Thursday, April 1, 2004

Entertainment Networks Must Battle For the Pocketbook Instead of Ratings

STANFORD GRADUATE SCHOOL OF BUSINESS—Technological innovations are rocking the media and entertainment world, cracking old foundations, and reshaping the landscape. The jolts, at an ever more frenzied pace, are shaking sitcom producers and Viacom directors alike.

The seismic epicenter isn't in Hollywood or New York. It's here, in Silicon Valley.

"The changes transforming the media and entertainment business are being driven, by and large, by companies within 50 miles of where we're standing," industry analyst Luis Ubinas told a Stanford Graduate School of Business audience. "Technology companies have as much to say about the future of entertainment as traditional media conglomerates."

Ubinas made the opening presentation at this year's Future of Entertainment Conference, an April 3 student-organized event that brings industry leaders to the Business School to survey the field and forecast trends.

"There's more change under way right now than at any other time in my nearly two decades in the industry," Ubinas, a director with McKinsey & Co., told the audience filling Bishop Auditorium on a sunny Saturday morning. "We've grown so accustomed to living in a media maelstrom that these major changes are going almost unnoticed."

Some were predictions laughed off as "Internet hype" only five years ago. More than 25 percent of U.S. households today, for instance, have broadband. More than 80 percent have access to 200 cable channels. And practically everyone has a DVD player.

"The pace of change is accelerating," Ubinas added. "Soon, some of you are going to be seeing e-video for your cell phone, which couldn't be more off the wall for me just a few days ago."

Technology-driven advances have ushered in what Ubinas calls an "unprecedented era of choice." Digital media—which he defines as the proliferation of interconnected digital devices, some of them standard in television sets—have cultivated a ravenous consumer appetite for variety, speed, and enhanced quality, changing our life styles in the process. Prime-time television, for one, is feeling the pain.

Network insiders were shocked, even angry, when Nielsen ratings reported that men under 35 are watching less prime-time TV than they did last year. These guys haven't cut back on video. "In fact," said Ubinas, "they're spending even more time in front of the screen than before—it's just that they're dramatically changing the way they watch." They're ordering up shows on VoD (video on demand) and other technologies, buying DVDs of their favorite shows and movies, and downloading news and sports clips from the Internet. The next group of under-35 males, now 13 to 18, already spends more time on the Internet—doing things like playing video games—than watching television, he said.

This creates a paradigm disruption for TV networks accustomed to sparring with each other, observed keynote speaker Brandon Burgess, NBC's executive vice president of business development. "It's no longer just about the ratings," he explained. "It's really about share of mind, share of wallet—you know, share of living room."

Unpredictability and instability have permeated all sectors of the industry. "Straightforward organic growth and year-after-year price increases are much harder to come by," Ubinas said. The new challenge for companies is to capture the profit pools displaced in this seismic shift—and the potential rewards are great.

"These aren't dollars on the come like they were five years ago," he said. "These are dollars that already exist yet are not even counted in the way the company measures products—like time on the Internet." Spending on media and entertainment products, he noted, has increased by nearly $1,000 per U.S. household in the past decade—twice the rate of inflation.

As different forms of media battle for their share of mind, wallet, and living room, what will give companies an edge? For one thing, said Ubinas, "you need to be in a lot of places. That means if you're a television broadcaster, you can no longer just be on TV."

Few people understand this better than Burgess, who engineered the historic acquisition last October that created NBC Universal, one of the world's largest media conglomerates with an expected $14 billion in revenues. Prior to that, he acquired the Spanish-language network Telemundo and the cable entertainment channel Bravo. Today, Burgess oversees key aspects of the NBC Universal integration, positioning the new company for strategic growth and launching operating businesses for the combined portfolio.

With the merger, NBC gains Universal's movie and TV studios, theme parks, and three cable channels. Universal's vast library of CDs and films also becomes available to NBC to sell through multiple platforms. "It gives us an opportunity to cross-promote, franchise, and better transport from one medium to the next," Burgess said.

"Our mindset in 2002 when this thing started was that we liked the idea of being a content pure-play company that is not the biggest but is the most profitable. Depending on how we do, it will be neck-and-neck with Viacom in the marketplace."

He shared some plans for NBC Universal, acknowledging that none are set in stone: digital broadcasting and multicasting; more assertive branding across media; international growth; video on demand; movie links; new settings for innovative advertising; yield-oriented, commercially oriented price standards; and additional acquisitions. Several key projects are just coming to fruition, including a major Olympics website that will launch in May, and wireless video, now available over some cell phones.

Above all, Burgess said, "you're going to see us experiment a lot more in the future." In order to negotiate broad ideas in the technological realm, NBC's content managers will "have to go back to IT school. Today, it's about owning the ideas so you can do all these things, whatever you want to do, whenever you want to do them."

Ubinas agrees. "Real innovation and creativity," he said, "continue to be the scarcest resources in the industry." To build a media company, you need to apply all the old skills while also managing the uncertainty that comes with the proliferation of new digital devices.

"But the good news is that the established media companies are, for the most part, facing the new reality with imagination," he said. "And at the same time, new independent players—music labels, film producers, online businesses—are finding their niches.

"There's nothing like a period of instability to create opportunity."

Related Links

What's Next for Entertainment? (2004 Conference)

The Reality of Video Games (2004 Conference)

Technology Drives Entertainment (2003 Conference)

Industry is Trying to Change How we Watch TV (2002 Conference)