UK: TMT Trends: Predictions, 2006 - A Focus on the Media Sector

Last Updated: 2 February 2006
Article by Igal Brightman

Most Read Contributor in UK, August 2017

Foreword

Welcome to the 2006 edition of Deloitte Touche Tohmatsu’s (DTT) Technology, Media and Telecommunications (TMT) predictions for the global media and entertainment sectors.

These predictions are the result of comprehensive research throughout 2005, the principal elements of which include:

  • input from DTT’s member firms’ 5,000 TMT partners, directors and senior managers around the world;
  • conversations with DTT’s member firms’ clients;
  • dialog with leading industry and financial analysts.

Accompanying each of these ten predictions is the DTT TMT group’s bottom line: the suggestions to the sector for exploiting each key development that the coming year holds. DTT’s TMT group trusts that this guidance makes this report a valuable reference for your company. On behalf of DTT and the TMT practices of its member firms, may I take this opportunity to wish you all the best for 2006.

Igal Brightman
Global Managing Partner
Technology, Media & Telecommunications

Executive Summary

In 2006, the global music industry should continue its digital revolution, with digitally distributed music occupying a growing share1. Online music has the best potential for medium-term growth, and this sector’s expansion through the year should be driven by a number of supply-side improvements, from cheaper MP3 players to the emergence of specialist online music stores. The threat of lawsuits will likely become more menacing than ever, suppressing any thoughts of illegal downloads for many2. Digital music will likely be most successful when sold in the format appropriate to the device and the distribution network. Thus, while the market for mobile ring tones should remain robust, revenues for MP3 downloads to mobile phones may stay miniscule in most countries.

As for the video world, 2006 should see three distinct trends and events: television will literally get bigger3, Internet protocol television (IPTV) should become reality4; and high definition TV (HDTV) will likely finally establish a global footprint5. Television’s expansion in 2006 should certainly be in terms of the size of the television set, with the average television screen size rising, driven by fierce price competition in the flat panel television market as well as the increasing availability of HDTV content. However the success of flat panel televisions, based on liquid crystal display (LCD) and plasma technologies, should not signal the demise of cathode ray tube (CRT) televisions, which should remain strong sellers in developing nations6.

The year should witness the launch of various IPTV services around the world. For content providers, IPTV will probably be just another distribution channel and a relatively small one at that. For telecommunications companies, IPTV will likely be seen as a central element of a triple-play growth strategy. All players in the value chain will likely be eager to demonstrate a strong return on investment from IPTV.

By year end, HDTV should have established a foothold throughout the world, with Europe, the last region lacking an early adopter base of HDTV owners, finally embracing high definition. Meanwhile, HDTV coverage in the established HDTV markets of North America and Asia Pacific should continue growing steadily7.

Digitization of the production process will likely progress across all media sectors. The two principal drivers will most likely be cost savings and revenue growth. Digitized production should typically result in lower costs, as fewer staff will likely be required to get the same amount of work done. Digitized media production should enable a variety of new revenue streams for any media company. It can make content archives more accessible. It can automate digital rights management. And it can make the repurposing of content easier. Revenue growth should be the most convincing reason to move to digitization, yet some media companies may not be investing enough time and effort to understand how the two can be linked.

One of the easier predictions to make is that the video game market should have a strong year, boosted by the launch of two new consoles in 2005 and another in 20068. The industry is likely to make its first major attempts to broaden the appeal of gaming beyond young males. New genres are expected to appear, including educational games and games aimed at female audiences9. These new genres may have only limited impact initially, but could sustain the industry’s overall growth over the medium-term by significantly increasing the addressable market. Video games may also become a victim of their own success: the more compelling and pervasive video games become, the greater the chance of backlash from concerned parents, politicians and spouses.

The business model for radio will likely be on the cusp of significant change10. Historically radio has been funded by advertising, and to a lesser extent, public subsidy. Although this funding will continue, radio stations will likely start to generate an increasingly diverse mix of revenue streams, satisfying an increasingly varied and geographically dispersed demand for radio content. Radio listeners – who may soon be referred to as customers – will likely enjoy increasing control over: what they listen to, when they listen to it (live broadcast or time-shifted playback), and on what device. They may also get to choose the amount of advertising they are exposed to and there should be increasing opportunities to purchase content.

The media industry should increasingly regard fragmentation as a benefit over the coming 12 months, rather than a drawback. It may well realize and exploit the fact that the more formats in which a product or service is offered, the greater the potential demand11.

Convergence will likely become an increasingly important element of value generation as the array of converged products and services widens. IPTV12, video-on-demand over the Internet13, podcasting14 and other services will likely grow throughout the year and should serve to demonstrate that convergence is both real and valuable.

