The digital future of creative Europe: The economic impact of digitization and the Internet on the creative sector in Europe

Among the sectors most profoundly affected by digitization is the creative sector, which, by the definition of this study, encompasses the industries of book publishing, print publishing, film and television, music, and gaming. The objective of this report is to provide a comprehensive view of the impact digitization has had on the creative sector as a whole, with analyses of its effect on consumers, creators, distributors, and publishers.

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Briefing

Thomas Künstner Matthew Le Merle Dr. Hannes Gmelin Christian Dietsche

The Digital Future of Creative Europe
The Economic Impact of Digitization and the Internet on the Creative Sector in Europe

CONTEXT

Digitization—the mass adoption of connected digital technologies and applications by consumers, enterprises, and governments—is a global phenomenon that touches every industry and nearly every consumer in the world. For each industry, digitization changes how things are produced, how they are sold and distributed, how the firms are managed, and how and with whom they compete. For many industries, digitization completely revolutionizes the way companies interact with their customers. Among the sectors most profoundly affected by digitization is the creative sector, which, by the definition of this study, encompasses the industries of book publishing, print publishing, film and television, music, and gaming. Nearly all of these have been fundamentally altered by the penetration of digital media into everyday life. Some industries, such as the music industry, have been wrestling with digitization for a decade or more; others, like print publishing, are only now feeling its full impact. The objective of this report is to provide a comprehensive view of the impact digitization has had on the creative sector as a whole, with analyses of its effect on consumers, creators, distributors, and publishers. It is particularly important to look more closely at the prevailing myth of digital erosion—the idea that online media and the accompanying “for free” culture have, in effect, led to a slowdown in growth and a loss of jobs. Indeed, digitization and the Internet are often named as the root causes for some of the creative sector’s problems; this is a perspective that fails to take into account many of the benefits of digitization. In this report, we take a more differentiated perspective, looking at each industry in detail. Our conclusion: The vast majority of all growth generated by today’s creative sector is digital. Depending on the industry, the non-digital part of the business is generally stagnating or even shrinking, but all industries have one thing in common: Digital is growing, enabling a 2 percent yearly growth for the entire creative sector. This growth is primarily driven by direct consumer payments, which are up 25 percent from the numbers in 2001—underlining the point that consumers are sustainably willing to pay for creative content. Furthermore, overall employment in the creative sector has been stable over the last 10 years, whether despite digitization or (more likely) because of it. Finally, benefits to consumers have been significantly increased by digitization. For example, access to creative products and services has increased, and so has consumers’ use of them. This report presents data and case studies on how some creative industries and companies across Europe are successfully leveraging these developments and seizing the opportunities while others are struggling to maintain their position. Digital is and will be at the heart of the sector’s future, if only because the consumer has decided it should be.

This report was financed by Google Inc., and independently researched and written by Booz & Company.

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ACKNOWLEDGMENTS

The authors would like to acknowledge the central role of numerous participants in meetings and interviews across Europe. Without their expert insights, the study would not have been possible in the present form. We thank individuals from the following organizations for their time, insights, and thoughts (Note: D = Germany, ES = Spain, F = France, I = Italy, PL = Poland, and U.K. = United Kingdom): 4t2 (U.K.) Adese (ES) Aeria Games Europe (D) Allianz Deutscher Produzenten (D) All3Media (U.K.) Audioteka (PL) aufeminin.com (F) Baltic Creative (U.K.) Base Creative Agency (U.K.) Base79 (U.K.) Beatpick e Soundreef (I) CD Projekt RED (PL) Colorado Film (I) Creative England (U.K.) DCMS (U.K.) De Tullio & Partners (I) demosEuropa (PL) Double Negative (U.K.) EMI Music (PL) F.I.M.I. (I) Fapae (ES) FAPAV (I) Fedicine (ES) Finetunes (D) Fluffy Logic (U.K.) FU Berlin (D) GAMFI (PL) Garamond Edizioni (I) Goldmedia (D) Institut für Internet und Gesellschaft (D) La Stampa (I) Lyra Media Group (F) Medioson (ES) MillionYou.com (PL) Ministère de la Culture (F) Ministry of Economy (PL) MTV Northern Europe (D) My-Music.pl (PL) NESTA (U.K.) Newbaz (U.K.) Northern Town (U.K.) Piano Media (PL) Platige Image (PL) Promusicae (ES) RAI Cinema (I) Sapienza Università di Roma (I) Université de Paris IV Sorbonne (F) SPI International Poland (PL) Spotify (U.K.) Startnext LAB Berlin (D) The Fifth Sector (U.K.) Tuenti (ES) Two Sugars (U.K.) Uria Law Firm (ES) veDrò (I) Warner Bros (I) Wolters Kluwer Polska (PL) Yam112003 (I) ZAIKS Society of Authors (PL) ZED (ES)

Photo credits cover Top left: © goodluz - Fotolia.com, top right: © chaoss - Fotolia.com Bottom: © Nuno Silva - iStockphoto.com This report was financed by Google Inc., and independently researched and written by Booz & Company, drawing on expertise from its communication, media, and technology practice and its digitization team, and also on academic and public research, public information, and primary research.

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TABLE OF CONTENTS

Context 3 Acknowledgments Key Highlights: Creative Growth is Digital 1. Introduction: Setting the Pace for Change 2. Shifting Value in the Creative Sector 3. The Consumer’s Perspective 4. Impact on Creative Production and Output 5. Varying Digital Maturity across Creative Industries 6. Opportunities in a New Creative Ecosystem Appendix: Methodology 4 7 8 10 19 23 27 41 44

Endnotes 46 About the Authors 48

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KEY HIGHLIGHTS: CREATIVE GROWTH IS DIGITAL

Mass adoption and high usage of the Internet have revolutionized the creative sector—but the biggest changes are yet to come. Media usage accounts for more than 60 percent of time spent in leisure activities across Europe; the Internet has driven consumption levels of creative products to record levels (+20 percent from 2004 to 2011 for the EU-27). Overall, consumer spending in the creative sector is up by 25 percent from spending in 2001; as further analysis shows, there is no lower consumer willingness to pay. Consumers benefit from a greater variety of content available anytime and anywhere, generally at lower prices. These changes have been reflected in industry growth (+20 percent in the 2001–11 period); yet the creative industries surveyed have developed at a rate slightly below GDP growth, which also mirrors the sector’s digitization efficiency gains. All growth in the creative industries is driven by digital media (an additional €30 billion in revenues in 2011 versus 2001). The overall number of jobs in the creative sector in Europe has been stable at 1.2 million on macro level albeit large variations on industry or country level, e.g., a job growth in Poland. Content creators benefit from easier access to distribution and more channels of communication with their audience members; their value captured seems to be stable, if not growing, in most industries analyzed. In some industries, such as film, digital growth has already made up for losses in nondigital media; in other industries, such as book publishing, growth opportunities are emerging as digital media begin to mature: New consumer experiences are being created and effectively monetized. The transformation to digital is challenging for many creative industry players, particularly those established players that focus on packaging and distribution of content, including many recorded music companies, which find it difficult to transfer their capabilities and business models to the digital ecosystem. New entrants and local companies, though, have gained easier access to global consumers. The Internet has unearthed efficiencies in the creative sector, especially in manufacturing and distribution. Lower revenues are not necessarily a sign of weakness in these industries, as they are often accompanied by lower cost and the impact on company profits thus might vary significantly depending on the cost structure. A new ecosystem architecture is emerging and presenting great opportunities. At the heart of the most successful business models is a seamless consumer experience, increasingly realized by new market entrants or involving their partnerships with incumbents.

