USER EXPERIENCE TAKES THE LEAD: E&M COMPANIES HARNESS DATA TO DRIVE DEEPER ENGAGEMENT AS ADVERTISING FACES HEADWINDS

Amid shifting consumer preferences, rapid advances in technology and ongoing disruption to business models, the new strategic imperative for E&M companies is to turn customers into fans – by innovating to create the most compelling, engaging, and intuitive user experiences.

7 June 2017

Wednesday, 7 June 2017 – Dramatic shifts are underway in how entertainment and media companies compete and generate value, as the quality of the experience they deliver to consumers becomes their primary basis for strategic differentiation and revenue growth. To thrive in a marketplace that is increasingly competitive, crowded, and slower-growth, companies are developing strategies and building capabilities to engage and monetize their most loyal and passionate users — their fans. According to PwC’s Global entertainment and media outlook 2017-2021, this means they must combine compelling content with breadth and depth of distribution, and then connect it all to a great user experience, where content is discoverable easily on an array of screens and at an attractive price.

Rapid advances in technology drive direct-to-consumer strategies

As companies compete to create the most desired user experiences, advances in technology are at the heart of their strategies. Combined with a great user experience, companies can harness technology and data to create a virtuous circle – one in which increasing consumer engagement and attention lead to the capture of more data and more insights into what users want. This understanding enables companies to further target and engage their core audiences, opening up new opportunities to generate revenue. Increasingly the models used to achieve this monetization are founded on direct-to-consumer (D2C) strategies, which are enabled by technology and characterized by greater choice and user control: over the next five years, Internet video will grow at an 11.6% CAGR, and music streaming at a 20.7% CAGR.

E&M growth will lag GDP as advertising comes under pressure

The focus on realizing new revenues by turning consumers into fans is being intensified by a slowdown in overall entertainment and media industry growth and pressures on advertising models. Over the next five years, we project that the entertainment and media industry globally will grow at a compound annual growth rate (CAGR) of 4.2%, lagging behind the growth of global GDP. Within this overall increase, global advertising revenue will also grow at a CAGR of 4.2% – down from 5.1% in last year’s Global entertainment and media outlook. This slowdown reflects pressures on ad-supported business models, driven by consumers’ preference for ad-free experiences and advertisers’ dissatisfaction with the current measurement capabilities available with digital media. While advertisers are still willing to spend, growth in ad spend is now overwhelmingly driven by Internet advertising.

Mobile advertising is growing apace – but still needs better measurement practices

The growth of Internet advertising is being powered by mobile advertising, which grew by 58.7% in the past year, and will continue to expand at an 18.5% CAGR through 2021. But despite this growth, wired Internet advertising still accounted for 61.6% of total Internet advertising in 2016. Also, the robust growth of Internet advertising actually masks an embedded form of inertia. Without accepted measurement practices that can provide transparency on the efficacy and efficiency of the major platforms, premium brands are reluctant to take on the perceived risks inherent in concentrating more of their advertising in digital mediums, resulting in larger agencies and their clients holding back their ad dollars.

Deborah Bothun, PwC Global Entertainment and Media Leader, comments:

“A raft of changes in technology, user behavior and business models have opened up a gap between how consumers want to experience and pay for E&M offerings, and how companies produce and distribute them. The right user experience bridges this gap. To deliver it, companies must pursue two related strategies. First, build businesses and brands anchored by active, high-value communities of fans, united by shared passions, values, and interests. And second, capitalize on emerging technologies to delight users in new ways and provide superior user experiences.”

Christopher Vollmer, PwC Global Advisory Leader for Entertainment and Media, adds:

“The steady march of digital technology has ushered in a more direct-to-consumer environment characterized by greater choice and user control. Amid an ever greater supply of media, businesses that are fan-centric will find themselves with audiences that are more engaged, more loyal, and spend more per capita. To thrive in the experience-driven marketplace characterized by this year’s Outlook, companies need to attract and harness the economic, social, and emotional power of fans.”

Major digital tipping-points are occurring or in prospect across all segments…

Internet advertising now generates more revenue than TV advertising globally. In 2016 an important tipping point was reached in the global advertising industry, with revenue from Internet advertising exceeding that generated by TV advertising for the first time. That lead, thanks to the rapid growth of mobile ad revenues in particular, is set to increase significantly in the next five years. However, at a global level we forecast TV ad revenues will also continue to rise, albeit at a more modest rate. Both platforms are important to consumers, so brands seeking to engage future audiences effectively will need to keep developing and growing their ability to plan, deliver and measure co-ordinated campaigns across multiple platforms.