2006 will likely see the number of personal weblogs (blogs) rise to over 60 million worldwide15. However, the average quality, relevance and value of each blog will likely decline. Whilst a minority of blogs will likely be skillfully written, interesting and well argued, a growing proportion may not appeal to a mass market audience and may soon be abandoned. The rising scarcity of quality blogs may catalyze the emergence of the blog aggregator, specialized in identifying the best quality content. There may also be rise in the number of professional journalists who rebrand and repurpose their existing writing as blogs in order to reach a wider audience.

The digital music revolution has only just started

In 2006, the global music industry is expected to continue its digital revolution. Although physical product should still dominate revenues, digital distribution will most likely occupy a growing share. By the end of the year, music distributed in purely digital form is likely to account for roughly 20 percent of total music revenues, with eight percent expected to come from legal downloads and 12 percent from ring tones (see Figure 1).

The digital music product with the greatest potential for medium-term growth is likely to be online music: the mobile ring tone market may be maturing. Growth in the former will likely be catalyzed by a range of supply-side improvements. The range of music available online will likely continue to expand, with leading stores offering many millions of titles by year-end16; the number of online music stores is expected to swell; the range of online-exclusive content should expand; and the commercial availability of online music will likely extend to more and more countries. The target market for online music is also expected to swell as broadband penetration deepens (per capita penetration is growing at over 15 percent per annum from a current base of ten percent or more in most OECD countries17). Furthermore, the range of digital music players should become more diverse than ever, ranging from $10 entry-level devices to expensive and sophisticated players aimed at purists.

And for those individuals still tempted by illegal downloads, the threat of lawsuits will likely become more menacing than ever, with fines rising and lawsuits being served in a growing number of countries18.

Digital music will likely sell best when sold in the most appropriate format for the end devices. Thus, while the market for song downloads to mobile phones will likely remain miniscule in most countries, the market for ring-tones, designed specifically for mobile phones and mobile phone networks, should remain healthy but stable – generating over $5 billion19 in gross revenues in 2006.

Yet the digital music industry will likely continue to resemble the traditional music industry. Packaging formats are expected to remain largely the same (a focus on single tracks and albums); contracts will probably change little; and broadly speaking, there will be little innovation that fully leverages the capabilities of the online and digital worlds.

Bottom Line

In 2006 and beyond, the music industry has an opportunity to rewrite its rules, with digital distribution serving as both catalyst and foundation.

A first challenge for the music industry is how to sustain the growth of digital distribution. One approach could be to introduce specialized online market channels, catering to progressively smaller niches. This could be done by creating sub-brands, and by launching specialty brands. Each niche brand could focus on a particular genre, from opera to urban20, with the corresponding specialty website offering a broad range of complementary content, from out-takes to interviews, which would otherwise be hard to find on a mainstream music site. The specialty sites could also offer content at varying quality levels and in various packages, depending on the needs and preferences of their particular niche. For example, opera lovers might demand CD quality downloads, while pop music fans might be happy with standard MP3 quality21; younger audiences might find renting music packages containing perhaps a half-dozen tracks more appealing and affordable than full albums.

Music companies should look for ways to make online music available to everyone, not just the current minority of people with a broadband connection, PC and credit card. Online music companies should install booths in a variety of retail locations, from shopping malls to train stations, allowing customers to select music and have it immediately downloaded to their MP3 players or burned to a CD. The industry should also offer a variety of purchasing options that are easy to understand, such as pre-pay, gift tokens and subscriptions.

Finally, the music industry should collaborate with consumer electronics manufacturers to develop MP3 players that could be used to purchase music directly – without a PC – eliminating a major barrier to ubiquitous online music sales. Such devices would need built-in broadband connectivity and a display screen large enough to present the available music titles and complete the sales transaction.

Bigger remains better for television

The average screen for watching TV and video is likely to become bigger than ever in 2006, driven by fierce price competition in the flat panel television market as well as the increasing availability of HDTV content.

A growing range of 42-inch flat panel television sets should become available under the psychologically important price of $1,000, driving demand for large television sets22. The completion of new flat panel television factories should allow price to fall further, ramping up demand for large televisions, both as principal and secondary sets within homes. In North America and Asia Pacific, close to ten percent of all televisions sold in 2006 are forecast to be both large format and high definition.

While shipments of flat panel televisions will remain significantly lower than for the incumbent CRT technology (see Figure 2), the higher average selling price of the latter may allow flat panel television revenues to exceed CRT for the first time23. CRT sales should however remain strong in developing markets, where CRT’s lower prices are better matched to current disposable incomes.

Against the background of demand for yet larger screens and increasing resolution, a number of companies will likely aggressively promote just the opposite: video viewed via mobile phone screens. Although hundreds of millions of phones should be capable of displaying video in 2006, on average users may only spend minutes every month watching video over mobile. This contrasts with dozens of hours that will probably be spent in front of large television screens24. Despite this, media companies, handset manufacturers and mobile operators will likely invest tens of millions of dollars developing video products and services for consumption over mobile phones.

