Head of Consumer Electronics & Digital Entertainment Practice
Just how much has digital changed the music industry?
The music sector, and especially recorded music sales, have been suffering the impact of piracy since the turn of the century. And it is within this crisis mode that the industry has gradually rebuilt itself around segments like publishing, concerts and new consumption, business and pricing models (based on downloading and streaming), and now through related services available equally and simultaneously on connected platforms, both fixed and mobile. If they have proven their ability to attract a large, if not massive audience, and are sketching out the future shape of the industry, the impact of these changes has not yet been enough to erase the accumulated losses of the past thirteen years.
Momentum driven by digital music and the proliferation of channels
The global recorded music market remains stagnant (+0.2%), inching up from 16.456 billion USD in 2011 to 16.481 billion USD in 2012.
Hard copy sales continue their slow decline, generating only 57% of the sector’s revenue in 2014, compared to 74% in 2008. IDATE forecasts that in 2014 this figure will drop below 50%. Digital music gained 13 points between 2008 and 2012, generating 35% of the industry’s total income in 2012. Revenue earned from synchronisation (i.e. royalties on music used in films, TV programmes and games), and from performance and broadcasting rights accounted for 2% and 6% of industry revenue, respectively, in 2012.
Digital music generated a total 5.8 billion USD in 2012. Worldwide, the bulk of this revenue comes from music downloads (72%), followed by unlimited subscriptions (13%), mobile purchases (8%) and streaming (7%).
Switching to a network-centric approach
So the music industry is reinventing itself around new business models and consumer behaviour driven to a large degree by what goes viral, and the sheer scale of the popular sites and platforms that users spend time on, i.e. app stores and social networking sites.
• The mobile phone is becoming a central device for consuming music products (albums, videos, information on the musicians, concert dates, etc.), both when on the go and at home, listened to through ear buds or nestled in a sound dock. A host of music-related applications have been rolled out, such as Shazam, Discovr and MusicWatch. All aim to enhance the user experience for music lovers, allowing them to discover and listen to new artists (Music Beat), find concert dates (Bandsintown) or get the latest news on their favourite bands (Songkick).
• The “socialisation” of music, and the need for artists to build a community around themselves are both phenomena born of the proliferation of social media and the massive success of smartphones. This creates a greater proximity between artists and their fans, which has also proven key in keeping fans loyal. The second effect is that, thanks to social networking sites, fans communicate more than ever before about the artists they like and their favourite songs. The ability of artists, and the companies responsible for promoting them, to make something go viral has become the key to the kingdom. Video is another key ingredient in the socialisation process: YouTube, Dailymotion and Vevo are crucial parts of both users’ discovery of music, and record labels’ strategies.
• Artists have become brands that are deployed, and developed on several media. They sell themselves, or are called on to sell themselves, well beyond just their music. Their image is becoming at least as important as the music itself, and a main selling point for their products. They need to create a community around themselves, nourish it, and help convert that into sales. By the same token, massive community support for a new artist can kick-start a career, and force a record label to reconsider its marketing strategy.
Florence Le Borgne
Head of the TV & Digital content Practice, IDATE.
Electronic distribution poised to become the mainstay
More and more content is being distributed electronically. If music and video are no doubt the two sectors where digital consumption is the most visible, this phenomenon has pervaded the entire content sector. Video games top the ranks of content that has moved most massively to the Internet and electronic distribution, followed by music, video and, well behind them, books.
In 2013, an estimated 51.4% of video game market revenue was generated by electronic sales – i.e. on smartphones, computers, home consoles and laptops connected to the Web – and by online gaming, which includes item selling, subscriptions and commissions on exchange operations. This figure is forecast to have risen to 68.6% by 2017.
In the recorded music sector, electronic sales are expected to account for 38.4% of total sales in 2013 while, over in the video sector, electronic sales and rentals are expected to represent 33.8% of total sales last year. We predict these figures will have increased to 53.6% and 52.2%, respectively, by 2017.
The book sector, meanwhile, has only recently started making the transition to electronic formats. In Europe, for instance, e-book sales will likely account for only 4.5% of total sales in 2013. But the swift rise of tablet penetration rates in households, which of course makes reading electronic books easy, means that e-books could account for as much as 21% of total book sales in Europe in 2017.
