Lessons from changeDigital pro� tability in the media and entertainment industry

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2 That was then … this is nowOpportunities 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 evolutionThe 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.

Securing your present: starring cost managementMedia 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 balanceRisk 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.

Improving your performance: maximizing pro� tability is keyCompanies must increase revenues and reduce costs to secure their place within this mature marketplace. Focusing on � nancial and operational excellence will be the key to successfully monetizing the business.

Reshaping your business: content on demandConsumers 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 thingIn 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 pro� table growth.

Conclusion: creating differentiated valueEven 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 emergingLessons from change comprises a series of 14 sector-speci� c 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.

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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.

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.

That was then ...

Asset impairm

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Business unit closure

Cash earnStress pendulum

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Court supervision

Stakeholder managem

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Supplier s

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Portfolio optim

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Do�nturn Stressed

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1. All survey data referenced within this report, unless otherwise noted, is from Ernst & Young’s Opportunities in adversity survey.

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... this is now

Questions and considerations As you take charge of implementing change within your organization, we invite you to re� ect 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 pro� les 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?

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 speci� c 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 � rms 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.

Introduction

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For decades, the media and entertainment industry has heard critics predict its demise. The industry is struggling to cope with the digital evolution amid an economic downturn. But despite the critics’ shouts, many industry players are quietly expressing more optimism about their prospects than other industries and feel better prepared to take advantage of opportunities when the economy rebounds.

In the 1950s, experts were sure that television would kill radio. In the 1970s, cable TV was going to spell the end of free-to-air television. In the 1980s, video was going to shutter movie theaters. More recently, YouTube has been seen as dooming professional content. And piracy — already having cut a swath through music — is causing alarmists to fear that it may destroy the entire industry.

But, to paraphrase Mark Twain, reports of its death are greatly exaggerated. The media and entertainment industry, each and every time, has not only survived but

thrived. It has remained resilient when compared to the broader economy even during the worst economic crisis since the Great Depression. Using Standard and Poor’s S&P Global 1200 index as a measure, during the 20-month period ended 31 August 2009, the media and entertainment index outperformed the broader cross-industry index by 4.2% — with staggering volatility. Some media and entertainment companies’ share prices showed a decline of up to 91%, while others grew as much as 7%.2

(See Figure 1.)

Embracing the digital evolution

2. Factset 2007.5B – Company Explorer 2.0 – Prices – Price Chart, accessed 2 September 2009.

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The perfect stormThe industry is facing a perfect storm of events. First, there’s the digital evolution, which is transforming the way consumers get information and entertainment, and the way advertisers reach their customers. Second, there’s the plummet in advertising and the severe 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 fact that they want it for free. For companies that once thought they could pursue digital initiatives at their own pace, the perfect storm is forcing them to accelerate as their core businesses come under assault.

Yet despite the lashing winds of change, most media and entertainment companies are weathering the storm. While earnings are down in many media and entertainment subsectors, many companies have retained strong cash or working capital positions. Most continue to be conservative with their cash management. Others are actively seeking strategic investment opportunities at bargain-basement prices. Those with less favorable liquidity positions are actively searching for ways to access capital or cut costs even further.

Figure 1S&P 1200 M&E Companies Index (1 January 2008 – 31 August 2009)

Indexed price (1 January 2009 = 100)

S&P Global 1200

S&P 1200 M&E

12/08 3/09 6/093/08 6/08 9/0830

50

70

90

40

60

80

100

Source: FactSet 2007.5B – Company Explorer 2.0 – Prices – Price Chart, accessed 2 September 2009.

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“We don’t know when or how the economy will recover, so companies will

wrestle with determining when it’s prudent to reinject resources.”

— Bruno PerrinErnst & Young Media & Entertainment Leader,

Europe, Middle East, India and Africa; Paris

A new model for the new economyAs consumer behaviors and technology continue to change, companies need to rethink their business models. Content owners, for example, need to chart a new course for exploiting their content assets through distribution channels that were unheard of just a short time ago. Finding the right balance will mean not only protecting pro� ts from traditional distribution, but also establishing a pro� table future.

Media and entertainment companies are also affected by vanishing consumer credit availability and job worries that together have resulted in a drop in discretionary spending — for example, in DVD sales and specialty-channel subscriptions (e.g., HBO, Showtime). Companies have to rethink the timing of relaunching or repricing services or products. The global economy has stepped back from the verge of collapse, but many economists believe that consumer spending habits have been permanently reset — at lower levels.

Optimizing capital availability and maintaining � nancial � exibility have been priority considerations for media and entertainment companies during the economic downturn. But not necessarily at the expense of long-term planning. True, there has been some short-term pain as companies secure their present, but those that reshape their businesses to compete in the digital age have the potential to position themselves for a strong and sustainable future.

