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Straight Talk Media & Entertainment

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Now that even Mark Zuckerberg seems to agree that Facebook is a media company after all, and as the fight for audiences and advertising revenue intensifies, it's worth reflecting on what a successful digital media company will look like in 2017 and beyond. What are the qualities needed to both engage fickle and demanding audiences and make money? It's not merely an academic question, but one that both tech-based companies and content creators, as well as telcos, are grappling with at the highest level.

The following list of requirements is a work in progress (and is possibly contradictory). Interestingly, no single company (outside of China, anyway) has mastered all these areas. But in Ovum's view, here's what companies aspiring to success in digital media need to do:

Open your wallet: Premium content is necessary for proper ARPUs

Facebook has built a huge and growing audience – Ovum forecasts it will surpass 2 billion monthly active users (MAUs) in 2017 – on the back of cheap or free content, largely created by users. Even though it dominates in terms of its share of digital ad revenues, its ARPUs (around $11 for each of its users in 2015) are dwarfed by those of proper media companies, such as Sky, each of whose users typically generated $715 in the same period. Sky spent $6.5bn on content rights that year. Will Facebook ever go beyond the token investments it has made in short-form video content? Facebook is gunning for its share of TV's ad dollars; but without paying for the content that attracts those dollars, it will struggle despite its huge user base.

Movies and sports may be losing a little of the clout that made them the twin battering rams of Sky's rise to prominence, but our appetite for great dramas (Game of Thrones, Sherlock, The Crown) is stronger than ever. Crucially, investment in original content is now supporting a number of different business models: Apple's recently announced investment in long-form content is intended to boost the appeal of its Apple Music service; BT's investment in English Premier League rights was to shore up its broadband subscriptions; Amazon Prime Video is a way of rewarding and encouraging loyal shoppers; while Netflix is focused on a subscription-only business. Premium video content is scarce and expensive, but is surely a must-have for any media company that aspires to create meaningful revenues, whatever its business model.

Factor in social: Communication and content are now inseparable

The ability to communicate is at the heart of social media's proliferation, and at the heart of the telco proposition. Attempts to formally connect the ability to communicate to the experience of consuming content have been largely unsuccessful. (Read tweets on your TV while watching the program? No, thanks.) But despite this, the next great media proposition will have communications – between friends, and between content creators, brands, and audiences – at its core.

That is why Ovum – in its recent study of media on messaging platforms – is bullish about the chances of messaging apps such as Snapchat taking a larger role in the media ecosystem. Snapchat might historically have been seen only as a communications platform, but increasingly content is at the heart of its appeal; indeed, Ovum concluded that Snapchat was best placed among its peers to generate future revenues from its media activity. The fact that Sony Entertainment's ex-CEO is the chair of Snap Inc. – ahead of its IPO – is another indication of where it sees its future growth.

Be creative: Ads must add to the appeal, not be a necessary evil

Ads must be part of what attracts consumers – think glossy magazines, not the low-quality mobile ads that have fueled the take-up of ad-blocking software. Clever formats, a fun factor, and smart targeting (still elusive for all the talk of AI's potential) can attract users to digital ads. Think about some of the (branded) Snapchat filters that have added to the gaiety of the digital nation. Or about rewarding the consumer rather than merely interrupting their content. Consider the wider value exchange – what's in it for the consumer? How about offering free data or discounts in exchange for their attention?

The recent claim by the founder of Medium that the digital ad business model is broken is not wholly true, but the model does need a major rethink. If you are reliant on ads (though plenty of media businesses, from the BBC to Netflix to Spotify Premium, do not carry ads) make them entertaining, educational, informational, and relevant. AOL's plan for a "customer-first" approach to digital ads makes sense; too many publishers still overlook the end-user's perspective, unwittingly reinforcing the low values associated with digital ad inventory.

Be transparent: Without trust you don't have a future

Tech companies such as Facebook seem at last to be facing up to the fact that they are indeed media companies. They use content to build audiences, then monetize those audiences through ads. Case closed.

The denial has been more about avoiding the responsibilities and regulation that come with being a media company. Facebook's belated but apparently earnest response to the issue of fake news was a realization that publishing misleading or false clickbait isn't just an issue for hand-wringing liberals sore about Trump's victory in the US election; it's much more important than that. Consumers need to trust the brands they interact with, whether they are buying soap powder or news. Even in (especially in) a post-truth world, trust and integrity matter if you want a long-term business.

Make it easy: Control over distribution is key, but so is ease of access

While it is likely that services that only distribute content from others will struggle to make big revenues, so content providers who don't control the means of distribution will also struggle. Some "old" media models still focus overly on stopping or limiting access to their content, and while that is important, much of Netflix's success in building an audience has, conversely, sprung from the ease of access – for paying subscribers anyway. Its early investment in making the service seamlessly compatible with just about any device or platform has been crucial to its adoption, as has partnering strategically with service providers to reach millions of new customers. Netflix has managed a great balancing act of apparently contradictory strategies.

Think about the user: UX remains a big problem, especially for TV

The challenge of connecting consumers with the right content at the right time on the right device has, in too many cases, still to be properly met. For some types of content – apps or digital music – a single store or service can give you access to pretty much everything available, but for the most valuable media business – TV – fragmentation is a real challenge. A viewer wanting the best content from free-to-air TV and their favorite pay-TV channels, as well as Netflix, Amazon Prime, or HBO, will need multiple accounts, several remote controls, and much patience to get to that desirable content. Even personalizing the electronic program guide to highlight the most frequently watched channels is still not an option for most viewers, despite our being able to personalize the content on our phones. It's a poor user experience, and in such cases solutions emerge that are not always favorable to the incumbents. Piracy is a perennial problem, but viewers simply turning off or going elsewhere is a greater existential threat. Whoever can provide a way of simply and effectively aggregating the best video content from all sources – perhaps using voice recognition and AI – stands to own the living room.

Tap into adjacent revenue streams: Digital commerce could be your savior

The idea that consumers don't want to pay for digital content is hard to sustain given the popularity of Netflix and Spotify, among others, as well as mobile games that require in-app upgrades. The right product, at the right time, on the right device, with a good UI – that still sells. More and more consumers are now comfortable with the idea of paying online or via their phone, for a whole range of goods and services.

For advertisers, a significant opportunity is emerging to bypass the traditional marketing funnel and sell direct to consumers. Telling them about a product and hoping they remember by the time they've got to the shop? It all sounds a bit twentieth century now. With the growth in payments technology, voice-activated digital assistants, and AI, there is an opportunity for growth. In 2010, I wrote a report called "We are all media companies now." Seven years on, it's time for the sequel: "We are all retailers now."

Keen-eyed observers will note that no single company has embraced all the angles covered above, or rather that no company excels in all these areas. The big Chinese players in particular are further down the line in terms of expanding the ways a platform can serve its users. But is it reasonable or even right to assume that one player, such as Facebook, can be all things to all people? Do we need a one-stop shop or as consumers will we be better served by a suite of providers? And can the current giants adapt to the changing market or will nimbler rivals – the two people in a garage – move the game forward again? The demise of Yahoo is a useful reminder that even first movers who accumulate huge audiences are not guaranteed long-term success.

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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