Digital Profitability in Media and Entertainment Industry by Ernst & Young


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Digital Profitability in Media and Entertainment Industry by Ernst & Young

  1. 1. Lessons from changeDigital proÕtability in themedia and entertainmentindustry
  2. 2. Contents 2 That was then … this is now Opportunities in adversity gave us a glimpse into the challenges media and entertainment companies were facing as they confronted the implications of an economic downturn. Lessons from change goes deeper, exploring what companies are learning and how they are using their new knowledge to prepare for the recovery ahead. Introduction: embracing the digital evolution 4 The media and entertainment industry is facing a perfect storm of events. The digital evolution, declines in advertising and consumer spending, and the desire for free online content are forcing companies to accelerate the pace of change as their core businesses come under assault. 8 Securing your present: starring cost management Media and entertainment companies are cutting costs more deeply than ever before. The economy has given organizations authority and protection to challenge the status quo. Areas once considered off limits are no longer safe — including creative business units. Protecting your assets: look for the perfect risk balance12 Risk management was high on media and entertainment’s list of priorities before the economic downturn. But as companies navigate the constantly shifting terrain of digital platforms, many are realizing that their risk assessment processes haven’t kept pace.18 Improving your performance: maximizing proÕtability is key Companies must increase revenues and reduce costs to secure their place within this mature marketplace. Focusing on Õnancial and operational excellence will be the key to successfully monetizing the business. Reshaping your business: content on demand24 Consumers are demanding content anywhere, anytime and through any device. While looking impatiently for the next new thing, companies need to ask: “Are we listening to our customers so we can adapt to their changing desires by delivering content regardless of the technology platform?” Sustaining your future: the next big thing28 In the past, there was a singular focus on growth, almost to the exclusion of all else. This was driven by the notion that growth would solve all other issues. Today, however, the focus is no longer just on growth, but on proÕtable growth. Conclusion: creating differentiated value32 Even when the global recession eases, the media and entertainment industry will continue to face a number of challenges. Companies must be able to create differentiated value that consumers are willing to pay for. They must also protect their assets in an increasingly fragmented distribution landscape. A new business agenda is emerging34 Lessons from change comprises a series of 14 sector-speciÕc white papers based on more than 40,000 client meetings and has produced more than 500 cross-industry insights. Studying this material, we see a new agenda for success emerging.
  3. 3. That was then ... In January 2009, Ernst & Young published Opportunities in adversity,1 a study that provided insights into the issues executives were facing as they grappled with the implications of the economic downturn. We suggested that every company falls somewhere on a stress pendulum between cash burn and cash earn, and for every business there is an appropriate course of action. By executing that course of action quickly and effectively, management teams can seize a potential source of competitive advantage. Stress pendulum Cash earn Cash burn s nitie ortu Cou n opp r t su lvent perv u isitio n Ca ision Acq tio pit iza Bu al res tim Inso p sin tru oo es ctu oli ty rin Stake rtf su nt ili g Po me ab ni ent Su st tc ss r lo h ie cce Ass se agem su pl older re Di as tal up et i ss ve re S api sti Cost reduction n et m d mana ity ma gc tu se rk pai re Ma es rkin rm s tr ge s Di Liquid ent Wo ment Do on turn d Stresse The media and entertainment industry was under considerable stress long before the global economy reached bottom. The digital evolution was forcing traditional media and entertainment companies to completely reexamine the way they do business. Yet despite this stress, the majority of respondents to our survey indicated that they were more optimistic about their prospects than other industries and better prepared to take advantage of opportunities when the market recovers. 1. All survey data referenced within this report, unless otherwise noted, is from Ernst & Young’s Opportunities in adversity survey.2
  4. 4. ... this is now Opportunities in adversity gave us a glimpse into the challenges media and entertainment companies were facing, but we wanted to know more. We wanted an in-depth understanding of the speciÕc issues executives were experiencing, as well as the lessons they were learning and applying to prepare their companies for the recovery ahead. And so we went back to our media and entertainment leaders to gain their insights. In total, Ernst & Young’s media and entertainment partners in our member Õrms around the world conducted more than 1,000 client meetings. These conversations revealed a series of strategic actions the industry is taking to position itself for success. Not all of their lessons from change may be new, but they are taking on new importance as companies strive not only to survive but thrive in the new economic environment. Questions and considerations As you take charge of implementing change within your organization, we invite you to reÖect on the following questions and considerations: • Take advantage of the global economic woes to challenge the status quo when it comes to cost management. What steps is your company taking to contain costs? • The digital evolution is transforming the way consumers source information and advertisers reach their customers. Accelerate the pace of introducing digital initiatives. How will your company convert online and digital platforms into revenues and cash? • Media and entertainment companies need to reassess their risk proÕles as they push beyond their core businesses. What is your company doing to provide adequate technology and resource support as you move into new markets? • Management needs faster, more accurate real-time business intelligence to make sound business decisions. Is your company investing in the appropriate resources (systems, people, processes) to get the data you need? • Don’t miss opportunities for strategic investment, global expansion or product innovation by being overly cautious. What approach is your company taking to strike a balance between avoiding risk and seizing opportunity? • Invest in your talent needs. What talent does your company need today? What will you need in the future? 3
  5. 5. Introduction4