Securingyour present

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Starring cost management

Cutting costs across the organizationMedia and entertainment companies are cutting more deeply than ever before. The economy has given organizations political, organizational and cultural protection to challenge the status quo. Areas once considered off limits are no longer safe — including creative business units. In many companies, creative cost areas like production, marketing, advertising and even travel and entertainment expenses — areas that were once untouchable by the � nancial or noncreative members of management — are now being scrutinized along with other cost centers. Companies are also rethinking signi� cant advances to talent, who are now expected to take more risks on the back end. This evaluation may have long-term effects on the creation of content in the future, but media and entertainment companies see this as necessary if they are to retain operating margins.

Companies are also exploring ways to increase operating ef� ciencies. They are reducing headcount and exploring potential savings and ef� ciencies that could be gained through shared service centers as well as outsourcing and offshoring arrangements. In our Opportunities in adversity survey, 84% of media and entertainment respondents said they have accelerated their cost-cutting activities over the past year. (See Figure 2.)

However, smart companies are realizing that headcount reductions must be accompanied by process and organizational changes if there are to be long-term gains in ef� ciency.

The breadth and depth of the economic crisis came as a surprise to some media and entertainment companies. However, it has provided a unique opportunity to realign organizational and cost structures to � t the new reality of slimmer revenues.

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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 survey

Rethinking supplier relationshipsThe economic crisis has media and entertainment companies taking a hard look at their supplier relationships. Many have found themselves dependent on limited sources for business-critical products or applications. The crisis in other industries, like automotive, has media and entertainment companies reevaluating not only the credit worthiness of their own suppliers, but also the credit health of the banks their suppliers depend on for � nancing. Many media and entertainment companies are making bold moves to identify multiple suppliers that will mitigate their risk and solidify their supply chain.

Maximizing cash reservesCash conservation is the new mantra. In our Opportunities in adversity survey, 57% of respondents said they are taking a top-down review of current cash management and cash � ows. (See Figure 3.)

Since many private equity and other debt options are still limited, companies are continuing to look for ways to maximize their cash � ows. For some companies, this has meant not only cutting costs but also reassessing their investments and refocusing their strategies. For example, in a deal that presages its departure from a 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 � ow.3

3. Peter Burrows and Robert D. Hof, “Yahoo! Gives in to Microsoft, gives up on search,” BusinessWeek.com, 30 July 2009, via Dow Jones Factiva, © 2009 McGraw-Hill, Inc.

Figure 2Which of the following initiatives has your organization accelerated over the past year?

Cost reduction 84%86%

Business restructuring 47%52%

Review of capital investment programs 41%43%

Finance function review 38%34%

Significant employee reduction program 28%38%

Relocation of production and shared service centers

16%22%

IT outsourcing or enterprise IT related program

16%17%

Corporate governance review 16%29%

Tax planning and review 16%23%

Construction or real estate related program 9%11%

Supply chain restructuring 9%21%

Media and entertainment All industries

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For most companies, capital expenditures have been relatively � at over the last two years. In today’s economy, capital projects need to generate immediate revenues. Some cable operators and direct broadcast satellite systems have been willing to spend when the results are tied directly to revenue generation (e.g., set-top boxes). But these direct capital-to-revenue expenditures have been relatively few. Several companies have noted that they are managing the balance sheet very closely.

Accumulating cash is good, but some analysts fear companies may not know what to do with it. Is it meant to boost M&A activity? Or are they looking to buy back shares or increase dividends to boost shareholder value?

Key considerations• Take advantage of the economic downturn to challenge

the status quo: Reassess organizational redundancies, cost reductions and ef� ciencies across the organization

• Make contingency plans for key suppliers

• Ensure cash reserves are available when strategic opportunities arise

Shown: percentage of respondents who selected the above steps to maintain liquidity in their operationsSource: Opportunities in adversity survey

Figure 3Which of the following steps is your company currently taking to maintain liquidity in the light of current market conditions?

Top-down review of current cash management and of cash flows

Considering alternate sources of liquidity(e.g., disposal of assets, shutdown or

sale of segments/revenue streams)

Communicating with lenders, analysts and rating

agencies proactively

Making an inventory of all debt covenants and monitoring

covenant compliance

Obtaining access to short-termfinance facilities/credit

Considering options to renegotiatedebt covenants

Other

None of the above, cash is not an issue

57%

28%

25%

30%

34%

35%

7%

18%

Protectingyour assets

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Look for theperfect risk balanceEven before the global economic crisis, risk management was high on media and entertainment’s list of priorities. But as companies navigate the constantly shifting terrain of digital platforms, many are realizing that their risk assessment processes haven’t kept pace.

