Commentary

Irwin Gotlieb: No More ARPU Available From Digital Goods

by Dave Morgan , Featured Contributor, October 28, 2010

If you work around the media industry, you certainly hear the term ARPU a lot. ARPU stands for Average Revenue Per User. Media businesses are always talking about how they are going to increase that number every year.

In the pay TV business, increasing ARPU means moving basic subscribers to premium subs. It means selling broadband in addition to TV. It means selling phone services. It means selling video-on-demand. It means selling ads in the 2 minutes per hour of spots that you get from network programmers.

As companies create more and more digital media, entertainment and communication services for mainstream Americans, from gaming to movie streaming to smart phone apps, these developers and their digital distributors have visions of even more ARPU. More stuff; more user fees; more ARPU. However, as WPP's Group M chief Irwin Gotlieb warned attendees today at the OnScreen Media Summit, "There's no more ARPU available from the 'average' American household."

According to Gotlieb, a typical U.S. household earning $32,000 per year already spends almost $300 per month on digital goods, all out of discretionary income. When you have a moment, total all of your family's spending on everything digital, from cable and online subscriptions, to pay-per-view, from apps to texting charges to software and music downloads and connection fees. Trust me, the total will shock you.

Gotlieb's warning is that there is no more room in those households for more fees for digital goods. One early warning: this past quarter we saw the first drop in decades in total cable subscriptions. If he's right, that means that there won't be room for more ARPU growth for digital media and entertainment distribution companies on new fees for new digital goods.

Gotlieb is probably more pessimistic on this issue than I am, but I do agree with him directionally. I do believe that we are already pushing the average consumer about as far as he/she can go with fees in digital goods. Gotlieb's prescription? In the absence of growing user fees, revenue growth to pay for more digital media and entertainment will have to come from growing ad revenues.

Easy to say, but how does Gotlieb expect media companies generally, and TV companies specifically, to accomplish this? Addressability. He believes that adding addressability to all digital media platforms is essential for the industry to thrive. While this is certainly not a new theme for him -- he's been saying it for years - it certainly takes on a new meaning when you consider the slow recovery we're experiencing from this recession.

Is Gotlieb right? Can all future incremental revenue growth in digital media and entertainment come from more advertising?

What do you think?

advertising, digital, tv

13 comments about "Irwin Gotlieb: No More ARPU Available From Digital Goods ".

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Ron Stitt from Fox Television Stations, October 28, 2010 at 4:47 p.m.
David - "If he's right, that means that there won't be room for more ARPU growth for digital media and entertainment distribution companies on new fees for new digital goods." I see how in the aggregate this is true, but obviously any individual company has the opportunity to charge/grow revenue - by taking it away from somebody else.
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David Carlick from Carlick, October 28, 2010 at 4:56 p.m.

I have long believed that the family digital budget will be equal or greater to the family car budget, up to a point, which is somewhere around the Mercedes C300. (After that, the conspicuous affluence offered by the car exceeds that which can be obtained by digital spending.)

Jon Mandel from Dogsled Enterprises Inc, October 28, 2010 at 5:08 p.m.

This is only half right. It is right that ARPU is close to some kind of max. That said, addressablitly will not save the industry.

Quite simply, it is right that it will make ads more effective so more product could be sold.

However, I propose there is also TRPU, CRPU,IRPU, CCRPU...there is a toothpaste revenue per user that is limited by how many times people can brush in a day, car revenue per user based on how many cars a year people can buy, insurance revenue per user based on how many lives that user has to insure, and credit card per user based on how many charge cards can be approved for an individual.

Thus while addressability will make advertising more efficient, it will do so by cutting out the audience that is not a product user. Thus total costs for advertising go down and advertising is more efficient as it is better targeted.

But that does not help the media seller.

The way that addressablity helps the seller if it can slice and dice advertising into small enough appropriately targeted pieces that new advertisers can afford to come in.

The beauty of Google wasn't just what they are really known for, the beauty was that they brought a zillion new advertisers into a medium.

Paula Lynn from Who Else Unlimited, October 28, 2010 at 5:16 p.m.

What do I think? I think just because another restaurant opens up in your neighborhood and even if it is very good, you are not going to pay for and eat 2 dinners the same night or in the same week if you only have enough to pay for one. So unless the consumer "steals" the money from another source - like savings, increasing debt, their kids lunch money - the ARPU is going to get you. Gezunteit ! Meanwhile, the professors of increasing ARPU on $32,000 gross annually should try it for a few years before then sneeze themselves silly. What it means is that overall content growth will stall with a large potential of fallback and all of entertainment venues will be taking that licking to be able to keep on ticking. Plus, within the US economy, interest rates will have to rise to offset, let's say, other international factors (of which the US cannot control much to the dismay of some popular beliefs) and that $32,000 will have less purchasing power. ARPU will depend upon less is more. ...Of course, they can always deport (or export) entertainment services and increase foreign ARPU.

Mike Azzara from Content Marketing Partners, October 28, 2010 at 5:22 p.m.

Even if addressability grows revenue, and even if the max ARPU available from consumers is higher than he thinks, the revenue won't necessarily accrue to media companies. Has anyone noticed the new revenue models recently put into place by Microsoft, Apple, Hewlett-Packard, Nokia, to name just a few? Ad-supported "technology" business models are emerging, perhaps with an inherent addressability advantage.

Jason Krebs from Tenor/Google, October 28, 2010 at 6:21 p.m.

$300 month for cable and broadband + $150 for cell phone =
$5,400 per year. In 1990 that equates to $3,000 which would have bought me around 100 magazine subscriptions, 30 newspapers and every premium cable channel per month. The fact that my money now doesn't go to the content creators is not my problem. It's their problem that they didn't build the pipe.