  6. 6. Embracing thedigital evolutionFor decades, the media and entertainment industry has heard critics predictits demise. The industry is struggling to cope with the digital evolution amidan economic downturn. But despite the critics’ shouts, many industry playersare quietly expressing more optimism about their prospects than otherindustries and feel better prepared to take advantage of opportunities whenthe economy rebounds.In the 1950s, experts were sure that thrived. It has remained resilient whentelevision would kill radio. In the 1970s, compared to the broader economy evencable TV was going to spell the end of during the worst economic crisis since thefree-to-air television. In the 1980s, video Great Depression. Using Standard andwas going to shutter movie theaters. Poor’s S&P Global 1200 index as aMore recently, YouTube has been seen measure, during the 20-month periodas dooming professional content. And ended 31 August 2009, the media andpiracy — already having cut a swath entertainment index outperformed thethrough music — is causing alarmists broader cross-industry index byto fear that it may destroy the 4.2% — with staggering volatility. Someentire industry. media and entertainment companies’ share prices showed a decline of up toBut, to paraphrase Mark Twain, reports of 91%, while others grew as much as 7%.2its death are greatly exaggerated. The (See Figure 1.)media and entertainment industry, eachand every time, has not only survived but2. Factset 2007.5B – Company Explorer 2.0 – Prices – Price Chart, accessed 2 September 2009. 5
  7. 7. Figure 1S&P 1200 M&E Companies Index (1 January 2008 – 31 August 2009)Indexed price (1 January 2009 = 100)100 S&P Global 1200 S&P 1200 M&E 90 80 70 60 50 40 30 3/08 6/08 9/08 12/08 3/09 6/09Source: FactSet 2007.5B – Company Explorer 2.0 – Prices – Price Chart, accessed 2 September 2009.The perfect stormThe industry is facing a perfect storm of events. First, there’s the digital evolution, which istransforming the way consumers get information and entertainment, and the wayadvertisers reach their customers. Second, there’s the plummet in advertising and thesevere decline in consumer discretionary spending, both caused by the global recession.The third event involves the gravitational pull of online content on consumers, and the factthat they want it for free. For companies that once thought they could pursue digitalinitiatives at their own pace, the perfect storm is forcing them to accelerate as their corebusinesses come under assault.Yet despite the lashing winds of change, most media and entertainment companies areweathering the storm. While earnings are down in many media and entertainmentsubsectors, many companies have retained strong cash or working capital positions.Most continue to be conservative with their cash management. Others are activelyseeking strategic investment opportunities at bargain-basement prices. Those withless favorable liquidity positions are actively searching for ways to access capital or cutcosts even further.6
  8. 8. A new model for the new economy “We don’t know when or how theAs consumer behaviors and technology continue to economy will recover, so companies willchange, companies need to rethink their business models.Content owners, for example, need to chart a new course wrestle with determining when it’sfor exploiting their content assets through distribution prudent to reinject resources.”channels that were unheard of just a short time ago.Finding the right balance will mean not only protecting — Bruno PerrinproÕts from traditional distribution, but also establishing a Ernst & Young Media & Entertainment Leader,proÕtable future. Europe, Middle East, India and Africa; ParisMedia and entertainment companies are also affected byvanishing consumer credit availability and job worriesthat together have resulted in a drop in discretionaryspending — for example, in DVD sales and specialty-channel subscriptions (e.g., HBO, Showtime). Companieshave to rethink the timing of relaunching or repricingservices or products. The global economy has steppedback from the verge of collapse, but many economistsbelieve that consumer spending habits have beenpermanently reset — at lower levels.Optimizing capital availability and maintaining ÕnancialÖexibility have been priority considerations for media andentertainment companies during the economic downturn.But not necessarily at the expense of long-term planning.True, there has been some short-term pain as companiessecure their present, but those that reshape theirbusinesses to compete in the digital age have the potentialto position themselves for a strong and sustainable future. 7
  9. 9. Securing your present8
  10. 10. Starring costmanagementThe breadth and depth of the economic crisis came as a surprise to somemedia and entertainment companies. However, it has provided a uniqueopportunity to realign organizational and cost structures to Õt the new realityof slimmer revenues.Cutting costs across Companies are also exploring ways to increase operating efÕciencies. They arethe organization reducing headcount and exploring potentialMedia and entertainment companies are savings and efÕciencies that could becutting more deeply than ever before. gained through shared service centers asThe economy has given organizations well as outsourcing and offshoringpolitical, organizational and cultural arrangements. In our Opportunities inprotection to challenge the status quo. adversity survey, 84% of media andAreas once considered off limits are no entertainment respondents said they havelonger safe — including creative business accelerated their cost-cutting activities overunits. In many companies, creative cost the past year. (See Figure 2.)areas like production, marketing, However, smart companies are realizingadvertising and even travel and that headcount reductions must beentertainment expenses — areas that were accompanied by process and organizationalonce untouchable by the Õnancial or changes if there are to be long-term gainsnoncreative members of management — are in efÕ being scrutinized along with othercost centers. Companies are also rethinkingsigniÕcant advances to talent, who are nowexpected to take more risks on the backend. This evaluation may have long-termeffects on the creation of content in thefuture, but media and entertainmentcompanies see this as necessary if they areto retain operating margins. 9
  11. 11. Figure 2Which of the following initiatives has your organization accelerated over the past year? Media and entertainment All industries 84% Cost reduction 86% Business restructuring 47% 52% 41% Review of capital investment programs 43% 38% Finance function review 34% 28% Significant employee reduction program 38% Relocation of production and 16% shared service centers 22% IT outsourcing or enterprise 16% IT related program 17% 16% Corporate governance review 29% Tax planning and review 16% 23%Construction or real estate related program 9% 11% Supply chain restructuring 9% 21%Shown: percentage of media and entertainment respondents compared to all industries who indicated that their initiatives have accelerated over the past yearSource: Opportunities in adversity surveyRethinking supplier relationships Maximizing cash reservesThe economic crisis has media and entertainment companies Cash conservation is the new mantra. In our Opportunities intaking a hard look at their supplier relationships. Many have found adversity survey, 57% of respondents said they are taking athemselves dependent on limited sources for business-critical top-down review of current cash management and cash Öows.products or applications. The crisis in other industries, like (See Figure 3.)automotive, has media and entertainment companies reevaluating Since many private equity and other debt options are still limited,not only the credit worthiness of their own suppliers, but also the companies are continuing to look for ways to maximize their cashcredit health of the banks their suppliers depend on for Õnancing. Öows. For some companies, this has meant not only cutting costsMany media and entertainment companies are making bold moves but also reassessing their investments and refocusing theirto identify multiple suppliers that will mitigate their risk and solidify strategies. For example, in a deal that presages its departure from atheir supply chain. market it helped pioneer, Yahoo! will refocus its efforts to dominate search engine capability and instead rely on Microsoft’s recently debuted Bing search engine. While the change is part of Yahoo!’s larger strategic efforts, it will save the company an estimated US$200m a year in technology costs and increase its ad revenues, thereby adding to its operating cash Öow.33. Peter Burrows and Robert D. Hof, “Yahoo! Gives in to Microsoft, gives up on search,”, 30 July 2009, via Dow Jones Factiva, © 2009 McGraw-Hill, Inc.10
  12. 12. Figure 3Which of the following steps is your company currently taking to maintain liquidity inthe light of current market conditions? Top-down review of current cash 57% management and of cash flows Considering alternate sources of liquidity (e.g., disposal of assets, shutdown or 35% sale of segments/revenue streams) Communicating with lenders, analysts and rating 34% agencies proactively Making an inventory of all debt covenants and monitoring 30% covenant compliance Obtaining access to short-term 28% finance facilities/credit Considering options to renegotiate 25% debt covenants Other 7% None of the above, cash is not an issue 18%Shown: percentage of respondents who selected the above steps to maintain liquidity in their operationsSource: Opportunities in adversity surveyFor most companies, capital expenditures have been relatively Öatover the last two years. In today’s economy, capital projects needto generate immediate revenues. Some cable operators and direct Key considerationsbroadcast satellite systems have been willing to spend when the • Take advantage of the economic downturn to challengeresults are tied directly to revenue generation (e.g., set-top boxes). the status quo: Reassess organizational redundancies,But these direct capital-to-revenue expenditures have been cost reductions and efÕciencies across the organizationrelatively few. Several companies have noted that they are • Make contingency plans for key suppliersmanaging the balance sheet very closely. • Ensure cash reserves are available when strategicAccumulating cash is good, but some analysts fear companies may opportunities arisenot know what to do with it. Is it meant to boost M&A activity? Orare they looking to buy back shares or increase dividends to boostshareholder value? 11
  13. 13. Protecting your assets12
  14. 14. Look for theperfect risk balanceEven before the global economic crisis, risk management was high on mediaand entertainment’s list of priorities. But as companies navigate the constantlyshifting terrain of digital platforms, many are realizing that their riskassessment processes haven’t kept pace.In the current economic climate, corporate business models and managing themanagement has been on the defensive, infrastructure to support them still rankedaddressing the most critical aspects of the in the top Õve.economic turbulence. Now, companies and New innovations and changing businesstheir boards must become more proactive paradigms are creating whole new areasand focus on internal priorities. Media and of risk: contract risk, systems risk,entertainment companies can leverage the operational risk. As companies are pushedlessons learned by their peers, as well as outside their core businesses, they mustcompanies in other industries, to rethink reassess their risk proÕle to ensure theytheir approach to risk assessment. have the necessary processes, people, data and technologies in place to supportReassessing risk their expanding business. For example,management practices when one content company branched into electronic gaming, it was faced with newIn The 2009 Ernst & Young business risk challenges in inventory control, pricing,report: media and entertainment,4 we timing and returns and adjustments. WhenidentiÕed the top 10 risks facing media a publishing company launched itsand entertainment companies today. products digitally, and when a music(See Figure 4.) The risks at the center of company sold songs for use in mobilethe radar in the graphic are those that ringtones, neither company anticipatedanalysts suggest pose the greatest the impact that third-party partners wouldchallenges to the leading global companies have on core business reporting. Neitherin the media and entertainment sector in digital partner was able to provide thethe year ahead. book title or song title revenue detail thatWhile the economic downturn and resultant the companies needed to comply withcost control and reduction efforts ranked their underlying contracts with authorsnumber one in the survey, consumer or artists.demand shifts, and operationalizing new4. The 2009 Ernst & Young business risk report: media and entertainment, Ernst & Young, 2009. 13
  15. 15. Companies must change their operations to support digital Figure 4distribution, which will have implications large and small, notthe least of which is integrating infrastructure across Financial Complianceplatforms. Multiplatform distribution increases pricing andscheduling challenges. Digital distribution raises contract Corporate governance and internal controlsissues. And then there are the microtransactions from, forexample, Kindle users, who may soon be able to buy a singlechapter or segment of a book. Information technology Asset exploitation and protectionsystems need to be able to capture multiplatform data, (including piracy and IP rights) Allocating investments betweenmicrotransactions and apportioning revenues for multiple traditional and new mediadistribution models. Economic downturn and resultant cost controls and reduction costsIn the days of the studio system — when there was singleownership of creativity, content and distribution — virtually all Shiftingrisk could be managed. Today, new content and distribution advertising dollars Operationalizing newpartners multiply the risks. Some companies are discovering business models and New market entrants managing thethat they haven’t adequately assessed all the risks that and impact on infrastructure toaccompany entering new markets. These additional value chain Consumer support them demand shiftsoperational risks can bring negative consequences that are noteasily or quickly Õxed. In Ernst & Young’s survey, The future of Emergingrisk, 85% of media and entertainment respondents indicated marketsthat improving the alignment of their risk management M&A activity and entry of PEapproach with their business strategy and business objectiveswas the most important step to improving risk efforts.5 Strategic OperationsThe economic downturn also brought to light treasury risksthat until now had seemed under control. As blue chip stocks Source: The 2009 Ernst & Young business risk report: media and entertainment, 2009,and top Õnancial institutions lost value almost overnight, some Ernst & Young.companies were caught off guard with their establishedmarketable investment strategies. “Only companies prepared for the worst came out relatively unscathed.” — John Nendick Ernst & Young Global Media & Entertainment Leader, Los Angeles5. The future of risk, Ernst & Young, July 2009.14
