday lives. According to PricewaterhouseCoopers GmbH, the volume of the entertainment market in Germany totaled around EUR 37 billion in 2018 (previous year: EUR 36 billion); of which EUR 30 billion was attributable to the traditional and EUR 7 billion to the digital entertainment market (previous year: EUR 30 billion and EUR 6 billion, respectively). ProSiebenSat.1 Group achieved a market share of less than 1% here.

In order to translate this market potential into growth and generate additional revenues, the Group is diversifying its entertainment offerings. The aim is to make our entertainment business more digital, local and live. To this end, the Group is increasingly investing in digital platforms in order to expand programming out from the starting point of television, the number one medium, and to make content available via as many channels as possible. By connecting the TV and online realms, ProSiebenSat.1 Group is achieving higher overall reach while increasing the advertising impact of campaigns.

ProSiebenSat.1 Group’s biggest revenue market is Germany, where the Group holds the leading position in the TV market. In addition, the Group offers a complementary portfolio of advertising-financed free TV stations in Austria and Switzerland: The Group has launched four new special interest stations in Germany since 2010, namely sixx, SAT.1 Gold, ProSieben MAXX and kabel eins Doku. Today, ProSiebenSat.1 Group’s station profile in the principal revenue market of Germany comprises seven brands that complement each other and address different viewer groups. The smaller stations have strengthened our position in the audience market.

In 2018, the Group increased its combined audience share in Germany by a significant 0.8 percentage points to 27.8 percentage points among 14- to 49-year-olds despite the major sporting events broadcast on the public stations. The market share increased to 28.8% in the fourth quarter (previous year: 27.8%). The stations marketed by IP Deutschland (RTL, VOX, n-tv, Super RTL, NITRO, RTLplus) had a market share of 24.3% in the year as a whole (previous year: 25.4%) and 24.7% in the fourth quarter (previous year: 24.8%).

The Austrian broadcasting group ProSiebenSat.1 PULS 4 GmbH achieved a combined market share of 28.6% among viewers aged between 12 and 49 years in 2018 (previous year: 27.5%). ProSiebenSat.1 Group thus also strengthened its market position in Austria and is the leading private broadcasting group in that country by some distance. The TV family in Switzerland achieved a combined market share of 17.7% among 15- to 49-year-olds (previous year: 17.8%).

In addition to increasingly specific, targeted approaches to viewers and the sale of advertising spots, ongoing digitalization is opening up new revenue models for the TV business. The distribution of programs in high definition (HD) is one example. Here, we participate in the technical service fees that end customers pay to the respective providers for programs in HD quality. The number of users of the satellite digital platform HD+, which distributes private TV stations in Germany, is continuously rising. In Germany, ProSiebenSat.1 HD stations had 9.5 million users in 2018 (previous year: 8.8 million). The Group also broadcasts its programs in HD quality in Austria and Switzerland.

Numerous partnerships emphasize ProSiebenSat.1 Group’s strategy of offering its programs via as many distribution channels as possible and expanding reach. Against this backdrop, the Company again concluded numerous new distribution agreements in 2018, including with Deutsche Telekom, freenet.tv, M7 (Diveo) and 1&1. In addition, the first shows were broadcasted in the new UHD standard. In line with its digital entertainment strategy, ProSiebenSat.1 Group also founded the joint venture 7TV together with Discovery Communications in the third quarter of 2017 and expanded it this year. The aim is to establish a cross-provider streaming platform in Germany that offers a comprehensive entertainment package with live streaming, a media library and sports broadcasts. To this end, the VoD portal maxdome and the Eurosport Player will also be integrated in this service. Around 3.5 million people already use the 7TV app (launched in 2017), maxdome and the Eurosport Player.

A further essential component of ProSiebenSat.1 Group’s portfolio is the global digital studio Studio71. It pools the broadcasting group’s digital content offerings and distributes them via digital platforms. In 2018, digital studio Studio71 achieved over 9.2 billion video views a month (previous year: 7.4 billion video views).

As well as reach and market shares, awards are an indicator of the popularity of our brands and programs; in 2018, the Group won awards including the German Television Award for “The Voice of Germany”.

Production market

The proportion of local programming on the Company’s own stations has become a particular strategic focus. In the next approximately five years, Red Arrow Studios’ share in the content commissioned locally by the Entertainment segment is to be increased from 13% today to over 30%. The aim is to set ourselves apart from the competition and further hone our brand profiles with our own productions. At the same time, the group of commissioners for high-quality productions has increased in recent years to include the operators of multinational streaming platforms such as Amazon and Netflix. These platforms have steadily increased their spending on in-house productions and also plan to spend more on their own content in the years ahead. As a result, Red Arrow Studios’ potential customer group in the US and the German-speaking region has become considerably larger.

Advertising

According to Nielsen Media Research, gross TV advertising investment in Germany rose by 3.7% to EUR 15.90 billion in 2018 (previous year: EUR 15.33 billion). In the fourth quarter of 2018, there was a 3.8% increase to EUR 5.37 billion (previous year: EUR 5.18 billion). TV has the greatest relevance in comparison to other media. In 2018 as a whole, 48.9% of gross advertising investment went on TV advertising (previous year: 48.0%). This figure was 52.3% in the fourth quarter (previous year: 51.1%).

063 / Media mix German gross advertising market in %, 2017 figures in parentheses

Data from Nielsen Media Research are important indicators for assessing the advertising market’s development. However, they are collected on a gross revenue basis, meaning that they do not take account of discounts, self-promotion or agency commission. In addition, the figures also include TV spots from media-for-revenue-share and media-for-equity transactions. Furthermore, major digital players from the US (such as Google and Facebook) are not reflected in the Nielsen figures and therefore they do not represent the entire market.

