Reprint Update of Whitepaper
Over the past few years, business headlines have been increasingly dominated by U.S. Entertainment, Media, and Communications (EMC) companies. Publications have narrated the blow by blow accounts of mergers, alliances, and strategic initiatives underway to own a stretch along the Information Superhighway.
Nobody knows how this market will shake out. As the industry joke goes... "anyone who claims to see the future of EMC is suffering from a case of virtual reality." While convergence is inevitable, the outcome of convergence has yet to be truly defined.
Most agree that EMC will be a growth category for the next several decades. The major players are investing billions to compete in tomorrow's market. No one wants to be what Ted Turner likes to call "road kill" on the Information Superhighway
As part of a continuing effort to monitor our EMC clients and their businesses, Price Waterhouse conducted two surveys involving nearly 100 senior executives from the leading entertainment, media and communications companies. What we found is that while there tremendous ambiguity in both the direction and pace of change, there is also a strong consensus on the major trends and challenges that will shape the future. Executives interviewed pointed to five market forces that impact strategic direction and investment in technology and transformation:
Taking Advantage of Rapid Technological Evolution
Understanding the Consumer in a Fractionalized Marketplace
Moving Rapidly into Global Markets
Successfully Navigating Worldwide Regulation
Rationalizing Alliances and Consolidations - Strategic Advantage or Risk?
This document explores in greater detail the trends that were identified by the survey participants.
Taking Advantage of Rapid Technology Evolution
The most clearly and commonly identified strategic imperative is to take advantage of opportunity brought about by rapidly changing technology. The executives consistently stressed that digital technology is changing the way that we work and live and, while technology is usually ahead of market acceptance, companies must be prepared to capitalize on these new technologies or risk being left behind.
However, which technology to invest in - and how to implement it - were the most puzzling challenge facing our respondents. Their answers were about as inconsistent as the widely divergent technology platforms being created by the companies interviewed in cable, satellite and telecommunications. Broadcasting also faced the burial of HDTV which faltered in an industry lacking agreement on design specifications, performance standards and format compatibility.
Certainly, the clear trend in all of the technology developments will be the drive towards digitization or the compression of millions of bits of information. Further, our surveys surfaced predictions that digital compression, distributed via satellite, cellular or fiber, will be commonplace technology in three to five years - far more rapid than many industry analysts have predicted.
However, the executives also consistently identified an important caveat to the technological leaps taking place - the customer is paying for content, not technology. In the words of one executive, “too much attention has been focused on distribution, not enough on content. The consumer doesn’t give a damn if the information comes by satellite or fiber. Technology opens up opportunities for new users.” This said, many of the executives leapfrogged to discussing the ability of their companies to store and deliver a wealth of information packaged in a variety of appealing services from health monitoring to banking, music video-on-demand to ordering a pizza, home shopping to accessing the Library of Congress, and many more.
While executives on both sides of the distribution and content divide boast of an array of new services, there are only a few that hold the promise of great consumer demand and the economic ability to fill the draining coffers of investing companies. Executives consistently pointed to four services that will probably not surprise you:
Video-on-Demand
Early trials by Viacom, Time Warner, Bell Atlantic and Discovery Communications (Your Choice TV) hold tremendous promise plus tremendous profit. The 50/50 split of the gross cost of a recently released movie (roughly $4 in many tests) between the distributor and the content provider overruns the traditional theater, video and broadcast distribution economics. Distributors are striking agressive deals to build the needed infrastructure and content inventory to make video-on-demand a commercial reality and boost margins.
Home Shopping
While many retailers need to stay focused on the basics of inventory control and distribution, many of the executives view on-line shopping as a viable distribution outlet and are embarking on the effort in one form or another. Furthermore, interactive home shopping will begin in the next three years by simply moving the concepts of catalogs and personal shoppers to on-line products. As one executive told us, "if Diane Von Fustenburg can sell $2 million dollars worth of clothes in two hours on QVC, you can to."