  16. 16. Exploring the risks of emerging markets Combating piracyEmerging markets may provide a means for media and Advances in technology and distribution channels, the risingentertainment companies to improve their proÕtability. As importance of less-regulated emerging markets, and the growth ofglobal economies like China, India and Latin America develop, open source and online video content combine to keep intellectualconsumers will have more access to technology and content. property protection a priority risk in the media and entertainmentBut while global expansion presents many opportunities, it also sector. Piracy and illegal distribution channels continue to expandcarries substantial risks. These include regulatory risks in developing countries. The impact of piracy will continue to grow(ownership restrictions, taxes), IP risks (piracy, copyright, as bandwidth increases and more media assets are offered online,licensing and reuse), content risks (cultural norms and local consumers become more comfortable accessing media contenttastes) and currency risks. Companies that do business in and products online and the expectation persists that some or allemerging markets need to ensure their risk management of that content should be free.process addresses these risks. If companies can successfully enhance the value of the fee-for- service alternatives, through compelling pricing, ease of use, quality of product, service or overall experience, consumers may Õnd pirated content less attractive. Attractive paid-content models — which allow companies to recover some revenue loss by inducing customers to pay for at least part of the content — have also started to emerge. Looking at the long term, more than a company’s revenue in a particular market may be at stake. Piracy not only puts margins and revenue growth under increased pressure, but also could endanger valuable brands. To minimize the impact that piracy may have on a company’s bottom line and reputation, companies must invest in antipiracy initiatives. Many media and entertainment companies have dedicated internal resources to combat rights infringements and participate in industry groups to gather information and develop effective strategies. Media and entertainment companies are also partnering with telecommunications and technology companies to develop technologies and hardware that combat piracy. In addition, media and entertainment companies must evaluate end-to-end production through distribution activities to determine areas at risk for piracy or unauthorized usage.“When entering emerging markets, media and entertainment companies should take a long-term outlook and conduct active risk management and process monitoring of their operations in these markets.”— Farokh BalsaraErnst & Young Media & Entertainment Leader, India, Mumbai 15
  17. 17. Protecting the brandCompanies looking to cut costs and limit investments should not doso at the expense of brand and reputation. In fact, some media and “The brand is key to future success.”entertainment companies are Õnding that maintaining brand equity — Ken Walkeroften requires extra effort and resources. Whether it’s investing in Ernst & Young LLP Global Client Service Partner, Los Angelesfront-of-house systems, producing a prime-time network show, orimproving a customer call center, media and entertainmentcompanies are making decisions that impact their costs and thatcould effect their brand. When cutting costs is a priority, companiesmust be vigilant in protecting their reputation and their brand.Companies also have to worry about internal threats to theirbrand. The recession is forcing many companies to reduceemployee pay and/or beneÕts. In the wake of recent publicattention, there is an increased sensitivity to executivecompensation. These conditions may lead to reduced employeeloyalty in the short term. In the longer term, once the economyturns around, there is the possibility of a talent grab where keyemployees may be enticed to move to more lucrative pastures. InErnst & Young’s 2008 CEO study, Fast forward: how CEOs arebalancing the transition to the digital future, participantsindicated that attracting, retaining and developing talentedpeople will be the top challenge and key to success over the nexttwo years.US regulatory risk implications As the regulatory climate continues to change, new challenges may emerge. There is a risk in the US that the Obama administration or Congress may work to enact rules that make it harder for large syndicated radio shows to operate. Using rules such as the“fairness doctrine,” or insisting on more “localism” could create real difÕculties for radio companies that air many nationally syndicated radio talk shows. Additionally, media and entertainment companies that were hoping that the government would ease media cross-ownership rules are likely to be disappointed.16
  18. 18. Protecting the value chainCompanies need to respond to consumers’ desire to access content Key considerationson demand, but at the same time, they must protect the value of • Actively assess risks arising from new distributiontheir assets. The music industry provides a cautionary tale of what platforms and changing business paradigmscan happen when content owners lose control of their product.Several content owners have had disagreements over price, usage • Make sure your operational infrastructures keep pace withand customer ownership with their new media distribution digital distribution platformspartners. At the root of many of these problems are differing • When doing business in emerging markets, be sure toobjectives of the parties. Once again, the music industry is address new challenges in risk assessment andinstructive. Apple wants to price content at a point that will help it process monitoringsell gadgets, but music companies say that these prices don’tcapture the maximum value of their content.6 Similarly, movie • Don’t reduce costs or limit investments at the expensestudios are at odds with the new movie kiosk services that rent of brandmovies for bargain prices. Media and entertainment companies run • Find the balance between meeting consumer anywhere-the risk of being eliminated as intermediaries by new forms of anytime demands and protecting the value of assetsdistribution. Wherever possible, content providers must seek tomaintain control of the customer, which allows them to maintain • Maintain control of the customer relationship tothe customer relationship and, in turn, maximize pricing options. maximize pricing optionsIt is likely that in the digital realm, variable pricing schemes willbecome more common. Yet most traditional media models are notequipped to take advantage of the opportunities that this allows.On the customer-facing side, it requires new ways of thinking aboutmarketing and consumer research. In the back ofÕce, it requiresadequate systems and processes to capture customer data. Thisapplies to both the content provider and the distributor.6. Robert Cyran, “Growth in paid-for music downloads doesnt mean happy days forthe labels,” The Daily Telegraph, 20 August 2009, via Dow Jones Factiva. 17
