Been meaning to share this for a few months now, it’s a paper I wrote on the state of the media industry through the recession with projections for the future. Kinda dense, but interesting if you’re into that sort of thing.
The “great recession” has caused a seismic downturn in the U.S. economy over the past three years. Many firms have shut down or exited the market, unemployment reached a staggering high of 10%, and companies in industries such as real estate and finance will have to possibly alter their entire business model to remain competitive. Yet, there is an industry that has been globally altered and seems to remain off the radar of the collective conscience, the media industry. Between the current recession and the widespread adoption of digital technology, the media industry has been reshaped for the 21st century.
Mediums such as radio, television, film and print have all been forced to quickly adapt to a new digital marketplace or to lose their market share. Consumers have made it clear that they want to receive their news and entertainment in a highly accessible form, whether it is a mobile app on their phone or online through websites such as iTunes (music), Pandora (radio) and Hulu (television). Advertisers have felt the brunt of this shift, as traditional advertising models are less effective in the digital age. With the advent of DVR’s, consumers no longer are forced to watch commercials during their television programs. Netflix and online movie sites have put a dent into brick and mortar stores such as Blockbuster and Hollywood Video. Prices at the movies have gone up and 3D and IMAX have become more marketable to give viewers enough of an experience to make it worth the trip to the theater.
Media executives have been under increased pressure to quickly come up with new business models that can adapt to the shift in technological innovation, while creating valuable content to a consumer. With the popularity of websites such as YouTube, anybody can now distribute their content online to a widespread audience at little to no cost. The days of having to move to New York or Los Angeles to enter a career in entertainment are over in the 21st century. Now a teenager with a camera phone could make the next great viral YouTube video that could land them anything from a record deal to a film role. The process of creating content, distributing the content via online platforms, and finding an audience to consume the content has become globally accessible to anyone on any type of budget. Artists, journalists, and actors do not have to rely solely on the infrastructure created by big studios and corporate conglomerates. Whether its podcasting, reality TV, or blogging local news stories, the everyday person now both creates and consumes the content they produce.
To understand how firms can remain profitable, it is important to look at the business model that they have relied upon up to this point. Barrett Garese, a business development consultant and former talent agent, discusses the scarcity model that Hollywood has used for the past 50+ years in a recent blog post. If you wanted to see a movie prior to the late 90s you had very limited options to choose form. You had to either go to the theater at the date/time it was playing, wait a specified period of time for a physical object to be released to retail (i.e. VHS, Betamax, DVD), or wait for it to come on television to a specified channel at a specified time. In the 2000s, the global accessibility to high speed internet and cable TV forced distributors to narrow the release gaps, and made it easier for consumers to pirate media taking away the opportunity for firms and artists to profit on their own work.
Firms still do maintain an advantage in being able to fund mainstream projects over independent producers working on a shoestring budget. As Garese (2009) states in his article, “…distribution still requires content, and content – at least as we understand current “mainstream” models of content – still requires funding. There’s still a checkmark in the win column for the traditional entertainment companies in this regard, as they’re the entities currently spending a lot of money on mass entertainment. No one else is financing content like media companies, and no one else in the world has the expertise to do so either.”
eNow Founder Edo Segal contributed an article to TechCrunch that also deals with media scarcity, “Media scarcity is dead” he states (Segal 2009). “In the future my son will have a flash drive that he will pay $29 for that will have the capacity to hold all movies and music ever released by a major label, studio or TV/cable network.” With highly accessible forms of technology making it easier to consume media than ever before, the idea of media convergence is brought up to help firms create profit. Segal mentions how Steve Jobs and Apple have been innovators in converging platforms with its iPhone and iPad mobile devices and app’s. According to Segal (2009), “Apple has created a media consumption experience where soon the consumer will not know if he is buying music, a movie or a game. The notion of App is changing. The lines between these different forms of media are quickly blurring and soon will be completely artificial. Already these distinctions are merely fossilized conventions that stem from consumers’ discovery habits. As those evolve, like learning that it is easier to go to Amazon and search to find a product than going to aisle 9 at the store. The coming confusion of the consumption experience where a user won’t care or know if what they are buying is a movie, a game or a music track presents vast opportunity.
One of the ways that media firms have tried to combat pirating and stay relevant is to create app’s that are not easy to duplicate, yet offer the user a satisfying overall experience. An example of this is the Toy Story 3 app recently released in advance of the film. The app includes info on the story and characters, a playable game, advertisements, and paid premium content. News outlets like the New York Times have been early adopters to mobile app development offering their stories the same day that they appear in print and online. The NY Times app has consistently placed in the top 10 of Apple’s top news downloads and there was recently an upgraded version to be read on the iPad which feels akin to holding a real newspaper. If media corporations cannot find ways to maximize their digital revenue streams in addition to traditional outlets, they will not be able to succeed in the new marketplace.
