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 in the EU.
In October 2015, Europe’s highest court struck down an international agreement that allowed companies to move digital information such as individuals’ web search histories and social media posts between the EU and the US. Europe has also been pushing back on what it sees as the monopolistic behavior of certain US companies.9
9 “Google Finally Responds to Europe’s Antitrust Charge,” The Economist, April 27, 2015.
6 Key questions
/ How will both large and small companies be affected by a balkanized Internet? On the other hand, governments such as China, / Will the protectionist policies that protect Russia, and many nations in the Middle East China’s domestic players dampen their are likely less concerned about privacy issues and outbound success? more concerned about managing Internet traffic within their borders. China in particular might well / Will US companies adapt to compliance announce a rival Internet that walls off its home demands across multiple fronts, such market, taking measures to ensure that local as China and the EU? champions like Alibaba gain the upper hand within the country and are positioned to become viable / Will US policy promote free trade or players globally.10 protect US firms? While the US has defended plans to internationalize / What would the effect of a balkanized Internet governance so far, other governments may Internet be on the level and pace act unilaterally. For now, the Internet Corporation of innovation? for Assigned Names and Numbers (ICANN) — which manages and oversees some of the critical technical underpinnings of the Internet such as the domain name system and Internet Protocol (IP) addressing — makes its policy decisions using a multistakeholder model of governance, in which a “bottom-up” collaborative process is open to all constituencies of Internet stakeholders.
The extent to which the Internet will become balkanized through regulations and other actions of nation states is still an open question. The dampening effect that walling off Internet traffic between nations would have on the global economy might serve as a deterrent. On the other hand, governments’ concerns about stability, national security, privacy, US hegemony, taxation, and protection of local industries may force concessions from US market leaders.
10 “How China’s Government Set Up Alibaba’s Success,” Bloomberg, May 7, 2014.
Streaming the future 7 Key questions
/ Will scale, control of customer data, infrastructure, the social graph (the interconnection of relationships in an online social network) and platform be the key strategic control points?
/ Will a strong balance sheet become a strategic weapon?
/ Will millennials grow uncomfortable with sharing their data online with Internet institutions?
/ Will large companies that control both infrastructure and customer data suffer a backlash from consumers, giving rise to smaller competitors?
8 Oligopolies versus diverse competition
While a handful of major companies currently dominate the Internet space, new entrants continue to shoehorn their way in, often beginning as niche players and expanding from there. Nevertheless, as they grow, oligopolies tend to gain strategic control of key assets and systems, potentially smothering competition. With their strong balance sheets One potential stumbling block for larger players they can often snap up smaller competitors before is addressing the privacy issues that arise from they become a major threat. their access to massive amounts of customer data. While analyzing and even selling that data At the global and local level, scale matters. Some can yield enormous benefits, these companies larger Internet players have invested in their may risk losing customer trust if they cross own infrastructure to varying extents. This creates the line. According to the 2015 Edelman Trust significant barriers to entry, which are often Barometer, global trust in business continues strengthened by network effects, as increasing to falter. Missteps by large companies in handling usage bolsters the value of these companies’ the customer data with which they have been offerings. However, in other areas of the TMT entrusted could end up opening the door to smaller space, such as content delivery, the barriers players who offer consumers better privacy and to entry may be lower. data protection options.
Despite the barriers to entry in the Internet space, however, business model disruption continues, and could presage diverse competition in the future. Should the Internet become balkanized, today’s market leaders may no longer be able to continue on their current growth trajectory, and they will need to look for new ways to thrive in a world that could well favor national champions in their home markets. It may be easier for smaller players to slip under the radar, reaching international markets via partnerships with nation-based leaders.