Interactive Games
Clearly, games are the hottest product in the electronics category. Many of the content executives viewed games as a natural extension of their movie production, much the same way soundtracks are today. Professional sports entertainment has oped up a new area of interactivity where in New York, you have the ability to play "John' Madden's NFL Football" with your brother on-line in Ft. Lauderdale will speed the advancement of games in older consumer age groups.
On-Line "Bulletin Boards"
Internet was never expected to become the social phenomenon it has become. However, in addition to such traditional companies as America On-Line and Prodigy, such companies as Nickelodeon, Honda, CNN and AT&T are branding a form of the on-line "bulletin board." Executives did admit that while profits will not be tremendous, this is a natural extension of their core products and an excellent vehicle for “chatting” with customers.
New technologies will also change the way that providers perform their existing business. As one executive stated “technology creates opportunities for everyone in the food chain -- such as by-passing intermediaries.” For example, record stores or traditional music companies who are simply packagers and distributors of music could be in peril. Will consumers continue to flock to music stores to purchase the latest release from their favorite artist or will they simply download it from their digital network or make a digital recording (DAT or mini-disc) of a digital radio transmission after being able to preview it right in their home? As one music executive put it “we produce a huge number of compact discs in this country, but technology makes this potentially obsolete. This could spell doom for us and our retailers.”
A similar situation can be seen in the publishing industry. Observed one executive,”with the internet, people can publish papers [online], get a peer review and never publish [in hardcopy]. Electronic classified ads can by-pass traditional newspapers. Providers of information must decide whether to compete with their traditional customers. The winners will be those that adapt and add value.”
The executives were quick to predict that these four services will be the central focus of their companies at deference to development of any other for probably the next decade. Simply, demand and profit will drive these strategies. While these executives clearly recognize that technology is changing and that their organizations must be prepared to react to these changes many questions remain:
What technologies will ultimately be successful?
How will information be delivered?
How will it be stored?
What will be charged for it?
How can we leverage assets across storage and delivery platforms?
Understanding Consumers in a Fractionalized Marketplace
While the changes taking place in EMC will likely be more evolutionary than revolutionary, there are a number of definite shifts taking place in consumer behavior and demand. Executives point out that their own biggest opportunity and threat is the fractionalization of demand and the fragmentation of media. As one executive stated “The issue in this business is fragmentation of viewer time. How do you get a critical mass of consumers?” Consumers will no longer be viewing (or participating in) the same entertainment en mass, with probably the exception of live events for news, sports and entertainment. The number of choices will increase dramatically and consumers will each choose entertainment in tune with their specific interests. Similar to what happened with magazines in the last decade, the proliferation of channels will result in more personalized programming, on-demand programming, and targeted programming.
What does this mean for advertising and the programming that depends on advertising dollars? According to the executives with whom we spoke advertising is not dead - however, it will change dramatically. Mass marketing will be replaced by more targeted marketing where advertisers will be able to tailor their messages to specific audiences. One executive went so far as to predict that there won’t be 500 channels - there will an infinite number so branded identities will be more important.
Executives are quick to point out that this development threatens the dominance of the networks which are mass-market advertisers, and also threatens the current mainstay of broadcast advertising - the 30 second spot. While it is true that broadcaster are attempting to narrowcast the medium through regional and sectional ad versioning, one executive we interviewed commented that the networks are under such great pressure that “at least one major broadcast network might move out of programming entirely and just sell time on its license.” The onset of this phenomenon is already apparent today. Coca Cola, which has traditionally used a mass-market approach, developed over two dozen commercials for its newest campaign - each with a different style for a different network. Another executive pointed out that the Fort Lauderdale Sentinal is actually 100 newspapers -- zoned editions, targeted editions, Hispanic editions, golf editions, and more. The paper is repackaging news and information as the customer wants it.
Consistent with the shift to more targeted programming and customized advertising the executives identified four trends they see emerging.
