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Where the true growth lies The market for digital media

2

With projections of better than 6% growth over the next five years, it is widely believed that the media and entertainment sector is expected to continue with the success it has enjoyed over the past decade. Consensus forecasts suggest that most of the growth will come from new digital media that was designed from inception to be interactive (“born” interactive). This new media will be delivered through Internet and mobile platforms, unlike traditional media which, according to forecasts, will continue to confront a shrinking market.

With the BRIC economies (Brazil, Russia, India, China) expected to grow about 14% over next few years1, players operating in media and entertainment are also looking toward these markets for future growth opportunities.

The future, according to conventional thinking, is in interactive media and in emerging markets. However, a closer look at the media sector paints a slightly different picture. Increasing digitization and more versatile media applications are likely to make the interactive component of traditional media a more attractive opportunity than new digital media in the foreseeable future.

Emerging markets will drive growthGlobalization has presented some outstanding opportunities for the media and entertainment sector, and will likely be the primary source of growth for these companies in the near future. Today, major U.S. film studios earn most of their film and home video revenues from sales in foreign markets2. The increasingly influential BRIC countries, along with a host of other emerging economies, will continue to drive growth. In contrast, more mature economies will experience a period of slower growth. While prices are generally lower in emerging economies, rising incomes, infrastructure improvements, and the potential for higher sales volumes can make these markets highly attractive in the long term.

Strong macroeconomic expansion is driving growth in emerging markets. Infrastructure improvements, particularly in broadband and multichannel television, will also play an important role. Low penetration of both suggests that there is still substantial room for growth. Internet advertising, Internet access, and television services are expected to lead the increase in entertainment and

1 Wilkofsky Gruen Associates, June 2008*

2 Based on Deloitte experience

3 Wilkofsky Gruen Associates, June 2008*

media spending in these countries (see Figure 1).

In BRIC countries, average spending on media and entertainment grew by 17.8% in 2007. The sector’s expansion is expected to continue to outpace that of gross domestic product by a healthy margin, as the rising disposable incomes of an urban middle class translate into increased consumer spending in these categories. Online and mobile distribution will only become more important to the future of media in these markets.

Digital media channels are on the rise

While the more established segments of the media and entertainment sector will continue to dominate, their growth is slowing substantially as consumers migrate to media delivered through digital and mobile channels. Digital and mobile distribution constituted only 5% of global media and entertainment spending in 2007. However, during the next five years, these revenues will account for 24% of the industry’s growth and will constitute 10% of global media and entertainment spending in 20123. This growth will offset flat or declining growth in more established areas of the business.

Companies are making bold plays to follow consumers into a more digitally oriented future. However, they continue to wrestle with the challenge of creating business models that can adequately monetize their investments.

Figure 1. Entertainment and media revenues in developed and developing countries: 2002–2012

Source: Wilkofsky Gruen Associates, June 2008*

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As used in this document, “Deloitte” means Deloitte LLP and its subsidiaries. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.

Where the true growth lies The market for digital media 3

The current thinking in the sector is to look at emerging markets and new media. Emerging markets are expected to provide new growth opportunities for applications and solutions that are already in existence in developed markets. Further growth in developed markets is expected to be driven by new media based on mobile and broadband. However, we believe that new media will not be the primary growth driver for the media and entertainment sector.

Trends point to greater role for interactive mediaConsumers are increasingly turning to interactive channels to consume media. Though growth is expected to be flat in traditional media, it is unevenly distributed across segments and some types of media could see growth on par with digital media (see Figure 2).

The media and entertainment sector can be classified into the following three segments, as featured in Figure 3:

Going interactive:• Represents traditional media sectors that historically used analog technologies but are beginning to use digital and interactive technologies to reach customers. Examples include interactive television and radio (see Appendix A).

Born interactive:• Represents those sectors that are inherently digital and interactive, such as mobile and web-based media (see Appendix B).Emerging:• Represents new technologies that today hold only a negligible share of the market. This segment is expected to remain small in the near future and has not been considered for further analysis.

