PwC Media Outlook: Convergence, Connections & Trust

Every year the global reporting giant PriceWaterhouseCoopers (PwC) produces an in-depth and compelling report on the state of global media and entertainment. The following highlights were taken from the recent 2018-2022 report where three key themes emerged, convergence, connections & trust.


What’s trending now? It’s clear we’re in a rapidly evolving media ecosystem that’s experiencing Convergence 3.0 – a new and different wave of convergence driven by different capabilities and higher expectations, and manifesting itself simultaneously in multiple dimensions.

In Convergence 3.0, the dynamics of competition are evolving while a cohort of ever-expanding super competitors and more focussed players strive to build relevance at the right scale. And business models are being reinvented so all players can tap into new revenue streams, by, for example, targeting fans and connecting more effectively with customers to develop a membership mind-set.

The pace of change isn’t going to let up anytime soon. New and emerging technologies such as artificial intelligence and augmented reality will continue to redefine the battleground. In an era when faith in many industries is at a historically low ebb and regulators are targeting media businesses’ use of data, the ability to build and sustain consumer trust is becoming a vital differentiator.

The result? To succeed in the future that’s taking shape, companies must re-envision every aspect of what they do and how they do it. It’s about having, or having access to, the right technology and excellent content, which is delivered in a cost-effective manner to an engaged audience that trusts the brand. For those able to execute successfully, the opportunities are legion.


A new wave of convergence

Artwork credit: Android Jones

Convergence is all the rage again across entertainment and media (E&M), technology and telecommunications. The thick borders that once separated these industries – and sectors within them – are dissolving.

Large access providers and platform companies are integrating vertically, while established giants are integrating horizontally. Companies that once offered only technology and distribution are moving into content. The distinctions between print and digital, video games and sports, wireless and fixed Internet access, pay-TV and over-the-top (OTT), social and traditional media are blurring.

Although they all had different starting points, many companies in this converged entertainment ecosystem are now aiming at business models that revolve around direct-to-consumer relationships. The transformation unfolding before our eyes is enabling this vast global industry to keep growing at a pace close to its historical rate – even amid significant disruption.


Drivers of change

Ubiquitous connectivity

Ongoing investments in technology and broadband network infrastructure have expanded coverage, capacity, bandwidth and connectivity to the point where consumers and their devices are always connected and always on. These developments support an ever-expanding supply and diversity of content, experiences and applications that can be delivered directly and digitally to users.

The mobile consumer

As spending grows, the connected mobile device is rapidly becoming consumers’ primary means of accessing E&M content and services across virtually all markets worldwide. That makes it imperative for content creators, distributors and platforms to develop the means to reach and monetise mobile consumers directly through mobile experiences rather than through traditional sales and distribution approaches.

Need for new sources of revenue growth

Many sectors of the E&M ecosystem are showing weak, stagnant or even declining growth. Whether it is newspaper companies in the UK, movie theatre operators in the US, publishers in Japan or magazine companies around the world, players will find that the streams that nourished them in previous years will not be flowing with the same force. Simultaneously, telecommunications companies face stagnant core businesses and are looking at E&M as a growth driver of new products, services and experiences. Every company in the E&M ecosystem is racing to develop new revenue streams, especially in digital.

Value shift to platforms

As entertainment and media have digitised, social media and technology platforms, and not publishers (content creators and packagers), have often been the primary beneficiaries of users’ growth in time and spending. The platforms have shown greater effectiveness in monetising across advertising, subscriptions and transactions. These platforms are playing a more prominent role in content creation. In parallel, many publishers, especially in video, are investing in their own platforms and seeking to become more proficient in technology, data and digital delivery.

Personalisation

Consumers no longer want one-size-fits-all E&M experiences determined by network programmers or publishing editors. Neither do advertisers. As a result, data analytics and technology that can support better decision-making with respect to content, distribution, user experience and monetisation have become increasingly critical to success in the E&M marketplace.


