Reset the media business model

Leading Research Harry Hawkes Thomas Künstner Gregor Vogelsang Timo Benzin Reset the Media Business Model Cost Reduction and Growth Priorities in Today’s Media Industry

Contact Information Abu Dhabi New York Gabriel Chahine Matthew Egol Partner Partner +961-1-985-655 +1-212-551-6716 gabriel.chahine@booz.com matthew.egol@booz.com Düsseldorf Harry Hawkes Thomas Künstner Partner Partner +1-216-696-1577 +49-211-3890-143 harry.hawkes@booz.com thomas.kuenstner@booz.com Christopher Vollmer Frankfurt Partner Timo Benzin +1-212-551-6794 Principal christopher.vollmer@booz.com +49-211-3890-459 timo.benzin@booz.com São Paulo Fernando Fernandes Milan Partner Luigi Pugliese +55-11-5501-6222 Partner fernando.fernandes@booz.com +39-02-72-50-93-03 luigi.pugliese@booz.com Seoul William Shin Munich Partner Gregor Vogelsang +82-2-6050-2586 Partner william.shin@booz.com +49-89-54525-590 gregor.vogelsang@booz.com Tokyo Shigeo Kizaki Senior Executive Advisor +81-3-6757-867 shigeo.kizaki@booz.com Booz & Company

EXECUTIVE As the impact of the Internet grows, and critical sections of the audience change how they consume information, the SUMMARY media business is facing challenges, both cyclical and structural, unlike any it has faced since the dawn of television. In response, virtually every media company is looking to reduce costs while investing in new sources of future revenue, according to a recent Booz & Company study of the media industry. Most participants in the study continue to be optimistic about their company’s financial position and long-term outlook, yet they concede that they must continue to look for significant cost savings if they want to generate the capital necessary to thrive in the future. Judging by the responses we received, Going forward, success will require however, companies are often taking developing strong capabilities in four far too conservative approaches to critical areas: devising innovative oper- rethinking their operations and to the ating processes and models to generate strategies and business models they are the savings needed to reinvest in future developing for the future. Still, they strengths; creating a truly innovative are well aware of the need to become approach to business development more innovative in their efforts to that can go beyond the “incumbent” transform their businesses, and most thinking of the past; planning honestly are already engaged in reassessing their and strategically about how to meet portfolios to focus on the most valu- the digital challenge; and balancing able assets and rethinking their degree the need to cut costs with the potential of vertical integration. risk to vital capabilities and businesses. Booz & Company 1

AN INDUSTRY A study conducted recently by Booz & Company makes clear just What are companies doing to prepare for a truly transformed media future, IN TRANSFOR- how seriously media executives are and what should they be doing? Our MATION confronting the industry’s many challenges. We asked media execu- goal in this Leading Research is to offer guidance for companies on how tives from all over the world, in every to approach that future. To that end, industry segment, about the current we hope to provide some answers status of their businesses, their cost- to four critical questions about how cutting activities, and their projections companies should be positioning The media business is undergoing and strategies for future growth. Their themselves: rapid change. Ongoing structural responses to the survey, and to our shifts, compounded by the recent in-depth follow-up interviews, sug- • Where should companies be look- global recession, have sent revenues gest that the media business, having ing to reduce costs going forward? spiraling downward in virtually weathered the recession, has a strong every market and at virtually every future ahead of it. • How should they intelligently traditional media company. New approach the process of reducing business models are being invented, Overall, the media industry appears costs? while old ones are becoming less willing to meet the many challenges viable and less important. Digital it faces head-on, in the belief that it • Where will the new opportunities media is having a major disruptive can ultimately continue to grow. At with the most potential for growth impact on all forms of print media present, the focus continues to be on be discovered? and television, business-to-business cutting costs. Cost cutting will remain media companies are struggling to a critical component of media players’ • How should companies approach diversify, and the large integrated efforts to prepare for the future. Yet the problem of generating growth? players are searching for successful media professionals are well aware strategies for the future. that, in the long run, companies can’t cut their way to growth. 2 Booz & Company

