UK: Media Predictions - TMT Trends 2007 - Part One

Welcome to the 2007 edition of the DTT TMT Industry Group’s Media Predictions.

The media sector has again had a vibrant year. As forecast last year, digital music’s popularity has continued growing, helped by the increasing range of online retailers and MP3 players. The television industry has also experienced much change, with the launch of ever larger television sets, a spurt in the uptake of high-definition equipment and huge excitement, though little revenue, from IPTV.

The falling price of memory and processors has enabled further digitization of the media production process. The video-game market has seen considerable progress online, with rapid growth, albeit from low levels, of participation in virtual worlds. Radio has continued its reinvention, both in the expansion of digital services and the launch of new digital sets. Both audience fragmentation and convergence have offered challenges as well as opportunities for all media players. Meanwhile, consumers themselves have had a hand in changing the media landscape – the number of blogs worldwide now exceeds 60 million¹ and user-generated video content has become headline news.

The outlook for the media sector in 2007 is similarly interesting. 2007’s Predictions cover: the commercialization of social networks and user-generated content; the disparity in metrics used to quantify new media and traditional media; opportunities in China’s media sector; the growth of real economies within virtual worlds; the long tail’s alternative forms; the immediacy of VOD to PCs; public participation in television programs; the growing symbiosis between online publications and paper sources and finally the cost of free media.

I am often asked how the DTT TMT Industry Group’s Predictions differ from the many similarly titled reports produced by other organizations. I believe Predictions has a unique combination of objectives and methodology.

The Predictions series has been designed to provide a diverse selection of views and thoughts that challenge, inform and engage industry leaders and executives. It neither aims, nor claims to be, a comprehensive forecast of every anticipated event.

The methodology used to generate the Predictions series is revisited every year. The 2007 series of Predictions has included inputs from conversations with member firm clients, contributions from DTT member firms’ 5,000 partners and managers specializing in TMT, and discussions with industry analysts.

This series of Predictions has incorporated two additional sources. The first is a series of 36 interviews with leading executives from around the world on the key industry theme of convergence. This global primary research exercise, spanning the TMT sectors, produced a wealth of insight, much of which is reflected in many of this year’s Predictions. The interviews, collectively published by DTT as a book, Convergence Conversations, are available from www.deloitte.com/tmt.

The second source is a column, Drowning by Numbers, that the Financial Times invited Deloitte & Touche LLP in the United Kingdom to write on a fortnightly basis. Some of the ideas for Predictions have been tested in this column.

I hope that the result of our endeavors provides you with plenty of food for thought for the year ahead. On behalf of DTT’s TMT Industry Group, may I take this opportunity to wish you all the best for an enjoyable 2007.

In 2007 user-generated content could increasingly complement established media output², perhaps to an unprecedented extent. Digital user-generated content is often cast as the conqueror of established media. Blogs, citizen journalists and amateur film makers have all been portrayed as threats to publishers, professional columnists and established media empires. However in 2007, as in years to come, owning a professional-quality video camera, a PC or a mobile phone is unlikely magically to imbue the majority of people with talent. Indeed, some user-generated content may increasingly be seen as a vindication of, rather than an assault on, the professional media industry. Nonetheless, some digital usergenerated content is likely to have a role in the professional media world. Much as readers’ letters, listeners’ phone calls and children’s drawings are expected to continue feeding into newspapers, radio shows and television programs respectively, their digital equivalents are likely to be used in a similar way. Additionally, media companies could well find that the online channels that serve up usergenerated content could become not only a powerful new promotional vehicle, but also an efficient and effective medium for scouting new talent.

Public participation in television has come a long way since producers first used studio audiences to create a sense of excitement for programs. Now millions of viewers participate in programs, directly influencing their outcomes. A key driver for the growth in participation has been technological advance in the forms of: rising broadband penetration, ubiquitous ownership of mobile phones and the development of platforms capable of handling thousands of simultaneous calls or text messages. Participation’s role in television is also likely to be driven by sharp declines in advertising, one of the major sources of revenue for the television sector. In 2007, the key forms of participation, voting, competition television and television shopping, all of which are based around a call to action from the television show to its audience, are likely to generate increasing revenues. However, the television industry should be careful not to let participation become regarded as a panacea. All formats of participation should be subject to constant reinvention; for example voting should not be regarded as solely relevant to light entertainment. In addition, companies offering television shopping should ensure they have two core skills: CRM and logistics. Broadcasters using competitions within programs should monitor regulations carefully.