Bottom Line

Television manufacturers have enjoyed recent success – albeit more in terms of sales than margins – from flat panel televisions. While demand for large, flat panel televisions should remain strong over 2006, thanks to falling prices, the industry should consider how to raise margin in the immediateterm while sustaining sales growth in the medium-term. A couple of approaches that the industry could take would be to differentiate more and to develop service revenue. Currently many panel television manufacturers appear to compete on size and price alone, with a consequence being to sell ever larger televisions for ever lower prices. Manufacturers could differentiate by designing specific models for different: rooms (from living rooms to kitchens); age groups (e.g. embedded parental controls for kids, high ease-of-use for adults) and purposes (e.g. fast refresh rates for video games, high clarity in medical environments).

Manufacturers should not turn their backs on the less glamorous CRT television, for which demand should remain strong in developing countries25, where television remains the privilege of a small but rapidly expanding group of people. There are still only 1.2 billion television homes – implying scope for many more sales26.

Of course, the customer should not be overlooked. The industry should ensure that customers do not get overly confused, by not only the growing diversity in television technology, but also the increasing range of distribution options, the coexistence of digital and analog signals27 and the emergence of high definition. Consumers should only be presented with expanding options, rather than mounting complexity. Functionality, not technology, should govern the way choices are presented.

As for television over mobile, the industry should consider the success of small format television over the past few decades, and also ask whether, while audio miniaturizes well, for video, bigger is always best28.

Digital gets deeper into media production but not everyone profits

2006 should see even more digitization of the production process in all media sectors. The two principal drivers will most likely be cost savings and revenue growth.

Digitized production should typically lower costs as fewer staff will likely be required to get the same amount of work done. In some media companies, up to 50 percent of staff in some divisions may be made redundant. Journalists may take over a large part of the production process, removing the need for dedicated producers. Tape editors, whose tools are scissors and tape, may no longer be needed. Job losses will likely be an unavoidable consequence of digitization for most media companies. Yet for some companies, the cost savings enabled by digitization may well mean survival.

Digitized media production should enable a variety of new revenue streams for any media company. It can make content archives more accessible. It can automate digital rights management. And it can make the digitization and repurposing of content easier.

The digitization of media production can also make it easier to supply content in the right format. For instance, recorded interviews for a newspaper could also be sold as podcasts. Television and radio comedies could be turned into online talking books. All of the photos taken for a newspaper article – most of which never make it into print – can be made available to agencies and end-customers worldwide.

Revenue growth should be the most convincing reason to move to digitization, yet some media companies may not be investing enough time and effort to understand how the two can be linked.

Bottom Line

The imperatives for digitizing media production are compelling – for all sectors. However, media companies must give careful consideration to specific details such as timing, digital security and process change.

Media companies that move too early may end up suffering from unstable, immature technology that reduces rather than increases efficiency. They may also pay too much for technology that is on a downward price spiral. Laggards, on the other hand, are likely to find themselves outpaced by competitors who are quicker to achieve reliable revenue sources and an efficient cost base.

Media companies undertaking widespread digitization of production facilities should also protect themselves against new risks such as increased vulnerability to hackers and intellectual property theft. For example, moving to network-based storage provides greater access and immediacy, but may also expose a media company’s most precious assets to viruses and pirates – neither of which was a critical issue when content was held on tape in a store room. Every media company board should be asking tough questions such as: what happens if the network gets infected by a virus, or a hacker starts corrupting files? What if a worm with a destructive payload starts wiping the archive? Big brand media companies are likely to be a hacker’s dream.

Most importantly, media executives should understand that the move to digitally media production is not just a technology refresh. It also demands new skills and new processes. Creative staff will probably need to develop information technology skills – as will suppliers and temporary staff. Processes throughout the production function will likely need to be redesigned around the new technology so the impact is not marginalized. Companies may also need to change their view on back catalog sales, treating them as a key element of the bottom line, not just a bonus.

Finally, media companies should bear in mind that there will likely always be ongoing opportunities to digitize media production. For example, the newspaper sector may have thought 25 years ago that the move to desktop publishing would complete the digitization process. But then the Internet came along, bringing new challenges such as websites, portals and, most recently, blogs. A similar dynamic is likely to affect every type of media – from book publishing to television broadcasting – making it imperative for companies to think well beyond the current generation of technology.

Video game sector enters next generation

One of the easier predictions to make is that the video game market should have a strong year, boosted by the launch of two new consoles in 2005 and another in 2006. The new consoles have unprecedented processing power for their size and price, and are expected to drive global game sales to $23 billion in 2006 (see Figure 3). Sales growth should also be driven by continued tie-ins between films and games – with multiple games platforms providing effective cross-marketing for selected blockbuster movies.

2006 should also see the industry’s first major attempts to broaden the appeal of gaming beyond young males. New genres are expected to appear, including educational games and games for female audiences. These new genres may have only limited impact in 2006, but could sustain the industry’s overall growth over the medium-term by significantly increasing the addressable market.

