Threats and Opportunities for the Entertainment Industry in 2014

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*Our 2015 trends for the sector can be found here*

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At the start of a new year, what to make of the entertainment sector? It depends where you look. One thing is for certain though; at the close of 2013 that old laggard the music industry upstaged its media cousins. For sheer daring and innovative nous, few initiatives could claim to beat Sony in its launch of Beyoncé’s new album. In the face of increasingly ailing streaming services, the album was released as a fixed bundle on iTunes, with no marketing behind it. The news of the release thus came as a last-minute surprise to the industry and consumers alike, creating a short but extreme burst of anticipation. The artist posted a message on Facebook saying she wanted to recreate the “immersive experience” she used to have listening to music. The album sold 80,000 copies in three hours. It is difficult to envision Sony’s film division at Columbia Pictures doing anything similar.

Near the end of last year, Zeitgeist was fortunate enough to be able to attend the 5th Annual GlobeScreen Conference at London’s May Fair Hotel. Eve Gabereau, the co-founder and MD of Soda Pictures lamented “nurturing a film is not possible any more… there is less opportunity for a film to find its audience”. Word of mouth, she said, had to be very good, and happen very quickly, in order for it to have an effect. Simon Crowe, founder and MD of SC Films International, disagreed with another speaker, who asserted that filmmakers were being hampered by a lack of data, in that they did not know who they were making films for. He dismissed the need for data, and, most worryingly, stated the primary focus should not be on the bottom line. This is dangerous thinking. Films may be art, but if the medium is to continue then it needs to be profitable. So the primary focus has to be ‘How will this product turn a profit?’. Zeitgeist asked him afterward about the viability of VOD (video-on-demand) as a channel; Crowe was not optimisitic about its future as a significant revenue producer, calling films that have found success on such platforms – such as Arbitrage and Margin Call – outliers. Zeitgeist offered that Netflix had not been considered a significant distribution channel for a while, until suddenly it was. Did he foresee a similar situation with VOD? “Don’t know”, was his retort. It was well worth staying late to receive such gems as answers. The whole conference spoke of an ignorance of the insight data can provide, a shunning of profit-focused management, and a general yearning for bygone times when the industry – not to mention the champagne and other substances – was flowing more freely.Such anecdotal frustrations found company in the form of hard data. To cap off 2013, Business Insider published an article entitled ‘The US 20: Twenty huge trends that will dominate America’s future’. Number 16 was ‘Old Hollywood is dead…’. It noted that inflation-adjusted box office receipts were down around 8% from their 2004 high (see chart). Industry trade mag Variety reported recently that UK box office fell 1% in 2013, which was the first drop in ten years and the biggest in more than twenty. Of course, part of the reason for this was because 2012 had a rather suave helping hand from James Bond, in the form of Skyfall. When Zeitgeist prodded Cameron Saunders, Managing Director of 20th Century Fox UK, about the news over Twitter, he was quick to leap to into the fray, noting that it was “still the second biggest box office year on record”. He also went on to concede though that “UK admissions however have flatlined, despite lots more films = fewer people seeing each movie”. The same scenario is happening in the US. China is one of the few bright spots in the world of film, and has seen an explosion in the number of physical screens installed in the country over recent years. But even the Chinese film industry has medium to long term challenges it will need to overcome, if, as some predict, it is to become the world’s largest film market – overtaking the US – by 2019. It is still at the mercy of a government with strict controls and vague whimsical notions about what makes for permissible content; the state is involved at almost every level of production and distribution. Moreover, though the quota on foreign releases in the market has been relaxed slightly, it is by no means open season for Hollywood. In much the same way as the banning in China of Google’s app service and videogames consoles led to poor knock-offs, so with film. The restrictions have spawned poor remakes of American films that didn’t see a release on China’s shores, which inspires little creativity or excitement.

It was not all doom and gloom in the cinema of late of course. Gravity continues to light up screens across the world, and seems poised to do well come Oscar night. Its only obstacles come in the form of other films that critics and audiences have been similarly impressed with this season, including 12 Years a Slave and Captain Phillips. But such artistic achievements can hardly make us forget what was a poor summer for the film industry. We have written before about how films in development are increasingly either mega-blockbusters or niche arthouse films. Producer Kevin Misher, talking to The Economist last month, echoed our thoughts; “Hollywood is like America: the middle class has been squeezed”. The article went on to lament the unique situation the film industry finds itself in, relying on outsiders for both ideas (“imagine if Apple or Toyota did this”) and funding.

Will more content producers partner up with those infringing intellectual property?

