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.

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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?

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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. Browser-based casual games sales, which represented approximately two-thirds typically appeal to a user base that skews older and more female of US mobile sales in 2008, according to the compared with traditional games.And console games themselves Recording Industry Association of America (RIAA). have also reached beyond their base, thanks to the massive Modest growth in ringback tone sales and full-track popularity of the Nintendo Wii platform and of group-oriented mobile downloads will not offset the decline in the games such as the “Guitar Hero” and “Rock Band” franchises. ringtone business during the forecast period.

Like other entertainment sectors, gaming is going ■ US sales of CDs and other physical sound carriers social. At the 2008 E3 video game expo, Microsoft announced a have declined for 10 consecutive years, and all series of enhancements to its Xbox Live service that enable users indicators point to continued losses in the years to create avatars and share content with other users. Microsoft ahead. In keeping with patterns noted in the past also unveiled a deal that allows Netflix subscribers to stream four years, eMarketer is forecasting escalating movies directly to their TVs via the Xbox 360 console. In addition, percentage decreases starting at 25% in 2009 and the Microsoft-Netflix venture lets users hold virtual screenings and reaching 35% in 2013. chat sessions about movies.

In late 2008, Sony went live with its own movie service, which delivers digital sales and rentals via the PlayStation 3 console. In addition, Sony added virtual world, messaging and other social features to its PlayStation Home online community.

Another intersection between gaming and social media can be seen in iPhone applications. In February 2009, nearly one-half of the top 25 iPhone apps were game-related, according to comScore. Further,79% of iPhone owners in a Compete survey said they downloaded game-related apps—more than any other genre.

Digital Entertainment Meets Social Media 3 Music

US sales of recorded music will dwindle to $5.52 billion in 2013, from The trend patterns from the past two years will continue: Online $7.31 billion in 2009.This downward trajectory will extend a pattern will experience healthy growth, mobile will trend slightly that began in 2000, when sales of physical sound carriers started to downward and physical will continue to plummet at accelerating decline after rising dramatically during the heyday of the CD. rates. Growth in digital formats as a whole (that is, the sum of online and mobile) will not compensate for losses in physical, but US Recorded Music Spending, by Segment, 2008-2013 it will slow down the rate of those losses to a 2.9% drop in 2013. (billions and % of total) 2008 2009 2010 2011 2012 2013 US Recorded Music Spending Growth, by Segment, Physical $5.76 $4.32 $3.11 $2.18 $1.48 $0.96 2008-2013 (% change) Digital total $2.64 $3.00 $3.39 $3.80 $4.20 $4.56 2008 2009 2010 2011 2012 2013 -Online $1.82 $2.22 $2.65 $3.07 $3.47 $3.82 Physical -27.9% -25.0% -28.0% -30.0% -32.0% -35.0% -Mobile $0.82 $0.77 $0.74 $0.73 $0.73 $0.74 Digital total 12.8% 13.5% 13.2% 12.1% 10.5% 8.4% Grand total $8.40 $7.31 $6.50 $5.98 $5.68 $5.52 -Online 25.0% 22.0% 19.0% 16.0% 13.0% 10.0% Digital % of total 31.4% 41.0% 52.2% 63.6% 73.9% 82.6% -Mobile -7.3% -5.6% -3.5% -1.7% -0.1% 1.0% Note: numbers may not add up to total due to rounding Grand total -18.7% -12.9% -11.1% -8.0% -5.0% -2.9% Source: eMarketer, June 2009 Source: eMarketer, June 2009 103970 www.eMarketer.com 103983 www.eMarketer.com 103970 103983 For additional information on the above chart, see For additional information on the above chart, see Endnote 103970 | 103983 in the Endnotes section. Endnote 103970 | 103983 in the Endnotes section.

RIAA figures indicate that in 2006, the leading online music formats—single downloads, album downloads and subscriptions— showed growth of 64% to 72%. However,by 2008 growth had tapered off to 25% to 30%.

US Digital Music Sales, by Format, 2005-2008 (millions) 2005 2006 2007 2008 Single downloads $363.3 $580.6 $801.6 $1,022.7 Album downloads $135.7 $275.9 $424.9 $568.9 Music video $3.7 $19.7 $28.2 $41.3 Kiosk $1.0 $1.9 $2.6 $2.6 Mobile $421.6 $773.8 $880.8 $816.3 Subscription $149.2 $206.2 $201.3 $188.2 Total $1,074.4 $1,858.0 $2,339.3 $2,639.9 Click here for a more in-depth look at the dynamics Note: numbers may not add up to total due to rounding Source: Recording Industry Association of America (RIAA), "2008 Year-End shaping the US recorded music industry. Shipment Statistics;" eMarketer calculations, April 2009 103346 www.eMarketer.com 103346

For additional information on the above chart, see Endnote 103346 in the Endnotes section.

The bottom line is that since online music is a maturing industry,it is reasonable to expect that its growth rate will level off in the coming years.

Digital Entertainment Meets Social Media 4 Music

Mobile music also started out strong earlier this decade, when Social Media in Music Marketing ringtones were all the rage.The novelty has worn off, however,and Apple’s success notwithstanding, the growth rate in the online the format has suffered as a result. It has not helped matters that download market has slowed down, leaving content owners and full-track, over-the-air (OTA) downloads have yet to materialize as online services scrambling for alternatives. a bona fide industry in the US.The combination of these factors resulted in a decline in the mobile music business in 2008, and this Increasingly,these alternatives involve social media. In September negative growth pattern is expected to continue. 2008, social networking pioneer MySpace and the four major music labels—Universal Music Group,Warner Music Group, Sony Digital Music Services Music and The EMI Group—stepped up to the plate with MySpace After Apple launched the iTunes Store as the first major a la carte Music, an ad-supported streaming and download service. music download service in mid-2003, other players entered the market.These included competing a la carte services (Amazon, Because it draws content from all four majors plus several Wal-Mart), subscription-based services (eMusic) and hybrid prominent independents, MySpace Music is better positioned than models (Rhapsody,Napster,Zune). More recently,ad-supported other ad-supported services that have struggled to license premium models such as imeem, Pandora, Last.fm, Qtrax and MySpace content. MySpace Music also has social networking expertise, brand Music have come into play. reach and a track record as a hotbed for music discovery.Further,it has a partnership with Amazon for paid downloads. Click here to see profiles of select US digital music services. “People want to stream music on their Despite this fragmentation,Apple remains the dominant player in the desktop, and they want to play music on online music arena. In a two-year tracking study of US online music whatever device they want. You do those downloaders’ perceptions, Ipsos MediaCT found that increasing two things, you’ve got some good numbers of users regarded iTunes (57%) as the best paid digital service, eclipsing the 9% response rate for second-place Amazon. businesses.” —Courtney Holt, CEO, MySpace Music, in an interview with eMarketer, May 12, 2009 Best Paid Digital Music Service According to US Online Music Downloaders*, Summer 2006-Summer Despite these obvious strengths, MySpace Music has been 2008 (% of respondents) criticized by fans for its lackluster user interface. More alarmingly, Summer Summer Summer 2006 2007 2008 Warner Music Group chairman and CEO Edgar Bronfman Jr.voiced (n=1,319) (n=1,632) (n=1,148) disappointment with MySpace Music during Warner’s May 7, 2009, iTunes 41% 50% 57% earnings call. Mr.Bronfman noted that the service has been slow Amazon - - 9% to deliver significant revenues and “that needs to change.” Napster 11% 10% 8% Rhapsody 6% 4% 7% At the same time, Mr.Bronfman expressed confidence in MySpace MySpace Music 8% 5% 4% Music’s new management team, led by recently appointed MySpace Wal-Mart6%6%4%CEO Owen Van Natta and MySpace Music CEO Courtney Holt. Yahoo! Music 6% 4% 2% Other 23% 20% 9% Note: ages 12+; numbers may not add up to 100% due to rounding; *who are aware of more than one paid digital music service Source: Ipsos MediaCT, "TEMPO Digital Music Brandscape" as cited in press release, October 7, 2008 098705 www.eMarketer.com 098705 One of the main drivers behind the success of iTunes has been the popularity of the iPod and the iPhone.This software/hardware combo has allowed Apple to muscle out its competitors and gain leverage over content owners with regard to licensing terms.