In the current economic climate, corporate management has been on the defensive, addressing the most critical aspects of the economic turbulence. Now, companies and their boards must become more proactive and focus on internal priorities. Media and entertainment companies can leverage the lessons learned by their peers, as well as companies in other industries, to rethink their approach to risk assessment.

Reassessing riskmanagement practicesIn The 2009 Ernst & Young business risk report: media and entertainment,4 we identi� ed the top 10 risks facing media and entertainment companies today. (See Figure 4.) The risks at the center of the radar in the graphic are those that analysts suggest pose the greatest challenges to the leading global companies in the media and entertainment sector in the year ahead.

While the economic downturn and resultant cost control and reduction efforts ranked number one in the survey, consumer demand shifts, and operationalizing new

business models and managing the infrastructure to support them still ranked in the top � ve.

New innovations and changing business paradigms are creating whole new areas of risk: contract risk, systems risk, operational risk. As companies are pushed outside their core businesses, they must reassess their risk pro� le to ensure they have the necessary processes, people, data and technologies in place to support their expanding business. For example, when one content company branched into electronic gaming, it was faced with new challenges in inventory control, pricing, timing and returns and adjustments. When a publishing company launched its products digitally, and when a music company sold songs for use in mobile ringtones, neither company anticipated the impact that third-party partners would have on core business reporting. Neither digital partner was able to provide the book title or song title revenue detail that the companies needed to comply with their underlying contracts with authors or artists.

4. The 2009 Ernst & Young business risk report: media and entertainment, Ernst & Young, 2009.

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Financial Compliance

Strategic Operations

Allocating investments between traditional and new media

Shifting advertising dollars

Corporate governanceand internal controls

Asset exploitation and protection (including piracy and IP rights)

Economic downturn and resultant cost controls and reduction costs

Operationalizing new business models and managing the infrastructure to support them

M&A activity and entry of PE

Emergingmarkets

New market entrantsand impact on

value chain Consumer demand shifts

Figure 4

Source: The 2009 Ernst & Young business risk report: media and entertainment, 2009, Ernst & Young.

Companies must change their operations to support digital distribution, which will have implications large and small, not the least of which is integrating infrastructure across platforms. Multiplatform distribution increases pricing and scheduling challenges. Digital distribution raises contract issues. And then there are the microtransactions from, for example, Kindle users, who may soon be able to buy a single chapter or segment of a book. Information technology systems need to be able to capture multiplatform data, microtransactions and apportioning revenues for multiple distribution models.

In the days of the studio system — when there was single ownership of creativity, content and distribution — virtually all risk could be managed. Today, new content and distribution partners multiply the risks. Some companies are discovering that they haven’t adequately assessed all the risks that accompany entering new markets. These additional operational risks can bring negative consequences that are not easily or quickly � xed. In Ernst & Young’s survey, The future of risk, 85% of media and entertainment respondents indicated that improving the alignment of their risk management approach with their business strategy and business objectives was the most important step to improving risk efforts.5

The economic downturn also brought to light treasury risks that until now had seemed under control. As blue chip stocks and top � nancial institutions lost value almost overnight, some companies were caught off guard with their established marketable investment strategies.

“Only companies prepared for the worst came out relatively unscathed.”

— John NendickErnst & Young Global Media & Entertainment Leader,

Los Angeles

5. The future of risk, Ernst & Young, July 2009.

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Exploring the risks of emerging marketsEmerging markets may provide a means for media and entertainment companies to improve their pro� tability. As global economies like China, India and Latin America develop, consumers will have more access to technology and content. But while global expansion presents many opportunities, it also carries substantial risks. These include regulatory risks (ownership restrictions, taxes), IP risks (piracy, copyright, licensing and reuse), content risks (cultural norms and local tastes) and currency risks. Companies that do business in emerging markets need to ensure their risk management process addresses these risks.

Combating piracyAdvances in technology and distribution channels, the rising importance of less-regulated emerging markets, and the growth of open source and online video content combine to keep intellectual property protection a priority risk in the media and entertainment sector. Piracy and illegal distribution channels continue to expand in developing countries. The impact of piracy will continue to grow as bandwidth increases and more media assets are offered online, consumers become more comfortable accessing media content and products online and the expectation persists that some or all of that content should be free.

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 � nd 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

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Protecting the brandCompanies looking to cut costs and limit investments should not do so at the expense of brand and reputation. In fact, some media and entertainment companies are � nding that maintaining brand equity often requires extra effort and resources. Whether it’s investing in front-of-house systems, producing a prime-time network show, or improving a customer call center, media and entertainment companies are making decisions that impact their costs and that could effect their brand. When cutting costs is a priority, companies must be vigilant in protecting their reputation and their brand.

