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Global entertainment and media outlook 20102014

Viewpoint

Seven success factors inthe new digital value chainThe migration away from traditional forms of media distribution and consumption and towards digitalplatforms is changing the underlying commercial dynamics of the E&M industry. Historically, E&Msprofitability as a sector was supported by the high costs of content creation and content distribution,which represented high barriers to entry. The migration to digital production and distribution haslowered those barriersmaking the overall E&M market more competitive and putting downwardpressure on profit margins.

Combined with the increasing pace of migration, these commercial pressures mean companies haveno time to waste in identifying, pursuing, and occupying their optimal and rightful positions in the digitalvalue chain. In the past five years, much of the E&M industrys collective experience on businessmodels, revenue streams, and organizational structures has been torn up.

A new value model

Companies are now experimenting and innovating in theirbusiness models at an unprecedented rate, as they seek toreassemble the pieces into a viable model one thatsuccessfully positions them in a sustainable, defensible, and,

ultimately, profitable place in the new value chain.

Social and consumer dynamics are at the heart of this pervasiveindustry changeand media companies ignore these buy-sidetrends at their peril. Time-starved individuals want both to usemultiple, connected devices and to have personal experiences,often with others. The explosion in media choices also meansindividuals face a growing set of trade-offs between theavailability, quality, and price of content.

Free may mean lower quality and convenience, while paid may

mean higher-quality, more personalized, and more engagingcontent services. A polarization will emerge between theseoptions. At the same time, many people will continue withtraditional habits such as reading a physical book or newspaper. Companies need to maintain these

I basically think thatmovies are going to bestored in one location at

your home and you canjust transmit them to anymedia that you own,whether it be a laptop or aPC, or your TV or your cellphone. You can just pusha button and the movieshows up on whatever yousend it to.

28-year-old, Los

Angeles, US

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legacy revenue streams while investing in their digital services and creating complementary andsynergistic relationships between their physical and digital offerings.

As these dynamics progressively transform the industry, media companies must make it a priority toestablish clarity about their role or roles in the new industry value chain and their relationships with theother participants. Possible choices include competing with other companies in some areas andpartnering with them in others.

The critical success factors

To optimize their positioning, our view is that two important dimensions that media companies shouldfocus on are scale and diversification. At the same time, desirable content, a cohesive strategy, andstringent execution will as ever remain prerequisites for success.

Taking these attributes as given, we have identified seven success factors we believe will play criticalroles in enabling and facilitating each organizations transition to its optimal place in the new digitalvalue chain. These are:

1. Strategic flexibility. In practice, the ability to identify and realize opportunities for diversifyingrevenue whether by service, model, customer, geographic market, and/or maturity of proposition.

2. Delivery of engagement and relationship with the customer through the consumptionexperience. For example, in cinema or DVD rental, the relationship defined around experience withfilm across platforms, which was previously defined by channel.

3. Economies of scale and scope. Driving synergies hard between different activities inconglomerates and using digital standards to exploit scale.

4. Speed of decision-making and execution, with the appetite to experiment and fail. Requiring theinspiring and empowering of individuals, the devolving of more accountability, and the streamlining

of governance to accelerate decisions.

5. Agility in talent management. Attracting and retaining key talent and then aligning andincentivizing individuals to deliver the strategy through objective setting, rewards, and performancemanagement.

6. Ability to monetize brand/rights across platforms. For example, music labels that monetizemusic events, independent producers who go into talent management, and broadcasters who gointo Web TV, leveraging the expertise, branding, and customer data they own and/or can collect.

7. Strong capabilities in partnership structuring and M&A targeting and integration. Amid greatercompetition for strategic assets than ever before.

As the new digital value chain takes shape, media companies that exhibit these seven characteristicswill be well-placed to diversify their revenues, increase scale when appropriate, and reshape theiroperating models. All these capabilities will help them secure a successful positioning in the industrysdigital future.

pwc.com/outlook

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