Even as the music market and the economy have struggled in the past two years,Apple has managed to increase its iPhone and iPod businesses. In the year ending March 31, 2009, global iPhone unit sales were up 191.5% over the previous year,while the more mature iPod was up 5.7%.

Digital Entertainment Meets Social Media 5 Music

The other social networking giant, Facebook, has not ventured Another statistic that illustrates the nexus between music and full-scale into the music business. However,many of the site’s top social media comes from an NPD Group survey of US teens.The user-ranked pages involve music celebrities. On May 13, 2009, company found that the percentage of teens who downloaded or Facebook’s rankings placed nine music profiles among the top 20, listened to music via social networks increased from 26% in 2007 including pages from Rihanna, Lady Gaga, Linkin Park and Coldplay. to 46% in 2008.

Top 20 Facebook Pages, Ranked by Facebook Users* US Teen Internet Users Who Download or Listen to Worldwide, May 13, 2009 Music via Social Networks, 2007 & 2008 (% of Type of Number of respondents) page users* 2007 26% 1. Barack Obama Politician 6,268,301 2. Vin Diesel Actor 3,514,557 2008 46% 3. Coca-Cola Product 3,423,622 Note: ages 13-17 4. Facebook Product 3,071,123 Source: The NPD Group, "Digital Music Study" as cited in press release, March 31, 2009 5. Pringles Product 2,773,257 102821 www.eMarketer.com 6. Rihanna Music 2,554,704 102821 7. Live Messenger Product 2,517,007 Many music fans are gravitating to social sites via iPhone 8. Lady Gaga Music 2,516,664 applications.The Pandora app, in particular,has been a huge 9. South Park TV show 2,506,392 success, with more than 4 million users as of early May 2009.At that 10. YouTube Product 2,494,119 time, Pandora chief technical officer Tom Conrad told TechCrunch 11. Michael Phelps Athlete 2,225,648 that about 20% of the 1 million songs per month downloaded 12. Linkin Park Music 2,173,203 through affiliate links were from Pandora’s iPhone app. 13. Coldplay Music 2,157,410 14. Jackie Chan Actor 2,055,019 15. Adidas Originals Product 1,865,548 “The iPhone was game-changing for Pandora. It 16. Metallica Music 1,844,924 was the first device where the lightbulb went 17. Chris Brown Music 1,784,940 off for listeners and those in the industry that 18. Beyoncé Music 1,753,254 Internet radio isn’t about just a Website and a 19. Susan Boyle Music 1,715,115 20. Katy Perry Music 1,691,855 PC anymore.” —Jessica Steel,VP of business Note: *identified as supporters or fans development, Pandora, in an interview with eMarketer, Source: Facebook Business Solutions, May 13, 2009 April 24, 2009 103978 www.eMarketer.com

103978 Clearly,this is a period of experimentation for the music business and Twitter has also emerged as a vibrant platform for musicians to social media. So far,the success stories have been fragmented across directly reach their fans and for fans to share music with each platforms—a cool iPhone app, an under-the-radar online other.John Mayer was among the first Twitter users to amass 1 recommendation service, an ad-supported online streaming million followers, and the microblogging service has been used at destination.The next step for these services will be to broaden their the South by Southwest (SXSW) music festival since 2007 to offerings into a user experience that straddles platforms and devices. generate band buzz. Any service that can deliver affordability,portability,flexibility and unfettered access to premium content will stand out from the “Going directly to the fans without any pack. Of course, it will take unprecedented cooperation from kind of middleman… that’s what I’m relying labels to make this happen, but given their precarious situation, on now.” —Jill Sobule, independent recording artist, labels are more willing than ever to play ball. in an interview with eMarketer,April 29, 2009

Digital Entertainment Meets Social Media 6 Movies

For decades, the movie industry enjoyed virtually Netflix stands apart from the pack with a business model that offers free streaming of select content to customers of the uninterrupted growth.The emergence of formats company’s mail-order DVD rental business. Netflix’s streaming that presented themselves as threats—think TV, service had a catalog of 12,000 digital titles as of May 2009, VHS and DVD—ended up being complementary compared with more than 100,000 DVD titles. to the business, and all boats rose. Click here to see profiles of select US digital movie services.

That started changing in the middle of the current decade. For the first time, Hollywood faced the double whammy of flat US The transactional sites offer a combination of rental and sell-through box-office revenues and a declining DVD business.To make choices, akin to brick-and-mortar video stores.Although prices vary matters worse, revenue growth during this time came only from by title and by service, most rentals fall in the $3 to $4 range.Also, rising ticket prices, not from gains in attendance. most services give customers a 30-day rental window and a 24-hour period to watch the film once playback is initiated.

Digital sale prices are more variable, ranging from $1 to $20. CinemaNow, which is in the process of merging with Blockbuster, allows purchased movies to be burned once. Other services permit data backups of DVD files from the PC, but not the burning of DVD videos that are playable on standalone DVD players.

The newest breed of movie streaming sites is the ad-supported model pioneered by Hulu. Initially formed as a joint venture between News Corp. and NBC Universal, Hulu recently added a third partner when Disney acquired a 27% stake in the company.

Most content on Hulu, whether full-length movies or TV shows, is presented with commercial interruptions.While there are fewer ads on Hulu-streamed films than on movies aired on network TV, Click here for a more in-depth look at the dynamics die-hard movie fans will probably prefer to pay for content than sit shaping the US movie industry. through commercials. Hulu is more likely to attract casual viewers—those who historically have been willing to watch films on broadcast TV. Digital Movie Services In this climate, film studios and DVD retailers are hustling to come up While the Hulu partner studios explore ad-supported streaming on with profitable business models. Determined to avoid the mistakes of their site, other studios including Sony,Lionsgate and MGM are the music business, the movie industry is holding fast to transactional partnering with YouTube to stream full-length movies on the popular models, even as it experiments with ad-supported streaming. video-sharing destination.These alliances reflect the studios’ interest in leveraging YouTube’s huge built-in audience.They also Hollywood is also being careful about managing digital rights, signal YouTube’s intent to evolve from a user-generated-video hub having seen the music industry get burned by the unprotected to a premium content distributor.The Google-owned site has not MP3 early in the digital era. It helps that, by virtue of their large file been able to monetize amateur clips, so it is pinning its hopes on sizes, digital films are inherently more difficult to copy and trade the commercial potential of full-length feature films. on file-sharing networks, compared with the smaller MP3s.

