Consolidate, diversify or perish
by Clemens Schwaiger
Arthur D. Little Media Flow of Funds, 2017

Executive summary

The media industry is experiencing a massive digital transformation. This creates a complex and volatile environment for media companies and the transformation will significantly affect value flows going forward. Traditional media companies will need to take (tough) portfolio decisions as the digitization of the industry progresses.

With a stronger domestic market and a higher share of audiovisual revenue, US-based media groups exhibit a more attractive economic performance than their European peers. Besides smaller scale, most European media groups also have sizeable legacy businesses in News & Print experiencing structural declines. However, as a consequence of this, European companies were forced to diversify aggressively into online segments, with online revenue of some of these companies now accounting for up to 50% (or, in some cases, more) of their total revenue. Going forward, we thus expect to see stronger revenue growth rates for most European players.

The traditional value chain will remain intact, but the value share of traditional players will reduce significantly. This will result in a double squeeze for traditional distributors and aggregators: lower incoming funds and higher content cost. This continued pressure has already kicked off a wave of consolidation, with participants aiming at full vertical integration across the value chain. This is particularly visible in the TV & Video segment, but will also affect other media segments soon. For players not active in consolidation or vertical integration, this will lead to long-term, structural competitive disadvantages. Furthermore, traditional players will be forced to seek revenue growth through aggressive diversification into adjacent segments (e.g. e-commerce or live events) and a tighter integration of their existing offline media assets.

Online growth will be substantial everywhere (+EUR 158bn until 2020), opening up opportunities for traditional media players as well as new entrants. Despite low barriers to entry in most online media segments, major positions have been taken (e.g. in online classifieds, video & music streaming). In the mid-term, the online value chain will undergo further fragmentation, resulting in the emergence of a distinct online aggregator business model and a large number of players competing in online distribution in each media segment. In the long term, we expect that online media segments will follow oligopolistic competition with vertically integrated scale players. Thus, any new player should critically assess its ability to achieve long-term scale before entering the online market at this stage.

Content owners and producers will have the strongest hand in the continued digitization of the media industry. Firstly, they will benefit from overall increased demand for their products through offline and online players alike. Secondly, both online and offline players will be willing to pay higher prices for premium content in a search for differentiation. However, content owners and producers will also be preyed upon by offline and online players seeking vertical integration.

In summary, global media will continue to be an attractive growth industry, but dynamics differ by segment and geography.