UK: Deloitte Media Predictions - 2011 – Part 2

Last Updated: 20 January 2011
Article by Deloitte Technology, Media & Telecommunications Industry Group

Most Read Contributor in UK, August 2017

Games Go Online and on Sale: The Audience Grows, But at What Price?

Deloitte predicts that in 2011 the global computer and video game industry will continue growing but from a more diverse set of revenue streams. The industry is forecast to generate $52 billion in software revenues in 2011, 6 percent higher than in 2010, while hardware is predicted to generate only $13 billion, a decline of 19 percent154.

An increasingly large percentage of games revenue is likely to come from monthly subscriptions, peripherals, fees for services and in-game purchases and advertising in the free-to-play (F2P) and "Freemium" markets. Deloitte forecasts that the total revenue from these relatively new sources could be as high as $10 billion, or 16 percent of total game revenues, by the end of 2012, and over time could represent 50 percent of all revenues for the industry.

The existing PC and console game business is confronting various challenges. Increased software piracy has had a profound effect on sales over the past few years, costing the industry billions155. Meanwhile, the higher costs and lengthening development times for high-end games have made game development riskier (publishers need blockbusters) and has reduced profits across the industry as whole156. For PC game developers and publishers, more and more computing devices are being sold – but many of them are smartphones, tablets and netbooks that do not have the hardware to support conventional high-end games.

Console revenues and profits tend to be highly cyclical as both hardware and software purchases are linked to the console upgrade cycle157. Five years have passed since the current generation of consoles was released; the result will likely be relatively flat growth in 2011. Moreover, there are some concerns that the console refresh cycle, which has averaged five years for almost two decades, is about to lengthen into a 10-year cycle, as existing games are not yet putting stress on the hardware capabilities of existing consoles. This would delay the next expansion phase. Console makers hope to bridge the gap by introducing add-on features such as motion control, camera peripherals and 3D.

Three major technological drivers – powerful portable devices such as smartphones, ubiquitous network connectivity, and social gaming – are transforming the industry and creating new sources of revenue. As these new revenue streams emerge, the industry should see growth that is both more stable and more profitable. Also, the global audience of gamers will likely continue to expand rapidly, primarily due to an increase in casual gamers on consoles, web and social networks, and most recently smartphones and tablets. However, worldwide games revenues are forecast to grow more slowly than the number of gamers: revenue per gamer is expected to fall.

Only a few years ago, very few gamers were connecting to the Internet for any reason. But today, an estimated 53-78 percent of gamers (depending on their console) in the United States use a connected console to play multi-player online games, download new content and converse with other players while gaming. Connected consoles are also used as PC substitutes for applications such as streaming video158. The benefits to the gamer of a connected machine are enormous – but the benefits to the games industry are even greater: the arrival of connected gaming has not only slowed the growth of piracy, but actually reversed it, especially in geographies where piracy was particularly high159.

As more of their customer base gets connected, game publishers are likely to see expanding contributions from revenue sources that aren't entirely new, but are becoming increasingly important: micro payments from selling additional levels, characters and costumes; online stores; and, possibly, real-time ads placed in games (although this has not been a big market so far)160. Also, some high-end games are being sold as monthly online subscriptions. The cloud gaming market (or GaaS, gaming as a service) is still nascent but could become a significant revenue source for companies that have customers with fast Internet connections – even people with relatively low-powered netbooks or small, cheap thin-client devices that can be connected to TVs should be able to enjoy console-like experiences161.

The fastest growing games segment will probably continue to be F2P and Freemium games. These games are typically based on a revenue model where basic game play is free, but a premium is charged for add-ons that enhance the game experience such as extra levels, accelerated progress and special in-game accessories such as weapons, supplies and costumes (micropayments). Many subscription games are converting to F2P and seeing their revenues increase by 100 percent or more162. Total F2P revenues in 2009 were about $2 billion163; in 2011, that number could reach $5 billion.

The upshot of all these trends is that the gaming industry will likely see smoother revenue streams, higher revenues and profitability and massive user growth. The existing market of core gamers isn't about to go away, but the mix of people who play games is likely to shift in many ways: age, gender and income, among others.

Bottom Line

The games industry appears to be following in the footsteps of the enterprise software market. Two decades ago, 90 percent of enterprise software revenues were one-time license sales – analogous to buying a game disc – and there were virtually no follow-on revenues or service fees. Today, many software companies derive more than half of their revenues from services and subscriptions, and license fees are much less critical.

