Living with disruption:

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1 Sponsored by Living with disruption: Digital responses to change in the entertainment industry Written by

2 Commonwealth Bank viewpoint Nick Aronson, Global Head of Technology and Telco, Commonwealth Bank of Australia The democratisation of content has led to immense competition in the entertainment sector and firms need to find new and creative ways to monetise their content to survive according to Nick Aronson, Global Head of Technology and Telco at the Commonwealth Bank of Australia. Power has traditionally been in the hands of a few, so the biggest driver of change is the underlying technology that has democratised content and what we re seeing now is that anybody can produce content, he explains. Content providers are competing with thousands if not millions of platforms to deliver, so that content has to be extremely compelling. The renewed focus on quality also seems to be driven by the proliferation of fake news, although it may still be too soon to tell how this will be commercialised. Mr Aronson says this shift means businesses need to be more strategic in the way they approach their product offering and deliver a tightly targeted experience that will maximise returns on what can be a significant content investment. Content providers need to either have really compelling content that they can deliver quickly, but that costs a lot of money, or they ve got to do it quicker and cheaper than anyone else, says Mr Aronson. If you do neither, if you sit in the middle neither the cheapest nor the best customer experience you're in trouble He adds that successful delivery of premium content requires the use of multiple parallel channels, which means mastering both old and new media. For example, new movies or TV series not only need cinemas or television channels; they are often enabled for streaming, promoted via social media, and cross promoted on all these platforms via merchandising and endorsements. Adjusting to the new business environment can be difficult, but Mr Aronson says the Commonwealth Bank of Australia s Innovation Lab can help entertainment firms keep pace by providing a data platform to drive insights from analytics. This data enables clients to better understand their audience through demographics, sociographics and the examination of broader dynamics across consumers. Ultimately, Mr Aronson says the Lab also serves as a platform for the exchange of ideas, adding that the ability to share ideas and insights, and provide softer support is fundamental.

3 About the research Change drivers is a series of articles written by The Economist Intelligence Unit and commissioned by the Commonwealth Bank of Australia, that examines how change-oriented the entertainment, education and retail industries are by determining the extent to which organisations have changed their product and service portfolios and their revenue models in recent years. The Economist Intelligence Unit bears sole responsibility for the editorial content of this report. The findings do not necessarily reflect the views of the sponsor. Denis McCauley was the author of this report and Charles Ross was the editor. The research draws on a survey conducted in March 2018 of 428 senior executives in Australia, Hong Kong, Japan, New Zealand, United Kingdom and United States. Interviews were also conducted and supplemented with wide-ranging desk research. Our thanks are due to the following interviewees for their time and insights: Nick Herm, director of strategy, Sky, United Kingdom Helen McCabe, digital content director, Nine Entertainment, Australia Angela Stengel, head of the Content Ideas Lab, Australian Broadcasting Corporation (ABC) The Economist Intelligence Unit Limited

4 Introduction The march of digital technology has transformed how entertainment industry content is consumed. Once limited to TVs, radios and cinemas, consumers can now access video and music from a multitude of devices, whenever and wherever they want. This development has been a boon to entertainment companies, creating new routes to customers, but it has simultaneously ratcheted up the competitive pressure on the industry s established players. The digital change has been led mainly by online entrants such as Netflix, Amazon, Apple, Spotify, YouTube as well as several smaller players. Seven in 10 entertainment executives surveyed by The EIU in March 2018 confirm that their industry is more competitive than it was just three years ago 1. The fiercer competition may be having an effect on companies bottom line. Only 42% of survey respondents say that their firm is more profitable than it was three years ago, and no more than 34% have seen their revenues grow since then. The going appears to be tougher in Australia than elsewhere, as more respondents from that country point to tougher competition and considerably fewer to recent profit and revenue growth. How are established entertainment providers responding to this disruption? To gain some insights, we explored recent change in their product portfolios, their revenue models and their approaches to new product development. New products, new markets, new models There has certainly been change in entertainment companies product Figure 1: A more competitive market Companies agreeing with statements about their industry and their business (% of respondents) 70% 79% 69% 42% 33% 46% 34% 39% 21% Our industry is more competitive today Our business is more profitable today Our revenues are higher today Overall environment Australia Other countries 1 The survey of 428 executives included 142 respondents working in the entertainment industry. Just under one-third of these 43 executives were based in Australia, with the balance coming from the US, UK, New Zealand, Japan, Singapore and Hong Kong. 2 The Economist Intelligence Unit Limited 2018

5 portfolios. Over seven in 10 surveyed firms (73%) have increased the number of products and services they offer over the past three years, and 42% of respondents have significantly increased the number of products and services they provide. (Figure 2) According to Nick Herm, director of strategy at Sky UK, the pace of change in entertainment product portfolios has accelerated, but he views it as evolutionary rather than radical. For large entertainment providers such as Sky, he says, the timing of portfolio change is as important as the number or frequency of new product introductions: When you have a much broader product ladder, you need to be able to manage the sequencing of new products to ensure that the value is commensurate with the price point of the package. For example, if introducing lower price points, it is important that what is included in higher price points continues to represent good value for the customer. Many entertainment firms have gone further. Half of those represented in the survey, for example (far more than in the other sectors in the study), have entered an entirely new product or service market in the past three years. Over one-third (37%) have changed their primary distribution channel, which in most cases probably means giving full weight to online delivery. Entertainment companies in Australia have been disappointed with their inability to monetise their digital assets in a substantial way, according to Helen McCabe, digital content director at Nine Entertainment, one of the country s major broadcast media companies. One attempt to change that is a start-up venture that Nine is funding called Future Women, a premium lifestyle website expected to launch in the second half of Managed as a separate entity from Nine, and focusing on subscription fees as its main source of revenue, Ms McCabe views the Figure 2: Many more products Firms reporting an increase in the past three years in the number of entirely new products or services they produce (% of respondents) Overall entertainment 31% 42% Australia 30% 49% Other countries 31% 39% Moderately increased Significantly increased The Economist Intelligence Unit Limited

