the media industry - a general overview

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The media industry- A General overview -

Dr. Johannes HummelJuly, 8th, 2002

General OverviewJuly, 8th 2002

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Agenda

1. The Media Industry

2. Media-Markets

3. Media-Companies

4. Strategies in the Media Sector

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Agenda


2. Media-Markets

3. Media-Companies



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Media companies are intermediaries betweenartists/authors and recipients

RecipientDistributionPackaging ofthe Product

TechnicalProduction

Production &Aggregation ofContent

Placement ofAdvertisement

ObtainingInformation & Content

Acquisition ofAdvertisement

• Purchase of Text Contribution• Purchase of Film Contributions• Obtain Advertisements

• Production of Text Contributions• Production of Film Contributions• Use of Advertisements

• Choice of Products & Components• Editorial Handling

• Print• Allocation of Infrastructure & Development Capitalization

• Sales• Development• Portal• Allocation of Terminal Equipment

The general Value Chain of Media Companies

Artist/Authors

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The Media Industry today is more and morediverse...

information entertainment

text

pictures

audio

videoTelevision

Radio

Movies

R e c o r d e d M u s i c

S c i e n t i f i c J o u r n a l s

Consumer

Magazineseducation

General OverviewJuly, 8th 2002Seite 6

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I n d i v i d u a l s

Non-Profit Organizations

Corporate Publishers

Internet Companies

FilmPrintersRadio

TV Music

Agencies ServicesOther Media Companies

Publishers

Source: Diebold (1999)

... increasingly hard to define...

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... and more and more concentrated

Six World-Players are dominating the industry• Walt Disney

• News Corporation

• Viacom

• AOL-Time Warner

• Vivendi Universal

• Bertelsmann

Industry Rationale is driving concentration processes:Building scale both in distribution and content to getsynergies and cross-pollination of brands

Top 20 mediacompanies get50% of global

ads


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Media products are different to otherproducts

Law Mediabusiness

Society

They have impact on society and are therefore especiallycontrolled by law

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Legal framework of traditional media: Theexample of Germany

• Copyright: Protection of intellectual propertyTranslation, synchronization also generate their own rights!New technologies – pirate copiesè Threat to the music industryè Black market for software

• Media freedom: article 5 para. 1 of the German Constitutionguarantees- freedom of opinion and information- press, radio and film freedom, no censoring

• Limits to media freedom (art. 5 para. 2 of German Constitution):Protection of personal dignity, youth protection, personality rights, theright to one’s own image, corporate rights reputation, name), checksagainst concentration

• Media supervision / cartel supervision


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The media Sector is usually intrinsicallyprofitable

• EBIT of the best companies in every sector is usually between 10 - 30%

• The Cash Return on Invested Capital is in average around 8% (ex-goodwill) and 30% before goodwill.

• The reason for this is often a mixture of low Capital employed but alsointrinsically high profitability

• The high profitability is determined through enormous economies of scalein the content-based business, where marginal costs of production arelow and delivery costs are decreasing in the web.

• This is why “content-based media companies should generate outstandingreturns over the longer term” (Deutsche Bank. 3/2001)

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What makes Media Business profitable?

1. BrandabilityA products group’s brandability is the degree to which it is capable ofgenerating name recognition and trust, and the degree to which that canbe built up through advertising. Brandability provides the potential forscale economies

2. InertiaCustomer inertia (“lock-in”), exists when the change of a customer for agood or service from one supplier to another creates switching costs.Inertia allows the customer to be overcharged.

Source: Deutsche Bank 3/2001


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What makes Media Business profitable? (2)

3. Suitability as an advertising conduitThis means the suitability of a particular media category as an advertisingconduit. Those media systems which deliver a target audience (mass orspecific) through content provision facilitate effective advertising orproduct promotion. But not all media categories can be used foradvertising (academic journals).

