Head of Internet Business Unit at IDATE
The Internet services industry is often perceived as a world of completely free services (and thus implicitly low quality), where everything is supported by advertising. In reality, the situation is obviously more complex. The majority of Internet services revenue comes from paid or transactional services, and the proportion of advertising revenue is trending downward (see Chapter 2, Internet markets) with the development of new services around mobile, cloud computing and even social networks, which rely more and more (at least partly) on paid solutions.
A low-cost approach to services?
Many services are actually offered in freemium versions, with a basic free version (often ad-supported) and a more premium paid version. Spotify and Deezer use this model for online music distribution, and Dropbox and similar services use the same for cloud computing. The goal is to establish a large user base by offering free services, and to then use this base as a lever to attract users to the paid services. The associated marketing costs are therefore next to nothing. The bestperforming players are managing to convert almost 15% of their user base to the paid versions.
Even paid services providers (including freemium models) are adopting low-cost pricing strategies, which breaks with traditional pricing models (like Skype for VoIP, Netflix for SVOD, Amazon for e-commerce and PayPal for payments) and thus undermines traditional service providers. However, this does not mean that Internet players never offer premium services.
Premium services still exist on the Web
Where monetisation and value creation of Internet services has seen the most success is when providers have used an approach that combines lower-cost pricing and premium services aimed at the end user and/or third parties (such as merchants, advertisers and developers). It is often the functionality offered to the user rather than the price that is premium, especially in terms of customer service (Amazon), scope of the service, account management and device support (Netflix), decision support, ease-of-use (PayPal). Most players also rely on a two-sided approach.
The service offered to third parties who connect with or capture data from users is premium. The price per unit for this is often moderate, too. But the service is very attractive for advertisers and merchants in such terms as quantity and quality of available data, ease of implementation, value-added services, targeting capacity. Advertisers are always willing to pay more for advertisements to reach the most attractive targets. The CPMs are therefore much higher on financial information sites. It is, then, ultimately data, and personal data in particular, that constitutes the premium resource of the Internet.
Premium services need advanced tools
To effectively implement premium services on the Internet (and consequently data management and processing), most players are investing heavily in infrastructure for both hardware and software. Major Internet players are positioning themselves around essential technological cornerstones, such as data centres, the Cloud, browsers, operating systems and even devices themselves, or specialized solutions such as DRM. They are implementing their own solutions and developing proprietary approaches if necessary, even offering their resources to third parties (such as Amazon Web Services, Google Analytics, Facebook Connect). Google invests almost one billion USD per quarter in infrastructure.
Advanced software solutions are also central to many Internet players’ activities, particularly around data processing and analysis, which is the focus of the recent growth of big data (see the Big data section in this chapter). Google is therefore indirectly behind the current reference service Hadoop, which derives from Google’s MapReduce.
Premium Internet services involve platform development
Premium services also require vast amounts of data to be collected. This data capture can be direct (via user tracking),declarative or from various sensors. It can also come from third parties through agreements (possibly via their API).
This has pushed most of the major players to develop platforms capable of collecting data from third-party services. This platform links users of the Internet player’s service with developers, merchants and advertisers who want to connect with a wide audience, with varying levels of targeting. It is therefore an essential intermediary tool. To increase interest in their platform, the major Internet players are also keen to offer a part of their infrastructure and devices (Nexus, Kindle Fire) at low costs, despite their relatively premium specifications.
About the Digiworld Yearbook
While digitisation will bring more growth to certain developed markets, the next decade will show a marked decline in linear television revenue in the video sector, and a corresponding increase in new on-demand services. For the incumbent audiovisual operators, their capacity to generate revenue from these new services will dictate whether they can sustain their levels of turnover. They will, for all that, only find growth opportunities in emerging markets.
197 pages that deliver the finest market insights from IDATE experts who track the changes at work in the globe’s telecom, Internet and media industries throughout the year.
the DigiWorld Yearbook is published in English and French and available in print and PDF format. An iPad edition, developed by Forecomm, is also available.
The 2012 edition can be downloaded for free
The 2013 edition is available for purchase. Print: €99.99, incl. VAT; PDF and iPad: €54.99, incl. VAT
- You can have a look at the digiworld yearbook 2013, purchase it or even download the 2012 version for free at : www.digiworld.org/yearbook/
Florence Le Borgne-Bachschmidt
Head of the TV & Digital content Practice, IDATE.
