Digital Media Trends

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The following is a summary of a presentation given at the World Future Society 2016 Annual Conference. It consists of a series of charts illustrating the major trends in the digital entertainment space. Although the aggregate trends are self-evident and already well known, there are important regional variations and sub trends that are worth pointing out.

Digital Media Trends

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Digital Media is Overtaking Physical Media

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No real surprises here. Digital media overtook physical media in the music business on a global basis in 2014, the crossover point for video in the United States will occur in 2016 and for books in 2017. On a combined, global, basis for all media, digital media will surpass physical media in 2019.

Digital Media Is Overtaking Physical Media

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There is no consistent definition of what constitutes an industry’s “sales.” Sync revenue, for example, is not always included as part of the music industry’s revenue base. Ditto for revenue from college book rentals. These kinds of discrepancies may affect the timing of the cross over point but they do not change the overall trend toward digital media.

Digital Media Is Overtaking Physical Media

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Music 2014

Music & CopyrightsMay 25, 2016

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Music 2014

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Video 2016

Motion Picture Assoc. of America, 2015

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Books 2017

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Overall worldwide digital media will surpass physical media in 2019

Consumer spending: traditional vs. digital (US $ millions)

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2009 2010 2011 2012 2013 2014 2015 20162017 2018 2019

Digital1 Traditional2

Global Media Report, McKinsey & Co., 2015

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Aggregate Trends Hide Significant Regional Variations

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Digital penetration for the top four music markets in the world is as follows: US (72%), Japan (17%), Germany (22%) and UK (45%). The US market represents $4.9 billion in total revenues, the other three markets represent a combined revenue of $5.33 billion. The overall digital share in those markets is 21%. If these markets approach the same level of digital penetration as the US it will represent an increase in digital revenues of over $2.6 billion.

Aggregate Trends Hide Significant Regional/Product Variations

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It’s unclear to what extent cultural factors may affect the overall level of digital penetration. Secondly, it’s not clear whether those markets that have lagged behind in digital penetration will make the same transition to downloads and then streaming or whether they will transition directly to a streaming model and skip the download phase.

Aggregate Trends Hide Significant Regional/Product Variations

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Secondly, for the first time in the history of the music business there has been a sharp reversal in the market share of new release titles versus catalog. Historically, new release sales, anything less than 12 months from release date, represented 60% of new release sales and catalog, those titles more than 12 months from release date represented 40%. New releases had higher unit sales per title but offered less margin. In 2015, for the first time catalog sales, 122.8 million units, exceeded new release sales, 118.5 million units.

Aggregate Trends Hide Significant Regional/Product Variations

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These numbers are based on data supplied by commercial record companies. They show both a decline in the average unit sales of new releases as well as a decline in the aggregate number of new titles. If one factors in “amateur” or “non-commercial” titles, it’s possible that the number of new release sales may still exceed catalog sales.

Aggregate Trends Hide Significant Regional/Product Variations

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In media, the business model revolves around the rate of recoupment. What the data suggests is that in a digital media world, rates of recoupment are falling to the point that many new projects are being shelved. The digital space is an excellent arena for recycling older titles, but it is less economic for titles that are not blockbuster hits or are produced for very little cost.

Aggregate Trends Hide Significant Regional/Product Variations

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Ultimately, the digital music industry will have to move to a split pricing system, as it was in the days of physical media, where new titles sell for higher prices than catalog titles. Otherwise the industry’s offerings will increasingly be limited to a combination of blockbuster titles, “non-professional” content and historic recordings.

Since streaming is less profitable then download sales, its likely that “availability windows” (as in the days of video rental versus pay-per-view) will become standard practice, especially for “hits/bestsellers”

Aggregate Trends Hide Significant Regional/Product Variations

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Finally, the composition of digital revenue varies widely by market. In South Korea and Scandinavia, for example, streaming represents over 90% of digital revenue. In Australia and Canada, on the other hand, digital downloads still represent 80%+ of digital revenues. Not surprisingly, the demographic of streaming users skews heavily young. Digital video also shows dramatic differences in utilization by country. These differences, however, may simply be a reflection of the prevalence of online piracy in certain markets and the degree to which commercial video streaming options are available.

