… says Ari Iso-Rautio, vice president, TME Consulting Practice, Capgemini
In the telecoms, media and entertainment (TME) industries, the immediate and painful impact of the global economic downturn overlay a story of long-term relative decline. Research by Capgemini’s Strategy Lab shows that in the last decade the proportion of household income spent on TME reduced both in the US and the UK. In the US for example, TME spend reached about 7.5% per capita in 1999, before falling to about 7% today. In dollar terms, this represents an anaemic real-term increase in spending of only 1.2% per annum in the decade to date.
Consumers have been the winners. In the UK, the total time spent consuming media has grown over the same period from about 53 hours per week in 2002 to 58 hours in 2007.
Time spent watching TV has been broadly flat over the same period, but the successful launch and rapid penetration of flexible ways of viewing such as the personal video recorder, video-on-demand services and catch-up TV have increased the value-add for viewers, while rapid penetration of high definition pay TV is enhancing this. Pay TV platforms have seen growing ARPU, reflecting consumer willingness to pay for the extra quality and flexibility in their TV viewing.
Increasing pay TV ARPU has also been driven by bundling telephone and broadband services with the pay TV subscription, though this has masked the revenue attributable to TV. However, heavy investment by distribution platforms in other servics has led to spending on channels and programming falling.
Meanwhile, TV advertising peaked in 2000 in real terms and has declined by 2.2% per annum in real terms since then. Ad-funded broadcasters are being forced to make painful adjustments in reducing programming and personnel costs in the face of steep falls in TV ad revenue. Strip out the effects of a cyclical downturn and one can see a structural shift taking place. Consumers are enjoying wider choice and greater consumption, while TME’s share of spend is declining in relative and absolute terms. This suggests that players in the TME value chain should not expect renewed growth when the recession in over. Instead, they should be planning for a low-growth future.
Here are some examples of steps companies are taking to adjust to the new conditions:
Diversification into content services: We believe content revenues will continue to grow in real terms, particularly gaming and mobile content services. We’re watching with interest how companies dipping their toe in the content waters for the first time fare. For example, Orange has started to tap into the gaming market in France and its parent company France Telecom is investing in content including movies, premium sport and own-branded channels.
Partnering in content-production: For content producers, new partnerships with distributors outside of the established TV value chain could create new revenue streams. As the traditional model of content commissioning by terrestrial broadcasters comes under pressure as their revenues fall, so producers need to diversify their funding base.
Bundling across the value chain: Bundling might not arrest the decline in consumer spending on TME, but it offers a means for those companies with an existing strong customer base to continue growing top-line ARPU by gaining share. For example, Nokia’s ‘Comes With Music’ offer is an example of content bundled with a device – in this case, a handset with pre-loaded music – and pay TV platforms have led the way with bundled TV, telephony and broadband services.
Effective segmentation and targeting: Superior consumer insights coupled with effective segmentation and targeting will continue to uncover growth opportunities. For example, Germany’s E-Plus mobile operator has launched multiple brands, each aimed at specific usage segments and with market-leading pricing.
All these examples reflect the fact that convergence is enabling players to seek growth by moving across the value chain.Technology developments and changing business models are reducing barriers to entering adjacent segments in the value chain. However, as real spending services is unlikely to grow more than 0.6% per annum in real terms to 2012, there will be losers. The overlap of more services, increasing competition and falling prices means consumers are unlikely to be among them.