The challenges extend further. Though Kodak suffered from other problems too, one of the things that prevented it from ever laying down a long-term strategy to embrace digital photography was the revolving door of executives at the top. Hollywood is similarly afflicted. In the past 18 months, according to The Economist, four of the six main studios have seen change at the top. Perhaps some longevity in senior roles would have encouraged these companies to embrace new ways of delivering films to eager customers. Instead, most films, particularly the ones glutting the summer schedule, still cling to an outdated distribution strategy of staggering releases across platforms. Studios resist doing this – save for the odd arthouse release – because it risks the ire of exhibitors. We’ve written before about the antiquated nature of such thinking. Every delay in getting to a consumer increases the chances that customer will resort to piracy. Companies like Netflix are reporting that intellectual property rights infringement dips once legal alternatives are made available to people; there are signs of hope.

Piracy is of course playing a role in television, too. In Poland, consumers have to wait months after the US broadcast for their dose of Homeland. It is thus one of the more popular shows to be pirated. Making the most of this trend, a publishing company responsible for a new book detailing Carrie’s life before the start of the series has been inserting adverts into the subtitles for the show. The MD of the publishing company told TorrentFreak, “We decided to advertise via subtitles because we wanted to show the book to all the fans of the Homeland series in Poland, no matter where they watch the show”. You can’t argue with placing a promotion for where you know your likely customers are. It will be interesting to see if any other unlikely coupling between pirates and content producers emerge. For, as amusing as this news is, it does point to a fragmentation in audiences, and thus in places for advertisers to reach them. It should have come as little surprise then when, last month, the Financial Times reported that TV’s share of advertising spend will slip this year, after three decades of uninterrupted growth. Jonathan Barnard, ZenithOptimedia’s head of forecasting, warned, “After television ad spending has grown pretty consistently for at least the last 35 years… there will be quite a lot of disruption to come over the next 10 years.”

Of course, disruption will come to other sectors of the entertainment industry, too. This was apparent at the recent Consumer Electronics Show in Las Vegas, where Samsung and Sony, among others, held court. It wasn’t the best of showings for Samsung, where famed producer / director Michael Bay walked out seconds into a presentation on curved televisions after the autocue failed. Sony had its disruptor product to tout, a cloud TV service. Beyond the glitz and glam of such new product releases, a big question remains: Can Sony use what assets they have and combine them effectively? A great article in the FT probed deeper, asking whether all these new products and services – we would be remiss were we not to mention the PS4, currently outstripping the Xbox One in sales – can be successfully integrated into an ecosystem that Sony is desperately trying to create. The corporation dabbles in film distribution, film production, smartphones, music as well as videogames and is slowly trying to tie them all together. All this while seemingly trying to disrupt itself, with cloud gaming doing away with the need for a console and image projectors doing away with the need for physical screens (Sony loses about $80 on every set it sells currently). As the article concludes,

“[CEO] Mr Hirai is trying to pick up the pace as Sony searches for its digital destiny. But the familiar questions remain: can it execute on the plan, how fast can it move – and how much pain is it prepared to take along the way?”

Where next for Sony?

Certainly if companies like Samsung and Sony wish to succeed in the coming years, they will have to do away with the obsession of focusing on hardware. It is plain now that, in consumer’s eyes, technology has reached a tipping point where the specifications of an object are no longer a unique selling point; they are a redundancy. This became clear at the Mobile World Congress in 2012, when PC Magazine published its event wrap-up under the headline “The End of Specs?”.

There are some companies that are embracing disruption, or at least, trying to hire those who started it in the first place. Disney, which often seems to have a strong strategic head on its shoulders, recently made the eminently sensible move of hiring the chairman of Twitter Jack Dorsey to join the Walt Disney board. This was no isolated occurrence for Disney, who had previously had Steve Jobs on the board and who have also hired Facebook COO Sheryl Sandberg. Elsewhere, the canny Weinstein brothers, who rarely miss an opportunity to make impressive artistic works that turn a decent profit, reteamed with their old company Miramax to develop further iterations of their film library. Seeing the opportunity for increased creativity in television, as well as new channels like Netflix and Amazon, they will also be developing new television series. And while online takes away advertising spend from other channels under the promise of reaching the right people at the right time, new local television development in the UK promises to do similar as it targets localised areas. Still, the film industry as a whole seems to be outright resisting any changes to the calendar; schlock in the summer sun, followed by arty pretense come Oscar time. Repeat. A writer in the New York Times elaborates,

“And then, after the Oscars, the machine picks up speed and starts excreting ghastly product like Oz the Great and Powerful, one of the worst movies of 2013 and the eighth highest domestic grosser of the year. Then the fall hits, and we cling to movies like Gravity and insist that, really, it isn’t all bad. And it isn’t, of course, even if creating a Top 10 list is finally an exercise in exceptionalism.”

