From the Perspective of a Founder - Creative Commons/ Magnatune/ Bookmooch - John Buckman - Media in Transition 2007

Future Business Models in the Digital World From Gutenberg to Google Munich, September 5, 2007 Copyright 2007 Annet Aris. No part of it may be circulated, quoted, or reproduced for distribution without prior written approval from nd Annet Aris. This material was used by Annet Aris during an oral presentation; it is not a complete record of the discussion.

AGENDA

How is digitization affecting consumer and advertiser behaviour?

How productive are current strategies of media companies to cope with these changes?

How will the industry dynamics develop? Where will the profits go?

ROLL OUT OF DIGITAL TECHNOLOGIES DRIVER OF CHANGING CONSUMER BEHAVIOUR

Digital technology opens up the playing field

Digitization of content and distribution allows for „zero cost“ content dispersion

Competitive roll-out of digital pipes through Cable, DSL, DTT, Satellite and UMTS enable quick and cheap downloading, streaming and exchange of content, including piracy..

Fast developing compression and storage technologies will shift content storage from central to decentral (home) locations

New appliances ( flat screen, mobile organizers, home media centres etc.) will diffuse the classical boundaries between TV, PC and handheld

AT FIRST SIGHT NO CANNIBALIZATION OF TRADITIONAL MEDIA Media consumption patterns; minutes/day * E.g., video’s, DVD’s, games, includes computer usage other than Internet Source: SevenOne Media; Norge statistites Sentralbyrå; The Kayser Foundation 168 142 36 464 2005-II Internet Other* TV Radio/ audio Print 143 39 397 1999 171 9 Germany 1.4 11 0 0 -1.2 2.8 CAGR 43 27 185 108 43 448 1999 120 184 104 43 513 2004 U.S. (8-18 Yr) 18.1 7.1 -0.1 -0.8 0 2.7 1999 156 122 55 421 2005 19 22 145 130 56 372 Norway 17.8 15.8 1.5 -1.2 -0.3 2.6

HOWEVER A CLOSER LOOK REVEALS FUNDAMENTAL SHIFTS IN THE WAY MEDIA ARE USED Media consumption patterns 8-18 years old, US, Hours/day 7 Source: The Kayser Foundation 513 2004 448 1999 Total media exposure +65 min. Total m e d i a use 381 1999 2004 379 -2 min. Parallel media consumption 67 1999 134 2004 +67 min.

SHIFT FROM PASSIVE TO ACTIVE MEDIA USAGE Active Media Usage Source: McKinsey analysis, Annet Aris Niche/digital media 1

Market share niche media (games, Internet, multi-channel TV , video) increases fast

CONSUMERS ARE INCREASINGLY MOVING AWAY FROM TRADITIONAL MEDIA * Other print includes books and newspapers, Mass electronic includes box office, broadcast television, radio, and recorded music; niche electronic includes video games, Internet, multi-channel television, and home video Source: Forrester, PWC, McKinsey market research Minutes per person per week, US 137,800 3,271 3,334 3,295 3,522 3,804 1992 1996 2000 2004 2008 Magazines Other print

Mass electronic media

Box office

Broadcast television

Radio

Recorded music

Niche electronic media

Video games

Internet

Multi-channel television

Home video

CAGR 1992–2008 % 0.9 7.0 -1.0 -1.2 -0.7

SHIFT FROM PASSIVE TO ACTIVE MEDIA USAGE Active Media Usage Source: McKinsey analysis, Annet Aris Access to long tail 2

30-50% media online buys are articles not obtainable in stores

Niche/digital media 1

Market share niche media (games, Internet, multi-channel TV , video) increases from 25% (2000) to 36% (2008) in U.S.

SHIFT FROM PASSIVE TO ACTIVE MEDIA USAGE Active Media Usage Source: McKinsey analysis, Annet Aris On demand content 3

Music downloads 1/3 of all music sales in 2009

44 million VoD households in U.S. in 2009

6% of consumers using RSS in 2005 in U.S.

Access to long tail 2

30-50% media online buys are articles not obtainable in stores

User generated content 4

My Space no. 4 site in U.S.