Figure 3. A taxonomy of media and entertainment services

Going interactive Born interactive Emerging

Interactive television and •filmInteractive radio and •musicInteractive publishing •services

Interactive mobile •servicesOnline media•Online interactive games•Digital animation•Simulation-based •applicationsLearning media•Business-enabling •applications

Pervasive computing and •mediaWeb 2.0 services •(Rich media search, video blogging, etc.)Virtual worlds•Interactive gesture •interfacesVirtual reality and •telepresence

Source: Deloitte analysis

Figure 2. Growth of traditional vs. digital media markets worldwide: 2008–2012

Source: Wilkofsky Gruen Associates, June 2008*

19.3%

8.4%

46.1%

34.2%

16.7%

1.8%

5.0%

3.5%

2%

-12.2%

0 20,000 40,000

Internet/mobile music

Electronic consumer and educational books

Consumer magazine digital advertising

Multichannel advertising

Digital newspaper advertising

CAGR (’08-’12)

Traditional (2.4%)

Digital (13%)

0 50,000 100,000 150,000

Physical recorded music

Print consumer and educational books

Consumer magazine print advertising

Terrestrial TV advertising

Newspaper print advertising

Traditional Media WW Market Size2007 ($ Million) Digital Media WW Market Size

2007 ($ Million)

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0

10

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40

50

60

70

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20122007

$91B

$40B

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Mature markets still present opportunitiesA sample of three countries, the United States, United Kingdom, and Japan, was used to analyze developed markets. Surprisingly, traditional media in these markets is expected to offer low, single-digit growth rates, while interactive digital media offers very healthy growth rates; the Going Interactive segment is expected to grow by a 19% compound annual growth rate (CAGR). In the United States, the largest of the developed markets, the media and entertainment market is expected to grow at a CAGR of 5% through 2012. However, the interactive services market alone is expected to grow at 18% through the same period (see Figure 5).

The growth of the Born Interactive segment, while healthy, is expected to lag behind the Going Interactive segment. Expansion of the inherently digital Born Interactive segment is closely related to Internet and mobile penetration, both of which have reached saturation levels in developed countries. In addition, the need for more high-end infrastructure places limits on further growth in the Born Interactive segment. This will likely change in the future as developed countries invest in more infrastructure, but not until at least 2012.

Traditional media remains the most effective opportunity in China and India

The analysis of emerging markets focused on the two most important developing economies, India and China. The Going Interactive segment in these countries is expected to grow by a robust CAGR of 28%, albeit on a smaller base than developed markets. The Born Interactive segment in emerging markets is also expected to provide double-digit growth. Rising penetration and increasing popularity of Internet and mobile-based applications are contributing to this growth. The main limiting factor today is the absence of the high-end infrastructure needed to run these devices and applications, a situation which will eventually change (see Figure 6).

The media market in China (the largest of the emerging markets) is expected to grow at a CAGR of 15% through 2012, which is slower than the expected growth rate of interactive services in the United States (see Figure 7).

Therefore, traditional media, as represented by the going interactive segment, remains the main opportunity in emerging markets. That said, these countries will also serve as good test beds for those media players who offer services in the born interactive segment.


Figure 5. Overall interactive market in the United States


Figure 4. Going interactive vs. Born interactive in developed markets

0%

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2007 2008 2009 2010 2011 2012

Going Interactive Born Interactive

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Interactive media platforms have led to a transformational shift in traditional media channels. Television is no exception. In the last decade, several new platforms have emerged and are growing at a break-neck pace. Globally, television viewership has been growing at a healthy 8% rate for the past few years and is expected to reach double digits soon, based on the emergence of these new interactive platforms.

One of these interactive platforms, IPTV (Internet Protocol Television), debuted in 2000 and is currently expected to grow at 15% annually in the near future, even in this softened global economic climate. Hulu.com, an online television website that provides commercial-supported streaming video of TV shows and movies from major networks and studios, receives 240 million on-demand views per month today, compared to Comcast’s 300 million views.43

4 Comscore’s VideoMetrix, Deloitte Research



Figure 6. Going interactive vs. Born interactive in emerging markets

Figure 7. Total media market size in China

Television (2008–2012)

The future is "Going interactive"

-30%

-10%

10%

30%

50%

70%

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110%

-0.1 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 1.1 1.2

Mobile TV

VoD

Traditional TV

IPTV

Relative size

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)

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Going Interactive Born Interactive

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6


Interactive TV and film

Interactive radio and music

Interactive publishing services

VOD (Video on •Demand) and pay-per-viewElectronic program •guideInteractive TV •gamesIPTV•Digital cable•Digital cinema•T-betting/gambling•3D movies•

