content disruptors - structural change in the media and entertainment industry

Content DisruptorsStructural change in the mediaand entertainment industry

Content Disruptors 01

About this report

Content Disruptors is a report written by the Economist Intelligence Unit (EIU) commissioned by UK Trade & Investment (UKTI). The report examines the key trends reshaping content markets and explains how companies are adapting to succeed in a fast-changing world.

To shed light on these topics, the EIU conducted a global survey of 485 executives in the media and entertainment industry. Respondents were drawn from Europe, North America, Asia-Pacific and Brazil. All companies have a minimum global revenue of $1 million. All respondents hold management positions, with 48% occupying C-suite or board-level positions.

To complement the survey findings, the EIU also conducted wide-ranging desk research and in-depth interviews with a range of organisations. Our thanks are due to the following for their time and insight:

– David Card, Vice President Research, GigaOm Pro

– Nick George, Entertainment and Media Partner, PwC

– Marco Gomes, Founder, Boo-box

– Stephen King, UK Managing Director, Believe Digital

– Ian Livingstone, Founder, Eidos Interactive

– Stella Medlicott, Chief Marketing Officer, Red Bee Media

– Robert Picard, Director of Research, Reuters Institute, Oxford University

– Anthony Rose, Founder, Zeebox

– Mitch Singer, Chief Digital Strategy Officer, Sony Pictures Entertainment

– Zhang Tian Xiao, President, Shanghai Fantasia Animation Company

– Marco Vernocchi, Global Managing Director of Media and Entertainment Practice, Accenture

The EIU bears full responsibility for the content of this report and the findings do not necessarily reflect the views of UKTI.

Content Disruptors02

Executive summary

Back in 1996, when the internet was yet to become the global phenomenon it is today, Microsoft co-founder and chairman Bill Gates argued that content would be king in the rapidly evolving digital world.

It turns out he was wrong – at least in the sense that traditional media and entertainment companies (television, film, radio, publishing and music businesses) have often struggled to translate their assets into a dominant position in digital markets. Indeed, many traditional media players have had to adjust to a world where new technology powerhouses (the likes of Google, Apple and Facebook) compete for their audiences’ time and attention. Even ‘digital natives’ in the games industry have had to adjust their business models, thanks to the arrival of mobile devices and social gaming.

The good news is that despite the ceaseless wave of disruption and innovation, the outlook for media and entertainment companies as a whole is bright. The appetite for media shows no sign of abating – indeed people seem eager to consume multiple media simultaneously. New technologies are giving rise to innovative formats and genres, and sophisticated consumers are emerging in high-growth markets with money to spend.

Inevitably, not everyone will thrive in this changeable and competitive environment. Some parts of the industry are finding it more difficult to adjust than others and there can be no single prescription for success in such a complex sector. Nevertheless, this report – based on a survey of almost 500 executives from the media and entertainment industry – provides insights into the trends that are reshaping the content business, as well as some of the key strategies that will help companies chart a successful future.

Key findingsDigital is where the growth is, but most companies are still searching for the right model Digital content will be the fastest-growing part of the industry over the next decade and is expected to account for 80% of the media we consume by 2020 (up from two-thirds in 2010). Businesses don’t need to shift to a purely digital model, but they need to tap into the growing digital market. Only 12% of firms polled in our survey already have a digital distribution model that is commercially successful – perhaps because their confidence in the future hasn’t been backed up by concrete action. Although 63% view the rise of social media as an opportunity, only 36% have undertaken social media and viral content initiatives in the past three years to increase digital revenues.

The revolution has only just begunExecutives in our survey identify a series of trends that have already transformed their industry. Over three-fifths (63%) believe advertisers are becoming more informed and demanding, and 53% say digital models have made it more difficult to reach consumers in their preferred environment. More than half (52%) agree that the media and entertainment industry “is not sustainable in its current form”. The majority think there is plenty of change still to come, with three-quarters saying that “we have so far only experienced a small part of the overall impact that the shift to digital will have on our economy”.

Opportunities outweigh threatsThe digital switch is increasing competition and forcing a rethink of operating models. As with any structural shift, this is creating winners and losers. Nevertheless, when asked whether they see different types of change, such as the growth of online consumption or increased use of social media, as opportunities or threats, the proportion of respondents seeing them more as opportunities never falls below 60%. One point that might be boosting industry optimism is recognition of the fact that demand for media and entertainment content will continue to increase, particularly in high-growth markets like Brazil and China.


This is still a hits businessDevices and formats may be changing, but traditional media players still have some advantages. They are good at tapping into what the audience wants. “Media and entertainment is still primarily a hits-driven business,” says David Card, Vice President Research at GigaOm Pro, a US technology consultancy. Of course, increasing the ratio of hits to misses is difficult, but technology may help in this area too. Nearly half of firms (49%) say they involve consumers in their innovation process.

