By Saul J. Berman and Louisa A. Shipnuck
Special to TelevisionWeek
Television has an inspiring past, ripe with innovation and popular culture influence. Since its coming of age mid-20th century, generations of TV viewers happily embraced their broadcast experience. For the industry, making a connection with consumers was a pretty straightforward, one-to-many experience … until recently.
Today audiences are becoming increasingly fragmented, splicing their time among myriad media choices, channels and platforms. For the last few decades, consumers have migrated to more specialized, niche content via cable and multichannel offerings. Now, with the growing availability of on-demand, self-programming and search features, some users are moving beyond niche to individualized viewing. With increasing competition from convergence players in TV, telecommunications and the Internet, the industry is confronting unparalleled complexity, dynamic change and pressure to innovate.
To hone our point of view of the midterm future circa 2012, from both a demand and supply perspective, IBM conducted extensive industry interviews across the value chain and commissioned Economist Intelligence Unit primary research in the U.S., Europe and Asia.
Our analysis indicates that market evolution hinges on two key market drivers: openness of access channels and levels of consumer involvement with media. For the next five to seven years, there will be change on both fronts-but not uniformly. The industry instead will be stamped by consumer bimodality, coexistence of two types of users with disparate channel requirements.
While one consumer segment remains passive in the living room, the other will force radical change in business models in a search for anytime, anywhere content through multiple channels. The tech- and fashion-forward consumer segment will lead us to a world of platform-agnostic content, fluid mobility of media experiences, individualized pricing schemes and an end to the traditional concept of release windows. Behavioral differences will lead to a “generational chasm” between the passive mass audience (“Massive Passives”) and leading-edge users (divided into two sub-groups: “Gadgetiers” and “Kool Kids”).
Given the influence of both segments in the 2012 forecast period, strategists must today work amid fragmentation, divergence and opposition in the market: to optimize across nascent and longstanding business models; across new and traditional release windows; with old and new content programmers; and with both IP and traditional supply chains. This is the beginning of “the end of television as we know it,” and the future will favor only those who prepare today. IBM offers six executive recommendations to get started:
Segment: Invest in divergent strategies and supply chains for bimodal consumer types. Identify, develop and continually refine data-driven user profiles to optimize product and service development, distribution, marketing messaging and service migration. Tailor content, advertising, pricing and reach dynamically.
Innovate: Innovate business and pricing models by creating, not resisting, wider consumer choice, with windows, bundles, pricing and distribution. Take risks today to avoid losing position long-term.
Experiment: Develop, trial, refine, roll out. Repeat. Conduct ongoing market experiments alone and with partners to study real-life consumer preferences. Invest in new measurement systems and metrics for the on-demand world of tomorrow.
Mobilize: Create seamless content mobility for users that require on-the-go experiences. Ensure easy synchronization across devices and without user intervention.
Open: Drive open content-delivery platforms to optimize content and revenue exploitation, and to create optimum business flexibility and network cost-efficiency. Position open capabilities to bolster digital content protection with consumer flexibility, and for plug-and-play business upgrades necessary in the fast-changing marketplace.
Reorganize: Assess business assets against future requirements. Identify core competencies needed for future competitive advantage. Isolate non-core business components for outsourcing or partnership. From an external perspective, reconfigure business to exploit market and financial levers to buy, build or team to future competitiveness.
One of the key revenue sources in TV, advertising (which funds about 50 percent of the market), should theoretically be most elastic to audience changes. And to some degree, revenues have adjusted. From 2000 to 2004, niche advertising compound annual growth rates for U.S. and European cable/multichannel networks were 7.4 percent and 6.2 percent respectively, compared to a 2 percent compound annual growth rate for broadcast/terrestrial advertising.
Yet cable in the U.S. collects only 30 percent of advertising revenues today, despite garnering almost double that percentage of viewership. This may be due to lagging perceptions about the reach and effectiveness of broadcast messages, or the complexity involved with any alternative, nonbroadcast media placement. Further, with today’s growing availability of self-programming, search and on-demand, some users are moving from a niche orientation (targeted content on cable and multichannel networks) to individualized services.
The IBM/EIU survey revealed that 70 percent of MSO, DBS and telco executives said on-demand content is a chief motivation in consumer purchase decisions, next to price. As the DVR makes advances-not just in the U.S., but also the United Kingdom, Germany, France, Spain and Italy-ad-skipping is also taking off as, one by one, viewers opt out of advertising content. Ad-skipping is expected to lead to losses of 6 percent in U.S. TV annual advertising revenues in 2009.
Even with a slower rollout in other regions, digital video recorders are still expected to have a material impact on advertising, with depressed annual revenues ranging from 2.4 percent in Germany to 6 percent in the U.K. in 2012.
Overall advertising is expected to rise (in part because DVRs inspire more content consumption), but its potential will be mitigated by the DVR impact. It is noteworthy that in addition to the DVR, there might also be a negative impact on the advertisement model from on-demand TV. Consumers may opt to buy episodes without advertising or skip through on-demand content where allowable.
Unlike the DVR, the on-demand model is being heavily managed by content owners and networks. The bottom line is that as these new technologies move from the early adopter stage to the mass audience, we expect continued downward pressure on TV advertising (and the traditional 30-second spot), as even the most passive viewer enjoys ad-skipping and time-shifting.
As consumers continue to move away from broad-based experiences, broad-based business models will be challenged as never before. And advertising is merely the first revenue category to adjust to this trend. Content models, today sold in bulk or bundles among major institutional players, will also go in search of more user-driven, on-demand opportunities on a widespread basis.
The IBM and EIU research with executives across the TV value chain confirm this trend to individualized services from broad-based models. Most surveyed executives, regardless of company origin, placed the least confidence in TV advertising compared with user-driven, on-demand revenue streams.
While there is industry consensus about impending revenue transition, the EIU survey revealed a lack of agreement regarding replacement revenues. With uncertain return on investment in TV and lagging metrics, advertisers may simply move dollars to the Internet, where metrics are individualized.
Though Internet revenues start with a smaller base, its advertising growth rate is forecast to be almost triple that of TV advertising by 2009.
This article is excerpted from an IBM Business
Consulting Services white paper titled “The End of Television as We Know It.” Mr. Berman is the company’s partner and global and Americas business strategy leader; Ms. Shipnuck is the company’s global media and entertainment industry leader.