MUMBAI: CFOs from 75 of the world’s media and entertainment companies are optimistic about revenue potential from the Internet and mobile devices in spite of declining revenues, according to Ernst & Young’s 2010 global media and entertainment CFO study.
The report, Poised for digital growth: Preserving profitability in today’s digital world offers insights from CFOs on the future of digital distribution, the Internet, mobile devices and the impact on their companies.
"The phenomenal proliferation of digital entertainment among consumers continues to challenge media and entertainment companies. Revenues are dropping due to the unbundling of media and the reduction of per unit pricing, challenging CFOs to identify innovative ways to reach their financial objectives. However, as the demand for digitally delivered entertainment continues to increase significantly, CFOs feel optimistic about revenue potential," said Ernst & Young Global Media & Entertainment leader John Nendick.
Given the discrepancy between increasing consumption of digital content and falling revenues, CFOs surveyed agreed that the industry must determine if and how much they can bundle media content and then settle on appropriate pricing. Ernst & Young analysis indicates that by 2012, the average per unit price of video and music content will decrease by almost 25 per cent from the per unit price in 2009. This would be on the heels of the 55 per cent decrease of the price of music and the 12 per cent decrease of the price of video between 2006 and 2009. Currently, the average per unit price of music is $3 and $6 for video. Additionally, total home video and music end-user spending for 2010, including digital and physical products, is estimated to be $28.5 billion compared to $36.4 billion in 2006.
"CFO’s see growth in new distribution channels, products and services. Publishers and similar content companies are embracing the fact there are almost 2 billion digital media users to leverage their content and core products and services to the web, mobile devices and electronic gaming globally," said Ernst & Young senior partner, Global Media & Entertainment Advisory Services Howard Bass.
Digital media consumption is set to continue at a rapid pace. The number of US households with both broadband connectivity and at least one 3G mobile device has quadrupled during the past five years, and increased more than 600 per cent on a worldwide basis, according to the report. Global penetration of households with broadband is predicted to reach 27 per cent by the end of 2010 and 3G mobile devices are predicted to reach 55 per cent by the end of this year. Ernst & Young’s index of digital media users, which is increasing by an annual rate of 32 per cent, is expected to reach 2.2 billion by 2011 – more than double than in 2007.
Other insights from the study include:
CFOs surveyed were definitive in their approaches to reducing costs and improving profitability. These executives have reduced their costs to the lowest levels possible, and are beginning to outsource more activities to yield significant savings.
Fifty-six percent of CFOs indicated that process improvement would be the greatest opportunity for savings during the next one to two years. Technology was frequently identified as a way to produce content faster and less expensively.
CFOs believe companies need to assess the business-heavy costs such as content production, acquisition and distribution, and increase shared processes for finance, IT, research, call centers and even content development – inside and outside their companies.
Sixty-six percent of CFOs consider disruptive business models, such as ebooks and mobile content, to have the greatest impact on the media and entertainment industry during the next two to three years.
Interactive media companies currently have an EBITDA margin of about 42 per cent and a five year EBITDA CAGR of 24 per cent. This growth rate is 7 per cent larger than its nearest competitor, satellite television, and is more than double most of the other sectors.
Transaction activity was down significantly in 2008, mainly due to the economic environment. In 2009, the number of deals has shrunk, but the average value of the deal has skyrocketed – higher than during the boom days of 2006 – due to a number of very large deals that drove that large dollar value per deal.