If it’s good enough, people will pay There has been much debate about whether enough people will be willing to pay for content now that there is so much available online for free. Nearly seven in ten (69%) respondents to our survey think consumers will get used to paying for well-targeted content as digital models mature. To turn this prediction into reality, the industry will need to make more headway against digital piracy as well as deliver genuinely compelling content that is enticing enough to command a premium.

From personalisation to gamification Three years ago, personalisation of content was seen as the most effective method of engaging with consumers, according to executives in the survey. Today, however, there is a greater emphasis on interactivity and so-called gamification. Having allowed users to personalise their experience, content providers are now trying to create a more interactive or playful experience.

Traditional media can learn valuable lessons from the masters of dataGoogle, Yahoo, Facebook and others have turned audience data into a science. By contrast, only 45% of magazine publishers say they have an efficient customer data mining strategy. This is a waste. In the digital world, there is an opportunity to continuously tweak and experiment with your product, measuring and refining the audience experience using the latest tools and techniques in data analysis.

04 Content Disruptors

Introduction

The world’s media and entertainment landscape is undergoing a radical transformation. Growing use of the internet and the introduction of new distribution platforms that enable content to be accessed via the world wide web mean that sectors like music, film, video games and publishing are all transitioning to a world where digital consumption is fast becoming the new normal.

At the same time, the proliferation of new kinds of devices, particularly smartphones, tablets and e-readers, is giving end-users more options about when, where and how they consume their content. If someone had mentioned a decade ago that they played, watched and read all their media and entertainment content on a single device it would have seemed unlikely. Now, with the introduction of the iPad and other tablet computers, it is becoming second nature to many.

As transformational as these developments seem, industry insiders think there is still plenty more to come. The impact of innovations like tablets and smartphones has yet to fully play out and continued advances in technology should ensure that the media landscape remains in a state of flux for years to come.

The media and entertainment industry is enormously complex, with significant differences in the rate of change and approaches to handling it between sub-sectors and regions around the world. This report acknowledges those differences, but focuses primarily on aspects of change that are common across the industry.

“ The impact of innovations like tablets and smartphones has yet to fully play out.”


Disruptive forces

Our survey highlights the scale of the challenges facing the world’s media and entertainment businesses. More than half (52%) of all the executives we polled agree that the industry “is not sustainable in its current form”. Only 18% think it is. Meanwhile, three-quarters think that “we have so far only experienced a small part of the overall effect that the shift to digital will have on our economy”. For those who fear change, these are worrying times and the future, it seems, can only promise more of the same.

Chart 1: Please indicate the extent to which you agree or disagree with the following statements

Statement 1

“�We�have�so�far�only�experienced�a�small�part�of��the�overall�effect�that�the�shift�to�digital�will�have��on�our�economy.�There�is�much�more�to�come.”

75%

Agree

22%

Neither/ Don’t know

4%

Disagree

“�The�media�and�entertainment�industry��is�not�sustainable�in�its�current�form.”

Statement 2

52%

Agree

30%


18%

Disagree

Source: Economist Intelligence Unit

Percentages were rounded up and may not add up to 100% for some charts.


The three Ds of technological change: Digital, devices and distributionThe shift to digital represents one of the most profound challenges the industry has ever faced. Physical distribution channels such as newspapers, magazines, books, CDs and DVDs have gradually been joined by online or electronic consumption, leading to a disruption of existing business models that is threatening profitability for many.

“There has probably never been a faster changing landscape than the one we’re in now,” says Nick George, Entertainment and Media Partner at PwC, a consultancy firm. Businesses are in the grip of what Marco Vernocchi, Global Managing Director of Media and Entertainment Practice at Accenture, another consultancy, describes as “pervasive change… where every dimension of the industry is undergoing a transformation.”

Both identify two big challenges. One is coping with the structural shift that is forcing a rethink of established operating models and increasing both competition and fragmentation. The other is dealing with an economic downturn that has reduced demand and accelerated the pace of change.

