The Media and Entertainment Industry
by Andrew Dittberner, Chief Investment Officer at Private Client Securities
Technology is changing the way the world consumes, connects and communicates. Whether you are a movie buff, a video game junkie, a die-hard sports fan or a series binge-watcher, you would have experienced these changing forces. Having already transformed the print media and music industries, digital and technological advancements are now being felt across the rest of the media and entertainment industry. Yet, spending within the entertainment and media industry continues at a steady pace, giving one the sense that it is business as usual within the industry, despite the immense amount of churning taking place beneath the surface.
Perhaps the single most important evolution within the broader media and entertainment segment is the blurring of the lines between the different sectors within the industry. For example, companies are in the process of integrating vertically (consider the introduction of Disney+ ) and horizontally (Disney 's acquisition of Fox). What was once a pure technology and distribution company is now also becoming a content producer, while the traditional content producers are now searching for increasingly cost effective ways of producing content while becoming a distributor at the same time.
In this way, the distinction between telecommunications, fixed line internet, wireless internet, streaming, pay-TV, print media, digital media, esports, video games, and social media companies is becoming less and less clear. In fact, the lines have become so blurred that the Global Industry Classification Standard reclassified a number of traditional media and technology companies under the newly-named communications sector. Companies such as Netflix, Disney, Facebook and Alphabet (Google) are now classified as communications businesses as opposed to media or technology companies. So while approaching it from different angles, the overarching goal of companies in the media and entertainment ecosystem appears to be that of owning the entire user experience.
The forces that are creating this change within and around traditional media and entertainment companies are linked to a number of new and ongoing trends. Evidence of the desire to vertically integrate between content providers and distribution companies can be seen as far back as the late 90s and early 2000s. It was during this period that the mega-merger between AOL and Time Warner took place. At the time, it was the world's largest merger by market value (overtaken only by the Vodafone and Mannesmann merger later in 2000), and despite it being a spectacular flop, the intentions were very clear. More recent trends within the industry include the move from cable TV to streaming, on-demand TV tailored to the viewer 's wants, multiple devices upon which to consume content simultaneously, targeted digital advertising, and the use of virtual reality and augmented reality to bring media consumption to life. Below we delve into each of the above-mentioned trends that continue to gather momentum within the media and entertainment industry.
With its origins found back in the 1970s and 80s, cable TV has long been the mainstay of TV distribution. Hollywood (content producers) has thrived on the back of subscription fees passed on from the consumer by cable (or satellite) providers. Initially, it was possible to select preferred channels from an á la carte-type menu. However, as the number of networks and channels exploded, providers quickly realised that they could bundle many channels together, charge consumers a single fee, and then pay each network a carriage fee. Traditionally, carriage fees were where the money was and it was the reason that networks jockeyed so hard to get their content included in cable providers' core packages.
Of the numerous disadvantages of cable TV relative to streaming services, the cost incurred by users is at the top of the list. Most cable providers had what amounted to a monopoly and South Africans will be particularly sensitive to this, given MultiChoice 's dominance in the local and African market. The result of many monopolistic industries is seen in the price of subscription fees. One way of reducing subscription fees is through the introduction of ‘skinny' bundles, where viewers are offered bundles with fewer channels at reduced rates. While this is great in theory, very often these skinny bundles exclude the most popular channels, and the only way to gain access to such content is by subscribing to the full bouquet. Once again, MultiChoice is guilty of this as their crown jewel, SuperSport, is only available on their premium package.
The ultimate response to the ever-increasing costs of cable or satellite TV subscription fees was the proliferation of numerous streaming services, which distribute content over the internet at much lower costs than via a cable or satellite connection. It is important to note that streaming is not restricted to video. Instead, it is a form of multi-media distribution that, interestingly, can be traced as far back as the 1930s when music was "streamed" in elevators. On the video streaming front, however, YouTube and Netflix are the current dominant incumbents.
In what is possibly the strongest piece of evidence that streaming is quickly eating cable TV 's lunch, a recent report by the Motion Picture Association of America showed that in 2018, the number of online video subscribers surpassed that of cable TV subscribers worldwide for the first time ever. This is depicted in graph 2.
Yet, while online streaming services are overtaking cable and satellite from a volume perspective, the money remains with cable TV providers. From a revenue point of view, cable and satellite remain comfortably ahead of the pack. In addition, revenue continues to grow for both cable and satellite distributors, as shown in graph 3. This suggests that despite mounting competition, traditional distributors are becoming better at squeezing more money out of their subscribers. It also points to the fact that many users have a cable/satellite connection and make use of streaming services.The most obvious disadvantage (particularly in South Africa) of streaming content is the lack of live content, and more specifically sport. For this reason, many households remain subscribed to their cable or satellite providers. One would imagine though that it is only a matter of time before either live events become more readily available via streaming services (various platforms are already making headway in this regard), or, alternatively, cable TV distributors provide an á la carte-type menu again for such services.