The leading digital film services in the US fall into two broad camps: paid download services (such as Blockbuster,iTunes and Amazon) and ad-supported streaming sites (such as Hulu and YouTube).

Digital Entertainment Meets Social Media 7 Movies

This frenzy of activity on the digital movie front has yet to translate On the other hand, increasing numbers of US Internet users appear into significant revenues for content owners or distributors. to be using digital downloading and streaming sites. Ipsos MediaCT AccuStream iMedia Research estimated that US movie and TV found that 11% of users had downloaded a full-length movie in the program download sales amounted to a mere $340 million in past month as of September 2008, up from 8% in December 2007. 2008, and much of this revenue came from the TV side. US Internet Users Who Have Downloaded a Digital US Movie and TV Program Download Sales, 2007 & Video* File, December 2007 & September 2008 (% of 2008 (millions and % change) respondents) Downloaded movie 2007 $221.7 8% 2008 $339.8 (53.3%) 11%

Source: AccuStream iMedia Research, "Subscription and Download Media Streamed TV show Stores 2003-2010" as cited in press release; eMarketer calculations, 7% January 27, 2009 11% 101255 www.eMarketer.com 101255 Total streamed (all video content) The NPD Group estimated that less than 1% of US consumer spending 19% on movies and video went to online purchases or rentals in 2008. 22%

December 2007 (n=862) September 2008 (n=935) US Consumer Spending on Movies and Video, by Format, 2008 (% of total) Note: ages 12+; *free or paid in the past 30 days Source: Ipsos MediaCT, "Motion" as cited in press release, December 18, 2008 DVD movie purchases 41.0% 100507 www.eMarketer.com DVD rentals* 29.0% 100507

Movie tickets 18.0% Two additional studies found that healthy percentages of US

DVD TV program purchases 11.0% Internet users are watching movies online. GfK Roper noted that 40% of users had ever streamed movies, while 17% did so on a Digital movie or TV program purchases/rentals online 0.5% weekly basis. Note: numbers may not add up to 100% due to rounding; *includes subscription services such as Netflix Source: NPD Group, "Entertainment Trends in America" as cited in press Types of Media Streamed by US Internet Users, release, September 16, 2008 September-October 2008 (% of respondents) 098038 www.eMarketer.com At least Ever 098038 weekly stream News stories 34% 63% Music 33% 60% Video clips 28% 60% TV shows 22% 50% Movie trailers/song clips 17% 49% Movies 17% 40% Talk radio 16% 35% Commercials 14% 28% Note: n=2,000 ages 18+ Source: GfK Roper, "Media, Advertising & Consumers," provided to eMarketer, November 20, 2008 100185 www.eMarketer.com 100185

Digital Entertainment Meets Social Media 8 Movies

Veoh Networks surveyed viewers who watch more than 1 hour of In March 2009, Hulu introduced “Hulu Friends,” a service that lets online video per week and found that 33% had viewed full-length users create online profiles, share videos, recommend movies, movies in the month leading up to the survey. comment on each other’s selections and monitor the activity of other users. In this regard, Hulu is trying to make its portal more Types of Online Video Content Viewed by US Active* like Facebook than a video-streaming site.The end goal of creating Online Video Viewers, August 2008 (% of respondents) this type of online community is to gather as much user data as Video posted by people like me (e.g., on YouTube, Google Video) possible and target advertising accordingly. 71% Movie clips or trailers Rather than build its own social network, Netflix decided to 63% partner with Facebook. Under an agreement announced in March Music clips or trailers 2009, the two companies are enabling their joint users to integrate 59% their accounts.That means that a Netflix user’s ratings will show Clips from current TV programs up on his or her Facebook account. If a Facebook friend 57% comments on the rating, that comment will appear on the user’s National/local news Facebook and Netflix accounts. 55% Comedy or other humorous online videos Facebook and MySpace are no strangers to film marketing. 51% Building fancy profiles on both networks has become de rigueur in Full-length current TV episodes Hollywood’s digital marketing toolkit.Twitter is now part of that 50% arsenal as well. Film studios are using their Twitter accounts to Sports news/highlights/events push marketing messages, teasers, games and other content 39% designed to stoke interest in upcoming releases. Full-length movies 33% These tactics have the potential to take movie marketing to new Clips of TV shows that aren't on TV anymore levels by engendering customer loyalty.Films have a long and 32% complex product cycle that includes several release windows Full-length TV episodes that aren't on TV anymore (theatrical, DVD, cable, video-on-demand, broadcast) and 28% opportunities for exposure from film festival honors and awards Commercials or promotional video created by companies to nominations (Cannes, Sundance, Oscars, Golden Globes). Studios promote their brands that use social platforms to connect with their target audiences 25% early in this cycle will be best positioned to tap this interest later Animation, anime and cartoons 25% on, when titles are available for online streaming or downloading. Adult entertainment 20% Online Ad Spending by Film Studios

Note: n=832 ages 13+; viewed in the past month; *those who watch more than 1 hour of online video per week Source: Veoh Networks, "Watching the Web: How Online Video Engages Audiences" conducted by Forrester Consulting, October 8, 2008 Behind the Numbers: US Online 098724 www.eMarketer.com Advertising Spending by Film Studios 098724 US online advertising spending by film studios will Social Media in Movie Marketing increase both in dollar volume and as a percent of Clearly,the goal of digital movie services is to distribute content overall film ad spending due to: directly to consumers and monetize it through transactional ■ A general, ongoing shift from traditional models or advertising support. advertising to online advertising

Another major objective is to use digital channels to engage with ■ Increased production from subsidiary studios, which movie fans on a more social level. Hulu and Netflix have made typically spend greater percentages of their budgets inroads in this area by integrating social network functionality into online than their major-studio counterparts their respective services. ■ A gradual increase in the average amount spent on film advertising by subsidiary studios

Digital Entertainment Meets Social Media 9 Movies

As Hollywood turns its focus toward digital distribution and social Most of the studios’ online advertising budgets go toward online media, it is increasing its commitment to online advertising. By trailers.These have proved to be an effective way to drive moviegoers 2013, film studios will spend $2.65 billion on online advertising, up into theaters on opening weekend, particularly as increasing from $1.24 billion in 2009.As a percentage of overall film percentages of this target audience are online.The syndication of advertising budgets, those figures will represent 14.2% in 2013, up trailers across online platforms such as iTunes and YouTube is a major from 7.7% in 2009. component of studios’ digital marketing strategies.

