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.”

BRIC countries to drive the future growth of the global media industry

This week PricewaterhouseCoopers came out with a comprehensive report on the five-year outlook of the global media industry. The growth in the booming BRIC nations (Brazi, Russia, India and China) will outpace the growth in mature U.S. and Western European markets by more than 2x. PwC forecasts that media sector in the BRIC countries will grow at an average annual rate of 13.5% from 2008 through 2012, compared to just 4.8% in the U.S. and 5.5% in Western Europe.

In terms of the total size, the worldwide media industry will reach $2.2 trillion by 2012. The size of the industry in BRIC countries will grow to about $250 billion, while it’ll be $760B in the U.S., $630B in Western Europe, and $165B in Japan.

Digital media will be the fastest growing segment within the media industry. Worldwide consumer spending on online and mobile is expected to reach $234 billion by 2012, growing at a huge rate of 21.8% annually. In the U.S., digital media spending will grow at an impressive 16.1% annual rate, reaching $75 billion by 2012. India and China will provide the best opportunities for Internet and mobile growth because people in these countries would use phones as a primary source of entertainment. Media companies will benefit from the proliferation of smartphones (iPhone, BlackBerry, etc.), which are essentially mini-computers. Already, a big portion of current traffic on most major digital properties (Facebook, Google, Yahoo, etc.) comes from emerging markets. As business models developed in mature U.S. and Western European markets get implemented in emerging markets, and new local models emerge, dollars in emerging markets will follow the eyeballs.

I believe traditional media firms stand a good chance of winning the digital media led future world too, but there will be pain during the transition phase. And they will need to do three things right:

1. First, as discussed before, traditional media firms need to accept the reality that their total revenue will decline during the transition phase, because online and mobile advertising will not fully compensate for declines in traditional advertising (broadcast, print, etc). Numbers over the past couple of years already reflect this harsh reality.

2. Second, they will need to continue their investment in the future, and experiment with new technologies and business models during the transition phase. This is not easy for most traditional media firms, as being public enterprises, they are under constant pressure from Wall Street to perform quarter after quarter, and have to keep their costs in check to protect margins as their revenue flattens/declines.

3. And third, their attitude towards technology, arguably the most important component of the digital future of the media industry, will need to change drastically. Building more bridges between Hollywood and Silicon Valley on an equal footing, and greater appreciation by each party for the value the other brings to the table will be paramount. Both come from very different cultures, but despite their traditional differences, they need each other more than ever before. Some early partnerships that I’ve seen between Hollywood and Silicon Valley bode well for the future, but the pace of change is still slow in my opinion.

Now a word about the BRIC nations in general. The term was coined in 2003 by Jim O'Neill, the global economist at Goldman Sachs, when he laid out his future world view. He believed that BRIC countries possessed the potential to become the world's four most dominant economies by 2050, and together could be larger than the combined economy of the U.S. and Western Europe. Considered until recently as the developing countries of the Third World, Brazil, Russia, India and China have quickly become the most dominant emerging economies of the next world. These are four markets with unique characteristics. They are tied together by their inherent economic potential resulting from positive changes in their political systems which unleashed the untapped demand from their huge domestic consumer market, constituting 43% of the world's population.

An interesting yardstick would be to check out the growing wealth in these countries. Last year, India and China showed the highest global growth rate in their population of millionaires. The number of millionaires in India rose by 22.7% to 123,000 people, the fastest growth in the world. Meanwhile, China grew at 20.7% in 2007 to end with 415,000 millionaires - it displaced France as the home of the fifth largest millionaire population in the world. Already, five of the world’s top ten cities, which can be classified as the centers of wealth generation for consumers climbing the economic ladder, are located in the burgeoning BRIC countries.

Finally, let’s evaluate BRIC from a leading marketer’s perspective, given that growth in demand for new products & services and resulting expenditure on advertising is a key indicator for an economy's growth. Sir Martin Sorrell, the CEO of the WPP Group, one of the largest media agencies in the world, identified the potential of BRIC markets even before the term BRIC was coined. WPP agencies are now at the top of the agency food chain in the BRIC countries. They command the lion's share of media buying in populous giants India and China. Today, continental Europe, U.K. and U.S. generate 82% of WPP's total global revenue, and rest of the world contributes the remaining 18%. The company believes that by 2015, 40% of its global revenue will come from Asia alone .