Although the overall outlook for the video games sector in 2006 should be positive, there may still be significant challenges. Games for the new consoles will most likely be significantly more sophisticated, and should cost significantly more to develop (see Figure 4). License costs for the most popular media brands, from sports to movies, are also expected to remain high.

Video games may also become a victim of their own success: the more compelling and pervasive video games become, the greater the chance of backlash from concerned parents, politicians and spouses.

Bottom Line

The recent or planned launch of three major games platforms should make 2006 a strong year for the video games industry. However, companies would be wise to focus their attention on building a foundation for future growth, rather than dwelling on their success. Given the games sector’s over-cyclical nature, there is simply no room for complacency.

The industry should strive to broaden its appeal, both demographically and geographically. Young males are the life-blood of today’s video games market, and many game titles and related products are heavily targeted at a male audience. Yet the female population also has a strong appetite for games, as demonstrated by the spectacular success of crossover games such as The Sims. Manufacturers and games publishers should invest in creating products and services specifically designed for a female audience, and industry groups should measure progress by tracking the extent to which females purchase consoles and game titles.

Electronic games revenues are dominated by North America, Europe and Japan, which currently account for 90 percent of global sales29. The billions of people in the rest of the world have less disposable income for games and such, but that discretionary income is rising steadily in certain regions. The industry’s challenge is to offer video games in an affordable format, with culturally appropriate content.

Electronic games are becoming increasingly pervasive in our culture, raising the prospects of an anti-gaming backlash. As children spend more time playing video games, parents tend to spend more time thinking about taking the games away. Indeed there have already been a few alarming cases of fatal addiction to video games. The games sector needs to be aware of public concerns and respond accordingly. On-screen timers and automated shut-off (with time-limits set by parents) could be easily incorporated into games, addressing the issue before it becomes a real problem.

Companies should also explore ways to extend the revenue potential of a game beyond the initial purchase. Next generation consoles all have built-in broadband access that could be used to sell a diverse range of digital content, from new game levels and character upgrades to cheat codes and multi-player tournaments. The network connection could also be used to pipe in localized and even personalized advertising.

Finally, as console-based development costs rise (seemingly without limit), some publishers may want to consider changing platforms. Handheld games typically cost less to develop and publish. Similarly, mobile games are generally very simple and thus relatively inexpensive. Electronic toys are another potential platform, with the falling cost of technology making it possible to build electronic games into almost every toy. Indeed one of the best selling toys during the 2004 holiday season was a digital spinning top that featured four built-in games.

IPTV supplements more than it substitutes

2006 will likely see a flurry of activity around IPTV, with numerous services being launched around the world, primarily by telecommunications network operators. For content providers, in 2006 IPTV will probably be just another distribution channel and a relatively small one at that. For telecommunications companies, IPTV will likely be seen as a central element of a triple-play growth strategy. All players in the value chain will likely be eager to demonstrate a strong return on investment from IPTV.

The good news is that IPTV should see relatively strong growth in 2006: some analysts predict that by year-end IPTV may represent about five percent of the global market for digital TV (see Figure 5). However, the less encouraging news is that IPTV may well remain a niche service in most markets30. One likely obstacle is the lack of networks with sufficient bandwidth (at least five mbit/s)31 to deliver IP-based television signals at a quality equivalent to satellite, cable or even standard television broadcasts. Although there should be several hundred million households with broadband connections by the end of 2006, the majority of these connections may be too slow to deliver IPTV with consistently competitive quality.

A key challenge for the majority of IPTV service providers with a telecommunications heritage will likely be their relative inexperience selling media services. Established broadcasters have many decades of experience commissioning and delivering content, including, in some cases, video-on-demand. Telecommunications operators have none. And while long-established operators have colossal client bases to which they can promote IPTV, and have proven their ability to convert nearly a third of those customers to triple-play services, growing demand beyond that mark may be a challenge32.

Bottom Line

IPTV has the potential to impact the telecommunications and media sectors both positively and negatively. To ensure the former outcome, the IPTV industry needs to:

  • Divide the value chain. There is a risk of telecommunications and media companies competing directly against each other. Co-operation would be a more productive approach.
  • Understand IPTV’s unique benefits. IPTV represents a powerful platform for interactive, value-added television services. But it may not be a viable replacement for existing broadcast technologies (unless it can deliver equivalent service at a lower price). Instead, its ideal role might be to complement traditional forms of television. The industry must determine the best way to use IPTV, and identify unique IPTV services that are valued by customers, yet unavailable via any other platform.
  • Get the timing right. IPTV should ideally not be launched until it is genuinely competitive with the more established alternatives. Unwanted services, confusing marketing, incomplete alliances and untested technology may well give IPTV a bad name.
  • Use IP when necessary. Although IPTV offers unprecedented interactivity and choice, the average viewer may not want three hours a day of totally personalized, interactive and self-determined programming. Companies must balance the technology’s capabilities against the slowly evolving needs and preferences of customers. A balance of one-way broadcasting and IPTV based interactivity may be a better approach.
  • IPTV should just be called TV. The vast majority of customers are unlikely to know or care what IP is, or what it does. Operators should simply refer to their service as ‘TV’, and keep the technical details to themselves.