Although this change was disruptive to the industry, most enterprise software companies found that after the transformation they were still able to grow profitably while enjoying less revenue volatility. The games industry might be able to learn from their experience, leveraging best practices from the enterprise software industry while developing new best practices of its own.

The F2P/Freemium revenue model is interesting and potentially lucrative. However, it could pose a serious disruptive threat to existing console hardware and software manufacturers if they respond too slowly. The new model will likely give rise to new competitors; also, it might reduce the perceived value of all games.164

The growing number of non-console and non-PC games and gamers suggests that companies focused on traditional console and PC hardware sales may need to diversify. We are already seeing high-end graphics chip manufacturers use their technology in non-gaming markets165. Also, the peripheral market seems to be shifting from single-purpose accessories (musical instruments, etc.) to multi-purpose peripherals that provide image recognition and motion capture. Peripheral manufacturers and game developers alike may need to adapt to this market shift.

Keeping the Life in Live: A&R Diversifies

Deloitte predicts that in 2011, the live music sector, with festival organizers at the forefront, will start expanding its talent creation and nurturing role, either as individual companies or joint projects. Until now, that role has been left largely to music labels' artist and repertoire (A&R) divisions. The live sector will identify, invest in, develop and commercialize the next generation of stadium-filling artists, using a variety of approaches, from talent contests at festivals to dedicated facilities for nurturing new talent. All aspects of the live music sector may get involved: venue owners, concert promoters, television production companies, ticket sales agencies and even some established recording artists.

The recorded music industry has traditionally built a pipeline of up-and-coming music acts through their A&R divisions. In 2010, the industry spent almost $5 billion on development and promotion of all acts, with about half going to foster new talent166. However, after a decade of declining sales, the labels' A&R spending is shrinking both in absolute dollars and as a percentage of sales. In some countries, A&R investment as a percentage of revenues is down about 25 percent since 2006.167

By contrast, the first decade of this millennium has been particularly prosperous for the live music industry. Revenues rose steadily and even fared relatively well during the recent recession168. However, the decade ahead looks to be more challenging, perhaps due to the ongoing decline in A&R investment by the labels.

There are two cyclical factors that could soften live music revenues in 2011 and beyond, forcing the live sector to pick up some of the slack in terms of identifying and commercializing new acts.

One factor is the vintage of the current highest grossing live acts. Some of the last decade's biggest draws appear to be approaching the twilight of their touring careers. In 2011 the lead singers for eight of the 20 highest grossing live acts in the United States from 2000-2009 will be 60 or older. Only one of the top 20, Rascall Flatts, released its first album this century (in 2000). Through 2009, Rascall Flatts grossed $222 million from touring. The other 19 acts, the majority of which rose to prominence on the back of single and album sales (and the associated promotional activity) grossed a cumulative $6 billion in ticket sales during the last decade: the sexagenarians alone brought in more than $2.5 billion (see Figure 7).

A second factor is the economy, particularly in industrialized countries. Stubborn unemployment, increases in value added tax, and an austerity-focused public sector might keep consumer confidence low and concert attendance down170. In fact, a weak economy might have been one of the key factors behind the 17 percent decline in the U.S. live market in the first half of 2010171.

While record companies will always exist, they might be unable or unwilling to handle their previous level of investment in new acts. If so, another part of the industry might need to take up the slack of identifying and publicizing new talent to a point where fans are willing to pay $100 or more per ticket to see them perform. The live music industry will need to build this new role into its long-term business model.

The role of festivals in A&R is likely to increase as festivals rely most heavily on musicians to sell their tickets. This differs from an arena or stadium whose major motivation is to book any act that can fill up its seats, including, for example, stand-up comedians whose staging costs are generally far lower.

Television's role in identifying new talent may start placing an increased focus on acts that are great recording acts but are even better at touring.

Bottom line

As festivals start to become more involved in nurturing talent, one of the promotional activities they are likely to take on is the release of new albums and singles (and all of the marketing activity that goes with it). This is likely to remain the principal way to raise awareness of bands and their latest outputs; for many fans, seeing a number one single performed live is likely to remain a key selling point172.

The live music industry might want to co-invest in the A&R process with companies outside of the music sector that wish to use music to promote their products. Given society's seemingly limitless affection for music, most vertical sectors – from fashion to mobile phones to automobiles – would likely value an association with music. Live music businesses could tap these brands to help pay for part of the talent development process, such as the funding of recording studios173.

