New media's effect on the value of a viewer
New media's effect on the value of a viewer
March 14, 2006
CHICAGO -- Mass adoption of digital broadband technology has suddenly presented media-related companies with a big problem: how to accurately establish new financial expectations, user metrics, advertising and subscription fees and content value in a rapidly changing marketplace with no precedent.
There is no easy or fast solution to any of these vexing issues. This period of trial and error has sent all budgeting and negotiations into a tailspin, leaving participants to make it up as they go. Because there is so much shakeout expected on so many levels across all industry sectors, there is good chance that some of the initial assumptions being made regarding the level of user and advertiser response and spending will be proved wrong, causing some financial angst.
Until more solid value propositions and metrics are established across the new-media spectrum, companies will need to take their best estimates in much shorter-term commitments.
The only certainty in all of this uncertainty is that media companies that make a reasonable effort to mine what content they have for new digital broadband consumption are likely to make more money than if they resist change and do nothing.
Although some early returns on various entertainment fronts appear promising, there is reason to be suspect about where consumer and advertiser response rates and prices eventually will settle.
For instance, the $1 billion in incremental income the Walt Disney Co. expects to earn from the sales of "Desperate Housewives" digital downloads, DVD sets and even more traditional TV syndication might be more indicative of the popularity of this series and the novelty of new-media applications rather than the kind of dollars that can be typically generated by digital content recycling.
On another front, the explosive growth of consumer access and advertiser sponsorship for NBC Universal's exclusive Winter Olympics online, compared with the declining ratings of its TV telecasts, surely will affect future cross-media pricing for all such special live events.
At the same time, the contraction and shuffle of movie exhibition windows from their initial theatrical release to home video and pay-per-view/video-on-demand premiere and DVD sales is changing studio economics. Although a blockbuster movie can yield $100 million-plus in wholesale DVD revenue, its PPV/VOD yield generally tops out at about $5 million, or much less than what is lost to piracy.
But even these early signs on the new-media playing field cannot be trusted.
The value of a viewer is in flux. The average hourlong primetime series generates $3.46 million in net advertising revenue, or the equivalent of 41 cents per viewing household. The same program would generate $1.39 in gross receipts for the content owner per $1.99 iTunes download, based on a 70-30 split with Apple, according to estimates from veteran analyst Larry Gerbrandt of Nielsen Entertainment Reports. If a content owner proposes providing downloads off of its own Web site -- as ABC.com, CBS.com, NBC.com and Fox.com have started to do -- they retain all of the $1.99 fee as incremental income.
With advertisers' increasing focus on return on investment, considerations reach well beyond the basic cost-per-thousand unit comparisons to factors such as uncluttered environments, pods and targeted audiences. The advertising rate, or cost-per-thousand-viewers (CPM) measure, for general TV households in primetime might be an average $21 and $25 for a 15-second Internet video spots called "prerolls." But for a much sought-after males 18-34 demographic, CPMs could range from a $198 primetime broadcast network CPM to a $120 Internet video CPM, Gerbrandt explains. Such advertising models and pricing will continue to change.
Returns from new-release hit movies can be as variable. Studios say they generally net $10-$12 from a new-release DVD compared with about $2.39 for VOD purchases. However, negotiated revenue splits and user support can make all the difference. At the moment, PPV splits are usually 50-50 between the content owner and PPV distributor, while VOD is 60-40 in favor of the studios. Assuming a $3.99 ticket price for both, and a 60 million homes PPV universe compared with an 18.5 million VOD universe, current VOD buy rates are at least three times higher than PPV, Gerbrandt points out. But all of that is subject to change daily.
The fact is price points such as $1.99 single downloads, $3.99 VOD or PPV and $120-$200 CPMs are just a place to start in the new-media world in which the daily emergence of new devices, platforms and formats ushers in a whole new realm of pricing and packaging options.