Digital audio •broadcastingVisual radio•Music podcast•

Interactive •business information servicesOnline catalog •and directoryeNewspapers•eBooks•ePeriodicals, •journal, and magazineseLibraries•

Digital advertising

Interactive TV •advertisingInteractive radio •advertisingInteractive digital •indoor/outdoor

Ad network •servicesOnline •advertisingMobile •advertising

In-game •advertisingSocial network •adsHolographic •displays

Applications for Going interactive

Appendix B


Interactive Mobile

Interactive Online Media

Games

Mobile music, TV •and videoTelematics •servicesMobile •communitiesMobile search•

Online music, •movies, TV showsE-commerce and •online business portalsOnline video •rentalOnline gambling•

Games publishing•Online gaming•Mobile games•Games consoles•Gaming engines •and environment

Digital delivery and enablement

Learning media

Simulation and animation

Interactive •payment systems (m-commerce, voice commerce, micropayment)Digital •exchanges/hubsDigital asset •management

Online learning•Simulation-based •learningInteractive •product and content management

Simulation in •industry (Defense, Manufacturing and design, Finance, and others)Movie and video •animationVisual effects•

Application for Born interactive

Appendix A It is too early to dismiss traditional media

Counterintuitive as it may seem, our research indicates that the interactive component of traditional media in developed markets offers a better opportunity for growth than either new media or media in emerging markets. Even within the developed markets, the Going Interactive segment is expected to provide faster growth than Born Interactive.

What does this mean for media companies seeking growth? First, they will need to extend their core business to take advantage of this immediate opportunity. Meanwhile, it will also be necessary to maintain strategic options in interactive technologies and new media. They will need to build interactivity into traditional businesses to pay off in the medium term, while selectively investing in new or emerging businesses to underpin long-term profit growth. Finally, they should keep an eye on infrastructure development in emerging markets, with the aim of eventually establishing a strong position there.

Notes:

Wilkofsky Gruen Associates Inc., ”Global i. Entertainment and Media Outlook: 2008–2012,” Report by PwC, June 2008"Turn on to digital: Getting prepared for digital ii. content creation and distribution in 2012,” A white paper by Deloitte & Touche LLP, 2006“The Digital Media Challenge for Consumer Business,” iii. Deloitte MCS Limited, Dec. 2007Alma Derricks, David Rips, and Ken August, “The iv. Digital Media Supply Chain: Is Everything Old New Again?,” Deloitte Touche Tohmatsu, May 2008

* Wilkofsky Gruen Associates data as published in "Global Entertainment and Media Outlook, 2008-2012", a report by PwC


Methodology

The market size for interactive digital media (IDM) for a particular media subsector is calculated by applying an IDM percentage to the market size data of that sector as predicted by various market assessment studies. This IDM percentage was calculated by applying multiple criteria

over media applications. These include frequency of interaction between the user and the application, level of control exerted by the user, direction of communication, context of communication, and adaptability. Figure 8 illustrates the assessment of interactivity of mobile-related applications.

Figure 3. Methodology for assessing interactivity of mobile applications


Mobile-based content/

applications

Mobile access

Mobile advertising

ComponentsPercentage of IDM assessment criteria

Percentage of IDM

Mobile gaming•Mobile music•Mobile TV and video•Location-based services•

Using primary criteria•Frequency of interaction•Level of control•Direction of communication•Context of communication•Adaptability•

100%•20%•30%•100%•

Voice• No interactivity associated with •voice

0%•

Data•Messaging-related content and •applicationNonmessaging-related content and •application

Interactivity assessed for premium •messaging content (eg., SMS voting)Weighted average of mobile •content/application

8% (premium SMS)•22% (overall mobile data)•

Mobile advertising (all inventory-•messaging, music, video, etc.)

Weighted average of mobile data •usageMessaging-related content and •applicationNonmessaging-related content/•applications

Message advertising — 8%•Search advertising — 100%•Overall — 13%•

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Technology, Media & Telecommunications (TMT) practice contacts

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Acknowledgments

Deloitte would like to acknowledge the contributions of the numerous individuals and entities, including industry specialists and value-chain players who enthusiastically participated in providing us with the inputs that helped us put together the contents of this report. Their contribution to this study, in terms of time invested and information provided, proved to be invaluable.

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