Media & Entertainment Group

Managing through Challenging Times Balancing short-term cost management with long-term digital transformation By Greg Douglass

In a period when companies have already been rocked by major trends such as the move to digital and the growing dominance of the online world, the current global financial crisis has pushed many companies into survival mode. Immediate attention to cost control is an urgent imperative.

At the same time, it's important to remember that, throughout every economic cycle that the media and entertainment industry has experienced in the past few decades, one thing continues to remain true: great content, great operations and great companies will usually win the day. This is still an exciting time for a large portion of this industry, and significant opportunities exist for savvy executives to help their companies not only cut costs, but also proactively transform their operations to pull away from the competition during the downturn.

Executive overview The recent news that the economy in the United States—and, most likely, in much of the rest of the world—entered a recession in December 2007 came as no surprise to most observers in the media and entertainment industry.

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Costs are the number one issue on the minds of many CFOs and CEOs in the media and entertainment industry with whom we are speaking today. In the short term, companies must take advantage of every opportunity to make their cost structure smaller and more agile, focusing on predictability, flexibility and reduction. In the medium and long term, the key is to truly transform a company's cost management capabilities, not just slash spending.

Such transformation includes new advancements in outsourcing and managed services, both in the front and back offices. Digital transforma-tion of a company's assets is also essential. With more cost-efficient, end-to-end digital supply chains, companies can more effectively deliver content anywhere in the world and to any device. Managed-services solutions in this area can help com-panies variabilize their cost structure and remain competitive in today’s environment. Digital transformation efforts can also help companies maximize their advertising yields.

Research and analysis conducted by Accenture1 have found that with a fully digital supply chain, media com-panies can manage and serve an ever-increasing range of channels with the same or fewer additional resources. With a fully digital business model, the elimination of physical media provides significant financial savings on a recurring basis. Based on Accenture analysis, media and entertainment companies have the potential to realize savings of up to 40 percent of their operational costs by migrating to a fully digital environ-ment. (See Figure 1.)

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Accenture also believes that a key to successfully managing through challenging times in the media and entertainment industry is forging new kinds of business models and partner-ships that cross industry sectors, from communications to high tech to software. Even, or especially, in economically volatile times, companies across related sectors must think creatively about how to bring multiple perspectives and capabilities together, focused on the customer. Convergence has made these industries more dependent on each other for success than ever before. High tech companies rely on media companies and the tele-communications operators for content

and channels. Communications com-panies need the high tech and media firms to drive new offerings. The media and entertainment companies need great communication links and high-speed mobile broadband links to make their content available to more people and to deliver a great user experience. The high tech firms rely on those links to make their devices function even better.

We believe that an integrated vision for these industries and how they can cooperate is essential. Now is not the time to go into protectionist mode. Now is the time to reach out to cross-industry partners and start to build bigger bridges together—to pool resources to do great things.

Previous recessionary periods have seen people turn to entertainment, reading and other forms of enrichment and diversion more than ever. Responding to these needs with com-pelling content, while simultaneously streamlining their operating models, offers companies real competitive advantages. Based on Accenture's experience and research in the media and entertainment industry, we believe that a combination of short-term tactical moves and longer-term operating model enhancements to improve strategic repositioning can help a company stay on the path to high performance even in tough times.

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Figure 1: Potential estimated cost savings from digital transformation (Source: Accenture analysis)

Physical media costs

Vendor tape activity

Physical storage costs

Data storage costs

Potential savings as high as

30% to 50%

80% to 90%

25% to 35%

25% to 35%

30% to 40%

30% to 40%

30% to 40%

30% to 40%

Potential total savings in a fully digital environment

On the one hand, media and entertain-ment companies make money through consumer engagement with their content. In this realm, we’re seeing a tremendous uplift in the number of people going to the box office, watching movies, spending time in front of the television, downloading video-on-demand films and so forth.