Internet video revenues will overtake physical home video in 2017. The Internet video segment has expanded rapidly in recent years, and will overtake the physical home video market for the first time in 2017. Internet video revenues are projected to grow at a CAGR of 11.6% to reach US$36.7bn in 2021, while the terminally declining market for DVDs and Blu rays will have fallen to US$13.9bn. Demand has shifted towards the more immediate and convenient video-on-demand (VOD) market, with content accessible via a wide range of connected devices allowing consumers to view when and where they desire. While there remains a strong market for ownership of content through transactional VOD (TVOD) services, growth will be mainly focused on subscription VOD (SVOD) platforms, with subscribers attracted to full seasons of original content and back-catalogues they can binge view.

Global newspaper circulation revenue overtook global advertising revenue in 2016. While newspaper circulation revenue has been on a downward trajectory since 2015, publishers have had the useful lever of cover price rises to partly offset the rapid fall in units. However, the year-on-year falls in newspaper advertising revenue have been more pronounced, with advertisers deserting print editions in large numbers, and publishers increasingly being squeezed out of the digital ad space by Google and Facebook. The upshot is a historic shift in the dominant revenue streams, as newspaper circulation eclipses advertising. By 2021, global total newspaper circulation revenue will account for 54.0% of total newspaper revenue.

In 2016, total digital recorded music revenue overtook physical – and streamed music overtook downloads. The digital recorded music segment was worth US$10.7bn in 2016, surpassing that for physical recorded music, at US$8.5bn, for the first time. Music streaming services grew apace during 2016, pushing global digital revenues up by US$1.8bn year-on-year, or 20.3%, as the physical segment declined 9.6%. While digital recorded music accounted for 55.7% of overall recorded music revenues in 2016, that proportion is set to rise to 80.3% in 2021. Digital music streaming revenue also overtook its download counterpart in 2016, with streaming revenues rising 65.3% to US$6.6bn, and downloading revenue slumping 18.4% to US$3.5bn. Downloaded music is expected to fall from 32.5% of digital revenue in 2016 to just 6.4% in 2021.

Virtual reality video revenue will exceed interactive application/gaming revenue in 2019. The consumer virtual reality (VR) content market will grow at a CAGR of 77.0% over the forecast period to be worth US$15.1bn by 2021. Of this, US$8.0bn will be spending on VR video (rising at a CAGR of 91.2%), surpassing interactive experiences and games in 2019. Spending on VR apps – software that is neither video or game, such as communications apps or utilities – remains modest, and will total just US$163mn by 2021. Spending in this category will also be in decline from 2018 onwards, as purchased utilities that make up for platform or OS shortcomings become integrated into the core platform, in the same way as smartphone apps have increasingly been integrated into new versions of iOS or Android.

Smartphone traffic will exceed fixed broadband data traffic in 2020. Although mobile usage is a key driver of growth in overall data traffic, fixed broadband will continue to account for the majority of data traffic in the 19 markets for which we have developed detailed forecasts. Many consumers still prefer to access data-heavy content – notably high-quality video – via fixed broadband rather than their mobile device. But the shift towards the smartphone will continue, especially in developing markets such as India and Indonesia, so that by 2020, overall smartphone data traffic across our 19 markets will exceed fixed broadband data traffic for the first time.

Global physical OOH revenue will slip into decline in 2019. Global growth in physical out-of-home (OOH) revenue has been trending downwards for some time as an ever-growing share of advertising spending is diverted to digital out-of-home (DOOH). This trend will reach a tipping point in 2019, when physical OOH revenue slips into decline, falling by -0.2%. By 2021, the rate of year-on-year decline will have accelerated to -0.8%. While physical OOH revenue will continue to grow in many markets – especially emerging ones – globally, it will be in terminal decline by the end of the forecast period, as DOOH takes over.