Streaming the future 9 Scenarios uncovered by the uncertainties
User network-based leaders Competitive free trade
/ Free flow of data under common or harmonized / Free flow of data under common or harmonized standards; standards;
/ Network effects favor a few firms which use their / Ecosystems develop around major firms to advantage/assets to become virtual storefronts, provide complementary services, e.g. players own the customer relationships, and secure in collaborative economy flourish; customer information; / New business models and partnerships likely / These firms will likely master global-local to arise that allow content/lifestyle brands connections. to form relationships with their customers. Harmonized cross-border Internet
A few oligopolies Diverse competition
Nation-based leaders Nationally controlled players
/ Controlled flow of data across and within borders; / Controlled flow of data across and within borders;
/ National Internet systems will likely be dominated / What happens when scale is limited to national by national champions and a few mega-regionals boundaries? which have the technological and structural sophistication to traverse multiple jurisdictions, / Innovation within closed systems will likely favor standards, and rules to provide secure ‘seamless’ large markets and focus on national priorities connections to customers across nations, and (greater penetration, installation of Internet of resources to gain political acceptance; Things, connected systems in cities, security, etc.);
/ These firms will likely be integrally involved / States will likely seek partnerships with select in the infrastructural development of the innovative companies; national systems. / Alternatives to Internet-enabled connections will arise. Balkanized, Internet nationalistic
10 User network-based leaders
In this scenario, data flows freely across national
borders, based on a common set of standards. As more and more users gravitate towards a single User network-based Competitive supplier of a particular service, network effects leaders free trade will likely favor a few firms, which come to anchor Harmonized Harmonized the global ecosystem. These firms will likely use cross-border Internet their advantage and assets to become virtual
A few oligopolies Diverse competition storefronts, own the customer relationships, and secure and leverage customer information. Changes in the law regarding sale of customer data could likely present an additional revenue stream. Nation-based Nationally leaders controlled players Balkanized, Balkanized, nationalistic Internetnationalistic
Questions to consider How to win in this scenario
/ What are the implications of the free flow For large, dominant TMT players, balkanization of data to your company? — especially in major markets like China — could seriously affect prospects for growth. They / Where does your company fit in this ecosystem? would need to seek new ways to reach consumers How will this change? in those markets, either through partnerships or investment in local companies. / Will you own the customer relationships?
Streaming the future 11 Competitive free trade
In this scenario, in which borders are also
permeable, the global market is made up of a proliferation of smaller ecosystems, each User network-based Competitive with their own anchor companies that flourish leaders free trade by providing complementary services in Harmonized Harmonized a collaborative economy. New business models cross-border Internet and partnerships will likely arise that allow
A few oligopolies Diverse competition content/lifestyle brands to form relationships with their customers.
Nation-based Nationally leaders controlled players Balkanized, Balkanized, nationalistic Internetnationalistic
Questions to consider How to win in this scenario
/ Where do you fit currently in your local Global players from China — such as Baidu ecosystem? In the global market? and Alibaba — and India will begin entering western markets. Meanwhile, US companies / Where do you want fit in the future? will begin partnering with regional and national leaders. Winning will likely require a global / What organizations provide complementary mindset combined with a keen understanding products and services to yours? Could of local preferences. you improve your competitive advantage by partnering with them?
12 Nation-based leaders
In this scenario, governments increasingly seek
to control certain elements of the Internet within their borders, for example, the distribution of User network-based Competitive a type of content. They may do so via a rival Internet leaders free trade or by creating their own governance system, placing Harmonized Harmonized restrictions on its use, and controlling traffic cross-border Internet between it and the legacy Internet. These systems
A few oligopolies Diverse competition are dominated by national champions and a few large regional players with the technological and structural sophistication to traverse multiple jurisdictions, standards, and rules to provide secure, Nation-based Nationally seamless connections to customers across nations. leaders controlled players
Balkanized, Balkanized, Large, powerful local companies will likely have the power to influence the infrastructural nationalistic Internetnationalistic development of the national systems. Connections across countries means transferring data from national Internet to national Internet with potential implications for speed and data privacy.
Questions to consider How to win in this scenario
/ Does your data need to pass through Given the world’s population dynamics, leaders sovereign-controlled Internets? in China, India, the US, and the EU will likely dominate their respective markets — with smaller / How can you become more involved countries aligned with one of these regional in these systems? leaders. The way the Internet operates in these regions could be quite different based on their regional values, for example, more open sharing in the US; privacy-conscious but free use and availability of information in the EU; and more controlled availability of information in China. A global leader is unlikely in this scenario.
Streaming the future 13 Nationally controlled players
In this scenario, innovation within closed
systems will likely favor large markets and focus on national priorities such as greater penetration, User network-based Competitive installation of the Internet of Things, connected leaders free trade systems in cities, and security. States will likely Harmonized Harmonized seek partnerships with select innovative companies. cross-border Internet Meanwhile, alternatives to Internet-enabled
A few oligopolies Diverse competition connections will likely arise. Governments could use access to their national Internets as a political weapon; global financial systems could cease to operate. Any multinational enterprise may be Nation-based Nationally limited in terms of what it can communicate leaders controlled players electronically, even within its own organization. The
Balkanized, Balkanized, potential exists to impede global economic growth. nationalistic Internetnationalistic
Questions to consider How to win in this scenario
/ Is your ability to scale limited within TMT companies must continually invest in the a nationally controlled Internet space? resources and capabilities required to understand and comply with the regulatory requirements / How can you be innovative within that in each territory where they operate. A content environment? provider, for example, would have to edit content differently based on the laws governing content in each country or region. A network operator would be subject to an entirely different set of regulations. In addition to understanding and complying with regulatory requirements, TMT companies must continue to advocate on their own behalf — in order to win.