The downfall of the scarcity business model came at a poor time as it was a part of a series of events which would prove to be disruptive for the industry. In 2006, the U.S. began to see widespread adoption of digital technology such as mobile devices, high speed internet, even more affordable computers and social networking. CD sales were already falling since 2001, and magazine and newspaper subscriptions had been trending down for many consecutive quarters. The U.S. entered the beginning of a major recession in late 2007, and consumers began to spend less money with worry for job security, real estate and a plunging stock market. With less spending, advertisers began to buy less space in mediums such as radio, television, and print. As these mediums were losing revenue from advertisers as well as losing revenue to digital forms of distribution (legal and illegal), they were forced to lay off employees, consolidate departments, and reduce costs.
The slowdown in advertising began in earnest during the final quarter of 2007, when ad spending grew an anemic 0.7 percent – its slowest pace in five years, according to Bernstein Research (Goode, 2010). This decline in advertising dollars was crippling to the newspaper industry as it had already been dealing with competition from online news sources, dwindling subscriber numbers and low ad rates. The New York Times and the Washington Post toyed with the idea to create a “pay wall” where consumers would have to subscribe for a monthly fee to access articles online. The Post soon realized that this strategy would not meet their needs as users could find information elsewhere too readily, especially with classifieds where sites like Craig’s List and Monster.com were biting into their market share. On the other hand a “pay wall” has been successful for a major business paper, The Wall Street Journal. News Corp CEO Rupert Murdoch has said that offering a few free articles daily or the first paragraph or two for free and then asking for a subscription code has been a profitable formula for the Wall Street Journal. It’s important to keep in mind that readers of the paper are generally more upscale and willing to pay for that information where as a casual reader may not. This goes in hand with one of the ten principles of economics which is to create an incentive. With special content and a taste of the article to hook the reader, the Journal found that its target demographic was indeed signing up for the service and finding value in paying for the WSJ content online which made the effort worthwhile.
Major media consolidations began to happen over the last two years in a variety of mediums to cut costs as well. In radio, Sirius and XM merged creating a monopoly of the satellite radio market. As part of the terms of the merger, the subscription price must remain constant for a specified period of time, but after that expires, it can be assumed that they will be hiked and leave consumers unhappy. In television, the Comcast/NBC Universal merger is one of note. With these two mega media companies converging, Comcast is in a delicate situation as they have an obligation to be fair to all of the major networks (CBS, ABC, NBC, FOX) as a cable provider. Now they have a vested interest in one of these networks being more successful than the others. This conflict of interest could create a multitude of problems and it is interesting that the government was quick to approve the merger before fully considering how the market could be affected. The deal has just only recently hit a roadblock with the FCC reviewing the merger details again.
The FCC is a federal regulating commission that controls the media industry. Most media corporations despise when the FCC interferes with its practices, as they generally make a ruling that will adversely affect the company in question from reaching its maximum profit making potential. One could say that this type of government regulation is unnecessary in a free market, but the FCC deals with many issues that directly affect consumers such as safety regulations, indecency guidelines, and educating the general public about telecommunications. The Public Knowledge group has come out against the Comcast/NBC merger stating that, “Comcast’s ability to control users’ access to content means that it can unfairly discriminate against non-NBCU content,” PK warns (Lasar, 2010), “either by refusing to connect users to the online video content of established competitors, or, more likely, simply de-prioritizing or throttling the bandwidth available to these competitors versus NBCU content.”
With these mergers, we are seeing the formation of a leaner industry with a few major corporate conglomerates controlling the vast majority of content production. In the music industry, there are only four major record label distributors. In film, studios such as MGM and Miramax have gone out of business, and in print, hundreds of local newspapers have disappeared along with entire departments at papers and magazines. The job market in the industry has recently been difficult as well. Clear Channel, which has a major radio and advertising business, cut 8% of its global staff in 2009. Many companies have experienced hiring freezes and a lot of these jobs will not come back.
As tough as times have been over the past few years, there are also signs of optimism for the future of the industry. When consumer spending returns to a more normal state, it can be expected that there will be more entertainment and media purchases helping to boost the economy of the industry. Social media sites like Twitter and Facebook have given advertisers the ability to narrow their efforts to certain demographics and reach them more effectively. This will cause online ad spending to continue to grow and will help fund more online media platforms. It’s interesting to note that the major firms in the industry are coming together and working on projects that will help create a foundation for the future. Sony Music, Warner Music Group, and Universal Music have all teamed up to create a site called Vevo. Vevo offers music videos and content from artists on its website and through a partnership with YouTube, comparable to a digital version of MTV (Lowry, 2009). NBC Universal, ABC, and FOX have teamed up in the television industry to create the widely successful Hulu.com. Hulu offers a large collection of free movies and TV shows, usually posted on the site just hours after they originally air. These types of partnerships have helped create an advertiser driven and even subscriber based business model to offer consumers a legal way to obtain media online. The firms seem to be realizing that they have more to benefit from cooperating with each other in trade, than to be competitive and further drive up costs and lose resources trying to win against each other.