TODAY’S MEDIA fall by 5 percent, on average, although individual responses varied widely, believe that structural trends in the industry will ultimately have an even INDUSTRY with many media companies expect- greater impact on their business; ing to generate growth (see Exhibit 1). among print executives that number Print media was the hardest hit: Print grows to 67 percent (see Exhibit 2). executives expected 2009 to end with This suggests that all players will double-digit revenue declines. And have to take an even more funda- The past couple of years have been judging from recent interviews, execu- mental approach to restructuring hard on the media business’s revenues. tives expect only a slight recovery, at their business models in the future. Overall revenues, according to respon- best, in 2010. Respondents had already achieved dents to our survey, grew slowly in an average cost savings of close to 7 2008 as the global recession took While a large portion of these declines percent in 2008, and they expect to hold. As of the past summer, respon- can be attributed to the economic cut 9 percent more in 2009. Those fig- dents expected revenues for 2009 to downturn, 57 percent of respondents ures, however, hide the fact that many Exhibit 1 As of Summer, Respondents Expected Average Revenue Declines of 5% in 2009 MEDIA AVERAGE (ACROSS ALL RESPONDENTS) Growth 2008 Expected Growth E2009 Weighted Weighted Average Average >10% 24% 2% >10% 11% -5% 6% to 10% 17% 6% to 10% 4% 0% to 5% 21% 0% to 5% 23% -1% to -5% 19% -1% to -5% 18% -6% to -10% 5% -6% to -10% 18% -11% to -20% 10% -11% to -20% 18% -21% to -30% 3% -21% to -30% 9% <-30% 0% <-30% 0% Source: Booz & Company analysis Exhibit 2 Most Respondents Believe That Structural Trends Will Have a Greater Impact on the Industry Than the Current Recession IMPACT OF CRISIS VS. STRUCTURAL INDUSTRY TRENDS Structural Industry Trends Financial/Economic Crisis Media Average (across all 57% 43% respondents) Print Media 67% 33% TV & Digital Media 62% 38% Integrated Player 50% 50% B2B Player 42% 58% Source: Booz & Company analysis Booz & Company 3

companies have already achieved are now (see Exhibit 4). B2B players Overall, we are pleased that media radical cost savings, while others have were the most optimistic about their companies remain so optimistic. Yet not yet begun this challenging journey. post-recession status, perhaps because we also worry that many media com- Clearly, cost reduction will continue they have already put themselves panies have not fully confronted the to be an ongoing issue in the years through substantial restructuring and degree to which their businesses will ahead. are already benefiting to some degree be affected by the coming industry from subscription-based data services. shifts, or the extent to which their Despite these concerns, executives in Print media professionals, however, basic business models will be chal- the media business appear optimistic, appear to be facing a much more lenged. All media companies must for the most part. Seventy percent of challenging future: They were the plan to act in a fiscally constrained respondents said their companies were most concerned about their financial manner in the near term, even as they financially healthy, a figure that rose situation—more than a third of print set themselves up to try to profit from to 80 percent among integrated play- respondents characterized their com- the structural changes that are already ers, (see Exhibit 3). And, surprisingly panies as financially pressured or even transforming their business. just a quarter of the executives we distressed—and the most concerned surveyed thought they would emerge about their post-recession position. from the recession worse off than they Exhibit 3 More Than Two-Thirds of Respondents Say Their Financial Situation Is Healthy FINANCIAL SITUATION BY MEDIA TYPE Distressed Pressured Sound Strong Very Strong Media Average (across all 3% 28% 42% 26% 2% respondents) Print Media 7% 27% 47% 20% 0% TV & Digital Media 29% 29% 38% 5% Integrated Player 20% 50% 30% 0% B2B Player 36% 55% 9% 0% Source: Booz & Company analysis Exhibit 4 Only 26% of Respondents Believe the Recession Will Leave Them Worse Off Than Before POST-CRISIS EFFECT Worse than pre-crisis Unchanged from pre-crisis Better than pre-crisis Media Average (across all 26% 31% 43% respondents) Print Media 40% 27% 33% TV & Digital Media 29% 38% 33% Integrated Player 50% 50% B2B Player 25% 8% 67% Source: Booz & Company analysis 4 Booz & Company

