Digital disruption: Lessons for TV from music BSAC Council Claire Enders +44 7831214036 claire.enders@endersanalysis.com 5 February 2013
Digital disruption impacts consumption of music, much less TV content Recorded music Many listeners, few buyers Lots of free music, legal and pirated Fans ready to pay artists for the live experience Buyers cherry-pick tracks from albums, discarding filler tracks CD in terminal decline as players vanish Looking for bargains on Amazon displaces the retail experience and browsing Value to user not in the music but the wraparound digital eco-system, dominated by Apple Ownership model still dominant, subscription services are a hard sell Appeal of freemium and music+mobile bundles TV in the home Low-cost family entertainment hub Multichannel delivers vast viewing choice for free High TV production values vs low quality of internet content Live events cluster audiences: X Factor; Olympics Live sport has obvious value to fans Far lower risk of dis-intermediating content from TV set due to wide screens, EPG, PVR Multi-screening prevalent amongst the young Internet usage and pervasive piracy of video content have not impacted usage of live linear Limited interest in connecting the TV to the internet Digital disruption: Lessons for TV from music 2
Digital delivery is an opportunity: retailing of recorded music is inefficient Big music companies remain relevant as artist-direct sales are limited in scope Digital music has better margins than the CD for the publisher, but publishers lose sales from cherrypicking and less browsing at retail E-commerce is a small channel to market, but disruptive to the high street HMV highlights the perfect storm Industry often complains of dependence on Apple for pricing and retailing decisions Apple s innovations have served the industry well, in our opinion Apple too has profited from music sales, although dwarfed by profits from devices Share of retail revenue 100% 80% 60% 40% 20% 0% 10% 10% 20% 16% 45% 56% 20% 20% 6% 10% 40% 28% 15% 4% CDs Digital music DVDs Manufacturer/delivery Retail VAT Publisher/distributor Artist/producer [Source: EAL estimates] Digital disruption: Lessons for TV from music 3
Big music corporations can survive industry disruption Warner Music Group revenues and profits ($m) $4,000 $3,500 $3,000 $2,500 $2,000 Margin resilience due to cost cutting, virtual sales growth and stable music publishing Virtual sales growing 16% 14% 12% 10% 8% $1,500 $1,000 $500 Physical format sales in terminal decline 6% 4% 2% $0 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 Physical and other Non-physical Music publishing revenue OIBDA Margin 0% [Source: Enders Analysis from Warner Music] Digital disruption: Lessons for TV from music 4
Decline of the US recorded music market has finally halted US recorded music retail market (m) $10,000 $9,000 $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $3.5 billion in lost retail revenues since 2005: -40% Flat topline recovery under softlanding for the CD; margin growth on growing share of $0 2005 2006 2007 2008 2009 2010 2011 2012f 2013f 2014f 2015f 2016f Physical music Digital album Digital track Subscription Mobile [Source: Enders Analysis] Digital disruption: Lessons for TV from music 5
Industry adaptation: Vevo stopped piracy on YouTube US PC audience for leading music streaming services (millions) 70 itunes #1 music destination 60 50 40 Vevo dwarfs Pandora 30 20 10 0 PANDORA.COM Spotify Grooveshark VEVO @ YouTube itunes [Source: comscore] Digital disruption: Lessons for TV from music 6
Industry consolidation and regulatory risk Concentration index for US recorded music mergers 4,000 3,500 3,000 Highly Concentrated Market 1,200 1,232 1,725 2,500 408 571 628 2,000 Moderately Concentrated Market 1,500 1,000 2,237 2,237 2,237 2,237 2,237 2,237 2,237 500 0 Base EMI & WMG EMI & Sony EMI & UMG WMG & Sony WMG & UMG Sony & UMG Base Increment [Source: Enders Analysis based on SoundScan data] Digital disruption: Lessons for TV from music 7
Internet content unlikely to displace TV content on the TV set Devices used to connect the TV set to the internet (%) 90 80 Older people much less likely to connect 70 60 50 40 Gamers connect the TV set to the internet to game 56.6 30 20 10 0 Smart TV is very small 5.9 4.3 Smart SmartTV: TV: wifi ethernet 7.8 BluRay player 14.0 13.8 12.8 15.0 2.0 5.2 2.4 PS3 Wii Xbox 360 AppleTV TiVo Sky+ Other None Total 16-24 25-34 35-54 55+ Base: 4,006 adults 16+ [Source: Deloitte; GfK] Digital disruption: Lessons for TV from music 8
Online is a small channel for viewing TV content and skews young At home, do you use the internet for (%) 70 60 50 Young people watch a lot of online video and downloads Older people much less likely to watch live TV online 40 30 20 10 0 Watching video clips Downloading music, movies or videos Watching PSB catchup content Watching live TV Downloading films (VOD) Total 16-24 25-34 35-54 55+ Base: 2,823 adults 16+ with internet access at home [Source: Ofcom; GfK] Digital disruption: Lessons for TV from music 9
In a mature internet economy like the UK, TV patterns are likely to remain resilient Live linear Flexilinear Other Linear Staggered +1 linear Broadcast payper-view linear PVR 7-day timeshift On demand 7- day catch-up timeshift Other on demand Physical format DVD/VHS etc. Linear and non-linear share, 2012 (UK) 88 100 100 95 67 53 33 25 1 1 7 1 1 1 Linear Staggered 1+ day Broadcast PPV PVR 7 day On-demand 7- day Other ondemand Physical Viewing share Share of homes [Source: BARB/InfosysTV; BBC istats; Nielsen; Enders Analysis] Digital disruption: Lessons for TV from music 10
Key conclusions Disruption due to digital is a common threat to music, games, books and video sold (in physical format) on the high street Music is the hardest hit at this point: games, books (except for textbooks), video cannot be cherry-picked for hits TV content continues to enjoy robust audiences and viewing time TV content is much harder to disintermediate from the TV set TV advertising has been adversely affected by shifting ad budgets to the internet, but not the impact is small and manageable for the industry Robust revenues for FTA and pay-tv broadcasters have preserved the health of the UK production sector Lean-forward consumption behaviours are dwarfed by live linear Digital does not represent a lower-cost distribution channel to PSBs or the BBC that get their spectrum for free: in the long-run, all TV distribution will be over IP Personalisation thanks to data mining is not much of a value for lean-back TV consumption However, disruption does lie ahead from cloud-based delivery channels Digital disruption: Lessons for TV from music 11