In the meantime, all of this economic flux is playing havoc with two immediate and urgent rituals: negotiations for individual artist compensation for works exhibited on new-media platforms and the price and value-added components of advertising time sold during the major broadcast and cable networks' upfront sales frenzy that grips Madison Avenue every year in May and June, after the broadcasters have unveiled their fall lineups. Both will be critical in working through some of the new-media economics.
The results of this year's upfront will be as telling.
With the online advertising market having grown 30% to nearly $13 billion last year, on the way to an estimated $33 billion by 2010, its inroads to conventional television spending are firmly in place. Advertisers approach upfront negotiations with broadcast and cable TV networks more confident in their new-media options, which will include $1 billion in local online search, growing to $4 billion by 2010, according to a new report by Borrell and Associates.
There is every reason to believe that Internet video -- featuring television fare on online platforms from BitTorrrent and Sling Media to Google and the Web sites of traditional networks -- will one day have its own upfront ad market.
The universe of digital devices and platforms will continue to emerge at a swift pace. DVD players, launched less than nine years ago, are in 78.5% of TV households; cell phones are in 76%, and personal computers are in 74% of American homes. HDTV sets, personal digital assistants like BlackBerry devices, portable MP3 players, satellite pay TV, digital video recorders, plasma screen TV sets and other high-end devices are the only new media still making their way toward critical mass, or penetrating about 20% of the population, according to Nielsen Entertainment.
However, the full breadth of the economic changes imposed by digital broadband technology has yet to be felt. A recent Forrester Research report is an eye-opener on the massive change that the explosion of user-generated content and communication will have not only transforming media and advertising companies but all industries including financial services, retail and health care.
Inexpensive digital devices, modular content and shared computing resources have encouraged individuals to increasingly take their cues from each other rather than from institutions such as media outlets, religion, political organizations and corporations. File-sharing and user-generated content as we know it today is just the start of a social and economic revolution. As the iPod community and other such platforms allow consumers to become the brand, content, marketing and research costs plummet, while advertiser and content producer access to the specialized demographics become more valuable.
"Technology and social changes are creating a potent mix of forces that will transform the way all businesses -- not just media firms -- operate, create products and relate to customers," the Forrester report said. "But (they) also will create direct value for companies if exploited properly."
There is no easy or fast solution to any of these vexing issues. This period of trial and error has sent all budgeting and negotiations into a tailspin, leaving participants to make it up as they go. Because there is so much shakeout expected on so many levels across all industry sectors, there is good chance that some of the initial assumptions being made regarding the level of user and advertiser response and spending will be proved wrong, causing some financial angst.
Until more solid value propositions and metrics are established across the new-media spectrum, companies will need to take their best estimates in much shorter-term commitments.
The only certainty in all of this uncertainty is that media companies that make a reasonable effort to mine what content they have for new digital broadband consumption are likely to make more money than if they resist change and do nothing.
Although some early returns on various entertainment fronts appear promising, there is reason to be suspect about where consumer and advertiser response rates and prices eventually will settle.
For instance, the $1 billion in incremental income the Walt Disney Co. expects to earn from the sales of "Desperate Housewives" digital downloads, DVD sets and even more traditional TV syndication might be more indicative of the popularity of this series and the novelty of new-media applications rather than the kind of dollars that can be typically generated by digital content recycling.
On another front, the explosive growth of consumer access and advertiser sponsorship for NBC Universal's exclusive Winter Olympics online, compared with the declining ratings of its TV telecasts, surely will affect future cross-media pricing for all such special live events.
At the same time, the contraction and shuffle of movie exhibition windows from their initial theatrical release to home video and pay-per-view/video-on-demand premiere and DVD sales is changing studio economics. Although a blockbuster movie can yield $100 million-plus in wholesale DVD revenue, its PPV/VOD yield generally tops out at about $5 million, or much less than what is lost to piracy.
But even these early signs on the new-media playing field cannot be trusted.