Aggregate Trends Hide Significant Regional/Product Variations

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Music: Physical versus Digital Sales

Billboard, “The World’s Top 10 Music Markets”, May 25, 2016

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Music: Physical versus Digital Sales

Billboard, “The World’s Top 10 Music Markets”, May 25, 2016

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Catalog Versus New Release Sales

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Music Downloads versus Streaming

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Demographic Profile of Streaming Users

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Digital Video Utilization

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Aggregate Revenue Trends

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The most significant variation in each industry’s aggregate revenues is that in the case of books and film/video, the overall revenue has grown notwithstanding the transition from physical to digital media. In the case of the music industry, however, aggregate revenues declined by about 25%. The difference is that the book and film industry retained control of pricing in the digital space, whereas the music industry lost control of its pricing to the digital aggregators.

Aggregate Revenue Trends

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Video

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Books

Firstnews.com.vn

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Music

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Entry Barriers for Media Creation Are Much Lower in

a Digital Environment

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Not surprisingly, it is easier to create and disseminate content in a digital environment than it is in a physical one. The result is that the amount of new content is growing at a geometric rate. Two graphs, the number of music tracks on iTunes and content creation on YouTube, illustrate this trend. Apple no longer publishes the number of tracks on iTunes. Its estimated that the number now exceeds 35 million tracks.

New Content Creation

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Of those, about six to eight million were tracks that were commercially released. There is a lot of duplication of material so that number could be as high as 10 million. The rest are tracks that were generated from what the industry euphemistically refers to as “non-commercial” sources, i.e. amateurs. Ditto for YouTube, where every second more than 120 hours of new video content is uploaded.

When availability grows faster than consumption average unit revenues must decline.

New Content Creation

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YouTube experience

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iTune music catalog

Extrapolated from Apple Announcements, 2003-2010

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Conclusions

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By the end of this decade most forms of entertainment content will be distributed and consumed digitally. The typical financial models for new content creation in the physical world breakdown in the digital space except for “hit/best seller” product and for low production cost “non-professional/amateur” content. This is particularly true of music content. I believe it will increasingly be true for film and book content as well. New financial models will need to emerge to justify new content creation in a digital world.

Conclusions

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The music industry was the first content industry impacted by digitization and many of its experiences, mostly bad, have been avoided by the film and book industry. The larger trends, however, mushrooming content creation and overall declining prices on a unit basis, are impacting all three industries.

Conclusions

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Historically, the music industry has had two primary channels of commercialization – physical media sales and concert touring. Digitization has not really affected concert touring, and the two channels, once heavily codependent, are increasingly divergent. The film and book/print industries have historically had multiple, somewhat parallel channels of distribution. These are increasingly merging. In a digital, online world, for example, the distinction between newspapers, magazines and books is increasingly blurred. Likewise, the distinction between pay-per view, streaming and rental are now obsolete.

Conclusions

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Coping with ever increasing amounts of content, balancing the need for curation against the danger of censorship by dominant market players, and developing financial models that justify new content creation are the three principal challenges faced by the media industries in the brave new digital world.

Conclusions

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Most entertainment content will be obtained and consumed digitally ◦ What happens to portability?◦ The Orwellian Ministry of Truth factor

First Mover Advantages are huge and self-sustaining◦ Market dominance versus censorship?

Content owners have to control the pricing model or industry revenues will decline◦ Who should decide the value of content?◦ Who should decide the business model?

Seminar Questions

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Content will grow at a geometric rate while consumption will grow arithmetically ◦ unit revenues will decline◦ one price fits all models are unsustainable◦ the problem of curation

The future of content as a service versus a product

Seminar Questions