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Straight Talk Media & Entertainment

Ovum view

Predicting what people will be doing in 10 years’ time is hard – especially when it comes to media. But we like to do hard things at Ovum, so that is what my team and I did as part of our “Digital Economy in 2025” project. I presented our views at our Digital Futures event earlier this week. Here’s a summary of what I said.

The events of the last 10 years highlight the challenges of predicting what the next 10 years will hold. In 2005, Microsoft owned the most-visited digital media properties, Nokia sold the most mobile phones, and MySpace was the most popular social network. Facebook, YouTube, and Netflix were relatively unknown. Twitter, the iPhone, and the App Store did not exist.

Compared with other aspects of the digital economy, changes can be felt immediately in the media business. Unlike devices or networks, there are no multiyear replacement rates or decades-long upgrade cycles. As a result, one of our media clients no longer plans beyond 18 months. And that client is one of the most successful and innovative players in the digital media sector.

Disruption will be the main constant

We are confident that there are more disruptive companies that will emerge over the next 10 years. In 2014, Google CEO Eric Schmidt argued that the biggest threat to its search business was not Yahoo or Bing, but Amazon: Ultimately, both are in the business of driving commerce, Google via advertising, Amazon via retail. Future challenges could come from an as-yet unknown start-up, added Schmidt.

His comments were interpreted by some as a way to deflect the European Commission’s concerns about its dominance of the search business. However, fast-forward to 2015 and Google’s advertising business is being seriously challenged by Facebook, especially in the video sector that many had assumed Google had cornered with YouTube. As Schmidt said: “Change comes from where you least expect it.”

More value will be created than destroyed

Constant disruption will not mean the constant destruction of perfectly good businesses. Consumers don’t cast aside old services in favor of new ones just because they are cheap or free. New services have to deliver value in five areas: time, money, relationships, status, and emotions. Facebook, Netflix, and Apple are great examples of companies meeting – and often exceeding – these expectations.

We think the traditional media firms can step up to the challenge too. As result, physical media will not die and pay-TV revenue will not fall off a cliff. All in all, we forecast that the total media and entertainment revenue will grow by 43% to reach $1.6 trillion in 2025.

Value will shift – in more ways than one

Digital media’s share of this revenue will more than triple from 12% in 2010 to 41% in 2025. Traditional media’s share will nearly halve to 26%. TV will largely hold its own, but will see its share shrink from 36% to 33% over the five years to 2025.

By 2025, we won’t be living in a world where the majority of media is ad-funded. Just over half of the total revenue generated by media and entertainment will come from advertising in 2025, up from 45% in 2015. But at 64/36, the mix of advertising and subscription revenue generated by digital media will almost be the mirror image of that of traditional media.

The challenge of adjusting to this shift will be compounded by the fact that many ad-funded and paid digital media services don’t pass the consumer-value test. This is especially true where companies have attempted to lessen the pain of migration to digital by shoehorning yesterday’s practices into today’s world – forgetting about the customer in the process.

Few platforms will rule – but that’s OK

A large proportion of revenue will be captured through a relatively small number of global or multinational “mega-platforms.” These platforms will dominate due to their ability to attract audiences, drive usage, and monetize content through advertising, subscriptions, and payments at massive scale and efficiency.

Many of these mega-platforms will have been “born digital” and a number of traditional pay-TV and telecoms operators will also make the transition, but many network owners will retrench back to their original role as connectivity and access providers.

Despite what some might think, this will ultimately be good news for many media businesses. The mega-platforms will live or die based on their ability to connect consumers with content they value. As a result, they will court content providers fiercely, offering greater revenue shares, direct investment, and – most importantly – deep data on their mutual customers.

Competition will shift from delivery to design

Data will be incredibly valuable because it will allow media businesses to fundamentally understand and guide their purpose.

Many media firms have become obsessed with delivering their services direct to consumers over the top (OTT) of the Internet, even though they have historically run sound businesses relying on third parties – TV networks, retailers, postal services – to do so.

While a handful will succeed with this ambition, their customers will also live on the mega-platforms and all media companies will need to meet them there in some shape or form. Many will also fail to attract and monetize audiences cost-effectively, and leave this tricky business to the industrialized mega-platforms which can do it better and at scale.

The most successful companies will realize that the greatest return will come not from distribution, but from technologies and smart people to measure, analyze, and reshape their core product: content. Note the word people in the previous sentence: While the media business definitely needs a larger dose of science than most, creating great content will remain more of an art.

Straight Talk is a weekly briefing from the desk of the Chief Research Officer. To receive this newsletter by email, please contact us.

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