WHERE TO positioning (see Exhibit 5). That should come as no surprise, given the The third most common answer to the question about key strengths was REDUCE COSTS historical efforts media companies cost management—again, no surprise. have made to build up their content Even before the recent rapid declines creation and brand management capa- in revenue, many media sectors were bilities. In the past, media companies forced to trim budgets in the face of subscribed to a revenue-driven busi- real structural challenges: Media con- When we asked media executives ness model that depended on generat- sumption habits have changed, sales where they think their key strengths ing content good enough to drive that in most retail channels have struggled, lie, their top two answers were revenue. And it worked well—until and new technologies have risen to uniqueness of content and brand recently. offer consumers more choice. Exhibit 5 Media Companies View Their Competitive Strengths to Be Content Quality, Branding, and Cost Management MEDIA AVERAGE (ACROSS ALL RESPONDENTS) (COMPARISON WITH 5 = VERY WELL) Content Strength/ 4.1 Uniqueness Brand Positioning/ 3.9 Market Strength Migration to 3.4 New Business Models Pay Models 3.3 Ad Sales 3.3 Cost Base/ 3.6 Management Technology 3.1 Capabilities Talent 3.1 Development Global Expansion 3.0 3,4 Source: Booz & Company analysis Booz & Company 5

When asked to choose the top areas Still, as companies trim back capa- Before embarking on a major cost- where companies are working to bilities lying closer and closer to the cutting program and slashing core realize future savings, however, heart of their value chains, they must capabilities, therefore, media compa- respondents noted that they plan to execute such programs with great nies must identify clearly the markets intensify efforts in content creation care and a clear understanding of they can successfully compete in and and marketing/sales—both areas the future value of these capabili- the business models that will help that appear to strike at the very ties. The problem companies face is them do so. Then they must determine heart of the strengths respondents not that their cost-cutting programs the key capabilities they will need to themselves identified (see Exhibit may be too ambitious, but rather succeed in those areas. Of course, they 6). This presents a conundrum: To whether a top-down approach driven might already possess some of those what degree can companies cut into solely by overall profitability targets capabilities; if so, those should be their core capabilities before they risk is simply too blunt an instrument. optimized for effectiveness. And they weakening their very strengths? Our Companies must strike the proper must plan how and to what degree experience indicates that companies balance between ongoing restructur- they should invest in the capabilities can indeed make real restructuring ing efforts and preserving activities they do not yet possess. This self- efforts without damaging their core that will create value. Thus, it is vital analysis must be done from a “market value chains if they do it with preci- that they combine a radical reduction back” perspective, as executives too sion, taking advantage of the all-too- of nonessential capabilities with the often base their views on experience obvious need to change and leveraging preservation and growth of core capa- and not enough on understanding and lessons learned from others. That, we bilities critically needed for the media evaluating actual market shifts. believe, also explains why respondents business models of the future. point to IT and applications development as areas where they plan to intensify their savings efforts. Companies must strike the proper balance between ongoing restructuring efforts and preserving activities that will create value. 6 Booz & Company

Exhibit 6 Savings Efforts Will Continue to Focus on Editorial Work, Packaging, Distribution, Sales Force, and Consumer Marketing COST MEASURES REALIZED SO FAR INTENSIFICATION OF COST SAVINGS MEASURES (2009, IN % OF RESPONDENTS) GOING FORWARD* (IN % OF RESPONDENTS) “Top Priority” “Second Priority” Measures Measures Business 20% 59% 13% Functions Overhead IT 19% 53% 30% Packaging/ 28% 45% 34% Programming Content Editorial Work 30% 43% 36% Creation Apps Dev. 18% 45% 32% Physical 18% 46% 2% Production Distribution/ Circulation 31% 45% 36% Distribution Subs Mgmt. 14% 37% 14% Sales Force 28% 56% 35% B2C Mktg. 33% 35% 42% Marketing/Sales Ad Sales Mktg. 17% 52% 16% Ad Sales 15% 50% 6% Back Office * Percentage of respondents planning to intensify efforts minus percentage planning to deemphasize efforts. Source: Booz & Company analysis Booz & Company 7