China is likely to remain one of the most tantalizing media sector opportunities in 2007. China’s 1.3 billion inhabitants would suggest massive potential, but this is likely to remain frustratingly hard to tap into during 2007 and possibly beyond. While China’s GDP is expected to continue growing strongly, only a minority of Chinese citizens are likely to have sufficient income to consume similar amounts of media to citizens in developed countries. Media companies targeting the Chinese market should have a realistic view of opportunities in 2007. China is a unique market, blending opportunity and challenge like no other country. Entering the Chinese market is likely to be quite different to any other in terms of scale, approach and timeliness.

A copy and paste approach to targeting China, based on attempting the same business model as in a media company’s home country, is unlikely to succeed. A blend of precision and patience will likely be required, with companies taking a long-term strategic approach enjoying the greatest likelihood of success. During the course of the year, the print media may increasingly realize that the relationship between paper and pixels may not always be about one versus the other, but more about a symbiotic, profitable coexistence. Both digital and physical publishing should enjoy strong success in 2007. Internet advertising should continue on its way to becoming a $20 billion industry. But 439 million people may still buy a newspaper every day. Digital and paper will retain their distinct strengths and may often be able to promote each other. Profit from both paper and pixels should be possible if publishing companies always seek to reinvent traditional formats and develop new products and services that use the unique characteristics of both online and printed text. Online-only publishers may turn to paper to raise profitability. Some blogs, for example, may generate more revenue as analog books than in their original online format.

The Internet has given rise to the online store, which in turn has revealed the long tail: the potential to yield value from media companies’ back catalogs. Many in the media sector may hail the long tail as a panacea. However media companies should not rely on the long tail to rekindle spontaneously the appeal of every title in their archive. Vast repositories of content available for sale over the Internet may struggle to sell even a tiny fraction of the volume generated by blockbusters, due to the still rather rudimentary nature of search and recommendation tools. Indeed the Internet may even serve to increase the dominance of the blockbuster. Websites selling all forms of content, from music to movies, are likely to list the most popular content prominently. Thus in 2007, while the potential of the long tail may grow longer still, it may be the thick, short start of the tail that is worked hardest and is most productive.

In 2007, the need for metrics that provide like-for-like comparisons between traditional and new media performance is likely to become more obvious. This should replace the old approach of using different sets of metrics that may flatter new media’s performance, underestimating the true impact of traditional media as a result. Comparing unique users or downloads for social networks to viewing figures for television stations, for example, may paint an unrealistically rosy picture of the former. Balanced, comparable statistics that clearly show the relative performance of all types of media, both old and new, should be used to ensure that investors’ expectations are properly managed, advertisers’ budgets appropriately allocated, and acquisitions are accurately priced. The public’s readiness to pay for content varies between geographies, changes over time and is influenced by a growing range of factors, from technology to disposable income. The challenge for media companies in 2007 is to second guess how the public’s perception of value may change, on a market-by-market and even segment-by-segment basis.

A benefit of this fluidity is that a reduction in the price paid for one format, in one market, is likely to be balanced by an increase in another. The year should see much experimentation with pricing for all types of media. For example television programs that were broadcast free may become available for purchase via Internet downloads.

Social networks enjoyed massive success in recruiting users in 2006. Their key challenge in 2007 is likely to be to monetize their massive user bases. Social networks are best known for offering 15 megabytes of fame to all for free. One of social networks’ revenue opportunities may be to offer gigabytes of privacy for a fee. Proud parents enjoy distributing photographs of their children to friends and family via the Internet. But they might feel more at ease if they could control exactly who was viewing those pictures. Friends may want to share videos of their weddings, including entertaining but indecorous escapades. But they may be prepared to pay to ensure that only their intimate circle, not prospective employers or existing peers, can see their uninhibited moments.