Companies also have to worry about internal threats to their brand. The recession is forcing many companies to reduce employee pay and/or bene� ts. In the wake of recent public attention, there is an increased sensitivity to executive compensation. These conditions may lead to reduced employee loyalty in the short term. In the longer term, once the economy turns around, there is the possibility of a talent grab where key employees may be enticed to move to more lucrative pastures. In Ernst & Young’s 2008 CEO study, Fast forward: how CEOs are balancing the transition to the digital future, participants indicated that attracting, retaining and developing talented people will be the top challenge and key to success over the next two years.

“The brand is key to future success.” — Ken Walker

Ernst & Young LLP Global Client Service Partner, Los Angeles

US regulatory risk implicationsAs 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 dif� culties 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.

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Protecting the value chainCompanies need to respond to consumers’ desire to access content on demand, but at the same time, they must protect the value of their assets. The music industry provides a cautionary tale of what can happen when content owners lose control of their product. Several content owners have had disagreements over price, usage and customer ownership with their new media distribution partners. At the root of many of these problems are differing objectives of the parties. Once again, the music industry is instructive. Apple wants to price content at a point that will help it sell gadgets, but music companies say that these prices don’t capture the maximum value of their content.6 Similarly, movie studios are at odds with the new movie kiosk services that rent movies for bargain prices. Media and entertainment companies run the risk of being eliminated as intermediaries by new forms of distribution. Wherever possible, content providers must seek to maintain control of the customer, which allows them to maintain the customer relationship and, in turn, maximize pricing options.

It is likely that in the digital realm, variable pricing schemes will become more common. Yet most traditional media models are not equipped to take advantage of the opportunities that this allows. On the customer-facing side, it requires new ways of thinking about marketing and consumer research. In the back of� ce, it requires adequate systems and processes to capture customer data. This applies to both the content provider and the distributor.

Key considerations• Actively assess risks arising from new distribution

platforms and changing business paradigms

• Make sure your operational infrastructures keep pace with digital distribution platforms

• When doing business in emerging markets, be sure to address new challenges in risk assessment and process monitoring

• Don’t reduce costs or limit investments at the expense of brand

• Find the balance between meeting consumer anywhere-anytime demands and protecting the value of assets

• Maintain control of the customer relationship to maximize pricing options

6. Robert Cyran, “Growth in paid-for music downloads doesn't mean happy days for the labels,” The Daily Telegraph, 20 August 2009, via Dow Jones Factiva.

Improving your performance

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Maximizing pro� tability is key

Improving bottom line pro� tabilityCompanies must increase revenues and reduce costs to secure their place within this mature marketplace. Focusing on � nancial and operational excellence will be the key to successfully monetizing the business.

Maximizing revenue is increasingly important. Companies with content libraries are resurrecting “long-tail” content — products in low demand or with low sales volumes — and working to monetize it. For instance, music companies have made substantial pro� ts from licensing songs to videogame makers for titles such as Rock Band and Guitar Hero.7 This has provided the labels an opportunity to generate new revenue streams from back catalogs. In the new media

environment, product development and innovation will likely have to be accelerated. Some corporate cultures may not have the � exibility or the fortitude to keep pace.

The current economic crisis has provided media and entertainment companies with opportunities to make improvements and gain ef� ciencies in areas once viewed as untouchable. Companies can no longer afford to have different business units with overlapping support functions (e.g., accounts payable). Where possible, they are eliminating long-standing divisional or business unit silos, as well as looking for opportunities to outsource certain functions or develop shared service centers for certain operations that do not produce revenue.

The recession may have mandated enterprise-wide cost-cutting, but to � rmly secure a place in the future, companies must � nd other ways to improve their performance.

7. Matt Hartley, “Guitar Hero’s Latest Release? Filthy Lucre; What Began as a Quirky Novelty Game Has Evolved into a Revenue Engine for the Video Game and Music Industries,” The Globe and Mail, 28 October 2008 via Dow Jones Factiva, © 2008 CTVglobalmedia Publishing Inc.

“The best companies will look at cost reductions in a long-term thoughtful way. The worst will be tactical and knee-jerk.”

— Michael RudbergErnst & Young Media & Entertainment Leader,

UK, London

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Considering change-management implicationsChanges such as these often present challenges to an organization’s internal culture. A decision to use shared service centers may seem obvious, but there are often associated integration challenges and change-management issues that management may not be prepared to address. Cultural change will impact not just leadership, but also the creative talent — especially as this may be the � rst time they have been asked to make sacri� ces. More than ever before, there is an understanding that there must be agreement at the top, and an alignment of governance and internal sponsorship, if meaningful change is to be made.