4. Other barriers to entryResult either from distribution economies or from the ownership ofscarce resources, e.g. broadcasting licenses, people

Source: Deutsche Bank 3/2001

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What makes Media Business profitable? (3)Profitibility Analysis for Media Sub-Sectors

EBIT Brand- Inertia Suitability Other Barr. TotalMargin (%) ability For Advert. to Entry Score

Print DivisionNewspapers: National 21 *** ** *** * 9 Regional 13 * * * * 4Magazines: Consumer 14 * *** * 5 B2B etc. 16 * * ** * 5Books: Consumer 10 * 1 Education 15 * * ** 4Legal/Accounting/Tax 25 *** *** *** 9Academic Journals 32 *** *** *** 9Directories 40 ** *** ** ** 9B2B Online Services 25 * *** * *** 8Recorded Music 15 ** ** 4

Broadcasting DivisionBroadcast TV 10-30 * *** *** 7Pay TV 30 * ** * *** 7Radio 10-20 * ** ** 5

Source:Company data, Deutsche Bank Source: Deutsche Bank 3/2001


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Major-Trends in the media industry

Trend 1: Convergence

è The multimedia integration of various content and channels (e.g.music from mobile phones) links formerly separate sectors(telecommunication, IT, media)

è new services, new sectors (MP3, lifeline, etc.)

è new corporate alliances (AOL-Time Warner, Vivendi-Universal)

Trend 2: Fragmentaion

è of consumption: special-interest offers with smaller number ofcopies, ranges and markets

è of processes: value-added chain braking down (authors publishingon their own via the Internet)

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Major-Trends in the media industry

3. Globalization

è Communication and financial markets (Online Trading, Communicationaround the globe / around the clock)

è Access to world markets and international customer base

è However: legal frameworks and technical standards not yet uniformlyregulated

Consequences for Companies

è Speed

è New start-up culture

è New dimensions of market evaluation

è Strategic alliances and M+A (Dino-strategy)


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Agenda


2. Media-Markets

3. Media-Companies


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Media companies have different markets,...

Media Markets

Printmarkets

Broadcast/MusicMarkets

Internet andMultimediaMarkets

Advertising Markets

Reader Markets

Buying Markets

Viewers/Auditors Markets

User Markets

Advertising Markets

Advertising Markets

Buying Markets

Buying Markets


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...which depend on each other

Tar

get

Gro

up

Mon

ey

MoneyContent

Content

Attention/Money ContentMarket

AdvertisingMarket

Media Companies

Recipient’sMarket

Amount of

ad. revenuesRecipient’s

success

Reven

ue

Leve

l of th

e

Advert

ising P

rices

BuyingSuccess

Structure ofContents

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Content is the lifeblood of traditional mediacompanies and internet-startups alike

• In the age of the Internet, the definition of content is unclear

• Content is „stuff“ that draws readers to magazines, viewers tochannels and visitors to websites

• Content can be produced from individuals as well as fromprofessional companies

•„New media“ can be described as content that is produced indigital format, with no analogue or hard copy antecedent, andthen digitally delivered

•„Old“ and „new“ media are merging in many cases into a singleentity (e.g. digital distribution of music and film)


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Germany is the third largest advertisingmarket – with further growth potential

143

30.4

19.6 15.49.8 7.4

USA Ger F IJ GB

Source: Zenith Media

0.55%

0.32 %

459 $

203 $

USA Ger USA Ger

Advertising marketshare of GNP (1997)

Advertising exp. PerTV household (1997)

Advertising expenditure 2000 in $ billions

Potential inGermany notexhausted

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Market share of advertising media in aninternational comparison in 2000

100%

18%

Source: Zenith Media

45%

24%40% 33%

22%36%

24%

23% 12%

15%

13%

23%

34%

33%41% 53%

39%

8 %19%

9%14% 12%10%

Newspapers Magazines TV Other (incl. Internet)

0%

($20 bill.) ($10 bill.) ($15 bill.) ($5 bill.) ($7 bill.) ($143 bill.)

Ger Fr GB Sp It USA


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Advertising is very close related to GDPgrowth

US Advertising growth versus GDP growth

Source: Deutsche Bank 2002

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The sensitivity of the media regardingadvertising is different - get the right mix!