HOW TO that involve primarily budget controls and organization chart cost cutting. approaches, including best practice implementation and process innova- REDUCE COSTS These essentially conservative tactics, tion—moves that will likely lead to we believe, suggest that companies are greater operational standardization. It still pursuing strategies that optimize is encouraging that media companies their current operating models, rather understand the need to employ more than working to develop radically radical methods, even if they have yet Up to now, judging by the results new business models. Fortunately, it to implement them fully. of our study, media companies have appears that companies across the concentrated largely on traditional, board are also pursuing a number of In some cases, the historical reluctance tactical approaches when making more aggressive and structural cost to commit to a radical approach to efforts to reduce costs. When asked reduction levers, including portfolio restructuring may be due to the fact which methods they had already rationalization, consolidation, and that many traditional “analog” busi- turned to, respondents pointed to process innovation (see Exhibit 7). ness models produce significant cash ongoing cost control and organiza- flows for their owners. So the tempta- tion redesign as the most common Going forward, greater emphasis will tion has been to keep concentrating methods of reducing costs, methods be given to a variety of cost reduction efforts on these businesses, trimming Exhibit 7 Companies Will Pursue More Strategic and Structural Approaches to Reducing Costs COST MEASURES REALIZED SO FAR INTENSIFICATION OF COST SAVINGS MEASURES (2009, IN % OF RESPONDENTS) GOING FORWARD* (IN % OF RESPONDENTS) “Top Priority” “Second Priority” Measures Measures Strategic Portfolio 25% 55% 31% Rationalization Outsourcing/ 7% 47% 16% Offshoring Consolidation 27% 46% 29% of Activities Structural Organization 29% 62% 31% Redesign Process 27% 47% 45% Innovation Improved 14% 68% 21% Purchasing Personnel 18% 61% 6% Expenses Tactical Best Practice 18% 54% 33% Implementation Ongoing 30% 59% 23% Cost Control * Percentage of respondents planning to intensify efforts minus percentage planning to deemphasize efforts. Source: Booz & Company analysis 8 Booz & Company

“fat” where possible to maintain ized technologies, operating policies, nies feel they do not deliver savings margins, while avoiding the need to and business processes, and a single quickly enough, and because they develop new, long-term sustainable support function to meet their non- inevitably create risk for businesses operating models. creative needs. Such an environment that remain profitable. To their credit, can allow for the economical opera- however, respondents say they view Every media company that hopes to tion of smaller assets and still support process innovation as a critical cost- raise the cash needed to finance the a considerable degree of creative trial cutting tool going forward. That belief business models required to succeed and error. in the value of process innovation in an increasingly digital future must indicates that media companies under- approach the cost reduction chal- Meanwhile, many media companies stand the importance of devising new lenge with an open mind. Companies continue to de-emphasize well-tested operating models. And they are clearly looking to transform their traditional cost reduction approaches includ- aware of the risks inherent in relying media assets must rethink their port- ing the outsourcing of overhead on old business models that are slowly folios, focusing on properties with dif- functions—such as IT, HR, and dying, and cost-cutting techniques ferentiated market positions that truly payroll—and certain core creative that are not creating the efficiency and contribute value. Undifferentiated and editorial functions, as well as effectiveness they need. offerings that consume resources physical distribution and select sales without bringing in significant revenue and marketing activities. Eventually, We recognize that the culture of many should be honestly analyzed for their however, they would be wise to traditional media companies has long future potential, and ultimately dis- consider such approaches as a means depended on a creative, talent-driven continued if they prove too weak and to further concentrate on the highest mind-set that places a premium on too expensive. value-producing components of their individual contributions and entre- portfolios. preneurial behavior. It can indeed be These traditional businesses should very difficult to reconcile this culture also be run with a low-cost, no-frills Even these cost-cutting techniques, with the kinds of process innovations operating model that will allow them however, are inherently conservative. and operational transformations we to stay profitable for as long as they Yet media companies have long found are advocating. Yet the changes that remain viable. In many cases, all the it very difficult to develop innova- are overtaking the media industry assets in a traditional portfolio should tive operating models that are more will force every company to examine be operated using one standardized cost-effective. Such efforts are rarely a not just their operational luxuries but business model, including standard- top priority, in part because compa- their cultural “sacred cows” as well. Companies looking to transform their traditional media assets must rethink their portfolios, focusing on properties with differentiated market positions that truly contribute value. Booz & Company 9

