Booz & Company Study Finds Media Companies Ready, Willing But Challenged to Grow in the Digital Future
Revenues from digital content are expected to double by 2015, reaching 36 percent of total.
New York, April 14, 2010 – Despite a downward spiral in revenues at virtually every traditional media company, a solid majority of industry executives are optimistic about their financial prospects and ability to reinvent themselves in the digital age, according to a comprehensive new study from Booz & Company.

The report from leaders of the world’s premier media companies, found that more than two-thirds (70%) characterize their company’s fundamental financial situation as “sound,” “strong” or “very strong.” This optimism extends even to the embattled print media segment, where only one-third (34%) of participants describe their financial picture as “distressed” or “pressured.”

The findings also discount the idea that the Great Recession may have delivered a crippling blow to the industry’s restructuring efforts. Roughly three-quarters (74%) of the executives believe their organizations will emerge either unchanged or even improved in the aftermath of the economic downturn.

“While we believe media executives may be overly optimistic, considering the pervasive industry challenges, it is encouraging to see that many media companies are addressing their issues head on, but of course much more will be necessary” said Harry Hawkes, a Booz & Company partner. “Many industry leaders have already substantially restructured their businesses, they’re experimenting with new paid content models, and they’re tapping new areas of customers’ marketing budgets beyond advertising.”

Indeed, the study shows that most executives recognize the new realities of the digital landscape:

  • 57% agree that deep-seated industry shifts—not the recessionary climate—are the source of the industry’s malaise
  • Nearly 70% identified last year’s top strategic priority as the development of new business models, primarily focused on boosting revenues from digital innovation (e.g., products and platforms)
  • Developing innovative, new ad sales models is also a clear priority with efforts further intensifying
  • More than half the executives (52%) called investing in digital business models their top investment priority, with even great focus for the future
  • By 2015, they expect revenue from digital content (as a percentage of total revenue) to increase to 36%, vs. 19% today
  • As media companies deemphasize traditional assets, there appears to be a growing recognition that new people and capabilities will be necessary to succeed.

Nonetheless, the survey paints the image of an industry still struggling in part with traditional “analog” operating cultures as well as finding creative new business practices that allow for improved economics:
  • 90% of media executives responding said that innovation and insufficient flexibility are the most daunting challenges they face in monetizing their digital efforts
  • Almost all participants in the study concede that they must continue to look for significant cost savings if they want to generate the capital necessary to thrive in the future
  • Respondents are looking to substantially increase their application of more structural approaches to cost reduction (e.g., portfolio rationalization, outsourcing and off-shoring, process innovation and improved purchasing) and reduce their use of more simplistic approaches such expense management and ongoing cost control
  • Interestingly, it appears global expansion is taking a “back seat” to the needs of developing digital businesses and new capabilities (at least for the time being) as respondents universally did not expect to intensify their emerging market investments, at least in the near-term.

Additional highlights from the study include:

Media companies continue to rethink the heart of their value chains. Media executives as a group identified the “strength and uniqueness of editorial content” as their top competitive strength; yet editorial work was one of the top cost cutting targets, along with content packaging and programming, distribution, sales force, consumer marketing and technology spending.

As digital revenues grow, display advertising will decline. Respondents expect revenues from all kinds of display advertising to decline dramatically, from more than half of all revenues today to just 29% in 2015.

Print media faces the steepest uphill battle. Print executives are the most concerned about their post-recession situation; 40% said they were worse off as a result of the recession, compared with TV & digital media (29%) and business-to-business players (25%). Integrated players universally felt their prospects were unchanged or better than pre-recessionary time. Yet print media predicts the biggest growth leap of all media sectors in digital and interactive revenues over the next five years—from 11% today to 28% of total revenues by 2015. In comparison, business-to-business, TV & digital media and integrated players, starting from higher bases, predict digital and interactive revenues to reach 49%, 37%, and 34% of total revenues, respectively.

Implications for Media Companies
Booz & Company identified lessons to help media companies improve their chances of success in the coming environment. These include: 1) developing much lower-cost operating models; 2) making business model innovation—typically not a core capability of media companies—a central priority; 3) honestly assessing current business properties as a precursor to building viable, profitable digital businesses; and 4) upgrading people assets and development processes capable of sustaining new business models.

“The old ways of doing business are never coming back,” said Booz & Company’s Gregor Vogelsang, Booz & Company partner. “Ultimately, companies will succeed in the digital realm not by transporting traditional media brands or formats to the Internet, but by building independent online businesses by leveraging their traditional assets.”

Methodology
The study was based on more than 50 interviews with senior executives representing a broad mix of functions in the media business and a quantitative online survey in which 67 companies worldwide participated. Of the companies surveyed, 36% were in TV and digital media, 26% were in print, 21% were business-to-business specialists and 17% were integrated media companies. Fifty three percent of the respondents were based in North America, 30% in Western Europe and 17% in growth markets around the world (e.g., Latin America, the Middle East, Asia and central/eastern Europe).

“Reset the Media Business Model” is available for download at www.strategyand.pwc.com.