Varieties of convergence

As the Global E&M Outlook highlights, the biggest technology and telecommunications firms are now acquiring and integrating E&M assets at a faster pace and a larger scale than ever before.

According to PwC’s TMT Deals Insights, the number of media and telecom deals rose 29% in 2017, to 876. But we are seeing participants of all sizes, and in all geographies, engage in strategic efforts that in prior eras would have been classified as vertical integration, horizontal integration or diversification.

The reason is that media, technology and telecommunications enterprises now view it as an imperative to own the user experience. What’s more, technology and telecom players are keenly aware that content has the potential to be a high-engagement, high-frequency, high-usage application that keeps users across all demographics and devices engaged and enables the provider to build relationships with them.

Convergence in Media

Convergence is taking place within the media segment itself, as providers and distributors link up with one another in unprecedented and unexpected ways.

Indeed, the distinctions among varieties of media are collapsing: an investigative series by a newspaper is now likely to include video, audio and text, all published in a digital format; additionally, distinctions are blurring between a video series made by a studio (Lionsgate), a pay-TV network (TNT, AMC or HBO), or a video streaming company (Netflix, Amazon or Hulu).

Convergence in business models

One interesting development is that highly successful companies that began life with very – even radically – different business and revenue models are converging on a similar macro business model.

Consider that Amazon is predominantly an Internet retailer, Disney is a content factory, Netflix began life as a DVD-rental-by-mail business and Apple rose to prominence in PCs and mobile devices. And yet today, each is simultaneously acting as a producer, distributor and retailer of content.

We are also seeing convergence among content, advertising and e-commerce, as a single user expression or impression can lead frictionlessly to a transaction – whether it is a video game player purchasing equipment for his avatar, an Amazon Prime shopper downloading a movie recommended to her by an algorithm or an Instagram user scrolling through her feed for fashion tips and making an in-app purchase after viewing a video from one of her favourite brands.

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Among more focussed players, especially in the publishing industry, we see convergence in building a greater level of direct-to-consumer revenues involving subscriptions, live events, e-commerce, licensing and consumer products.

PwC also covers convergence in geographies and convergence in access. Please use the link at the end of the article to view the full report.


Reinventing media business models

A deep dive into the data reveals something of a disjunction. On the one hand, the overall volume of E&M spending continues to rise at a steady, reliable clip along with economic growth, placing the industry in the same bucket as consumer products and similar sectors.

On the other hand, underneath the seemingly placid top line, an immense amount of churn is taking place, with different sub-sectors and geographies on sharply different – and occasionally volatile – trajectories. All this contributes to players’ sense of an urgent need to rethink and reengineer their business models.

At every point in the value chain, in every country, companies are having to reconsider precisely how and where they generate revenues and what role they play in the E&M ecosystem.

Take advertising. Global spending on marketing is rising, especially the digital component. But there is a widespread concern over the viability of existing models that centre on advertising.

Digital advertising

In digital advertising, the duopoly of Google and Facebook continues to gather the lion’s share of US digital advertising, about 57%. One result of this dynamic is that digital publishers that were the darlings of the industry just a few years ago – BuzzFeed, Vice, Mashable and many others – have struggled to meet ad sales targets that were formerly achievable. Mashable, valued at US$250m in 2016, went for a fire-sale price of US$50m in November 2017. DNAinfo, which owned local news sites such as Gothamist, simply closed its doors.

Ad skipping and ad blocking are having an impact, as consumers act on their preference to avoid advertising by using ad-blocking tools, skipping ads, consuming shows on DVR and fast forwarding through the ads, or simply doing something else during ad breaks. In February 2018, Google said it would build an ad blocker into its Chrome browser to protect users from the most intrusive and annoying online ads.

Direct-to-consumer model

Large segments of the consumer marketing world are now choosing direct-to-consumer business models and building brand-direct marketing, e-commerce and media capabilities, creating a significant ripple effect on media and advertising.

