While the industry has grappled with change, its relative resilience and ability to bounce back lies in the fact that demand from the end user - the consumer - has not waned.
While COVID-19 has triggered disruption ⎯ both positive and negative ⎯ across most of the segments, it’s clear that the entertainment and media industry’s underlying strengths and appeal to consumers remain as strong as ever, and consumer demand for entertainment and media products and services has not waned. We are seeing consumers and businesses adapt in parallel, and the industry is reconfiguring in order to meet this new shape of demand. The ongoing challenge for entertainment and media companies lies in capturing their share of consumer attention, and the subsequent monetisation of these audiences.
There are six drivers of industry change which are reconfiguring the market to meet, and subsequently monetise, this demand.
While there will still be challenges for entertainment and media companies as we move beyond the pandemic, the digital migration that it has accelerated will generate opportunities in all segments – and not only for those whose offerings were already primarily digital, and thus have benefited from its impacts to date.
PwC sees six key drivers of industry change, which existed pre-COVID-19 to varying degrees, but have been accelerated or transformed by its impact.
1. Consumption behaviour continues to shift as the available choice for content expands, and Australians’ adoption of digital consumption and behaviour has been accelerated by COVID-19.
COVID-19 had a dramatic and abrupt impact on our consumption of media. Media channels that are generally consumed within the home have fared well, while out-of-home media and entertainment saw mass declines in consumption as a consequence of environmental factors. In cases where the changes to consumption habits were caused by a sharp decrease in availability and accessibility, we expect that the change will be temporary, as consumers revert to pre-COVID-19 and largely unaffected consumption behaviours.
We expect lasting change, however, for channels that have benefited from the acceleration of digital adoption and the use of digital media as a means of social and personal connection. Given the presence of the pandemic will not significantly affect consumers’ ability to access these means of entertainment, we expect that these new, accelerated behaviours are more likely to stick.
2. As consumption habits continue to evolve, the global industry is experiencing a major shift, as consumer revenue outstrips advertising revenue in the forecast period, perhaps for good. This trend is gaining traction in Australia.
In the Australian market, consumer revenue has been driven by the proliferation of newly available subscription-based entertainment and media businesses, such as Netflix, Kayo, Stan, Disney+, Apple TV+, YouTube Premium, Binge and Amazon Prime, as well as a rise in Australians paying for news content. At the same time, advertising revenues have been impacted by COVID-19 as advertiser confidence declined and certain categories’ need for advertising reduced due to a lack of supply.
We expect growth in consumer revenue throughout the forecast period, as incumbent media companies continue to diversify their product offerings, pursuing ad-free models, and new players enter the market and command their share of consumer attention. Subscription-based models are likely to be appealing to the new generation of consumers who have been brought up to view advertisements as an annoyance, to be skipped or avoided, and who are increasingly demanding personally-curated, individualised and on-demand experiences. These consumers are proving that they are willing to pay; amid the pandemic, Netflix saw its global subscriptions surge to almost 193 million by July 2020, up 15.6 percent from 167 million subscribers at the end of 2019.60
As the subscription-based entertainment and media business models evolve and mature, both the quality of products and depth of these direct-to-consumer relationships will be key to gaining and maintaining a competitive advantage.
3. The battle for consumer attention will remain crucial to win, as media companies with the largest audiences will continue to gain share of both advertisers’ and consumers’ wallets.
A proliferation of new platforms, channels and formats is continuing to dilute media companies’ share of consumer attention, meaning that advertisers must be more savvy about their usage of channels to deliver reach - a primary and important objective for most advertisers. Advancements in advertising-funded channels’ collection and application of data has facilitated a shift to audience-led planning, allowing advertisers and media planners to place advertisements across various channels which leverage robust data sets, in order to ensure the audience they are reaching has a high proportion of the target audience. As pressure on budgets continues, advertisers will prioritise suppliers who can reach audiences at scale, and with credible data offerings. This will allow them to leverage volume discounts, drive ease of transaction, and limit the cost to execute, thus driving efficiency from their investment.
In parallel, consumers will favour entertainment and media products whose scale affords them the ability to invest in and thus personalise content for its audience. Consumers are willing to pay, but only if the content resonates with them and they can consume as much as they want. More than ever, media companies must look beyond those with whom they compete for advertising revenue, and redefine their competitive set to include all platforms and companies that command consumer attention.