US Online Advertising Spending by MPAA-Member While the trailer is the dominant online ad medium for theatrical Studios and Their Subsidiaries, 2008-2013 (millions, % campaigns, studios use display,search and video ads to promote change and % of total) DVD releases. For example, in late May a Google search for the Online ad % Online % animated title “WALL-E” turned up contextual ads from its spending change of total distributor,Disney,and from gift, toy and online movie 2008 $975 - 6.3% destinations.A video ad for the DVD release of the Tom Cruise 2009 $1,237 26.8% 7.7% feature “Valkyrie” was featured in Amazon’s movie section.And 2010 $1,586 28.2% 9.3% 2011 $1,986 25.2% 11.2% the DVD pages of Web portals such as Yahoo! and AOL carried 2012 $2,405 21.1% 13.2% prominent display ads from studios touting DVD releases. 2013 $2,651 10.2% 14.2% Note: includes search Source: eMarketer, June 2009 103973 www.eMarketer.com 103973

For additional information on the above chart, see Endnote 103973 in the Endnotes section.

These estimates combine spending by Motion Picture Association of America (MPAA) members and their subsidiaries. MPAA member studios are Paramount Pictures, Sony Pictures, 20th Century Fox, Universal Pictures,Walt Disney Pictures and Warner Bros. Pictures. Subsidiaries include studio “classics” and specialty divisions such as Fox Searchlight, Miramax, New Line and Sony Pictures Classics.

From 2001 to 2008, a number of factors tilted the balance of online advertising spending toward the subsidiaries. First, the number of films released through subsidiaries increased steadily from 258 to 444, while the number of MPAA titles dropped from 182 to 162. Second, the average marketing cost per film rose dramatically for subsidiary films while remaining relatively flat for MPAA releases. And third, the percentage of film advertising budgets spent online edged higher among subsidiaries than MPAA studios.

As a result, subsidiaries will spend an estimated $892 million on online advertising in 2009, compared with $345 million for MPAA studios. By 2013, this gap will widen further as subsidiaries outspend MPAA studios online by a factor of more than 3-to-1.

Digital Entertainment Meets Social Media 10 Video Games

At a time when the recorded music industry is In-Game Advertising spiraling downward and the film industry is struggling to find its footing in the digital age, the Behind the Numbers: US In-Game video game business is thriving. Advertising Spending ■ US in-game advertising spending on console/PC The Consumer Electronics Association (CEA) estimated US video games and Web-based games will continue on an game software and hardware revenues at $19.8 billion in 2008—a upward trajectory through 2013. whopping 25% increase over the 2007 figure of $15.8 billion. ■ Because of the recession, the growth rate will be Further,the CEA projected that in 2009 the industry will grow by slower in 2009 than 2008. Growth will rebound in another 11%, reaching $22 billion. 2010 and taper off by 2013.

■ The relative mix of in-game ad spending among console/PC games and Web-based games will continue to shift toward the latter as ad-supported, casual games become more sophisticated and amass larger audiences.

■ A demographic expansion of the gaming population to include more women and older players will increase in-game advertising opportunities.

As the US video game industry grows in the next several years, dollars spent on in-game advertising will increase accordingly.

By 2013, marketers will spend a total of $681 million on in-game advertising, up from $403 million in 2008. During the forecast Click here for a more in-depth look at the dynamics period, the relative mix of console/PC-based and Web-based shaping the US video game industry. advertising will shift slightly toward the latter,with 75% of the total spent online in 2013. IBISWorld noted growth in US video game revenues in 2008 and projected further growth through 2013. Using an index that US In-Game Advertising Spending, by Segment, includes retail sales of software and hardware, as well as software 2008-2013 (millions) development and distribution costs, IBISWorld sized the US 2008 2009 2010 2011 2012 2013 industry at $38.9 billion in 2008.That represents a 9.3% increase Console- and PC-based $117 $124 $140 $155 $167 $170 over the 2007 figure of $35.6 billion. By 2013, the industry will see Web-based $286 $319 $370 $418 $464 $511 Total $403 $443 $510 $574 $631 $681 total revenues of $63.2 billion—a compound annual growth rate of Note: excludes advergames and advertising on mobile games; numbers 10.2% over five years. may not add up to total due to rounding Source: eMarketer, June 2009 US Video Game Industry Revenues, 2007, 2008 & 2013 103975 www.eMarketer.com (billions) 103975

2007 $35.6 For additional information on the above chart, see Endnote 103975 in the Endnotes section. 2008 $38.9

2013 $63.2

Note: includes games/software, consoles, accessories and online subscriptions Source: IBISWorld, "Video Games: US Industry Report," July 23, 2008 as cited in press release, August 18, 2008 097464 www.eMarketer.com 097464

Digital Entertainment Meets Social Media 11 Video Games

According to comScore, in November 2008 the number of In another survey of gamers, RealGames found that more than display ad views on US online gaming sites and the number of 70% of respondents said they clicked on at least one in-game ad advertising-exposed unique visitors rose by 29% and 30%, to find out more information. respectively.In addition, advertising-exposed reach increased by 25% and the number of display ads per page viewed—a measure US* Gamers Who Click** on In-Game Advertising, by Frequency, November 2007-January 2008 (% of of so-called “ad clutter”—decreased by 17%. Although not all of respondents) the ads on gaming sites appear in or around the game space, the growth trends in ad views and ad-exposed visitors are strong Often indicators of the momentum of Web-based in-game advertising. 10.8% Never 28.4% US Display Advertising Metrics for Online Gaming Sites, November 2007 & November 2008 Sometimes November November % 32.5% 2007 2008 change Rarely Total display ad views (millions) 6,659 8,610 29% 28.2% Advertising-exposed unique visitors 52,066 67,834 30% (thousands) Note: n=2,004; numbers may not add up to 100% due to rounding; *73.4% Advertising-exposed reach 28.6% 35.6% 25% of respondents are US-based and 26.6% reside outside the US; **clicked Display ads per page viewed 1.00 0.83 -17% on ads that run at the beginning or the middle of the game to find out more information Average frequency 127.9 126.9 -1% Source: RealGames, "In-Game Advertising Survey," provided to eMarketer, February 6, 2008 Gross rating points (GRPs) for total 2,271 2,913 28% population 092221 www.eMarketer.com Note: home, work and university locations 092221 Source: comScore Ad Metrix as cited in press release, January 28, 2009 101277 www.eMarketer.com Online and Casual Gaming 101277 comScore noted that the number of unique visitors to online An MTV Networks study showed that 75% to 80% of free online gaming sites grew by 27% to nearly 86 million in December 2008. gamers who noticed advertiser-sponsored games did not change By comparison, the total Internet audience grew by 4% in that time. their impressions of a brand after seeing an ad.Among the remainder,many more respondents emerged with a better brand Top 10 US Online Gaming Sites, Ranked by Unique Visitors, December 2007 & December 2008 (thousands impression than with a worse one. and % change) December December % change Change in Impression of Brand Among US Free Online 2007 2008 Gamers Who Have Noticed Advertiser-Sponsored Games, by Age, 2008 (% of respondents in each group) 1. Yahoo! Games 16,184 19,468 20% 2. EA Online 12,673 15,369 21% 8-12 13-17 18-24 25-49 50-60 (n=196) (n=260) (n=182) (n=463) (n=340) 3. Disney Games 11,933 13,458 13% Better impression 20% 19% 24% 21% 18% 4. WildTangent 7,650 13,306 74% No change 75% 76% 75% 75% 80% 5. AddictingGames 9,706 11,343 17% Worse impression 5% 5% 1% 4% 2% 6. AOL Games 8,380 10,750 28% Source: MTV Networks, "An Exploration of Online Casual Gaming," July 22, 7. MSN Games 9,685 10,263 6% 2008 8. Miniclip.com 7,264 8,636 19% 096834 www.eMarketer.com 9. Nick Games 6,020 7,092 18% 096834 10. SPIL GAMES 1,821 6,715 269% Total online gaming 67,547 85,977 27% Total Internet 183,619 190,650 4% Note: home, work and university locations Source: comScore Media Metrix as cited in press release, January 28, 2009 101276 www.eMarketer.com 101276