The entertainment industry has successfully weathered previous economic downturns because of people's needs for entertainment and escape, and there are some indications this trend will continue. A study recently released from NATPE and E-Poll Market Research2 found that consumers are saying even today that they will cut back elsewhere—on eating out, shopping and vacations—before they’ll give up entertainment spending such as cable/satellite service, DVD rentals and going out to a movie. So the content part of the business, while under stress, is currently performing adequately.

On the other hand, these companies also generate significant revenues by selling advertising, and that part of the business is in a severe recession. This downturn is affecting the printing and publishing sector especially hard. Subscription rates and ad rates for the newspaper industry, for example, have dropped dramatically over the last three to four years.

Different parts of the world are also feeling the effects of the downturn slightly differently. In North America, for example, the content creation business—predominantly movies and television shows—continues to be strong. However, the content distribu-tion portion of the business is under pressure, both online and in physical stores, primarily because of ad revenue decline.

In Europe, on the other hand, tremen-dous competition is emerging in the content distribution space. Cable TV, IPTV operators, satellite TV operators and, most recently, digital terrestrial television are all competing for the same customers. Programming costs are also on the rise, which is putting severe strain on many companies.

Media and entertainment executives attuned to more subtle dimensions of the downturn are also looking at how economic challenges affect the availability of workforce talent. At the top end of management structures, stiff competition for talent is occurring in some parts of the world as senior executives in the industry move from company to company. Experienced and knowledgeable people are being aggressively wooed as companies try to rescue their digital efforts that have

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Distinctive characteristics of the downturn in the media and entertainment industryEvery industry is unique in the particular ways it experiences the trauma of a recession. In media and entertainment, a strong dichotomy exists.

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struggled in recent years. At the same time, there is a dearth of talent at lower levels of many media and entertainment companies. In positions where com-panies once expected to be operating with talent that had five to seven years of experience under their belts, desks are being occupied by people with only two to three years of experience. Those are operating deficiencies that don't show up on a spreadsheet, but they still hurt. It's one reason why companies are looking for external talent through an outsourcing or managed services provider. It's a way to gain immediate and ongoing access to deep experience and resources.

In some industry sectors today, keeping an eye out for bargain acquisitions is a key part of our counsel to corporate executives. The benefits of scale, broader geographic reach and access to scarce resources will continue to make acquisitions an attractive source of future growth. The acquisition of troubled companies or the purchase of assets out of liquidation offers the potential to leapfrog the competition.

Due to the current severe constraints in the capital markets, the media and entertainment industry is unlikely to experience large-scale mergers or acquisitions. A situation more likely to occur is that large companies with strong cash balance sheets will use that strength to make strategic, pointed acquisitions to enhance their overall portfolio.

Given these distinctive characteristics of the media and entertainment industry, Accenture believes that a key to staying on track for high performance dur-ing these challenging times is a dual strategy focused on rethinking and reshaping corporate operating models. Cost transformation—meaning dramatic improvements in the ability to manage costs and improve operational excel-lence, not simply slash spending—is essential.

In the back office, especially in the printing and publishing sector, companies are looking to aggressively move as many of their back-office functions as they can into an out-sourcing environment. This means looking for strong outsourcing collaborators in finance and account-ing, in applications and technology infrastructure, as well as in areas such as procurement and HR transactions. Broadcasters, for example, are finding opportunities for better cost management in production- and broadcasting-related application outsourcing, including application maintenance and development. Order management is also coming under closer scrutiny at many companies as they seek to reduce the costs associated

with advertising orders. The biggest cost opportunities, however, are in the traditional back-office areas, where outsourcing, shared services and managed services approaches can help reduce the costs of production and rights acquisition, thereby decreasing the overall cost of programming. Interestingly, we’re seeing a move to outsourcing and to managed services in the front office or revenue-generat-ing side of media and entertainment companies, as well. For example, one of the challenges that the movie and television studios face is that they must invest tens or hundreds of mil-lions of dollars in a film or television show before they actually receive one dollar of revenue from it. Especially in today’s risk-averse economic climate,

this creates investment constraints that many companies cannot over-come. Why would companies make a multi-million dollar investment if they were not sure of ever recouping or profiting from that investment? New managed-services offerings and strategies that let companies take cost out of the movie and television production process can help here. The value proposition for digital media services—a managed-services approach to content management and distribution—is that a media or entertainment company needs to supply basic content only once. Then the provider manages the rest of the end-to-end process according to a set of business rules proper for the content company.

