Leila Abboud is a Bloomberg Gadfly columnist covering technology. She previously worked for Reuters and the Wall Street Journal.

ITV Plc disappointed the many short sellers betting its earnings would fall flat. But CEO Adam Crozier isn't in the clear.

Short sellers circled ITV before earnings
Source: Markit

The U.K. broadcaster on Wednesday announced both an increase in its regular dividend as well as a special payment of 5 pence a share. That helped to send the stock up as much as 3 percent, even as the broadcaster's ad revenue declined.

The shorts still have a point. ITV relies on advertising for 70 percent of sales and operating profit. Younger people are watching fewer hours of TV. Online advertising is booming and will account for more than half of all ad spending in Britain this year. All that is putting ITV's core revenue stream under pressure. 

ITV's advertising revenue fell last year
Source: Bloomberg Intelligence

To weather this, the company needs to show that it can meaningfully grow its content production unit, ITV Studios, best known for making dramas like "Victoria" and reality shows like "Love Island." That will take bigger acquisitions or more investment. Crozier has managed to double sales at ITV Studios since 2010 -- but his effort faltered last year, with the failure of a bid for Canada's Entertainment One Ltd.. There has also been a drought of hit shows after Downton Abbey ended.

Further acquisitions won't be easy given the high valuations enjoyed by the few publicly traded content producers. ITV's tactic of buying up smaller studios, as it did recently in France, is too incremental. Crozier on Wednesday ruled out another bid for Entertainment One, best known for making the kids' cartoon Peppa Pig, but said he would consider acquisitions if they made sense.

Perhaps more worryingly, there are more TV shows being made than ever, competing for eyeballs. And that's not even counting the wonders on our smartphones. Netflix Inc. and Inc. are spending billions on content and traditional cable players are seeking to keep up. All this means it's harder for ITV's shows to find their audience.

Binge Watching
There are more shows being made than ever
Source: FX Cable network study

If ITV Studios can't be expanded, shareholders will rightly continue to see the company as a play on the wider U.K. economy: the broadcaster's earnings largely depend on how much U.K. companies spend on marketing to reach consumers. But with the U.K. economy forecast to grow 1.5 percent this year and 1.3 percent next amid Brexit-related uncertainty, there isn't much scope for optimism that spending on advertising will suddenly accelerate.

Crozier's forecast is conservative: he expects net ad revenue to fall 6 percent in the first four months of this year as retailers, supermarkets and banks spend less.

ITV trades at roughly 30 percent discount to European peers like France's TF1 and Germany's ProSiebenSat.1 Media SE on a 12-month blended forward price-to-earnings basis. For that gap not to widen, the U.K. ad market will need to hold up. Narrowing it will require Crozier's content push to pay off -- an even harder task.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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Leila Abboud in Paris at

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