BRIC countries to drive global growth of the media industry

This week PricewaterhouseCoopers came out with a comprehensive report on the five-year outlook of the global media industry. The growth in the booming BRIC nations (Brazi, Russia, India and China) will outpace the growth in mature U.S. and Western European markets by more than 2x. PwC forecasts that media sector in the BRIC countries will grow at an average annual rate of 13.5% from 2008 through 2012, compared to just 4.8% in the U.S. and 5.5% in Western Europe.

In terms of the total size, the worldwide media industry will reach $2.2 trillion by 2012. The size of the industry in BRIC countries will grow to about $250 billion, while it’ll be $760 billion in the U.S., $630 billion in Western Europe, and $165 billion in Japan.

Digital media will be the fastest growing segment within the media industry. Consumer spending on both online and by mobile phones worldwide is expected to grow to $234 billion by 2012, at an monumental rate of 21.8% annually. In the U.S., digital media spending will grow at an impressive 16.1% annual rate, reaching $75 billion by 2012. India and China will provide the best opportunities for Internet and mobile entertainment growth because people in these countries would use phones as a primary source of entertainment. Media companies will benefit from the proliferation of smartphones (iPhone, BlackBerry, etc.), which are essentially mini-computers. Already, a big portion of today’s traffic at most leading digital media firms (Facebook, Google, Yahoo, etc.) comes from emerging markets. As business models evolved in the relatively more mature U.S. and Western Europe markets reach emerging markets, and new local models emerge, dollars in emerging markets will follow the eyeballs.

I believe traditional media firms stand a good chance of winning the digital media led future world too, but there will be pain during the transition phase, and they will need to do three things right:

1. First, as discussed before, traditional media firms need to accept the reality that their total revenue will decline during the transition phase, because online and mobile advertising would not fully compensate for declines in traditional advertising (broadcast, print, etc). Numbers over the past couple of years already reflect this trend.

2. Second, they will need to continually invest in the future and experiment with new technologies and business models during the transition phase. This is not easy for most traditional media firms which are public enterprises, and hence face Wall Street's pressure quarter after quarter to keep their costs in check to protect margins as their revenue flattens/declines.

3. And third, their attitude towards technology, arguably the most important component of the digital future of the media industry, will need to change drastically. Building more bridges between Hollywood and Silicon Valley on an equal footing and with an appreciation for the value each brings to the table will be paramount. Both come from very different cultures, but despite their traditional differences, they need each other more than anytime before in the history of the media industry. Some early partnerships that I’ve seen bode well for the future, but the pace of change is still slow in my opinion.

Now a word about the BRIC nations in general. The term was coined in 2003 by Jim O'Neill, the global economist at Goldman Sachs, when he laid out his future world view. He believed that BRIC possessed the potential to become the world's four most dominant economies by 2050, which could be larger than the combined economy of the U.S. and Western Europe. Considered until recently as the developing countries of the Third World, Brazil, Russia, India and China are quickly becoming the emerging economies of the next world. These are four markets with unique characteristics, and are tied together by the potential created after changes in their political systems unleashed the consumer demand of 43% of the world's population.

A relevant and interesting yardstick would be to check out the growing wealth in these countries. Last year, India and China showed the highest global growth rate in their population of millionaires. The number of millionaires in India rose by 22.7% to 123,000 people, the fastest growth in the world. Meanwhile, China grew at 20.7% in 2007 to end with 415,000 millionaires - it displaced France as the home of the fifth largest millionaire population in the world. Already, five of the world’s top ten cities, which can be classified as the centers of wealth generation for consumers climbing the economic ladder, are located in the burgeoning BRIC.

Finally, let’s evaluate BRIC from a leading marketer’s perspective, given that growth in demand for new products & services and resulting advertising spend is a key indicator for an economy's growth. Sir Martin Sorrell, the CEO of the WPP Group, one of the largest media agencies in the world, identified the potential of BRIC markets even before the term BRIC was coined. WPP agencies are now at the top of the agency food chain in the BRIC countries. They command the lion's share of media buying in populous giants India and China. Today, continental Europe, U.K. and U.S. generate 82% of WPP's total global revenue, and rest of the world contributes the remaining 18%. The company believes that by 2015, 40% of its global revenue will come from Asia alone - a strong vote of confidence for the region from a global leader.