Looking for deal opportunitiesM&A transactions have slowed in the media and entertainment industry. But as companies look to the future and adapt to new models, executives may begin to consider acquisitions of smaller innovative companies. Several media and entertainment executives

have noted recently that they will continue to look for deal opportunities, but only those that can meet high ROI hurdles and will increase share price from inception. New media will continue to be a focus for deal activity, as many traditional platforms enter the maturity phase. In the Ernst & Young 2008 CEO study, Fast forward: how CEOs are balancing the transition to the digital future, CEOs indicated that new technologies and content were the most attractive investments. (See Figure 5.)

In addition to M&A, companies are spinning off nonstrategic businesses. In so doing, they are becoming pure-play again after years of following a conglomeration model. They are asking themselves hard questions about organizational structure. Does good content need to own distribution, or vice versa? Until recently, companies favored vertical integration. Now, however, many companies seem to be moving in the opposite direction. For example, Time Warner has spun off its cable unit and is contemplating a spinoff of its online business as well. Both moves position Time Warner to focus on becoming a pure-play content company.8

8. Time Warner SEC form 10-Q, � led 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.

Source: Fast forward: how CEOs are balancing the transition to the digital future, 2008, Ernst & Young.

Figure 5What kinds of opportunities are most attractive to you for investment — including both organic and media and entertainment — right now?

New technologies(digital interactive TV, mobile technology, etc.)

New types of content(content that complements existing

content, user-generated content, etc.)

Mergers and acquisitions

Content distribution and accessibility

Organic growth focus

Integrating/managingexisting businesses

21%

19%

19%

17%

14%

10%

5%0% 15% 20%10% 25%

Percent of responses

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“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

Improving business intelligenceTo improve bottom-line performance, companies must improve their planning and performance-monitoring processes. Changing business models require that different drivers and metrics be integrated into planning and performance-reporting systems. Given the relatively small amount of revenue generated from digital initiatives, many companies have not devoted the necessary resources to construct rigorous risk models, much less invest the time and money required to set up the processes, controls and infrastructure that new media requires.

The challenge of projecting pro� ts from new media assets or investments has made decision-making — already dif� cult in today’s economy — even more dif� cult. Many media and entertainment executives have discovered a need for better data, faster, from within their own organization to enable better and faster decision-making. Revenue and pro� tability projections and ROI analyses are critical components of a company’s decision to acquire an innovative partner or to divest itself of a noncore business.

Multiplatform distribution requires companies to have better tools for aggregating, measuring, reporting and analyzing customer data across platforms. Companies need this data to gain greater insight into consumer behavior, since advertisers are increasingly interested in behavioral rather than reach-based metrics. These metrics are also required to develop more personalized advertising capabilities (i.e., better customer targeting).

Yet, while management appreciates the value of real-time business intelligence, it often struggles to � nd the funds to pay for it in today’s economic climate. In a downturn, information and data systems are easy target areas for cost-cutting, since it is notoriously hard to measure their value. However, this may be shortsighted. Companies will need more robust information to deliver value down the road.

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Figure 6EBITDA margin percentage* 2005—2009E

0%

10%

20%

30%

40%

50%

2005 2006 2007 2008 2009E

Interactive media: 22%

Satellite TV: 17%

Cable networks: 10%

Cable operators: 13%

Music: 1%

Conglomerates: 2%

TV broadcast: (7%)

Film and TV production: 1%

Publishing: 0%

Radio broadcast: (19%)

Electronic games: 10%

Source: 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.

Interactive media gets top marksErnst & Young has analyzed EBITDA9 growth for all the major media and entertainment subsegments. It is no surprise that interactive media gets top marks in EBITDA dollars compound annual growth. Traditional media, such as radio and TV broadcast, have seen their EBITDA growth fall dramatically.

9. Earnings before interest, taxes, depreciation and amortization.

2005–2009E CAGR (EBITDA$)**

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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

• Don't 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

Reshapingyour business

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Content on demand

The landscape in the media and entertainment industry has been shifting and changing for quite some time. Consumers are demanding content anywhere, anytime and through any device. Technology is setting the pace and driving consumers to demand more. 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?”

The now-pervasive desire for on-demand content continues to drive changes to business models. Consumers want to pay for content once, if at all, and then access it through their television, computer or mobile device. This is a new pattern for companies that are used to a linear content-delivery model. But companies are responding. Comcast and Time Warner Cable are experimenting with a pilot program where paying subscribers can access cable programming online or via mobile devices at no additional charge.10

The future lies in digital download, but a multitude of factors that depress the price of content are making it hard for media and entertainment companies to � nd the right digital business model. Is it advertising, subscriptions or a hybrid model? Where does the customer/consumer � t in? And what is the relationship (if any) of the customer to the brand? How do companies create differentiated value that the consumer is willing to pay for?

10. “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.

“There is a generational expectation that content is free.”