Increasing use of the internet has been one of the principal drivers of the structural shift. As chart 2 shows, worldwide internet use has grown dramatically since 2000, with the number of users rising from 386 million to an estimated 2.2 billion in 2012. Speed of access has improved for many people too, with the number of broadband users rising from just 16 million in 2000 to an estimated 649 million today. Both trends – rising internet use and broadband access – are set to continue well into the future as high-growth markets continue to develop their infrastructure.1

Another driver of the digital switch has been the increased use of mobile devices, particularly smartphones. As chart 2 shows, the number of worldwide mobile subscriptions has increased even more quickly than internet users since 2000, rising from 690 million to an estimated 5.2 billion in 2012. Crucially, the share of smartphones in total mobile sales is growing rapidly too, increasing from 19% in 2010 to 31% in 2011.2 “Mobility is exceptionally high, but the other driver is functionality,” says Mr George. “More functionality is being put into devices that are almost ubiquitous and that’s giving people the opportunity to consume media wherever they are.” Zhang Tian Xiao, President of Shanghai Fantasia Animation Company, believes this is increasingly true in emerging markets. “In big Chinese cities, even taxis are equipped with tactile tablets which customers can use to watch TV or play games,” he says.

The shift to digital and the growing use of mobile devices has created what Mr Vernocchi calls a “broadband-enabled ecosystem.” One of its defining features has been the introduction of new content distribution models. iTunes, Apple’s music and video download platform, is probably the most well known. Other examples include Spotify, the music streaming website, and Netflix, which allows users to stream films and TV shows.

Chart 2: Internet users and mobile subscriptions, 1991-2016

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The challenge for businessThese trends – increasing digitalisation, the proliferation of mobile devices and the introduction of new distribution platforms – mean increased choice and convenience for end-users. “You’re getting many more platforms on which audiences can get new or old content so they’re getting a lot of choice,” says Professor Robert Picard, Director of Research at the University of Oxford’s Reuter’s Institute. “This is really good for audiences in terms of not having to be captives of legacy media firms and platforms.”

New devices and programmes are also enabling a shift in the way end-users consume media. According to InMobi, a mobile advertising network, mobile devices have now surpassed TV in terms of time spent on media, with consumers spending 27% of their time on mobile devices compared with 22% on TV.3 Viewers are also increasingly getting into the habit of ‘dual screening’, meaning that as they watch TV they are also using their mobile devices to interact with family and friends or purchase products they have seen. Consumers are also accessing content at different times and with different types of devices. A survey by IAB Europe, a trade association, found that 73% of European internet users watch TV online, either live or using catch-up services like the BBC’s iPlayer.4

All this makes for a richer, more engaging and more convenient media experience for end-users, but it is a mixed blessing for those involved in the media and entertainment business. The most difficult part of the adjustment process has been, and remains, the development of new business models that effectively monetise content. There are signs of progress on this (see next section), but many industry sub-sectors are still struggling to come up with a solution.

Another feature of the process has seen incumbent businesses coming under increasing pressure from market entrants with new business models that challenge established approaches. Though they have experienced different levels of commercial success, the obvious examples here are iTunes and YouTube, which both work alongside – as well as in competition with – traditional media. “The biggest strength of Apple, Google and YouTube is that they’re always one step ahead of the game, whereas most media companies have a passive approach to change,” says Mr Zhang. “Instead, they should be anticipating disruptions and funding research in new technologies and platforms.”

Of course, disruption comes with opportunities as well as challenges. Apple’s launch of the iPad, although by no means the first ever tablet computer, opened the door to many publications finding a means of selling content they had previously given away on the web. The blog, ipad.blorge.com, reported in March this year that the launch of Apple’s Newsstand had resulted in users spending $70,000 per day on subscriptions within six months.

This hints at a wider point that Mr George is keen to underline. “As societies get richer and technologies improve it makes it easier to consume more of the media you want, so the net effect is that media consumption will increase,” he says. With established markets still growing, albeit slowly, and with emerging market middle classes also expanding quickly, demand for media and entertainment content is unlikely to decrease anytime soon. The nature of the demand may evolve, but it will undoubtedly be there. The challenge for firms will be finding ways to tap into it.

The opportunities that come with the shift to digital should not be underplayed, but nor should the challenges be underestimated. The process of digitalisation represents a radical shift that many parts of the media and entertainment industry are still struggling to get to grips with. The next section of the report reviews attitudes towards change and explains some of the strategies being adopted in a selection of industry sub-sectors as they race to adapt.“ Mobile devices have now

surpassed TV in terms of time spent on media.”

http://www.ipad.blorge.com


High growth markets

As in other industries, another important driver of change in media and entertainment is the rapid growth of emerging markets. In terms of total media spend, the US remains the world’s largest market by far with, according to PwC, a total spend in 2010 of over $443 billion. However, other countries are growing more quickly. China’s total spend on media and entertainment grew by more than 75% between 2006 and 2010, and it is expected to grow at nearly the same rate up to 2015. Brazil too is growing exceptionally quickly (see chart).

Brazil, India and China have fast-growing economies and middle classes who are big consumers of media,” says Mr George. “There’s quite a strong

correlation between GDP growth and consumer spend on media and entertainment… so it’s natural that we see the highest growth rates for media in these high-growth markets.”