  19. 19. Improving your performance18
  20. 20. MaximizingproÕtability is keyThe recession may have mandated enterprise-wide cost-cutting, but toÕrmly secure a place in the future, companies must Õnd other ways toimprove their performance.Improving bottom line environment, product development and innovation will likely have to be accelerated.proÔtability Some corporate cultures may not have theCompanies must increase revenues and Öexibility or the fortitude to keep pace.reduce costs to secure their place within this The current economic crisis has providedmature marketplace. Focusing on Õnancial media and entertainment companies withand operational excellence will be the key to opportunities to make improvements andsuccessfully monetizing the business. gain efÕciencies in areas once viewed asMaximizing revenue is increasingly untouchable. Companies can no longerimportant. Companies with content afford to have different business units withlibraries are resurrecting “long-tail” overlapping support functions (e.g.,content — products in low demand or with accounts payable). Where possible, theylow sales volumes — and working to are eliminating long-standing divisional ormonetize it. For instance, music companies business unit silos, as well as looking forhave made substantial proÕts from opportunities to outsource certainlicensing songs to videogame makers for functions or develop shared servicetitles such as Rock Band and Guitar Hero.7 centers for certain operations that do notThis has provided the labels an opportunity produce generate new revenue streams fromback catalogs. In the new media “The best companies will look at cost reductions in a long-term thoughtful way. The worst will be tactical and knee-jerk.” — Michael Rudberg Ernst & Young Media & Entertainment Leader, UK, London7. Matt Hartley, “Guitar Hero’s Latest Release? Filthy Lucre; What Began as a Quirky Novelty Game Has Evolvedinto a Revenue Engine for the Video Game and Music Industries,” The Globe and Mail, 28 October 2008 via DowJones Factiva, © 2008 CTVglobalmedia Publishing Inc. 19
  21. 21. Considering change-management implications have noted recently that they will continue to look for deal opportunities, but only those that can meet high ROI hurdles andChanges such as these often present challenges to an will increase share price from inception. New media will continue toorganization’s internal culture. A decision to use shared service be a focus for deal activity, as many traditional platforms enter thecenters may seem obvious, but there are often associated maturity phase. In the Ernst & Young 2008 CEO study, Fastintegration challenges and change-management issues that forward: how CEOs are balancing the transition to the digital future,management may not be prepared to address. Cultural change CEOs indicated that new technologies and content were the mostwill impact not just leadership, but also the creative attractive investments. (See Figure 5.)talent — especially as this may be the Õrst time they have beenasked to make sacriÕces. More than ever before, there is an In addition to M&A, companies are spinning off nonstrategicunderstanding that there must be agreement at the top, and businesses. In so doing, they are becoming pure-play again afteran alignment of governance and internal sponsorship, if years of following a conglomeration model. They are askingmeaningful change is to be made. themselves hard questions about organizational structure. Does good content need to own distribution, or vice versa? Until recently, companies favored vertical integration. Now,Looking for deal opportunities however, many companies seem to be moving in the oppositeM&A transactions have slowed in the media and entertainment direction. For example, Time Warner has spun off its cable unit andindustry. But as companies look to the future and adapt to new is contemplating a spinoff of its online business as well. Bothmodels, executives may begin to consider acquisitions of smaller moves position Time Warner to focus on becoming a pure-playinnovative companies. Several media and entertainment executives content company.8Figure 5What kinds of opportunities are most attractive to you for investment — includingboth organic and media and entertainment — right now? New technologies(digital interactive TV, mobile technology, etc.) 21% New types of content (content that complements existing 19% content, user-generated content, etc.) Mergers and acquisitions 19% Content distribution and accessibility 17% Organic growth focus 14% Integrating/managing 10% existing businesses 0% 5% 10% 15% 20% 25% Percent of responsesSource: Fast forward: how CEOs are balancing the transition to the digital future, 2008, Ernst & Young.8. Time Warner SEC form 10-Q, Õled 29 July 2009; Emily Steel, “Time Warner Repurchases Google’s 5% Stake in AOL,” The Wall Street Journal, 28 July 2009,via Dow Jones Factiva, © 2009 Dow Jones & Company, Inc.20
  22. 22. Improving business intelligence Multiplatform distribution requires companies to have better tools for aggregating, measuring, reporting and analyzing customerTo improve bottom-line performance, companies must improve data across platforms. Companies need this data to gain greatertheir planning and performance-monitoring processes. Changing insight into consumer behavior, since advertisers are increasinglybusiness models require that different drivers and metrics be interested in behavioral rather than reach-based metrics. Theseintegrated into planning and performance-reporting systems. metrics are also required to develop more personalized advertisingGiven the relatively small amount of revenue generated from capabilities (i.e., better customer targeting).digital initiatives, many companies have not devoted the necessaryresources to construct rigorous risk models, much less invest the Yet, while management appreciates the value of real-time businesstime and money required to set up the processes, controls and intelligence, it often struggles to Õnd the funds to pay for it ininfrastructure that new media requires. today’s economic climate. In a downturn, information and data systems are easy target areas for cost-cutting, since it isThe challenge of projecting proÕts from new media assets or notoriously hard to measure their value. However, this may beinvestments has made decision-making — already difÕcult in today’s shortsighted. Companies will need more robust information toeconomy — even more difÕcult. Many media and entertainment deliver value down the road.executives have discovered a need for better data, faster, fromwithin their own organization to enable better and faster decision-making. Revenue and proÕtability projections and ROI analyses arecritical components of a company’s decision to acquire aninnovative partner or to divest itself of a noncore business. “New business models give rise to new metrics, which companies must think about incorporating into their planning and performance-reporting systems.” — Bud McDonald Ernst & Young LLP Global Client Service Partner, New York 21