— Howard BassErnst & Young LLP Global Client Service Partner, New York

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Movie studios are similarly seeking additional revenues as the market changes. DVD sales — a potent revenue and pro� t source for the industry — are slowing because of the format’s maturity and lower consumer spending. Recent reports show that half the 15% drop in DVD sales during the last two quarters is due to general consumer retrenchment.11 Likewise, videogame sales — once thought recession resistant — have also fallen. Annual sales to June 2009 fell by 29% year over year, owing to consumer weakness.12

Many media and entertainment subsectors have been hurt by the decline in spending for advertising, which has been driven by advertisers’ � nancial distress as well as viewership declines in traditional distribution channels. As ad revenues continue to decline, some companies are looking for alternatives to the advertising revenue model. For instance, in the US, several television stations are getting retransmission fees from cable operators — an entirely new source of revenue. Music companies are licensing their music to ad-supported music streaming sites in exchange for a cut of the advertising take.

As consumers become more fragmented, advertising is becoming more targeted. Companies want to ensure they are not just reaching audiences, but are reaching the right audiences. Last year, six US cable companies launched Project Canoe, a system designed to deliver targeted TV ads to viewers through their cable boxes.13 To advertisers, a more engaged consumer is a more valuable one. Targeting and engaging audiences is particularly important in a world where consumers may not be as receptive to spots as they once were or can simply skip them altogether by using DVRs.

Seizing opportunities from regulationMedia and entertainment companies are analyzing opportunities afforded by changing regulations. Throughout the world, governments are using the advent of new media to take a fresh look at how they regulate media and telecommunications. There are several efforts underway to boost broadband penetration.

In the UK, the government has launched a new initiative called Digital Britain. The effort will wire all UK homes and businesses with broadband at a minimum speed of two megabits per second by 2012. The goal is to position the UK as a leader in the global digital economy and spur growth in the digital and communications industries. The plan will be paid for by taxing those with access to provide access to those without. It also includes a small tax on all � xed phone lines.14 These efforts will provide additional outlets for content.

When pay television was introduced, Australia and many European countries initiated plans to ensure that sporting events of cultural and national signi� cance would remain freely available to the public. Now Australia’s government is building a high-speed � ber-to-the-home broadband network called the National Broadband Network (NBN), a A$43b (US$37b15) project that will provide high-speed internet to much of Australia.16 The NBN will allow Australians to view high-quality, live streaming video over the internet. While there is little evidence to date that sporting events are being exclusively “siphoned” to these new digital platforms, the potential for siphoning is causing much discussion and debate 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.17

11. 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 power houses 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 Brie� ng, 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 on National Broadband Network project,” IHS Global Insight Daily Analysis, 3 July 2009, via Dow Jones Factiva, © 2009 IHS Global Insight Limited; “Strategy Analytics: Australia’s broadband policy ‘sets the bar’ for other countries; nation will have 5 million � ber 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 and the Digital Economy discussion paper, August 2009.

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Building sustainable revenue modelsIn exploring new digital territory, companies need to be cautious with investments, which may take longer than expected to become pro� table, or not become pro� table at the rate expected. Buzz is not the same as pro� t. Both YouTube and MySpace have legions of users. However, it has proven dif� cult to turn user-generated content and social networking into sustainable revenue generators.

Even the newest, seemingly successful digital business models may be already changing. Beginning in the late 1990s, a consensus had emerged that “information wants to be free.” Newspaper publishers put their content online for all to view. A few newspapers tried to charge for content, but those experiments were quickly dropped. While online visitor and ad growth are impressive, the economics are less so. Publishers’ online ad revenue growth has not made up for what they have lost in print. In a way, the online versions are slowly strangling print circulation. The problem is that consumers no longer pay for much of the information they consume. According to a Pew Research Center study, in 2008, more people got their news for free online than paid for it by buying a newspaper or magazine.18 Companies can’t sustain a business if their content is given away. Newspapers are rethinking their online business models and may, in the near future, be charging for online news content. Some analysts liken the move to “trying to put the toothpaste back in the tube,” but several believe it is the only way for newspapers to survive. This also illustrates the need for differentiated content. In a world awash in free content, media and entertainment companies must deliver something that consumers are willing to pay for.

New media has also increased interdependence among all parties in the value chain. In the days before digital media, a movie studio or a publishing house controlled its product from start to � nish.

Now these producers are reliant on any number of outside parties at different points in the chain. To some degree, they have lost control over their own destiny. Distribution must now take Apple, Amazon and Net� ix into account. Often, the distributors and content owners have competing agendas.