The rise of digital starting to offset the decline of the hard copy
Even though digital is widely associated with the destruction of revenue – the music market lost 40% of its revenue between 1999 and 2012, and the video market lost 13% between 2006 and 2012, after having increased by a factor of 3.8 between 2000 and 2006 – we are seeing a growing number of signs that the markets are becoming more stable.
After hitting a record low in 2010, the recorded music market enjoyed a slight recovery worldwide in 2011 and 2012, which will likely carry on through 2013. This has been due in part to a slower rate of decrease in hard copy sales, and to a steadier rate of increase in revenue from digital sales – including downloads, subscriptions, and ad revenue on music sites.
We are also seeing encouraging signs in the video market. The US market has been reporting growth for two years straight (+0.2% in 2012 and +0.7% in 2013), thanks to a steady rise in permanent download sales (+47.1% in 2013), which topped the 1 billion USD mark for the first time last year. The UK market is enjoying the same momentum, reporting 0.5% growth in 2013, thanks to a very healthy increase in digital sales (+40.2%) and a 10% rise in spending on Blu-ray.
The book market in France, where e-books accounted for only 4.4% of sales in 2013, is starting to lose ground (-1.2% in 2012 and -1.3% in 2013), whereas Britain’s book market continues to grow – by 4.9% and 2.5%, respectively, during those two years – despite a decline in printed books sales: -4.7% in 2012 and -5.5% in 2013. The fact that the UK’s e-book and audiobook market kicked off earlier than it did in France, has meant both more readers who have adopted these formats, and a high rate of digitisation for the works themselves (27.5% in 2013). The rise in e-book sales is thus offsetting ailing print edition sales.
Although it is still too early to conclude that digital will open up new growth avenues for the content market, these positive signs in a globally dismal economy do offer some rays of hope.
Deputy Managing Director
Director of TV & Digital Content Business Unit
Like with cloud computing that moves computing power and certain applications to remote servers, the post-production industry is also seeing a growing number of cloud-based solutions coming onto the market.
This trend is a response to the growing complexity of the TV value chain. The production of programmes on the one hand, and their distribution on the other, once represented two sequential processes. But now that video on demand – and the distribution of video programmes on the Web in general – are flourishing, distribution strategies can now retroact on content to produce different versions that are better adapted to a given platform, device or target audience.
Media Asset Management: a key link in the chain
This interaction between production and distribution has resulted in the emergence of media asset management systems that consist of storing, archiving, cataloguing, annotating and retrieving programmes for delivery over multiple networks, of inserting targeted ads, and indexing for search engines and social networking sites. Video solutions providers today need to be able to supply producers with centralised and shared management solutions for their content, where the post-production stage interfaces directly with the process of preparing programmes for distribution.
At the same time, technical industries are suffering from the ever accelerated rate of technological innovation which, although improving the performance of their solutions, also require constant expenditures, and give an advantage to new entrants who acquire the latest technologies available, while the competition is still trying to amortise the last round of investments in hardware. Post-production customers are also under tremendous pressure to lower programming costs, due to increased competition in the TV sector which is operating in a climate of economic uncertainty. In addition to centralising the services, a cloud-centric approach allows post-production companies to pool their equipment and to have variable costs, exchanging investments in hardware and licences for computer or application time.
Cloud-based post-production solutions offer different levels of service, ranging from remote storage to the use of editing applications (via lower quality rendering that can be accessed on an ordinary desktop computer) and, possibly down the line, additional functions like indexing. These solutions offer several advantages:
• costs correlate directly to actual use;
• workflow is generally optimised thanks to the use of a single storage location;
• all of the parties involved have access to the programme in production, regardless of their location, and service providers have access to the latest technological developments.
But there are risks involved as well:
• the content’s security;
• the need for a telecommunications network (between the service provider and the cloud service, and on the service provider’s premises) with a guaranteed level of quality;
• lack of compatibility between the different cloud solutions.
Integrating key functions in the cloud
We are seeing a growing number of post-production solutions, being marketed by companies like Grass Valley, Adobe, Aframe, Sony and Avid. The solution being sold Avid is an ambitious one, offering a service platform in the cloud that combines all of the essential functions of programme production and management. The platform is intended to be employed not only with Avid editing and post-production solutions, but also solutions that help customers monetise their content (producing different versions of programmes, integration of Consumer Analytics) and those that enable the creation and management of metadata. The company also has plans to create a marketplace. Not all of the applications hosted on this open platform will be developed by Avid, as some could be supplied by partner companies. This approach is nevertheless an expression of Avid’s desire to build on its core business, i.e. post-production solutions, to expand into content distribution. In doing so, it hopes not only to generate new revenue steams, but also and above all, to secure the loyalty of its customers who, once they have embraced the platform, will have no need to switch to another provider.