WHERE who participated in our study clearly growth is to develop new business understand this reality. Thus far, models to monetize products and TO GROW efforts to generate more revenue to generate new ad sales models by optimizing current business (see Exhibit 8). models—rethinking product and ad sales pricing, for instance, or Ultimately, respondents expect the expanding distribution networks—or great majority of their revenue growth by diversifying into consumer markets to come from digital innovation. On The ongoing emphasis by media or new geographies have not yet average, media companies expect to players on cost reduction is not a delivered the desired impact in many boost the proportion of their revenues path to sustainable growth—and cases. Respondents agree that the that come from digital media from virtually all the media executives only way to sustain attractive top-line 19 percent in 2009 to 36 percent in Exhibit 8 Most Companies Plan to Continue to Invest in New Business and Ad Sales Models REVENUE MEASURES EXECUTED SO FAR INTENSIFICATION OF REVENUE STABILIZATION (2009, IN % OF RESPONDENTS) MEASURES GOING FORWARD* (IN % OF RESPONDENTS) “Top Priority” “Second Priority” Measures Measures Business New Business Model 69% 13% 62% Models Innovative 41% 35% 56% Ad Sales Models Advertising Optimize Ad 33% 43% 38% Sales Force Optimize Pricing 24% 49% 43% Innovative New 46% 35% 43% Media Products Product Expand Distribution 35% 50% 43% Revenue Platforms Optimize Pricing 27% 50% 29% Adjacent Consumer 16% 47% 33% Businesses Diversification Revenue New 18% 40% 14% Geographies * Percentage of respondents planning to intensify efforts minus percentage planning to deemphasize efforts. Source: Booz & Company analysis 10 Booz & Company

2015 (see Exhibit 9). By that time, we media will be for all traditional In the digital world, advertising expect that fully half of the revenues players, and the degree to which true dependent business models that brought in by the industry’s leaders innovation will be the key to success are based on maximizing the size will be derived from digital. As digital in that future. The media industry is of the online audience will not be revenues grow, respondents expect going digital, and nothing can stop enough to drive a profitable, growing revenues from all kinds of display that process. Yes, great content will business. Many observers of media advertising to decline dramatically, always be needed, but it won’t be companies, particularly those in the from more than half of all revenues enough. New assets and capabilities print business, agree that advertising today to just 29 percent in 2015. will also be required to better revenues will never fully recover monetize the relationships that media from their current plunge, especially This shift in revenue sources suggests companies have developed with their if companies cling to the traditional just how challenging the future of audiences. display advertisement model. This Exhibit 9 Participants Expect Their Share of Digital Revenues to Nearly Double to 36 Percent by 2015 SHARE OF DIGITAL & INTERACTIVE REVENUES (AS PERCENTAGE OF TOTAL REVENUES) 2009 2015 Your Company 19% 36% Media Average (across all respondents) Industry Leader 31% 60% Your Company 11% 28% Print Media Industry Leader 20% 41% Your Company 20% 37% TV & Digital Media Industry Leader 27% 49% Your Company 19% 34% Integrated Player Industry Leader 37% 51% Your Company 29% 49% B2B Player Industry Leader 47% 62% Source: Booz & Company analysis Booz & Company 11