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1. INTRODUCTION: SETTING THE PACE FOR CHANGE

Digitization—the mass adoption of connected digital technologies and applications by consumers, enterprises, and governments—is a transforming force for all industries. It changes the way products and services are produced, marketed, and consumed. This change is especially pronounced for creative industries. Consumers now expect to find information about media and entertainment on the Internet; they shop online for the media they buy; and they often receive the product online in fully digitized form, as a download of (for example) a movie, software package, publication, or audio recording. One primary enabler of this shift has been the build-out of broadband infrastructure. This development is already quite advanced in the mature European economies, where usage has evolved to mass adoption during the last 10 years. In the EU-27 countries today, more than 70 percent of all inhabitants use the Internet (see Exhibit 1). Although there still are large disparities between the different countries—in 2011, Internet usage ranged from 85 percent of the population in the U.K. to 54 percent in Italy—the penetration of digital infrastructure and services is generally high.
Exhibit 1 Internet Usage Has Grown Significantly between 2001 and 2011

INTERNET USAGE IN LAST 3 MONTHS EU-27, 2001-11, Percentage of inhabitants 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 32% 36% 42% 45% 51% 52% 57% 62% 65% 69% 71%

INTERNET USAGE IN LAST 3 MONTHS Focus countries, 2011, Percentage of inhabitants D ES F I PL U.K. D Germany F France I Italy PL Poland 54% 62% 85% 67% 78% 81% Leading EU countries: - Sweden 93% - Netherlands 91% - Denmark 90%

ES Spain

U.K. United Kingdom

Source: Eurostat, Booz & Company analysis

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All indications suggest that the impact of digitization will only increase during the next few years. The European Commission’s Digital Agenda is actively promoting this; one of its key objectives is 100 percent population coverage with 30 Mbps+ broadband by 2020.1 Technological change also has its own momentum. According to a study by Ericsson, by the year 2018, all mobile phones in Europe will be smartphones.2 That will enable more and more people to communicate conveniently, to access digital services, and to receive personalized and localized information on the go. “Generation C”3—born after 1990, always connected, communicating, and clicking—already behaves in that way, and other demographic groups will follow suit. Older generations will use different services, e.g., online health monitoring or specific modes of communication, but they will go digital as well. This is all welcome news. A 2012 study conducted by Booz & Company for the World Economic Forum (WEF) found that a higher degree of digitization tends to benefit consumers and the economy at large.4 In Europe, performance indicators of economic and societal well-being, such as GDP and the OECD Better Life Index5, are positively influenced by rises in the ubiquity, reliability, and speed of digital services. These factors are all used in determining a country’s or region’s score on the Booz & Company Digitization Index. In other words, the higher a country scores on the Digitization Index, the higher it is likely to rank in dimensions such as GDP per capita, the Better Life or the Human Development indexes (see Exhibit 2).
Exhibit 2 Correlation between Digitization and Quality of Life
…GDP1 PER CAPITA (37 European countries) GDP per Capita (USD, thousands) 70 60 50 40 30 20 10 0 20 40 60 Digitization Score 80 Well Being Index …BETTER LIFE INDEX (34 OECD countries) 70 60 50 40 30 20 10 0 20 40 60 Digitization Score 80 Human Development Index …HUMAN DEVELOPMENT INDEX (120 countries) 70 60 50 40 30 20 10 0 0 20 40 60 Digitization Score 80

y = 1.2236x – 30.292 R² = 0.6364

y = 0.1289x + 0.095 R² = 0.5141

y = 0.2311ln(x) - 0.0684 R² = 0.8721

1 Real GDP 2011 Note Better Life Index brings together internationally comparable measures of well-being (Stiglitz-Sen-Fitoussi Commission) Real1: GDP 2011 Note 1: 2: Better Human Development Index is a internationally composite statistic of life expectancy, education, income indices Commission) Note Life Index brings together comparable measures of well-beingand (Stiglitz-Sen-Fitoussi Source: OECD Better Life Index, Gallup Well-Beingstatistic Index, UNDP HDI, IHS, Booz & Company analysis Note 2: Human Development Index is a composite of life expectancy, education, and income indices Source: OECD Better Life Index, Gallup Well-Being Index, UNDP HDI, IHS, Booz & Company analysis
1

Future changes will go beyond the media and entertainment industries. For example, innovations in digital fabrication, machine-to-machine communication, and wearable computing will lead to the emergence of an “Internet of things,” in which material goods become far more fungible and customizable than they are today. Thus, the issues facing the creative sector today will face all industries in a few years. By putting the right kinds of measures in place with media today, society has an opportunity to pave the way for a highly beneficial continued rollout of digital development.

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2. SHIFTING VALUE IN THE CREATIVE SECTOR

Everybody has an initial understanding of the “creative sector,” but there is no uniform definition. To create a common ground that is comparable across the EU-27 countries, this report defines that sector as the end-user-directed creative industries in the larger information and entertainment business. Our research focuses on five industries: film and television, periodical (newspaper and magazine) print publishing, book publishing, music, and electronic gaming. These five are the major copyright industries from a revenue perspective, and within those industries most of the revenue-generating activities are included, both digital and non-digital. The excluded industries include the live performing arts and sports events; fine arts, such as painting and photography; blogs and other content production not organized in a commercial format; and all business-to-business (B2B)-directed creative production, including product design and architecture. The creative sector is supported by “enabling industries” such as advertising agencies, search engines, and social media; these providers are also excluded from creative industries as defined by this report. (We thus include advertisingsupported media, such as television and online newspapers, but not the advertising industry itself.) In short, our goal is to capture the impact of digitization on consumeroriented creative media, where the works produced have a for-profit, commercial return (see Exhibit 3). All the creative industries in scope include traditional products and services as well as digital ones; book publishers, for example, still produce hardcover and paperback print volumes as well as e-books. In all five industries, the major digitization trends are evident and active. The film and television industry has seen the introduction of a wide array of digital products—IPTV, over-the-top streaming, video-on-demand offers—revolutionizing the industry and pushing revenues to new levels since 2005. The music industry has

