The Future of Digital Media

The future of media and entertainment is increasingly uncertain as the methods by which content is created, distributed, monetized and consumed are changing before our eyes. Over the next decade, powerful and disruptive forces, including the ubiquity of broadband Internet connectivity, novel technologies and devices that empower consumers with content control and portability, and the digitization of content and entertainment will forever change the media and entertainment landscape.

As a result, broadband service providers face a mounting challenge: their key growth markets—IPTV, fixed mobile convergence and broadband connectivity—are on a collision course with key trends in the digital media world. As all forms of digital content rise to the top of the connected consumer value chain, service providers must pick their strategies, battles and partners carefully. On the Internet, a world of infinite content “shelf space” and distribution means that the economics of the digital age tend to benefit content creators and challenge traditional content distributors.

With core markets (dial-up access, phone lines and cable TV) continuing to decline, broadband service providers cannot afford to become marginalized or relegated over time to simple transport. Winning providers will employ new models that allow them to play an important role in offering a point of seamless access and monetization for what is bound to be a nearly endless sea of content from an increasing number of sources. Before providers can employ the right business model for capitalizing on the growth opportunities presented by shifts in the media landscape, it’s important that they fully understand the powerful trends shaping digital media’s future in four key areas—Content Creation, Distribution, Monetization and Consumption. Below is a summary of these trends. Additional details can be found in the William Blair & Company Industry Report entitled The Future of Digital Media, available at www.williamblair.com.

Creation of Media Content

Content will be redefined as citizen journalists and publishers flourish. The age of user-created content is upon us, as the barriers that prevented individuals from producing, distributing and monetizing content are rapidly disappearing. Developments over the past few years have set the stage for a future that will be marked by individual-created content rather than that created by major production shops. Only very recently have individual consumers, or “publishers,” been able to share broad content such as photos, video, audio and text with a nearly unlimited audience with no significant barriers to distribution. To assist consumers in navigating the volume of content, cultural attachés and specialized technologies will likely emerge to serve an important role in matching content owners, consumers and marketers. To adapt to these changes, many established content owners will adopt an “open source” approach, allowing individuals to access and edit their content to create remixes of the original, thus increasing the enjoyment or relevance of the experience for users.

The value of premium and niche content increases—middle-ground content is marginalized. As the bandwidth, number of digital devices, distribution channels, compression technologies and ways to monetize the use of digital content grows, so too does the value of premium and niche content. For example, the transition from physical media to digitized content increases the number of digital (destination) devices for content consumption and enables mobile entertainment and infotainment systems. Now, content owners have an opportunity to sell the same piece of content numerous times (iPod, cell phone, etc.) as a result of the growing number of types of digital devices. Moreover, the role of the media company as an intermediary, or “toll taker,” between the highest-quality content and the consumer will be marginalized by rapid growth in Internet bandwidth and media storage, and due to the emergence of branded entertainment portals. Not all content producers have such a rosy outlook, however. “Middle-ground” content (think mediocre sitcoms on Monday evenings that were watched because of lack of alternative content) are likely to decrease in value, as Hollywood and the networks are no longer able to regulate supply to drive demand. Although media consumption will continue to increase, there are only so many hours in the day, and consumers will become even more discriminating with content consumption—hence, middle-ground content will become marginalized.

Digital piracy puts certain media models at risk of extinction. Many traditional media industries were created and sustained as a result of local, regional, or national monopolies or oligopolies that were protected by unusually high capital requirements for entry or licensing restrictions. These include the cost of assembling and distributing a newspaper or broadcast towers and spectrum licenses, to name a few. But as bandwidth expands and content competition increases, the value added by the traditional media pipe will continue to ebb. Rising piracy rates are compounding these problems, breaking down the foundation of the traditional Hollywood studio and record label business models. They need to change the way they do business or face extinction. In addition, increased distribution channels (e.g. Internet, mobile, peer-to-peer) put consumers in the driver’s seat, and Hollywood can no longer regulate supply to drive demand. Hollywood cannot beat pirates, but it can outdistribute and outmonetize them.

