We are accustomed to hearing that content is the crucial factor for any media venture in the digital world, but the reality is far more complex. Rapid changes in technology, user behaviour and business models have created a gap between how consumers want to experience and pay for entertainment and media, and how companies produce and distribute their offerings. To bridge this gap, companies should pursue two related strategies: (1) focus their efforts on building businesses and brands anchored by active, higher value communities of fans, and (2) capitalise on those emerging technologies that delight users in new ways, thus delivering superior user experiences.
In this article, we summarise some key developments that we believe will ultimately drive further growth in the overall Dutch Entertainment and Media market by about 3.2% per year. These developments boil down to user experience, data and digitisation, combined with a changing regulatory environment. The impact, maturity and pace of these developments differ from one market segment to the next - but the overarching conclusion is that digital keeps winning ground both in advertising as in consumer spending.
|Total Entertainment & Media spend (€ millions)|
|Netherlands||Historical data||Forecast data||CAGR %|
|Digital consumer (inc. internet access)||3,934||4,296||4,721||5,193||5,645||6,039||6,417||6,767||7,109||7,439||5.7%|
|Total digital E&M||5,103||5,562||6,132||6,725||7,351||7,923||8,482||9,000||9,489||9,940||6.2%|
|Total non-digital E&M||6,757||6,375||6,215||6,153||6,126||6,055||6,020||5,957||5,899||5,826||-1.0%|
Source: PwC, Ovum
The tale of digital music download revenue provides us a first insight into the modern digital consumer.
Whereas two decades ago everyone owned physical copies of music records or albums, today it is all about having access to our favourite content. In the past 20 years, we have seen the rise and fall of the music download, which turned out to be an interim technology. What changed? In a nutshell, a form of access emerged that offered a vastly improved user experience: music streaming. Streaming companies, with Spotify at the forefront, utilise a stickier subscription model by offering customers free access in return for listening to ads, removing the need to engage in multiple micro transactions. Streaming companies also invested in offering a great suitability for listening on home music systems, mobile devices and even in-car. They have also introduced algorithms suggesting music that consumers might like based on their previous choices – a much-needed form of curation, considering that larger streaming companies have well over 30 million songs in their inventory.
But is streaming in its current form the end-game? We don’t believe it is. Democratisation of platform ownership, blockchain technology and other trends will change the landscape yet again.
To gain the utmost control over user experience, businesses are switching to more direct-to-consumer (“D2C”) models. This allows them to control the message and consumer data. With the supply of media growing by leaps and bounds, there is simply too much competition for businesses to survive on the experience of the casual “eye-ball” and other low-value audiences. Developing a fan-centric approach will unlock opportunities and engage committed audiences who are more willing to pay for the right content or interface, either in cash, likes, shares, data or just time.
The shift in user experience in the video market has been considerable and accompanied by large investments. Companies like Netflix have created a strong fan base by investing in technologies and content and by attaching their name to hit after hit. They have truly changed the market, and watching video content wherever and whenever one likes is becoming the norm. Telecoms, broadcasters and producers are all working hard to maintain or win control over the customer in this changing market. Instead of extending their licence agreements, content producers such as Disney are launching competing D2C platforms themselves, forcing Netflix to invest in its own content. At local level, Dutch broadcasters are collaborating on local OTT services. NPO, RTL and SBS have joined forces, initially by offering a joint VOD platform and more recently by launching live TV, bypassing local telecoms.
One of the main questions media companies must ask themselves is how consumers select the content they want to see, hear or read now that their access is virtually unlimited. While there is still plenty of room for niche markets, consumers largely opt for mainstream content.
An endless inventory of music, movies and TV shows has led to a growing concentration on blockbusters rather than giving us a broader view. There are still plenty of other ways to find and consume content. New D2C models are being launched in quick succession, but how many subscriptions are consumers willing to enter into? Or will one consolidator win out and seise control of consumer relationships?
The focus on a user-centric experience that we have seen in the music and video industries requires certain capabilities, and companies will need to optimise operations to cater for this rapidly changing business environment. Organisations must be agile enough to respond quickly to new user preferences, new business models, partnerships and new technologies. Companies need to develop capabilities in such areas as user interface design, customer acquisition/retention, personalisation and customer service as these become more critical for the E&M market to move forward.