Exhibit 3 The Largest End-User-Directed Creative Industries Are the Focus of the Study

Definition of Focus Sectors Culture & Language

Description - Overall environment of people in a local culture / country, e.g. language - Unorganized creative production, e.g. blogs - Organized creative industries, mostly profit-oriented - Organized creative industries, directed toward businesses as well as individuals

Creative Ecosystem

Organized Creative Industries Film & Television Print Publishing Book Publishing Music Gaming

Creative Industries in Focus

HEAD

- End-user-directed creative industries in the larger information and entertainment business

Enabling Industries

- Enabling industries that support the distribution and monetization of creative content, e.g. ad sales

Source: Booz & Company analysis

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experienced a dramatic shift in distribution and consumption patterns; the print publishing industry is beginning to undergo a similar shift. The gaming industry saw the introduction of completely new creative opportunities and revenue models. Finally, the book publishing industry is at the starting point of a paradigm shift as more and more people receive and read their books on e-readers and tablets. The creative sector, of course, is part of a social system that includes, at the outer layer, the language and culture of a country or region on which all creative production is based. From a geographic scope, the report covers the EU-27 (also simply referred to as Europe) and in addition zooms in on six focus countries: France, Germany, Italy, Poland, Spain, and the United Kingdom. These six jointly account for more than 60 percent of both the entire EU-27 population and GDP. Our study of the creative sector in these countries has yielded a number of observations: • Creative industries dominate leisure time: The importance of the creative sector is best illustrated by the share of time people spend consuming creative products. Of the approximately 6.8 hours per day the average European consumer has available for activities other than work, meals, sleep, and household chores, more than 60 percent are spent consuming creative industry products. This includes reading the newspaper or watching television (see Exhibit 4). The role this sector plays in people’s lives can hardly be overstated.
Exhibit 4 Creative Industries Dominate Leisure Time
AVERAGE DAY TIME SPLIT EU-27, 2011 24.0 hours Other / Leisure time 6.8

Eating / Cooking Houshold chores Working hours

2.5 1.0 5.4 Other / Free time 39% Media usage 61%

Sleep

8.3

2011
Source: Eurostat, IAB, Booz & Company analysis

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• Different segments develop at different rates: The aggregate value of the creative sector was roughly €200 billion across the EU-27 in 2011. It has grown from €170 billion in 2001 with a compound annual growth rate (CAGR) of 2 percent (see Exhibit 5). This growth rate is slightly below the general GDP growth rate overall, but the individual segments’ growth rates vary considerably. The print publishing industry and the music industry have both contributed negatively to the creative sector’s top-line performance, showing—on average—negative growth rates over the last 10 years. On the other hand, gaming and the film and television sector have outpaced GDP.

Exhibit 5 Creative Sector as a Whole Has Been Growing around 2 Percent Annually

CREATIVE SECTOR REVENUE BY INDUSTRY EU-27, 2001-11, in bn EUR

+2% 198.9 193.6 196.5 30.7 30.3 30.0 Book Publishing
HEAD

176.3 170.0 174.2 27.4 27.6 27.8

182.5 28.3

188.2 29.5

193.3 29.6

201.3 201.5 31.1 31.0

Share of Total 15.1%

CAGR 20012011 0.9%

59.8

59.4

58.9

59.5

61.6

62.4

63.1

60.9

55.1

55.0

53.7 Print Publishing

27.0%

-1.1%

62.4

66.2

68.7

73.7

75.9

79.9

83.5

84.8

84.0

88.2

92.0 Film & Television

46.3%

4.0%

16.9 3.6 2001

16.7 4.3 2002

16.0 4.9 2003

15.5 5.5 2004

15.3 5.9 2005

15.0 6.5 2006

14.6 9.1 2007

13.9 10.9 2008

13.6 10.3 2009

12.6 10.4 2010

12.6 10.5 2011

Music Gaming

6.3% 5.3%

-2.9% 11.3%

Note: Includes consumer spend and advertising revenues. Copyright fees are not included here Source: PWC, eMarketer, IHS, Euromonitor, Booz & Company analysis

3 columns width 2 columns width

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The film and television segment accounts not only for nearly 50 percent of the creative industry’s total revenue, but also for a major share of its growth. This segment grew by an average of over 5 percent annually throughout the last 10 years and was barely hit by the economic downturn in 2009. The main driver of film and television growth is the increase in subscription revenues, including those for premium cable and IPTV channels. Subscription revenues grew by nearly €20 billion and are generating around 2.5 times the revenues of 2001. Overall, this industry has benefited dramatically from the digitization of distribution networks, like IPTV and digital terrestrial television, as well as from the growth of new services such as YouView, Maxdome, iTunes, and Apple TV. Online gaming has also proven to be a strongly growing segment, especially since 2008, while video console games have decreased in value. Online gaming accounted for around €3 billion of revenues in Europe in 2011—with strong growth prospects ahead. The book publishing sector has grown only slightly in the past 10 years. With e-books making up around 2 percent of the total market value in consumer as well as educational books, the digital revolution in the book publishing market has mainly been in commerce platforms (such as Amazon) and not in the product itself. However, according to expert opinions and forecasts, strong growth in e-books is imminent. As an industry, print publishing (newspapers and magazines) has experienced challenging times since 2001. The 10-year compounded growth rate of negative 1.1 percent translates into lower revenues of almost €6.1 billion in 2011. A shift in consumer behavior and changing usage patterns have led to stagnating offline circulation and dramatically decreasing offline advertising revenues (a loss of €7.7 billion since 2001). By contrast, revenues for digital periodicals have increased by about €1.6 billion. This relatively small amount indicates the industries’ challenge from digitization. By further embracing the Internet as an attractive source for advertising eyeballs and pay revenues, established players still have huge opportunities; they have the content capabilities and brands to develop viable business models that meet consumer needs and expectations. Some publication companies have shown that digital content can be monetized through new value propositions and that consumers are willing to pay for them (see “The Financial Times and Its Subscription Model,” page 14). This trend is also evident in recent successes in the U.S. (for example, a metered model for innovative Web presences by such publications as the New York Times or more than 75 local titles of Gannett).6