Convergence of Advertising and Programming
The distinction between programming and advertising will blur. Product content will include more “infotainment” and “edutainment” variant offerings and smart advertisers will look for programs with a longer shelf life. Some advertising executives said they would not be surprised to see an increase in other program sponsorship trends such as programs specifically tailored to meet sponsor objectives (product positioning, demographics), the pre-scheduling of advertising time by producers, and up-front funding of program development projects by advertisers. Advertisers will also increasingly explore the use of infomercials. For instance, the Ford ad could tell a viewer at end of an ad if he is interested to set his VCR to tape a half-hour infomercial at 3:30 am on channel 402 for a pickup, 403 for a sports car, and so on.
Interactive Advertising
Passive viewing of ad messages may be replaced in some measure by active viewer control over advertising. This means that viewers will only watch the advertising in which they are interested and will often seek it out themselves. This presents a number of new opportunities for advertisers. For instance, a Ford ad could instruct the viewer to press 1 for a convertible ad, 2 for a sport utility, and so on with the viewer actually making the ad choice. This will increase the effectiveness of advertising but will require advertisers to persuade consumers to view the message and then make it an interesting experience to do so.
Increasing Precision in Database Marketing
Consumer databases will grow even more robust as interactive media will supply advertisers with more information on individual viewing and buying habits. Advertisers are looking to fine tune the marketing information “feedback loop” to correlate and even predict the impact of advertising on at the household level. "I will be able to use point-of-sale (POS) to measure marketing effectiveness on an individual basis" extolled one advertising executive.
Expanded Use of Promotion
Promotion will become a more integral component in advertising campaigns. Advertisers will more aggressively seek out captive audiences through targeted in-store promotion and “space based” advertising, or live mass broadcast sports events and rock concerts. By plastering one's name all over the arena one can gain exposure both to the attendees and the television viewing audience.
Several executives focused on the fact that customer expectations are also changing. People have less patience - they want things immediately. At the same time, they are more willing to pay for things which were free in the past. This presents opportunity for providers who are able to give people the ability to obtain the information or entertainment they want when they want it - and how they want it.
Moving Rapidly into Global Markets
Whether you say expansion globale (French), kokusai teki na kakudai (Japanese), expancion mundial (Spanish), sarvabhaumik vistaran (Hindi) or the English version - global expansion - movement into international markets is among the most important strategies for the executives interviewed. Already nearly 40% of Time Warner Entertainment's revenues come from overseas as does 40% of Dow Jones’s, 15% of McGraw-Hill’s, and 14% of AT&T’s. What these firms and many others like them have found are markets with consumers hungry for Western culture and content. Conversely, major international companies such as British Telecom and Fox are each establishing a strong presence in the United States and other uncharted countries.
The executives we spoke with consistently listed international expansion as one of their greatest opportunities and key corporate goals. Geographic regions such as Latin America, East and Central Europe, China, India and other Asia markets were identified as their most important targets. However, the executives also listed their greatest challenges in moving into new, foreign markets as the following:
Lack of Technological Standards
Cultural Differences
Stringent Regulation
The executives agreed that distribution systems and digital compression technology will vary around the world. They see satellite and other wireless technology being more prevalent overseas as many countries have not already made the huge investment in wired technology that has been made in the United States over the past five decades. The executives see this as an obstacle to pushing abroad as it will result in different technological standards in different countries. One executive told us that "this means that I can't send my knowledge abroad with my capital - I have to learn all over again." This will make it more difficult for their companies to simply market one product around the world.
Cultural differences will also present a significant challenge in expanding abroad in terms of consumer goods packaging, program content and advertising. While American content is in great demand, there are many nuances to providing programming in different cultures and this will only become more so as the degree of targeting increases. It is not as simple as just shipping a product for the American market to another country. As the amount of choice increases this will become even more so. One executive referred to the now immortalized Chevrolet blunder. At a time when American cars were in great demand in Mexico, Chevrolet marketed its Nova, a popular seller in the United States, in Mexico without considering the fact that Nova means "no go" in Spanish. Needless to say, the car was not a big seller.
Regulation was also consistently mentioned by these executives as a significant obstacle to international development. We will explore this in greater detail in the next section.