Tuning in to Radio 2.0

The business model for radio will likely be on the cusp of significant change in 2006. Historically radio has been funded by advertising, and to a lesser extent, public subsidy. Although this funding will continue, radio stations will likely start to generate an increasingly diverse mix of revenue streams, satisfying an increasingly varied and geographically dispersed demand for radio content.

Radio listeners – who may soon be referred to as customers – will likely enjoy increasing control over: what they listen to, when they listen to it (live broadcast or time-shifted playback), and on what device. They may also get to choose the amount of advertising they are exposed to and there should be increasing opportunities to purchase content.

This suggests that radio stations should enjoy a growing range of opportunities to charge for content and advertising.

Customers who miss a broadcast can buy a replay; classic archive broadcasts can be sold as downloads; the best content could be reserved for subscribers only; high definition audio could garner a premium. Furthermore the growing digitization of radio archives could be opened up and licensed to content aggregators. Listeners accessing broadcasts via Internet Protocol (IP) networks can be monitored more accurately than those listening via traditional radios, enabling new approaches to charging for advertising33.

As new forms of consuming radio emerge, traditional radio will likely remain a genuinely mass medium – with an installed base of 1.8 billion radio sets worldwide34. Regular AM/FM radio will continue to attract a healthy share of global advertising spending.

Bottom Line

The days of radio as a single, broadcast product, are coming to an end. Through offering consumers a widening scope of ways in which to consume radio content, the radio industry has the potential to boost its revenues significantly. Preparation will be key: what is happening is far more than just an explosion of distribution options. Rather, the business model for radio is being rewritten. The implications of Radio 2.0 that require consideration include:

  • The globalization of local radio. Radio stations should no longer regard their broadcasts as regional or national: every radio station can now appeal to a global audience. As foreign listeners will often be accessing via the Internet, far more accurate audience tracking than is undertaken of conventional radio listeners is possible, implying better service for advertisers. Furthermore there is scope for delivering localized, and even customized, advertising.
  • The digitization of the radio archive. Particularly where content is proprietary (such as drama, comedy, news and sports) radio stations now have significant opportunities to repackage and resell content commissioned over the last few decades. Digitization also enables revenue generating replay services for listeners who missed the original broadcasts.
  • The emergence of subscription radio on a global scale. The radio sector should learn from the experience of television, which in some key markets evolved from advertising-dominated to subscription-dominated in just a few decades.
  • Delivering choice, not complexity, to customers. Digital radio platforms offer enormous technical flexibility, from time shifting to digital recording. These features, along with electronic programming guides, reminders, recommendations and other conveniences, should be used to ensure that the next generation radio experience is noticeably better than its predecessor. At the same time, however, simplicity must be central to all players’ strategies. Radio is a very simple, easy-to-use medium, and consumers have had many decades of experience with AM/FM radio sets. Making radio functionally more complex serves no one. Radio 2.0 must be as intuitive and easy to consume – if not more so – than the current version.

Fragmentation bears fruit

During 2006, the media industry is likely to regard fragmentation increasingly as a benefit, rather than a drawback. The media industry may well realize and exploit the fact that the more formats in which a product or service is offered, the greater the potential demand. Underlying the opportunity is the fact that media consumption and spending across both traditional and new media forms is rising (see Figure 7)35.

Though the exact consumption mix varies widely by country, the trend is broadly positive on a global basis – Internet, radio, television and newspaper consumption are all growing. Given the parallel growth in DVD sales and rentals, cable and satellite television subscriptions, satellite and digital radio subscriptions and other new lines of business, and it seems likely the media industry should see 2006 as something of a renaissance.

This should come as no surprise. Rising media consumption is being fueled by the major investments a number of industries have made in new technologies. From broadband connectivity to digital audio broadcasting, most media organizations have been presented with new routes to market and new product formats, made possible by new platforms, devices and electronic media. And with those technologies maturing, the progress of audience fragmentation is likely to quicken.

A fragmented audience is also a more specific audience, and one that can be more precisely targeted by advertisers. Though the practices are still in their infancy, 2006 should see a growing number of attempts to advertise to such audiences – through embedded advertisements in console games, banner ads on mobile phones and audio ads interspersed in podcasts. All of these developments should be interesting, but will most likely not affect the capacity of more traditional media – most notably television and radio – to attract the lion’s share of advertising dollars.

Bottom Line

Audience fragmentation should be embraced and exploited by all sectors of the media industry. Technological advances, as well as rising disposable income, make fragmentation inevitable. The resulting steady erosion of the mass audience is a development that media companies should control and capitalize on – not lament. If they approach it strategically and start planning now, in all likelihood it will only add value. Although full fragmentation will not happen overnight, media companies should be ready.