is true for three key reasons: First, may find that their audience is more market-leading capabilities in either media companies face a much broader willing to pay for unique content, marketing solutions or “user-driven range of competitors online than in although there is little evidence that solutions” can achieve higher growth their traditional markets. Second, consumers will spend more than they than industry peers (see Exhibit 10). as dollars migrate from traditional, already do for their current multi- The first path, providing marketing linear media to digital, the significant channel subscriptions for further gains solutions, focuses on further tapping online imbalance between supply in convenience and functionality. into customers’ marketing budgets and demand is putting substantial The reality is that the vast majority in areas such as custom content and pressure on pricing. Finally, how of media companies face so much lead generation. The second path, audiences access the content they competition that paid content alone “user-driven solutions”, focuses on want is shifting rapidly. Not only is will not provide an adequate solution delivering insights and workflow search playing a key role in driving to their digital business model offerings for which users will pay audience engagement, but so is social challenges. Paid content will likely a premium above and beyond media. As a result, even as they drive prove to be a long and winding road basic editorial content. The study valuable traffic to other media sites, to a house that’s just too small. further demonstrated that leaders players such as Google, Facebook, in marketing solutions not only and YouTube are also capturing Improving digital advertising sales generated new revenue streams but a significant share of the limited performance and introducing new also gained share in core advertising advertising spend for themselves. paid content models offer attractive as well. opportunities for many media Unfortunately, journalism and companies looking to reinvigorate In addition to extending their information have already become growth. But these opportunities are reach into marketing budgets commodities on the Web, and not likely to be sufficient to turn beyond advertising spending, media charging for content online is unlikely these businesses into real growth companies can also employ new to deliver enough revenues to restore stories. Rather than simply migrating means to monetize the level of media companies to growth as their old circulation models to the digital audience engagement in their content. audiences continue to migrate online. world, media companies will need Paid content may not be the most Publishers are experimenting with to identify innovative ways to drive direct way to capture consumer new paid content models—such as growth, building new revenue streams spending. Within specific categories, Kindle sales, multi-title subscriptions, and enabling new capabilities. e-commerce may provide even more and micropayments—but these efforts fertile ground for tapping audience are not likely to offset the significant In a study Booz & Company engagement (see Exhibit 11). In this erosion of core revenues that media recently completed with American way, media companies that can build companies have faced over the past Business Media, we demonstrated deep relationships with audiences two years. And television companies that companies that develop around targeted content are likely 12 Booz & Company

Exhibit 10 Growth in Media Will Require Coordinated Innovation in Both Content Creation and Advertising Services Marketing Services Advertisers pay for contact Growth driven by deeper audience involvement & leveraging customer insight Traditional Advertising Advertisers Simple monetization of pay for ads audiences by ad sales will be the future growth driver Media Audience pays for Audience pays for content, Business content utility & commerce Model Source: Booz & Company analysis Exhibit 11 Future Growth Will Come from Innovative Marketing Services and E-Commerce ADVERTISING MARKET (2008 VS. 2015) ONLINE REVENUE POTENTIAL (2008 VS. 2015) European market European market assessment assessment 1% 2008 49% 51% 100% 2008 81% 17% 100% 49% 2%-3% 2015 45% 55% 118% 2015 70%-72% 25%-27% 162% Traditional Marketing E-commerce & Digital Paid advertising services digital services advertising content CAGR CAGR (’08-’15) +1% +4% (’08-’15) +7% +15% +21% - Print media - Dialogue, direct & - Physical goods - Display & - Digital goods (e.g., - Online display database marketing - Transaction- search music, videos, games, advertising - Lead generation focused services advertising e-books) - Out-of-home media - Consumer promotion (e.g., online - Affiliate - Content-focused - …. - Branded entertainment bookings, marketing services (e.g., vertical - Outsourced custom ticketing) search, dating) publishing - Proprietary media - … player content (e.g., sites, news, archive) Source: Booz & Company analysis Booz & Company 13