4. After a period of mergers and deals to increase the scale and sophistication of media companies’ networks, COVID-19 has spurred a refinement to operating models, and a relentless focus on businesses’ core.
In order to deliver scale, media companies have increasingly pivoted to operate across networked environments – across channels and various geographic markets – rather than being organised around one core channel, location or capability. In recent years, this has been helped by the relaxation of media consolidation laws. Financial pressure from COVID-19 has shifted this trend to divestments, and the shedding of some business lines and assets that are no longer considered “core”.
The reduced mergers and acquisitions activity in the last year doesn’t mean that scale doesn’t matter. Scale helps to make content work in a consumer-oriented market, and is a major competitive advantage to secure advertising revenue. But, a return to acquisitions and investments at scale may be a while off; expect to see a wave of consolidation post-COVID-19. We expect to see a continued trend towards divestment of under performing assets, and the market should react positively to those with low debt, high liquidity and secure access to capital.
5. As the battle for scale and sophisticated data application increases, we expect to see ongoing regulatory change related to privacy, data integrity and the responsible use of AI.
The entertainment and media world continues to face persistent challenges surrounding regulation and trust. Concerns surrounding anti-competitive scale, data protection, privacy, and the accuracy of public information remain top of mind.
The spur that the pandemic has delivered to digital behaviours among consumers has boosted the fortunes of the technology platforms. In the three months ending in June 2020, Apple, Amazon, Facebook and Alphabet all reported a surge in earnings. In August, Apple became the first publicly-traded US company to hit a market capitalisation of US$2 trillion. This uplift from the pandemic wasn’t just limited to US-based players; in July 2020, a rally in Chinese social media giant Tencent’s shares saw it overtake Facebook as the seventh most valuable company in the world.
As these businesses gain power, the public and political scrutiny has increased. This has been compounded in an environment where the relative power of other media companies, as measured by their share of advertising revenue, is declining. In an effort to restore the power balance within the entertainment and media landscape, we expect new and revised regulation surrounding the distribution of news content, content quotas for local free-to-air and pay TV providers, and regulation to address and mandate ethical and compliant storage, management and treatment of data.
6. The industry will experience a continued and increased focus on efficacy and measurement, as pressure on advertising budgets is sustained, and businesses require evidence of advertising’s impact.
Central to advancements in data collection and utility will be media companies’ ability to use this data to provide advertisers with robust measurement of the impact and efficacy of paid advertising.
There is significant evidence that investment in brand-led advertising messages are crucial to the long-term growth of brands. Despite this, in the short to medium term, we expect that advertising placements without short-term, direct and attributable linkage to commercial outcomes may be de-prioritised by organisations seeking a quick return.
Growth is available, and the future success of entertainment and media companies will rely on their ability to capture demand, and ultimately, monetise it.
Even before COVID-19, the pace of digitisation, changes in consumption, and innovation in the Australian entertainment and media industry was dramatic and accelerating. COVID-19 has opened the throttle still further, accelerating change across most segments.
As the industry reconfigures, growth is available, and the entertainment and media industry is in the enviable position that ultimately, demand for the core product - entertainment and media - has not waned. Rather, the business models that support the monetisation of this demand are under pressure, and the commercial opportunity isn’t equally distributed. And therein lies the challenge; outsized opportunities are available in the segments that are growing more rapidly, but prospects are shrinking in segments that are lagging, and COVID-19 has dramatically accelerated the timeframes that the lagging segments have to transform.
If COVID-19 has taught humanity anything, it’s that we cannot control or predict everything. With this in mind, and as we await some sense of normality as time progresses, we will be tracking and monitoring the health and the rebound of the industry, with close attention to key indicators, including:
Trends and shifts in consumption behaviour, with a specific focus on which new behaviours stick, and which new habits are forgotten as quickly as they were adopted as the world returns to a pre-COVID-19 "normal";
The ongoing migration of consumer attention into non-advertising supported channels, and consumers’ willingness to pay for these services as restrictions ease;
The extent to which advertising and marketing investment follows consumption patterns;
The media ownership landscape, including both the divestment of non-core products and legacy businesses, and acquisition driving individual scale and further market consolidation; and
The sophistication of measurement systems, an issue ripe for sorting, and one that we believe will be key to securing competitive advantage within the advertising landscape for years to come.
We hope that you enjoy our 19th (and special) edition of the Australian Entertainment & Media Outlook. We hope to return to our normal report next year to share stories of an industry that has found new paths to recovery after an unprecedented year of disruption and change.
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