Consumers will likely still gravitate towards quality content; and they should still be loyal to the media brands they know and trust. But over time, they may also supplement their core consumption with other, more personalized activities, often supplied by the same familiar brands. From downloading movies over the Internet to digital radio subscriptions, customers may increasingly be willing to pay a premium to get exactly what they want, when they want it. And in so doing, they may also unknowingly identify themselves to potential advertisers, enabling more precisely targeted promotions. Such niche audiences may well quickly be recognized as a substantial opportunity, demonstrating a higher propensity to spend on content because they are comprized of increasingly well documented and well understood segments, and because they should be relatively easy to target for cross-selling and upselling.

Media companies should focus on exploiting fragmentation while also bearing in mind that most customers, most of the time, will probably still want to be spoon-fed with content. Only a tiny portion of customers are likely to want totally customized content all the time. The chances are most customers may want to supplement their core consumption with personalized content; and monetizing this personalized consumption – where possible – should be given high priority.

Finally, media companies must examine the legal rights associated with their content sooner rather than later. With the recent explosion of new media formats and devices, the rights owned by many media companies may prove inadequate. It is important that companies carefully examine the extent to which the rights they have been granted over any given piece of content permit distribution via new media. This is a particularly important issue with archive content, much of which was created prior to the digital age. Media companies must take time now to ensure that appropriate rights have been negotiated, so as to avoid the potential for future litigation.

Convergence consolidates

2006 should be a year of consolidation for convergence, which will likely become an increasingly important element of value generation as the array of convergence products and services widens. IPTV, video-on-demand over the Internet, podcasting and other services will likely grow throughout the year and should serve to demonstrate that convergence is both real and valuable.

Convergence is likely to receive several important boosts during 2006. The underlying technologies required to make convergence a reality may mature to the point that technology per se no longer represents a major barrier. Broadband penetration will likely continue to grow, and average bandwidth per connection should rise; mobile penetration should continue its upward trend; and next generation fixed and mobile networks should become more widespread.

End-user devices – from home media hubs to portable media players, digital gaming consoles to mobile multimedia phones – are all likely to continue growing in popularity as costs fall. Increasing diversity in the product range is also expected to encourage strong uptake, combined with improvements in design and usability. The home media hub will likely be of particular significance, with forecasts of strong growth and sales of over 15 million units in 200636. Such systems will likely become much more practical and easy-to-use during the course of the year, encouraging both adoption and usage.

Video content may well be the primary beneficiary of convergence. Video-on-demand over broadband networks and IPTV are both expected to demonstrate good growth, though they may remain a tiny niche compared to established media (especially broadcast television). Audio content in the form of podcasts should also illustrate the power of convergence (see Figure 8). Tens of thousands of podcasts37 are forecast to become available, and may form an ever greater part of the public’s audio consumption38, particularly as mobile phones become capable of replaying podcast content39.

However, not all convergence will succeed. A tendency towards contrived products and services is likely to continue to blight the industry. Some companies will likely continue trying to shoehorn more and more functionality and content into devices – in the name of convergence – producing lowest common-denominator products with little market appeal. Others may continue trying to migrate content onto new media – simply because the technology allows it to be done – and this will likely do little to generate value. Mobile television may be the most obvious example of convergence failure in 2006.

As always, the difference between success and failure will likely be the extent to which customer needs are acknowledged, respected and served – and the extent to which convergence is properly viewed as just one of many ways to address customer needs.

Bottom Line

Convergence has always been an exciting – but challenging – area for the TMT industries. It is neither product nor service, segment nor strategy. Rather, convergence is a conceptual model describing how the telecommunications, media and technology industries can potentially interact to generate value.

Companies must always remember that successful convergence relies on creating value for the customer. While 2006 should illustrate more clearly than ever that value creation is possible, convergence may well remain complex, particularly as media companies have historically had limited control over the total customer experience. Furthermore, media companies should always remember that while the term convergence is relevant within the industry, it has far less meaning for customers.

As convergence produces an increasingly diverse mix of devices capable of media consumption, connected by a growing variety of networks, media companies should ensure they are well positioned to exploit the shifting dynamics of the market. This generally means partnering with other companies; overseeing the quality of the customer experience and creating and packaging content appropriately for each emerging area.

Timing is also key: the media industry stands a far greater chance of success if it initiates a convergence product or service, rather than being invited to join. Media companies need not play second fiddle to telecommunications companies or technology firms, acting only as suppliers of content. Many media companies have strong brands, established and powerful routes to market, loyal customers. These skills should be brought to bear in 2006, to help ensure media companies get their slice of the action.

HDTV goes global

By the end of 2006, HDTV should have established a foothold throughout the world, with Europe, the last region lacking an early adopter base of HDTV owners, finally embracing high definition40. Meanwhile, HDTV coverage in the established HDTV markets of North America41 and Asia Pacific should continue growing steadily.