Distribution of Media

Bandwidth and storage will no longer be gating factors. The now widely known Moore’s Law, which is credited to Intel co-founder Gordon Moore circa 1965, suggests that the complexity of an integrated circuit will double every 18-24 months. This empirical observation largely has held true over time and has spawned Kryder’s storage law, credited to Mark Kryder of Seagate Technology, which states that storage will double every 13 months or about 1,000 times over 10.5 years. If Kryder’s law holds, the iPod of the future should hold one year of video by early 2012 and essentially all commercialized music by 2015. The rate at which consumers can access and download content, or bandwidth, may not follow the same exponential growth pattern of Moore’s or Kryder’s laws, but similar phenomena are likely to increase access speeds in a similar pattern. Moreover, improvements in compression technologies (i.e., audio and video) will continue to improve, which will contribute to eliminating bandwidth as a roadblock preventing the distribution and receipt of content. Third-party content providers by-pass cable in the digital age. Just as the satellite companies are taking cable subscribers in many markets, further broadband advancements may facilitate content distribution to the home, threatening established traditional cable/satellite advantages and the upcoming telecom IPTV strategies. As more digital content becomes available and as more households sign up for broadband, third-party Internet aggregators such as AOL, MSN, Yahoo and Google are jockeying to fill the traditional roles of cable and TV networks, broadcasters, cable companies and satellite companies for video content. New “entertainment portals” will emerge to stream content directly to consumers with ad-supported revenues, or act as content aggregators based on preferences, or both. If consumers need only reception, the carrier’s advantage is weakened. Hence, simply transferring content to end-users is not a sustainable long-term strategy.

Monetization of Media

Targeting, measurement and analytics will explode. In the future, consumers will be faced with a choice in how to pay for much of the content they wish to consume. Three currencies will be used in this exchange: time, money and data. In many cases, each consumer will personally decide how much of each to give in the exchange. We expect that most consumers will decide to surrender some privacy (in the form of data) in exchange for more content and less marketing. As a result, the next decade will bring a dramatic increase in the science and sophistication of media and marketing, which will be driven by improvements in computing technology, increasingly sophisticated analytics algorithms, and a dramatic increase in the breadth and depth of consumer data. Branded entertainment portals will grow in importance. As consumers flock to the Web for on-demand entertainment, content owners and consolidators will emerge online in the form of branded entertainment portals influenced by television distribution paradigms in place today. The economic interest in controlling and monetizing copyrighted content will lead studios to offer television shows and movies either through their own Web sites or to license the content to another party online. Third-party branded entertainment portals increasingly will emerge to distribute content online, in part out of necessity to address the challenges posed by online monetization of content produced by one studio and distributed by another. This conflict should lead to the development of revenue-sharing standards between producer and distributor, with greater value placed on content creation.

Multimedia advertising “super sellers” will emerge. Media fragmentation, radical changes in media distribution, a heightened focus on marketing effectiveness and failures in consolidation among traditional media companies have left the advertising sales landscape uncertain and ripe for change. As a result, the role played by media companies in the ad sales process will be marginalized over time and a significant portion of media sales will be consolidated among a few “super sellers” of advertising. These companies will have a unique blend of several assets, including a critical mass of brand advertisers and direct marketers (hundreds of thousands if not millions), robust advertising management technology, significant reach and inventory, rich user and marketing-effectiveness data, vertically focused sales expertise, and robust targeting and tracking technology across multiple media.

Consumption of Media

Media consumption increases. Digitization and media portability will continue to drive increases in global per capita spend and media consumption. For example, the per-household spend on consumer electronic devices has increased to roughly $1,250 in 2005, up from roughly $600 in 1990, and consumer electronics represents 1.6 percent of total personal consumption expenditures, up from 0.9 percent in 1960. A higher-quality experience and improved portability drove a 4 percent increase in total media consumption from 2001 to 2005, from an average of 3,356 annual hours to 3,482. More specific, digital media consumption increased nearly 25 percent over that period, and the average U.S. consumer now sends more than 1,200 hours consuming digital media each year, up from 989 hours in 2001. Traditional media consumption has declined 5 percent over the same period.

Consumers become “rights owners” of the rights owners. The traditional entertainment experience of purchasing and owning physical media and consuming it on a focused, nonintegrated (VHS, DVD player, etc.) device will transition to purchasing a digital asset/content (iTunes and streaming video, among others) that will allow device-to-device use of a single piece of content. Furthermore, consumers will transition from owning physical media and digital assets to owning rights to use digital content resident on the Web, PC, portable media device, etc.

All content available anytime, anyplace. Consumers increasingly are demanding all pieces of content whenever and wherever it is convenient for them. Digital content and the proliferation of digital devices facilitate the ubiquity of content in many nontraditional venues. Moreover, families are beginning to recycle content between other members and across multiple devices and venues, and the digital entertainment experience will continue to offer more value to the household. A significant share of content will become seamlessly integrated from the home PC, TV, mobile devices, and vehicle entertainment systems—or the “four screens” of content consumption—as opposed to only TV, which today is still the primary content consumption device. Changes in content creation, distribution, monetization and consumption in the age of digital media have opened up a new opportunity (similar to the early days of broadband) for service providers to differentiate themselves beyond simple transport. The future of digital media belongs to those who can rapidly establish a defensible, value-added offering for consumers.

Troy Mastin is Principal in Advertising and Marketing Services, and Ralph Schackart III is a CFA in the Digital Entertainment Group, both at William Blair and Company, LLC.