The value of a viewer is in flux. The average hourlong primetime series generates $3.46 million in net advertising revenue, or the equivalent of 41 cents per viewing household. The same program would generate $1.39 in gross receipts for the content owner per $1.99 iTunes download, based on a 70-30 split with Apple, according to estimates from veteran analyst Larry Gerbrandt of Nielsen Entertainment Reports. If a content owner proposes providing downloads off of its own Web site -- as ABC.com, CBS.com, NBC.com and Fox.com have started to do -- they retain all of the $1.99 fee as incremental income.
With advertisers' increasing focus on return on investment, considerations reach well beyond the basic cost-per-thousand unit comparisons to factors such as uncluttered environments, pods and targeted audiences. The advertising rate, or cost-per-thousand-viewers (CPM) measure, for general TV households in primetime might be an average $21 and $25 for a 15-second Internet video spots called "prerolls." But for a much sought-after males 18-34 demographic, CPMs could range from a $198 primetime broadcast network CPM to a $120 Internet video CPM, Gerbrandt explains. Such advertising models and pricing will continue to change.
Returns from new-release hit movies can be as variable. Studios say they generally net $10-$12 from a new-release DVD compared with about $2.39 for VOD purchases. However, negotiated revenue splits and user support can make all the difference. At the moment, PPV splits are usually 50-50 between the content owner and PPV distributor, while VOD is 60-40 in favor of the studios. Assuming a $3.99 ticket price for both, and a 60 million homes PPV universe compared with an 18.5 million VOD universe, current VOD buy rates are at least three times higher than PPV, Gerbrandt points out. But all of that is subject to change daily.
The fact is price points such as $1.99 single downloads, $3.99 VOD or PPV and $120-$200 CPMs are just a place to start in the new-media world in which the daily emergence of new devices, platforms and formats ushers in a whole new realm of pricing and packaging options.
In the meantime, all of this economic flux is playing havoc with two immediate and urgent rituals: negotiations for individual artist compensation for works exhibited on new-media platforms and the price and value-added components of advertising time sold during the major broadcast and cable networks' upfront sales frenzy that grips Madison Avenue every year in May and June, after the broadcasters have unveiled their fall lineups. Both will be critical in working through some of the new-media economics.
The results of this year's upfront will be as telling.
With the online advertising market having grown 30% to nearly $13 billion last year, on the way to an estimated $33 billion by 2010, its inroads to conventional television spending are firmly in place. Advertisers approach upfront negotiations with broadcast and cable TV networks more confident in their new-media options, which will include $1 billion in local online search, growing to $4 billion by 2010, according to a new report by Borrell and Associates.
There is every reason to believe that Internet video -- featuring television fare on online platforms from BitTorrrent and Sling Media to Google and the Web sites of traditional networks -- will one day have its own upfront ad market.
The universe of digital devices and platforms will continue to emerge at a swift pace. DVD players, launched less than nine years ago, are in 78.5% of TV households; cell phones are in 76%, and personal computers are in 74% of American homes. HDTV sets, personal digital assistants like BlackBerry devices, portable MP3 players, satellite pay TV, digital video recorders, plasma screen TV sets and other high-end devices are the only new media still making their way toward critical mass, or penetrating about 20% of the population, according to Nielsen Entertainment.
However, the full breadth of the economic changes imposed by digital broadband technology has yet to be felt. A recent Forrester Research report is an eye-opener on the massive change that the explosion of user-generated content and communication will have not only transforming media and advertising companies but all industries including financial services, retail and health care.
Inexpensive digital devices, modular content and shared computing resources have encouraged individuals to increasingly take their cues from each other rather than from institutions such as media outlets, religion, political organizations and corporations. File-sharing and user-generated content as we know it today is just the start of a social and economic revolution. As the iPod community and other such platforms allow consumers to become the brand, content, marketing and research costs plummet, while advertiser and content producer access to the specialized demographics become more valuable.
"Technology and social changes are creating a potent mix of forces that will transform the way all businesses -- not just media firms -- operate, create products and relate to customers," the Forrester report said. "But (they) also will create direct value for companies if exploited properly."
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