14 Other disruptive forces to consider
/ Who will drive the content (mobile versus Tangential to these developments would be the static)? How will it be controlled (studios versus development of artificial intelligence (AI) cable versus digital players)? and machine learning. We could ultimately reach a scenario where each consumer would have / Who will layer value-added services on top a digital avatar that understands the needs, tastes, of the content layer? How? For example, the and behaviors of their masters and acts as their emergence of intelligent personal assistants surrogate in presenting data, information, and that can learn from individual behavior, then entertainment to them. The players who develop access the appropriate content, such as the and control these intelligent agents — AI and Siri and Cortana of the future. machine learning companies — might well have the ultimate power on what gets presented across / What will the future of virtual reality and all devices, interfaces, and mediums — if they augmented reality look like? Will these techno- are able to become the intelligent digital valets logies remain largely in gaming communities serving human owners. or will we see more mass-market entertainment in 3D? If they bleed over into mass-market entertainment, that crossover could change the landscape of bandwidth, infrastructure, content creation, and customer relationships.
/ What is the future of the Internet of Things (IoT)? If IoT takes off, the amount of data transferred between machine to machine (M2M) will far exceed all human-generated content by an enormous margin. The transition from machine- to-person and person-to-machine (M2P/P2M) to M2M volume could happen much faster than the transition we’ve experienced from fixed line to mobile.
Streaming the future 15 55 % of entertainment and media CEOs and 52% of communications CEOs say a significant competitor from the tech sector is emerging or will emerge.11
16 What are the implications of these scenarios?
We’ve outlined the main implications that ensue As a result of these global developments, TMT from the scenarios described above. However, the companies face a complex, ever-changing environ- need for flexibility cannot be underscored enough, ment with new rules continuously replacing what given the vast uncertainty about the future of might have worked in the past. One key question technology impact in general and the potential for posed by these changes is which nations will align continued government intervention. Organizations with what views on digital privacy, security, and are well advised to build in flexibility and align government control of digital traffic within strategy with IT and operations in a SWAT-type national borders? environment to prepare for the change ahead. In contrast to this geopolitical digital uncertainty, Interoperability and consumer platform preferences are clear and technology platforms uncompromising. Consumers want content experi- ences they can access seamlessly from platform In December 2015, China advanced the idea of to platform — with a strong and rising preference cyber sovereignty, in which national governments for mobile and video. They want round-the-clock decide how to control and regulate the Internet access with little regard to distinctions between 12 within their borders. In such an environment, traditional and digital media. activities on social media can trigger government In fact, consumers are forcing the integration action. Egypt, for example, shut down the bulk of industry platforms in OTT and traditional media of data traffic across its Internet and cell-phone services. They are just beginning to explore digital infrastructure during a time of political and wearables laden with sensors flashing feedback economic unrest. And governments typically prefer in domains like health and fitness. The Internet of to give domestic companies the edge in competing Things (IoT) is primed for wireless connection for digital business. between consumers and everything that sustains their lives at home, work, play, and everywhere they go. In response to the rise of these new and changing technologies, successful TMT companies can likely reap the rewards of continual business- model innovation by mining the rich data consumers provide as they consume digital content.
11 PwC, 18th Annual Global CEO Survey, 2015. 12 PwC, Global Entertainment and Media Outlook 2015 – 2019, 2015.
Streaming the future 17 The goal is to create an ever-evolving organization that brings everyone along. That’s the art of becoming rather than trying to dictate where we’ll be in five years. Even if I tried to tell you what I think we’re going to look like in five years, I’d be absolutely wrong.13 — Lisa A. Hook President and Chief Executive Officer, Neustar, Inc.
Global licensing agreements
In early 2016, Netflix began selling streamed content in more than 100 countries worldwide in its quest to become the first global online content network. However, while Netflix wants to move toward global licensing agreements, legacy regional arrangements currently in existence may prove a challenge as content providers protect their own revenue streams. As a result, while content is available in more than 100 countries, what is available varies widely by country.
Content licensing could offer lucrative rewards for a global licensee. For example, some shows die in markets where they’re slotted onto lesser networks or time slots that don’t attract potential viewers. So a global licensee could move A-list content to its own high-profile, well-financed network — and reap the rewards.