The cloud-based service platform according to AVID
Source: Avid: Avid Everywhere - A Vision for the Future of the Media Industry
Fewer barriers to entry
The development of cloud-based solutions, which are still in their infancy, indeed appears to be in line with customers’ needs for solutions that are both more centralised and more collaborative. It is also an expression of the emergence of media asset management as a key stage in programme production and distribution. Lastly, it is a reflection of the need of technical industries grappling with a tough economic equation to seek out complementary business opportunities along the technical video chain. But these solutions also represent a threat to existing service providers: the cloud lowers the barriers to entry into the post-production market, and so ushers in more competition, based not on the financial ability to acquire the necessary hardware and licences, but rather on creative excellence.
Deputy Managing Director
Director of TV & Digital Content Business Unit
Three recent deals are reshaping the video distribution landscape in the United States. The first is Verizon’s takeover of Intel’s media division, after the latter decided not to launch its own OTT service. The carrier will use Intel technologies to better integrate OTT solutions into its own internet plans, but perhaps and above all to roll out its own internet TV service, which would be available even outside the carrier’s service area.
The second is US cable market leader Comcast’s acquisition of Time-Warner cable, which still needs to be approved by anti-trust authorities. The deal would increase the new entity’s market clout in both OTT services and with American studios. The third major deal is the agreement between Netflix and Comcast, whereby the cableco would be paid to guarantee high quality network access for Netflix customers.
These three deals are milestones in that:
• They take net neutrality debates to a commercial negotiation between services and network operators. If Netflix and Comcast managed to reach an agreement, there is no longer a need for specific regulation, provided network access is still supplied under non-discriminatory conditions.
• They attest to the pressure that triple play operators are under to protect their place in the video distribution chain. Cable TV customers in the United States are a shrinking population, whereas broadband cable customers constitute the majority. As a result, securing good terms from the TV networks has become vital to video distributors’ economic well-being.
• They reveal that size does matter when going head to head with increasingly globalised internet companies. A portion of competition in video distribution today is playing out in the realm of technological innovation. Comcast has been spending heavily on R&D on new video services for the past several years – investments that need to be amortised over a larger number of customers than what it has now.
• Ubiquitous online distribution heralds the disconnection, first between video access services and, second, the supply of premium services, and could augur a future split in the companies that currently supply them both.
Round-up for 2014
It’s hard, in the first editorial of the year, to avoid laying out the overriding themes that we expect to see play out over the next twelve months. But it is still too early for me to deliver a complete summary of the year gone by, which has become the much-anticipated task of our DigiWorld Yearbook.
You will also need to wait until the next Executive Note to find out the central topic selected for this year’s DigiWorld Summit (but you can already mark your calendars for November 18, 19 and 20).
What I can share with you, however, is our belief in the profound relevance of certain issues, by summarising three topics that we have chosen to explore in this year’s Collaborative Research Programme (CRP 2014). These are think tanks open to existing IDATE member companies and those wanting to join, who will work for close to a year with a dedicated team of our analysts on the following subjects:
Telecoms USA: model or counter-model?
Following thorough on the two projects carried out in Brussels in 2012 and 2013 on telcos’ new business models, and the new European policy options being considered, we will work to deepen our understanding of the specific points that explain the different directions being taken on either side of the Atlantic.
The internet of things: will everything be connected?
We are going to analyse the true potential of the internet of things, by taking account of the developments that need to occur in the technical environment, difficulties in generating income from both consumer objects and industry applications and, finally, governance and personal data ownership issues, with tie-ins to our 2013 think tank on personal data
What will tomorrow’s TV and video networks look like?
Here we are building on the 2013 Video as a Service think tank by exploring issues surrounding the future of television and video distribution networks, and by analysing long-term scenarios for the delivery of TV and video products, taking particular account of the cooperation and convergence between networks, i.e. hybridisation involving both fixed and cellular networks
Other topics may be added to the CRP. For instance, we are contemplating an ambitious project that aims to define what could be a comprehensive, metropolitan area-scale digital investment strategy, going beyond marketing clichés and segmented vertical approaches.