  23. 23. Interactive media gets top marksErnst & Young has analyzed EBITDA9 growth for all the major media and entertainmentsubsegments. It is no surprise that interactive media gets top marks in EBITDA dollarscompound annual growth. Traditional media, such as radio and TV broadcast, have seentheir EBITDA growth fall dramatically.Figure 6EBITDA margin percentage* 2005—2009E 2005–2009E CAGR50% (EBITDA$)** Interactive media: 22% Satellite TV: 17%40% Cable operators: 13% Electronic games: 10% Cable networks: 10% Conglomerates: 2%30% Film and TV production: 1% Music: 1% Publishing: 0% TV broadcast: (7%)20% Radio broadcast: (19%)10% 0% 2005 2006 2007 2008 2009ESource: EBITDA data is based on publicly available company and investment analyst reports for the years 2005 to 2009E.Notes:* EBITDA margin percentage is EBITDA dollars divided by revenue dollars.** 2005-2009E CAGR (EBITDA$) is the compound annual growth rate of EBITDA dollars.9. Earnings before interest, taxes, depreciation and amortization.22
  24. 24. Key considerations• Institute strong management sponsorship to drive organizational change and cultural shifts• Explore offshoring, outsourcing and other changes in business processes to reduce operating expenses• Dont neglect investments in business intelligence capabilities that enable and facilitate accelerated, informed decision-making• Explore strategic M&A in a depressed market to drive growth and innovation 23
  25. 25. Reshaping your business24
  26. 26. Content on demandThe landscape in the media and entertainment industry has been shifting andchanging for quite some time. Consumers are demanding content anywhere,anytime and through any device. Technology is setting the pace and drivingconsumers to demand more. While looking impatiently for the “next newthing,” companies need to ask: “Are we listening to our customers so we canadapt to their changing desires by delivering content regardless of thetechnology platform?”The now-pervasive desire for on-demand The future lies in digital download, but acontent continues to drive changes to multitude of factors that depress the pricebusiness models. Consumers want to pay of content are making it hard for media andfor content once, if at all, and then access it entertainment companies to Õnd the rightthrough their television, computer or digital business model. Is it advertising,mobile device. This is a new pattern for subscriptions or a hybrid model? Wherecompanies that are used to a linear does the customer/consumer Õt in? Andcontent-delivery model. But companies are what is the relationship (if any) of theresponding. Comcast and Time Warner customer to the brand? How do companiesCable are experimenting with a pilot create differentiated value that theprogram where paying subscribers can consumer is willing to pay for?access cable programming online or viamobile devices at no additional charge.10 “There is a generational expectation that content is free.” — Howard Bass Ernst & Young LLP Global Client Service Partner, New York10. “More Join TV Web Party: Time Warner Cable, Verizon, AT&T Test ‘TV Everywhere’,” Multichannel News,7 September 2009, via Dow Jones Factiva, © 2009 Multichannel News, Reed Business Information,a division of Reed Elsevier, Inc. 25
  27. 27. Movie studios are similarly seeking additional revenues as the Seizing opportunities from regulationmarket changes. DVD sales — a potent revenue and proÕt sourcefor the industry — are slowing because of the format’s maturity and Media and entertainment companies are analyzing opportunitieslower consumer spending. Recent reports show that half the 15% afforded by changing regulations. Throughout the world,drop in DVD sales during the last two quarters is due to general governments are using the advent of new media to take a freshconsumer retrenchment.11 Likewise, videogame sales — once look at how they regulate media and telecommunications. Therethought recession resistant — have also fallen. Annual sales to June are several efforts underway to boost broadband penetration.2009 fell by 29% year over year, owing to consumer weakness.12 In the UK, the government has launched a new initiative calledMany media and entertainment subsectors have been hurt by the Digital Britain. The effort will wire all UK homes and businessesdecline in spending for advertising, which has been driven by with broadband at a minimum speed of two megabits per secondadvertisers’ Õnancial distress as well as viewership declines in by 2012. The goal is to position the UK as a leader in the globaltraditional distribution channels. As ad revenues continue to digital economy and spur growth in the digital and communicationsdecline, some companies are looking for alternatives to the industries. The plan will be paid for by taxing those with access toadvertising revenue model. For instance, in the US, several provide access to those without. It also includes a small tax on alltelevision stations are getting retransmission fees from cable Õxed phone lines.14 These efforts will provide additional outletsoperators — an entirely new source of revenue. Music companies for content.are licensing their music to ad-supported music streaming sites in When pay television was introduced, Australia and many Europeanexchange for a cut of the advertising take. countries initiated plans to ensure that sporting events of culturalAs consumers become more fragmented, advertising is becoming and national signiÕcance would remain freely available to themore targeted. Companies want to ensure they are not just public. Now Australia’s government is building a high-speedreaching audiences, but are reaching the right audiences. Last Õber-to-the-home broadband network called the Nationalyear, six US cable companies launched Project Canoe, a system Broadband Network (NBN), a A$43b (US$37b15) project that willdesigned to deliver targeted TV ads to viewers through their cable provide high-speed internet to much of Australia.16 The NBN willboxes.13 To advertisers, a more engaged consumer is a more allow Australians to view high-quality, live streaming video over thevaluable one. Targeting and engaging audiences is particularly internet. While there is little evidence to date that sporting eventsimportant in a world where consumers may not be as receptive to are being exclusively “siphoned” to these new digital platforms, thespots as they once were or can simply skip them altogether by potential for siphoning is causing much discussion and debateusing DVRs. within Australia and other countries with similar plans. Local governments and broadcasters must decide whether free-to-air digital channels (including the internet) should be allowed to show events included on the “anti-siphoning list” if the event was not previously or simultaneously shown on their broadcast channels.1711. Michael Santoli, “Media, The Eye-Opening Truth,” Barron’s, 20 July 2009, via Dow Jones Factiva, © 2009 Dow Jones & Company, Inc.12. Yukari Iwatani Kane, “Videogame makers can’t dodge recession,” The Wall Street Journal, 27 July 2009, via Dow Jones Factiva, © 2009 Dow Jones & Company, Inc.13. Tim Arango, “Cable Firms Join Forces to Attract Focused