Digital to overtake traditional as largest revenue source: Ernst & Young

A new report from Ernst & Young says digital is set to overtake traditional as the largest source of revenue for media and entertainment (M&E) companies by 2015. The findings are presented in a new study, “Digital Agility Now!,” based on interviews with global media and entertainment executives from a broad swath of industry sectors, […]

Chris Powell June 21, 2013

A new report from Ernst & Young says digital is set to overtake traditional as the largest source of revenue for media and entertainment (M&E) companies by 2015.

The findings are presented in a new study, “Digital Agility Now!,” based on interviews with global media and entertainment executives from a broad swath of industry sectors, including advertising, broadcasting, publishing, gaming, music and social media.

The study suggests that 57% of top-line revenues for M&E companies will come from digital within two years, up from 47% today. Respondents indicated that “smart mobility”—defined as personalized, anywhere, always-on content—would be a key revenue driver.

Consumers are rapidly assimilating new smart mobility or social media technologies, profoundly affecting their media consumption behaviour while providing M&E companies with “unprecedented” insights into consumer tastes and behaviour patterns that is fueling digital revenue growth, said the report.

The study identifies 69 so-called “global leaders” (out of the more than 550 survey respondents) that have implemented social listening programs, leading-edge analytics and cloud-based infrastructure that enable rapid deployment of new products and services.

According to the report, these leaders share three characteristics:

Achieving those benchmarks, particularly from a revenue standpoint, represents a significant challenge for traditional media and entertainment companies, said Martin Lundie, partner and Canadian media, technology and telecommunications leader at Ernst & Young in Toronto.

This is particularly true for those in the publishing and broadcasting sectors, he said. “That’s a significant transition,” said Lundie. “It’s a big challenge to move over 50% of revenue to a digital platform.”

Ernst & Young also developed an “Agility Index” that ranked companies’ ability to adapt to the new digital landscape based on their responses to 16 questions related to factors like “creating a culture of innovation,” “analyzing customer interactions” or “building alliances” with technology partners.

The study found that mid-sized companies with annual revenues between $500 and $999 million were 9% above average in terms of their agility, with small companies 7% below average and big companies 1% below average.

While the interactive gaming and social networking segments were deemed the most agile—17% and 9% over average, respectively—advertising and management and publishing and information services were deemed the least agile.

Lundie, who has sat on the board of the Interactive Advertising Bureau of Canada (IAB) for more than 10 years, admitted that seeing advertising and management listed among the least agile companies came as something of a surprise.

“I interact a lot with agencies and my impression is that they are ahead of the curve. I was very surprised by that agility score,” he said. “It might be that it hasn’t migrated into new revenue streams as quickly as it should.

“I’ve observed that quite a lot of agencies still have siloed base structures with traditional print, traditional broadcast all separate, so maybe it’s their hierarchy that doesn’t allow the level of flexibility and innovation that’s being measured here.”

Another key characteristic of agile media and entertainment companies, said the report, is the ability to “fail forward” fast: learning from their missteps and fixing them quickly before moving on.

The report said it’s a trait embodied by streaming video service Netflix, which incurred the wrath of subscribers in 2011 when it announced a 60% price increase for a combined DVD rental and streaming video service—a prelude to splitting the company into two separate business units—that cost it 800,000 subscribers and 83% of its share price.

After a quick apology by CEO Reed Hastings and a decision not to separate the businesses, Netflix’s subscriber base in Q1 of 2013 matched that of HBO, with subscribers streaming some 4 billion hours of content.

Lundie said failing forward is imperative in an environment in which the lifespan of products and services has become condensed. “You rarely have time to go through all your user testing and release a perfect product; if you do that, by the time you launch that product or service, someone else will have beaten you to the mark or the eco-system will have moved so fast that that product is now going to have no real value,” he said.

“It’s a very short cycle and you don’t have time to get to perfection—you have to go for velocity,” said Lundie.

The importance of digital strategy to the overall health of a company is underscored by who is overseeing its implementation, said the report. Asked who is responsible for the digital technology vision and strategy within their company, CEOs were identified almost as often as chief technology officers: 23% versus 24%. Among companies identified as digital leaders, CEOs and CTOs were tied at 26% apiece.

The complete report can be found here.