This is backed up by the findings of Nielsen’s global media consumption index, which shows that Asia (excluding Japan) and BRIC countries surpass Europe and Western markets on TV viewing and video consumption via the internet or mobiles.5 Marco Gomes, Founder of Boo-box, a Brazilian advertising network, emphasises the opportunities created by the growth of the middle class in emerging markets. “The Latin American market has grown thanks to the increasing buying power of the middle class,” he says. “We are

witnessing an explosion of start-ups focusing on consumer audiences.”

Brazilian firms in particular seem eager to embrace interactive content. According to our survey, four-fifths have developed products with an interactive interface to increase digital revenue in the past three years compared with only 52% of Chinese firms and 59% of European firms.

But Brazil, India and China aren’t the only countries to look out for. “Any country with strong GDP growth and a rising middle class is going to have an interesting media market,” says Mr George, citing Mexico, South Africa and the Philippines as examples.

Chart 3: 2011-2015 growth forecasts for the world’s largest media and entertainment markets

China

Brazil

Canada

Spain

South Korea

United States

Australia

France

Italy

UK

Germany

Japan

0% 2% 4% 6% 8% 10% 12% 14%

Source: PwC Forecast compound annual growth rate 2011-2015


Rethinking the media firm

Given the scale of the challenges faced by those operating in the media and entertainment industry, one of the most remarkable findings from our survey is that the majority of respondents see the process of change more as an opportunity than a threat.

As chart 4 shows, in each of the areas we asked them about, from the rise of emerging markets to the fragmentation of media channels, the proportion of respondents viewing these changes as opportunities rather than threats never drops below 60%.

Chart 4: Do you see the following more as an opportunity or a threat?

Growth of online consumption

Paid search

New advertising models

Increased use of mobile devices

Rise of social media

Internet TV

Rise of emerging markets

Fragmentation of media channels

0 10 20 30 40 50 60 70 80 90 100

82% 12% 5%

60% 11% 27%

67% 11%

9%

10%

12%

8%

12%

21%

27%

25%

23%

25%

23%63%

63%

63%

64%

67%

1%

2%

2%

1%

1%

1%

0%

1%

Source: Economist Intelligence Unit■ More as an opportunity■ More as a threat

■ Neither an opportunity nor a threat■ Don’t know/NA


Reasons to be cheerfulThis optimism chimes with Accenture’s thinking. “If you go back just three years, most of the debate was about the digitalisation to come,” says Mr Vernocchi. “Now that future has arrived and while some companies might not have been as quick to adapt as they should have been, most are really accelerating.”

Encouragingly, our survey results seem to back this up. More than seven in ten (71%) companies say they “now have a strategy for mitigating the threats posed by the rise of digital content”, while nearly six in ten (58%) have a strategy to grow their business by exploiting it.

Perhaps most impressively, though only 12% of respondents say they have a profitable digital distribution model at the moment, more than six out of ten (61%) expect to have one in the next three years.

There is no doubting the industry’s confidence, but recent growth figures suggest that some sub-sectors have more cause for optimism than others. According to PwC, the filmed entertainment, video games and radio sub-sectors all grew during 2010, but recorded music declined and newspaper and magazine publishing were both flat.

Chart 5: Please indicate the extent to which you agree or disagree with the following statements

Statement 1

“�We�now�have�a�strategy�to�mitigate�any�threats��posed�by�the�rise�of�digital�content.”

71%

Agree

20%


8%

Disagree

Statement 2

“�We�now�have�a�strategy�to�grow�our�business��by�exploiting�digital�content.”

58%

Agree

23%


20%

Disagree



“ More than seven in ten companies say they have a strategy for mitigating the threats posed by the rise of digital content.”

Chart 6: When, if ever, do you expect to have a digital distribution model that is commercially successful?

We already have a digital distribution model is commercially successful

that

In the next year

In 1-3 years

In more than 3 years

I do not think our company will be able to create a commercially successful digital distribution model

We are not looking to create a digital distribution model

Don’t know/NA


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0 10 20 30 40 50 60 70 80 90 100

12%

31%

30%

19%

5%

2%

1%


Misplaced or not, part of the industry’s confidence might come from its ability to come up with creative ways of engaging with its target audiences and its willingness to embrace these new methods when they prove effective. Our survey certainly seems to suggest that media and entertainment firms are flexible about the approach they use to engage with customers. When asked for their views on which methods of consumer engagement

are most effective, executives in the survey say personalisation was top of the list three years ago. But now the emphasis has shifted to interactivity and gamification.

