V and Y Productions Limited (VYP), established in October 2004, is an independent TV production company based in the UK that makes programmes for a variety of TV broadcast organisations. It is founded by Steve Voddil and John Young, who were programme directors worked in TV broadcast companies. VYP is not listed on either a main stock exchange or the alternative investment market. It has a market share of 1.4% and generated total revenue of £28.6 million in YA 2011, almost 39% growth in total revenues from the previous year.
STRATEGIC AND FINANCIAL ANALYSIS
VYP produces 4 programme genres, including documentaries, drama series, scripted comedy programmes and general entertainment programmes. It has won several TV awards in the past few years. VYP’s revenue comes from the commission fee paid by the TV broadcast companies and international sales of programmes. VYP currently employs 60 people directly and outsources much of the routine TV production work to other small specialised companies.
Porter’s Five Forces
Competitive Rivalry within Industry: High
The industry refers to third party content providers or independent TV production companies. This industry is characterized by monopolistic competition where there is a large number of firms producing similar products (television shows) but are not perfectly substitutable due to differentiation between the different ideas and contents created.
Bargaining power of suppliers: Medium
Suppliers include artists, actors, presenters, outsourcing companies and freelance individuals involved with the programmes. While basic videoing and editing crew may be easily sourced, when it comes to the engagement of famous actors or the expertise of freelance individuals or small specialised companies in programme-making, the bargaining power of these suppliers is relatively higher.
Bargaining power of customers: High
Customers refer to TV broadcast organisations like BBC, ITV, Channel 4, Channel 5 and Sky in the UK and other commercial broadcast organisations in other European countries. These customers have high bargaining power due to the presence of a large number of independent TV production companies. In addition, many broadcasters are not obligated to purchase indie productions. In BBC’s case, even though it has an obligation to commission a minimum percentage of its programmes form independent production companies, it has currently already exceeded it, hence increasing its bargaining power.
Threat of new entrants: High
There exist low barriers to entry. Firms can enter the independent production company industry easily without a need for large amounts of upfront capital investment.
Threat of substitute products: High
Substitutes include “in-house” productions and “acquired” programmes. For the former, broadcasters are able to produce their own programmes with their own production teams that substitutes for the need to purchase programmes from independent production companies. For “acquired” programmes originally created for another broadcaster, it is highly likely that there already exists a huge following for such shows in the UK or has been well received in its country of source. This means that these shows can gain an upperhand on programmes produced by independent production companies that are not tried and tested.
Assessment of Financial Ratios
Return on Equity (RoE)
Net Operating Profit Margin
Times Interest Earned (TIE)
A quick look shows that generally the financial ratios improved across the board from 2010 to 2011, suggesting continued (albeit slow) growth for VYP. The increase in RoE is due more to a growth in income despite a constant equity base than optimal capital budgeting by the company – it shows growth in the business of VYP as a whole. However, the NOPAT margin remained low with only a minimal increase. This reflects...
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