Disruption in video: Five (possible) paths out of the ......the brand, for upsell to the advocates...

Media Business 2017-21

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Disruption in video: Five (possible) paths out of the maelstrom

McKinsey & CompanyMcKinsey & Company 1

Digital penetration is greatest in Media

31% 32%39% 42% 44% 44%

51% 54% 55%62%

MediaTelecomBusiness services

Travel andlogistics

Financialservices

RetailHigh techHealthcareAssemblyCPG

Perception of digital penetration by industry, % of respondents

Standard deviation(%)

57 32 48 33 37 48 42 31 38 21

SOURCE: McKinsey Digital Global Survey 2016


Disruption is driven by new entrants and business models

24.5

17.5

16.9

16.0

15.4

13.5

12.7

8.3

7.6

26.3

16.8

Telecom

High tech

Business services

Media

CPG

Assembly

Travel and logistics

Financial services

Healthcare

Sample average

Retail

Estimated market share of digital new entrants and business models, %Industry

SOURCE: McKinsey Digital Global Survey 2016

High digital penetration in Media in general is driven by new entrants and business models and no more so than in video


Platforms and formats for viewing video have exploded

D2C plays

Remix

Livestream

Traditional cable/DTH IPTV

Portals

Broadcasters

VOD aggregators

Publishers

Firstwave digital

New bundles

MCNs

Social

Secondwave digital


Online video viewing is growing fast

SOURCE: McKinsey iConsumer survey

Online video as % of all online viewing

2016

171 mins

2010

62 mins

30%

60%


Most of this growth is happening on mobile devices

SOURCE: McKinsey iConsumer survey

40% 38% 23%Overall share of online viewing time

Growth in time spent on devices for watching video, US, %

34

PCTV

4

30

3

Mobile

12

21

CAGR 2014-16CAGR 2012-14


Traditional TV viewing is falling, especially amongst the young

SOURCE: Enders, statista

Change in time spent, 2011-14 abs %

Younger audiences

-5

-3

-2

0

Overall

-21

-14

-12

-12


This is reflected in ratings for almost all genres

SOURCE: Enders, statista

+6.6%

+6.4%

-9.4%

-12.5%

-8.4%

1 Average primetime rating for top 50 US cable nets. Other channels include AMC, Syfy, truTV, Spike TV, E!, HGTV, ABC Family, TLC, Hallmark, Lifetime, BET, TV Land, Animal Planet, H2, LMN, Nat Geo, OWN, WeTV, GSN, Oxygen et al.

Change in ratings, 2010 vs. 20141

Scripted drama/comedy

Kids

Sport

Factual entertainment

News

▪ USA▪ TBS/TNT▪ Comedy Central▪ FX Network▪ Syfy

▪ Nickelodeon▪ Disney Channel▪ Cartoon Network

▪ ESPN▪ Fox Sports▪ NFL Network

▪ Bravo▪ MTV▪ Discovery Channel▪ History Channel▪ Food Network

▪ Fox News▪ CNN▪ MSNBC

Example channels

-2.5%Total for top 50 cable nets

-14.0%Total for all cable nets


Ad spend is shifting away from TV to search and display

SOURCE eMarketer, McKinsey iConsumer survey

Fastest growing advertising sector

Growth in ad revenues, US, 2016, %

Displaybanners

-9.6%

TV

5.6%

37.4%

Online video

24%

3.8%4.3%

Search

18.6%

19.2%

Share of ad spend, 2015


Social platforms are increasingly dominant in online referrals

SOURCE: Shareaholic

Other social Facebook

Share of online referrals, %

155

6

87

3730

25

10

7

6

122011

3

31

13

1013

21

37

14 15

47

2016


They are also leading in desktop video consumption

SOURCE: Comscore, UKOM

UK, June 2016Total monthly viewers, 000s

US, June 2016

YouTube / Google sites

Warner Music

8,797

10,275

19,159

6,659

30,334

7,490

8,294

8,657

Maker Studios Inc.

BroadbandTV

Microsoft Sites

Facebook

Twitter

Fullscreen

Vimeo

VEVO

5,465

6,109 Maker Studios Inc.

Warner Music

CBS Interactive

43,839

38,363

44,169

42,003

182,177

39,960

81,057

45,261

41,237

58,238Yahoo Sites

Facebook

YouTube / Google sites

Twitter

BroadbandTV

Comcast NBCUniversal

VEVO


There are at least five (possible) paths out of this maelstrom

Invest in content

Achieve global scale to fund investment in original content, both global and local

Aggregate AVOD

Drive increase in online video CPMs, with larger players attempting to create a “winner-takes-all” effect

Consolidate for scale

Merge to expand premium content portfolio and achieve greater economies of scale to fund future investment

Launch a D2C offer

Access new customers and capture incremental margin by disintermediating traditional distributors

Monetize traffic

Monetize video-generated traffic, expand into adjacency and protect customer relationship to avoid becoming “dumb pipe”

1

2

3

4

5


(Distinctive) content is still king

Authority in opinion-forming

Social discovery

Polarisation of opinion

Commanding breadth and depth of voice in a genre

Must-watch content

Share of value capture in IP Video

2.5

7.2

4.7Content Production

Distribution

Total

Aggregation

0


▪ Customers willing to pay primarily for premium sports, US scripted drama, and first run movies

▪ Even though barriers of entry for content are lower, but the bar for distinctive-ness is higher

▪ Production cost per episode of series close to production cost of a “good” European movie

2014-2016

8

0.5

2013-15

4

2x

2.8

2014

4.4

2017E

2x

However, premium content costs are increasing massively

Source: Press research, Virgin Media, Sportcal

Typical local scripted content cost1

Content costsEUR mn, per episode

Netflix content spendEUR bn, per year

1 Average of Tatort (EUR 1 mn per episode) and "Gute Zeiten, Schlechte Zeiten" (EUR 0.1 mn per episode)


D2C: Opportunity to fill in the demand curve … … with an expanded product portfolio

▪ Gateway product to motivate customers to move beyond free into a low-commitment, paid relationship with the brand - up-sell over time

▪ Exclusive products, privileges and experiences serve as a showcase to re-anchor prices of other offerings

▪ Benefits/products that collectively embody the brand, for upsell to the advocates among the core

▪ The brand’s core product – a large majority of brand-engaged consumers buy

Definitions

Ultra

Premium

Core

Entry

Winning the DTC battle will be key

1,000

10,000

500

100

10

Total audience

Affinity (annual willingness to pay in $)

Print and web advertising

Sub-scription

Newsstand and print advertising

Sub base

Total subscriber base


There’s still a lot to play for…

Advertising1. How quickly will older audiences move away from traditional

TV platforms?

2. Will digital or traditional TV platforms provide the most value to advertisers?

1

2

Distribution1. Will any individual content producer be able to survive without

being aggregated?

2. How dramatic will cord-shaving/cutting be given emergence of D2C video?

3

4

Production1. Is growth in content production sustainable or is it a

bubble?

2. As local production grows, will there still be global demand for English-language content?

5

6

Disruption in video: Five (possible) paths out of the ......the brand, for upsell to the advocates...

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