The worry is that any shift in the schizophrenic nature of film scheduling and creation will probably involve at least a short-term hit to the bottom line. And a recent dismissal hints that no such shift is underway at the moment. In October, the great James Schamus of Focus Features was let go by Universal. Schamus was instrumental in bringing director Ang Lee to the US, distributing his Crouching Tiger, Hidden Dragon before going on to make The Pianist, Far From Heaven and Brokeback Mountain, among many other extraordinary films. Doug Creutz, senior media and entertainment analyst for Cowen & Company, told the New York Times in December,

“The major media companies are so big that nothing but a blockbuster really makes sense. Say you make a low-budget comedy and it brings in $150 million. So what? That doesn’t move the needle. You make a blockbuster… You can do the sequel and the consumer products and a theme park attraction. The movie itself is almost beside the point. All Disney is going to be doing is Marvel, Star Wars and animation.”

That would be a great shame for those who like artistic diversity, as well as sensible financial returns, in their film studio output. Current business models seem to be producing diminishing returns. This is true for videogames, movies and music. Experimentation, such as that by Sony’s music division mentioned at the beginning of the article, must be more widespread to engage with new consumer habits and to rekindle jaded minds. Consumer engagement and feedback as a whole is largely missing from much of the strategy with which the entertainment industry steers itself. Shareholder returns and operational logistics occupy most of their time. A far more rigourous approach to data – collecting and analysing it – and a more open ear to one’s customer base, might prove beneficial.

Beyond the Linear – New ways of entertaining

The days of P.T. Barnum, and the sense of spectacle an audience received from seeing a live performance have long passed; codified, commodotised, sanitised and made instantly available. Or have they? The way we entertain ourselves nowadays has changed greatly, and keeps changing. But are our tastes evolving or revolving? Is there hope for such seeming anachronisms as the TV, the live performance and even the book?

Two years ago, Zeitgeist wrote a brief article on the nature of contemporary consumption of media. It began with the headline that 8-18 year olds in the US spend a quarter of their media time with multiple devices. Furthermore, almost a quarter of that age group use one other device most of the time while watching television. In 2013, this preference for multiple stimuli has only accelerated. 80% of UK smartphone owners (making up over half the phone-owning population) use their phones while watching the TV. Similar figures were reported in the US, and similar figures were also reported for tablet owners.  Such figures give marketers pause for thought as they begin to approach these complementary devices as ways to extend their brand from the television onto the second screen. JWT Intelligence has a great report on this.

However, it is easy to overstate the arrival of shiny, new devices, and the apparent death of television. The blame for this misconception lies partly with the media itself; journalism is less engaging when it merely reports on the maintenance of the status quo (i.e. ‘people are still watching TV’). Far more interesting to hear about what new objects are showing a bit of ankle at CES, and that us mere mortals might one day dare to dream of owning ourselves, at which point all other material objects become unnecessary. All the more so when the journalistic integrity is compromised by corporate meddling, as was the case with CNET’s reporting this year. It was refreshing then to read TechCrunch’s recent article with the headline, ‘TV still King in Media Consumption’. The article, quoting a recent report by Nielsen, was particularly interesting in noting the prevalence of TV when it referenced that almost half the homes with TVs in the US owned four or more sets. Startling. More startling, the average household spends six days a month watching television, far ahead of other media consumption (using the Internet on a computer, at a little over 28 hours a month, came a distant second). The FT writes,

Over the past decade, despite the proliferation of video content on the web, TV consumption in the UK has remained steady with the average person watching about four hours a day. Almost 80 per cent of this viewing is on the top five channels, virtually unchanged from 10 years ago.

Creative destruction is something Zeitgeist takes an active interest in and has written about several times before on this blog. It takes hold in some industries (and households in this case) more quickly than in others. The same Nielsen study found that over 55% of US homes still had working VCRs. Moreover, despite much editorial to the contrary over recent years, the PC has not yet been wiped out by creative destruction and remains a staple for several reasons in both Western and emerging economies. According to Deloitte’s recent publication, “Technology, Media and Telecoms Predictions 2013”, although the attraction of tablets – and now ‘phablets’ – mean powerful computing and a cheaper cost, allowing the potential for leapfrogging of PCs in emerging markets, qualitative research shows a small but significant demand remains for PC ownership. Moreover, many businesses in the West, currently struggling with the implications of BYO devices, are not about to jettison the PC either. Switching costs, Zeitgeist suspects, are at play here, as with those stubborn VCR owners. Click here for more of our thoughts on switching costs.

