Media companies will be surprised by the coming digital disruption: PwC report

PricewaterhouseCoopers has released the eleventh annual edition of its five-year global outlook on the media & entertainment industry (2010 - 2014). They looked at consumers and advertising spending in a comprehensive analysis across 13 industry segments in 48 countries. The report's main conclusion is that the digital transformation of the media industry and the resulting disruption over the last several years is just the beginning. The next five years will witness a much greater turmoil than expected by the incumbents.

The link to the full PwC report is here, and below is the intro para:

Towards 2014: the search for the position in the digital value chain
"The pace of consumers' migration to new digital platforms is running well ahead of the industry’s expectations—and yet non-digital revenue streams will still account for two thirds of total global spending in 2014. Changing consumer behaviour is impacting on all segments of the entertainment and media industry, as companies search for the right role and positioning in the digital value chain that is now taking shape."

The report is not freely available, so below are some of its highlights from GigaOm.

Memo to Media Cos.: Disruption? You Ain’t Seen Nothin’ Yet

Mathew Ingram Tuesday, June 15, 2010 2:30:41 PM

The media and entertainment industries have been through an unprecedented amount of upheaval over the past several years, as content has become increasingly digital, consumers have correspondingly moved their attention online and advertisers have begun to follow. The resulting shifts have caused turmoil in everything from the newspaper and TV industries to Hollywood and Madison Avenue, as companies have tried to move their business models in new directions — many have failed, while others are in the process of failing. But a new report from PricewaterhouseCoopers on the future of the entertainment and media industries forecasts even greater turmoil over the next five years.

Mobile and social:
The driving force behind all this upheaval won’t come as any surprise to GigaOM readers: the continuing growth in mobile communications and entertainment, as well as the explosion of social networking and related services.

“The digital pace of change has proven to be even quicker than anticipated, with consumers embracing new media experiences and digital downloads at often-unexpected speeds,” PricewaterhouseCoopers analyst Ken Sharkey said in a statement released with the report, the firm’s annual Global Entertainment and Media Outlook. “There is no ‘one-size-fits-all’ approach for E&M companies to stake their position in the digital value chain.”

Digital spending to climb:
Not all of the upheaval will be bad (unless of course you’re an existing media or entertainment company that fails to manage the transition). The PWC report notes that new business models will emerge, as advertising continues to move online and companies find new ways of connecting with consumers. And that creates opportunity for startups and innovation — some of which we’ve already seen with the growth of the likes of YouTube and Facebook.

Over the next five years, the report estimates that digital spending — defined as spending on broadband and mobile access, wired and mobile advertising, video on demand, digital music, online movie rentals, video games and newspaper and magazine advertising — will climb from below 20 percent of all entertainment and media spending in the U.S. to over 26 percent. Globally, the firm expects digital spending to hit 33 percent of all spending on media and entertainment by 2014.

Advertising growing slowly:
The wild card for many media companies and entertainment entities will be the health of the advertising industry, PWC says. While there have been signs of a rebound in spending, the company says ad revenues “remain fragile in nature and spending is unlikely to return to former levels.” By 2014, the report estimates that U.S. advertising spending will still be almost 10 percent below where it was in 2007, although it will be somewhat higher than it was last year (2.6 percent, the report says).

To take just one example of the impact that the growth of online advertising is having on specific industries, Internet ad spending is expected to surpass spending on newspaper advertising this year. PWC’s forecast shows ad spending for Internet, TV and video games growing over the next five years, while spending on ads in consumer magazines, newspapers, directories and trade magazines is expected to shrink. The consulting firm says its research shows that brands are changing their focus from “advertising on a medium, to marketing through — and with — content.”

Mobile, online and engaged:
PwC says the three themes that the media and entertainment industries need to wrap their heads around are as follows:

• The power of mobility: Converged, multifunctional mobile devices are coming of age as a consumption platform, according to the firm: “Consumers are increasingly demanding ubiquity and the ability to consume and interact with content anywhere, anytime, and to share and discuss that content experience with others via social networks.” It expects the number of consumers with mobile Internet access to grow by 40 percent over the next five years.
• The dominance of the Internet: PWC says the consumer “has moved beyond thinking of the Internet as an end in itself, and expects all forms of media to embed the convenience, immediacy and interactivity of the Internet.” This applies to TV, where more and more users want Internet features and services as well as the regular television experience; it also addresses how tablets are reshaping the magazine and newspaper business and the impact of digital music services such as Pandora on the music industry.
• Increasing engagement: Consumers are ready to pay for content, PWC says, but only if media and entertainment companies and their offerings become more engaged with them. “Ongoing fragmentation means that media offerings will need greater consumer engagement and quality,” the firm says. “Consumers are more willing to pay for content when accompanied by convenience and flexibility in usage, personalization and a differentiated experience that cannot be created elsewhere.”

If your company is focused on Internet advertising, video games, TV advertising, radio or movies, PWC says you will likely see growth in the U.S. market over the next five years — ranging from rates in the 3 percent range to as high as 8.8 percent (for Internet ads). But if you’re in the recorded music, newspaper publishing or consumer magazine industries, the firm expects that you will see those markets decline by between 2.4 percent (music) and 2.8 percent (newspapers).

To add insult to injury, the PWC report warns that “today’s E&M environment is one in which it is very easy to get surprised by the pace of developments, even if you have already predicted the direction of travel correctly.”