Fragmentation

October 25, 2010
For an informed view on connected entertainment in the UK & Ireland, visit Cue Entertainment 

In the spirit of a week dominated by financial gloom and doom, it is probably a good idea to get the bad news out the way first: By the end of 2014, transactional entertainment revenue in the UK will have declined in absolute value by 25%.

Screen Digest Broadband Media Head Dan Cryan noted at the annual Future of Digital Media Distribution conference in London that income in 2005 from sales of physical video and music media, added to online video and music revenues and topped off with PayTV and VOD subscriptions brought in £4.1 billion. By the end of this year, the combined revenue from the same sources is expected to be just less than £3.2 billion. This downward trend is forecast to continue at least until the end of 2014, said Cryan, by which date general entertainment spending in the UK will have fallen to £3 billion.

Cryan presented data showing that the decline in revenue from packaged media will not be offset by rising income from online delivery of entertainment services. It’s not that audiences will not continue to consume online content – they will – but Cryan said, “It is staggering how much online media is free.”

He said, “Download to own (DTO) doesn’t feature, and only a small part of overall consumption is long-form TV.” He predicted that the average UK household spend on entertainment will be £540 by 2014.

Despite the occasional outbreak of pessimism, the event produced many reasons to be cheerful about the UK digital economy. Speaker after speaker enthused about online delivery, the growth in consumption and the advent of new video delivery platforms, including smartphones and tablets.

The opening keynote from Brightcove CEO Jeremy Allaire, a pioneer in the delivery of rich media applications on the internet, offered an indication of the scale of the online video revolution and the underlying forces that will drive it over the next few years.

“Video now accounts for 51% of all the data that flows over the internet and that trend line is continuing, so it is becoming a video-based internet,” said Allaire. “Virtually every business on the planet is using video as a content type to drive their business and almost every type of business is today an online video publisher.”

It’s an interesting statistic but since the volume of data is the measure, and video is a notable data-hog, it isn’t actually surprising that so much internet activity consists of video playback. The key issue is how much that data is worth because, as Cryan said later in the conference, “It is staggering how much content is free.”

Allaire drew attention to the rate of growth of advertising and non-entertainment video with figures to indicate that online video advertising is the fastest growing sector in the advertising industry, reaching a value of $4 billion by 2013 in Europe alone.

“The other driver is actually outside of media. Brands, marketers and retailers are all pushing that growth and the majority of new business acquisitions by Brightcove are from this area,” he said. “There are more of them in the world than there are media companies and figures for 2009 show that 68% of top US retailers offer video on their web site.”

Allaire described the investment that these companies are making as “an investment in programming to support the customer life-cycle”. He claimed that the use of video enhances top-line sales and reduces costs at the bottom line, specifically because online video leads to better-informed customers who are less likely to return products.

So far, so effective, but Allaire then reminded his audience that things are no longer as simple as they were in the days when Adobe Flash was the only technology on offer. It’s an issue leading to much discussion during the conference and it goes by the name of “fragmentation”.

Different devices, different demands, different markets: the list goes on and the battle between five or more different platforms places pressure on video publishers to support every format. It was a lot easier when format wars involved just two contenders!

Faced with the enthusiasm of a speaker such as Allaire, it can be easy to overlook the significance of the figures presented by Cryan. The good news is that packaged video media has held up surprisingly well over the past five years. Earnings from DVD, Blu-ray and other physical video formats, which were worth £2.3 billion in 2005, are predicted to still generate $1.7 billion a year by 2015.

The much-vaunted growth in the value of online transactional video, which failed to make any visible impact on the value of the market until 2008, is hovering at £0.07 billion this year and from Cryan’s figures, video delivered online will struggle to generate £0.2 billion annually by 2014. While Allaire might argue with some justification that online video marketing supports growth in corporate profitability, it is not the same as persuading consumers to part with their hard-earned income to fund their entertainment habit.

DVD and Blu-ray remain the dominant formats on Cryan’s chart for home video entertainment delivery and the downward revenue trend flattens off at around £1.9 billion p.a. in the years up to the end of 2012, before slipping slightly to £1.7 billion in 2014.

It’s worth noting that the transactional entertainment revenue figures shown at the conference included PayTV and VOD subscriptions. BSkyB, Virgin Media, BT Vision and the many other sources of paid-for video entertainment took a 2.7% share of a £4.1 billion market in 2005. This year, their share will be 4.5% of a £3.2 billion pot and in 2014 they will together account for 5.7% of a market worth £3 billion. Compare that with physical video media’s 60% or more share of a market worth £3.2 billion in 2010.

Joy is not totally unconfined. Alas for packaged music revenues (mainly CDs), which Cryan says will generate barely a third of their 2005 figure by 2015. For the music industry, however, the healthy upward trend of income from online music delivery offers a glimmer of light. Paid-for online music barely showed on the chart in 2005 but growth has been significant and this year’s revenue could reach £0.25 billion.

Screen Digest expects this trend to continue through to 2014, with the trend set to flatten slightly but it will still reach an annual £0.37 billion or so in four years time. If achieved, that means online music sales will equal the combined revenues from online video, PayTV and VOD.

The future of digital media distribution isn’t always what we expect.