Advertisers dependent on TV are at a risk in the new media landscape: GroupM report
MUMBAI: These are dangerous days for advertisers who have used television as the foundation of their communication strategy. With shifts in viewing habits, commercial impressions in the most viewable, the highest attention media are in free fall across the world. The problem is universal and if the viewing behaviour of younger audiences is a harbinger, things are not going to get better.
GroupM has come out with a new publication – Media Landscapes, where GroupM Senior Advisor Rob Norman and Global President, Business Intelligence Brian Wieser provide a portrait of the media industry with an eye toward the ways in which it affects the large brands.
Talking about disruption, the report noted that the simple truth is that Google and Facebook on the one hand and Netflix on the other have structurally undermined a century-old economic model: the former two companies by advertising-led monetising of intent and social interaction in the absence of content, and the latter one by monetisation of content in the absence of advertising.
“In the former instance, massive outflows of cash combined with a diversion of attention from print media eviscerated the legacy publishing model. In the latter, the creation of an appetite for ad-free video diverted time, attention and money from traditional television. Enabled by the ubiquity of cheap broadband, Netflix led the over-the-top (OTT) revolution that threatens to undermine the business model of ad-supported television.”
According to the report, Netflix is as disruptive as Google and Facebook are but is less dominant. The company has what may be a durable market share but a less clear path to meaningful profits, as content costs continue to rise and producers wrestle with the choice between vertical integration of production and distribution and becoming content arms dealers with a focus on the highest bidder.
It further stated that Netflix was commonly viewed as nonthreatening in its earliest days. In fact, Netflix was initially looked upon favorably by studios as a source of incremental revenue for library content that would bid up costs for everyone else. Few were concerned about Netflix’s stated ambition to “become HBO before HBO becomes us.” Before long, Netflix would have its own meaningful capacity to produce content, integrating the functions of the studio, packager, and distributor.
The report noted that it remains true that Netflix and other SVOD services do not own all aspects of distribution, as can be the case when studio-network owners deliver content via broadcast services. This is because the physical layer of distribution via an internet service provider (ISP) is still typically owned by infrastructure companies, whether traditional cable/telecom operators or mobile carriers. However, woe to an ISP that chooses to block access to an SVOD service with popular content. The risks of regulation where it doesn’t already exist and opportunistic competitor reactions are typically real, so financial terms between SVOD services and ISPs are reasonably achievable.
Similarly, Netflix does not own any hardware for a consumer to access its content, but then again, the declining costs of making hardware opened up opportunities for the likes of Roku and placed pressure on manufacturers of TV sets to make access to SVOD services relatively easy.
Against this backdrop, Netflix was able to build a massive business, which, while neither particularly profitable nor cash-flow generative, clearly demonstrated that vast numbers of consumers are willing to access content through a different interface than the interface they use to access other content, that it is possible to deliver a high-quality video experience, and that consumers are willing to pay for the privilege of receiving it.
This outcome, alongside the relative successes of Amazon’s Prime Video and Hulu, illustrated what was possible in the disruptive act of going “direct to consumer”. They have incentivised consumers to “cut the cord,” eliminating or downgrading traditional TV subscriptions, and in so doing have threatened the highly lucrative TV business model that had sustained studio owners. Those owners’ financial results were, and to a large extent remain, highly dependent on selling bundles of networks to distributors who are decreasingly able to force consumers to buy large packages of content (regardless of whether consumers actually want them) and pay continuous price increases.
Fear around the loss of those revenue streams has largely driven the strategic choices of video-centric studio owners and content packagers in recent years. In the past few years, among the U.S.-based global conglomerates (the dominant owners of global film studios), Fox disposed of assets; Time Warner sold itself outright to Disney and AT&T, respectively; and most recently, CBS and Viacom (Paramount film studio owner) announce a remerger.
Among non-film studio owners, Discovery and Scripps combined and a growing number of joint ventures among European network owners as well. These companies have their roots in traditional broadcasting or cable networks rather than in content production. Does this make them different than companies that own major film studios? Probably not, at least if they are willing and able to invest in content sufficiently. However, those with film studios will generally have an advantage because of the libraries of premium content to which they have ready access, and because of their capacity to make more.
The report added that the challenge that these companies face is to keep up with Netflix, whose investors are willing to support growth without positive cash flow. Further, these companies need new investments in technology services, whether outsourced, hired in-house or acquired (as Disney did in buying BAMTech for several billion dollars). They also need massive investments in customer service and support operations and ongoing spending on the infrastructure required to keep their streaming services running smoothly. In addition, traditional network owners must deal with internal conflicts when they balance the need to invest heavily in new services versus supporting the incumbent distributors or their worsening but- still-dominant legacy businesses.
On a more positive note the report said that if there is one advantage most of these companies possess, it’s that they are nothing if not commercially focused. This extends to a focus on commercials themselves. By contrast, Netflix appears institutionally allergic to conventional advertising. Traditional owners of TV networks supported much of their legacy businesses through ad revenue. While many made mistakes in depending too much on advertising (worsening the consumer proposition with too much commercial clutter), they hopefully will learn from these mistakes in traditional media and keep their streaming services relatively uncluttered.
In this space, the CBS–Viacom combination is particularly intriguing because it could come closest to presenting a relatively infrastructure-light “media company of the future.”
They bring together integrated studio production capabilities for a wide range of content types and experience with direct-to-consumer content packaging via CBS’ All Access and the Showtime OTT app over the past five years. With enough new content investment—perhaps funded by selling some of its broadcasting, publishing or cable network assets—and enough tolerance for a significant cash burn, ViacomCBS could begin to look more like Netflix than any other media owner. However, the companies must first go through the painful process of merging and, eventually, fully develop an integrated strategy for the future.
Still, Disney is undoubtedly the 8,000-pound gorilla (or mouse) among this group of companies, given its acquisitions and prioritization of direct-to-consumer services. If there is any risk to Disney realising its goals, it is that the company’s margins may fall by more than investors anticipate as the company devotes ever-increasing resources to this space while concurrently helping accelerate the relative decline of its traditional higher-margin businesses.
Among the next tier of companies—those lacking traditional film studios—Discovery stands out for its geographic breadth. It is substantial in the US and Nordic markets and significant in many other countries. This arguably provides the company with a better sense of differences within and across countries and exposes it to a wider range of business models to evaluate for its core markets. If this leads to more experimentation across the company’s apps, it will probably help Discovery find superior business models or otherwise be more attuned to different ways to run its business going forward.
This advantage is somewhat offset by Discovery’s relative lack of scale in any one country, at least compared to the infrastructure-based media owners (Comcast and AT&T), or Disney or ViacomCBS. While Discovery may develop new streaming services with niche appeal, it is less likely going to develop one with comparably broad appeal. It remains to be seen whether a large collection of niche businesses can be as proportionately large to a parent company as a small collection of large streaming services.
The report noted that regulation is the biggest threat facing Google and Facebook. what competition has failed to disrupt is now the bull’s-eye of regulatory interest across the world. It seems that those regulators have identified consumer harm, the enablement of criminality and the undermining of democracy as sufficient reason to demand radical change. A boycott by advertisers is no threat at all; advertisers go where the customers are.
The limit of their caution is to avoid poorly lit neighborhoods. The small businesses that drive perhaps half of Google and Facebook revenue are focused on ease of buying; most others (including many large advertisers) are pragmatic about user-generated content—if that’s where the consumer goes, there go we.