Ads,” The New York Times, 10 March 2008.14. “Get up to speed: We must have faster broadband connections,” The Herald, 28 July 2009, via Dow Jones Factiva; Robin Pagnamenta, “Digital Britain in jeopardy as powerhouses move abroad,” The Times, 27 July 2009, via Dow Jones Factiva, © 2009 Times Newspapers Ltd.; Matthew Wanford, “UK government issues Digital Britain interim report,”Mondaq Business BrieÕng, 13 July 2009, via Dow Jones Factiva.15. A$1 = UD$0.867905 as of 20 September 2009.16. “Australia appoints advisers on broadband,” Dow Jones International News, 6 August 2009, via Dow Jones Factiva; Jing Li, “Australia Invites Public Comment onNational Broadband Network project,” IHS Global Insight Daily Analysis, 3 July 2009, via Dow Jones Factiva, © 2009 IHS Global Insight Limited; “Strategy Analytics: Australia’sbroadband policy ‘sets the bar’ for other countries; nation will have 5 million Õber broadband subs by 2020,” Business Wire, 9 June 2009, via Dow Jones Factiva,© 2009 Business Wire.17. Sport on television: A review of the anti-siphoning scheme in the contemporary digital environment, Australian Government, Department of Broadband, Communications andthe Digital Economy discussion paper, August 2009.26
  28. 28. “As more digital platforms come on line, the advertising pie is being split between more and more players.” — David McGregor Ernst & Young Media & Entertainment Leader, Oceania, MelbourneBuilding sustainable revenue models Now these producers are reliant on any number of outside parties at different points in the chain. To some degree, they have lostIn exploring new digital territory, companies need to be cautious control over their own destiny. Distribution must now take Apple,with investments, which may take longer than expected to become Amazon and NetÖix into account. Often, the distributors andproÕtable, or not become proÕtable at the rate expected. Buzz is content owners have competing agendas.not the same as proÕt. Both YouTube and MySpace have legions ofusers. However, it has proven difÕcult to turn user-generated The new media paradigm raises the issue of just who owns thecontent and social networking into sustainable revenue generators. customer. For example, given that The Wall Street Journal is now available on Kindle, News Corp. no longer has the direct customerEven the newest, seemingly successful digital business models may relationship it once had. As Rupert Murdoch explained in a recentbe already changing. Beginning in the late 1990s, a consensus had analysts’ call, “We are changing the price of the Journal on Kindle,emerged that “information wants to be free.” Newspaper and we will get a better share of the revenue, although I can’t saypublishers put their content online for all to view. A few that I’m satisÕed that it’s the Õnal result that we want. But it will benewspapers tried to charge for content, but those experiments a lot better. But it’s not a big number. And we’re not encouraging itwere quickly dropped. While online visitor and ad growth are at all, because we don’t get the names of the subscribers. Kindleimpressive, the economics are less so. Publishers’ online ad treats them as their subscribers, not as ours, and I think that willrevenue growth has not made up for what they have lost in print. In eventually cause a break between us.”19a way, the online versions are slowly strangling print circulation.The problem is that consumers no longer pay for much of theinformation they consume. According to a Pew Research Centerstudy, in 2008, more people got their news for free online thanpaid for it by buying a newspaper or magazine.18 Companies can’tsustain a business if their content is given away. Newspapers arerethinking their online business models and may, in the near Key considerationsfuture, be charging for online news content. Some analysts liken • Embrace disruptive business models as technology andthe move to “trying to put the toothpaste back in the tube,” but consumer consumption patterns rapidly changeseveral believe it is the only way for newspapers to survive. Thisalso illustrates the need for differentiated content. In a world awash • Evaluate how new media distribution and the debate overin free content, media and entertainment companies must deliver who owns the customer impact growth and proÕtabilitysomething that consumers are willing to pay for. • Understand the changing drivers of advertising value asNew media has also increased interdependence among all parties media consumption shiftsin the value chain. In the days before digital media, a movie studioor a publishing house controlled its product from start to Õnish.18. “Race for a better read,” Time, 16 February 2009, via Dow Jones Factiva.19. “News Corp. Q409 Earnings Call,” CallStreet via FactSet, 5 August 2009. 27
  29. 29. Sustaining your future28
  30. 30. The next big thingMedia and entertainment companies must keep a careful balance betweenrushing into the next new thing and missing a wave of opportunity. Acquisitionsand new distribution channels (if the pricing is right) can secure their future.But companies should not make nonstrategic or expensive investments.In our Opportunities in adversity survey, capitalize in the digital media space. Yahoo!44% of media and entertainment provides a good example of Õnding arespondents said that in the next 12 balance between cost management andmonths, they will use M&A as a method to retaining the right talent in difÕcult times.position their business to emerge stronger While managing its costs, it is still hiringfrom the crisis than their competitors. salespeople and engineers to help accelerate product development.20 CuttingIn the past, there was a singular focus on costs without a long-term plan in place maygrowth, almost to the exclusion of all else. limit a company’s ability to change itsThis was driven by the notion that growth strategy. Moreover, careless cost-cuttingwould solve all other issues. Today, may limit a company’s ability to respondhowever, the focus is no longer on growth, when the economy recovers.but on proÕtable growth. Often this willtake investment, even in a cash-constrained Because internal research andenvironment. Our Opportunities in development at most media andadversity survey revealed that in the next entertainment companies has been slowyear 72% of media and entertainment to keep up with the pace of change,respondents think achieving proÕtability companies must continue to look forwill be their greatest concern, followed by opportunities to acquire innovation.achieving sales goals (56%). Postcrisis, however, companies will not invest in innovation unless there is a rapidAs business models change, in-house talent and demonstrable ROI.needs to keep pace. Companies need todrive new models and understand how to “As business models change, in-house talent needs to keep pace.” — Mark Besca Ernst & Young LLP Media & Entertainment Leader and Global Client Service Partner, New York20. “Yahoo! Q209 Earnings call,” Call Street, via FactSet, 23 July 2009. 29