Successfully Navigating Worldwide Regulation
At the same time that companies are trying to sort out the direction of the information superhighway and their role in it, so are governments. The direction of regulation and legislation in governments around the world and particularly in the U.S., will be a key issue as either an opportunity or barrier to change. In the eyes of the executives, regulation and legislation currently pose a significant obstacle to the development of the superhighway infrastructure in every major region of the world.
While the executives surveyed are focused on the stringent communications regulations in each country or market, they are most concerned with the situation in the U.S. The concerns they cite range from obstacles to the introduction of new business lines to the “decimation” of cable revenue flow - a giant step backwards by the U.S. , which according to one executive had been historically viewed as a "trend setter" in the modern day regulation of international communications.
Regulating Fuzzy Grey Lines
Although sweeping telecommunication changes are pending today, with limited exceptions, cable and phone companies are restricted from entering each others businesses. The communications executives were quick to highlight that due to the different eras and circumstances under which each industry arose, they are regulated very differently. This means that two companies trying to provide an identical service face completely different obstacles. Furthermore, for a cable company and a telco to merge would require the approval of the Justice Department, FTC, FCC, state public utility commission and the council of every city in which the cable company provides service. While they expect that the U.S. government will remove many of the obstacles to cross-industry competition, executives remain unsure of how far-reaching the change will be, what restrictions will remain, and what the time frame for change will be. In the words of one executive "our government is anti-size but size is needed to compete in this market. Hopefully this will change."
Multiple Courts of Last Resort
The outlook is complicated by the fact that regulations are being addressed in multiple arenas. Congress is trying to develop a regulatory environment where barriers to the development of the information highway will be removed but competition and universal access which provides that everyone will have access to the information highway are ensured. At the same time, the development of the highway is being affected by regulatory bodies such as the Federal Communication Commission (i.e. mandating a 15% reduction in cable TV rates in May 1994) and legislation being debated in the court system. One executive said the restrictions on the most rapidly developing country will put "the Information Superhighway at a speed limit of 5 mph."
Ensuring an Level Playing Field
In the U.S., some executives were also concerned about a complete relaxation of regulation. As one executive put it “remember that the smallest Bell operating company is larger than the entire newspaper industry. Is it good public policy for someone to own the roads and the trucks?” Executives, especially content providers, felt that the government must ensure universal access to whatever distribution system eventually arises. This issue was particularly heartfelt given that the recent cable regulations have made it significantly more difficult for new providers to gain access to distribution.
Protecting Intellectual Property
Another concern cited by the executives was whether the government would continue to protect intellectual property rights. "With digital, it’s terrifying how easily trademarks can be ripped off. This is a legislative issue - what is software and what does it mean?” remarked one executive. Lack of uniformity in the rules across platforms and geographic boundaries further complicates the issue. The executives want the government to take steps to ensure that copyrights and trademarks are protected and are disturbed by indications that the government may not aggressively seek to do so.
Rationalizing Alliances and Consolidations - Strategic Advantage or Risk?
While much remains ambiguous regarding the future of this industry one thing is clear to the executives with whom we spoke - the companies that survive to become major players in the field will be large. Almost every company of note has entered or is considering entering into strategic partnerships and/or acquiring other companies in the industry. The executives listed several including BT-MCI, Paramount-Viacom, US West-Time Warner, and NYNEX-Viacom and the 3DO Company, a video game maker, which is a joint venture of Matsushita, AT&T, Time Warner, and Electronic Arts.
A senior executive of a major telecommunications company stated that “his firm thinks as much about who their partner is as what services to offer.” The executives surveyed, the trend toward industry consolidation will continue until "in the end, there will be four to six huge conglomerates, two or three in the U.S. and several offshore.” They believe that their companies must make moves now in order to ensure that they are a player in the future and that while not all the moves will pan out "the worst thing is to be the deer in the headlights, not acting." In the executives' eyes there are three key factors pushing them to consolidate:
High Cost to Compete
Enormous capital requirements to compete will continue to grow. Content production, delivery and promotion need to introduce new technology is so expensive that even the largest of companies cannot afford to develop and leverage them on their own. Cable companies have an advantage over the telcos in delivering products to the home due to the greater bandwidth of their coaxial cable. However, both cable companies and telcos need to lay fiber optics at least to the neighborhood. The cost projections for upgrading the nation's wiring to a fiber-coaxial network totals in the tens of billions of dollars. In the words of one respondent, “compare this figure with the cable industry's annual revenues of $22 billion and it is hard to see how they will be able to do it on their own. They will need to tap the resources and the expertise of the telcos.”