to reap the greatest rewards, on with the audience. This will often must make choices about which new several levels: They can tap into include asking the audience to register content model and corresponding broader pools of marketing spend, for content and services, so that the advertising model they want to they can maximize the audience’s media company can provide a more develop. Traditional media companies willingness to pay for differentiated personalized experience. These goals will need to determine how to position content, and they can benefit from need not be in conflict. By providing themselves in the new digital world opportunities in which the proximity greater utility to the audience, and avoid wasting good opportunities. of targeted content to e-commerce media companies can drive a high And every media company will need offerings provides the convenience and volume of registered relationships to drive this migration with greater relevance audiences are looking for. (through e-newsletters, contests and boldness. sweepstakes, and access to exclusive Meanwhile, these new markets content, for instance). At the same In short, time is of the essence. Media will depend not on either content time, encouraging registration opens companies can no longer rest on the innovation or marketing services, but up new opportunities to build insights assumption that their positions as the on both. Driving greater audience about the audience that go beyond incumbents in the content creation engagement and new monetization demographics to include behavioral and distribution business will keep opportunities go hand in hand. targeting. The same principle applies them safe. Instead, they must move Audience development needs to to paid content—advertisers are likely quickly to find ways to protect move beyond most media companies’ to pay a premium to reach these more themselves from the technology historical focus on maximizing the size engaged audiences. players that are already putting their of the audience. Companies must also business models at risk, and to carve focus on more successfully engaging Managing this transition, however, out new territories of their own. and building a deeper relationship won’t be easy. All media companies Improving digital advertising sales performance and introducing new paid content models offer attractive opportunities for many media companies looking to reinvigorate growth. 14 Booz & Company

HOW TO challenge with successful new business business models if they want to keep models that actually generate profit- growing. More than half of the par- GENERATE able revenues. We believe that placing ticipants in our study pointed to the GROWTH a relatively lower priority on investing creation of new digital models as their in people and capabilities may be a top investment priority (see Exhibit risky move. The innovations needed 12). At the same time, respondents to generate profitable growth in admitted that actually developing digital media can only come through these new models will not be easy. Media companies, and the people who the efforts of people willing to think When we asked them to indicate the work for them, have long been highly beyond the incumbent, “protection- most critical challenge they face in creative in developing and distribut- ist” attitude that has been far too meeting the demands of the digital ing great content and designing the pervasive in the media industry. future, by far the most common advertising programs needed to sell it. choice was innovation and flexibility Yet they have proved far less innova- Still, media executives are well aware (see Exhibit 13). tive in their ability to meet the digital of the need to invest in new digital Exhibit 12 Across All Media Types, Digital Business Models Are Now the Top Investment Priority INVESTMENTS REALIZED SO FAR INTENSIFICATION OF INVESTMENT PRIORITY GOING (2009, IN % OF RESPONDENTS) FORWARD* (IN % OF RESPONDENTS) “Top Priority” “Second Priority” Investment Investment Emerging Markets 13% 29% 0% Traditional Media Assets 10% 31% -17% Digital Business Models 52% 29% 35% People/Capabilities 35% 33% 22% * Percentage of respondents planning to intensify efforts minus percentage planning to deemphasize efforts. Source: Booz & Company analysis Exhibit 13 As Companies Look to Monetize Their Digital Efforts, Improving Innovation and Flexibility Will Be the Top Challenge Critical Challenge Challenge Innovation & Flexibility 55% 35% Product & Service Design 24% 58% Technology 24% 51% Consumer Insight 26% 46% Advertising Business Model 43% 24% Transactional Business Models 33% 33% Partnering Capability 14% 39% Source: Booz & Company analysis Booz & Company 15

Other investment opportunities fared less well. Very few respondents viewed investments in emerging markets as a top priority, for example. Many Western media companies may see emerging markets as a risk— and especially a risk to the value of their content, given weak copyright enforcement. And advertising and distribution markets in many of these emerging markets have proved to be highly volatile, adding an additional constraint. Finally, media companies are often so caught up in the effort to transform their core business models that they view new markets not as real opportunities but rather as potential distractions. CONCLUSION • True innovation has never been a core capability of media compa- Yet we believe strongly that tradi- nies, which have long tended to tional media companies can transform think very creatively about content, themselves into profitable businesses branding, and marketing, but much for the digital age. To do so, however, more conservatively about over- they must leverage the loyal audiences The media industry is going through all business strategy. That must they already have, offering them digi- a major structural transformation change. Business model innova- tal business models attractive enough brought about by a combination tion must become central to the to make them willing to migrate to of factors, including the rise of culture and mission of every media digital and to pay for it. One such digital media, changes in the media- company that hopes to thrive in the business model might involve the consuming habits of its customers, coming years. creation of theme-oriented program- and the deterioration of its traditional ming in a variety of media that takes economic model. In this respect, • No company will survive in its advantage of an audience’s common 2009 marks a clear watershed, as the current form unless it can come to interests while offering useful ways industry became aware that the old terms with the digital age. Every to extend that thematic community. ways of doing business will never company that expects to build Ultimately, companies will succeed in come back. a viable, profitable digital busi- the digital realm not by transporting ness must generate the ability to traditional media brands or formats In response, every media company honestly assess its current position to the Internet, but by building inde- must seek out new markets, new and to develop truly innovative pendent online businesses by leverag- customers, new business models, but realistic strategies and business ing their traditional assets. and new processes to meet a very models for the future. uncertain future. Based on our survey and in-depth discussions with media • All media companies are ultimately executives around the world, we offer dependent on the employees who four lessons to help media companies have the creativity and capabilities improve their chances of success in to develop new content and busi- the coming environment: ness models needed to survive. As such, companies must learn to • Companies must go beyond tra- balance the need to generate cost ditional, conservative cost-cutting savings with an awareness of the methods to develop truly innova- core capabilities they will need to tive operating processes and models survive and thrive in the future. that will enable them to generate the savings they need to invest in the business models of the future and to keep existing businesses profitable in the face of declining revenues. 16 Booz & Company