The record companies' traditional A&R process was very effective, but also very resource intensive. In today's environment where music fans seem to value a live experience more than a recording, the live music industry might be in a better position to identify top talent – specifically, the talent that can really deliver on stage.

The various players in the live music industry must recognize their common need for an ongoing pipeline of new acts to replace the existing big draws – and they must take combined action. Over the next few years, label-sourced A&R is likely to decline by roughly $500 million per year globally. It seems reasonable to assume that the live music industry – or other source of funding – will need to step in to prevent the well from running dry.

Pop Goes Pop-Up: Music Retail Goes Seasonal and Temporary

Deloitte predicts that 2011 revenues for digitally distributed music will exceed physical music sales in at least one major market, most likely the United States. This long-anticipated event will probably be driven by a sharp decline in CD sales, rather than a significant increase in digital music subscriptions or downloads174.

This likelihood leads to a related prediction: CD retail will start becoming a seasonal or event-driven purchase. By the fourth quarter of 2011, there could be 1,000 temporary "pop-up" music outlets created to meet occasional surges in demand. Pop-up outlets will be a small, but growing, niche segment175.

In 2011, the United States will likely be the first of the big-three recorded music markets to see digital music revenues from downloads, subscriptions and streaming services advertising surpass revenues from physical music. The UK is likely to follow, either in 2011 or by the end of 2012176, assuming CD sales continue their steep decline177. To put the severity of this decline in perspective, CDs made up 75 percent of record labels' 2009 revenues in the United Kingdom.

The decline in the CD market is likely to cause a marked reduction in year-round shelf space dedicated to physical music. Even with fewer competitors, dedicated music retailers may decide that their shrinking revenues and profit margins make physical music retailing less viable178. Some may diversify, shifting their focus from recorded music to equipment for playing music, concert and festival tickets, or music-related clothing.

Rather than selling popular hits, other music retailers may specialize in music genres that would be harder to discover on the Web. Their aim would be to attract fervent music fans who are willing to pay for music. These niche markets will likely make up only a small portion of total album sales, similar to vinyl record sales. For example, in the United States, vinyl sales grew 250 percent from 2006 to 2009. However, the end result represented only 2.5 million units out of a total album market of 374 million179.

Despite the shift toward digitally distributed music, physical music retailing will not vanish: while demand for CDs in the medium term will continue, it will become increasingly seasonal. In 2010, nearly half of all CDs sold in the United Kingdom were expected to be purchased during the fourth quarter, driven by seasonal gifting and the finale of music talent shows180.

Retailers will likely respond to variable demand by creating pop-up stores. Current music retailers might establish a variety of temporary stores, including conventional retail spaces with short-term leases181, temporary outlets in high traffic locations182 and small-scale outlets offering curated, exclusive merchandise183. These curated outlets could be located wherever and whenever there are people who want to buy CDs, such as at live music venues184.

In the medium term, pop-up stores may also be set up to coincide with major record releases. A long line of fans eager to purchase a new release from a pop-up store could generate marketing buzz and increase record sales.

General retailers, such as department stores and supermarkets, may abandon selling CDs year-round if their turnover and margin targets are not met. Instead, they may only stock CDs when demand is stronger, such as during gift-giving seasons or major music events. In some cases, music might be sold from a pop-up outlet physically located within the main store185. During the rest of the year, music might only be available from the main store's website186.

Bottom Line

The next few years will probably remain challenging for music retailers. The one bright spot is that CD prices could rise over the medium term as dedicated CD buyers have fewer outlets to choose from. CDs could follow the path of vinyl LPs, which rose significantly in price following their exit from the mainstream.

Music fans who prefer CD audio quality might be willing to pay a higher price. However, price increases will not compensate for a continuing decline in unit sales; net revenues from recorded music will continue to decline.

Nevertheless, because recorded music provides crucial exposure for musicians, it is likely that record labels and other music promoters will continue to produce CDs – even at a loss.

Footnotes continued

154. World Video Games Market: Data and Forecasts 2010-2014, IDATE, 2 June 2010:

155. One study suggests $41.5 bilion for portable game piracy alone. Japan's Computer Entertainment Supplier's Association report dated 4 June 2010 cited in Slashdot, 8 June 2010: and (in Japanese)

156. Homefront Studio: Rising dev costs post greatest challenge to games industry, Interview with Zack Wilson of Homefront/THQ, 14 September, 2010:

157. Xbox birthday signals death of 5-year console cycle, CNET News, 29 November 2010:

158. PlayStation 3 is "most connected" console in US, The Diffusion Group Research, 12 April 2010:

159. An article titled 'Game Hacking 101' which is sample chapter from the book 'Exploiting Online Games: Cheating Massively Distributed Systems' published by Addison-Wesley Professional, InformIT, 21 November 2007:

160. Microsoft redeploys Massive technology, Microsoft website, 20 October 2010:

161. Cloud gaming means sky's the limit for any PC, Guardian, 24 November 2010: Although the issue is complex: some think that GaaS is being pushed out by F2P, while others who went from subscription to F2P are now going back to subscriptions.