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The Financial Times and Its Subscription Model One of the most successful examples of digital pay revenues for newspapers is the Financial Times. As early as 2001, it introduced a version of paid online content. Its current model dates back to 2007; users get a certain number of free articles each month, after which they have to buy a subscription. In mid-2012, digital subscription for the first time passed 300,000 users, overtaking the number of print subscribers. This is equivalent to 30 percent year-on-year growth in digital. Overall sales and profit were both up year-on-year. FT.com offers a subscription package that works on PCs, mobile devices, and tablets. About 20 percent of FT.com traffic is generated through mobile devices today—for an additional fee, access to the e-paper version is available as well. A yearly subscription to the print edition costs £624; the premium digital subscription (including e-paper access) costs £353 or around 43 percent less. The electronic versions offer additional content beyond the print edition, making them valuable options for consumers. Among these added features are universal access on mobile, tablet, and desktop devices; continuous updates; and interactive videos. According to John Ridding, chief executive of the Financial Times, it “is very unlikely that advertising will support the kind of newsrooms that produce good-quality journalism”; consequently, the FT monetizes its online and offline content through pay revenues as well as advertising. Today, 35 to 40 percent of revenues are from advertising, versus around 85 percent 10 years ago7 (see Exhibit 6).
Exhibit 6 Positive Development of FT Digital Subscriptions
FINANCIAL TIMES DIGITAL SUBSCRIPTIONS in thousand, July 2007 to October 2012
350

300

250

200

150

100

50

0 2008 2009 2010 2011 2012

Note: Strong subscription growth after 2010 mainly due to new features such as the introduction of mandatory registration for all users and new/improved access on mobile devices Source: Company Information Source: Company Information

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The music industry is the most developed industry when it comes to a shift in consumption patterns and changing revenue streams. Since 2001, overall revenues (recorded music and concerts) have decreased by nearly 3 percent annually. Recorded music sales (digital and physical) have lost 50 percent of total revenues; physical music sales in 2011 reached only 40 percent of the 2001 level (the top-line decrease does not lead to lower artist and label income on average across Europe though, as outlined in Exhibit 13 page 21). However, concerts and digital music sales are growing—digital music revenues have increased by 32 percent annually since 2007. For this reason, the decline in overall revenues stopped in 2010, and revenues grew slightly in 2011. Forecasts for 2012 show growing recorded music sales again as new revenue models are being established and gaining traction with consumers. (See “The Spotify Story,” page 15.) As a harbinger for other sectors, the music industry entails also positive news; it seems to have found some viable digital business models and is successfully establishing them in the marketplace.

The Spotify Story Spotify represents one of the clearest cases in which the benefits of digitization have created an entirely new value proposition for the consumer. This and similar services have revolutionized the music industry by providing a valid digital business model beyond paid downloads. Launched in 2008, Spotify today delivers its services to 15 million users in 16 countries. It is the leading music streaming service in Europe, with growth to match; it has at least doubled its revenue each year for the past three years, reaching an estimated €500 million in 2012. Spotify users have the choice between a free basic streaming service that is financed by advertising, and a premium service for a subscription fee (€10 a month for full access, including mobile) that allows music streaming to multiple devices, an offline listening mode, better sound quality and exclusive content—all without advertising. With its two-service model, Spotify successfully implemented current digital trends to deliver a better product to the consumer: • Superior discovery and search functions allow users to navigate through a vast musical repertoire. • Personalized radio channels and recommendations based on the music users usually listen to and personal ratings help find new favorite songs and artists. • Offline and online modes as well as mobile solutions and broad platform compatibility allow subscribers to listen to music everywhere and on almost any device. • Social integration features enable users to integrate their Spotify accounts with existing Facebook and Twitter accounts and share music and playlists with friends and followers. Notwithstanding its success with consumers, the commercial viability of Spotify is to some extent still to be proven. Up to now, losses have been mounting, because the majority of users are free subscribers and there is still insufficient monetization of this model through advertising. But the potential for profitability is huge, and commercial dynamics will likely change with further growth. Due to the nature of the contract that Spotify has signed with record labels (a minimum of 75% of total revenues is distributed to artists & labels) and its tremendous growth so far, industry sources expect it to break even for the first time in 2012 or 2013.8

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• The creative sector shows robust growth in some countries: Within the six focus countries, the development of the creative sector was only slightly below GDP development (see Exhibit 7). The Polish creative sector exhibited the strongest revenue growth of all countries, and Germany and Spain lagged behind the other focus countries. The general industry trends, however, are very similar in all six countries: Print publishing is declining (except in Poland, where even print publishing is still growing—though this trend is forecasted to reverse in 2012), music is stabilizing thanks to the growing importance of digital sales and film and television as well as gaming (especially online gaming) are growing industries. Despite solid growth over the last 10 years, the size of the creative sector, relative to GDP, has decreased. When compared with GDP of the EU-27 countries, the creative industries’ share of GDP was around 1.6 percent in 2011, a slight decrease from around 1.9 percent in 2001. However, as explained later in this report, the most important reason for the lagging revenue development relative to GDP is a shift in the industries’ value distribution, where particularly intermediaries are losing revenues as electronic distribution eliminates parts of the manufacturing and distribution costs. As a result, the revenue figures lag GDP,
Exhibit 7 Creative Sector Revenues by Country, 2001 and 2011

Focus countries, 2001 and 2011, in bn EUR 2001 DE ES F IT PL U.K. 39.2 11.3 26.3 17.1 2.8 31.4 2011 40.2 12.1 33.5 20.4 4.2 36.0 CAGR 0.2% 0.6% 2.5% 1.8% 4.1% 1.4%

Source: PWC, eMarketer, IHS, Euromonitor, Booz & Company analysis

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but the profitability of individual companies still increases in many cases (see chapter 5). Adding it all up, this is still a sizable industry and it remains an important part of the economy (see Exhibit 8). • The overall number of jobs in the creative sector has remained constant at 1.2 million over the last 10 years: Employment has actually grown in aggregate by 5 percent for all the EU-27 countries. But the pattern of job growth varies by segment. As with revenue development, film and television is a significant driver of job growth, whereas print publishing has seen job numbers decline by about 6 percent over the seven years

Exhibit 8 Creative Industries in Comparison to GDP

CREATIVE INDUSTRY SHARE OF GDP EU-27 & Focus Countries, 2001-11 2.6% 2.4% 2.2% % of GDP 2.0% 1.8% 1.6% 1.4% 1.2% 1.0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 EU-27 U.K. DE F ES I PL

Source: PWC, eMarketer, IHS, Euromonitor, Booz & Company analysis

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covered in the statistics below (see Exhibit 9). Analysis by country also shows differentiation; creative industries in the United Kingdom and Germany have experienced declining employment (with a CAGR of negative 0.7 percent and negative 1.1 percent, respectively), whereas the numbers for Spain, Italy, and Poland grew by more than 2 percent annually, in part possibly driven by different maturity levels of the creative sector in those countries. Once again, the film and television industry is the primary growth driver. It increased its employment significantly across all focus countries except Germany. Employment in the music industry declined in all focus countries except Poland. Print publishing was hit hard in the United Kingdom and Germany; employment in that sector has declined 14 percent and 11 percent, respectively, since 2001. Some of this job loss can be explained by the strong restructuring measures that these industries have undertaken. In contrast, print publishing employment in the other focus countries held constant or even increased a bit. Book publishing decreased in all countries except Spain and Germany, and the gaming sector represents a growth story in all countries, tripling employment in the time from 2003 to 2010.