Digital Entertainment Meets Social Media 12 Video Games

The list of top online gaming sites tracked by comScore includes A comScore survey of female Internet users noted a sharp online destinations of console game publishers (such as EA), increase in the number visiting online gaming sites. In August 2008, dedicated casual game sites (such as WildTangent and these sites collectively drew more than 42 million unique female AddictingGames),Web portals with game sections (such as visitors—a 27% increase over the previous year.Coincidentally,this Yahoo! Games,AOL Games and MSN Games) and entertainment was the same percentage increase that comScore noted in the properties that have branched out into games (such as Disney online gaming category as a whole in December 2008. and Nickelodeon). US Female Internet Users Who Visited Online Gaming Sites, by Age, August 2007 & August 2008 (thousands “The growth in display ads in the online of unique visitors and % change) gaming category [shows] that gamers are August August % 2007 2008 change increasingly accepting of ad-supported 12-17 3,030 4,710 55% games, [and] that the advertising 18-24 3,781 5,090 35% community is recognizing the value of this 25-34 5,724 6,543 14% highly engaged audience.” —Edward Hunter, 35-44 7,990 8,839 11% director of gaming solutions, comScore, in a statement 45-54 6,366 7,359 16% January 28, 2009 55-64 3,100 4,418 43% Total 33,888 42,884 27%

Not surprisingly,given the diversity of these sites, online gaming Note: home, work and university locations Source: comScore Media Metrix as cited in press release, September 15, enthusiasts represent a wider demographic span than gamers as 2008 a whole.The Entertainment Software Association (ESA) found in 097985 www.eMarketer.com 097985 2008 that the gender split among online gamers was 56% male to 44% female. By contrast, video gamers as a whole break down Social Gaming 60% male to 40% female, according to the ESA. As gaming reaches further into the mainstream, developers and publishers are more interested than ever in integrating social US Online Gamers, by Gender, 2008 (% of respondents) media elements into their products.

EA’s long-awaited “The Sims 3” is expected to launch in June 2009 with a suite of built-in video and picture creation tools, as well as Male syndication options for embedding game content in social 56% networks. In addition, EA is building its own game-related social Female 44% network around the play experience, according to MediaPost’s “Gaming Insider” column.These social elements build on the success EA experienced with similar elements in its popular PC game “Spore.”

Source: Entertainment Software Association (ESA), "2008 Essential Facts Microsoft is reportedly working on a version of its “Halo” game About the Computer and Video Game Industry" conducted by Ipsos-MediaCT, July 16, 2008 that will incorporate online social communities.A job posting for 096730 www.eMarketer.com an engineering position on the Halo team said:“We’re looking to 096730 blend console, web, and mobile to create an immersive Halo world that follows the dedicated Halo fan wherever they go.”Although the release of this version of “Halo” is at least one year away,the listing signals Microsoft’s strategy to incorporate social elements into the game franchise.

Digital Entertainment Meets Social Media 13 Video Games

This follows Microsoft’s move to enhance its Xbox Live online A comScore study of iPhone applications found that 12 of the top community with tools that allow the creation of avatars and 25 apps, as ranked by their US installed base, were game-related. content-sharing. Meanwhile, console rival Sony incorporated a They included the wildly popular Tap Tap Revenge, hockey and host of social features—including virtual world creation and bowling games, puzzle games and an adaptation of the arcade instant messaging—to its PlayStation Home network. classic Pac-Man.

Top 25 Apple App Store Applications, Ranked by “When people go to gaming sites they want Penetration of US App Store Users, February 2009 a experience that’s similar to what they % Category Developer get on social networks…some idea of installed 1. Tap Tap Revenge 32% Games Tapulous, Inc. who’s in your game playing network, how 2. Backgrounds 27% Entertainment Stylem Media you fare against them, how you speak to 3. Touch Hockey: 26% Games FlipSide5, Inc. them, how you reach out to them, how you FS5 challenge them.” —Jessica Rovello, chairman, 4. Facebook 26% Social networking Facebook Arkadium, in an interview with eMarketer,April 29, 2009 5. PAC-MAN 24% Games Namco 6. iBowl 24% Games SGN The goal of game developers, game publishers and console-makers 7. MySpace Mobile 23% Social networking MySpace is to reach gamers on all available platforms, including mobile 8. Google Earth 22% Travel Google devices.And no smartphone has tapped into the public’s fascination 9. Labyrinth 22% Games Codify AB with casual gaming more successfully than the iPhone. 10. Pandora 21% Music Pandora Media, Inc. 11. AIM 19% Social networking AOL 12. Flashlight 19% Utilities John Haney 13. Virtual Zippo 18% Lifestyle Moderati Inc. and Lighter Zippo Manufacturing Co. 14. Movies 18% News Flixster 15. Hangman 18% Games JamSoft 16. Bubblewrap 18% Entertainment Orsome Software Ltd. 17. Lightsaber 17% Entertainment Lucasfilm Ltd. Unleashed 18. Shazam 17% Music Shazam Entertainment Ltd. 19. MazeFinger 16% Games ngmoco:) 20. Cube Runner 16% Games Andy Qua 21. Sol Solitaire 15% Games Smallware LLC 22. Crazy Penguin 15% Games Digital Chocolate, Inc. Catapult 23. Topple 15% Games ngmoco:) 24. Sudoku 14% Games Mighty Mighty Good Games 25. Remote 13% Entertainment Apple Note: home, work and university locations; includes iPhone and iPod touch users Source: comScore, Inc., "comScore Apple App Store Report" as cited in press release, April 7, 2009 102946 www.eMarketer.com

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Digital Entertainment Meets Social Media 14 Video Games Case Studies

A Compete survey of US iPhone users found that 79% had ‘Terminator Salvation’ Using Twitter-Based Game downloaded game apps to their phones, making it the top category. Some of the most innovative digital marketing campaigns have emerged from the film and video game industries. Examples Top 20 Mobile Application Categories Downloaded by include “The Dark Knight”-themed alternate reality game (ARG), US iPhone Owners, Q1 2009 (% of respondents) which allowed fans to inhabit a virtual Gotham City; the “Killzone 1. Games 79% 2” toolbar,which, once downloaded, meant a user could be 2. Entertainment 78% “attacked” any time while browsing the Web; and the “Dragon Quest VIII” online community,which revealed game assets before 3. Weather 57% release and allowed members to contribute to aspects of the 4. Music 55% game itself. 5. News 43% The latest addition is a Twitter game called Resistance2018, which 6. Utilities 42% is being used to promote the Warner Bros. post-apocalyptic epic 7. Social networking 35% “Terminator Salvation.” 8. Navigation 33% In the game, members of the film’s Human Resistance 9. Finance 32% communicate through Twitter to decode intercepted 10. Lifestyle 29% transmissions from the villainous Terminators and the Skynet 11. Travel 29% supercomputer.To play the game, users must follow 12. Reference 28% Resistance2018 on Twitter and then visit Resistance2018.com to

