Media companies took a battering from the
internet. Cash from digital sources is at last repairing some of the damage.
THIS
summer a made-for-TV movie about a tornado carrying man-eating sharks was a
surprise hit in America. The preposterous plot of “Sharknado” may strike a
chord with media bosses who have watched the internet ravage their business
over the past decade. Newspapers have lost readers and advertising to the
internet. Book and music shops have closed for good. Sales of DVDs and CDs have
plummeted. The television industry has so far resisted big disruption but that
has not stopped doomsayers predicting a flight of advertising and viewers.
In
2008 Jeff Zucker, then the president of NBCUniversal, a big entertainment
group, lamented the trend of “trading analogue dollars for digital pennies”.
But those pennies are starting to add up. And even Mr Zucker, now boss of CNN
Worldwide, a TV news channel, has changed his tune. Old media is “well, well
beyond digital pennies,” he says.
What
has changed his mind? The surge in smartphones, tablet computers and broadband
speeds has encouraged more people to pay for content they can carry around with
them. According to eMarketer, a research firm, this year Americans will spend
more time online or using computerised media than watching television.
“All-access” services, such as Netflix (for film and TV) or Spotify (for
music), which give unlimited content on mobile devices for a monthly fee, are
prompting people to spend more on digital products.
After
years of wreaking havoc, the internet is helping media companies to grow.
PricewaterhouseCoopers (PWC), a professional-services firm, reckons that
revenues for online media and entertainment will increase by around 13% a year
for the next five years. Even in music, which took the biggest hit from the
internet, downloads are something to sing about. For the first time in over a
decade global music-industry revenues grew last year, by about 0.2%, according
to the IFPI, a trade group. Online sales just about made up for the drop in
physical ones for the first time. Subscription services, such as Spotify and
Deezer, let people stream songs over the internet either for a subscription or
free with adverts. Online radio is also growing. On-demand and radio streaming
services raked in about $1 billion, 15% of the industry’s revenues in America
in 2012.
The
fear that streaming would cannibalise downloads is seemingly misplaced. Tiny
sums—ten plays bring in around four cents for on-demand streaming and much less
for radio—are adding up as more people try out the services, and listen to
their favourite songs repeatedly. Mobile-phone companies offering subscriptions
with bundled music services, like Vodafone in Britain with Spotify, will help
to boost payouts. “Streaming is a good business that will eventually become a
really big business,” says Troy Carter, Lady Gaga’s manager. There is also
evidence that streaming could reduce piracy, by offering a cheap, legal and
convenient way to listen to music.
Other
distribution services have transformed from foe to financier. YouTube, a video
site, was once the bane of media firms for hosting copyrighted content that
viewers could watch free. Recently it has tried to become an ally to old media.
YouTube and Vevo, another popular site, now pay labels a small royalty when
punters watch a music video.
Revenues
from couch potatoes are also stabilising thanks to downloads, rentals and
streaming services—to the relief of Hollywood studios. Netflix and Redbox
(which runs kiosks that dispense rentable films), were once scorned for
undermining DVD sales. Now those sites—and others, including Hulu and
Amazon—are boosting profits at media firms by buying the rights to stream
content online.
Netflix,
Hulu and Amazon are paying around $3 billion to license content, a figure that
is sure to rise. Television and film companies are selling rights to broadcast
content after it debuts but before it is repeated on TV. It’s working. Sanford
C. Bernstein, a research firm, reckons online licensing was responsible for
about a third of the growth in revenues at CBS, an American media firm, in
2012.
The digital divide
The
most obvious change in the past few years is the decline of “physical”
products, such as CDs, DVDs and print newspapers. In 2008 nearly nine-tenths of
consumer cash went on them; by 2017 it will be a little over half, with digital
grabbing the rest. Electronic content has some advantages, in particular lower
distribution costs. Business-to-business media companies such as Reed Elsevier,
which owns information services like LexisNexis, have done reasonably. Firms
still want legal information and scientific journals so their prices have
stayed high even as delivery has become cheaper. But other media companies have
struggled. Consumers expect to pay less for electronic products and are renting
instead of buying.
Media
firms used to make a fortune selling “bundles”. Songs are grouped into albums;
newspapers are packages of articles and advertising. The internet lets people
pick what they want. Firms that can keep on bundling have done better. Pay-TV
has preserved bundling by not putting current programmes online while they air
on screen.
Book
publishers are also adapting. Thanks to the rise of tablets, e-book sales have
climbed. Total spending on books is not likely to rise. But the growing share
of e-books—around 14% globally this year, and 30% in America, according to
PWC—means fatter profits for publishers as printing, distribution and storage
costs fall. Around 40% of sales will be e-books in three years, predicts Brian
Murray, the boss of HarperCollins, a big publisher.
Firms
that depended on print advertising are among the worst hit: prices for digital
display ads pale in comparison with glossy double-page spreads. Classified
advertising has migrated permanently to the web. Online video adverts fetch
higher prices than static ones, so newspapers are producing videos to
accommodate them.
Newspapers
are also trying to peddle digital subscriptions; the New York Times has nearly
700,000 online subscribers, but few others have done so well. Media businesses
do best when they have at least two profitable revenue streams, says
Christopher Vollmer of Booz & Co, a consultancy. As a result newspapers are
pushing into new businesses such as marketing and conferences. American papers
last year made around $3 billion, or 10% of their total revenues, from these
new activities.
Dancing for pennies
The
internet is at last contributing to media-industry bottom lines. But it will
not restore the newspaper or music businesses to their previous size. The
economics have changed for good. And there is still a big question. Claudio
Aspesi of Bernstein wonders whether the prices that can be charged for
computerised products “can support the underlying industries if they are not
also physical businesses”.
Some
media firms need to get bigger and trim costs. Penguin and Random House, two
publishers, merged earlier this year in order to compete with Amazon, which now
publishes books as well as selling them. Universal Music bought EMI, another
label, last year. The rounds of sackings at media businesses are as
long-running as popular cable-TV dramas.
What
will happen as the internet’s influence increases? Journalists write more
articles for smaller salaries in shrinking newsrooms. Musicians complain that
streaming pays too little. But authors do better. Royalties from e-books are
about 25% of net receipts, compared with an average of around 16% in print.
Careers can take off faster. E.L. James’s bondage-buster, “Fifty Shades of
Grey”, turned up online before being published on paper. Many musicians get
more exposure online than they would have had in a record shop, where space was
tight, says Martin Mills of Beggars Group, a British music company.
New
technology can also provide opportunities for media firms. The value of
archives is growing in the internet age: owners can profit from older
programmes that are rarely broadcast. Netflix and other online-video firms are
snapping up old films and drama series. When a musician releases a new album or
goes on tour, old songs are streamed more too, says Daniel Glass, who runs a
music label.
The
internet can also help firms become cleverer. Concerts have become the
lifeblood of the music industry and make up more than half of revenues. Acts
used to go on tour to sell albums. Now they put out albums so they can make
their living on the road. Bands will probably get cleverer at using streaming
data to decide where to perform. Publishers are releasing books electronically
to test sales before putting them in print, and to adjust prices to drive
demand. Experiments that were once impossibly expensive now cost peanuts. The
trade of dollars for digital pennies doesn’t always hurt. (The Economist)