Research Methodology The Booz & Company media industry study was conducted also set out to achieve a geographic balance—53 percent between July and September 2009. The study was based of participating organizations were based in North America, on more than 50 interviews with senior executives in the 30 percent in western Europe, and 17 percent in growth media business and a quantitative online survey in which markets around the world (i.e., Latin America, the Middle 67 companies worldwide participated. Of the companies East, Asia, and central and eastern Europe). All quantitative we surveyed, 36 percent were in TV and digital media, data presented in this report was drawn from the results of 26 percent were in print, 21 percent were business-to- the online survey. The qualitative data was mainly drawn business specialists, and 17 percent were integrated media from our detailed in-person interviews and text responses companies. All the respondents to the online survey were to online survey questions. senior managers representing a broad mix of functions. We About the Authors Harry Hawkes is a partner with Booz & Company based in New York. He leads the firm’s global operations and performance improvement practice for the media and entertainment industries. Thomas Künstner is a Booz & Company partner based in Düsseldorf. He specializes in building marketing, sales, and customer service capabilities for telecommunications and media companies. Gregor Vogelsang is a Booz & Company partner based in Munich. He specializes in organizational development and transformation, corporate governance and organization, and growth strategy development and implementation, as well as finance and controlling for telecommunications and media companies. Timo Benzin is a Booz & Company principal based in Frankfurt. Working primarily for media companies, he specializes in growth strategies, sales force optimization, and operating model improvements. Booz & Company 17

The most recent list of Worldwide Australia, Dublin Middle East Mexico City our office addresses and Offices New Zealand & Düsseldorf Abu Dhabi New York City telephone numbers can Southeast Asia Frankfurt Beirut Parsippany be found on our website, Adelaide Helsinki Cairo San Francisco www.booz.com Auckland London Dubai Bangkok Madrid Riyadh South America Brisbane Milan Buenos Aires Canberra Moscow North America Rio de Janeiro Asia Jakarta Munich Atlanta Santiago Beijing Kuala Lumpur Oslo Chicago São Paulo Delhi Melbourne Paris Cleveland Hong Kong Sydney Rome Dallas Mumbai Stockholm Detroit Seoul Europe Stuttgart Florham Park Shanghai Amsterdam Vienna Houston Taipei Berlin Warsaw Los Angeles Tokyo Copenhagen Zurich McLean Booz & Company is a leading global management consulting firm, helping the world’s top businesses, governments, and organizations. Our founder, Edwin Booz, defined the profession when he established the first management consulting firm in 1914. Today, with more than 3,300 people in 59 offices around the world, we bring foresight and knowledge, deep functional expertise, and a practical approach to building capabilities and delivering real impact. We work closely with our clients to create and deliver essential advantage. For our management magazine strategy+business, visit www.strategy-business.com. Visit www.booz.com to learn more about Booz & Company. Printed in Germany ©2009 Booz & Company Inc.

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Reset the media business model

by Luca Conti on May 25, 2010

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Reset the media business model — Document Transcript