So in 2010 I think that entitles me to plenty of content and I doubt I'm alone in my consumption habits. So no, i won't be paying for any more content or services on top of that; Irwin is correct.

Mark McLaughlin, October 28, 2010 at 8:06 p.m.

Irwin has started preaching addressability??? His great quote is "if you wait until somebody is shopping for an expensive car to start advertising Mercedes Benz, you are too late."

Irwin has defended "waste" as reach forever.

If Irwin now believes that addressability is the key to creating more value for advertisers, why is he focusing on the TV box. Addressability has been a healthy and valid capability of the web for five years now. Why not just move TV dollars online if addressability is the key? Why get on a soap box and try to get dysfunctional cable providers to move forward in a cooperative manner that they have shunned for 20 years?

Addressability is here and it is scaled. It's just not inside a TV box.

Mark Silva from KITE, October 28, 2010 at 8:34 p.m.

Good comment thread and lightening rod subject. Couple of other considerations: the average home has $90 of change lying around. The beauty of digital is its long-tail and micro-nature which disrupts classic lock, load & hold subscription approaches. Still, I think Gotlieb is right about a household limit. Not sure the winner is advertising and traditional players longer-term, but there may be something in aggregated value for all-you-can-eat services that can win. Whoever can bring that bundle closer to reality may not get higher ARPU, but can win significant share. Check out how MetroPCS is training young mobile users to think and what to expect from a service provider. HT to Gotlieb for raising a demanding reality. Cheers! Mark Silva

Dave Morgan from Simulmedia, October 29, 2010 at 11:33 a.m.

I do think that we are going to see significant reallocation of the digital goods fees, and I'm not sure that content owners are necessarily going to be the biggest beneficiaries, though some smart ones certainly will. However, I agree with Irwin and do think that for average American households, there just isn't going to be enough money left over from their $2,500-ish monthly after tax income after paying for housing, food, clothing, car, gasoline, education, health care, retirement, insurance, etc. to push that $300 monthly digital goods number much higher. They are tapped.

Howard Koval from Hit Start, October 29, 2010 at 5:36 p.m.

David, love this conversation's direction. It's interesting, timely and completely up in the air.

Agreed that the average US consumer is basically tapped out on digital fees and really won't be able to afford much more. Re-packaging, re-allocation and the introduction of new players will forever take place and evolve - forever and always. That's a constant.

Addressabilty? Yea sure, its coming and will be another another drastic game changer. But...

Ultimately - and totally impending - there will be another great shift in power and the next "short term" winners will be whoever first ends up controlling the "living room" or digital home of the future. (until the next technical leap)

Cable, broadband, satellite, game consoles, tablets, web TV boxes, smart mobile, content services (like iTunes), YouTube, Hulu, on-demand, a la cart (OMG!)... who will ultimately drive addressibilty? All of them will. Its only technology. It becomes ubiquitous quickly these days.

More fragmentation. More media choices, more media partners on media plans, smaller audiences, more challenging to reach and engage desired audiences.

Higher costs on media execution for agencies will make it more difficult and costly to move the bar for our clients.

What happens when the NFL realizes they can make more money by distributing their own programming and selling their own inventory? ... without Fox. Why not? Of course it will happen. Unless Fox buys the NFL (before Google does (Lol)

Adressability is not the answer in increasing revenues. Addressability will enable greater targetability (and accountability) but - BUT - in the end, it will also drive home the concept of performance-driven ad models and less CPM-based planning and buying.

Initially, CPMs would, for sure, increase with addressable homes but it will also splinter the audience and drive home the newer more effective/efficient ad models that new tech will enable.

With the sophistication that the promise of "addressable" enables, it will drive true "partnerships" between brand and media outlet. (until the point of diminishing return) It will turn everyone into a DRTV advertiser. Media companies will be compensated based on what they yield back to their clients - until that yield drops off due to audience fatigue etc.

With so many choices and options that the future will bear - not sure how all the content companies will afford to stay in business. Right?

This brings me back to the ARPU issue. Average consumers ARE tapped out in what they can afford and what they are willing to afford here. Take that same consumer ... and imagine if they also like Starbucks 1-2x/day ($100/month), smoke a pack of cigarettes ($300/month), buys lunch everyday at work ($225/month), commutes to work everyday ($225/month) etc. etc.

Where's the beef? Lmao

In the digital future, ARPU growth will only come to those that offer more and greater value to the consumer. This growth will only come from other's revenue demise.

Addressability is both a blessing and curse in the context of this post.

Paul Benjou from The Center for Media Management Strategies, October 29, 2010 at 6:32 p.m.

Irwin is on spot with his warnings on the shrinking dollars available for ARPU increases.
Our own surveys indicate across the board reductions in digital service spending by consumers going back 8-12 months.

Paul Benjou

Ad Blog: www.MyOpenKimono.com

Thom Kennon from Free Radicals, October 29, 2010 at 7:20 p.m.

And the winner is... @Mike Azzara's point re how certain smart platform brands - Microsoft, Nokia, Apple etc - are already driving the bus in the direction that solves for all this: apps and content with ads & commerce baked right in.

Not only are these biz models and content units addressable, but they are fueled by distributed real-time commerce.

You put that model on 4 billion (and counting) mobile devices and Irwin's cable partners are gonna have a lot of set-top TV boxes to sell on Groupon.

@tkennon | bigevidence.blogspot.com

Kevin Horne from Verizon, November 2, 2010 at 3:15 p.m.

How does Gotlieb (or anyone on this thread) explain how ARPUs increased every financial reporting period throughout the recession...and continue to...for wireless, cablers, and satellites?