You Tube: 13 million monthly unique visitors, 40 million videos watched per day

Oh my News leading newspaper in korea

27% of US Internet users read blogs

Secondlife with more than 2,5 mio subscribers and 1 mio Euro spend per day

Niche/digital media 1

Market share niche media (games, Internet, multi-channel TV , video) increases from 25% (2000) to 36% (2008) in U.S.

A NEW MODEL OF AGGREGATION? CONTENT PLAYERS WILL INTEGRATE USER GENERATED CONTENT Ohmynews example in South Korea

Content for 70% from 40.000 “news guerillas”

Hourly update of articles

Generates revenue from advertising and consumer payments (max. 30$ p.p. per article) and news syndication

Source: Company Web sites

THE MEDIA INDUSTRY WILL NO LONGER BE ABLE TO DECIDE WHAT IS „GOOD“ FOR THE CONSUMER

Unbundled products: individual songs, programs and articles rather than packages, tailored rather than „across-the-board“ prices

Flexible release windows: access to new content as soon as it is available anytime, anywhere

Consumer voting instead of professional reviews

Communication instead of consumption

The media consumer is coming „of age“ and is expecting tailored business models Source: Annet Aris

DISCUSSION THESES Current belief Alternative scenario Source: Annet Aris There will be a fundamental shift from passive to active media consumption.. Consumers will become increasingly bi-polar, oscillating between peer and blockbuster content The consumer will fundamentally change in the digital age... The digital age will finally enable the consumer to fullfill his/her basic needs

HOW STRONG WILL DIFFERENT MEDIA SECTORS CHANGE? High, soon Low, later ILLUSTRATIVE High Low Impact of industry trends on core business (digitalization, fragmentation, convergence, etc.) Sophistication current processes (Re)create Reshape Adapt Fine-tune Change required in business system Source: Aris Free TV Pay TV Newspaper Magazines Books Music 1999 Games Music 2005 Internetsites Radio

WHO DRIVES CONVERGENCE AROUND MEDIA?

Content Creator

Producers

Sport associations

Webeditors

Users

User

User

Mobile content developers

(Digital) Pay TV

Cable operators

Mobile operators

Terrestial

Satelitte

Cable

ISP‘s

Telco‘s

FVNO

Mobile operators

MVNO‘S

Content packager Platform operator TV Inter- net Fixed Line Mobile Source: Annet Aris Content bundler Hard-/ Software provider

TV

Set top box

PC

Game consoles

Home media centre

Telephone manufacturers

Mobile phone manufacturers

TV channels

Free

Pay

Portals

Content sites

Mobile operators

Who will own the consumer?

Source: Annet Aris Current belief Alternative scenario DISCUSSION THESES There will be a fundamental shift from passive to active media consumption.. Consumers will become increasingly bi-polar, oscillating between peer and blockbuster content Value will shift to few players in the value chain.. Value will shift from industry to consumer/customer The consumer will fundamentally change in the digital age... The digital age will finally enable the consumer to fullfill his/her basic needs

EUROPEAN MEDIA ADVERTISING EXPENDITURE Magazines Newspapers 1994 1998 2000 2002 2006 64,3 85,6 103,3 97,4 113,9 USD billions * Includes Cinema, Outdoor, Radio Source:ZenithOptimedia TV Other* 72,4 104,9 1996 2004

ADVERTISERS ARE LATE ADOPTERS OF NEW TECHNOLOGIES Time Percentage New Business Model Source: Annet Aris Technology roll-out Consumer adoption Advertsiser adoption

Advertising spend on Internet does not reflect media usage patterns Percent * Germany, U.K., Sweden, Denmark, Norway, Netherlands, Belgium, France, Italy, Spain Source: Jupiter; EIAA; IAB 20% Internet 5-7% ~€ 75 billion Advertising spend 20% 50 hours Media consumption per week 100% = Other 3.3x Western Europe*

INTERNET ADVERTSING GROWTH DRIVEN BY SEARCH ADVERTSING Source: eMarketer, July 2004 Display advertising Search engine marketing USD, millions US DATA Rich media Classified Sponsorships E-Mail,Interstitials, Slotting fees, Referrals 161 109 Total (in USD billion) 2003 2004 2005 2006 2001 2000 2002 8.1 7.1 6.0 7.3 9.1 11.2 13.5