Not surprisingly, total digital E&M spending in the Netherlands continues to grow and now exceeds non-digital revenue. This trend emerged many years ago and has continued to spiral upwards under the influence of technology. The total Dutch E&M sector is expected to grow at a CAGR of 3.2% through 2021, with digital (consumer and advertising) spending growing at a CAGR of 6.2% per year. Important drivers in digital spending are streaming revenues, internet advertising and internet access spending.
Fast and ubiquitous internet access and appealing mobile subscriptions have allowed digital innovators, both international and home-grown, to provide compelling experiences that consumers are prepared to pay for. With more and more generous data plans on offer, consumers are using more apps and going online more while on the move.
TV broadcasters are feeling the effects of the migration to digital offerings. Consumers – especially, but not only, the younger demographics – spend less time watching linear television. This, coupled with other factors such as lagging audience measurability in this sector, is beginning to erode advertiser spending on this medium. For the first time, we are seeing a material decline in TV advertising spending in the Dutch market. As illustrated in the graph, broadcasters have been able to increase total TV advertising revenues compared to 2012 levels. For 2017, we do foresee a €40m - €50m correction.
A user-centric approach requires companies to really know their customers. For a D2C model to work, data is essential.
The best example is targeted advertising. Targeted advertising can reduce waste in the market because the ads will be more tailored to specific users. This in turn will increase the value of an individual ad, and thus raise prices. To wage the battle against the digital giants (Facebook, Google, Spotify, etc.) and respond more flexibly, strong local players are starting to work together in strategic alliances. For example, Sanoma and media agency GroupM formed a partnership to share consumer data. RTL and TMG are working together for the supply of online video-advertising, which in turn will attract advertisers by offering a broader proposition and richer consumer data.
Gathering data alone is not enough; the trick is to connect and understand the data. This is illustrated by P&G’s recent statement that it had cut USD 100m from its online advertising budget without impacting its financial results. Their example shows that the online advertising market is still developing and learning. Targeting in itself does not deliver the full value potential; it is important to consider data interpretation and the true objectives of the advertisement before making decisions or drawing conclusions. In other words, the marketeer and data scientist need to collaborate much more closely to maximise the results of ad spending.
It is anyone’s guess how using data for targeted advertising will impact total advertising budgets once this strategy goes mainstream. So far, all online advertising categories are growing, despite the highly saturated Dutch market.
Insights into consumer behaviour are valuable not only for targeted advertising propositions but also for improving the user experience and developing relationships into a fan base.
Companies that know how to interpret usage data will gain a better understanding of the quality and value of their content. When does a consumer stop reading an article? How far along into a movie does a viewer lose interest and switch channels/programmes? The answers to these questions will give companies a better understanding of consumers and their own content. Measuring and understanding data will help them improve the user experience.
So far, the global giants continue to dominate the data-driven landscape. For example, Facebook’s status as a giant of the digital world is unquestioned as they hit 2 billion registered users in 2017. Facebook’s vast array of consumer data will help brands generate customer lifetime value by targeting an audience that Facebook can predict – with a high level of certainty. The European market has enormous potential and is growing; average revenue per user in the US/Canada is $15, whereas in Europe it is around $5. A major concern for other E&M companies, which are already facing tough competition to host advertising, is that Facebook will use its enviable data and innovativeness to monopolise the digital space and become a “one-stop shop” for advertisers. So although internet advertising will continue to grow rapidly, the benefit accruing to the Dutch E&M market will be much less pronounced unless the landscape changes drastically.
Technological changes have had a huge impact on the E&M industry. The list of examples is virtually endless. Below we touch upon artificial intelligence and blockchain, two technologies we expect to impact many E&M businesses.
Today, more and more companies around the world are preparing to take the plunge with AI. AI tools are becoming increasingly affordable and can help remove friction in commerce, delight consumers, and make smarter investment decisions. AI has numerous potential benefits, including the creation of abstract models to recognise media and behaviour from millions of data points. It will allow companies to analyse and process volumes of media that are impossible to handle with traditional methods. AI will help companies present new features that keep consumers on a site or bring them back for more. Media companies shouldn’t feel too pressured to invest yet, but they do need to get their data foundation right by building deep data resources and by staying on top of market trends.
Blockchain is another technology that has the potential to disrupt existing business models and enable new ones. This is definitely true for the E&M industry, where intellectual property (“IP”) is very valuable but also vulnerable to being copied or pirated without a loss of quality.
