Entertainment industry: The content-conduit conundrum
The next five years will herald the continued establishment of an end-to-end system for entertainment and media content distribution, marketing, sales, and monetization. Entertainment executives must determine fundamental business issues of this emerging value chain “ what content to produce, where and how to market it, and how to monetize it. New distribution channels are inspiring new content and revenue streams. But it’s a precarious environment in which sometimes, the new cannibalizes existing content and devours consumer spending.
To discuss emerging business realities and opportunities, top-level industry executives gathered this fall at the Four Seasons in Beverly Hills for “The Outlook for Content and Communications,” hosted by PwC. There, they disclosed their experiences in the trenches, describing potential business models for user-generated content and how traditional media companies are harnessing the options offered by new media.
Setting the stage, two PwC partners delivered insights on current market trends and the outlook for key industry segments during the next five years, providing analyses of the impact these findings will have on the industry. Randy Vallen, PwC’s Southern California Entertainment, Media and Technology Practice Leader revealed data that underscores the growing importance of digital distribution channels. Deborah Bothun, U.S. Advisory Leader, PwC's Entertainment and Media Practice, discussed the most recent market trends for key entertainment market segments, such as filmed entertainment, Internet advertising and access spending, television, recorded music, and video games. Taken together, these segments account for about 50 percent of the entertainment industry's revenue.
The big (and small) picture of the future
Vallen delivered two key messages: Strong growth will continue – but so will continuous change, driven by the penetration of wired and wireless broadband digital access. According to the PricewaterhouseCoopers Global Entertainment and Media Outlook: 2006 – 2010 , in 2001, 30 million households had broadband. In 2005, 187 million had it. By 2010, there should be more than 430 million broadband households – an 18 percent compound annual growth rate (CAGR). Vallen also pointed to the continuing growth of wireless telephones, which are projected to grow from today’s 1.8 billion subscribers to 2.8 billion users in 2010, a 9.1 percent CAGR.
“Ubiquitous digital devices underlie changing consumer behaviors and ultimately how consumers are organizing their time. Increasingly, entertainment companies will recognize that consumers are online and mobile, and that they will receive more of their information and entertainment content in digital formats. Future success requires attention be paid to the evolving communications environment as the penetration of digital distribution enables new business models,” said Vallen.
Additionally, as the impact of piracy is controlled and continues to decline, initial doomsday prophecies that piracy could wipe out the profits of entire segments of the industry have become increasingly unlikely. “Anti-piracy legal actions and technological advances are beginning to limit piracy. And entertainment companies have developed more attractive business models providing consumers with easier, legal access to digital content. However, piracy is not going away, and it is still a significant problem in Asia Pacific. But the impact of piracy is lessening on an incremental basis,” explained Vallen.
Within the overall global economy, the US will continue to be the largest market by far, but also the most saturated and slowest growing – growing from $553 billion in 2005 to an anticipated $726 billion in 2010, a 5.6 percent CAGR. Asia Pacific will be the fastest-growing region, expected to reach $425 billion in 2010 at a 9.2 percent CAGR, which will be more than half of the US market at that time. Central and Eastern Europe are forecast to be the next fastest-growing entertainment regions.
There are some significant differences in the revenue growth between entertainment industry segments. Some traditional segments, such as television, are proving to be resilient.
In the television market, the predicted demise of the thirty-second spot has not come to pass. Television is still the largest medium for advertising, bringing in $145 billion in 2005, forecast to rise to $202 billion in 2010.
“We're very bullish on TV and television advertising during the next few years,” stated Bothun. “Even as far out as 2010, Internet advertising will be only 25 percent of the size of traditional television advertising. During our Outlook launch in New York, CBS’ Les Moonves called this the ‘golden age of television.’ We see a lot of energy and activity in television that we didn’t see, even a year ago. Consumers are watching TV on DVDs, clips on YouTube, mobisodes with short subjects and teasers on their favorite TV programs, all increasing the consumers’ involvement with TV viewing."
The filmed entertainment segment has seen an increase in attendance and revenue in 2006 – a welcome recovery from the decline in 2005, including the rental market, including DVDs and digital downloads and subscriptions, which bounced back this year. This segment is now vibrant, particularly among people aged 18-34. During the next five years, filmed entertainment is expected to increase by a 5.3 percent CAGR, globally.
“With the advent of such models as Apple Movie Store and Amazon, download-to-own appears to be the new digital model. At this early stage, it is hard to say where it will go and based on our research and focus groups, it will be some time before it gains a mass audience or significantly impacts revenue. As revenues evolve during the next few years, we will track this market,” said Bothun.
An upbeat report on recorded music indicates that there are now two years of revenue increases – reversing four years of decline. During the next five years, this segment is expected to rise at an approximate 5 percent CAGR, driven by mobile music and digital downloads. In the US, licensed digital distribution is forecast to grow from $653 million in 2005 to $4.9 billion – a 50 percent CAGR; indeed, in the U.S., mobile music and digital distribution will constitute 42 percent of consumer spending on music. Another growing source of revenue is the evolution of ringtones into ringtunes, which are expected to increase at a 26 percent CAGR between 2006 and 2010.
In the U.S., the Internet advertising and access spending segment is growing dramatically – more than 54 percent during the past three years. In 2006, rose to an estimated $144.5 billion globally, and $45 billion in the U.S. Search sites, such as Google and Yahoo!, grew 40 percent to $3.1 billion this year, and display advertising, mostly banners, increased 31 percent to $2.5 billion.
Video games, including console, PC games, games and wireless games, will continue strong growth as well – 2006 revenue equals revenues taken in by US theatrical box office – approximately $9.5 billion. In 2010, video games revenues are anticipated to be 20 percent higher than US box office revenues.
Console game revenue streams depend on the release of new consoles to the market. Thus, in 2005, the market waited for the introduction of new consoles and revenues decreased 3.6 percent. However, during the next five years, that market is anticipated to grow by a 5.6 percent CAGR. Online games are forecast to grow by a 19.1 percent CAGR to $2 billion in 2010, driven by the penetration of broadband Internet service. Wireless games are expected to grow the fastest at a 29 percent CAGR to $2.3 billion in 2010. In 2010, 27 percent of wireless telephone subscribers are anticipated to download games, translating to 75 million people in the US.
New directions and solutions
The executives who attended PwC’s “The Outlook for Content and Communications,” learned more about how new communication channels are bringing new opportunities and solutions, even as they pose challenges to traditional business models. For example, just five years ago, there was no iPod, no ringtunes, no Netflix. Fortunately, awareness of the coming changes allows well-informed executives time to adapt to the new environment and take advantage of emerging revenue streams.