Strategic Positioning: Content vs Distribution
While the debate between content and distribution favors content, many companies are forming combinations to participate in both parts of the market. They are unsure of how the industry will play out and are hedging their bets by being on both sides of the equation. Turner, for example, who owns a number of distribution outlets, has made a number of acquisitions in recent years including paying over $100 million last year to acquire Castle Rock Entertainment. Similarly, the proposed merger between Blockbuster and Viacom, the failed merger between CBS and QVC, and Disney's interest in acquiring one of the major networks represent additional attempts to unite content providers and distributors. Some executives also claimed that content is more valuable if the content provider also owns the means of distribution, though this was a point of contention.
New Rules of the Game
As the pace of convergence increases and the boundaries between what historically have been separate industries blur or disappear, companies are increasingly realizing that they lack many of the critical skills necessary to compete. Alliances and acquisitions provide a cost-effective method in which to gain those skills. As one cable executive said “cable needs to consolidate, and will do so with the phone companies. Different skills are needed -- programming and telephony.” Some executives cautioned that the inherent risks involved in alliances and mergers should not be underestimated. Having two or more corporations agree upon a common vision of the future, and successfully overcome differences in corporate culture, operational practices and underlying business economics is difficult, if not impossible to orchestrate. Despite the downside risks, companies are forging ahead, 1993, for example, TCI says that it “was working with several communications and multinational companies, including Time Warner, Turner, Sega, US West, AT&T, Sumitomo, Dow Jones, Cox, Continental, and Comcast. They continue their commitment to strategic alliances as the most effective means of expanding TCI’s access to skills, markets, technologies, and capital.”
While the executives surveyed see the winners as large combinations, they do not agree on who the winners will be. In the words of one executive, “while it’s impossible to pick who the winners will be, we can pick who will be around - The 500 pound gorilla for example - AT&T.” Another executive said that he believes the survivors will be “Time-Warner, AT&T, most RBOCs (with partners), probably IBM, plus a couple others.” Regardless of the eventual winners, nearly all of the executives identified the trend toward consolidation in the industry and stated their own interest in identifying and pursuing alliances with other firms. They all arrived at the conclusion of one executive who likened the future of companies in the industry to “Kieretsu where there will be major strategic alliances each having one or more core partners.”
The Challenge of Change
For companies, these changes outlined above provide a number of challenges and critical success factors. In order to be successful in this environment, companies must:
Obtain access to the home and ultimate consumer
The ability to achieve this will depend upon:
Regulators ensuring open access for content creators,
the delivery side becoming more powerful like a retailer of information products
and companies which may have not have in the past, developing an expertise in maintain ing a relationship with the customer.
Stay 'ahead of the curve' strategically
Companies must understand what business they are really in and how to protect their customer franchise as they move from traditional to on-line delivery. They must decide whether to get on the bleeding or leading edge with its inherent pitfalls or wait and risk losing the market. They must be able to produce product improvements more often and faster than ever before as the market itself is continually reinventing itself
Stay current with technology and processes
Companies must make sure that their infrastructure is current with technology advances so that they can offer the best possible service to the customer
Organize to meet the challenges and capture the opportunity
In response to change, companies must continually assess the operational impact on the organization and determine how to best redeploy, leverage or acquire resources needed to get the job done
Understand how to market and package in the rapidly changing new environment
Companies must identify and reach markets that are large enough to make a profit. They must understand how to establish brand identity and brand loyalty in interactive mode and they must more accurately target messages.
Achieve the critical mass to be a player profitably, globally
Companies must find the right alliances to compete successfully and understand how to do business in foreign markets. They must be willing to finance global expansion and develop a network of advisers who know the intricacies of foreign markets and cultures