…and in geographies worldwide

Without exception, low-spending markets will be the fastest-growing. The most rapid growth rates in E&M revenues over the coming five years will be in less-developed markets and economies, where entertainment and media spending on a per capita basis is generally quite low. In mature markets in North America and Europe, and wealthier Asia-Pacific markets, consumers spend a lot — more than US$500 per capita annually — on entertainment and media, but growth rates are relatively slow. In contrast, less developed economies feature much lower per capita spending and faster growth albeit from a very low base – less than US$50 a year in many cases. The world’s fastest-growing E&M market over the coming five years will be Nigeria at a 12.1% CAGR (albeit strongly influenced by surging spending on mobile Internet access), while the slowest-growing will be Japan, growing at a 1.7% CAGR.

China's total number of cinema screens now exceeds those of the US. China had 41,056 cinema screens in 2016 compared to 40,928 in the US. This marks a significant shift, underlining the growing popularity of cinema among Chinese audiences of different ages and demographics – and especially among middle-class cinemagoers with disposable incomes. Although some of the cinemas being erected at such speed in shopping malls across China are not necessarily all premium quality, their existence will serve to hook yet more consumers on the cinema-going habit, and contribute to the longer-term replacement of the US as the number one market for box office revenue.

Data consumption in Russia will overtake Japan in 2020, but the US and China will account between them for nearly half of all data traffic. Our analysis of data traffic in 19 countries shows that the US and China will continue to dominate traffic globally. They are not just the two largest markets individually, but together will account for nearly half of all the data traffic forecast across the 19 markets. Moreover, both will see high levels of growth in the next five years. However, the fastest levels of market growth will come from less developed markets, notably Russia and Brazil. Indeed, Russia is set to overtake Japan in 2020 to become the third-largest market for data traffic among the 19 countries, albeit some distance behind China in second place.

By 2020, Asia Pacific will be the most digitised OOH region. Currently, North America gets a higher proportion of its OOH revenue from digital out-of-home (DOOH) than any other region – 37.9% in 2016. But there are signs that DOOH is approaching saturation point in North America; the region has lower-than-average public transport usage, and the digitisation of the billboard market is being limited by regulation. In Asia Pacific, by contrast, public transport usage is already high in markets such as Japan and South Korea, and soaring in others, as China and India invest in extending metro networks, and Indonesia, Vietnam and others open rapid transit systems. This increased room for growth in DOOH will allow Asia Pacific to overtake North America as the most digitised region in 2020; by 2021, DOOH will be approaching half of all OOH revenue in the region, with a share of 47.7%.

Deborah Bothun, PwC Global Entertainment and Media Leader, comments:

“Alongside the tipping points being reached in specific segments and geographies, the whole entertainment and media industry may have arrived at its own global tipping point. In many of the largest markets, and hence in the industry as a whole, entertainment and media businesses are approaching or have reached a form of saturation. This effectively puts us on an industry plateau – one where some traditional, mature segments are in decline, the Internet and digital E&M content are growing but at a slowing rate, and the next wave of content and entertainment is in areas such as e-sports and virtual reality that are just beginning to ramp up. Thriving in a world of slower growth, intense competition for attention, and continual disruption will be challenging. But the opportunities inherent in this world are immense. And the data, analysis and perspectives in our Global entertainment and media outlook provide compelling insights into how companies are adapting, investing, experimenting, and innovating to succeed in this new world.”

Ends

About the Global entertainment and media outlook

PwC’s 18th annual edition of the Global entertainment and media outlook 2017-2021, is a comprehensive online source of global analysis for consumer and advertising spend. With like-for-like, five-year historical and five-year forecast data and commentary across 17 industry segments in 54 countries, the Outlook makes it easy to compare and contrast consumer and advertising spend across segments and countries. Find out more at www.pwc.com/outlook.

Segments covered by the Global entertainment and media outlook

Books, Business-to-business, Cinema, Data consumption, E-sports, Internet access, Internet advertising, Internet video, Magazines, Music, Newspaper, Out-of-home advertising, Radio,
Traditional TV and home video, TV advertising, Video game, Virtual reality.

About Global entertainment and media outlook data

Much of the content in this press release is taken from data in the Global entertainment and media outlook 2017-2021. PwC continually seeks to update the online Global entertainment and media outlook data. Therefore, please note that the data in this press release may not be aligned with the data found online. The online Global entertainment and media outlook 2017-2021 is the most up-to-date source of consumer and advertising spend data.

About PwC

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