How Will Technology, Media, and Telecommunications Companies Prepare for Further Disruption Ii at a Glance

Streaming the future How will technology, media, and telecommunications companies prepare for further disruption ii At a glance Perhaps no other development in recent history Bottom line: It is hard to predict how things will has transformed the business landscape as look just a few years from now. To better envision much as the Internet. In less than two decades, the future, PwC has analyzed the key uncertainties life without the Internet has become almost facing TMT companies and developed a series unimaginable. And yet, recent international court of scenarios for what the playing field might look cases and the policymaking of some governments under different circumstances. These scenarios make the future of the Internet as we now know can help industry participants and investors to it less than certain. navigate the future. A handful of technology, media, and telecommu- We start with a contextual assessment of the forces nications (TMT) companies have come to dominate of change affecting TMT companies (page 2), various aspects of the Internet, including access, then explore two uncertainties that will have search, social networking, on-line shopping, a profound impact on how TMT companies grow the sharing economy, advertising, and content and compete over the coming decade (page 6), creation and distribution. These players were assess the scenarios uncovered by those able to enter the market with unique offerings uncertainties (page 10), and finally, describe the or business models, quickly shaking up industry implications of those scenarios (page 17). after industry. These disruptors appear to have a stronghold in their chosen markets, but ongoing innovation in the Internet space continues to usher in new businesses that could well end up disrupting the disruptors. Global forces drive sweeping change Businesses everywhere are being reshaped by Net neutrality broad megatrends, from demographic shifts to changes in the locus of global economic power Net neutrality ensures Internet service providers to a mass migration of populations into urban treat all Internet traffic equally rather than areas. For TMT companies, the rise of the middle charging differently based on type of content, site, class in emerging markets has created vast platform, application, or equipment. In February opportunities from on-line shopping and social 2015, the US Federal Communications Commission networks to creation of local apps, advertising, (FCC) upheld net neutrality by reclassifying and content. China and India are expected to high-speed Internet service as a telecommunications account for nearly 50% of all new mobile Internet service rather than an information service.2 users between 2013 and 2018. And 22% of total The move effectively prevents Internet service global entertainment and media revenues in 2017 providers (ISPs) from charging content providers are anticipated to originate in growth markets in for faster delivery of their data through paid China, Brazil, India, Russia, the Middle East, North prioritization arrangements. Africa, Mexico, Indonesia, and Argentina.1 As more and more consumers substitute broadband- Tech-savvy youth and young adult populations hogging streamed Internet content for bundled in emerging economies countries present additional cable television options, thus straining ISP networks, opportunities. Mass migration into urban areas Congress might well revisit the issue in the future. has imposed equally massive demands for commu- And those companies who oppose net neutrality nications infrastructure on cities across the world. might seek redress from the courts. The convergence of these forces requires TMT companies to address a variety of unresolved The net neutrality story is also unfolding differently issues with major implications on go-to-market in other parts of the world. For example, policy- strategies and service or product offerings. makers in Europe recently agreed to allow mobile and broadband operators to charge a premium to content companies who want to deliver video to consumers at higher speeds.3 Until this all shakes out, it is difficult to predict who will be winners and who will pay the greatest price 1 PwC, Global Entertainment and Media Outlook 2014 – 2018, 2014. for service delivery. 2 FCC, “Open Internet,” https://www.fcc.gov/general/open-internet, accessed January 26, 2016. 3 Mark Scott, “EU to End Cellphone Roaming Charges in 2017,” The New York Times, June 30, 2015. 2 14 % revenue uplift recorded by the most innovative 20% of TMT companies.4 Streaming the future 3 Addressable advertising, contextual awareness, and data responsibility TMT companies are still not sure how best to analyze customer data for valuable insights that can be monetized — an important question because it affects their valuations and their attractiveness to investors. One potential avenue for turning customer information into PwC analysis finds that consumers are willing to revenue is by combining data analytics with provide personal information and accept advertising contextual awareness. if it is contextual and relevant. They also are interested if they receive something in return, such Contextual awareness refers to the customer’s as a discount.5 New digital technologies make location, the type of device they are using, this type of personalized addressable advertising the content they are consuming, current customer possible. For example, when watching streaming activity, and even a customer’s data or account television, a consumer could choose when and how balance. In its broadest sense contextual awareness many commercials to receive. helps companies better understand customer intention and behavior. Access to customer-specific information makes it far more cost-effective for advertisers to reach potential buyers of their products, since they are able to, for example, target automotive ads to consumers who have shared that they are in the market for a new car. In fact, there are companies that are already in possession of this type of information — from social networks to content providers to shopping websites — and they are looking for ways to mine it. Insights gained from contextual awareness, while highly valuable, run the risk of sparking a backlash from consumers who might feel intruded on without their knowledge or permission. TMT companies need to strike a balance between harnessing the power of contextual awareness and demonstrating to consumers that they are not going to abuse it. 4 PwC, Global Innovation Survey, 2013. 5 PwC, “What do US Consumers Want?,” Consumer Intelligence Series, 2014. 4 Prepare yourself to understand that disruption and change are normal in a digital company, and that instead of thinking of them as failures, embrace them as change. Use that change.6 — Devin Wenig President and Chief Executive Officer, eBay Inc. Monetization: reaching the next billion customers Consumer revenue from digital sources — excluding Internet access and e-commerce — will reach only 17% of total spending in 2018, up from 10% in 2013. Two of the leading performing consumer sub-segments use a model by which consumers pay for round-the-clock access: digital music streaming, where revenue will grow at a 13.4% CAGR, and electronic home video OTT/streaming, set to rise at a 28.1% CAGR. Growth rates such as these will not only offset a slow-moving non-digital consumer market, but may also point the way forward for other segments.7 TMT companies are fully aware that if they want to grow substantially they will need to attract the growing population of consumers with Internet access in the developing world. PwC projects that China’s massive base of fixed broadband households and mobile Internet subscribers will reach 280.5 million and 962.7 million respectively by 2019. In India those numbers are expected to reach 23.2 million and 560.8 million households for fixed broadband and mobile Internet respectively.8 6 PwC, 19th Annual Global CEO Survey, 2016. 7, 8 PwC, Global Entertainment and Media Outlook 2015 – 2019, 2015. Streaming the future 5 Exploring two uncertainties In the analysis that follows, we will examine two Balkanization versus important questions that will have a profound harmonization impact on how TMT companies grow and compete over the next decade: Though controlled by many stakeholders, the Internet is subject to US hegemony. This is causing Cross-border data flows: friction with foreign governments, and some have How deeply will governments likely intervene signaled that they may consider taking wholesale in the Internet? Will the global network that control of Internet governance within their national is the Internet be harmonized and cross-border borders. If traffic begins to flow less freely across or “balkanized” and nationalistic? a balkanized Internet, this could upend global Marketplace competition: business models, limiting growth and embroiling Will a few oligopolies likely sustain their market companies in geopolitical disputes. positions and ownership of key assets or will Concern over US Internet dominance is coming from diverse competition flourish, giving rise to two very different directions. In Europe, alarm over innovative niche players or even new disruptors? privacy issues and the extent to which US Internet companies have access to citizens’ personally identifiable information (PII) has led the European Union (EU) to announce its intention to step up regulation of these entities. For example, Europe has changed its stance about what information can be stored and transmitted

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