For now, Europe is moving toward a Digital Single Market (DSM) — targeted for the end of 2016 — to unify its current system that consists of both national online services (42%) and US online services (54%).14 A DSM in Europe would mean a single licensing agreement for all EU member nations. For now, a global licensing agreement continues to remain elusive.
13 PwC, 19th Annual Global CEO Survey, 2016. 14 European Commission, Digital Agenda for Europe, September 2015.
18 Global governance challenges
In March 2015, the US Federal Communications Commission published new rules governing broadband Internet access. The first rule reclassifies broadband Internet access as a telecommunications service governed by Title II of the Telecommunica- tions Act —essentially treating broadband providers as public utilities. The second forbids preferential treatment for certain broadband consumers or Brand management discriminatory penalties imposed upon others by broadband providers. Continued uncertainty of digital audiences surrounding net neutrality will likely persist for Every TMT company must determine who will some time; TMT companies will have to navigate aggregate, analyze, and excite digital audiences. the uncertainty while satisfying ever-increasing Will it be an agency, a digital disruptor, a little consumer demand. of both, or the brand itself? By gaining direct In Europe, the laws governing digital services access to Facebook’s user base through a multiyear might well be an effort to stem the tide of partnership, for example, WPP ad agencies gain disruption from tech titans. Meanwhile, antitrust powerful consumer insights to inform and target actions could have similar impact. While the their campaigns for client brands. It looks like terms of the EU’s developing Digital Single “a little of both” will go a long way for many brands. Market confer benefits on non-EU-based market Protection of personal information is a key concern participants, they are also designed to jump-start for digital consumers everywhere, no matter why a globally competitive European technology-and- and how any brand collects and uses that data: telecommunications industry. 87% of consumers want to be able to manage how 15 Tech-savvy content pirates, meanwhile, always their personal information is used. However, seem to find new ways around payment. Global 91% of US adults do not believe they control the licensing agreements would signal a move toward collection and use of their personal information by 16 legalizing virtual private networks (VPNs) that interested companies. Across the Atlantic, the content pirates currently use to access content not European Commission announced formal agreement available in a particular country. Hardcore content in mid-December 2015 on rigorous data-protection 17 piracy beyond VPNs continues to evade efforts reform within the EU’s Digital Single Market. to sleuth them out. The good news: 73% of consumers are willing to share personal information for a benefit, such as a discount or personalized offers.18 For TMT companies, that means continually assuring consumers of the security of their personal information while providing the benefits consumers seek in exchange for the rich data sources of 15 PwC, “Consumer Privacy: What Consumers Are Willing to Share,” customer feedback that leads to customized content. Consumer Intelligence Series, 2012. 16 Pew Research Center, Privacy and Cybersecurity: Key Findings, Jan.16, 2015. 17 European Commission Press Release, “Agreement on Commission’s EU Data Protection Reform will Boost Digital Single Market,” December 15, 2015. 18 PwC, “Consumer Privacy: What Consumers Are Willing to Share,” Consumer Intelligence Series, 2012.
Streaming the future 19 Customer relations
Consumers now expect their preferred worlds of digital and media experience to find them, instead of searching for the experiences they crave. This challenge for many TMT companies also presents a business opportunity. For example, round-the-clock access to digital-music streaming and electronic home-video OTT/streaming promise robust double-digit growth rates over the next several years, according to PwC’s Global Entertainment and Media Outlook.19
The most passionate fans of social media and digital/mobile communications are rising fast in overall numbers, influence on other consumers, and the money they spend on the outlets they value. TMT companies can boost revenues from these valuable fans by first identifying them through marketing efforts and digital tracking, then directing special offers and incentives to these “superfans” in return for higher-level subscriptions, increased social- media advocacy, and participation in digital developmental projects.
As new disruptors continue to emerge and national governments impose new legislation that effectively shuts out large swaths of competition, these scenarios can help TMT companies navigate an uncertain future. We’ve challenged the status quo by presenting different approaches that respond to these inevitable changes. Assessing the various plausible options of the future can help uncover the right choices to make today — and offer a blueprint for how best to allocate resources in
19 PwC, Global Entertainment and Media Outlook 2015 – 2019, 2015. support of those choices.
20 Streaming the future 21 Contacts
Deborah Bothun
Global Entertainment and Media Leader (646) 471 9048 [email protected]
Matthew Lieberman
US Technology, Infocomm, Media and Entertainment Marketing Leader (213) 217 3326 [email protected]
Pierre-Alain Sur
US Technology, Infocomm, Media and Entertainment Leader (646) 471 6973 [email protected]
John Sviokla
Global Thought Leadership Leader (617) 530 5359 [email protected]
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