The new media paradigm raises the issue of just who owns the customer. For example, given that The Wall Street Journal is now available on Kindle, News Corp. no longer has the direct customer relationship it once had. As Rupert Murdoch explained in a recent analysts’ call, “We are changing the price of the Journal on Kindle, and we will get a better share of the revenue, although I can’t say that I’m satis� ed that it’s the � nal result that we want. But it will be a lot better. But it’s not a big number. And we’re not encouraging it at all, because we don’t get the names of the subscribers. Kindle treats them as their subscribers, not as ours, and I think that will eventually cause a break between us.”19

Key considerations• Embrace disruptive business models as technology and

consumer consumption patterns rapidly change

• Evaluate how new media distribution and the debate over who owns the customer impact growth and pro� tability

• Understand the changing drivers of advertising value as media consumption shifts

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.

“As more digital platforms come on line, the advertising pie is being split between more and more players.”

— David McGregorErnst & Young Media & Entertainment Leader, Oceania, Melbourne

Sustainingyour future

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In our Opportunities in adversity survey, 44% of media and entertainment respondents said that in the next 12 months, they will use M&A as a method to position their business to emerge stronger from the crisis than their competitors.

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 on growth, but on pro� table growth. Often this will take investment, even in a cash-constrained environment. Our Opportunities in adversity survey revealed that in the next year 72% of media and entertainment respondents think achieving pro� tability will be their greatest concern, followed by achieving sales goals (56%).

As business models change, in-house talent needs to keep pace. Companies need to drive new models and understand how to

capitalize in the digital media space. Yahoo! provides a good example of � nding a balance between cost management and retaining the right talent in dif� cult times. While managing its costs, it is still hiring salespeople and engineers to help accelerate product development.20 Cutting costs without a long-term plan in place may limit a company’s ability to change its strategy. Moreover, careless cost-cutting may limit a company’s ability to respond when the economy recovers.

Because internal research and development at most media and entertainment companies has been slow to keep up with the pace of change, companies must continue to look for opportunities to acquire innovation. Postcrisis, however, companies will not invest in innovation unless there is a rapid and demonstrable ROI.

Media and entertainment companies must keep a careful balance between rushing into the next new thing and missing a wave of opportunity. Acquisitions and new distribution channels (if the pricing is right) can secure their future. But companies should not make nonstrategic or expensive investments.

The next big thing

“As business models change, in-house talent needs to keep pace.”

— Mark BescaErnst & Young LLP Media & Entertainment Leader and

Global Client Service Partner, New York

20. “Yahoo! Q209 Earnings call,” Call Street, via FactSet, 23 July 2009.

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Figure 7Ernst & Young index of media technology innovation frequency 1920—2007 (US)

1920 1940 1960 1980 20001930 1950 1970 1990 2010

0%

20%

40%

60%

80%

100%

10%

30%

50%

70%

90%

Perc

ent

of h

ouse

hold

s or

pop

ulat

ion

in y

ear

Source: Fast forward: how CEOs are balancing the transition to the digital future, Ernst & Young, September 2008.

Technology platformsYears to

achieve 5%Years to

achieve 50%

Radio 2 9

TV 2 6

VCR 5 10

DVD player 2 7

Wireless devices 7 16

Personal computer 1 17

Internet access 2 8

Cable TV 13 35

Video games 4 27

Broadband 3 10

Portable media player 2 NA

DBS 2 NA

HDTV 3 NA

DVRs 4 NA

Satellite radio 3 NA

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Key considerations• Shift your company’s focus from revenue growth to

pro� table growth

• Look for opportunities to innovate — either internally or through acquisitions

• Reexamine and invest in the right talent for the future

With challenges come new opportunities. As illustrated in Figure 7, in the early days of the industry, changes may have been extreme but they were relatively few and far between. Movies, radio and television were the entertainment triumvirate for decades, with little changing except screen size and the advent of cable. But since just before the turn of this century, new technology has been rocking the market at a rapidly accelerating pace. Mobility is now key to content delivery and consumer access. The strong growth in worldwide entertainment users and revenue is a strong signal of this global shift in the way customers experience media. But innovation holds the key to the future where new technologies could come from unknown and otherwise untried sources. Content innovation is a great example as it � nds its way to the mainstream from consumers themselves. User-generated content is grabbing viewer attention and social networking is supplanting advertising’s “branded” trust.

After years of missed attempts, web-enabled television may � nally have found the right application — television widgets. Developed by Intel and Yahoo!, television widgets deliver information, entertainment and social networking capabilities right on the consumer’s television screen — similar to computer desktop icons.21

But it remains to be seen if television widgets will gain high levels of popularity with consumers.

