Digital technology drives Entertainment and Media industry growth through 2010

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The growing acceptance and commercial impact of digital technology is having an uplifting effect on almost every sector of the entertainment and media industry, as companies turn developments once considered ?fear factors? into opportunities for growth. That was a major take-away from the opening session of PricewaterhouseCoopers? (PwC) seminar, ?Outlook 2010: The Road Ahead for the Entertainment and Media Industry.? The event attracted more than 200 senior industry executives, and was held at the firm?s New York headquarters on June 21.

The opening presentation focused on some of the major points contained within PricewaterhouseCoopers? just-released research report, Global Entertainment and Media Outlook: 2006-2010, where some of the most deep-seated concerns about future developments were dispelled. Among them:

* Physical formats, like books, DVDs and CDs, are not going away anytime soon.
* A la carte offerings of TV channels by multichannel platforms are not likely to have the dire consequences that many anticipate.
* The growing penetration of digital video recorders, facilitating the ability of consumers to skip ads, will not have as negative an impact as has been predicted.

James DePonte, PwC?s New York Metro Entertainment and Media Practice Leader, noted that the ?Outlook? report ?is anticipating pretty healthy annual increases in spending? ? a 6.6 percent compound annual growth rate (CAGR) across all industry sectors, to $1.8 trillion by 2010.

DePonte noted that ?virtually every segment is influenced by the distribution of content online or by digital technology in general.?

While physical formats won?t become extinct, there will definitely be shifts in that arena. ?Some of the segments, like physical music, will decline. But others will continue to grow, like high-definition DVDs,? DePonte said. ?On balance, physical formats will not go away, but the growth patterns will slow.?

The ability of certain segments to dramatically shift course was clear from recent activity in the Internet category. ?Between 2000 and 2002, Internet advertising declined by 17 percent, followed by three years of growth in excess of 35 percent,? DePonte noted.

The Internet is expected to outstrip every other medium in terms of advertising revenue growth, rising in excess of 18 percent per year and jumping from a 3 percent share of global advertising in 2002 to 10 percent by 2010. That increase correlates with the growth in broadband household penetration, which is expected to experience an 18.3 percent CAGR uptick, to 433 million households worldwide by 2010.

PwC anticipates Internet advertising and access revenue to reach $266 billion by 2010, topping the much more mature TV networks sector, which is projected to grow to $227 billion by 2010, with a healthy 6.6 percent CAGR. That TV growth is expected despite the less-than-stellar upfront market that was experienced by some networks this year. ?The real story here is the shifting of viewers and dollars to the cable networks,? said Peter Winkler, a director in PricewaterhouseCoopers? Entertainment and Media Advisory Practice.

PwC does not believe DVR penetration will grow as quickly as some anticipate, and the negative implications of the device?s ad-skipping functions have been ?overstated? by some prognosticators, said Winkler. Another great industry concern, the introduction of a la carte TV channel offerings and pricing, will not be considered attractive by the majority of consumers, thereby limiting its overall impact.

In the recorded music category, Winkler noted an interesting turn-around that began to occur in 2004, as record companies were able to reverse a severe revenue erosion trend. He noted the ?watershed? introduction of a legitimate, online download alternative, Apple?s iTunes service, and its help in halting the downward slide. PwC now projects a 5.2 percent CAGR for recorded music over the next five years, to $48 billion.

While mobile and digital distribution now account for 5-10 percent of music industry revenues, they are expected to leap to 20-30 percent in the forecast period. Conversely, physical formats are likely to decrease at a 4-6 percent average annual rate in major markets.

Filmed entertainment is the only sector covered by the ?Outlook? report that experienced a revenue decline in 2005, at -1.8 percent. Yet PwC projects it will enjoy a 5.3 percent CAGR, reaching $104.1 billion in 2010. ?What we?ve seen in the first half of 2006 is a significant upturn in the U.S. box office,? said Winkler. ?That?s had a knock-on effect internationally.?

A key factor that will drive the growth of filmed entertainment in the next few years is online film rental services. ?That part of the market will grow very quickly, as well as digital streaming and download services,? Winkler said. A larger number of screens and more sophisticated theaters in three regions ? the Europe, Middle East, Africa (EMEA) region, along with Asia Pacific and Latin America -- will also boost filmed entertainment revenue.

Asia Pacific is expected to experience the greatest growth of the five regions of the world covered by the report. Fueled by an explosion of activity in China and India, the region is expected to enjoy a 9.2 percent CAGR, exceeding $425 billion by 2010. It is ?red hot? in the Internet sector, with a lot of room to grow in terms of both dial-up and broadband penetration. It will continue to have the largest revenue in the video game space, jumping to $17.4 billion in 2010.

Asia Pacific also streaks past the other regions in the television distribution sector, a category that includes not only multichannel platforms but also broadcast stations in the U.S. Worldwide, TV distribution is expected to surpass $230 billion in 2010, with an 8.3 percent CAGR. While piracy will dampen the prospects somewhat, Asia Pacific TV distribution should clock about 13.9 percent CAGR, to $36 billion. Low current multichannel TV penetration rates will also spur double-digit gains in Latin America and EMEA.

A much different picture will emerge in the United States, where the TV distribution business is mature, and cable operators are experiencing greater competition from satellite operators and telephone companies. The ?battle of the bundles? is the order of the day, as competitors offer different combinations of TV, phone, Internet access and mobile service.

"It?s anticipated that Internet protocol TV will have 10 million U.S. subscriber households by 2010," Winkler said. "As the telephone companies provide cable and satellite platforms with a larger challenge, it will be interesting to see what happens to the pricing and the offerings," he noted.

The video games sector is projected to have a much smaller revenue base than TV distribution by 2010 at $46.5 billion, but its projected CAGR is 11.4 percent, faster than any other sector, except for the Internet. The increase will be spurred by a fresh generation of consoles (precipitating a spike in games software sales), as well as online and wireless video games.

There are elements casting a shadow on the video games business, however: a decline in PC games, and the more challenging economics associated with acquiring rights, development of games and marketing. Those economics could lead to consolidation in the sector over the next few years.

It?s clear that in every category spotlighted, all of the challenges are outweighed by positive trends. ?We?re fairly bullish,? said Winkler, in summarizing the Outlook report?s findings. ?While there may be fear and loathing of new digital models in the beginning, what we often find is that once they?re embraced and implemented, the [revenue] pie gets bigger.?

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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