Exhibit 9 The Number of Jobs in the Creative Industries Has Remained Constant Over The Last Decade1

JOBS IN THE CREATIVE INDUSTRIES EU-27, 2003-10, in thousand 1,191 147 1,210 146 1,224 141 1,234 144 1,245 150 1,256 148 1,234 145 1,222 141

CAGR 20032010 Book -0.5% Publishing

628

634

644

647

640

637

HEAD

612

590

Print -0.9% Publishing

384

398

403

409

418

431

438

454

Film & Television Music

2.4%

-1.9% 13.7%

5

28 2003

5

27 2004

6

30 2005

6

28 2006

9

28 2007

11

29 2008

10

28 2009

11

25 2010

Gaming

Source: Eurostat, National Statistical Offices, National Business Associations, Booz & Company analysis

Note: Definition of employees included according to Eurostat criteria: book publishing excludes distribution of books and independent writers; print publishing includes newspapers, journals and periodicals and other publishing activities and excludes independent writers and photographers; film & television includes motion picture, video and television production and post-production and motion picture projection and excludes independents; music includes sound recording and music publishing activities but excludes all independents and performing arts, theaters, etc.; gaming includes the category publishing of computer games Source: Eurostat, National Statistical Offices, National Business Associations, Booz & Company analysis 1 Jobs in the music industry appear relatively low relative to revenues generated; this is mostly due to the fact that independents (due to a lack of reliable data on a EU-27 level), distribution and manufacturing are excluded altogether

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3. THE CONSUMER’S PERSPECTIVE

There is little doubt: The consumer is a big beneficiary of digitization in the creative sector. He or she gets easier access to additional, more diverse, and more relevant content. This view of the consumer’s digital dividend appears to be widely shared among creative industry representatives. In our survey of experts, nearly 100 percent of the respondents agreed that consumers use more creative content today than ever before and that they gain access to more relevant content as a result of digitization. Consumers benefit from a rising number of TV channels, online access to nearly the entire music catalog through streaming or download platforms, access to global news providers across the world, insights into recommendations from friends and opinion leaders, and many more elements. One important driver of the changes is the proliferation of new devices, such as smartphones and tablets. Starting in 2010, a much larger number of consumers started to access the Internet through platforms other than the PC, especially smartphones and tablets. Time spent on the Internet via mobile phones has multiplied since then and today makes up around 15 to 20 percent of the entire time spent online for our focus markets. Smartphones and mobile devices enable a growing number of local services, such as Facebook check-in, a feature in which people use their smartphones to tag themselves with their current location as a way to connect with others they know who may be nearby. According to comScore, 24 percent of the total time spent online in Europe is spent on social networks (such as Facebook and LinkedIn). This is partly driven by new access models; nearly 50 percent of users regularly access social network via mobile phones’ apps or browsers. Furthermore, social networks are not a phenomenon of the young anymore; they reach the 55-plus demographic to nearly the same degree.9 These numbers impressively back up the current buzz around consumers going “social, local, mobile.” With most new platforms, the consumer gets the opportunity to participate—in everything from rating restaurants to uploading videos to commenting on articles to participating in the democratic process. Political campaigns today require candidates to be present in social networks and answer to individuals’ concerns. Recent political movements around the world, most notably in Eastern Europe, Africa, and the Middle East, have demonstrated the power of digitization and its positive effects on democracy and free speech.

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There are a number of striking findings about the evolution of consumer demand as digitization has spread: • Growing use of creative products: Since 2003, the average time spent on media platforms has increased by nearly 20 percent, to more than four hours in 2011. The main driver of this development was the increase in Internet and film and television usage. It partly represents an overall increase of media use; in part, it represents time taken from print publishing (see Exhibit 10). The time spent online has more than doubled across the EU-27 population in the same time frame. The Internet growth rate also increased to 15 to 20 percent annually in 2011 and 2012, which suggests further increases in Internet usage ahead, not a weakening of the trend. • Increased time spent on the Internet is driven by a multitude of factors, not just the proliferation of smartphones and tablet devices. New and improved product offerings for media consumption, e-commerce, and social networks have contributed greatly to increased usage. Only an estimated 20 percent of time is dedicated to reading content and 13 percent to multimedia sites. The rest of the time is split between social networking (22 percent), search (21 percent), email and communication (19 percent), and online shopping (5 percent).10 Nevertheless, more time online also benefits time for media usage. Bottom line: between 2004 and 2011, media usage has increased by almost 20 percent.

Exhibit 10 Media Usage Evolution across EU-27 Countries of Selected Media Types

MEDIA USAGE EU-27, 2004-11, in hours per day 4.17 3.66 3.82 3.97 3.70 3.78 3.84

CAGR 20042011

3.52

2.10 1.98 2.04 2.03 2.09 1.85 1.91 1.99

TV

0.9%

0.57 0.34 0.62 2004

0.56 0.34 0.73 2005

0.55 0.33 0.91

0.58 0.30

0.50 0.30

0.48 0.28

0.45 0.29

0.44 0.30

HEAD

Newspapers Magazines

-3.6% -1.7%

HEAD

1.00

1.05

1.11

1.11

1.32

Internet

11.3%

2006

2007

2008

2009

2010

2011

Source: IAB, Booz & Company analysis
Source: IAB, Booz & Company analysis

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• Different stages of development: There are substantial variations in development and usage patterns among European countries. To be sure, all countries have two things in common: TV is the most frequently used platform in all countries, and the Internet ranks second. Beyond that, however, the patterns of segment use shift from one country to the next (see Exhibit 11). • For example, time spent with the Internet exceeds time spent with print publishing by between 50 and 100 percentage points in all countries except Italy. In Italy, the share of Internet usage is only around 21 percent, less than half of Sweden’s share. The reason for the difference is not the intensity of the Italians’ daily usage (the time spent online) but the penetration of access (the percentage of people having access to broadband). Industry experts point toward a renewal of government interest in supporting broadband penetration and the rollout of mobile technologies; these will likely increase broadband access throughout the country during the next few years. • Management of perceived risks: Several public concerns have affected attitudes about digitization. These include data security concerns, fear of online fraud, and concerns about viruses and malware. These must be taken seriously but can be managed through appropriate technological and governance mechanisms. Booz & Company has determined a number of pillars that are important for online services to have, to provide consumers with digital confidence.11 Among them are threshold standards for network integrity and quality of service, protections for privacy and data security, protection of minors, and theft avoidance. When these measures are ignored, the spread of digitization is negatively affected; this would have detrimental effects on the economy as a whole.
Exhibit 11 Split of Media Usage in Focus Countries

MEDIA USAGE SPLIT EU-27, 2011, in hours and in % of total 3.70 3.68 4.26 4.01 4.09 4.86 100%

49%

52%

48% 63%

54%

48%

TV

9% 13% 8% 10% 4% 9% 9% 7% 29% 34% 35% 21% 27% 10% 8%

10% 6%

HEAD

Newspaper Magazines

HEAD

35%

Internet

DE

ES

F

IT

PL

U.K.