13. Productivity 27% find the instructions for game play. 14. Business 25% While all this may be a little involved for the casual Twitter user,it is 15. Books 23% a fairly progressive marketing step and a potential coup for engagement-based advertising. 16. Education 23%

17. Sports 23% Sal Ladestro, executive VP of marketing for Sony Pictures, the

18. Photography 20% film’s distributor in most territories outside the US, said in a statement:“In the fight against Skynet and the Terminators, mass 19. Healthcare and fitness 19% communication is vital, so it’s no surprise that the resistance 20. Other 2% would turn to Twitter.We think this is the perfect environment for Note: n=102 the Terminator game as it allows users to interact with the movie, Source: Compete, Inc. as cited in company blog, April 29, 2009 their friends and other game players instantaneously.” 103505 www.eMarketer.com 103505 There is also a Facebook application associated with the movie, which has 3,000 monthly active users (about the same as on Twitter), along with a soon-to-be-released “Terminator Salvation” iPhone game by Gameloft.

Warner Bros.’ efforts to promote the film have been more traditional, relying heavily on TV and print ads. However,the studio has teamed up with Pizza Hut to broadcast exclusive film footage on the Pizza Hut Website.Visitors will be able to win film-related prizes, including “Terminator Salvation” video games and Xbox consoles.

Digital Entertainment Meets Social Media 15 Case Studies

While it is too early to gauge the success of this integrated The relationships these titles have created for the music and video campaign,Warner Bros. and Sony have already generated game industries has not been without tension, however. significant buzz by putting the game on Twitter.Considering that On a Warner Music Group earnings call, chairman and CEO Mr. the microblogging site is a very hot destination right now—new Bronfman said,“The amount being paid to the [music] industry, accounts were up 1,841% in February 2009 over the same period even though their games are entirely dependent on the content last year—the studios are focusing their efforts in the right place. that we own and control, is far too small.”

Role of Video Games in Energizing Music Sales On the other side of the argument,Activision VP of music affairs By 2006, the music industry had heard so much bad news that it Tim Riley said,“The number of people interested in being must have been a relief when the video game “Guitar Hero” associated with the game is probably a thousand times more than pumped new life into the business. Since then, the success of the we can get into the game.” game has spawned several sequels and another game series, There have been concerns that the genre has become saturated. “Rock Band,” which also invigorated music sales. As of January 2009, unit sales of “Guitar Hero World Tour”—the The impact these games have had on the music business latest installment in the series—were down 55% compared with is undeniable: its predecessor,“Guitar Hero III.”At that time,“Rock Band 2” had sold fewer than 1 million units, compared with 4 million for the first ■ Veteran rock band Aerosmith saw a 40% sales increase in its title in the series. Meanwhile, Disney,Konami and Nintendo have back catalog following the release of “Guitar Hero:Aerosmith,” all released music-oriented games. and Activision CEO Bobby Kotick announced that the game had made more money for the band than any of its individual albums. As many experts have pointed out, 2009 will be a pivotal year for music-themed games. If anyone can give the genre a shot in the ■ “Rock Band” became more than a promotional outlet when it set arm, it is the Beatles.This fall should help determine whether up a download destination for songs featured in the game gaming and music executives sing “Baby You’re a Rich Man” or franchise.As of March 2009, more than 40 million download “You Never Give Me Your Money.” purchases had been made from the “Rock Band” music store.

■ Bands including Mötley Crüe, Metallica and Rush have found the Microsoft + Netflix: Streaming Movies Through “Guitar Hero” and “Rock Band” titles so popular that they have Xbox Live released new recordings exclusively,or simultaneously,through Netflix and Microsoft are pioneers in their respective industries, and the games. their alliance to stream Netflix movies through Microsoft’s Xbox Live video game console platform showcases both companies’ ■ The Beatles, still holdouts to digital downloading as of May 2009, eagerness to expand their businesses in the digital space. have licensed their music to “Rock Band” publisher MTV Games for a Beatles-themed title due in fall 2009. The venture allows customers of both companies—that is, subscribers to Netflix’s mail-order DVD rental service and ■ Sales of Weezer’s track “My Name Is Jonas” increased by a factor members of Microsoft’s Xbox Live Gold online community—to of 10 after it was included in “Guitar Hero III: Legends of Rock.” watch movies and TV shows for free through the console. Although the video game business was less desperately in need of At the time the deal was announced in July 2008, content an infusion, the success of these game series has been a boon to availability on Netflix’s streaming service was limited to that industry as well: approximately 10,000 titles. By May 2009, the selection had ■ By October 2008, the “Guitar Hero” series had sold 23 million units in increased to 12,000 titles—still a fraction of the 100,000 movies in the US and earned its publisher,Activision, $1.6 billion in revenues. Neftlix’s DVD library,but a growing number that illustrates the growth of the service.As more content opens up for streaming, ■ NPD reported that “Rock Band” was the top revenue-generating consumers should have a greater range of choices going forward. title of 2008. In February 2009, Netflix and Microsoft announced that 1 million ■ NPD also reported that music-themed games made up 19% of Xbox Live Gold members had downloaded the Netflix application overall software industry sales in July 2008. since the service debuted in November 2008. Michael Pachter,a ■ The success of “Guitar Hero” and “Rock Band” inspired other video game analyst at securities firm Wedbush Morgan, estimated publishers, such as “Grand Theft Auto IV” publisher Rockstar that approximately 200,000 of these joint members signed up for Games, to set up download destinations for songs featured on Netflix after the November launch. game soundtracks.

Digital Entertainment Meets Social Media 16 Case Studies

In a January 27, 2009, interview with Game Daily,Mr.Pachter said, Although VH1 spearheaded the “Anvil”marketing effort, the “We think subscriber growth will continue at super-normal levels for company has no stake in the film’s theatrical release, which quite some time.We believe that the Xbox Live Gold membership is opened in select US markets in February and is scheduled for a proverbial gold mine of potential members, and expect to see as broader distribution later this year.However,VH1 stands to benefit many as 1 million join as Netflix members in the next year.” from the film’s eventual cable and DVD releases.

He also estimated that Microsoft would sell between 5 million and VH1 should also benefit from the band’s planned participation in 6 million Xbox 360 consoles in the US in 2009, and that 35% of these an upcoming installment of the video game “Rock Band,” which is new console owners would subscribe to the Xbox Live Gold service. published by sister company MTV Games.