I can also tell you that the next issue of Communications & Strategies (DigiWorld Economic journal) will be published in March, and is shaping up to be a promising one. It will be devoted to scoring Europe’s telecommunications sector, and examining potentially clashing policies.
And, finally, a reminder that the best way to delve into the subjects that are consuming our teams is though the reports that we publish every month as part of our annual Market Research programme.
Deputy Managing Director
Director of TV & Digital Content Business Unit
Some views on the future of video from the IDATE think tank
The “Video As A Service” programme, which was managed by IDATE experts as part of the DigiWorld Institute’s Collaborative Research Programme, brought together 25 audiovisual industry professionals to explore what the future holds for the sector.
Over the course of three seminars held from September to November 2013, they discussed their views and those of the guest speakers, before establishing a consensus on the future of consumer behaviour, services and distribution. Although the complete results of the programme are available only to the think tank’s participants, we can share some of the more interesting ideas to emerge.
Lower barriers to entry
The leading media industry companies’ competitiveness used to be based on their control over three things: content, the networks and the devices. But video-on-demand offers are coming to undermine the exclusive content model, and the internet does away with the need to obtain a DTT broadcasting licence, or to negotiate with network operators that package pay-TV solutions. Added to which, the television is becoming an open access device.
Arrival of global players
If content production is already a relatively global business, distribution is still largely a national affair, controlled by national companies. But new entrants have a global footprint in mind.
Accelerated rate of technological development
For a long time, technological innovation in the audiovisual sector advanced at a snail’s pace. But the growing complexity of programme distribution today requires solutions that evolve as quickly as the internet does.
Software excellence becoming a key competitive edge
Intelligence centralised in the cloud to optimise the network, understanding where and how users are consuming their content, catering to a variety of devices, customising offers, offering the best possible user interface, making IT expertise a central part of media operators’ business.
More complex regulatory framework
Regulation that is specific to the audiovisual market, which in France is particularly strict, is not the only regulation to apply to the industry’s companies. With the increasing globalisation of both the markets and the companies that populate them, new sector-specific regulations, such as those concerning data privacy and net neutrality in some instances, or more generally the growing role played by common competition law, can result in a greater disconnect between cultural and economic regulation.
2014 Collaborative Research Programme: “What will tomorrow’s TV and video networks look like?”
In terms of screen time, traditional broadcasting networks are still the top distributors of TV programming. Depending on the country, terrestrial, satellite, cable and IPTV networks account for the majority of viewers’ screen time. But on-demand viewing is becoming increasingly popular with users, and increasingly available on portable devices.
In addition, the different networks are undergoing, and will continue to undergo performance-boosting upgrades, including the switch to DVB-T2 or DVB-Sx, the adoption of HEVC and VP9, and increased throughput on both fixed and mobile networks. Fixed and mobile internet networks want to incorporate linear multicasting.
All of which is creating new video distribution configurations. Hybrid solutions are already making the most of broadcast and unicast systems by combining fixed broadcasting and internet networks, and will soon include mobile broadcasting and internet systems as well. From a more general perspective, fixed and mobile internet networks can appear to be increasingly interchangeable, or at the very least complementary.
Further down the road, the dividing lines between the different types of network are bound to dissolve more and more: cellular networks providing last mile connections for fixed networks, the (already begun) convergence of fibre and cable, and the first forays into a unified wireless terrestrial network, capable of delivering both broadcast TV channels and unicast video services.
The longstanding configuration of TV broadcasting silos and services appears to be giving way to a more expansive view of hybrid systems, combinations that can be reconfigured according to the type of service being supplied and how mature the market is. Bringing this vision to full fruition would involve a sizeable change not only in the way spectrum is managed, but also in how technical distributors operate and how they interact with service providers.
To explore these various topics in depth, one of the IDATE think tanks in 2014 will be devoted to the question: “What will tomorrow’s TV and video networks look like?”
Florence Le Borgne
Head of the TV & Digital content Practice, IDATE.
In summer 2013, the American media made a steady diet of the record drop in pay-TV subscribers in the United States between mid-2012 and mid-2013 (-911,000 subscribers) – giving credence to the cord-cutting scare, whereby pay-TV customers were cancelling their regular plans en masse and turning instead to SVoD services, offering chiefly films and TV series for a very affordable price of less than $10/month.
