June 2009 Digital Entertainment Meets Social Media Paul Verna, Senior Analyst [email protected] Executive Summary: Three pillars of the entertainment industry—music, movies and video games—are facing disruptive changes that are prompting them to explore opportunities in digital distribution, digital marketing and social media. 103969 Key eMarketer Numbers — Digital Entertainment The recorded music industry is the most beleaguered of all. Knocked off balance by the emergence of the MP3 in the late $4.56 billion US digital music spending in 2013, up from $3.00 billion in 2009 1990s, it has not recovered since. CD sales are plummeting and 82.6% US digital music spending as a percent of total US digital revenues are not picking up the slack.The industry faces recorded music spending in 2013, up from 41.0% in 2009 an uncertain future as it grasps at alternative business models. $5.52 billion Total US recorded music spending in 2013, down from $7.31 billion in 2009 The film business is facing problems of its own, but it is $2.65 billion US online advertising spending by MPAA-member fundamentally healthier.A period of sustained growth in film studios and their subsidiaries in 2013, up Hollywood’ s two core businesses—box-office receipts and from $1.24 billion in 2009 DVD sales/rentals—has stopped and new physical and digital 14.2% Percent of film studio advertising budgets spent online in 2013, up from 7.7% in 2009 formats have not taken a solid place in the revenue mix. $681 million US in-game advertising spending in 2013, up from $443 million in 2009 The video game industry has escaped much of this trouble. 75.0% Percent of US in-game advertising spending that Sales of hardware and software remain strong, and the player will be spent on Web-based games in 2013, up population is broadening and creating new opportunities for from 72.0% in 2009 marketers. Still, the industry’s future depends more on digital Source: eMarketer, June 2009 distribution and ad-supported models than on revenues from consoles and retail titles. For additional information on the above chart, see Endnote 103969 in the Endnotes section. All three industries share a sense of urgency in adopting new business models centered on digital content and distribution. Social media is emerging as a key link in this The eMarketer View 2 chain. Experimentation is in full swing and game-changing Music 3 innovations may be just around the corner. Movies 7 Video Games 11 Key Questions Case Studies 15 ■ How will social media play out in the music, movie and video Conclusions 18 game industries? Endnotes 19 ■ What factors are driving—or holding back—these industries? Related Information and Links 21 ■ How will digital music formats fare in the next five years? ■ How much will film studios spend on online advertising by 2013? ■ How much growth will take place in video game advertising? ® Digital Intelligence Copyright ©2009 eMarketer, Inc. All rights reserved. The eMarketer View In 2009, the US recording industry will mark 10 This situation raises the stakes for the emergence of new digital consecutive years of declining CD sales. Spending on revenue streams. Like the music industry,Hollywood faces some CDs and other physical sound carriers (i.e., packaged audio serious obstacles, including licensing restrictions, piracy and products) dwindled to $5.8 billion in 2008, down 60% from their consumer resistance to digital rights management (DRM) schemes peak of $14.6 billion in 1999. that many content owners consider necessary to combat piracy. The movie industry also faces the possibility that ISP metered Online downloads have helped offset these losses. Spearheaded bandwidth systems such as ones being tested by Comcast and by the success of Apple’s iTunes Store, US sales of single and AT&T would make the cost of streaming video prohibitive. album downloads reached $1.59 billion in 2008, more than tripling the 2005 figure of $500 million.While that growth is encouraging, it Fortunately for film studios, consumers appear willing has not made up for the shortfall in CD sales. to experiment with digital services. Research points to healthy and growing percentages of US Internet users who download Business models and formats that the industry had and stream full-length movies.As more digital content becomes hoped would stem its losses have fallen short of available and technology allows for better integration between online expectations. Some, such as ringtones and music-themed video services and living-room TV sets, home video consumption should games, appear to have peaked, while others, including ad-supported eventually evolve from packaged media to digital options. music sites, have yet to achieve liftoff. Still others, such as music videos on YouTube, are marred by licensing disputes between A handful of services are jockeying for position in the paid-download content owners