The entertainment, media and technology worlds watched with bated breath this week as a US court deliberated over whether to allow AT&T’s $85bn takeover of Time Warner this week. On Tuesday, the wait came to an end: a federal judge approved the communication giant’s purchase of the entertainment company with no conditions, and the US government, which had argued that the acquisition would harm consumers, has since stated that it will not seek an injunction to stop the deal.
AT&T now owns the rights to Time Warner’s vast range of media and entertainment assets, including major sports leagues and film franchises such as Harry Potter and Lord of the Rings. Time Warner’s TV content, now also owned by AT&T, is arguably unrivalled, including as it does Game of Thrones, The Wire, True Detective, The Sopranos and many more. Channels HBO and CNN are included in the deal, as is HBO’s SVoD app which boasts 130 million subscribers who each pay about $15 a month. There’s also Time Warner’s video game assets such as Lego, which bring in $2.5bn a year in revenue.
In short, the AT&T acquisition of Time Warner is one of the biggest and most significant mergers of content producers and distributors ever, and represents a seismic shift for the media and communications industries not only in the US, but across the world. It is the culmination of dramatic changes disrupting the media and technology spaces, driven by changing consumer behaviour. Consumers are increasingly consuming content on mobile devices and over internet connections, so distributors who could previously rely on provision of cable services for revenue are scrambling to adapt; this will only be made more urgent by the advent of 5G. Companies such as YouTube, Amazon and Netflix – the latter now the world’s most valuable media company – are upping the stakes even more; indeed, AT&T argued that they needed to acquire Time Warner so they could remain competitive against these and other SVoD providers.
This dramatic shift in the media industry is the driving force behind a flurry of mergers between content distributors and producers. The trend started with Comcast’s purchase of NBC Universal in 2011 and last week’s announcement about AT&T and Time Warner is expected to accelerate that trend. Indeed, Comcast are once again in the spotlight having announced just days after the AT&T news that they have made an all-cash offer of $65bn for the large portion of 21st Century Fox that
Rupert Murdoch has put up for sale. That’s a significant increase on the $52.4bn offer that rivals Disney made in December and demonstrates how desirable the Fox assets, which include the film and TV studios, cable networks and a stake in streaming service Hulu, are to distributors. It remains to be seen how Disney will fight back.
Mergers between distributors and producers will open up opportunities for cross-promotions across different parts of a business, for example the exclusive screening of proprietary content on a distributor’s networks (although this has been explicitly prohibited in past deals), as well as opportunities to increase revenue by licensing shows to other distributors and fleshing out existing pay-TV offerings.
Of course, such big news in the entertainment sector will inevitably have a profound impact on advertisers. AT&T has for some time been working on an advertising and analytics unit, headed up by ex-Group M North America CEO Brian Lesser, that will create an ‘automated advertising platform that can do for premium video and TV advertising what search and social media companies have done for digital advertising’. AT&T CEO Randall Stephenson has openly stated that his company’s goal is to enable TV advertising to target consumers and households more specifically in order to compete against the likes of Facebook and Google. It’s ambitious, but when you consider that AT&T collects data from its nearly 160 million wireless and 40 million pay-TV subscribers, and will own content from Time Warner networks like HBO, CNN and TNT, it suddenly seems more than feasible – particularly as it will be one of the few US companies that will be able to follow consumers across their TV screens, computers and mobile devices. AT&T’s move into this area (and we imagine Comcast isn’t far behind) is yet another demonstration of the fact that the ability to gather consumer data, analyse it and transform it into value for the consumer – and therefore advertiser revenue – is a huge financial opportunity.
Once again, we’re seeing the effects of technology on the media and communications industry. The AT&T acquisition of Time Warner and the outcome of the 21st Century Fox bidding war between Comcast and Disney will have a profound impact on the US media scene for years, if not decades – and we expect that similar vertical mergers will become the norm in both the US and across the world. The lines between the media, entertainment, technology and communications industries are becoming increasingly blurred.
Last week Accenture, best known in advertising circles for its media auditing business, announced that its digital arm, Accenture Interactive, was launching a programmatic services practice. Accenture Interactive Programmatic Services will offer services in three areas: programmatic consulting and in-housing; media strategy, planning and activation; and ad tech implementation and support. In doing so, they have placed themselves in direct competition with both media agencies and a wide range of specialist companies that already offer programmatic planning and buying services.
They claim that they have launched this service in response to an increasing trend amongst advertisers of bringing programmatic spend – at least partially – in-house, in order to regain control of their advertising investment in a time where transparency is a concern. The May 2018 ‘Programmatic In-housing’ report by the US Interactive Advertising Bureau found that 18% of marketers have moved their programmatic buying in its entirety in house, while another 47% have begun the process and intend to continue it. This can be a complicated process involving synchronisation of many previously disparate parts of an organisation, so advertisers are interested in somebody who can help them manage the process with 100% transparency, which Accenture claims it will provide.