Mr Vernocchi offers an explanation for the rapid shift. “What we observe more and more is a ‘screen-centric’ user experience,” he says. “There has been an explosion of connected devices across the world that is transforming

the way end-users are able to engage with content.” The result is that businesses are harnessing the new platforms to come up with innovative ways of engaging their target audience.

Chart 7: What do you see as the most effective methods of consumer engagement?

Personalisation (eg allowing a consumer to modify their page after logging onto a company’s website)

Interactivity (eg by creating that can be manipulated)

data visualisations

Gamification (eg by creating leaderboards that rank performance)

Convergence (eg offering free access to a movie to incentivise the purchase of a game)

Consumer-led innovation (eg by crowdsourcing improvement to products or services)

0% 10% 20% 30% 40% 50% 60% 70%

■ 3 years ago■ Today■ 3 years from now



Music: adapting to digitalThe music business has experienced massive disruption from the shift to digital, with music downloads, piracy and, more recently, streaming from sites like Spotify, Pandora and Last FM all forcing change.

While the sector as a whole is growing, these pressures have meant that its sources of income have begun to shift as revenue from recorded music has declined. According to eMarketer, a US research firm, worldwide music industry revenue increased from $60.7 billion in 2006 to $67.6 billion in 2011. Over the same period, however, income from recorded music fell from $36 billion to $34.7 billion while income from live events increased from $16.6 billion to $23.5 billion.6

Increased revenue from live performances has been welcome, but what is happening to recorded music? In a nutshell, income from online and mobile sales has been rising, but is not enough to offset the decline in physical sales.

As this suggests, the pattern of how people consume music is far from settled. “A lot of old school people still like downloads and owning, and a lot of young people have only known streaming or stealing,” explains Stephen King, UK Managing Director of Believe Digital, a digital distributor for independent artists. “Our job is to persuade them that stealing content is unacceptable and the only way you can make that case is to make everything available legitimately.”

David Card, Vice President Research at GigaOm Pro, agrees that the music industry is being disrupted, but thinks that new technologies and distribution models are only part of the problem. “The birth of rock culture, the baby-boomer generation and the switch to selling albums rather than singles were probably responsible for artificially inflating consumer spending on music relative to where it had been,” he explains. “The music industry used to be 2% of consumer entertainment spending – it went up to 3% for a while and now it’s probably back down to about 2%.”

He also thinks there has been a fragmentation in the demand for music, which means that there are now fewer of the really big artists who have acted as cash cows in the past. “There are so many genres and sub-genres now,” he says. The result has been that there are fewer big bands with crossover hits. “The hip hop stars here in the US are pretty big, but they’re not as big as the stars of the 1970s and 1980s, or even the 1990s.” For an industry that relies on hits, he says, this is a major problem.

Regardless of the underlying reasons for the music industry’s struggles, digital distribution is now a given for new artists and their music. More challenging is the situation surrounding artists who were signed before digital was prominent or even existed. In 1963 clearly there was no need for a digital clause in a contract but those contracts need revisiting with the artists or their estates, says Mr King. “The cost for the [music] majors is quite high, there’s a lot of legal work in those areas and they think it outweighs the return.”

There can be issues such as those concerning Pink Floyd, an English rock band, which has contractually prohibited the sale of its music as individual tracks on vinyl and CD, and wanted the same to apply in the download world. Its record company EMI disagreed, but in late 2010 a judge ruled in the band’s favour. King believes this should have been the label’s view as well. “If Pink Floyd says we don’t want our tracks available individually, I wholeheartedly support them and say ‘if that’s the rule for you with your digital rights, we have to find the answer to it’, rather than saying ‘that’s not how people consume it’.”

In fact King rejects the word ‘disruptive’ when it comes to music distribution. “For people to talk about content disruptors is ludicrous,” he says. It indicates that something is finishing, whereas people who saw the shift from the single being the most important sale, to the album, to the CD, will be accustomed to change. “There are changes in the methods of distribution, that’s all it is,” he explains. “It’s how you enhance your offering that really counts. The great thing about digital is that it de-risks the industry. We don’t have to manufacture. Distribution is quite an easy process and it’s developing on a daily basis.”


TV: does every wheel need to be reinvented?TV is evolving too, but it is important not to overstate the extent of the transformation. As long ago as 2005, executives at ITV, a UK broadcaster, were claiming the family-viewing tradition on Saturday was effectively dead, ignoring their own X-Factor-style successes and failing to anticipate the BBC reinventing the genre with a relaunched Doctor Who and Strictly Come Dancing, both popular programmes in the UK. The same is true in the US, says Mr Card. “A lot of people have been talking about major disruptions in television content… but I think the broadcast networks and cable networks have actually done a pretty good job of locking down their business.”

