The media and entertainment industries are about to be rocked by a perfect storm of change: the convergence of all-digital television transmission, the prevalence of DVR-type devices, and universal forms of on-demand content -- all of it facilitated by a new standard of personalized portable interactivity.
Granted, that is a lot to digest, but it is sink or swim time for all players: Hollywood studios and television networks, broadcasters and cable operators, publishers and video game makers, recorded music producers and advertisers.
Those who prefer to write all this off as a lot of sky-is-falling huffing and puffing best take a hard look around. Evidence of this three-pronged sea change is everywhere, even though the full brunt of this perfect storm will not be felt for several years. Any company willing to wait that long to respond is in trouble.
The implications of some of these rapid-fire developments are so profound that they are not easily grasped by executives searching for the next hit TV series, feature film, video game, pop song or marketing campaign. Even the most thoughtful and visionary corporate leaders, knowing there are pitfalls and opportunities ahead, are not sure of the way.
But both likely and unlikely allies are scrambling to do joint ventures that catapult them to a new competitive plane.
Last week's announcement that TiVoToGo would be available on any device operating on Microsoft software was one such development that has implications for every producer and distributor of content and services. Empowering consumers with ways to access, store, manipulate and replay their favorite content any time, anywhere is the Holy Grail of the new digital broadband world. The greatest liability so far is the failure of content producers and distributors to protect their copyright, right to payment, attendant advertiser support and access to consumers while they still can.
The inability to forecast with much certainty the potential impact extent to which company and industry sector revenue and earnings will be impacted by these paradigm shifts doesn't make them any less real or urgent. Without a road map or precedence to guide them, media and entertainment companies are beginning to take their first steps onto a shifting digital broadband terrain that, in the long run, should prove more lucrative and diversified than the status quo.
Robert Iger, the Walt Disney Co.'s CEO-elect, says he is making digital adoption a top priority by migrating more Disney- and ABC-branded content to the kind of video-on-demand and rich-media Web offerings already successfully embraced by ESPN. That means ABC does not have to stop at $400 million-plus of improved upfront advertising sales based on its recent primetime success but can generate new revenue from "Desperate Housewives Plus" day-after series episodes streamed online with deleted scenes, extras and all-new advertising, for a price. Like all broadcasters, ABC must rely on gatekeepers -- cable operators such as Comcast and Time Warner, and Internet providers like Yahoo! -- to facilitate their interactive participation. But even the gatekeepers will need to rely on others to extend their own reach: cable operators to get outside the home, telephone companies to get into television, broadcasters to get into interactivity, film studios to find an on-demand platform successor to already declining DVD sales. Beyond the limits of what they know is a boundless strain of unknown competition from alternative broadband providers, from fourth-generation cellular to Wi-Max, Wi-Fi and utility power lines.
The prospect of so many alternative places for consumers and advertisers to go is not lost on Madison Avenue.
For the first time ever, advertisers in television's all-important upfront market appear to be considering the medium's challenged value proposition before leaping blindly into rising unit prices despite shrinking audiences. Much of NBC's estimated $600 million-$800 million drop in upfront ad sales this year compared with last year might have shifted to ABC and CBS because of the peacock's ratings woes, but in the bigger picture, advertiser spending on broadcast and cable networks is being arrested by a host of factors -- including the steady shift of dollars to the Internet.
It is unclear how much of Procter & Gamble's announced 25% reduction in its upfront TV spending is being shifted to other media, including the Internet. But unless this is just negotiation posturing, P&G is sending a message to television that others will surely follow.
"A 10% drop in demand at the television networks could mean a 40% drop in advertising prices. That is why (advertising rates) are poised to fall off the table, and no one is prepared for it," says analyst Craig Moffett of Bernstein Research, an independent Wall Street firm whose proactive reports often are eye-opening. "No one wants to believe it can happen, but it will."
At issue is how quickly advertisers shift a meaningful portion of their efforts and dollars to target marketing. Changes are more likely to show up in future spot ad markets rather than in the upfront sales process, which is a network-controlled brokered match of supply and demand as advertisers book advance commitments for the upcoming season.
At the risk of oversimplifying these monumental shifts, a quick glance at projected adoption rates and service rollouts paints a dizzying picture of new business models. Here are some first-pass projections on where these converging changes are headed and what is at risk.
All-digital conversion: The number of subscribers to network DVR (head-end based DVR services) and various forms of VOD will increase dramatically since they are virtually synonymous with an all-digital platform. The gradual switch-off of analog during the next four years doesn't take into account the growing number of consumer-driven, place-shifting wireless broadband devices such as PC-based media centers and video game consoles. Magna Global expects 83 million households to be online by 2010, 80 million of which will be broadband, compared with a current 64 million Internet-connected households, 40 million of which are broadband. Head-end-based and set-top box DVR subscribers will top 32 million by decade's end, from 7.4 million today, when the vast majority of cable subscribers (about 66 million) will have access to VOD content, Magna Global projects. Although VOD is available to 72% of cable homes today, only about 20.4 million digital subscribers can access those services.
Broadcasters face the most risk here because they face the challenge of reacclimating their entire business not only to digital but to interactivity. Even cable operators must find a way of translating their brands and value outside the home in order to participate in interactive portability outside of 110 million television households.
VOD-like on-demand business: Although VOD is considered to be more secure for content owners and advertisers, content providers have been cautious about giving away replay rights that would undercut existing businesses.
The falling price of increased compression and storage will make it possible to store 1,500 movies on a $70 hard drive, rising to more than 12,000 by decade's end. By the 2007-08 season, every new broadcast network primetime season could be recorded and never erased from a drive costing less than $60 -- and only $8 by decade's end -- to be endlessly viewed without commercials.
Even now, faster-than-expected growth of multichannel penetration (now 81% of TV households) and the substitution of multichannel subscription TV for over-the-air broadcast will soon push some traditional content providers and distributors of the edge despite prevailing indirect or secondary copyright liability concerns at the heart of the MGM v. Grokster case now pending before the Supreme Court.
Without adequate digital-rights management, media-related companies stand to lose about $160 billion in equity value from unchecked piracy and ad-skipping by 2010. Some prognosticators are betting that the same media players stand to lose as much if they wait out the coming perfect digital storm in the deceptive shelter of the status quo.
Diane Mermigas, The Hollywood Reporter. June 14, 2005
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