By these accounts, this project has been a win-win for both Besides the endorsements via Twitter,documentarian Michael companies and a sign that complementary entertainment Moore of “Bowling for Columbine” and “Fahrenheit 911” also products can lead to subscriber growth. spoke favorably of “Anvil,” calling it “the best documentary I’ve seen in years.” Heavy Metal Documentary Anvil Using Twitter To be sure, this kind of marketing strategy is not necessarily Documentaries about obscure heavy metal bands are not the stuff applicable to big-budget Hollywood features. However, that film marketing success stories are generally made of.With the independent studios are likely to take notice of social media’s exception of the 1984 cult sleeper hit “This Is Spinal Tap”—which potential to raise awareness of titles that might otherwise slip was actually a fictional parody of a rock documentary—these beneath the radar. movies are generally marketed only to a band’s fan base.

Thanks in part to social media, the 2009 release “Anvil! The Story of Anvil” may be rewriting the rules of marketing niche films.The movie chronicles the Canadian heavy-metal band Anvil, which had a modest hit in 1982 and promptly disappeared from the scene.

Viacom-owned VH1, which retains cable and DVD rights to the music-themed documentary,sent promotional copies to musicians active on Twitter,including John Mayer and Joel Madden.VH1’s goal was to get those celebrities to tweet about the film—and it worked.

On April 8, 2009, Mr.Mayer posted:“Check out www.anvilmovie.com. Moving, inspiring, funny,sad, bright, wonderful film.” Mr.Madden, a member of the band Good Charlotte, posted that he was going to see the movie on April 7.As of early June 2009, Mr.Mayer was the most-followed music star on Twitter,with nearly 1.2 million followers; Mr.Madden had more than 146,000 followers at that time.

“Had you purchased the kind of exposure that [Mayer and Madden] have through Twitter, you would have spent many, many, many hundreds of thousands of dollars.” —Claude Brodesser Akner, Los Angeles bureau chief, Advertising Age, commenting on the viral “Anvil” campaign on American Public Media’s “Marketplace,” May 28, 2009

Digital Entertainment Meets Social Media 17 Conclusions

Although different dynamics are at work in the Movies The movie industry rode a gravy train for decades thanks to the music, movie and video game industries, all three ongoing popularity of the theatrical industry and the success of face the same challenge: the need to leave behind home video configurations such as VHS and DVD. But those revenue streams have stopped growing and no other formats business models based on packaged media and loom as potential saviors.This makes the emergence of digital embrace a digital future in which content is business models all the more urgent. monetized in new ways, including through As the film industry explores alternatives ranging from transactional download services to free, ad-supported streaming, advertising, paid downloads and subscriptions. brand marketers can benefit by inserting themselves into the Social media will play an increasingly important marketing loop between movie studios and their customers. role in the new entertainment economy once More and more discussions are taking place on social sites, content owners, technology providers,Web including influential customer ratings and recommendations on services such as Netflix,Amazon and Facebook.Twitter is publishers and consumers figure out a way emerging as a buzz generator and a marketing tool for studios. forward that takes into account their various— Every one of these venues represents an opportunity for marketers to actively participate in the massive amount of interest and often conflicting—interests. and anticipation that films continue to generate.

Video Games Music The video game industry was built on the interdependence These have been challenging times for the recorded music between hardware and software. Successive generations of game industry,to say the least. But, as the cliché goes, every challenge consoles inspired increasingly sophisticated games, and the most brings an opportunity. popular of these in turn sparked innovations in console design. The result has been a multibillion-dollar industry that stands alone For marketers, the depressed state of the music business means among entertainment and media sectors because it is actually that labels and artists are more open than ever before to creative healthy and growing. licensing and branding opportunities. That said, the game industry is facing its own transitional issues. Console games are still the king of the hill, but their predominance Jill Sobule is being challenged by a new generation of browser-based games. These games are more advanced and more immersive than Singer earlier Web-based titles, largely thanks to faster broadband Independent Recording Artist connections and the graphics and audio processing capabilities of Artists who have been on major and independent labels, such as today’s home computers. Jill Sobule, are choosing to forgo the label route altogether and At the same time, more casual games, many of them on mobile finance recording projects through other means. She used social devices, have caught on in the mainstream.This has exposed new networks to solicit her fan base to contribute money toward the audiences to gaming, with more older players and more females project. In an interview with eMarketer, Ms. Sobule said she would among the casual game set than among “hardcore” gamers. be more than open to a brand participating in a future project by Accordingly,marketers have a golden opportunity to reach an providing funding in exchange for exposure.This receptiveness to audience that is larger,more diverse and more active in a host of brand involvement is a far cry from the days when artists were online and mobile pursuits than the average population. stigmatized for “selling out.” Further,a growing number of ad-supported online games are With video games,TV commercials and social networks emerging available to consumers for free. Surveys show that gamers have largely accepted the bargain of free game play in exchange for as increasingly viable platforms for music exposure, marketers have exposure to ads.This puts marketers in pole position to make their a virtually open palette to align themselves with music properties. brands part of the gaming experience through banner ads, video Although the recording industry has been hurting for some time, ads, sponsored sessions, product placements or other vehicles. music itself remains as cool, vibrant and potentially lucrative as ever. Like the games themselves, the advertising opportunities around them seem to lend themselves to going one level further each The full interview is available on eMarketer’s Website. time around.

Digital Entertainment Meets Social Media 18 Endnotes

Endnote numbers correspond to the unique 103969 six-digit identifier in the lower left-hand corner Key eMarketer Numbers — Digital Entertainment of each chart.The charts from the report are $4.56 billion US digital music spending in 2013, up from $3.00 billion in 2009 repeated before their respective endnotes. 82.6% US digital music spending as a percent of total US recorded music spending in 2013, up from 41.0% in 2009 103346 $5.52 billion Total US recorded music spending in 2013, down from $7.31 billion in 2009 $2.65 billion US online advertising spending by MPAA-member US Digital Music Sales, by Format, 2005-2008 (millions) film studios and their subsidiaries in 2013, up 2005 2006 2007 2008 from $1.24 billion in 2009 Single downloads $363.3 $580.6 $801.6 $1,022.7 14.2% Percent of film studio advertising budgets spent online in 2013, up from 7.7% in 2009 Album downloads $135.7 $275.9 $424.9 $568.9 $681 million US in-game advertising spending in 2013, up from Music video $3.7 $19.7 $28.2 $41.3 $443 million in 2009 Kiosk $1.0 $1.9 $2.6 $2.6 75.0% Percent of US in-game advertising spending that Mobile $421.6 $773.8 $880.8 $816.3 will be spent on Web-based games in 2013, up from 72.0% in 2009 Subscription $149.2 $206.2 $201.3 $188.2 Source: eMarketer, June 2009 Total $1,074.4 $1,858.0 $2,339.3 $2,639.9 103969 Note: numbers may not add up to total due to rounding Source: Recording Industry Association of America (RIAA), "2008 Year-End Extended Note: eMarketer benchmarks its US recorded music Shipment Statistics;" eMarketer calculations, April 2009 spending projections against Recording Industry Association of 103346 www.eMarketer.com America (RIAA) data, for which the last full year measured was 2008. 103346 Extended Note: Kiosk data includes singles and albums. Mobile These projections include physical and digital (online and mobile) data includes master ringtones, ringback tones, music videos, music. Physical segment includes all CD, cassette, vinyl and music full-track downloads and other mobile. Subscription data is the video formats, such as DVD Video, DVD Audio and SACD. Online weighted annual average. segment includes single downloads, album downloads, music videos, digital kiosks and subscription services. Mobile segment includes master ringtones, ringback tones, music videos, full-track downloads and other mobile; excludes MIDI-based monophonic and polyphonic ringtones. In-game advertising spending includes console- and PC-based game spending as well as Web-based game spending. Console- and PC-based in-game ad spending includes static ads, dynamic ads, product placements, game portal display ads and sponsored sessions appearing within console- and PC-based games.Web-based in-game ad spending includes all ads in or around game space, including sponsored sessions. eMarketer benchmarks its film studio US online ad spending projections against Motion Picture Association of America (MPAA) data, for which the last full year measured was 2008. MPAA members are Paramount Pictures, Sony Pictures, 20th Century Fox, Universal Pictures,Walt Disney Pictures and Warner Bros. Pictures. MPAA member subsidiaries include studio "classics" and specialty divisions such as Fox Searchlight, Miramax, New Line and Sony Pictures Classics.Total advertising spending includes billboards; Internet (including search); magazines; newspapers; radio; trailers;TV (cable, network and spot); and nonmedia spending for production/creative services, exhibitor services, market research and promotion/publicity.