Still no massive change in the American market
It is true that the second quarter of 2013 was marked not only by another drop in cable TV customer numbers (-159,000 for Comcast and -93,000 for Time Warner Cable, the market’s top two players), but this is not in itself an isolated event as American cablecos have been losing subscribers since 2001. What was exceptional was the drop in customer numbers for the country’s two satellite pay-TV providers, Dish TV and DirecTV, which lost 78,000 and 84,000 subscribers, respectively. If, at the same time, the two IPTV plans continued to enjoy an upswing in customers (+140,000 subscribers for FiOS TV and +231,000 for U-Verse), it was not enough to offset the loses being posted by the main broadcasting networks.
So third quarter results were eagerly awaited. The figures released on 30 September 2013 revealed that satellite subscriptions were back on the up, and IPTV customer numbers had increased slightly. Meanwhile, cable continued to lose customers but in a way that was consistent with third quarter results in previous years.
Video ARPU continues to rise
It should also be mentioned that while cable TV subscriber numbers have decreased, average per user revenue (ARPU) has increased. For Comcast, video ARPU has been rising steadily, standing at $161.07/month in Q3 2013 – which is $10 more than in Q3 2012 and $22 more than in Q3 2011. Charter Communications’ total video revenue rose by 7.4% over the past 12 months, despite a 3.3% decrease in its video subscriber base. While Time Warner Cable saw its video revenue shrink by 4.4% between Q3 2012 and Q3 2013, the decrease is smaller than the 6.1% drop in subscriber numbers during that time.
Equally noteworthy is that cable TV subscribers are also watching premium content supplied by vendors other than their traditional pay-TV provider.
A strategy of alliances with European cable companies
In the UK, where American-born Netflix is also present, it is just as hard to measure the company’s impact on pay-TV subscriptions. Market leader, Sky Digital, reported a slight increase in TV subscribers (+203,000 subscribers) between the time Netflix launched and Q3 2013, whereas cableco Virgin Media reported a slight decrease (-10,000 subscribers) in its pay-TV customers during that time, but an overall increase in paying customers (+200,000).
It seems unlikely that the partnership between Netflix and Virgin Media will drive existing Virgin customers to cancel their pay-TV plans. In fact, for an extra £5.99 a month, Virgin subscribers with a TiVo (i.e. 49% of them) have been able to access Netflix directly on their TV set since mid-November 2013.
Also present on Swedish pay-TV provider ComHem customers’ TiVo since 20 January 2014, Netflix could actually prove an incentive to sign up for a cable pay-TV plan.
Head of "Video Distribution" Practice
The market report entitled, “Hybrid TV: challenges and opportunities for telcos and cablecos” published as part of IDATE’s video distribution series, explores the biggest changes that wireline operators are facing today, and the options available to them. It details the three main strategic options that operators will need to choose from: strengthen their video service provision business, charge for OTT traffic or focus on internet connectivity.
Project Manager Jacques Bajon says that, “how telcos’ and cablos’ video strategy evolves is becoming an increasingly important issue, as the growth of OTT video and its impact on internet traffic will change the balance of power for video distribution on wired networks”.
Verizon recently announced its upcoming takeover of Intel’s Media Assets, a division devoted to developing cloud OTT video products and services, as part of the carrier’s bid to step up the rollout of new generation video services for all devices.
While the impact of these changes will vary depending on the region, the state of competition, the influence of the market leaders and the strategies adopted by operators, broad policies and choices are nevertheless becoming clear. Operators will be able to choose their positioning from, increasingly hybrid, strategies.
Strengthening the role of video service provider
Many telcos have joined cable operators in a providing 'traditional TV' services. The underlying reasons are varied and often non-exclusive, and include improved ARPU, triple-play subscriptions and reduced churn. This strategy can be extended, allowing operators to:
• provide new OTT services,
• become a publisher of TV services,
• go beyond their technical network coverage by relying on broadcast partner networks or 'public Internet'.
Charging for OTT video traffi
With the net neutrality debate still hanging over this option, where discrimination is being tolerated only for operators’ OTT services targeting their customer base:
• The first grey area agreements have been made between some service providers generating large volumes of traffic and telcos
• Development of operator or telco CDNs can help with internet traffic optimisation and can also become a traffic quality solution for third-party service providers.
Relying on online connectivity
With this option, operators can rely primarily on internet subscription revenues by assuming the role of neutral distributor of IP services, including video. For telcos, this is a case of returning to their incumbent business, but is a change of role for cable operators.
• More information on Hybrid TV market insight : Challenges and opportunities for telcos and cable operators