High Medium Low

Consumer Magazines Professional Magazines Books

Free TV Newspaper Pay-TV

Portals Public Radio Movie

Private Radio


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Widespread book and reading culture inGermany

7066

74

50 51

0

10

20

30

4050

60

70

80

Ger F GB Sp It

% of population reading at leastone Book per year

Other types ofreaders92%

Information-seeking readers8%

Other types ofreaders

80%

Information-seeking readers20%

1999

1996

Source: Buch AG, Bertelsmann Foundation, Lesebarometer

Number of information-seeking readers on the rise

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Acceptance of daily newspaper as mediumgreatest in GB and Germany

Percentage of population reading at least one daily newspaper

79

50

74

3842

58 Germany

France

Great Britain

Spain

Italy

USA

Source: Bertelsmann Foundation, Gruner+Jahr (G+J)


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Magazines

Percentage of population reading at least one popular magazine

96.5 95.286.5

55.2

71.4

85.4

GermanyFrance

Great Britain

Spain

Italy

USA

Source: Bertelsmann Foundation, Gruner+Jahr (G+J)

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First Signs of Substitution: Online users watchless TV

Source: ARD / ZDF- Online study 2000, based on no. of regular online users in Germany, 14 years and older

2 % more less 34 %

4 % more less 14 %

5 % more less 9 %

TV

Print media

Radio


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Agenda


2. Media-Markets

3. Media-Companies


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Tasks of the media company

2. Ethical responsibility / responsibility for effects of media- Define objective, profile, freedom of action and restrictions

- Design program and positioning / company's launch in society

- Responsibility for socio-political effects of its products

1. Business concept- Develop vision, product and marketing idea

- Define strategy and business plan, secures access to market

- Organize product development / looks for creative potential i.e., finds - motivates - guides creative staff

- Secure media competence in the value-adding process

- Ensure professionalism in editing, publishing, production, sales . . .


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The media business requires...

Vision / Idea

Product idea and raison d´etre

Productdevelopment

Creativity

Product and marketdevelopment /

positioning

Creative staff iscrucial to success

Management of creative personnel

Day-to-day adaptability

Preconditions arequality assurance/quality principle and professional

standards

Customer focus/Quality assurance

Social Responsibility

Sensitivitytoward society

...is influencial

...can manipulate

Principles of strategic management in media companies

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Vision: Media business always begins with anidea...

Gap in the market Vision

The IdeaExamples:

Simple Internet access (AOL)Weekly magazine (FOCUS)

Daily business newspaper (FTD)Sunday papers

Book club

Creativity/Product design

Market accessSkills

Product idea

Competition Target group

Financing


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Management of creative personnel is a basicprinciple...

1) Human resources work is the key task of mediacompanies

- e.g., Hubert Burda => Helmut Markwort

2) It must- find the best leaders,- provide them with objectives and the freedom to act,- make performance transparent and measurable.

3) Methods of recruitment - targeted scouting - developing young talents (recruiting/“incubators“)

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Creativity needs freedom and a special kindof Corporate Culture

4) Creative people need- Freedom- Targets- Competition- Mentors/Support- Participation (from information to stock options)- Supervision

5) A corporate culture must offer high-potential staff- an open/dialog-friendly atmosphere- an atmosphere that encourages creativity, innovation and thirst for action- a competitive atmosphere that fosters action and efficiency


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Customer focus is of high importance

- Understanding trends and social milieus is aprecondition for finding appropriate target groups andcreating a company profile

- Cultural sensitivity is crucial in international business

- Service orientation opens new markets(e.g., club idea, ebay, etc.)

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Quality assurance is crucial

Media companies should

- Define quality objectives

- Sustain them by assuming responsibilities and self-evaluation

- Develop and cultivate one's own media image,

- Work as a learning organization:- introduce self-regulating quality and evaluation circles (editorial staff conferences, program discussions, etc.)

- provide regular training and qualification programs (feedback, corporate university, knowledge management, etc.)


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Important element: Social responsibility

- Freedom of information and speech guaranteed by Art. 5, para.1 of German Constitution

- Restrictions on the freedom of speech (Art. 5, para. 2 – protection of minors, protection of personality, protection of personal honor, etc.)