2007 should see substantial growth in the number of movies that are made available simultaneously on DVD in the shops and for download via VOD over the Internet to PCs. VOD’s allure is that it has the potential to exploit the 21st-Century consumer’s passion for instant gratification. But the addressable market for VOD is likely to remain very small. While close to 300 million consumer broadband connections are forecast for the start of 2007, fewer than five percent of these may be fast enough to support high-quality VOD. As a result, media companies should not see VOD as a panacea, but rather as one of a growing number of routes to market. Differentiation is likely to be essential, as VOD will have to compete with well-established and inexpensive alternatives, such as rental by post. For most DSL subscribers wanting instant access to blockbusters, a swift walk to the local video rental store may be the most immediate route to satisfaction.

The real world value of transactions taking place in virtual worlds is likely to rise through 2007. Second Life’s overall GDP for 2007 could be close to $700 million. Members of some virtual worlds may be able to withdraw cash from their virtual bank-accounts via realworld cash machines. A small handful of individuals are expected to make a healthy living from virtual worlds. But for the vast majority, particularly those in developed countries, virtual worlds are likely to remain little more than a recreational activity throughout 2007. If virtual worlds’ economies were to grow by 10 percent per month, GDP per capita by the end of 2007 would still be under $700 per annum. A sense of perspective is required. The games industry should question how large the addressable market for such fantasy games really is. The number of individuals with the desire and means to spend $15 per month, 50 hours a month and some $500 a year on their alternative life may be limited. Indeed the majority may already be customers. Governments should be alert to any attempts to exploit the mechanisms of virtual economies to undertake criminal activity. Money launderers may use trade in digital artefacts and virtual currencies as a new means of money laundering.

Digital user-generated content has been cast as the eventual conqueror of the established media world. Blogs could batter established media empires. Citizen journalists may render the professional columnist redundant³. Amateur film-makers, armed with camera phones, could even topple Hollywood⁴.

This view has been gathering steam during 2006 and may become even more prevalent in 2007, as the volume of blogs grows, the specification of mobile phones improves and the number of websites supporting user-generated content rises.

Yet the majority of user-generated content is likely to remain mediocre, and thus of little interest or value to most. Essentially it is not likely to pose a major threat to the media industry.

In 2007, the majority of blogs and bloggers, while being available to the billion Internet users around the world⁵, may well find themselves ignored by most of that number. While a few thousand blogs may attract significant traffic, few of the estimated 60 million bloggers⁶, excepting those columnists who have just rebranded themselves as such, may be able to make a living from their weblogs alone⁷. By the end of the year there may still be just one example of a news site of any scale that is based solely on citizen journalists⁸. In 2007 the role of the individual with a camera phone may be recognized as being more like that of a digital eyewitness, providing a photographic or video-based comment on an emerging news story, rather than a journalist trained to analyze and interpret an unfolding event⁹. Websites whose original ethos was to collect user-generated content may find their most popular content is user selected rather than user created¹⁰.

Indeed, in 2007, as in years to come, owning a professional-quality video camera, a PC or a mobile phone is unlikely magically to imbue the majority of people with talent, much as it is improbable that a paintbrush could produce a budding Picasso. In many cases, usergenerated content may increasingly be seen as a vindication of, rather than an assault on, the professional media industry.

However, this does not mean that digital, user-generated content has no role in the professional media world. Indeed in 2007, all forms of user-generated content should complement established media¹¹, perhaps to an extent that has never been seen before. As well as readers’ letters, listeners’ phone calls and children’s drawings continuing to feed into newspapers, radio shows and television programs, respectively, their digital equivalents are also likely to be used in a similar way – to complement professional content.

Further, digital, user-generated views may well be used to provide informal feedback on a wide range of media, and websites featuring user-generated opinions and recommendations may also be used, subversively or openly, as an increasingly important research and marketing channel.

Audience participation has contributed to the enduring popularity of television since its first days as a mass medium in the early 1950s. Producers used studio audiences to create a sense of excitement for programs. Wide, pan-shots of audiences emoting in response to shows helped engender loyalty to programs and made viewers feel like a part of them.

Since then, participation has come a long way, and now millions of viewers participate in programs, directly influencing the outcomes of some of the most popular shows in television¹⁹. This trend is likely to continue through 2007.

Use of participation is also being driven by technological advances, in the forms of rising broadband penetration, ubiquitous ownership of mobile phones and the availability of platforms capable of handling thousands of simultaneous calls and text messages. These advances have enabled new, instant ways for audiences to connect with television programs on a wide scale ^{20 21}.