In ProSiebenSat.1 Group’s view, the TV advertising market fell short of the previous year on a net basis in 2018; there are similar assessments from experts from the Organization of Advertisers in the German Brands Association (Organisation Werbetreibende im Markenverband — OWM). After the German net TV advertising market grew only slightly and was characterized by greater volatility in 2017, the market continued to benefit less from macroeconomic development in 2018. This was attributable to sector-specific effects, such as increasing consolidation of important sectors for the TV advertising market, which represent developments whose duration and impact cannot yet be conclusively assessed. The slowdown affected not only the German TV market, but the entire European advertising industry. Official data on the net TV advertising market for 2018 will be published by the German Advertising Federation (Zentralverband der deutschen Werbewirtschaft — ZAW) in May 2019.

Against the backdrop of the mentioned developments, the agency forecasts for 2018 vary considerably: The forecasts for the German TV advertising market range between +0.4% (Magna Global) and +3.6% (ZenithOptimedia). For the German advertising market as a whole, Magna Global anticipates net growth of +2.7%; ZenithOptimedia forecasts growth of 2.0%. In-stream video advertising is likely to continue its dynamic development and drive growth on the online advertising market. Here, the research institutes anticipate a plus of 8.8% or 10.5% (Magna Global) respectively.

According to Nielsen Media Research, ProSiebenSat.1 Group is the market leader in the German TV advertising market and generated gross TV advertising revenues of EUR 6.42 billion in 2018 (previous year: EUR 6.38 billion). In the fourth quarter of 2018, revenues increased by 1.9% to EUR 2.25 billion (previous year: EUR 2.21 billion). For the full year of 2018, this resulted in a market share of 40.4%; in the fourth quarter, ProSiebenSat.1 Group achieved a market share of 41.9% (same periods of the previous year: 41.6% and 42.7% respectively). The development of the market share is partly due to the emergence of new market participants: As of the beginning of 2018, Nielsen Media Research added numerous channels of the pay TV broadcaster Sky to its analysis, as well as kabel eins Doku, RTLplus, MTV, and Servus TV.

064 / Market shares German gross TV advertising market in %, 2017 figures in parentheses

By selling in-stream video ads, which are shown online before, after or during a video stream, ProSiebenSat.1 Group generated gross revenues of EUR 293.8 million in the full year of 2018 (previous year: EUR 304.6 million). This corresponds to a year-on-year decrease of 3.6% compared to the previous year. Nevertheless, the market share increased to 46.7% (previous year: 44.8%). In the fourth quarter, the Group generated EUR 107.2 million (previous year: EUR 119.0 million) from their sale; this results in an advertising market share of 48.1% (previous year: 49.4%). The market volume for advertising budgets for in-stream video ads in Germany decreased by 7.6% to EUR 628.8 million in 2018 (previous year: EUR 680.5 million), and by 7.5% to EUR 222.8 million in the fourth quarter (previous year: EUR 240.7 million). Overall, investments in online forms of advertising rose by 5.0% to EUR 3.66 billion in 2018 (previous year: EUR 3.49 billion). In the fourth quarter, they amounted to EUR 1.15 billion (previous year: EUR 1.13 billion). With these investments, ProSiebenSat.1 Group generated revenues of EUR 378.1 million in the year as a whole (–4.7%) and of EUR 125 million in the fourth quarter (–15.6%). In addition to in-stream videos, the online advertising market also includes display ads such as traditional banners and buttons.

Nielsen Media Research designates gross figures for the online advertising market in Germany. They do not comprise data from Google/YouTube and Facebook, among others, and therefore they do not represent the entire market. For the overall online video market, it can be asssumed that it has grown.

Commerce

Overall, e-commerce on all digital devices in Germany is expected to have grown by around 10% to a market volume of EUR 63 billion in 2018. As such, e-commerce probably accounted for 10% of total retail in 2018. This was the result of a current study by the Institute of Retail Research in Cologne (Institut für Handelsforschung Köln). According to this study, mobile commerce is likely to have been of great significance for e-commerce growth in Germany in the period under review, with a volume of around EUR 31 billion (previous year: around EUR 24 billion). This corresponds to 48% of online revenues in Germany overall. The individual e-commerce areas differ in terms of their dynamics. Relevant markets for ProSiebenSat.1 Group are described below:

• Online dating. According to Statista’s Digital Market Outlook, revenues in the online dating market are likely to have increased to EUR 162 million in 2018 (previous year: EUR 155 million). The online dating market comprises the matchmaking, singles site and casual dating segments. Our portals Parship and ElitePartner belong to the matchmaking segment, which generates the highest revenues in the online dating market and accounts for roughly 66% of total revenues. Recent studies by ElitePartner highlight the market’s growth potential: Close to 31% of Germans are single.
• Online price comparison. The market volume of online comparison portals in the fields of energy, telecommunication, car insurance and consumer loans in Germany is expected to come to approximately EUR 721 million in 2018 (previous year: EUR 634 million). A recent study by WIK Consult shows that more than 70% of Germans use comparison portals. And they do not just rely on a single one: 40% of consumers use more than one comparison portal to find information and conclude contracts.
• Gift experiences. OC&C Strategy Consultants cites a volume of around EUR 2.8 billion for the experiences market in Germany in 2018. An examination of purchasing behavior throughout Germany in the 2017 gift experiences report showed that an average of around EUR 109 was spent per gift experience.
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