VCR owners though will one day cease to be in the majority. New avenues of distribution and consumption are opening up, though not as quickly as first thought in some cases, particularly in that of live, streaming TV, which has faced many regulatory hurdles. Variety elaborates, “Loudly trumpeted efforts have fallen short, victims of poor design decisions, overpriced services and/or confusion about the target audience”. Yet alternatives are there. One of the more interesting streaming TV options in the US currently is that of Dyle, with 90 stations in 35 markets. It is run by a partnership that includes Fox, NBC, Hearst Television and others. The really interesting thing about the service is that it neutralises the problem many smartphone users will have of returning data caps by streaming off a separate network spectrum, which doesn’t impact on data allowances. Nice thinking.

Is the increasing popularity of streaming, and the content viewers prefer to watch over such a channel, already beginning to effect the types of films being produced?

Though new technology has not created new tastes in content or viewing habits, it has undeniably acted as a catalyst to desires already present. Zeitgeist remembers hearing a LoveFilm representative speak last year at AdTech in London about the increasing share streaming films took in the marketplace. Nothing too extraordinary in that statement, especially from a purveyor of streaming content. The rub came when he went on to elaborate that people tend to stream films when they are in the mood for instant gratification, in the form usually of an action film or romantic comedy. The increasing popularity of streaming, and therefore the increasing popularity of these particular genres, means the way the medium is distributed may very likely have a very significant influence on the type of content in the future that is commissioned. It was no surprise then to see, on a recent cinema trip, trailers for three films that neatly fit into that category for instant gratification (see above). Zeitgeist wrote at length on the need for film studios to address arbitrary platform release windows at the end of last year. Our article was mentioned in the lead editorial of entertainment trade paper Variety. Part of our argument is beginning to be addressed already. The FT recently published news that studios had managed to stem the six year decline in home viewing figures for films last year. The article elaborates that this is in part due to the strength of digital downloads, with films sometimes being available for digital distribution before they were available on DVD. Taken 2, a superb candidate for streaming given the previous statement by LoveFilm, was released Christmas Day in the US on digital platforms, “weeks before its release on DVD”. Such thinking goes hand-in-hand with the new UltraViolet format, to which several studios are subscribing. This allows those purchasing a movie on DVD – such as the recent Dark Knight Rises – to watch it with ease on multiple platforms. Mashable carried an article last week stating that several electronics firms have now also signed up to the UltraViolet partnership. Consumers will receive ten free movies when they sign up to the service, as incentive.

The example of Netflix is an interesting one in trying to understand the balance between consumers’ desire for multiple media and instantly-accessible content, and content owners desires to drive maximum revenue from their product. The company has been making a bigger push into providing TV shows of late, and is being rewarded for it, particularly with regard to older shows. A cultural trend many a pundit has put their finger on since the credit crunch began to bite back in 2008, nostalgia has manifested itself in consumers’ desire for old shows, including Midsomer Murders and Rising Damp, reports the FT. This long tail effect is turning a tidy profit for Netflix, as well as the original broadcaster, ITV. As a complement to this, the company is also fostering new partnerships, first with Disney in December, giving it “exclusive rights from 2016 to movies from Disney, Walt Disney Animation Studios, Pixar Animation Studios, Marvel Studios, and Disneynature”. Then, at the beginning of this year, it inked a deal with Warner Brothers, to show new and old TV shows from the studio. It should be noted however, as with all these new deals and technological developments and marches into previously uncharted territory, regulatory wranglings have ensued, in this case with sister company Time Warner Cable. The problem in this situation is not perhaps so much that Netflix is trying hard to push its availability into lateral markets, but that it is not trying hard enough to create a cohesive platform that is available across all complementary platforms and devices.