- Social responsibility is secured by: - self-determined objectives

- ethical standards- media image- codes of conduct

- Decentralized organization/internal pluralism

- Publisher's (editor in chief's) principle

- Supervisory authorities (supervisory board, broadcasting board, press office)

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Agenda


2. Media-Markets

3. Media-Companies



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Strategy of a media company is driven by abusiness idea

Idea / Vision Business idea

Market potential analysis

• Resources required (skills,finances, rights)

Resources analysis

• Resources comparisonè external resources needs

• Analysis of value-adding chain

• Analysis of success factors

• External restrictions

• Food-chain analysis

Business concept and strategy• Business plan • Portfolio analysis

• Strategy options • Resources procurement plan

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Analysis of the value-adding chain reveals barriersto competition and demands on resources

1. Building the sector-specific value-adding chain

2. Identifying critical success factors of the value-adding chain

3. Defining core tasks in critical success factors

4. Resources management (creativity + leadership)

5. Market adaptability/adjustment

6. Publisher's patience vs. risk awareness


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It is always about understanding and managingspecific value chains

Exam

ple

mag

azin

e Information andreports by editorsand photographers

Putting a magazinetogether

(packaging)

Attracting advertising Billing foradvertising

Print, production

Marketing Distribution- Subscriptions- Wholesale

Book

publ

isher

s

Scouting for andrecruiting authors

Packaging(proofing andconception) Print, production Distribution

Marketing Sale

Recipient

Recipient

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Focus on critical success factors

• Differentiation– Product (content, quality)– Marketing

• Ensuring optimal access tocustomers

• Competitive price

Critical success factors

Focusing on critical successfactors and outsourcing

all other stages in the value-adding chain

Acquiringand

generatingcontent

Pooling,program-

ming;packaging

Marketing

Print,production

(Trade,broad-casting)

Capitalizing on audience/advertising

1 1 3

2

1 Differentiation of products

2 Important element in product financing

3 Generation/pull

4 Only if access to customers is a limiting factor

Critical success factorFactor important for success

Reasons why success is important:

Distribution

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Acquiring content: Core tasks and successfactorsAcquiring exploitation rights. No purchasing of products• Works by authors, artists, intellectuals and producers• Licenses to use works• Rights to events, e.g., soccer

Active involvement in product development by proofreaders, labelmanagers, etc. to ensure marketability Generating information products yourself, e.g., editors producingup-to-the-minute news

Success factors

• Scouting skills: Sniffing out "promising" talent• Managing relationships with creative artists through good contact,

contractual agreements and exclusive use rights• Acquisitive strength: Attractiveness to artists, and scale

effects through downcycling

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Programming/packaging as a success factor

Core tasks in program conceptionIdentifying an interesting target group and their demands of the program

Mixing different topics or program elements into a uniform and/or brandedpresence

Meeting the identified target group's demands in order to double value-addingeffect

Marketing the media products to the target groupSelling the advertising industry access to the target group

Success factors

• Understanding the demands and wishes of the target group• Sensing the right topics• Production skill


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Marketing/capitalizing on audience as asuccess factor

Core tasks in capitalizingon the audience

• Selling advertisers access to theaudience/Selling advertising slots

• Defined and attractive targetgroup

• Efficient sale of advertising

• Scatter losses/CPT

Success factors

• Winning over new customers forthe product (CPI/CPO*)

• Binding existing clients to theproduct

• Customer Segmentation/community-building

• Product's USP• Demands of target group• Marketing concept• Customer retention programs• Sales and distribution concept

Success factors

Core marketing tasks

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In addition to conducting a value chain analysis,external factors must also be taken into account• Social acceptance of new ideas

• Political system: legislation, regulation, state broadcasting agreement, deregulation of telecoms market, data protection

• Monopoly monitoring and definition of market by monopoliescommissions

• National income and available purchasing power (society'sprosperity)

• Industrial skill and strength (internationality, size)

• Consumer demand and interest profile

• Consumption habits, recipient behavior

• Safety measures, e.g., patents, licenses, intellectual property rights


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The success factors must be assessed relativeto the competition