“It’s amazing how people had written TV off,” says Stella Medlicott, Chief Marketing Officer of Red Bee Media, a firm which helps broadcasters and platform operators connect their output with their audience. “We mustn’t underestimate the art of scheduling. A lot of people say they want to have the freedom of choice of what they watch, [but] when you get down to it in reality they don’t. A lot of the time people want to sit back and have content pushed at them, and that hasn’t really changed.”

The other thing that doesn’t need reinvention, she suggests, is the ‘event’ TV programme. “Big broadcasters such as ITV and BBC have invested heavily in live-event broadcasting whether through a voting-based mechanism or live sporting events,” she says. “We’re seeing this type of premium content really booming.”

There are some changes afoot, however. Video-on-demand service Netflix, for example, commissioned a further season of Arrested Development, a US TV series. This was never intended for traditional broadcast, but for direct streaming to the box. The episodes concentrated on a specific character and could be watched in any order. This, Ms Medlicott suggests, marks a new way of commissioning away from the constraints of linear programming.

Another shift is coming in the integration of TV and mobile device experiences. “In future, all of television is going to be two-way interactive and socially connected,” says Anthony Rose, Founder of Zeebox, which has created an app to help integrate the two domains. “Today, TV and the internet exist as two separate entities, with little interaction between them, but that’s all going to change as technology allows us to make it more interactive, personalised and targeted.”

Mr Rose also thinks that improving technology could lead to a major shift in the way the TV industry organises itself. “Broadcasters do three things today: they’re content providers, distributors and aggregation portals,” he explains. “In future, however, they might not want to do all three. For example, you might find that one doesn’t want to do content anymore. Instead, it can simply reinvent itself as an aggregation portal. Do broadcasters realise these kinds of options are open to them? If they don’t, they might find themselves disenfranchised in the future.”

Mr Zhang thinks partnering with foreign producers is the best way to tap into international markets. For example, Fantasia worked with French national broadcaster France Télévisions to develop Shaolin Wuzang, a popular show about three teenagers fighting a ruthless demon in China during the 16th century. The show has since received numerous awards. “Many of our projects are built on that model,” comments Mr Zhang.

Storing your content

In the download market Sony Pictures Entertainment, the television and film unit of Japanese conglomerate Sony, has launched Ultraviolet, a cloud service where customers can store their purchased films. Mitch Singer, Chief Digital Strategy Officer at Sony Pictures Entertainment and the chief architect of UltraViolet, says the idea originated from customer research.

“[Consumers] said they can’t share content with their family when they buy it online, they’re worried about what might happen to it if their hardware crashes and about keeping track of what they own,” he says. “They have to remember where they bought it and where it’s stored – on Apple, on Amazon or on a shelf at home.”

The company’s solution was to create a platform that could be shared more easily with family and the service is building up a reservoir of users. “We have over four million registered users and we’ve been running for less than a year,” says Mr Singer. “Of course I’d want hundreds of millions of users but I’m very happy with the growth.”


Computer games: the new outgrowing the newIronically, the most striking example of a medium outgrowing the devices on which it is traditionally consumed is also the newest. Computer games were digital to begin with, even in the days when a tennis game consisting of two blobs batting another blob between them was considered sophisticated.

Ian Livingstone, Founder of Eidos Interactive, is a leading games industry figure and an advisor to the UK government on computer games and digital skills. He believes the impact of games moving to the online, downloadable or streamable world has been profound. “Content creators, no matter where they are in the world, are able to serve digital content to global audiences via high-speed broadband,” he says. “Small, agile studios are able to innovate and self-publish, bypassing the traditional supply chain of getting boxed games to retail stores. Games are moving from analogue to digital, from being a product to a service, from a premium price model to a freemium model.”

It is worth explaining the freemium model for non-players. If someone goes on Facebook and plays a game called Farmville, for example, the object is to build up a farm full of animals and these are acquired in two ways. Either the player works for ‘rewards’ and therefore gets a cow or a sheep or some other token, or they can pay cash to boost themselves. Entry to the game is free but the company behind it makes money from people buying the extras so they can enjoy the game a lot more.

Another factor that has pushed the price of games down is the ubiquity of computer games once they became available on smartphones. “All the explosive growth has been on games played on Facebook, smartphones and tablets,” says Mr Livingstone. “Smartphone growth has been phenomenal, leading to successes like Angry Birds, which has seen a billion downloads over the past couple of years. Everyone’s now carrying a games device in their pocket in the shape of a smartphone and that’s where the true growth is happening today.”