Only part of the ensuing revenue “leakage” has been recovered through new consumption models, such as all-you-can-consume streaming subscriptions and micro-payments for articles. Blockchain can be extremely disruptive because the technology makes it possible to bypass content aggregators, platform providers, and royalty collection associations and fundamentally reset pricing, advertising, revenue sharing and royalty payment processes. Even more interestingly, blockchain can also shift power to the content owners.
Although the number of domestic E&M companies is limited, there is room for further consolidation. A contributing factor is that consumers now have greater access to international services and content. The telecom, TV, radio and newspaper industries have all recently moved towards greater consolidation. The merger between Vodafone and Ziggo has combined the second-largest mobile operator and the largest cable company in the Netherlands. One key strategic objective behind the merger was to develop a quad-play offering that should reduce churn. In the TV industry, Talpa acquired the remaining 67% of shares in SBS (SBS, Net5 and Veronica), allowing it to combine its content and broadcasting assets. In the radio industry, Talpa and TMG combined their radio assets (primarily FM radio stations) into Radio Talpa. This allows them to offer attractive radio content to a wide range of consumer groups, and therefore serve a wide range of advertisers. It also gives the joint venture more scale to invest in innovative technologies. In the newspaper industry, we have seen further consolidation with Belgian Mediahuis acquiring TMG. At the time of publication, Mediahuis held about 70% of the shares. This is not enough to fully integrate TMG and Mediahuis therefore cannot capitalise on the full synergy potential just yet. The magazine industry is undergoing a different M&A trend. Traditional large publishers keep offloading titles to dedicated smaller publishers. Bertelsmann recently announced the potential divestment of its Dutch G+J business.
On top of a rapidly evolving technological environment and changing market demographics, E&M companies need to stay abreast of regulatory changes. The regulatory environment – in particular the environment associated with data and privacy – is developing rapidly but often lags behind advances in technology. The result is uncertainty and potentially significant reputational and/or financial risk. A recent example is Google’s €2.4 billion fine for “misuse of power”, related to their price comparison shopping engine Google Shopping. We list some regulatory developments below.
General Data Protection Regulation (GDPR)
As data gathering grows more important, privacy regulations continue to have major implications for the E&M user experience and the role of brands within digital media ecosystems. Companies continue to navigate the fine line between delighting customers and annoying them. The GDPR, due for introduction in May 2018, is meant to improve personal data protection in the EU. It will have huge data security implications for companies that operate in Europe and the rest of the world. Companies must comply with the new legislation when developing new business models and when gathering data.
The telecom industry has been impacted by multiple regulatory changes and court decisions. An example is the European Commission’s roaming regulation, which became effective in the summer of 2017.
It allows consumers to use data bundles abroad and they have greeted it with great excitement. The impact on revenues, costs and capital expenditure differs per telecom provider. The overall expectation is that larger, international telecom providers, like Vodafone, will not be impacted as much as smaller providers, since the larger providers have a network in most of the countries covered by this reform. The new regulation is impacting consumer behaviour abroad and therefore provides opportunities for other companies. One obvious example is to target consumers on business trips or holidays, when they increase their app usage.
Value-added tax on digital products
Another development which could have a positive impact on the industry is the European Commission’s proposal to use the same VAT rates for digital and non-digital products. The current Dutch VAT rate on, for example, printed books/newspapers is 6%, whereas a rate of 21% VAT applies to digital copies. This reform could provide urgently needed support for the ongoing development of digital products, including educational e-books. The Commission’s proposal was approved by the European Parliament in June 2017. The ball is now in the court of the EU member states, which must approve the reform unanimously. The Netherlands has already agreed to this change.
Reselling of digital products
An interesting debate has evolved around second-hand sales of digital products. Consumers may sell physical products (DVDs, CDs or books) on the second-hand market, but the resale of digital products is currently prohibited. The European court is reviewing the question of who has ownership once a product has been acquired by the consumer. The outcome will be interesting, as it may yet again disrupt revenue models and, for example, result in a digital platform to trade second-hand e-books.
Ennèl van Eeden
Global Entertainment & Media Industry Leader
Tel: +31 (0)88 792 45 40
Partner, PwC Netherlands
Tel: +31 (0)88 792 65 20