Probability of success

Resourcesas conditionfor success

Content• Scouting• Management of

relationships• Acquisitive strength• Talent

Success factors

Program• Understanding the target

group/"feel"• Conceptual creativity• Production skill

Marketing• Product's USP• Target group work• Marketing concept• Sales/distribution

Capitalizing on audience• Importance of defined target

group to advertising clients• Efficient sale of advertising space• Reutilization

Relativeweighting offactors

Relativecompetitiveposition

Demands onresources

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Good ideas can be blocked by a lack ofresources

People with specificknowledge and/or skillsèTechnologyèAccess to content/rights

management

Drawn from interim businessplan, e.g.èFundingèInfrastructure

Need for resources

Own resources– Abilities– Technology– FinancesObtainable resources• Easily obtainable• Difficult to obtain e.g. venture capital, staff

Available resources

Resourcesbalance

Only those ideas for which resources are either available or relatively easy to obtain have a good chance of success


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A variety of income sources is the key tosuccess in the media industry

Mediacompanies

Rights Fees

Licenses

Mediaaccess

Mediause

Advertising

Othersubsidies, taxbreaks, etc.

Rightsmarket

State

Otherservices,

merchandising,etc.

Other datamining,

commis-sions, etc.

Adver-tising

marketRecipientmarkets

Transaction -

independent

Transaction

-dependent

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Strategic options for media companies

Specializing on onevalue-adding element Developing core skills

Focus strategy

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Network strategy

Cooperation betweengroups of companies

X,Inc.

A,Inc.

B,Inc.

C,Inc.

Strategicnetwork

Strategicalliance

Y,Inc.

Z,Inc.

Synergy managementto broaden range ofservices offered

Integration strategy

HorizontalintegrationèPortfolio

management

Vertical integrationè Earnings

Print Books Music


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Individual companies and corporations havedifferent assessment criteria

Individual company

• Is the business concept marketable?

• Can the initial funds carry thecompany until break-even?

• Is the business idea profitable inthe long term?

Stand-alone assessment

Corporation

• Does the business idea fit into thecorporation portfolio, i.e.,does itcreate synergy effects?

• What harm could be done toexisting business by a competitorimplementing the business idea?

Portfolio management

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Relevant assessment criteria in a corporateportfolio

High

Low

Marketgrowth Dogs

è Consider opt-out

Cash Cows

è Maximize viability

Relative market share(Alternative: Yield)

0 1 > 1

Questions

è Expand

Stars

è Polish

High

Low

Strategic fit

Opt-outdeals

è Consider opt-out

Family silver

è Sell

Yield

Expansion deals

è Increase yield

Crown jewels

è Tend

Low High


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Strategic fit: New business activities must fitinto the portfolio

Financial criteria

Yield– Capital needed to build up

business (initial funding)– Period before break-even– Risk/sensitivity analysis– Worst-case scenario– Milestones

Strategic criteria

Synergy effects for existing businessactivities– Strengthening and Supporting existing business activities

– Extra products– Extra countries– Extra customers

– Greater downcycling, e.g., film studio è video rental è pay- and free-TV– Cannibalizing on existing business

activities (è field must not be left to the competition)Fit of skills and strategy– New products, e.g. magazine publisher moving into TV Strategic targets, e.g., going online

and,not or!

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Strategy is the guideline for portfoliomanagement

1. Increasing the yield/growth of existing businessIncreasing profits by expanding business activity and/or reducingcostsStimulating growth of the market and your own business throughnew products, marketing, etc.

2. Diversifying into new business activitiesFuture company pillarsProfitable growth

3. Opting outPermanently low-yield businessStrategically non-relevant business


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Extending the life cycle of existing products isa permanent management task

Long-term yield must be maximized!

Time

Results

Extending the life cycle bycontinually adapting to newcustomer wishes

Timely re-investment in existingproducts

– Improvements

– New product additions orelements

0Typical life cycle of abusiness idea

Life cycle of a well-managed business idea

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Different life cycles demand differentstrategies and lead to different dynamics

Music

Video

MovieFilm Divisions EBITDA margins (%)

Studio Market Shares (%)

the media industry - a general overview

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