Mobile television is estimated to be a US$1.7b opportunity. With mobile television viewers estimated to double in the next four years, mobile devices could evolve into the most popular medium for consumers to access entertainment.22

These and other new technologies on the horizon raise several important questions for media and entertainment companies to consider. First, there is the question of where and when. As devices and platforms proliferate, should media and entertainment companies be represented on them all or just a select few? Businesses would be wise to exercise prudence. Not all technology platforms and models will deliver as promised. For promising new areas, should companies be � rst to market, or should they wait until things develop more? Regardless of the direction companies take, processes and systems for driving platform decisions must be up to the task.

Second, companies need to consider the disruptive impact new technologies may have. In the music industry, for instance, digital delivery led to the unwelcome unbundling of its product. Kindle may usher in a similar challenge for publishers, and some analysts are beginning to warn that moving broadcast television content from the television to the personal computer — and thus unbundling it — may diminish the industry’s pricing power.

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.

Conclusion

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Creating differentiated value

Unlike most industries, many of the issues media and entertainment companies are struggling to solve were present before the recession began. The deteriorating economic landscape may have exacerbated these issues, but it was certainly not the cause.

Accelerating innovation and shifting patterns in consumer behavior mean that change is the new constant for media and entertainment companies. In an environment where consumers expect free (or nearly free) content, media and entertainment companies must be able to create differentiated value that consumers are willing to pay for. They must also protect their current assets in an increasingly fragmented distribution landscape.

We are entering a new and changing world. Executives who show ingenuity, have the courage to make tough decisions and demonstrate the foresight to apply lessons from change will guide their companies to success in the media and entertainment sector. And they will be the leaders who establish the foundation upon which our new global economy will rise.

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A new business agenda is emergingLessons from change comprises a series of 14 sector-speci� c 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.

The new normalWhile cash may no longer be “king,” it is still a critical issue for many organizations. Some have addressed their immediate � nancial issues. Others are still in some stage of cash distress and may not survive in the future.

The global economy may be back from the brink of disaster but companies do not expect a return to the “normal” conditions we have experienced for much of the previous decade. Many executives feel that we will continue to see:

• Depressed demand and increased price sensitivity

• Increased taxes and regulation

• Ongoing restrictions on accessing funding

• Continued downward cost pressure across the value chain

• Structural shifts to markets and sectors

• A more global market

• Renewed challenges to government models and calls for increased transparency

Emerging cross-sector insightsWe � nd a striking similarity in the actions all companies across 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 key performance objectives:

• Reevaluate your business model. Embed innovation and constantly challenge your existing business models against the new business environment.

• Optimize the � exibility of your operations. Increase the responsiveness of your organization by emphasizing � exibility and leveraging resources.

• Optimize capital availability and deployment. Re� ect the continued importance of cash and constricted funding by optimizing the availability and deployment of capital for a more � exible and robust balance sheet.

• Optimize your market reach. Optimize your global market reach and product/service mix to exploit opportunities, achieve optimum returns and mitigate risk.

• Accelerate your decision-making and execution. Make and execute decisions more quickly to take advantage of shorter windows of opportunity and respond more quickly to adverse developments.

• 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’ con� dence. Regain and retain stakeholder con� dence through transparency and better communication on � nancial and non� nancial performance.

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About Ernst & Young’sGlobal Media & Entertainment CenterWhether it’s the traditional press and broadcast media, or the multitude of new media, audiences now have more choice than ever before. For media and entertainment companies, integration and adaptability are becoming critical success factors. Ernst & Young’s Global Media & Entertainment Center brings together a worldwide team of professionals to help you achieve your potential — a team with deep technical experience in providing assurance, tax, transaction and advisory services. The Center works to anticipate market trends, identify the implications and develop points of view on relevant industry issues. Ultimately it enables us to help you meet your goals and compete more effectively. It’s how Ernst & Young makes a difference.

Media and entertainment sector insightsLooking at these cross-sector insights from a media and entertainment perspective, we � nd three to be key:

• As consumer behaviors and technology continue to change, companies need to rethink their business models. Content owners, for example, need to chart a new course for exploiting their content assets through distribution channels that were unheard of just a short time ago. Finding the right balance will mean not only protecting pro� ts from traditional distribution, but also establishing a pro� table future.

• Changing business models bring new areas of risk: contract risk, systems risk and operational risk. Companies must reassess their risk pro� les to ensure their processes, controls, people, data and technologies are keeping pace with the new business paradigm.

• Companies must adapt their operations to support new digital distribution platforms. Companies that demonstrate operational � exibility will be successful in delivering the content that consumers demand and value.

Contact

John NendickGlobal Media & Entertainment Leader

+1 213 977 3188john.nendick@ey.com

For more information on Lessons from change and the 14 sector-speci� c white papers this study comprises, please visit:

ey.com/lessons-from-change

Ernst & Young

Assurance | Tax | Transactions | Advisory

About Ernst & YoungErnst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 144,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.

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Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.

© 2009 EYGM Limited. All Rights Reserved.

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This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.