Changing consumer demands drive new digital media distribution channels
London, 5 November 2010 – A report released today by Ernst & Young highlights how media and entertainment (M&E) companies will increase future revenue and profitability from digital media distribution by creating premium bundles of differentiated products and services. The report also compares global penetration rates of free online content with the tendency to engage in online commerce and examines where online paid content strategies succeed.
According to Monetizing digital media: creating value consumers will buy media and entertainment companies will use digital content to add value to consumers and thereby improve revenue and profitability in four key areas:
- Format and additional content: content and information can be delivered to consumers in specific formats that are most conducive to their needs and the devices on which they consume content. Consumers will also find value in additional bonus or exclusive content.
- Timing: Content consumption has been steadily shifting from a fixed-time model to one in which consumers can enjoy what they want, when they want. M&E companies can profitably monetize their products and services by accommodating this desire. For example, content can be offered on an exclusive basis, e.g. premium customers can view a TV show or movie prior to its release to the general public.
- Availability and interoperability: consumers want to access their media and entertainment from anywhere on multiple devices. M&E companies will enable multiple-device distribution and allow consumers the ability own and access content stored in a “digital locker.”
- Sharing: the concept of sharing is changing dramatically. Free content can become premium content if consumers have the ability to share it with their social networks or can recommend, comment or customize it. In this way, providers can turn what has traditionally been a liability into an asset.
One example of this direction is Internet radio stations that are shifting their focus from free content to premium services that offer subscribers a wider selection, a higher quality stream, no advertising and the ability to create and listen to customized channels on mobile devices.
“Now that the majority of consumers have learned to seamlessly integrate free digital media and entertainment content into their lives, companies have the opportunity to better monetize this habit by developing multiple paid content strategies that focus on consumer value,” said John Nendick, Ernst & Young’s Global Media and Entertainment Leader.
Online commerce versus free online content
The report also compared penetration rates of free online content with the tendency to engage in online commerce. The US has an average penetration of free online activities of 57%, with South Korea showing the greatest penetration of free online activities at 70% and Japan the least at 43%. However, when examining the willingness of consumers to engage in online transactions — as measured by e-commerce and online transactions — a different picture emerged. The average penetration levels of ecommerce and online transactions ranged from a high of 59% in Japan to a low of 7% in Russia, with the US placing third highest at 49%. The countries that ranked highest in free online content were generally less likely to engage in online commerce.
This divergence becomes most apparent when overall penetration is compared to online spending. In the US, for example, Internet users spent an average of US$8.80 on digital music products last year, with 34% of the population using the Internet to access digital music, both paid and free. Looking across the globe, Japan has a high per user spend (US$10.12) with a relatively low penetration (25%), indicating the Japanese are paying for their music content more than in any other country. Conversely, China has an extremely high penetration (83%) with a very low per user spend (US$.20), indicating the Chinese are getting the overwhelming majority of their online music for “free.”
“Media and entertainment companies will be more likely to see their online paid content strategies succeed in countries where Internet users’ online spending is more aligned to their online media consumption habits,” says Bruno Perrin, Ernst & Young’s EMEIA Media & Entertainment Leader.
Microtransaction model – the way forward?
When looking at how willing consumers are to pay for online content, the report highlights that they are more willing to pay for games, TV shows and music, and are less likely to pay for news, except for few highly specialized business newspapers, which have successfully combined advertising, subscription and microtransactions revenues.
Bruno added that, “The gaming industry has developed various paid content business models for social gaming, generating revenues through microtransactions for virtual goods. Most users don’t pay for virtual goods, but those who do, generate enough revenue to make the model work.”
In the US, the virtual goods market reached US$1.6b in 2010. Which, the social gaming market contributed US$835m. Another rapidly developing market, China, has estimated 105 million gaming users. Virtual goods sales in 2009 were estimated at US$2.2b. However, micropayments processing costs are still too high, with cost approximately US$0.20 per transaction, which is prohibitively high for a payment of US$1 or less. Nonetheless, market leading vendors are capitalizing on the opportunity, resulting in a more competitive market for micropayment processing.
Nendick concluded that, “Consumers in certain parts of the world will pay more for content and services they value. In creating “a la carte” content, M&E companies will generate more microtransactions, which in turn will increase micropayments and monetization.”
About Ernst & Young’s Global Media & Entertainment Center
Whether it’s the traditional press and broadcast media, or the multitude of digital 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 our clients achieve their 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 our clients meet their goals and compete more effectively. It’s how Ernst & Young makes a difference.
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