In 2013, Netflix released its first self-commissioned content, the House of Cards series. This was the first evidence that content producers would eventually opt to keep their best content for themselves; and content distributors therefore needed to create their own content. Fast forward four years to the summer of 2017 and Disney announces that it will soon stop sending its movies to Netflix. A further two years down the line, Disney announces the imminent launch of its own streaming service, Disney+.
The move up and down the value chain from distributors and content producers, respectively, is evidence of the need and want of these companies to control the enduser experience, not forgetting the economies of scale that will flow as a result. However, it is no small feat in transitioning your business in either direction as an enormous amount of time and capital is required. For the distributors, integrating back up the value chain requires them to produce original content of the required quality to compete with traditional content producers who have been doing it for decades. For the original content producers, being able to distribute their own content successfully does not just require the necessary IT infrastructure and support back up, but also the correct data-driven approach to ensure that the right type of content is reaching the appropriate audience. Consumers want video on-demand that is tailored to their specific preferences and it is therefore equally important in knowing what to distribute, as opposed to purely focusing on the how.
A large amount of uncertainty remains around who the ultimate winners will be. Industry insiders themselves are unsure, with most content distributors indicating that both self-commissioned and sourced content will continue to be available on their platforms. Likewise, should content producers who distribute their own content remove it from other platforms? Such a move could materially dent revenue streams. Given the low cost of streaming services, it is also not inconceivable that users have multiple subscriptions across providers. These are some of the many aspects that remain uncertain.
Consumption of video content over the course of the next decade is undoubtedly going to be mobile first. Not only do consumers want on-demand video, but the proliferation of devices upon which to consume video content has allowed consumption to happen onthe-go and out of home. This trend has been driven predominantly by the mass adoption of the smartphone since 2010, while being aided by tablets and laptops. By 2020, it is estimated that just 1 in 10 consumers will watch TV on a traditional screen only. Therefore, while the average time users spend watching video content increases around the world, the couch potato is becoming a dying breed. Highusage, multi-screen viewing is growing rapidly, and both scheduled TV and on-demand video stand to benefit immensely from this trend.
Not only are consumers consuming video content across multiple devices, they are also consuming different forms of content across different devices simultaneously. The reason for this simultaneous consumption varies from being a habit, to believing it is a form of multi-tasking and is therefore a more efficient use of one's time, to gathering additional information to enhance the primary screen experience, and to avoid the boring sections (think misdirected adverts) on the primary screen. Needless to say, whatever the reason, this form of simultaneous content consumption has important implications for marketers and content producers. These include ensuring high quality, entertaining content that is easy to consume and is viewable across all devices in order to entice viewers and, more importantly, keep them engaged. This brings us back to the point of ensuring that content is distributed to the right audience.
Advertising agencies have been grappling with the idea of how they get their clients' products in front of audiences that are becoming more mobile and digital and less advert friendly than ever before. At the same time, it is important to remember the critical role that advertising plays in the role of funding new content creation. Therefore, advertisements that appear in video cannot simply disappear. Instead, the industry needs to move to a more efficient and effective model of bettertargeted adverts, but at a much lower frequency.
Brands have increasingly taken their media operations in-house while embracing IT consulting firms as opposed to making use of advertising agencies in order to achieve the afore-mentioned goal. The likes of Accenture are benefiting from this trend, and brands are becoming far more innovative in how they place their products in front of the correct audience. Ensuring omnichannel engagement with consumers across all generations is also critical for brands to get their message across effectively. This requires reaching the targeted audience with a consistent message across all available devices. As an example of how companies are innovating and engaging with their audiences, Nike has partnered with Epic Games, a software development company, in order to deliver branded content to the game Fortnite.
One of the main challenges facing video content producers is delivering an experience that effectively engages the audience. Virtual and augmented reality is a viable solution to this challenge. Within the media and entertainment industry, virtual reality is the fastest growing segment, although it is still relatively small in the greater industry.
Virtual and augmented reality puts a supplementary sense of participation in the minds of consumers. This is extremely powerful in connecting people to the videos that they are watching and raising their levels of empathy. It a misconception that virtual and augmented reality isolates people from the real world. Consumers want to become more engaged and better connected with the stories that they are watching - whether it is news, video or gaming - and virtual and augmented reality achieves exactly that. As such, virtual and augmented reality will remain the fastest growing segment within the industry for the foreseeable future.
The media and entertainment industry faces a number of challenges as it navigates its way through the changing competitive landscape. However, with these challenges comes a great deal of opportunity. Companies are jostling to gain the upper hand and, as a result, the overall time and money spent within the media and entertainment industry is on a steady upward trajectory. Every day the number of consumers increase as children come of age, internet access improves and smartphone penetration increases. Every day companies are looking to create high quality, original content. They are looking at distributing it effectively and efficiently, and brands are looking at placing their products in front of the right audience. There are a large number of moving parts, with many trends gaining traction, and a high degree of uncertainty regarding where we will end up. As a result, the media and entertainment industry will be one of the more exciting industries to keep an eye on in the years to come.