Advertising to Outpace Consumer Spending in the Migration to Digital for Entertainment & Media Industry

As the entertainment & media (E&M) industry continues its digital shift, advertising growth is outpacing consumer spending, according to PwC’s annual Global Entertainment and Media Outlook 2014-2018 – an in-depth five-year outlook for global consumer spending and advertising revenues directly related to entertainment and media content – released today. Attracting, retaining, and monetizing the digital consumer remains challenging and requires businesses to apply a ‘digital mindset’ to build the right behaviors to move from a digital strategy to a business strategy fit.

The Outlook forecasts that global E&M spending is expected to rise from $1.8 trillion in 2013 to $2.3 trillion by 2018, growing at a compound annual growth rate (CAGR) of 5 percent. The U.S. remains the largest E&M market, growing at a 4.8 percent CAGR and reaching $724 billion by 2018, from $573 billion in 2013.

Globally, digital E&M spending (excluding Internet access spending) is expected to grow at a 12.2 percent CAGR between 2013 and 2018 and account for 65 percent of global entertainment and media spending growth by 2018 – almost two out of every three dollars. Digital spending in the U.S. is expected to grow at an 11.2 percent CAGR over the next five years and account for 45 percent of overall U.S. E&M spending growth, up from 33 percent in 2013. U.S. digital advertising is leading the way; 40 percent of total advertising growth is expected to be digital by 2018.

According to Outlook, E&M companies should operate with a digital mindset. This requires adopting three behaviors: forging trust with consumers; creating the confidence to move with speed and agility; and empowering innovation.

“The consumer is now at the center of their own entertainment and media world, pivoting from finding to being found by content experiences via every channel and device,” said Ken Sharkey, PwC’s U.S. entertainment, media & communications practice leader. “The battle for relevancy has never been greater as E&M businesses are being joined by companies from other industries such as retailers, automakers and utilities to compete head on for the same consumer relationship. E&M businesses may need to look beyond technology, and adopt more flexible business models that allow them to get closer to the consumer. What’s important to the consumer is the specific experience – whether it’s live or on-demand and on any screen.”

Mobile Internet penetration is expected to reach 86 percent of the U.S. population in 2018, which will help drive digital advertising to increase its share from 17 percent of total advertising revenue in 2009 to 40 percent by 2018. With Internet advertising in the U.S. growing at a 9 percent CAGR (compared to a total advertising CAGR of 3.7 percent), the industry is approaching a significant tipping point.

Advertising is spearheading the digital migration as it follows eyeballs online:

    Online TV advertising will more than double its existing share of total TV advertising revenue increasing from US$2.8 billion in 2013 to US$5.9 billion in 2018 at a CAGR of 16 percent.
    In 2013, U.S. advertisers generated US$7.08 billion in mobile Internet advertising revenue – up 110.2 percent from the previous year – and this is expected to rise at a CAGR of 22.1 percent to US$19.22 billion (or 29 percent of total Internet advertising revenue) in 2018. In 2016, mobile will overtake display to become the number two Internet advertising channel in the U.S.
    Video’s share of the overall Internet advertising revenue pie has more than doubled to 7 percent in the last six years, and video Internet advertising revenue is expected to grow at a 19.5 percent CAGR to reach US$6.77 billion by 2018, up from $2.78 billion in 2013.
    Digital consumer magazine revenue is much larger than digital circulation. Digital consumer magazine advertising revenue will rise by an average of 19.2 percent a year from US$3.15 billion in 2013 to US$7.6 billion in 2018; Digital circulation revenue will be just US$1.45 billion in 2018.
    Video games advertising revenue will continue to grow at an impressive pace, which surpassed total PC games revenue in 2012, is expected to reach US$1.63 billion in 2018 from US$921 million in 2013, at a CAGR of 12.1 percent.

Spending on digitally delivered content will only account for 16 percent of U.S. consumer spending in 2018 (excluding spending on Internet access), compared to 40 percent of total advertising spending. In PwC’s analysis, the growth of ‘24/7 access’ and micro-transactions indicates that the key to monetizing the digital consumer will require E&M companies to be innovative in offering more consumer choice and experiences.