HDTV’s temptation in 2006 will be manifest in two main areas: soccer and video games. 2006 will see the first major global sporting event offered in high definition format – the soccer World Cup42, with most demand for HDTV coverage likely being concentrated in Europe and Asia Pacific. The soccer World Cup should create strong awareness of HDTV products and technology and a wealthy minority of soccer fans may feel compelled to purchase large-format HDTV sets. A significant number of bars and clubs showing the tournament are likely to acquire HDTV to attract customers.

In addition, two major new games consoles, Microsoft’s Xbox 360 and Sony’s PlayStation 3, both featuring high definition output, should enjoy strong sales. Analysts predict 35 million game consoles will be sold in 200643, with up to 50 percent of them being capable of high definition imagery, driving demand for HDTV – particularly in the United States and Asia – as gamers upgrade from their standard televisions to get the maximum benefit from high definition titles44.

The quantity of high definition television broadcasts and programming is growing. And the format’s appeal should rise yet further if HDTV owners were to purchase the set top box required to process HDTV signal. Only a third of HDTV households have this facility45.

Bottom Line

HDTV should finally develop a toehold in all regions by the end of 2006. Now that the launch phase is nearing completion, the industry should be planning hard for HDTV’s medium-term roll out, which should see HDTV convert into a mass-market product.

HDTV manufacturers should work together with broadcasters, advertisers and regulators. Broadcasters need to be persuaded to provide a steady increase in high definition content that justifies the purchase of high definition hardware. In addition, manufacturers and broadcasters should agree on how to present conventional definition content on a HDTV screen. The move to 100 percent high definition broadcast may take many years46; but the inferior resolution and fidelity of standard television signal should not make viewing of standard signal views on an HDTV set intolerable47. Otherwise some customers may choose to defer their purchase. Both HDTV manufacturers and broadcasters also need to work carefully with advertisers to develop campaigns that work well with both HDTV and conventional signals.

The transition to high definition amongst broadcasters is often driven by the broader move from analog to digital. Given that few countries will have moved entirely to digital before 2010, many broadcasters’ timeframes for moving to HDTV may sit at odds with the business plans of television manufacturers. HDTV manufacturers should therefore work closely together with regulators to ensure digital switchover timetables do not slip. The ball most likely sits in the manufacturers’ court – they will need to prove to regulators that there will be a sizeable market for HDTV content which is in the public interest. Manufacturers should also court public service broadcasters, whose support for HDTV can serve to both raise confidence in the format as well as bolstering public awareness48.

The commercialization of the blog

2006 will likely see the number of personal weblogs (blogs) rise to over 60 million worldwide. Over the course of the year, the number of new blogs created daily could rise to over 100,000 a day – more than one per second. However, the average quality, relevance and value of each blog will likely decline. Whilst a minority of blogs will likely be skillfully written, interesting and well argued, a growing proportion may not appeal to a mass market audience and may soon be abandoned. Currently, over half of all blogs cease to be active within three months of their creation, and only 13 percent of all blogs are updated more than once a week49.

Thus the challenge of locating quality blogs will probably get much harder, with the average reader finding it nearly impossible to locate blogs of interest. As a result, a new form of intermediary will likely emerge: the blog aggregator, most likely funded by advertising, and specialized in identifying the best quality content. The net impact should be increased blog readership, as average consumers are able to find the content they want more quickly and easily.

There may also be rise in the number of professional journalists who rebrand and repurpose their existing writing as blogs in order to reach a wider audience, and to drive traffic back to their employers’ websites.

Bottom Line

The continued popularity of weblogs has surprised some in the media sector. In many cases, the poor (and declining) quality of the average blog has led companies to dismiss all blogs as a short-term fad – a premature assessment that will likely lead to missed opportunities.

Media companies should regard blogs as an asset, not a threat. Professional blogs, written by existing staff, allow the news media to reach audiences via a more informal language. Responses to blogs can both inform the development of a story, and provide immediate feedback on quality; although media companies must carefully moderate the comments to ensure they are responsible and relevant.

Blogs can also provide a way for emerging writers to get noticed by prospective employers. Although the exploding volume of blogs will probably require extensive filtering, it is likely that during 2006 several bestselling books may be published based on content that first appeared in blogs.

Footnotes

1 Recorded Music, Enders Analysis, October 2004.

2 Biggest wave of actions yet announced against illegal file-sharing, IFPI, 15 November 2005.

3 LCD Television Prices Drop, CNet News, 28 July 2005; Display Search Reports Record Results for Flat Panel TVs, infocomm.org, 14 December 2005.

4 IPTV Winners and Losers, Goldman Sachs, June 2005.

5 106 Million HDTV homes forecast by 2010, dvd-intelligence.com, 27 November 2005, based on Informa Telecoms and Media data.

6 CRT Not Ready for Museum Shelf, iSuppli Corporation, 25 May 2005.

7 106 Million HDTV homes forecast by 2010, dvd-intelligence.com, 27 November 2005, based on Informa Telecoms and Media data.