Coming out of the recession, the media industry looks to show signs of a turnaround and even show a slow growth over the next few years. Recently, analysts have predicted that the media industry will show growth again in 2013 and advertiser dollars being spent are on the rebound as the world is slowly recovering from the U.S. recession (Satariano, 2010). The rise in digital sales has helped to offset the decline in physical media sales and looks to continue to do so for the near future. In a global outlook of the Entertainment and Media Industry by Price Waterhouse Coopers, the industry was expected to experience growth at a 3.8% over the next four years (Goode, 2010). Another interesting discovery by PwC was that internet advertising will overtake newspaper advertising by 2014 as the second largest advertising medium in the country behind television. Not including mobile, online ads are set to expand to $34.4 billion in 2014 from $24.2 billion in 2009 (Goode, 2010).
One media sector that shows tremendous potential for growth is the video game sector. While the rest of the entertainment industry was losing revenue, the video game industry was almost recession proof (Kalning, 2008). The industry was experiencing 10-13% growth up until mid-2009 when it finally saw a small decrease (Miguel, 2009), most likely attributed to decreased revenue for parent companies and lagging overall retail sales. One of the reasons the video game industry did perform so well is because consumers still found value in buying games and console systems when they were cutting spending on other entertainment options. Video games provide longer and more interactive entertainment content than a film or book, while also adding a replay factor. The movie industry held its own during the recession, as people flocked to the theater to get a few hours of escape from real life. Online ticket retailers like Fandango and MovieTickets.com experienced major growth for first quarter of 2009 with lighter comedic films faring the best (Sutter, 2009). This goes to show that if a consumer finds enough value in a product, it can weather even the toughest recession.
To survive in the post-recession landscape, media executives must reevaluate their products and make sure that it is not something that would be easy to copy in a digital format. They must focus on creating content that gives the user an interactive experience while also maintaining brand identity. An example of this could be an iPhone app where you can download an artist’s new music, buy their concert tickets, play games involving them and order their merchandise. This would give a unique experience to each person who uses the app, while also creating multiple new revenue streams for the artist. The cost for a firm to sell apps would be minimal, as beyond the initial development cost it would just require periodic updates. This model would give the firm an even greater profit margin that it could use to research and develop new and upcoming technologies. Coming out of the recession and looking to the future of the industry, executives must look at digital media not as a replacement to traditional media, but as a complement to it. There is still a demand in the market for traditional media platforms, and old habits die hard for the baby boomers that comprise the largest age demographic in the country. It is evident that there is still plenty of growth left in traditional media, but firms must look outside of the traditional sphere to stay competitive in the market and maximize their potential revenue streams.
REFERENCES
Lasar, M. (2010, June 23). Comcast/NBC merger: should FCC require net neutrality? Retrieved from http://arstechnica.com/tech-policy/news/2010/06/new-condition-asked-for-comcastnbcu-merger-net-neutrality.ars
Segal, E. (2009, October 31). For the Future of the Media Industry, Look in the App Store. TechCrunch. Retrieved from http://techcrunch.com/2009/10/31/for-the-future-of-the-media-industry-look-in-the-app-store/
Fine, J. (2008, December 4). Media Predictions for 2009. Bloomberg BusinessWeek. Retrieved from http://www.businessweek.com/magazine/content/08_50/b4112082264180.htm
Garese, B. (2009, August). Scarcity, Experience, and a New Seat at an Old Table. Retrieved from http://www.barrettgarese.com/post/141270170/scarcity-experience-and-a-new-seat-at-an-old-table
Goode, L. (2010, June 15). Internet Is Set to Overtake Newspapers in Ad Revenue. Wall Street Journal. Retrieved from http://blogs.wsj.com/digits/2010/06/15/internet-is-set-to-overtake-newspapers-in-ad-revenue/
Kalning, K. (2008, March 7). Is the Video Game Industry Recession-Proof? Retrieved from http://www.msnbc.msn.com/id/23472166/
Miguel, R. (2009, March 20). Video Game Industry’s Recession Resistance Persists. Retrieved from http://www.ecommercetimes.com/story/66575.html?wlc=1278215261
Lowry, T. (2009, December 6). Vevo Aims to Help Music Companies Cash in on Vide. Bloomberg BusinessWeek. Retrieved from http://www.businessweek.com/technology/content/dec2009/tc2009126_307441.htm
Satariano, A. (2010, June 15). Music Sales to Rise After ‘Turning Point’ in 2013, Report Says. Bloomberg BusinessWeek. Retrieved from http://www.businessweek.com/news/2010-06-15/music-sales-to-rise-after-turning-point-in-2013-report-says.html
Sutter, J. (2009, February 24). Will the Recession Change Movies? CNN. Retrieved from http://www.cnn.com/2009/SHOWBIZ/Movies/02/24/economy.movies/index.html
Bruno, A. (2010, January 7). 10 Trends to Watch: Digital Media Outlook for 2010. Billboard. Retrieved from http://www.billboard.biz/bbbiz/content_display/industry/e3i3a9920d504eb965442e77b6596403a13