and distribution channels.The net result has been space.They include well-established home video and e-commerce negative growth for the industry as a whole. brands such as Blockbuster,Apple and Amazon, as well as emerging players such as CinemaNow and ReelTime. In addition, Netflix Despite these bleak indicators, there are signs that offers free online streaming to users of its subscription-based DVD music itself is more popular than ever. The two leading US rental service. performance rights organizations, BMI and ASCAP,continue to report record-setting royalty collections year after year.Sales of iPods, Video-sharing sites Hulu and YouTube are making a iPhones and other smartphones and media players are increasing. serious play for free, ad-supported movie streaming. Many of those devices are enhanced with music-oriented third-party As a joint venture between News Corp. and NBC Universal—the applications such as Pandora and Shazam.And the number of US parent companies of the Fox and Universal film studios—and Disney, teens who downloaded or streamed music on social networks was Hulu is in a strong position to stream premium content free to the up in 2008, according to an NPD study published in March 2009. consumer.Google-owned YouTube also has significant leverage in this area, since it commands by far the biggest audience of any Seeking to capitalize on this nexus between social networking and online video site. Recognizing this, studios including Sony,MGM and online music, the four major label groups and some prominent Lionsgate have made deals with YouTube to stream movies on the independents formed a joint venture with MySpace in late 2008. site. In announcing the deals, Google left open the possibility of The service, MySpace Music, offers free, ad-supported streaming charging for select content. of tracks from participating labels. One of the keys to growing these digital services will be the extent If this venture ultimately succeeds, it could serve as a blueprint for to which they incorporate social media features. Hulu took a step the future of the business. If it does not, the industry will need to dig in this direction in March 2009, when it unveiled “Hulu Friends,” a deeper into its creative toolkit to come up with new alternatives. So social tool that allows registered users to exchange information far,lukewarm feedback from users and at least one of the label with one another about what they are watching. Similarly,Netflix partners indicates that corrective steps need to be taken to ensure entered into an agreement to extend Netflix members’ movie a positive outcome. ratings to their Facebook accounts.And YouTube’s pre-eminence After years of consistent increases in its core as a sharing site bodes well for future integration of social media businesses, Hollywood’s growth has stalled. At the functions and movie content. end of 2008, US box-office revenues were up marginally but Unlike the music and movie industries, the video attendance was flat—and trending downward.To make matters game business is fundamentally healthy, and worse, DVD sales are also in decline, so they can no longer make forecasts call for continued growth in the years up for softness in box-office receipts. ahead. Nevertheless, disruptive forces are likely to gradually shift the video game industry’s momentum away from hardware consoles and packaged media, and toward digital distribution, browser-based interfaces and ad-supported business models. Digital Entertainment Meets Social Media 2 ® The eMarketer View Music Accordingly,US in-game advertising spending will increase by US Recorded Music Spending a compound annual growth rate (CAGR) of 11% from 2008 to 2013, reaching $681 million in 2013.The balance of these ad dollars will Behind the Numbers: US Recorded Music continue tilting in favor of online, casual games. By 2013, 75% of Spending in-game ad budgets will support Web-based games, up from 72% ■ Paid downloads of tracks and albums have fueled in 2009. growth in the digital music industry since Apple’s A key factor driving the growth of in-game iTunes Store launch in 2003, but the rate of growth is advertising is the level of brand engagement slowing down. eMarketer expects paid downloads to shown by gamers. A Nielsen Games study conducted for continue growing through 2013, but at modest and Brandweek in 2008 found that 11% of active video game players declining rates. purchased a brand that was advertised in a game. By ■ After a period of aggressive growth through 2007, comparison, only about 1% of viewers of traditional direct US sales of mobile music decreased for the first time response ads typically purchase the product advertised. in 2008. eMarketer expects negative growth in the Another driver for ad-supported gaming is a demographic years ahead as a result of falling master ringtone broadening of the gaming population.