162. Lord of the Rings Online Revenue Doubles Since Going F2P, MMO Hut, October 2010:

163. A blog on 'Top Moneymaking Online Games Of 2009', Forbes, 10 June 2010:

164. EA: Free-to-play will threaten console business, News at GameSpot, 5 November 2010:

165. Nvidia describes 10 teraflops processor, EE Times Europe, 18 November 2010:

166. To provide context of the scale of investment that can go into promoting a new release, Taylor Swift's October 2010 release, "Speak Now", which sold a million copies in its first week on release, was backed by a two-year long marketing campaign. Source: Taylor Swift Album Is a Sales Triumph, New York Times, 3 November 2010:

167. New report shows how much record companies are "investing in music", Music Industry Report Press Release, 10 March 2010:

168. Live music boom drives off recording blues, Financial Times, 20 August 2010:

169. Top tours of the decade 2000 – 2009 in North America, Pollstar:

170. See attached for a discussion on the potential impact of a rise in value added tax on the live music sector. Source: Budget threatens ticket price hike as global live music biz sags,, 17 June 2010:

171. One other factor cited for the performance of the U.S. box office was the concentration of events within the same few months. Source: Live Biz Hit By Summer Slump, Cancellations,, 16 June 2010:

172. One reason attributed to lacklustre demand for some U.S. touring acts was the lack of recent album or single releases. Source: Live Biz Hit By Summer Slump, Cancellations,, 16 June 2010:

173. For example, Converse has set up a community-based recording studio in Brooklyn, New York. See: We are opening a community-based recording studio in Brooklyn. For real., Converse, 5 October 2010:

174. According to the IFPI, in 2009 CD sales fell by 12.7%, losing $1.6 billion in value; digital downloads grew by 9.2%, gaining less than $400 million in value.

175. In 2010, one chain, ToysRUs opened 600 pop-up toy stores in the U.S. alone. Source: Boo! Pop-Up Stores Popping Up All Over, NPR, 19 September 2010:

176. Deloitte's view is that it is feasible that physical sales recapture the lead over digital distribution in markets where it had already been overtaken. If in 2012 there were a strong roster of album releases by the type of artist that is favored by mature audiences, this would boost CD sales, as this age group tends to buy physical product rather than downloads, particularly in gift-giving season. Any regained lead would probably be short-lived.

177. For perspectives on other markets, see: for Canada: Industry looks to the titans to revive flat sales, Metro News, 25 November 2010:

178. One of London's largest music stores is scheduled to close in 2011. Source: HMV to leave Oxford Street store, Retail Gazette, 18 November 2010:

179. U.S. vinyl record sales. Source: Top Ten Selling Vinyl Albums of 2009,, 10 January 2010:; U.S. 2009 album sales. Source: U.S. album sales fall despite Michael Jackson boost, Reuters, 6 January 2010:

180. X Factor finalists top UK chart with Bowie's Heroes, BBC News, 28 November 2010:; Take That album sales frenzy,, 16 November 2010:; Industry looks to the titans to revive flat sales, Metro News, 25 November 2010:

181. HMV to open pop-up shops, BBC 6 Music News, 19 October 2009:; Pop up shops,

182. For an example of this approach in the jewelry sector, to address demand in the run-up to Valentine's day, see: Signet Group jewellers open pop-up stores for Valentines,, 8 February 2010:

183. For an example of how pop-up stores have worked in other sectors, see: The pop-up shop phenomenon, Sunday Times, 28 December 2008:; for an example of how pop-up stores have worked in food retail, see: Marmite reopens pop-ups, Marketing Week, 20 October 2010:

184. For some examples of deployments of music stores, see: Third Man pop-up stores to hit London this week,, 27 October 2009:; The Black Keys release Brothers + NYC pop-up store + 2010 tour dates, bandweblogs .com, 11 May 2010:

185. Popping for Shoppers, Hub Magazine, February 2010:

186. 'X Factor effect' boosts profits, says Sainsbury's boss, Independent, 10 November 2010:

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.