Internet access costs set to sap digital content spending
Consumers’ willingness to pay for digital content is in danger of being held back by their rising spending on internet access, according to a new forecast that raises questions about the media industry’s hopes for streaming music and video subscriptions.
The report from consultancy PwC, to be released on Wednesday, estimates the total size of the industry will grow to $2.15tn by 2018. But the fortunes of the market’s three segments will vary, with internet access revenues growing faster than both consumer spending and advertising.
That suggests internet providers such as Time Warner Cable and AT&T will be poised to capture a growing share of industry revenue. Streaming services such as Netflix and Spotify , the latter of which had Macklemore & Ryan Lewis as its most popular music artists last year, will also be well-positioned to lead growth in consumer spending, as they capture subscribers willing to pay for round-the-clock access to movies, television shows and music.
However, while consumer spending will still make up the largest portion of industry revenue, the balance is shifting as the cost of internet access itself may be sapping willingness to pay for digital content.
By 2018 PwC predicts consumer spending will slip from 45 to 41 per cent of total industry revenues and advertising will fall from 30 to 29 per cent as outlays on internet access rise from 25 to 30 per cent, driven in large part by mobile use.
“A concern for content providers is that spending on internet access may be taking share away from spending on content and services,” PwC said.
Internet access will drive more consumer spending than any other product or service over the next half-decade, PwC said, growing to $636bn by 2018. The trend has been one factor behind a recent dealmaking wave in the cable and telecommunications sectors from Europe to the US. Consumer revenue is expected to reach $875bn and advertising is forecast to grow to $640bn in the same period.
Digital content, which is generally cheaper than traditional books, music, video games and news, is forecast to rise to 17 per cent of consumer spending excluding internet access in 2018 from 10 per cent in 2013.
That contrasts with a faster migration to digital advertising. A third of ad revenue is expected to come from digital in five years, compared with 14 per cent in 2009 and 25 per cent in 2013, as the industry shifts its focus to digital marketing efforts to reach a more precisely targeted audience.
The divergence highlights what PwC calls a “huge challenge” for companies wishing to monetise consumers’ digital appetites and suggests the industry will still rely heavily on advertising and business-to-business spending.
“The irony is that, ultimately, we’ve never consumed so much and paid so little,” said Marcel Fenez, PwC global leader for entertainment and media.
Global music revenues
Overall, PwC forecasts the global media and entertainment industry will grow at a 5 per cent compound annual growth rate from $1.69tn in 2013 to $2.15tn in 2018. That is down from the 5.6 per cent five-year compound rate the consultancy predicted last year and only slightly above last year’s 4.9 per cent annual rise.
Total digital spending will grow at a 12.2 per cent compound rate over that same period, and will account for 65 per cent of revenue growth.
The success of subscription-based models like Netflix and Spotify is evident in PwC’s prediction that streaming video and music will be two of the fastest-growing consumer segments over the next half-decade, with compound growth rates of 28.1 and 13.4 per cent, respectively. By contrast, digital music downloads are set to grow just 3.3 per cent.
But Mr Fenez said that in order to capture a greater share of digital spending, companies need to adopt more “flexible” business models.
“What people pay for are differentiated experiences. If people are only interested in the basic [content], inevitably they will find it somewhere free,” he said. “It’s not just the convenience of content, it’s the convenience of payment.”
Some may prefer to pay a fixed monthly subscription each month while others would rather pay on a per-item basis, so companies should “offer more choices and better experiences”.
Emerging market consumers are predicted to contribute the fastest growth in the next five years. China, Brazil, Russia, India, Mexico, South Africa, Turkey, Argentina and Indonesia together will account for 21.7 per cent of global revenue in 2018, up from 12.4 per cent in 2009.
China’s clout in particular will be felt as it eclipses Japan as the world’s second-largest entertainment and media market, behind the US, with revenues of $213bn in 2018.