  31. 31. Figure 7Ernst & Young index of media technology innovation frequency 1920—2007 (US) Years to Years to Technology platforms achieve 5% achieve 50% 100% Radio 2 9 90% TV 2 6 VCR 5 10Percent of households or population in year 80% DVD player 2 7 70% Wireless devices 7 16 Personal computer 1 17 60% Internet access 2 8 Cable TV 13 35 50% Video games 4 27 40% Broadband 3 10 Portable media player 2 NA 30% DBS 2 NA 20% HDTV 3 NA DVRs 4 NA 10% Satellite radio 3 NA 0% 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010Source: Fast forward: how CEOs are balancing the transition to the digital future, Ernst & Young, September 2008.30
  32. 32. With challenges come new opportunities. As illustrated in Figure 7, Second, companies need to consider the disruptive impact newin the early days of the industry, changes may have been extreme technologies may have. In the music industry, for instance, digitalbut they were relatively few and far between. Movies, radio and delivery led to the unwelcome unbundling of its product. Kindletelevision were the entertainment triumvirate for decades, with may usher in a similar challenge for publishers, and some analystslittle changing except screen size and the advent of cable. But are beginning to warn that moving broadcast television contentsince just before the turn of this century, new technology has been from the television to the personal computer — and thusrocking the market at a rapidly accelerating pace. Mobility is now unbundling it — may diminish the industry’s pricing power.key to content delivery and consumer access. The strong growth inworldwide entertainment users and revenue is a strong signal ofthis global shift in the way customers experience media. But Key considerationsinnovation holds the key to the future where new technologiescould come from unknown and otherwise untried sources. Content • Shift your company’s focus from revenue growth toinnovation is a great example as it Õnds its way to the mainstream proÕtable growthfrom consumers themselves. User-generated content is grabbing • Look for opportunities to innovate — either internally orviewer attention and social networking is supplanting advertising’s through acquisitions“branded” trust. • Reexamine and invest in the right talent for the futureAfter years of missed attempts, web-enabled television may Õnallyhave found the right application — television widgets. Developed byIntel and Yahoo!, television widgets deliver information,entertainment and social networking capabilities right on theconsumer’s television screen — similar to computer desktop icons.21But it remains to be seen if television widgets will gain high levelsof popularity with consumers.Mobile television is estimated to be a US$1.7b opportunity. Withmobile television viewers estimated to double in the next fouryears, mobile devices could evolve into the most popular mediumfor consumers to access entertainment.22These and other new technologies on the horizon raise severalimportant questions for media and entertainment companies toconsider. First, there is the question of where and when. As devicesand platforms proliferate, should media and entertainmentcompanies be represented on them all or just a select few?Businesses would be wise to exercise prudence. Not all technologyplatforms and models will deliver as promised. For promising newareas, should companies be Õrst to market, or should they waituntil things develop more? Regardless of the direction companiestake, processes and systems for driving platform decisions must beup to the task.21. Ernst & Young, “Will Widgets Work? Web-enabled TV in search of a killer app,” June 2009.22. Ernst & Young, “Mobile television and its impact on business: The big picture on small screen opportunities,” May 2009. 31
  33. 33. Conclusion32
  34. 34. Creatingdifferentiated valueUnlike most industries, many of the issues media and entertainment companiesare struggling to solve were present before the recession began. Thedeteriorating economic landscape may have exacerbated these issues, but itwas certainly not the cause.Accelerating innovation and shifting patterns in consumer behavior mean that change isthe new constant for media and entertainment companies. In an environment whereconsumers expect free (or nearly free) content, media and entertainment companies mustbe able to create differentiated value that consumers are willing to pay for. They must alsoprotect their current assets in an increasingly fragmented distribution landscape.We are entering a new and changing world. Executives who show ingenuity, have thecourage to make tough decisions and demonstrate the foresight to apply lessons fromchange will guide their companies to success in the media and entertainment sector. Andthey will be the leaders who establish the foundation upon which our new global economywill rise. 33
  35. 35. A new business agenda is emergingLessons from change comprises a series of 14 sector-speciÕc white Emerging cross-sector insightspapers, based on more than 40,000 client meetings, and hasproduced more than 500 cross-industry insights. Studying this We Õnd a striking similarity in the actions all companies acrossmaterial, we see a new agenda for success emerging. Lessons from change are taking as they prepare for success in the new economy. These actions, taken from the lessons these companies have learned, culminate in eight keyThe new normal performance objectives:While cash may no longer be “king,” it is still a critical issue for • Reevaluate your business model. Embed innovation andmany organizations. Some have addressed their immediate constantly challenge your existing business models against theÕnancial issues. Others are still in some stage of cash distress and new business environment.may not survive in the future. • Optimize the Õexibility of your operations. Increase theThe global economy may be back from the brink of disaster but responsiveness of your organization by emphasizing Öexibilitycompanies do not expect a return to the “normal” conditions we and leveraging resources.have experienced for much of the previous decade. Manyexecutives feel that we will continue to see: • Optimize capital availability and deployment. ReÖect the continued importance of cash and constricted funding by• Depressed demand and increased price sensitivity optimizing the availability and deployment of capital for a more• Increased taxes and regulation Öexible and robust balance sheet.• Ongoing restrictions on accessing funding • Optimize your market reach. Optimize your global market reach and product/service mix to exploit opportunities, achieve• Continued downward cost pressure across the value chain optimum returns and mitigate risk.• Structural shifts to markets and sectors • Accelerate your decision-making and execution. Make and• A more global market execute decisions more quickly to take advantage of shorter windows of opportunity and respond more quickly to adverse• Renewed challenges to government models and calls for developments. increased transparency • Revitalize the way you manage risk. Identify the full risk complexity of the market and develop and align a strong control framework for your business. • Strengthen your management talent. Gain, retain and deploy a management team that is capable of addressing the complex market and organizational environment. • Strengthen your stakeholders’ conÔdence. Regain and retain stakeholder conÕdence through transparency and better communication on Õnancial and nonÕnancial performance.34