Source: IAB, Booz & Company analysis Source: IAB, Booz & Company analysis

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The rising awareness of those risks to the general public has been spurred by several news events: Concerns about apps that transmit consumer data; current legislative efforts involving privacy, piracy, and ancillary copyright; and the emergence of the “pirate parties,” political movements centered in Sweden and Germany that aim to prevent legislative efforts that hurt the freedom of the Internet. • Willingness to pay: Analysis shows that consumers remain willing to pay for content in the digital arena. Although observers question whether online business for the creative sector is sustainable, and many believe that consumers are less willing to pay for digital products than their physical equivalent, research is leading to a different conclusion. Consumers overall are spending more on products and services from the creative sector than they have in the past, and this revenue stream will continue to constitute the largest growth opportunity. This significant increase in media usage is reflected in increasing pay revenues from online products and services, up 25 percent from 2001 to 2011. Pay revenues per usage hour in the EU-27 countries have increased by 27 percent for film and television, remained about constant for the publishing industry, and increased by more than 130 percent for Internet-related products and services like digital newspaper editions or online games (see Exhibit 12). The relatively small actual pay monetization of Internet usage hours has two major explanations. First, usage is split among many more outlets and providers; on average, they collect less of a share of overall revenue. Second, included in the usage hours are all products and services currently available free of charge. For example, most news websites are still available without a paywall and solely supported by advertising. If we excluded non-paid content usage from the analysis (assumed at 80% of time spent on the Internet), the monetization per paid usage hour in 2011 would jump to the level of print monetization.
Exhibit 12 Pay Monetization of Media Usage per Media
MEDIA USAGE PAY MONETIZATION EU-27, 2011, in EUR per hour 0.018 0.043

Internet

+139%

HEAD

Print Publishing

0.237 0.236 0.134 0.171 2003 2011

0%

Film & TV

+27%

1/5 paid content assumption

2003 2011

Source: PWC, eMarketer, IHS, Euromonitor, IAB, Booz & Company analysis

1/5 paid content ass

The results of a survey conducted with more than 100 representatives from the creative industry in the focus countries suggest a similar perspective: Only 21 percent of respondents believe that there is a general lower willingness to pay. About 57 percent saw clear improvements and another 21 percent saw no change.

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4. IMPACT ON CREATIVE PRODUCTION AND OUTPUT

New technologies are broadly used throughout the creative community. Thus, entirely new content, processes, and markets are created and growing at a rapid pace, e.g., by local players becoming global in their reach. Almost as much as consumers, creators are great beneficiaries of the digital revolution. In nearly all sectors, they are using the Internet and other digital technologies consistently in their works. (This trend was again confirmed by the group of European industry experts surveyed for this report.) There are several reasons for this. First, digitization has revolutionized the way creators work and collaborate. Even data-heavy film production is fully digitized today, and collaborators from around the globe can access the same video material in real time. Second, digitization has brought the creator a lot closer to the consumer. As a result, distribution of content is less of a bottleneck in many markets. It is possible for creators to reach the consumer directly by complementing or circumventing intermediaries and prior gatekeepers. To be sure, this power shift implies a significantly changed economic model in most of the creative industries, but it also gives creators the opportunity to build closer relationships with consumers, learn more about consumer preferences, and tailor their products to the consumer’s need. Third, digitization enables a greater pipeline of creative material from consumers—which has the effect of creating broader communities of creative involvement. Today, many more people can become creators with (theoretically) the same chance of reaching a mass audience and achieving mass success. In other words, the distinction between consumers and creators has become blurred. This is often perceived as a threat to creators, but it also represents a promise; their audience, in becoming more sophisticated and engaged, raises the level of interest and awareness in all forms of creative content. That is one of the reasons the music industry has been able to reverse the past trend of declining revenues, with new models building on this promise. A shift in the value distribution away from intermediaries and toward consumers and creators accompanies this change. Digital innovations have made creative production and distribution more efficient—driving down the overall top line of the sector but not necessarily affecting the bottom line, thus the industry’s profits. For the creators, a higher share of value partly compensates for the overall lower revenue of the sector. This dynamic is most evident in the music industry, the most digitally advanced creative sector. With the establishment of digital downloads as an alternative to physical recordings, the economics of the industry fundamentally changed. Today, around 66 percent of revenues from a

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download go to the artist and label, compared to around 32 percent for a CD sale. The additional share for artists and labels is coming nearly entirely from intermediary and distribution costs that have been reduced as a result of the new format (see Exhibit 13).

Exhibit 13 Artist and Label Profit Distribution and Total Revenues

PROFIT DISTRIBUTION PHYSICAL SALE / ONLINE DOWNLOAD in % of sales price Sales Tax Trade 14% 22% 14% 13% 7% 100% Sales Tax Intermediary Fee Publishing

Distribution Manufacturing Publishing

19% 5% 8%

66%

Artist & Label

Artist & Label

32%

CD Sale ARTIST & LABEL REVENUES EU-27, 2001-11, in bn EUR

Online Download1

0% 8.1 8.0 7.8 7.7 7.9 0.1 8.0 0.2 2.3 7.9 0.3 2.1 7.8 0.4 1.8 7.9 0.5 1.7 7.7 0.8 1.3

7.6 0.6 1.5

3.4

3.3

3.0

2.8

2.6

2.8

2.8

2.9

2.9

3.1

3.2

3.3

3.3

3.4

3.4

3.4

1.8

1.9

2.0

2.0

2.1

2.2

2.3

2.3

2.3

2.1

2.2

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Copyright Licensing Concerts
1

Digital Recorded Music Physical Recorded Music

Based on 99-cent download and 65-cent PPD (published price to distributors) Note 1: Sales tax based on 16% VAT rate Note 2: Artist share in concert revenues estimated 30% Source: Interviews, Collection Societies, PWC, IHS Global Insight, Booz & Company analysis