Participation’s role in television is also likely to be driven by sharp declines in advertising, one of the major sources of revenue for the sector²².

In 2007, the key forms of participation, all of which are based around a call to action from the television show to its audience, are likely to generate increasing revenues.

Voting, whereby viewers communicate with a television program to influence its outcome, may generate hundreds of millions of dollars in revenue in 2007, particularly in countries where the use of premium-rate calling and messaging services is legalized²³. The United Kingdom has seen spending on voting via text messaging rise to $458 million per year^{24 25}. In 2000, that spend was zero.

Competition television, where viewers call in to participate in competitions in a game-show format, is likely to become more popular among television networks worldwide as a means of boosting the bottom line. In European countries, competition television can generate up to tens of thousands of calls per hour, at rates of up to $2 per minute²⁶.

Television shopping generates revenues by encouraging the audience to purchase products being demonstrated on the program. Viewers participate in the program by affecting the price and even by speaking live to the presenters. Revenues from television shopping may reach billions worldwide; in the United Kingdom alone they may reach close to $1 billion in 2007, with strong growth predicted²⁷.

Other forms of participation may also emerge in 2007. Text-to-speech participation, in which viewers’ text messages are read out on air by virtual hosts is likely to become a popular niche for late-night shows²⁸. MMS messages may also become a more popular form of participation, with viewers sending in photographs to be broadcast²⁹. Similarly, mobile and webcam video contributions are likely to become more commonly broadcast. Additionally, reverse auction programs, in which viewers use their mobile phones to bid, are likely to grow in popularity, after initial success in India and the United Kingdom³⁰.

China’s sheer size and growing importance in the world economy give it an almost irresistible allure to media companies around the world. Yet China is a market in transition, particularly in its media sector³⁴, which remains of strategic importance to the Chinese government, both in terms of its economic value and also because of its ability to influence³⁵.

China’s population implies a massive potential market³⁶. But that potential may be hard to tap into. While China’s GDP continues growing at a rapid pace³⁷, only a minority of Chinese citizens have the disposable income to consume content in a substantial way. The bulk of China’s 1.3 billion inhabitants³⁸, some 800 million people, still live in relative poverty in rural China³⁹, with limited access to contemporary media⁴⁰.

Furthermore, government censorship and restrictions on foreign ownership and private enterprise have made China a challenging market for foreign media companies to develop. In 2006, the Chinese media market has appeared to tighten up, rather than open, to foreign media companies⁴¹.

Piracy is another big challenge for all types of media and is likely to remain a key issue in 2007. Illegal copies are likely to be available everywhere, in cafes, bars, major retailers and even in the workplace⁴².

Yet there should still be steady growth in the value of China’s media sector in 200743. Broadcast and cable television are expected to grow steadily, with a forecast value of $18.8 billion by 2009, a 66 percent increase over five years. China’s film and entertainment business may be worth $1⁴³ billion by 2009, compared to only $46.4 billion five years earlier⁴⁴.

Thus the liberalization of the Chinese media sector is likely to remain slow and sporadic in 2007 and beyond, although opportunities are likely to tantalize both established and emerging media companies.

The pixel has often been portrayed as paper’s long-term replacement; in the long-run, online may just be another channel to market for quality content.

Digital subscription and advertising revenues now comprise over 18 percent of business publishers’ and 10 percent of consumer publishers’ total revenues⁵². Internet advertising is on its way to becoming a $20 billion industry⁵³. Online classified advertising generates more than $2 billion in revenues⁵⁴. One forecast has predicted that 2043 may be the year in which the last newspaper is printed in the United States⁵⁵.

Yet, currently 439 million people in over 210 countries buy a newspaper every day⁵⁶. Over 1.4 billion magazines are sold each year and numbers are rising⁵⁷. Book sales exceed three billion annually⁵⁸. The relationship between paper and pixels, it seems, may not always be about one versus the other, but more about a symbiotic, profitable coexistence.

In 2007, the print industry may therefore start making its future more certain by focusing on two areas: understanding and exploiting the unique characteristics of print, which cannot be replicated via other media, and turning the threat of the Internet into an opportunity. There may even be scope for the newspaper sector to reverse some of the declines it has suffered, particularly in more developed markets⁵⁹.

