Big Media May Be Dwarfed By Internet, Streaming Options

It wouldn't take much to upend the measured recovery many media companies have enjoyed this year, and some industry experts say they see trouble ahead.

It isn't just the recent economic indicators pointing to a more sluggish than hoped for recessionary rebound that could stretch through 2011. It isn't just the regulatory uncertainties in Washington, or the natural ebb and flow of industry consolidation. And it's not the steady stream of over-the-top technology challenging and eventually replacing the status quo.

It's all of these factors combined.

Although it takes years for new methods of digital distribution and creation to fully take hold, their presence in such unstable times has stymied, rather than inspired, too many media players fixed on surviving quarter to quarter. We are fast approaching the tipping point where content creation, aggregation and distribution economics will be dramatically altered, if not displaced, by Internet bypass alternatives.

A team of industry analysts at Credit Suisse led by Spencer Wang is troubled enough by what they see to have downgraded the entire U.S. entertainment sector to "underweight." That's in response to a forecasted economic slowdown and increased risk from Internet-delivered video to conventional television and film. This is being driven by Netflix's expansion to stream a wide array of video to consumers wherever they are, and the competition about to explode between Apple TV and Google TV.



"There is a window of opportunity for Big Media to control its own destiny, as they control about 70% of TV viewing required to launch over-the-top Internet delivered video," notes Credit Suisse. But that window will close as low-cost, all-you-can-eat subscription streaming services take hold. The pace of that certain change will depend on developments involving Hulu, TV Everywhere, rumored Amazon and HBO subscription services, YouTube branded video rentals and merged Comcast-NBCU online video options.

"With broadband homes now numbering 78 million, or 67% penetration of total households, the Internet is emerging as a viable, broad distribution platform for video content to multiple platforms including the OC, TV and mobile devices," Wang notes. The prevalence of the Internet bypass will be dramatically disruptive and change the television ecosystem.

As the content paradigm shifts, revenues will remain inconsistent, since so much of the media business is hinged on ad sales closely tied to the overall economy. A steeper-than-expected slowdown in economic growth momentum is only half the story. Wang and his team point to lackluster non-auto retail spending, the slowdown in private sector job growth, increasing jobless claims, a decline in capital goods orders, the collapse of the home sales correction and weak consumer sentiment. TV advertising is fine for now, which is why Credit Suisse has lowered its 2010/2011 scatter-pricing growth forecast for national broadcast and cable from 5% and 3%, respectively, to flat for both.

The good news is there are ways media companies can constructively cope with and leverage themselves in times of uncertainty and change.

Accept and innovate for the inevitable

The three most likely business models taking hold are Apple TV/iTunes' a la carte pay-to-play content access, Netflix's low-priced all-you-can-eat monthly subscription (which will increasingly include TV shows) and Google's new Internet-enabled TV. Regardless of the direction of consumer demand and use of Internet TV in any form, declining profits for traditional cable, satellite and broadcast television appear certain.

Embrace apps as a shortcut to consumers

A media company can better sell its hit goods and services by making its connection with consumers as easy as pressing a button. That is the beauty of apps, which were first debuted by Apple a mere three years ago. A new report by the Pew Research Center and Nielsen finds that 35% of adults have cell phones with apps, although only two-thirds actually use them. Still, that reflects an extraordinary adoption rate of a new paradigm, which has the potential to change everything about selling to and connecting with consumers.

Aim for quality, not quantity

Hit content is more valuable than ever as a way to cut through the clutter. "The risks attached to producing mediocre content rise in the digital world," Wang observes. The downside is that there is no consistency to a company's ability to create hit content or fickle consumers' response to it. Dedicating resources to the most promising projects with laser-like focus -- a la Pixar --enhances the chances of producing a hit, Wang said.

Redefine and reassert your brand

Now more than ever, "companies with strong brand equity (as opposed to just brand recognition) that resonate with consumers can outperform," Wang notes. The Walt Disney Co.'s core Disney, Pixar, ESPN and new Marvel brands are the best example of nurturing and leveraging this power. It is telling that Wang excludes ABC from the lot as the network influence, like that of its peers, is increasingly marginalized in the digital world. By the same token, new well-managed brands can take off faster and dominate longer. Facebook and Twitter weren't on anyone's radar screens five years ago.

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