Digital-first boutique brands that don’t rely on physical retail or on mass advertising have been making headway, including Dollar Shave Club (razors), Casper (mattresses), Warby Parker (eyewear), Away Travel (travel), Birchbox (beauty), Everlane (apparel) and the Honest Company (household products).

They largely eschew advertising on television, radio, newspapers and digital publications in favour of content experiences designed for social media, e commerce and their own branded assets. Amazon, with its Prime shopping platform, has emerged as a locus for advertising. JPMorgan Chase estimated that Amazon’s ad revenues were US$4.5bn in 2017.


Developing new revenue streams

Given the prospect of such disruptions, it’s hardly surprising that building new revenue streams is at the top of the agenda for every player in the E&M industry, especially those that are currently reliant on advertising. In fact, companies are exploring an expanding array of strategies to build new streams. (For a more thorough description, see “The Revenue Stream Revolution in Entertainment and Media,” by Christopher Vollmer, strategy+business, May 7, 2018.)

Some approaches are listed below.

Maximising distribution reach by monetising existing core brands, products and intellectual property through new channels and platforms, either owned and operated or accessed via partners.

Closing the loop between user engagement and commerce activity. Video game company Ubisoft, like its peers Activision, EA and Take-Two, has shifted its strategy from releasing annual blockbusters to reinventing franchises such as Assassin’s Creed and Tom Clancy’s Rainbow Six Siege as live digital services. In-game micro transactions, or what Ubisoft refers to as ‘recurring player investments,’ such as a US$4.99 ‘unicorn mount’ for Assassin’s Creed players, grew 87% in fiscal year 2018, and now represent 27% of total company revenue.

Extending the brand from media properties into new revenue streams through physical experiences and products. Tasty, BuzzFeed’s foodie brand, parlayed its massive social media fan base across Instagram (17m followers), Facebook (94m likes) and YouTube (6m subscribers) into a multimedia franchise that now also includes an eponymous best-selling cookbook and a line of Tasty-branded kitchen tools at Walmart.

BOOM Festival 2016. Photo: Pierre Ekman / pierreekman.com

Encouraging a membership mind-set that allows a company to sell premium media experiences and related benefits, products and services. The New York Times Company saw its digital subscriptions soar from 910,000 in 2014 to 2.64m in 2017. The engaged subscriber fan base has become an attractive monetisation target for consumer offerings such as travel (New York Times Journeys), product recommendations (Wirecutter, a site acquired in 2016) and events (Times Talks, New York Times conferences and subscriber events).

Prospecting for new revenues in entirely new entertainment and media markets. Video games publishers and sports entertainment entities increasingly view e-sports as their next big revenue growth engine.

Globalising aggressively by pushing into new geographic markets. Netflix is currently available in 190 countries. Having grown tenfold between 2012 and 2017, international subscribers (62.8m) now exceed the company’s domestic subscribers (54.8m). Netflix curates content, in any language, that would appeal to the nearly 2,000 ‘taste communities’ it identified during the course of its global rollout. Taste communities are groups of subscribers around the world who are fans of certain types of content, regardless of where they live.

Business model innovation has much further to run

As the drive to create new E&M business models continues, it’s clear that the pressure driving this wave of innovation – not least the squeeze on ad revenues – won’t ease off anytime soon. So the reinvention has much further to run, and the industrywide move to tap into and develop new streams may have only just begun. Ongoing advances in technology will be one of the main forces that aid in that effort.


New technologies, new battlegrounds

Across all segments of E&M, technology is enabling cheaper and more personalised content delivery.
That is having the effect of squeezing out less efficient players, intensifying pressure on all links in the value chain and opening the way to the creation of new formats, such as e-sports. For all participants in E&M, cost efficiency is an important element of future viability. And the more traditional conglomerates, many of which have legacy cost structures in place, find themselves competing against challengers with different cost structures. This only heightens the sense of urgency with respect to investing in new technologies that can help companies compete more effectively.

Data Analytics & Insights

As business models and capabilities change, it’s clear that data and analytics will play a pivotal role in E&M. Today, many companies still lack the data and analytics capabilities they need to deliver content, advertising and other experiences to the right users at the right time and in the right context – although this is clearly a high-priority investment area for many.