8 Games Software Publishing – Strategies for Success, Screen Digest, November 2005.

9 Women gear up for the gaming invasion, bbc.co.uk, 30 June 2005.

10 Arbitron Survey sees Growth of Internet Radio, Silicon Valley Business Journal, March 2005.

11 Gaining Strength from Audience Fragmentation, The Hollywood Reporter, 3 January 2005.

12 IPTV Winners and Losers, Goldman Sachs, June 2005.

13 Video distribution and technologies key growth areas for 2006, tvover.net, 15 December 2005.

14 The Future of Digital Audio, Forrester Research Inc., 5 December 2005.

15 State of the Blogosphere Part 1 – Blog Growth, Technorati, August 2005.

16 Music industry escalates war on piracy, Financial Times, 15 November 2005; http://news.ft.com/cms/s/aae07cb2-55e1-11da-b04f-00000e25118c.html

17 Broadband Statistics, OECD, June 2005; http://www.oecd.org/document/16/0,2340,en_2649_34225_35526608_1_1_1_1,00.html

18 Biggest wave of actions yet announced against illegal file-sharing, IFPI, 15 November 2005.

19 Future of Mobile Music, MarketResearch.com, Key Note Publications, 1 November 2005;. http://www.marketresearch.com/product/display.asp?productid=1186547&SID=1428 20 For examples of specialists online music stores, see www.djdownload.com and www.musicgiants.com

21 For example see, MusicGiants - First Company to Offer High-Fidelity Downloads, Stereophile, 16 May 2005.

22 LCD Television Prices Drop, CNet News, 28 July 2005.

23 Display Search Reports Record Results for Flat Panel TVs, infocomm.org, 14 December 2005.

24 American Time Use Survey (ATUS) conducted by the Bureau of Labor Statistics (BLS); http://usgovinfo.about.com/gi/dynamic/offsite.htm?zi=1/XJ&sdn=usgovinfo&zu=http%3A%2 F%2Fwww.bls.gov%2Ftus%2F25 CRT Not Ready for the Museum Shelf, iSuppli Corp., Electronic News, 25 May 2005.

26 106 Million HDTV homes forecast by 2010, dvd-intelligence.com, based on Informa Telecoms and Media data, 27 November 2005.

27 HDTV – A Shopper’s Survival Guide, Business Week, November 2004.

28 For further discussion, see: Public Not Interested in TV on Phones, Entertainment Media Research, November 2005.

29 Games Software Publishing – Strategies for Success, Screen Digest, November 2005.

30 IPTV gets cool reception in UK, The Register, 22 November 2005.

31 For a discussion in download speeds required for regular television and high definition television, see: Requirements of the New IPTV Network: Beyond Optimization, IPTV Magazine, 4 October 2005.

32 IPTV Winners and Losers, Goldman Sachs, June 2005.

33 Arbitron Survey sees Growth of Internet Radio, Silicon Valley Business Journal, March 2005.

34 MSN Encarta Encyclopaedia, 2005.

35 Communications Industry Forecast, Verons Suhler Stevenson, August 2005.

36 It’s time for media to take center stage, CRN, 5 December 2005.

37 At the time of writing, almost 18,000 podcasts were available, based on the directory listing on podcast.net

38 The future of digital audio, Forrester Research Inc., 12 April 2005.

39 One of the first phones to support podcasts as standard is Motorola’s RoKR which includes Apple’s iTunes software. For more information on how podcasts are supported, see: http://www.apple.com/itunes/mobile/faq/

40 High Definition 2006, Informa Group, 15 December 2005.

41 For information on the growing range of HDTV sports coverage in the United States, see: www.hdsportsguide.com

42 For more information, see: http://www.fifaworldcup.philips.com/view4_2_1.php?country=global&lang=en43 40 Million Game Consoles To Be Sold in 2006,. Isuppli, 24 November 2005; http://www.xbitlabs.com/news/multimedia/display/20051124220342.html44 HD Era – the case for and against, Eurogamer, 16 March 2005. http://www.eurogamer.net/article.php?article_id=58262

45 Informa Telecoms and Media, November 2005, published on DVD-Intelligence.com. The Informa Group research stated - "Of the near 20 million HD households at end-2004, 5.9 million had the necessary set-top box (or integrated HDTV set) to enable content to be viewed. i.e. they were actually viewing HD content, rather than simply having the potential to do so. This means that less than a third of homes with an HDTV set were receiving HD content. By 2010, 75.3 percent of HDTV set homes will be receiving content." For more information, please visit - http://www.dvdintelligence. com/main_sections/news_archive/2003_free/11_informa_hdtv.htm

46 BBC to trial high-definition TV, BBC News, November 2005.

47 Informa Telecoms and Media, November 2005, published on DVD-Intelligence.com

48 No country to achieve full digital TV penetration before 2010, Global Intelligence Incorporated, October 2004.

49 State of the Blogosphere Part 1 – Blog Growth, Technorati, August 2005.

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