A future of possibilities -- The road ahead for Entertainment & Media

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As the FIFA World Cup soccer games riveted most of the world during the summer, Nike attracted consumers to a relevant commercial on the Internet. The ad, which featured a Brazilian soccer star, Ronaldinho, as he put on a pair of Nike soccer shoes, was downloaded millions of times, according to Aryeh Bourkoff, managing director of UBS Investment Research.

That's just one example of how the power of commercial messaging is evolving in entirely new ways ? a topic examined in detail during a PricewaterhouseCoopers panel session "A Future of Possibilities ? The Road Ahead for Entertainment & Media" in New York on June 21. In addition to Bourkoff, the event featured other experts in the media investment and advertising communities and focused on several trends that are shape-shifting the business.

In discussing how various media sectors will evolve, the panelists noted how consumer usage and expectations are changing ? and the challenges that it imposes. The session's moderator, Michael Kelley, a PricewaterhouseCoopers advisory partner in the Entertainment & Media Practice, noted that a recent survey by the company revealed that 18-to-25-year-olds are showing an increased willingness to give up information about themselves in exchange for marketing messages and information relevant to their interests.

That trend was confirmed by Lauren Rich Fine, first vice president and managing director, Merrill Lynch. "There's a real shift going on, in terms of the receptivity of traditional advertising being pushed out to them and their willingness to accept it," she said, in discussing young demographics and the attitudes of her own teenage children. "I would characterize it as an arrogant generation, and they're very proud of it. They only want what they want ... which may be a scary trend, but it's really prevalent."

That pattern is paralleled by another: a growing movement by consumers to create their own messaging from the ground up, competing for eyeballs with professional, top-down messages from advertisers. "Consumers can create a phenomenon on their own that's almost as powerful -- if not more so -- than advertisers that have dominated in the past," noted Tim Hanlon, senior vice president of Ventures, Denuo, a unit of advertising conglomerate Publicis Groupe. He added that a lot of people in the advertising business are "frozen in that top-down mentality, and it scares the bejesus out of them. The agencies are caught in the middle of that."

Kelley reported that in PricewaterhouseCoopers' focus groups on advertising, executives say they spend about 40-50% of their time trying to understand new media from a buying perspective, but they only expend about five to 12% of their budget in that sector.

There's a similar disproportionate ratio at play within large media companies, when their efforts in the new media space are compared with financial results. While the Walt Disney Co. has a dynamic online presence ? and generated 30 million downloads of its programming to iPods, garnering about $60 million in revenue, "that's not going to drive the story as much as [Disney's] traditional business," said Bourkoff. For similar reasons, the addition of MySpace to the News Corp. empire can't be perceived as a major driver of growth in the near term, he added. "While the financial performance from digital media initiatives at the major media companies are not material versus the traditional segments, assets like MySpace (for News Corp.) can be helpful if integrated within other business divisions to enhance growth and the culture of the entire company. "

The implications of new media are a major topic of interest within the investment community as it tries to project future growth of various assets and potential acquisitions. Jim Quagliaroli, principal at Spectrum Equity Investors, a media and entertainment-focused private equity firm, noted, "Many opportunities in private equity over the past few years have [involved] acquiring assets from larger corporations and introducing new management ... the combination of new management teams and financial leverage has proven successful for many, but these buyouts are not without risk given the rapid changes in technology and predictable pains during a cultural transition from a larger conglomerate."

Quagliaroli said that the private equity owners of Warner Music Group were able to respond more quickly to the pressures in the recorded music business, in part, because of the fact of its independence as a private company. "Part of carving out these types of assets is more about blocking and tackling than the application of new technologies," he explained. However "as you examine the impact of new models on older industries, it does fundamentally force you to wrestle where growth is going to come from ? and how to balance the growth of new models with their fundamental disruption to [legacy] profitability. Digital music is just one example of a media that represents both potential and pitfall for the traditional players."

Among the industry segments that have been deeply affected by the growing power of the Internet is publishing. Fine noted that newspapers have lost their monopolistic position in the classified advertising space to online options. Yet while publications have historically not attracted younger consumers, there's "enormous opportunity" for publishers to lure them with online sites.

Fine reported that in 2005, most publishing companies experienced a 35% up tick in revenue from their online business, and in the first quarter of 2006, it was up 25-35%, depending on the company.

"The critical question, and I don't have the answer, is how much of that growth is cannibalization of the print product," Fine said. "I spoke with a private publisher yesterday and I learned he believes that half of his online business is incremental dollars. If that's true, that's really exciting." However, she noted that online ad rates are lower than print ad rates. Looking five years out, Merrill Lynch expects the publishing industry to have margins 500 basis points lower than what they are today, despite double-digit growth online.

The broadband opportunity is, of course, a key revenue stream that's driving the cable industry, in terms of both high-speed data and Voice over Internet Protocol. Bourkoff noted that more than 75% of cable's voice customers also subscribe to video and high-speed-data offers.

He predicted that telephone companies' growing presence in the video space won't be impeded so much by regulatory decisions on franchising rights as they will be by the "time and money" involved in building out infrastructure for video service.

"When you look at even the end of 2007, as the Bells shift from [being essentially] construction companies to marketing companies, some of these cable operators will have more than half of their subscribers as triple play ? where the churn is lower and loyalty is higher," Bourkoff said.

As broadband Internet content grows ever richer, it's allowing online players to create what Hanlon refers to as "massive niches." He foresees the day when media sectors like publishing will "atomize" their content, allowing users to subscribe to specific types of content, such as sports news or business information.

The traditional demographics, such as 18-49 males, "don't really apply much anymore," Hanlon said, noting the many differences between men on either end of that age spectrum. He noted that advertisers have the opportunity to more finely granulate their messages, aiming them at more targeted demos.

"Marketing companies can no longer depend on media companies to aggregate audiences and hope they do all the legwork," Hanlon said. "Now it's the marketer's job to [provide] multiple messages to multiple audiences and do the aggregation themselves... We'll see how that plays out during the next few years."

For more information on the Outlook, including how to place an order, please visit www.pwc.com/thr.
The PricewaterhouseCoopers Global Entertainment and Media Outlook: 2006-2010 is the leading global entertainment and media industry forecast, including in-depth global analyses and five-year growth projections for 14 industry segments covering every major global region. The complete 632-page book, which includes a "Global Overview" can be purchased for US$995. The 50-page "Global Overview" can be purchased separately for US$95; individual chapters can also be purchased separately in electronic format for US$95.

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