6 venture as a test case to see if we can make something like this work, both culturally and in terms of the revenue streams. (Only five entertainment companies in the survey have done something similar.) A different type of incumbent response to new models introduced by digital challengers has been to partner with them. Sky provides an example. Challengers such as Netflix sometimes inject new content supply into the market and lead businesses like ours to re-evaluate our product packaging, says Mr Herm. The two firms recently launched a partnership to bundle the full Netflix service into Sky s subscription TV platform 2. Lessons from the tech industry Industry incumbents could energise their responses to disruption by streamlining new product development and reducing time to market. This is not easy for larger players. Getting new ideas to market takes too long in our industry, observes Angela Stengel, who is head of the Content Ideas Lab at the Australian Broadcasting Corporation (ABC). The survey results provide a picture of how long that is. More than eight in 10 entertainment respondents overall (81%) say their firm takes three months or longer to bring an entirely new product or service to market; 20% say its takes a year or more. Only 19% of firms can get a new product to market in two months or less. (The Australian figures are broadly the same.) Reducing time-to-market of new content is one of Ms Stengel s priorities. Like other firms in the industry, the ABC is applying agile development practices to content development. Popularised in the technology industry, and particularly in software development, the agile approach is gaining adherents in many walks of business. By applying agile thinking to content production, she says, we can find opportunities to get out to market quickly in a low-risk way before scaling up. By applying agile thinking to content production, we can find opportunities to get out to market quickly in a low-risk way before scaling up. Angela Stengel, head of the Content Ideas Lab at the ABC Mr Herm believes that agile development and other practices adopted from the technology industry have brought change to how products are developed in the entertainment sector. In some respects, this follows logically from the important role that software developers now play in content development and delivery. Ms Stengel explains the advantages of an agile approach to content development: Rather than learning everything we can about the audience for a new piece of content and spending a year developing 2 Sky to Integrate Netflix Package Into New Subscription Bundle, Morningstar, March 1, The Economist Intelligence Unit Limited 2018

7 Figure 3: Customers driving change Most important influence on the nature and characteristic of new products in the past three years (Top responses; % of respondents) Customer/end-user focus groups 49% Feedback received form end-users through digital channels 49% Ideas gained in open innovation forums 31% Results of predictive data analysis 29% Ideas generated internally by the R&D function 29% it, we re instead looking to test an idea by putting smaller chunks of the content into the market. The ABC is fortunate in that we have digital properties, radio stations, TV stations and journalists spread across the country, so we can go quickly to market with, say, live radio and news articles and start testing a concept before turning it into a podcast or even a TV programme. Change is also evident in the inputs that entertainment companies seek into new product development. End-user forums are, not surprisingly, a dominant influence, but just as many respondents point to feedback obtained via digital channels. A large number of respondents firms have also made use of innovation forums and predictive analytics. (Figure 3) Two schools of thought on feedback channels are battling for pre-eminence within traditional media and entertainment companies, according to Ms McCabe. An old school, she says, remains wedded to getting gut reactions to content from focus groups and other user forums. A newer school values the use of social media as well as advanced data analytics and other emerging technologies to better understand user preferences and behaviour. Getting those two cultures to talk to each other is one of the big challenges Australian media companies face at the moment, says Ms McCabe. Challenges and solutions Cultural issues figure prominently among the factors that hamper entertainment companies efforts to improve their product development. Survey respondents overall accord equal weight to a risk-averse culture, a lack of innovative ideas and poor understanding of consumer needs as major The Economist Intelligence Unit Limited

8 Figure 4: A cultural barrier to change Biggest barriers to introducing new products or services (Top responses; % of respondents) 42% 33% 26% 36% 33% 29% 33% 33% 33% 32% 33% 32% 27% 28% 26% Lack of innovative ideas Risk-averse culture Poor understanding of consumer needs Lack of people with the requisite skills Lack of technology capability Overall environment Australia Other countries hindrances. (Many more in Australia point to risk aversion than to other factors.) 42 % of Australian firms the highest of any country surveyed say a risk-averse culture is the biggest barrier in introducing new products or services Such obstacles are arguably more difficult to overcome than, say, a lack of funding or obsolete technology. One partial remedy would be to recruit talent from other industries. Relatively few entertainment executives, however (37% overall, and only 23% in Australia) believe this is critical to fostering change. One who thinks differently is Ms Stengel: Bringing in new blood from elsewhere is certainly necessary. It s about critical thinking and seeing problems from different perspectives, which could help to reinvigorate an industry that is going through massive change. (Figure 4) The technology industry is a good place to start looking for new blood, believes Ms Stengel, as gaming firms and software developers more generally are similarly fixed on building applications and services that audiences will spend time on. The inroads that technology firms such as Amazon, Apple and others have made into entertainment certainly suggest that the borders separating the two industries are receding. Talent recruited from the entertainment industry have helped turned such tech firms into strong content providers in their own right. A reverse or reciprocal flow could help established entertainment companies to compete digitally with their new and nimble rivals. z 6 The Economist Intelligence Unit Limited 2018

9 Key takeaways Part of entertainment companies response to digital disruption has been to expand their product and service portfolios in recent years. Many have also ventured into new product markets and changed their primary distribution channels. Agile development practices borrowed from the technology industry are helping some entertainment companies to streamline product development and reduce time-to-market of new products. Risk-averse cultures and skills deficits hamper efforts to improve product development. Recruiting talent from other industries (including technology) can help to overcome these impediments. The Economist Intelligence Unit Limited

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