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Despite the decline in recorded music revenues since 2001, the overall artist and label revenues have remained largely constant. In 2011, the split of artist and label revenues was around 28 percent from recorded music (42 percent in 2001), 44 percent (35 percent) revenues from copyright licensing, and 28 percent (23 percent) from concerts and festivals. This indicates a significant diversification of revenue streams for artists and labels beyond recordings. In short, although recorded music revenues are down around 40 percent from 10 years ago, most of the decline took place in the early stages of change. Since 2007, mainly as a result of increasing digital sales, recorded music revenues have remained stable and were even expected to rise again in 2012. A relevant factor in making up lost revenue from recorded music sales is licensing fees paid to artists and labels—the amount paid out increased from €2.8 billion in 2001 to €3.4 billion in 2011 across Europe. (These licensing fees are not explicitly covered in the overall music numbers, thus this artist view does not match to the music industry revenues.) Copyright licensing has benefited from the increased usage of music in a rising number of TV channels, more flexible online fee structures that enable new business models to prosper (such as Spotify), and improved international licensing. Furthermore, concerts have remained a stable source of revenue for artists across the years. The effects of digitization on those value pools are almost paradoxical. Revenue from sales of recorded music has gone down, on the one hand, but on the other hand, the digitization of TV distribution has led to a plethora of new channels, significantly driving usage of music and licensing fees. The fourth reason that creators are major beneficiaries of the digital revolution is that new models like crowdfunding are complementing creative traditional financing models. A major obstacle for the “consumer/creator” model (in which the boundaries between consumer and creator are blurred) has been access to the financing needed to make professional products that consumers are willing to pay for. Traditional players with a proven track record still have easier access to financing than the independent consumer/creator does. However, new sources for funding, such as European crowdfunding platforms, are establishing new niche markets, where everyone can pitch projects to the “crowd” in order to receive financing by multiple (mostly small) donors, in return for receiving the to-be-created product and other benefits (like access to special concerts and events). The crowdfunding industry is still in its infancy, but has shown tremendous growth in the past few years; total funds raised in 2011 reached more than €1.1 billion worldwide and were expected to nearly double in 2012, to around €2 billion.12 Around 40 percent of that number is expected to be raised in Europe. As a result, crowdfunding will further disintegrate the traditional creative value chain and blur the distinction between creators and consumers. (See “Studying Startnext,” page 23.)

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Studying Startnext Startnext is one of the most successful German crowdfunding platforms, with a market share of around 85 percent of crowd-funded projects in Germany in 2012. In a nascent market, Startnext has already distributed more than €2 million to more than 600 projects—85 percent of which went to creative ventures of some sort. Generally, two main crowdfunding models are available: —Equity-based funding, wherein the financial backers take an equity stake in the firm—an extension of the family and friends founding rounds, to some extent. —Reward-based funding, wherein the creator receives backing for a defined product or service he or she promises to deliver in order to enable the production. In Europe, both the reward- and equity-based funding options are popular. By contrast, in the U.S., because of current regulation, equity-based funding is negligible. Startnext has a clear focus on the reward-based model, which is also the most suitable approach for creators to achieve financing. The most popular creative products that are looking for crowdsourcing are (in December 2012): financing for small film or video productions (413 projects on Startnext), music projects (315), literature projects (137), and game development (57). Unlike other crowdfunding platforms, Startnext does not charge a fee for its services. Individual backers are asked to contribute a voluntary amount in order to sustain and further develop the platform. Startnext also offers regional crowdsourcing platforms in close cooperation with local culture funding authorities and private foundations (for example, in Hamburg and Dresden), where selected projects get access to the platform. The sponsoring foundation or cultural authority matches the investments or donations that come from the crowd.

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5. VARYING DIGITAL MATURITY ACROSS CREATIVE INDUSTRIES

All growth in the creative sector is driven by digital and consumer payment, rather than by advertising. Digital growth amounted to €30 billion in Europe during the 10 years from 2001 to 2011. In some industries, digital revenues made up for losses in non-digital revenues; the opportunities from this change are available to be captured by all industry players. This report considers the changing prospects for a diverse set of creative industries, from five-centuries-old book publishing to the recently established gaming industry. As is to be expected, the digitization trends play out differently and at different speeds in the various industries, and even more so across different countries. Nevertheless, two trends are very clear from the data: All growth in the creative industries is digital, and it is driven by consumer payments (see Exhibit 14).

Exhibit 14 Revenue Split by Type and Source
REVENUE SPLIT BY TYPE EU-27, 2001 & 2011, in EUR bn and % of total CAGR 2001-2011 Digital 11.2% 170.0 30% REVENUE SPLIT BY SOURCE EU-27, 2001 & 2011, in EUR bn and % of total CAGR 2001-2011 -0.7% Advertising

198.9 170.0 10% 25%

198.9 24%

90%

75%

NonDigital

-0.2% 70%

76% Pay

2.4%

2001

2011

2001

2011

Source: PWC, eMarketer, IHS, Euromonitor, Booz & Company analysis

In 2011, digital revenues accounted for 25 percent of the total creative sector revenue. In absolute terms, digital revenues now total nearly €50 billion across Europe, an increase of €30 billion over 10 years. A large part of that growth can be attributed to TV subscriptions like IPTV or premium pay models that oftentimes operate in separated ecosystems and walled gardens. (Premium pay generates around €21 billion annually.) The remaining revenue increase of €8.6 billion can be attributed to growth in pure Internet-based media use. Still being small by the numbers, Internet television platforms already have a significant impact: they increase the breadth of content offered; they offer the possibility to upload content, both (semi-)professional and user-generated; and they foster new consumption

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habits, e.g. on demand or parallel usage with other platforms, like social media. Platforms such as Dailymotion, YouTube, Clipfish, Wuaki have already accumulated significant reach and with pay models being introduced for premium content and advertising money following the usage, the growth prospects of these new ecosystems are very positive. Many media companies have expanded their revenues by following consumers online. As noted in chapter 2, they have successfully introduced a variety of new business models to monetize their content and create new experiences, such as music streaming services and high-definition downloads on video platforms. Double-digit growth is expected to continue, because innovation in media business models is accelerating. Digital and non-digital revenues are also becoming more interdependent. For example, many newspaper newsrooms file both Internet and print versions of stories, often with extra interactive features on the Internet site but the same basic content. Subscriptions often conflate print and digital versions. Despite these fundamental usage shifts, revenue from non-digital sources was stable over the 10-year period from 2001 to 2011 across all media in focus. Established print models such as newspaper distribution and traditional TV advertising still provide the majority (about 75 percent) of the sector’s revenues. But the industry should not rely on this stable basis going forward. New developments can accelerate substantially after having reached certain inflection points—as the steep decline of the US newspaper market has shown with its 51 percent loss in revenues since 2006.13 Another broad trend is the growth of pay revenues. The creative industries have always relied on two distinct value pools: revenue from advertisers and payments from end consumers in the form of subscriptions, product purchases, and admissions. Over the last 10 years, advertising revenues have been stable at best, whereas pay revenues have grown by more than 2 percent year-on-year. Growth has been especially strong in the TV sector, where new and better services of digital TV have lured many consumers to a premium pay model (as in IPTV). Despite a perception that consumers are interested in free media only, and the price erosion induced by the Internet, the facts are clear: Consumers spent more money on creative products in 2011 than ever before. This trend may well accelerate as consumers become interested in new offerings with new value propositions.