The importance of cost transformationA distinctive characteristic of effective cost management today in the media and entertainment industry is that initiatives are turning to both the back office and the front office.

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Such a managed-services strategy can lower risk, cut costs and provide a more effective way to distribute content across multiples screens and devices. Based on Accenture experience, moving to a file-based production and post-production process gives studios the potential to cut up to 20 percent of the cost out of making a movie or television show. Those savings make it more attractive to invest in producing the content, and they help generate more revenue on the back end.

We are also seeing the music industry, which has been under severe stress over the past five to six years, move to this same type of cost cutting as well. These companies are looking to a managed-services model where they pay based on usage—by the number of files distributed and the number of digital files stored. This model allows them to move to a variable cost struc-ture and remain more competitive.

In the broadcasting sector, Accenture has been working with companies in an area called "integrated broad-casting," which enables broadcasters to automatically and systematically schedule and program an entire week’s worth of scheduling and automate the playout. This kind of solution reduces a significant amount of overhead in broadcasting production. When implemented, one person on one machine can program the entire 24X7 programming for a network. This kind of streamlining has a tremendous impact on the cost structure and also positions a company to emerge from the current downturn in a strong operational position.

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The digital transformation imperativeTaking a long-term view of cost management moves media and entertainment in the direction of what Accenture refers to as "digital transformation."

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The existing operations of most media companies are ill-equipped to service these new channels in an economic or timely manner. Legacy operations have limited ability to scale and can rapidly become overstretched by the increased operational effort needed to deliver tailored digital content. To serve new channels profitably, the seismic shift under way in digital media consumption needs to be mirrored by fundamental changes in the way media companies create and deliver content. In simple terms, nothing short of a pervasive digital transformation will do.

We envision a fully-integrated digital environment for production, post-pro-duction and distribution, supported by a flexible, automated infrastructure that enables new business models to drive growth while significantly reducing costs.

For example, Accenture is teaming with Warner Bros. Entertainment to help transform its core media production and distribution capabilities into a single, totally integrated digital operation. This initiative makes the company one of the first studios in the world to move its entire film and television production, post-production and distribution to an entirely digital end-to-end-process. This work will bring Warner Bros. the scale needed to serve an expanded set of distribution channels in a way that strengthens customer relationships, improves delivery efficiencies and provides stronger security for copyrighted content. The project will enable the company to advance toward high performance by significantly reducing its reliance on physical media, cutting its physical media costs up to 40 percent.

Both our experience and research suggest that this transformation is now an inevitable, inexorable part of the media and entertainment landscape. Over the last three years Accenture has conducted an annual survey of more

than 130 senior executives in the media and entertainment industry, asking them how quickly and aggressively they are moving to transform their business into a digital environment.

Each year, the research results show a more aggressive movement into the digital domain, with more money, time and resources being directed to move the organization toward a fully digital environment. At the moment, the situation is one that might be called "analog dollars and digital cents." That is, companies still continue to make the vast majority of their profits from traditional, analog media and entertain-ment products while they may make mere cents on the dollar from their digital efforts and endeavors. Accenture research shows that executives are aware that this situation is changing. The day is not too far off when the situation will be reversed—it will be a matter of digital dollars and analog cents. So now is the time to invest in this future, even as costs come under severe scrutiny.

Today, the digital advertising industry has turned upside down. It’s now a situation where companies are looking to squeeze as much profit as they can out of the ad space that they sell or populate.