This will have an effect on a market in which $50 for the latest release is commonplace, one might think. “That graphic-rich, interactive cinematic experience is still going to be required by a lot of people, but the business model and the formats by which these games will be served will undoubtedly change,” says Mr Livingstone. “The console game might one day become software-embedded in a smart TV, for example. But one thing is certain, the games industry has become mass market entertainment, driven by advances in technology and content diversity. In terms of where we are as an industry compared with film, we’re only in the 1930s and yet the global market for software sales alone is $50 billion a year today and that’s going to rise to $90 billion by 2015 as more people play games.”

Also, the casual player is more accustomed to paying $1 than five or six times that, which changes the dynamic. “Paradoxically, ‘free’ content actually forces up the quality of production,” says Mr Livingstone. “If you want someone to pay for an item inside the game they’re playing, your game had better be good because people will only spend money when they’re enjoying themselves.”

Changes in this market have led traditional sales channels to suffer. In the UK the Game store chain spent a period in receivership just as in the music industry HMV has posted poor profits. Mr Livingstone believes these channels have supported the games industry but now need to change with it in order not to be outmoded.


PublishingPublishing is another sector commonly thought to have struggled with the switch to digital. Newspapers have lost out as consumers have started accessing news and opinion for free online, and advertisers have increasingly looked elsewhere to capture their attention. Book publishers are struggling too as the growing popularity of e-readers eats away at margins.7

“Newspapers and magazines have been hugely disrupted,” says Mr Card. “In the US in particular, we had a big market with lots of local newspapers and not so many national newspapers, but Craigslist (the online classified advertisement site set up in the mid-1990s) basically destroyed the local news business by giving away classified ads for free.”

That kind of blow is difficult to duck, but many think that a big reason the publishing industry has struggled is that it was too quick to offer content for free in the early days of the digital switch. It is still possible to visit a newsagent and pay for a newspaper while someone else is in their home looking at the same articles for free on their computer (see box below for more on this).

News Corp was one of the first companies to strike out against this trend, insisting on charging for everything beyond the current day’s newspapers. It was heavily criticised by consumers at the time who had become accustomed to free services from Facebook, Twitter, free office automation from Google and free music from a number of sources. Since then, however, other newspapers – including the Financial Times and New York Times – have started selling rather than giving away their content.

Much rides on the outcome of the publishing industry’s attempted shift from free to paid-for content on the internet. Executives in our survey believe audience expectations will change: indeed, fully 69% of them say that readers will be prepared to pay for content.

But Mr Card sounds a note of caution. “I don’t think paywalls are hopeless, but they’re very tricky because there’s so much good free content available,” he says. He thinks we need to be realistic about how much paywalls can do to solve the industry’s problems. “Historically, it’s difficult to get more than single-digit figures of your audience to subscribe for content. If you’re getting 6%, 7% or 8% you’re doing pretty well, but that’s not the kind of ratio newspapers are used to at all.”

Our survey confirms that publishing firms are struggling more than their internet, TV and entertainment peers to adapt to changes brought about by the shift to digital. Perhaps most importantly, only half (49%) of magazine publishers believe marketing through digital channels has increased their sales and lead generation significantly compared with two-thirds of TV and film companies.

A punishing time for publishing

Meanwhile, only 55% of newspaper publishers expect to have a digital model that is commercially successful in the next three years compared with 69% of film companies.

There are also understandable differences within the publishing industry, particularly when looking at the impact of social media. Magazine publishers are much more sanguine about its rise than newspaper publishers. More than seven in ten (71%) of the former view the rise of social media as an opportunity compared with only 54% of the latter.


Brazil’s media and entertainment market is forecast to grow by nearly 12% between 2011 and 2015, a much higher rate than in the US and European countries. According to Mr Gomes, Latin America is undergoing a major digital revolution. “Facilitated access to the internet and the growth of homes with personal computers, laptops, smartphones and tablet sales have fostered a spirit of entrepreneurship and innovation in Latin America,” he says. “I believe we can expect a massive expansion of start-ups focused on technology, internet and e-commerce.”

Mr Gomes has taken advantage of this trend to create Boo-box, a platform for content providers with novel ad formats, such as Twitter feeds or blog text. “People in Latin America love to interact with content, which is why we are experiencing such a surge in social media,” Mr Gomes explains.

Boo-box: how to make online content profitable

“And yet companies are missing a trick by not showcasing their core business on these networks. So I founded Boo-box.” Last year, it quintupled the number of ads it placed to reach four-fifths of Brazilian web users.

Described by web publication TechCrunch as “Brazil’s Web 2.0 ad network”, Boo-box has been experimenting with rich-media ad formats, behavioural targeting and demographic profiling. In return this gives publishers (Boo-box’s customers) the possibility to explore differentiated formats and higher profitability.