Internet advertising spend is projected to grow faster than market in the short term, but share still well below time spend € Billion Internet share Percent 82.7 3.9 86.6 2005 90.7 7.8 98.5 2010 Other Internet 4.5% 7.9% Western Europe +10% +13% +200% 0.2 0.4 Percent increase 2005-2010 Source: Jupiter 0.4

Innovation inhibited by current advertising eco system Source: Annet Aris The advertising ecosystem What has to happen for widespread ad dollar shifts Consumer Advertiser Media company Agency Advertising sales managers caught in “prisoner dilemma” with regard to standard prices, try to shift to value added offerings but have problems with in house coordination and getting through to advertisers Marketing manager needs to justify spend to board: relies on well known and accepted measuements (risk aversion). Often little analytical resources available in house to optimize marketing spend Media Buying Agencies under significant cost pressure, claim to invest in developing strategic concepts but in reality focus on buying large quantities of commodity advertising space

Will there be a tipping point at 60% broadband penetration? 540 Source: U.S. Bureau of Census; Veronis Suhler; Universal McCann; Media Dynamics; Television Bureau of Advertising; ZenithOptimedia; Jupiter Media; McKinsey Cable ad spend, U.S. $ Billions Cable Penetration Percent 2005 1995 1980 Online ad spend, normalized to 2005 Broadband penetration Percent of households Korea Based on Korea Projected online ad spend, US $ Billions Broadband penetration Percent of households U.S. 2006 2009

Source: Annet Aris Current belief Alternative scenario DISCUSSION THESES There will be a fundamental shift from passive to active media consumption.. Consumers will become increasingly bi-polar, oscillating between peer and blockbuster content Value will shift to few players in the value chain.. Value will shift from industry to consumer Advertising will become increasingly targeted to smaller segments (“1-to-1”) The consumer will fundamentally change in the digital age... The digital age will finally enable the consumer to fullfill his/her basic needs Reach can be achieved quicker and cheaper but through many more channels

WHERE WILL THE ADVERTISING EURO‘S GO IN A FRAGMENTED WORLD?? TV Producers profiting increasingly from product placement replacing traditional advertising Source: Annet Aris introducing mid price range mobile multimedia „phone“ with DVB-H, radio, MP3, 3G, camera, games: opportunity for phone specific local advertising! advertsing revenues under pressure due to digital channels and Skyplusbox moving actively into contextual brand advertising and cross media advertsing sales using Tandberg Television AdPoint platform, which automatically splices ads directly into VOD content. offering pan-European advertising campaigns, currently negotating with softdrinks and car company

Source: Annet Aris Current belief Alternative scenario DISCUSSION THESES There will be a fundamental shift from passive to active media consumption.. Consumers will become increasingly bi-polar, oscillating between peer and blockbuster content Value will shift to few players in the value chain.. Value will shift from industry to consumer Advertising will become increasingly targeted to smaller segments (“1-to-1”) The consumer will fundamentally change in the digital age... The digital age will finally enable the consumer to fullfill his/her basic needs Reach can be achieved quicker and cheaper but through many more channels Internet players will become the future winners in advertsing Winners will be those who know their consumers best

AGENDA

WHAT HAPPENS WHEN ALL START DOING THIS? Source: Annet Aris Current strategies traditional media companies... Results so far Future perspective Adaptation of traditional media offerings (easier to consume, less costly) Launch of tabloid format, reality shows, new magazine titles, trade paperbacks.. New revenue sources Up to 50% of revenues from sale of other products (music, books, add-on‘s) Scale growth (vertical, horizontal, international) Cost reduction programs….. 20-30 percent cost savings realized in the past years Industry consolidation, vertical integration, growth in EE Build up of digital offerings (Re) launch of webactivities, acquisition of digital new entrants Loss of quality and distinctiveness? Marketsaturation, brand franchise overstretched? Further cost savings require fundamental process changes Integration issues distracting from innovation? Market inefficiencies? Too many copy cats? Acquisition price explosion?

AGENDA

Future scenario’s for the (traditional) media industry Price war, copy cats Source: Annet Aris Initially attractive for consumer (low price), but loose out long term Build brand franchise More attractive offerings, less surplus with consumer The doom scenario Is a positive virtual loop possible? Low quality offerings Loss of consumer/ advertiser franchise No funds to invest in new offerings Multi media “ brand reinforcing” offerings Deep consumer access Funds to further build franchise

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