Digital Entertainment Meets Social Media 19 Endnotes

103970 | 103983 103973

US Recorded Music Spending, by Segment, 2008-2013 US Online Advertising Spending by MPAA-Member (billions and % of total) Studios and Their Subsidiaries, 2008-2013 (millions, % change and % of total) 2008 2009 2010 2011 2012 2013 Online ad % Online % Physical $5.76 $4.32 $3.11 $2.18 $1.48 $0.96 spending change of total Digital total $2.64 $3.00 $3.39 $3.80 $4.20 $4.56 2008 $975 - 6.3% -Online $1.82 $2.22 $2.65 $3.07 $3.47 $3.82 2009 $1,237 26.8% 7.7% -Mobile $0.82 $0.77 $0.74 $0.73 $0.73 $0.74 2010 $1,586 28.2% 9.3% Grand total $8.40 $7.31 $6.50 $5.98 $5.68 $5.52 2011 $1,986 25.2% 11.2% Digital % of total 31.4% 41.0% 52.2% 63.6% 73.9% 82.6% 2012 $2,405 21.1% 13.2% Note: numbers may not add up to total due to rounding 2013 $2,651 10.2% 14.2% Source: eMarketer, June 2009 Note: includes search 103970 www.eMarketer.com Source: eMarketer, June 2009 103970 103973 www.eMarketer.com 103973 US Recorded Music Spending Growth, by Segment, 2008-2013 (% change) Extended Note: eMarketer benchmarks its projections against Motion Picture Association of America (MPAA) data, for which the 2008 2009 2010 2011 2012 2013 Physical -27.9% -25.0% -28.0% -30.0% -32.0% -35.0% last full year measured was 2008. MPAA members are Paramount Digital total 12.8% 13.5% 13.2% 12.1% 10.5% 8.4% Pictures, Sony Pictures, 20th Century Fox, Universal Pictures,Walt Disney Pictures and Warner Bros. Pictures. MPAA member -Online 25.0% 22.0% 19.0% 16.0% 13.0% 10.0% -Mobile -7.3% -5.6% -3.5% -1.7% -0.1% 1.0% subsidiaries include studio "classics" and specialty divisions such as Grand total -18.7% -12.9% -11.1% -8.0% -5.0% -2.9% Fox Searchlight, Miramax, New Line and Sony Pictures Classics.Total Source: eMarketer, June 2009 advertising spending includes billboards; Internet (including search); 103983 www.eMarketer.com magazines; newspapers; radio; trailers;TV (cable, network and spot); 103983 and nonmedia spending for production/creative services, exhibitor Extended Note: eMarketer benchmarks its projections against services, market research and promotion/publicity. Recording Industry Association of America (RIAA) data, for which the last full year measured was 2008. Physical segment includes 103975 all CD, cassette, vinyl and music video formats, such as DVD Video, DVD Audio and SACD. Online segment includes single downloads, US In-Game Advertising Spending, by Segment, album downloads, music videos, digital kiosks and subscription 2008-2013 (millions) services. Mobile segment includes master ringtones, ringback 2008 2009 2010 2011 2012 2013 tones, music videos, full-track downloads and other mobile; Console- and PC-based $117 $124 $140 $155 $167 $170 excludes MIDI-based monophonic and polyphonic ringtones. Web-based $286 $319 $370 $418 $464 $511 Total $403 $443 $510 $574 $631 $681 Note: excludes advergames and advertising on mobile games; numbers may not add up to total due to rounding Source: eMarketer, June 2009 103975 www.eMarketer.com 103975 Extended Note: Console- and PC-based in-game ad spending includes static ads, dynamic ads, product placements, game portal display ads and sponsored sessions appearing within console- and pc-based games.Web-based in-game ad spending includes all ads in or around game space, including sponsored sessions.

Digital Entertainment Meets Social Media 20 Related Information and Links About eMarketer

Related Links AccuStream iMedia Research eMarketer is "The First Place to Look" for http://www.accustreamresearch.com/ research and analysis on digital marketing Apple and media. eMarketer analyzes information http://www.apple.com/ from over 3,000 sources, and brings it together Arkadium in reports, articles and the most comprehensive http://www.arkadium.com/ database of online marketing statistics in Consumer Electronics Association (CEA) http://www.ce.org/ the world. Entertainment Software Association (ESA) http://www.theesa.com/ A Trusted Resource eMarketer serves as a trusted, third-party resource, cutting Facebook through the clutter and hype–helping businesses make sense of http://www.facebook.com the numbers and trends. eMarketer's products and services help IBISWorld companies make better,more informed business decisions by: http://www.ibisworld.com/ ■ Streamlining research sources and reducing costs International Federation of Phonographic Industries ■ Eliminating critical data gaps (IFPI) http://www.ifpi.org/ ■ Providing an objective, bird’s eye view of the entire landscape

Motion Picture Association of America (MPAA) ■ Better deploying and sharing information across the company http://www.mpaa.org/ ■ Building solid business cases backed up by hard data MySpace Music http://music.myspace.com/ ■ Reducing business risk Pandora ■ Saving valuable time http://www.pandora.com/ Recording Industry Association of America (RIAA) To learn more about subscriptions to eMarketer, http://www.riaa.com/ call 800-405-0844 (outside the U.S. and Canada, call 001-212-763-6010), or e-mail [email protected]. Sobule, Jill http://www.jillsnextrecord.com/

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Report Contributors Susan Reiter Managing Editor Joanne DiCamillo Production Artist Amanda Green Staff Writer Dana Hill Production Artist Russ Josephs Senior Researcher Chris Keating Senior Researcher James Ku Data Entry Associate and Production Artist Nicole Perrin Copy Editor Allison Smith Senior Editor

Digital Entertainment Meets Social Media 21