As companies in E&M pursue new revenue streams, first-party data has emerged as perhaps the most valuable asset.

Schibsted, the Norwegian media company, has developed prediction models that determine how likely it is that an ad-supported user can be converted to a subscriber. After analysing first-party signals such as the frequency of visits, it assigns each user a ‘propensity score’ that indicates his or her likelihood to subscribe (high, medium or low). Schibsted then tailors the user experience (by, for example, enticing high potentials with greater content access before they hit the paywall) to encourage conversion. The model identifies readers who are three to five times as likely as average users to subscribe.


Looking to the future

The future holds both a great deal of promise and significant challenges. The good news is that, overall, the amount of time and money spent on E&M industries is growing throughout the world. And that trend shows no sign of slowing. Our lives may appear to be saturated with media. But every day, new viewers are coming of age and attending their first movie, millions of people are plugging into the Internet for the first time, or getting their first smartphone, or gaining enough income to spend on a digital publication (see below).

The challenge is that the way in which that time and money is spent is shifting – in some instances, dramatically. For many, the business model that worked for the last 10 years may not work in the next 10 years. In fact, it may not work in the next three years. For many businesses, the models, assets, practices and capabilities that support their current market positioning likely will not be sufficient to carry them into the future.

The question is how companies should and will react to this reality. It is clear that armed with this knowledge (and with the robust data of the Global E&M Outlook), E&M companies will have to go above and beyond.

Above and beyond how they currently envision themselves

Every E&M company now faces important choices about its future basis for competition. How will it seek to win? This choice is essentially between becoming a super-competitor and building relevance at scale; between embracing complete convergence and embracing selective convergence.

Whichever way this decision goes, the effort will bring its own challenges. Businesses seeking convergence must either muster the resources necessary for acquisitions and investment, or improve their ability at partnering – a capability that has not traditionally been core for media companies.

Building relevant scale will require becoming a powerhouse of quality and engagement by having content creators who are as passionate about the subject matter as the target fans; engaging high-value, hard-to-reach audiences that can translate into powerful and distinctive fan communities; and maintaining consistency and brand safety with respect to content and advertising.

Above and beyond the way they currently make money: E&M companies must develop an urgency in the creation of new revenue streams. They must distil more value from the streams they currently have, continually prospect for new streams and adopt a strategic mind-set that permits investment and experimentation to connect directly with users and monetise those relationships in new ways.

Above and beyond their current capabilities

E&M companies must build a strong content creation and curation capability, supported by a clear understanding of the economics behind it. But they must also develop a more refined understanding of customer segments and needs – including customers’ willingness to accept advertising – by leveraging data and analytics. They must add team members who can focus on developing compelling user experiences and retention strategies, as well as building loyalty and understanding lifetime customer value.

Above and beyond the way they build and retain trust

A recent research report in PwC’s Consumer Intelligence Series – Protect.me – finds that 85% of consumers will not do business with a company if they have concerns about its security practices, and 92% believe they should be able to control the information available about them on the Internet (see Exhibit 14).

Given the ingenuity of hackers and the intensification of regulatory, social and media attention on data security and trust issues, companies have to redouble their efforts. To build trust, companies should do more than what’s required by law. They should proactively manage cybersecurity and privacy risks in a way that goes beyond a compliance checklist approach and enables customers both to see the data held about them and to control how it’s used.

In the E&M world, there is no guarantee of success, and no single path towards a viable future. Making long-term predictions is challenging, especially in this age of continual disruption. But our ongoing efforts to collect, analyse and understand data at a granular level, assess the impact of the trends affecting our world and lay out the strategic imperatives that all companies face allow us to approach the exciting vista with a sense of clarity and optimism.


These were just some of the highlights found in PwC’s ‘Perspectives from the Global Entertainment & Media Outlook 2018-2022’. Visit PwC for more in-depth insights.

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