Despite strong competition from the Internet, television is still a dominant media platform among those currently available.
Television is adopted at an unrivaled rate across all age groups combined, is used frequently and for considerable lengths of time, and these consumption patterns are still showing growth. It is both a source of information and leisure time, and with its ability to reach a mass audience, television wields incomparable influence. Therefore, it is no surprise that, having captured a large audience, advertisers have also been drawn to television looking for visibility and brand building.
Television is still the leading platform for ad spending
40% of advertisers' above-the-line media spending is received by television, on average (excluding below-the-line investment). Revenues are also continuing to rise, while those of the press are crumbling faced with the rapid increase in the Internet's influence.
However, despite resisting well so far, the first signs of slowing growth are appearing, especially in Western markets where TV is beginning to lose market share to the Internet. The sector is in fact facing two phenomena:
- The proliferation of new channels is resulting in audience fragmentation, which is detrimental to the major channels' audience figures and, by extension, to their advertising revenue;
- TV program consumption is becoming more personalised. It is transferring to "new" screens, in real time and delayed (via time-shifting, recording programs or catch-up TV services). Although the same content is being consumed, these phenomena are leading to a decrease in broadcast audience figures and therefore to decreasing advertising revenues in some cases.
The capacity of traditional TV channels to capture a wide audience allows them to keep rates high, even to increase them despite decreasing viewing time and audience share, at least at certain times of the day (the "premium to the leader" phenomenon).
Cost of a 30 second spot on national channels according to time slot, USA, 2009-2012
Source: IDATE based on TVB, TV ad faced to new media challenges, June 2013
However, channels are questioning the ability of online video services to become genuine growth drivers. For now, broadcast TV seems to retain certain benefits:
- In terms of coverage: The current gap between an online video service and a free national channel remains substantial. In the United States, the major networks have a reach of around 70%, compared to 32.4% for YouTube's and 9.0% for Hulu;
- In terms of exposure: A viewer in the United States is exposed to an average of 72 minutes of TV advertising per day, while an online video service user will be exposed to an average of 23 minutes 30 seconds of video advertising per month;: A viewer in the United States is exposed to an average of 72 minutes of TV advertising per day, while an online video service user will be exposed to an average of 23 minutes 30 seconds of video advertising per month;
- In terms of average cost: Broadcast channels and premium video sites are still comparable, though. The average CPM on a site like Hulu or on the sites of US television channels cost between 15 and 20 USD in 2012, compared to 13.8 USD to reach 1,000 homes via a national channel.
Although TV advertising has so far largely demonstrated its effectiveness, it's the concept itself that may lose focus in the next few years. Will it still only involve ads broadcast on the TV set during the programming stream, or will it be any ad spot aired at the same time as a TV program, be it broadcast or streamed, in real time or time-shifted?
Even if they invest heavily in online advertising, TV channels are facing new competition and especially different requirements from advertisers, who are seeking efficiency and ROI rather than more visibility and branding. How will channels adapt to this new paradigm?
Senior Consultant at IDATE
The global market of online advertising will rise from 60 billion EUR in 2012 to 108 billion EUR in 2016
Our recent research on the world Internet markets which we conduct permanently – and more precisely on Online Advertising – has given interesting results we would like to share with you:
USA dominant in the field, with APAC growing rapidly
- The USA leads both the EU27 and APAC for online advertising value, claiming 36% of the market in 2012
- However, it is APAC, and especially China, who leads in terms of growth: from 2012 to 2016 China will see CAGR of 26%, and as a result APAC will generate revenues in close proximity to USA by 2016
Online advertising important part of total media advertising
- Online advertising is already, and will remain an integral part of the total media advertising market
- No large differences between the regions, with online advertising expected to account for roughly a quarter of total media advertising in 2016, up from around a sixth in 2012
Video, mobile and social networks lead the way
- Advertising driven mainly by the global juggernauts in these markets: Google (including YouTube), Facebook, Apple, Hulu…
- By 2016 mobile advertising will generate the most revenue, spurred by both increasing mobile (smartphone) usage and developments in advertising tools. CAGR from 2012 to 2016 will stand at 34%.
Highest per-user revenue for advertising on social networks
- Through their social graph, social networks can provide effective targeted adverting, and this is reflected in the high revenue return per social networker.
- All three segments will see growth in per-user revenue, through developments in advertising formats specific to each segment.
Senior Consultant at IDATE
> Visit our website for more information on our World Internet observatory updated half-yearly.