M&E Forecast: Slowing Growth, Tighter Choke Points

Two five-year forecasts issued this week together paint a picture of a much tougher business environment facing media and entertainment companies over the next half decade.

According to PwC’s annual Outlook report, the media and entertainment industries are nearing a revenue “plateau,” particularly video-centric industries, as many historical growth drivers are running out of steam. Worldwide, PwC expects M&E revenue to rise from $1.8 trillion in 2016 to $2.2 trillion in 2021, representing a compound annual growth rate of 4.2 percent– a ratcheting down from the 4.4 percent CAGR it forecast last year.

For the U.S., revenue is projected to grow even more slowly, increasing from $635 billion in 2016 to $759 billion by 2021, for a CAGR of 3.6 percent.

Much of what growth there is to be found, moreover, will be concentrated in a few fast-growing but still nascent sectors, like virtual reality and eSports. M&E companies that don’t play in those sectors will be facing serious headwinds, PwC projects. U.S. box office revenue, for instance, is projected to post a sluggish CAGR of 1.2 percent over the next five years. Revenue from DVD sales and rentals will continue their current decline, at a 13.4 percent compound annual rate while digital rentals will decline at 1.8 percent.

Subscription VOD services and music streaming services will show healthy growth, at 11.3 percent and 5.6 percent respectively, but traditional pay-TV revenue will be essentially flat over the next five years.

Internet advertising will see robust growth, from $72.5 billion in 2016 to $116 billion (9.9 percent CAGR), according to PwC. But alas for M&E companies, most internet advertising is today is sold by Google, Facebook and other other large platform providers rather than directly by content creators and distributors.

While slowing growth and revenue plateaus are never good looks for any industry, it’s coming at a particularly inopportune time for M&E businesses.

As Cisco’s annual Visual Networking Index makes clear, nearly all aspects of the video industry are going over-the-top.

Overall, global video IP traffic is forecast to grow three-fold between 2016 and 2021, at a CAGR of 26 percent, and will represent 82 percent of all consumer IP traffic by the end of that five-year period. Internet video traffic, consisting of video downloaded or streamed to connected consumer devices, will grow four-fold over that time, at a CAGR of 31 percent.

Internet video to TV, which Cisco classifies separately from video to PCs and mobile devices, grew a whopping 50 percent in 2016, and is projected to increase another 3.6-fold by 2021, driven by the spread of smart TVs and internet-connected set-top boxes.

The nature and source of that video will also change over time, the Cisco analysts expect. Live internet video, for instance, driven by the proliferation of virtual pay-TV services like Sling TV and DirecTV Now, is projected by grow 15-fold by 2021, and will represent 13 percent of all internet video traffic by then.

“Livestreaming is replacing broadcast,” said Cisco Senior Analyst Shruti Jain. “Most livestreams are unicast. This is going to be a significant source of traffic going forward.”

Consumer video-on-demand traffic will double by 2021, according to the forecast, ultimately representing the equivalent to 7.2 billion DVDs per month.

Augmented and virtual reality traffic, meanwhile, will explode over the five-year period, growing at a compound annual rate of 82 percent.

In short, the Cisco forecast envisions a massive shift in video viewing share from traditional, fixed platforms to internet-based platforms over the next five years. And it will be happening, according to PwC, just as overall growth is reaching a plateau.

That’s a potentially ugly combination for M&E companies.

Unlike traditional platform operators — movie theaters, pay-TV services, etc. — that are totally dependent on content from M&E providers to generate revenue, the internet-based platforms likely to dominate video delivery — Facebook, Google, Amazon — were built on other types of content and commerce. With their global reach, they’re also far larger than any theater chain or pay-TV company.

That leaves M&E providers with far less leverage than they have historically enjoyed for extracting favorable distribution terms.

Even where M&E providers are able to sell directly to consumers over the internet they still face the possibility of significant bottlenecks getting access to last-mile delivery networks controlled by ISPs — a situation that is likely to get more even more challenging for content providers assuming the Federal Communications Commission goes ahead with its proposal to undo the current net neutrality rules.

As I’ve noted here before, much of the debate over the current rules, enacted in 2015 by the previous, Democratic-controlled commission, was driven by concerns that ISPs would seek to abuse their control over last-mile interconnection points to extract payments or other considerations unfairly from content providers seeking to deliver data-heavy content like video to their subscribers.

Although the current rules don’t expressly forbid such interconnection agreements, part of the previous commission’s purpose in reclassifying broadband services as Title II “common carrier” service was to extend its authority to oversee those arrangements and if necessary sanction operators that abused them or to write more explicit regulations later.

The current proposal, being fast-tracked by the new Republican-led FCC, would roll back the Title II reclassification, which would remove the the commission’s legal authority to regulate interconnection agreements. While analysts differ on how much impact removing the rules would have on the consumer broadband experience, ISPs have made no secret of their hopes to create a two-sided market in which consumer pay for access to the internet and edge providers pay for access to consumers.

That would represent a major change in the economics of distribution from the traditional arrangement, in which distributors and delivery systems pay for content rather than the other way around.

In all, the trends projected to play out over the next five years add up to an environment of slower growth for traditional media providers, greater competition for viewers, and the emergence of an inverted distribution ecosystem in which content’s reign as king is greatly attenuated.

That doesn’t mean individual M&E won’t figure out ways to thrive in the new environment. But it likely means they’ll have to work a lot harder for the money.