Mr Gomes thinks the digital revolution will lead to more success stories like his. “A growing number of entrepreneurs and investors are coming to Brazil to implement their projects,” he says. “We are undoubtedly witnessing a historic moment.”


Conclusion: Who will come out on top?With the impact of digitalisation still playing out, which types of organisation can we expect to prosper as the media and entertainment industry continues to evolve?

One thing is for certain, there will be winners and losers, just as there are in any industry experiencing structural change.

The shift to digital is a critical and ongoing challenge, and there is no sign of relaxation in the pace of change. In 2010, digital content was estimated to account for about two-thirds of all media, but by 2020 it is forecast to account for about 80%.8

Media and entertainment firms failing to effectively tap into the digital shift will either be niche players or will disappear. As Mr Rose points out, “Technology giveth and technology taketh away. If you don’t embrace it, you’re eventually going to be left behind.” This doesn’t mean that everything will go digital. Instead, many will be governed by ‘the rule of and’, meaning that they will need to complement physical distribution channels with a digital offering.

Quality content will still have a huge role to play. “Media and entertainment is still pretty much a hits-driven business,” says Mr Card. This isn’t going to change. “Movie studios, record labels and TV stations will be doing the same thing they’ve been doing forever: they have to manage a portfolio, jump on the ones that take off and then franchise them to death.”


However, that doesn’t mean they can’t learn from other parts of the industry. “The likes of Google, Yahoo and others are very numbers-orientated,” explains Mr Card. “They programme, they see what works and they do it again. Traditional media companies that can take their taste and deal-making capability and combine it with as much numbers discipline as possible will probably be able to react and move better than others.”

Drawing some of these themes together, Mr Vernocchi says firms that succeed will be characterised by their capacity for “continuous innovation”. This is critical, he thinks, because growing complexity and the increasing pace of change mean that the profitability of existing business models will be continually called into question.

One of the key strategies for firms trying to transform themselves into this kind of organisation, Mr Vernocchi says, is to remain “open to the ecosystem”, meaning that they should collaborate and absorb innovations where possible, but buy them in where necessary.

Winners and losers might also be determined by the evolving perceptions of value for money in advertising. One of the clearest messages from our poll is that those media channels seen as being most effective from a marketing point of view are in a state of flux. Traditional advertising mediums like radio, TV, print and poster advertising are all seen as being in decline in terms of the value for money they offer marketers. Perhaps most strikingly, whereas radio was seen as the best value for money just three years ago, in three years’ time our respondents think it will only rank sixth.

In comparison, the biggest risers are mobile, social media and telesales, with social media expected to become the best value for money media channel over the next three years. As in any industry, when the balance of return on investment shifts so does the focus of activity. Media and entertainment spend has already been refocused to fit the shifting consumption habits of users and we should expect to see this continue.

Chart 8: In your opinion, which of the following marketing channels will provide best value for money for companies attempting to engage with content consumers in your sector of the media and entertainment?

■ 3 years ago■ Today■ 3 years from now

0%

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The media and entertainment industry remains in the grip of a radical transformation. In managing this, the key challenge for market players is to come up with new business models that can ensure they remain profitable. Though many companies were slow to respond, there are signs that the industry is beginning to get a handle on the challenges involved and many are optimistic about their ability to adapt.

Mr Singer of Sony Pictures Entertainment is firm. “You can view disruption in one of two ways,” he says. “You can view it as a threat which forces you to attack it or you can view it as an opportunity. New technologies, for example, cloud services, are opportunities to us and to our consumers to get content in entirely new ways. There’s a lot of things you can do with disruption and I don’t think viewing it as a threat is very productive.”

This kind of bullish attitude towards change, shared by the majority of our respondents and interviewees, is just as well because there is much more to come. The good news for those that can adapt is that media and entertainment markets continue to expand, particularly in high-growth economies like Brazil and China. Demand for quality content delivered in the right way is far from satisfied. For those that can find a way to tap into it, the future looks bright.

End notes

1. Internal Communications Market Report 2011, Ofcom

2. Market Share: Mobile Devices, Worldwide, 1Q12, Gartner

3. Mobile Media Consumption Research, InMobi, February 2012

4. Mediascope Europe 2012, IAB Europe

5. Turning Digital: The Asian Media Landscape, Nielsen, 2012

6. GrabStats.com

7. IHS iSuppli, April 2011

8. A Brave New World of Connected Media, Cognizant, November 2011

http://www.GrabStats.com

Image credits Cover: © Getty Images Page 4: © Plain Picture Page 17: © iStockphoto Page 18: © Getty Images

© 2012 The Economist Intelligence Unit Ltd. All rights reserved.

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Published September 2012 by UK Trade & Investment URN 12/1130

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