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A third trend is the change in advertising that has come about through digitization. In contrast to offline advertising, which has had flat or limited growth since 2001, online advertising has been continuously expanding (see Exhibit 15). Newspaper and magazine publishers have been hit hard by this transition. Between 2001 and 2011, their overall revenues decreased by 10 percent across Europe, to €54 billion. The reasons for this development are as varied as demographic challenges, an abundance of news content on the Internet, and usage shifts already at work for the last decades. And although display advertising on print-related Internet sites today represents a sizable category of almost €1.5 billion, this form of advertising will not make up for the drop in overall revenue in the short term.
Exhibit 15 Print Publishing Revenues Have Decreased 10 Percent in the Last 10 Years Despite a Promising Digital Growth Trajectory
PRINT PUBLISHING REVENUES EU-27, 2001-11, in bn EUR -10% 59.8 0% 0% 53.7 3% 0% 46% 37% -8.1% 0.90 CAGR 2001-11 PRINT PUBLISHING ONLINE ADVERTISING REVENUES +13% EU-27, 2001-11, in bn EUR Accounts for around 7% of total print advertising revenue 1.27 1.08 1.08

1.45

12.6% NM1

0.53 54% 60% -1.5% 0.17 0.02 0.04 2001 2011 0.09 0.35

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

1

Not meaningful Source: PWC, eMarketer, IHS, Euromonitor, Booz & Company analysis

As consumers spend more leisure time on the Internet, their media consumption will fragment across an ever-wider range of products and services: professional media content, user-generated content, search, social networks, classifieds, and e-commerce. Advertising money will follow the eyeballs and thus fragment even more across an abundance of providers. Therefore, even as the overall pool of advertising revenue increases, individual sites and venues will not be able to count on the same levels of revenue they enjoyed in the past. At the same time, online advertising does not always require traditional creative content or production values. For example, a successful Facebook ad can be relatively simple. As a result, supply and demand are out of balance in online advertising, and creative production costs are by definition harder to recoup. This increased competition for online revenues has led to a strong segmentation of inventory, especially for display advertising.

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Some selected online properties—front pages of online news outlets like Spiegel.de or Lefigaro.fr—can generate significant reach with premium target groups and can charge premium prices for their inventory. Another large amount of inventory is of lower value and is traded as a commodity in real time through automated auctions or algorithms. A large part of professionally produced and curated content is squeezed in between these two poles, a position that does not enable the same level of monetization these publishers were used to in the offline world. The solution going forward will not solely be to monetize print content better on the Internet but to continuously create relevant consumer experiences. Print publishers have great assets with their established brands and existing content capabilities. These will need to be consistently complemented by a larger variety of content types, such as video. The value of ad inventory for marketers in such an environment will also increase, even more when supported by a detailed and data-backed understanding of the audience. Online video and music portals, such as Vimeo, Vevo, Spotify, and YouTube, have shown tremendous growth in the past years. YouTube alone streams more than 4 billion videos per day (providing it an annual growth rate of around 25 percent14). Even though these new media outlets are very diverse in their types of content and business models—they range from professional to user-generated content, and from purely advertising-funded to freemium and paid business models—they have all attained an enormous reach by providing a new or more convenient user experience. They all recoup at least part of their cost by selling advertising. For many professional content producers, these venues either provide an additional and very easy-to-use distribution channel or an attractive marketing platform, promoting products to be monetized elsewhere. (For example, YouTube and Vimeo are often used to watch trailers for box office movies.) In some instances, the revenue from these platforms is already sizable. And if the service is of value to consumers, they will continue to shift their time to these sites—and the advertising money will ultimately follow. Like other new media before them, Dailymotion, YouTube, and others will not replace existing TV and broadcasters. Rather, they will complement the media landscape and increase consumer choice, providing new forms of reach, monetization, and customer data collection. (See “Successful Online Video Monetization,” page 28.) The challenge to specific parts of the creative sector is clear, and it will not go away. Due to competition and increased expectations from both users and advertisers, online advertising will remain difficult. Monetizing existing content better with more online advertising will not alone solve this challenge for established players that originated in the offline world. Instead, new types of content and new ad inventory will need to be developed. New ad formats will need to be explored like actionable generation of leads. A buildup of new assets and brands will take place; the expansion by Springer and Schibsted into the scaling business model of international online classifieds is a prominent example. Other alternatives include the move into new businesses such as e-commerce or data analytics.

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Successful Online Video Monetization Base79 is a U.K.-based online video company offering rights-management and audiovisual distribution services for high-quality content rights holders; revenue is generated as a share of advertising income from rights holders. The core capability Base79 offers to its clients is the monetization of content on digital video platforms, such as YouTube or Dailymotion, and the management of their rights to protect from fan-based or pirated illegal distribution of content. In comparison to traditional video distribution (e.g., broadcasters), online video requires entirely new skills in audience building and management, because the content has to be discovered by users among millions and millions of options instead of stumbled upon on a TV channel. With 500 million views a month across its 600 channels, Base79 is the most successful online multichannel network in Europe. At the core of Base79’s strengths is its ability to build and grow audiences and steer existing audiences effectively in order to keep them in their environment as long as possible. Deep platform knowledge, technical expertise for automated solutions, effective video search engine optimization, and sufficient scale to crosspromote within the network are critical success factors in this field. Base79 is doing this for productions such as Hat Trick’s Have I Got News for You, for which it built a successful YouTube channel; moreover, together with Hat Trick, it is starting an original content channel (available only on YouTube) called Bad Teeth in January 2013 featuring British comedy. As underlined by the success of Base79 and other players in the past few years, online video and the monetization of it is a field that has exhibited tremendous growth and is expected to grow even stronger through connected devices (connected TVs, game consoles, etc.). Moreover, as a result of YouTube’s push to promote and monetize original content channels by professional producers, more quality content is moving online—potential