“As entertainment and media companies increasingly cross traditional boundaries to compete in each other’s core area, the race to achieve relevancy to the individual consumer and a greater share of lifetime value is expanding,” said Deborah Bothun, PwC’s U.S. advisory entertainment media & communications leader.  “Those players that achieve relevancy can join the consumer’s ‘inner circle of trust’. To stay there, they’ll need to apply innovation and agility to keep pace with the roll-out of new ways to deliver, package and price content and services.”

Notable fast growing U.S. consumer sub-segments to watch:

    Electronic home video over-the-top (OTT)/streaming is one of the fastest-growing consumer sub-segments and is projected to reach $10.1 billion in 2018, up from $3.3 billion in 2013, at a 24.8 percent CAGR in the U.S.
    Box office resilience underscores the continuing popularity of the cinematic experience. U.S. box office revenue will exceed revenue from physical home video in 2015 and grow over the forecast period to US$12.5 billion by 2018, from US$10.8 billion in 2013, at a 3.1 percent CAGR.
    Electronic home video revenue will exceed physical home video revenue in 2016. Total electronic home video revenue, driven primarily by SVOD rather than through-TV subscriptions, will surge from US$7.34 billion in 2013 to US$17.03 billion in 2018, a CAGR of 18.3 percent. Furthermore, by 2018, the electronic home video segment will be the main contributor to total filmed entertainment revenue at 43 percent, overtaking the box office in 2017.
    Advertising-supported and paid-subscription streaming music services rose 48.5 percent in 2013 as streamed offerings gained significant traction for U.S. consumers and were wholly responsible for taking the steam out of digital music and single sales. There were a total 118 billion music streams in the U.S. in 2013, representing significant year-on-year growth of close to one-third. Digital music streaming revenue is forecast to increase at a CAGR of 14.5 percent from US$848 million in 2013 to US$1.7 billion in 2018, when it will account for 37 percent of total digital recorded music revenue.
    Mobile video gaming continues to drive uninterrupted growth in the U.S. and is forecast to grow at a CAGR of 6.9 percent to reach US$1.84 billion in 2018, up from US$1.32 billion in 2013.
    Online video gaming is widening user participation and micro-transactions are boosting revenues. Online video gaming is forecast to grow at a CAGR of 7.4 percent to reach US$3.60 billion in 2018, up from US$2.51 billion in 2013.
    Consumer books electronic revenue will reach US$8.7 billion in 2018, up from US$4.5 billion in 2013, a CAGR of 14 percent. Digital revenue will overtake consumer books print/audio revenue in 2018 with growth in tablets encouraging digital consumption of books.

U.S. advertising growth by segment

Overall, U.S. advertising is expected to increase at a 3.7 percent CAGR from $206 billion in 2013 to $247 billion in 2018. Video games are expected to average 12.1 percent CAGR, followed by Internet advertising at 9 percent CAGR. Television advertising, the largest segment, is expected to grow at a 4.9 percent CAGR and out-of-home advertising at a 4.7 percent CAGR. Music and filmed entertainment advertising are expected to grow by 2.8 percent and 2.4 percent CAGR, respectively. Radio advertising (1.2 percent CAGR), business-to-business (0.9 percent CAGR) and magazine publishing (0.6 percent CAGR) are all expected to have slower growth. Newspaper advertising (-5.8 percent) is expected to decline.

U.S. segment highlights

In the U.S., Internet access is expected to continue to outperform all other E&M segments, with double-digit gains of 11.4 percent CAGR expected. Internet advertising (9 percent CAGR), video games (6.2 percent CAGR), TV advertising (4.9 percent CAGR), out-of-home advertising (4.7 percent CAGR) and filmed entertainment (4.7 percent CAGR) are expected to grow more than 4 percent compounded annually.

Business-to-business publishing (3.7 percent CAGR), radio (2.1 percent CAGR), music (1.9 percent CAGR), TV subscriptions (1.3 percent CAGR), consumer and educational book publishing (1.2 percent CAGR) and consumer magazine publishing (0.3 percent CAGR) are expected to generate modest growth.

Spending on newspaper publishing (-4.4 percent CAGR) is expected to decline moderately.

Overall, U.S. consumer/end-user spending is expected to grow by 2.7 percent CAGR.