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Digitizing a company's supply chain can produce dramatic results. As noted, media companies can potentially save up to 40 percent of their operational costs by migrating to a fully digital environment. Digitization can espe-cially help companies in the struggling printing and publishing industry, helping them develop digital competencies and processes in sales, advertising, editorial content and distribution.

Digital transformation offers important possibilities in the area of advertising, as well. In spite of the pressure on ad revenues, the fact remains that compa-nies have to advertise or they risk going under entirely. We have seen high-profile cases of companies that tried to slash their advertising budgets too severely, resulting in dramatic declines in revenue.

What's needed instead is a way to streamline the advertising model to maximize results. In the early days of digital advertising it was all about putting as many ads in as many places as possible, and filling up inventory in numerous portals. Today, the digital advertising industry has turned upside down. It’s now a situation where companies are looking to squeeze as much profit as they can out of the ad space that they sell or populate.

One important related development has been in "yield management" in the digital advertising space. This is similar in many respects to how the airline industry manages its yield. Airplanes have a fixed number of seats, so the airlines constantly move and shift the prices based on perceived capacity at

any given point in time. In the media and entertainment industry, companies need to develop a similar type of capa-bility. There are opportunities to become much more sophisticated when it comes to digital advertising pricing and the creation of inventory online. Companies can optimize or do yield management around the pricing associated with digital advertising in an effort to gener-ate every dollar of potential revenue they can out of this environment.

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I WILL COLOR HER CLOTHES BLUE

If one takes a long view of industry trends, it becomes apparent that media and entertainment companies must also reach out to their brethren in related industries—communications, high tech and software companies in particular—to forge innovative kinds of partnerships based on new business models. This is an insight Accenture sees every day, as we bundle our ser-vices and offerings across these related sectors of media, entertainment, pub-lishing, communications, software, high tech and electronics.

Certainly there are competing strate-gies and points of view out there. Some companies have decided to forge closed ecosystems where they seek to control the content, device and even the communications link. Other com-panies have decided to be more open with both the content and distribution channels. Many of the companies seek-ing to control things too closely are under severe pressure. The great tides of change appear to be pushing com-panies toward an open, collaborative model.

This kind of openness is also a way to encourage innovation and the growth that comes from it. Even in difficult times, innovation must be on the minds of board-level executives. Driving cost efficiencies in the near term is essen-tial. At the same time, driving out cost while still positioning a company for competitiveness and long-term profit-ability will be the key to achieving high performance in the years ahead.

Conclusion: Taking the long view of high performanceIn challenging economic times, people look for entertainment and information more than ever. That means that media and entertainment companies who are committed to developing great content, but also to transforming their cost structure and capturing the benefits of fully digital operations, can meet their short-term cost reduction needs while also positioning themselves for longer-term competitive differentiation.

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1 Accenture, "Embracing the fully digital ecosystem: Digital transformation in the entertainment industry," www.accenture.com.

2 National Association of Television Program Executives (NATPE), "Can the Entertainment Industry Survive the Recession?" 24 October 2008, www.natpe.org.

Copyright © 2008 Accenture All rights reserved.

Accenture, its logo, and High Performance Delivered are trademarks of Accenture.

About the AuthorGreg Douglass is the Global Managing Director for the Media and Entertain-ment Industry Practice at Accenture. Greg lives in Dallas and graduated from the University of Texas with a Bachelor of Science degree. He has more than 17 years of consulting and management experience across the telecommunications and media industries, having worked on projects including new business and product launches, systems integration, business process development, business process outsourcing and strategic convergence planning. He focuses on developing and implementing innovative solutions, working closely with a global team specializing in the convergence of Communications, Media and Entertainment, and High Tech products and services.

About AccentureAccenture is a global management consulting, technology services and outsourcing company. Combining unparalleled experience, comprehen-sive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. With more than 186,000 people serving clients in over 120 countries, the company generated net revenues of US$23.39 billion for the fiscal year ended Aug. 31, 2008. Its home page is www.accenture.com.

This document is an informed point of view based on research, opinion and experience, and should not be considered as professional advice with respect to your business.