A key reason, in 2007 and beyond, for the enduring consumer appeal and commercial success of print is its practicality and its universality. Unlike its digital equivalents, print needs no power supply or network access. Print is portable, foldable, inexpensive, lightweight, legible in sunlight and accessible to anyone who can read.

The increasingly widespread and vibrant growth of free newspapers is evidence of continued demand for the printed word, even in markets such as the United States, where newspaper circulation has seen sharp decline⁶⁰. Free dailies can increase the total number of newspaper readers, without cannibalizing revenues from existing titles⁶¹. And most importantly, free papers tend to appeal to younger readers⁶², whose attention and loyalty should become a key strategic objective in 2007.

With just 285 million broadband connections⁶³ serving a global population of 6.5 billion, paper retains an unassailable lead as the best route to the mass market. Further, for any article greater than 800 words with photographs or graphics, print is typically preferable to most readers⁶⁴.

Nonetheless, in parallel, print media companies are likely in 2007 to continue making more active and profitable use of the Internet, to compensate for some of print’s inherent weaknesses: its content cannot be updated in real time, and print-runs imply up-front risk. Newspapers are generating a growing proportion of their revenues from online advertising⁶⁵, magazines, particularly special-interest titles, are enjoying revenue growth from online subscriptions⁶⁶.

Conversely, online-only publishers may also start looking at the printed page as a means of boosting their revenues. Printing may be the best way of monetizing previously digital-only content.

During the course of 2007, print media companies are likely to make increasingly diverse and creative use of both paper and pixels, to support revenue growth, fuel innovation, defend their core business and expand their relationships with customers.

The Internet has given rise to the online media stores, capable of selling both physical and digital products on almost endless virtual shelves. The largest online stores are able to offer their customers millions of products, all of which are readily accessible.

While customers of a physical store may get exhausted at the mere prospect of browsing through millions of goods, online customers are offered two tools that have the potential to accommodate a huge variety of choice: a search tool and a recommendations engine. The former allows the customer to pull information on any content in an instant. The latter pushes suggestions to the user. This combination of push and pull has the potential to revitalize the ever-growing back catalogs owned by media companies.

Previously forgotten content in theory becomes more accessible to the general public. So books that have long been out of print may suddenly discover another lease of life. Television programs, long since consigned to the archive, may find a new audience, decades after they were originally broadcast. This impact is known as the long tail⁷³.

To many in the media, the long-tail phenomenon has been embraced as a panacea. Even if new releases do not turn into blockbusters, the long tail means that the back catalog has the potential to become a more productive and potentially profitable line of business, less prone to the seasonal sales spikes and massive marketing costs of new releases.

However media companies should not rely on the long tail to rekindle the appeal of every title in their back catalog automatically. Even with search and recommendation engines, the vast repositories of content available for sale over the Internet may struggle to sell even a tiny fraction of the volume generated by blockbusters. In short therefore, the majority of sales may well always be generated by a minority of product⁷⁴.

As a means of exploiting the long tail, recommendation is not perfect, particularly if recommendations are driven purely by technology, and that technology is driven solely by historical purchasing behavior⁷⁵. While one customer’s purchase may consist of a couple of CDs in the same genre, another customer may well be collecting gifts for a wide range of friends and family. So the purchase history for one may make little sense for anyone else with a different combination of friends and family (in other words, potentially everyone else in the world). Similarly, search is only a useful function if users have a good idea of what they are looking for, and more importantly, if the content has been tagged, or otherwise identified, correctly. For the vast majority of content produced before the digital age, which is by far the bulk of all professional media content in existence, and even some of the content created digitally, this is not yet the case.

Further, while technology may have the potential to enable the long tail, in many cases it also serves to promote a short list of blockbusters. Websites selling all forms of content, from music to movies, provide prominent lists of the most popular content.

The real estate of a website is clearly physically smaller than that of a shop display, favoring the display of a top 10, as opposed to a shop’s top 20. As for content sold over a mobile phone, such as a ringtone or a song, a general inability to browse extensively means typically only a top five is possible. As a result, for content sold over a mobile phone, the tail is rather short indeed⁷⁶.

Thus in 2007, while the potential of the long tail may grow longer still, it may be the thick, short start of the tail that is most productive.