Research from Accenture illustrates a declining demand for single-use devices

One thing which Netflix will want desperately to escape being accused of – and it has done so with much success thus far – is being a niche provider of content. Sadly, the days of the point-and-shoot camera, the dedicated games console, etc., are numbered, according to a recent report by Accenture. It is evidently with such a strategic outlook in mind that Disney have recently announced their Infinity gaming platform. Variety describes it as an “online treasure chest”, featuring a plethora of Disney characters from over the years that can be interacted with over multiple platforms, whether on mobile or on videogame consoles. Importantly, the concept is designed to be an iterative, one that will grow and add characters over time, presumably as new IP is created. It certainly pays heed to the second screen phenomenon by recognising the need for multiple device access. It also plays off the trend started by the game ‘Skylanders’, which involves both physical toys and digital interaction. The same principle will apply with new toys developed for Infinity, which can then be used to create unique stories and drive narratives. The idea of having disparate characters from different Disney franchises is potentially a frightening one for those in charge of the individual brand essences of said titles, but the potential for success can be found by looking no further than the Toy Story films, which feature an assortment of different genre toys that mix well in situ.

We’ve discussed the changing models of consumption for most of the article, but it is worth noting briefly how our cultural tastes are also changing, brought on by technology (again), but also globalisation. Pundits are often quick to point out nowadays that there is a substantial demand for the live experience. Yet if we look at music, one of the most profound things to experience live, recent figures showed attendance to concerts had dipped. At the end of last year, in an insightful roundtable, The New York Times interviewed several talking heads, asking them to round up their thoughts on 2012 in the music industry. One of the more interesting points repeatedly made was that of the abundant opportunity that the Internet now provides for musical talent. Moreover, the Internet at large has become just as viable – if not a more viable – starting place for an emerging artist than signing with a record label:

“Now this year something’s been proven: Pop performers can become truly famous by building their careers themselves online, maybe more efficiently and faster than a major company can help them to do.

… you look at the first-week sales numbers of someone like Kendrick Lamar, who had an independent album that was digital only and is now on [the major-label] Interscope, but basically has no major radio hits, even if he is well-liked by mainstream hip-hop. He comes out and sells about 240,000 in his first week. A couple weeks later Rihanna comes out — not her first album and at the height of her pop fame — and sells a few thousand less than Kendrick did.”

The other trend, globalisation, has meant that voices increasingly other than those that are Western, are more easily heard. The irrepressible Psy had the honour of being the performer in the first YouTube video to cross one billion views. Conversely, in his home country of South Korea, ‘Gangnam Style’ has accrued a pitiful “$50,000 from CD sales and $61,000 from 3.6m downloads”. The point remains, however, that the fallacy of the West as the cradle of pop culture is being exposed. Christopher Caldwell illustrates this masterfully, writing for the FT in December.

Zeitgeist has written before about the upheaval new trends and preferences for media consumption – impacted significantly by the arrival of the Internet – have wrought on financial growth in the media and entertainment sector. Digital, in the form of Napster and its myrmidons in particular, has a lot to answer for. There was some relief then that at the beginning of the year when UK digital sales topped GBP1 billion for the first time (though still failing to off-set the physical media decline). Moreover, Boston Consulting Group predicted last month – in an excellent report entitled Changing Engines in Midflight: The 2012 TMT Value Creators Report – that by 2015 the digital services ecosystem will reach $1 trillion by 2015 (see above).

It is interesting to see where the ownership of content starts and ends across layers, and how content owners are trying to monetise these platforms and grab as much market share as possible from their competitors. Amazon recently began offering digital downloads of any CD you have purchased from them since 1998. It would be a great surprise to see if they do the same for books anytime soon. Fortunately, reading still constitutes an avenue of entertainment, for those of all ages. A recent piece by The New York Times reported that digital reading was on the rise for children. The article notes the numbers give some room for discrepancy, but states “about one-fourth of the boys who had read an e-book said they were reading more books for fun”, which is a desperately important emotional connection to maintain. While e-reading is a commendable past-time, is there any merit in pushing further, and advocating for interacting with a medium that does not involve a digital display? Such a turn of events, perhaps aided by the trend for nostalgia mentioned earlier, is presenting itself in the luxury hotel market, with physical libraries returning to shelves. It has been termed ‘rematerialism’.

So what does this all mean for consumer entertainment? There are evidently lots of new technologies being released, from smart TVs to new gaming devices, that will attempt to capture eyeballs. These devices, far from having to think of their natural competitors, still have the common television – and, as we have seen, even VCRs – to compete with and overthrow first. TV commands such a huge slice of viewing time, but it is under threat from distracted viewers who are now very comfortable – and more importantly socially accepting – of using a tablet, laptop or phone during a show. There are also regulatory implications t consider, which will most likely be shaped, ex-post, along the way. Taking consumers on a journey across multiple platforms and media in a seamless way will be key. Disney’s Infinity platform, when it is released, will hopefully serve as an excellent example to others of how to combine physical and digital entertainment.