Many media and specialist programmatic agencies have expressed profound concerns about a conflict of interest, with some saying that they will no longer accept Accenture audits. We at ECI agree. The key to effective media auditing is impartiality, and no company can legitimately claim to be impartial whilst offering media services to a market where it has highly privileged access to the data and financial information of both advertisers and agencies. You cannot provide independent benchmarking as an auditor if you are also buying inventory. As Paul Bainsfair, the Director General of the IPA (the UK ad industry’s trade body) said, the move is “incompatible with [Accenture’s] role as a media auditor… In an era where transparency is under the spotlight, this self-evident conflict of interest is unacceptable”.
Accenture has defended its impartiality by claiming that will not provide both auditing and media services to the same client, and that, as Accenture Interactive is a separate business unit to the media auditing business, firewalls and confidentiality agreements will be in place. We have doubts that, in practice, this will be effective. As one media agency boss said, what’s to stop them telling prospect clients that their agency is non-transparent and that they have the solution?
TV, once the unassailable king of advertising, is at risk of being toppled from its throne. Video streaming services such as Netflix, Hulu and Amazon Prime are fundamentally changing the viewing habits of consumers, particularly – but by no means exclusively – of younger users. Figures from April this year suggest that Netflix has 125 million subscribers globally– an increase of 27% versus the first quarter of 2017. In the third quarter of last year, the 56.4 million US subscribers missed about 35 commercials each per daybecause of Netflix – adding up to two billion missed ad impressions a day, according to nScreenMedia. Whether it’s on Netflix, Hulu, Amazon Prime or even Spotify, for the first time in history a generation of viewers are prepared to pay for content that is free from advertising. Consumers typically spend between $5 and $12 a month for these ad-free options. So the question is – how can we reach these consumers?
Advertisers are painfully aware of the effect that subscription video on demand (SVOD) services are having on their TV spots. In 2017, TV ad sales in the US fell by 7.8% to $61.8 billion – the steepest decline in the last two decades, outside of a recession. This is being repeated across the world and, apart from cyclical events such as the Winter Olympics, the FIFA World Cup and the US midterm elections, there’s no sign of an improvement.
Advertising budgets do not just disappear – they are reallocated elsewhere. So where is the money that is leaking out of TV budgets going? And is it doing the job? The answer is obvious – it’s going into different channels within digital advertising. Behemoths Google and Facebook are creating TV-like products in order to retain users in their ad-rich ecosystems, and are ready to capture any stray TV ad dollars. Their sales pitch is the ability to target individual viewers which if achieved is a highly attractive prospect for advertisers looking to make every cent work harder. What’s more, the tech giants will start buying up the broadcasting rights to major sporting events, such as Amazon’s purchase of the rights to the UK Premier League from 2019 to 2022 – another major blow for the traditional TV channels.
All this means that TV’s dominance of advertising revenues has given way to digital: in the US, digital is expected to count for nearly half of all ad revenue in 2018.
Media and content owners are having to transform their strategies in order to survive the ‘TV apocalypse’. Disney, for example, is looking to become both a content owner and a distributor, playing Netflix at its own game; in August 2017, it announced that it would stop selling content to Netflix by 2019 and instead launchtwo streaming services, one for sport (the ESPN network) and one for films. Meanwhile, NBCUniversal is reducing the number of commercialsthat it airs during its primetime TV shows in order to increase the impact and therefore value of its advertising, and stem the tide of viewers flocking to SVOD services.
In the UK, the major TV broadcasters and avowed competitors ITV, Channel 4 and Sky joined forces to defend TV’s ability to build brands and reach that crucial younger audience. They claim that a lack of trust in advertising stems from the ‘Wild West’ of the internet and not from TV, which is regulated and drives brand equity. Indeed, advertisers are starting to review their digital investment as research shows that important brand KPIs are affected when ad dollars are moved to digital.
However, the UK and some other European countries are unique in the fact that people are used to an ad-free experience thanks to state-financed broadcasters like the BBC with a high market share; SVOD services are therefore less appealing than in countries where commercial TV with a higher ad load is inescapable. This ad load is often 20-30% of every primetime hour. Within the ad-financed digital video world such as YouTube, consumers seldom find an ad load of more than 10%; furthermore, they can often skip those ads or avoid them by other means, as a load of more than 10% would have a negative effect on viewing.
It’s not all doom and gloom for the TV industry. As the UK broadcasters were quick to point out, an increasing suspicion of digital media owners means that TV is still a valuable tool for brand building and driving top-of-mind awareness. What’s more, as SVOD services proliferate, consumers will find they want an increasing number of subscriptions to feel satisfied they are getting the content they want to watch, which costs money; ad-supported, free-to-use media could once again feel like an attractive option.
However, this does not let the TV industry off the hook: to survive, they will need to follow NBC’s example and transform their product offering to advertisers. Consumers who are used to ad-free content on Netflix will not tolerate the eight or nine minutes every half an hour that has become the norm on US primetime TV. Fewer, higher-impact ad spots for which advertisers pay a premium will likely be acceptable to viewers and may well become the norm. With the rising number of smart TVs, more targeted ads will be more engaging for viewers and will suffer lower levels of rejection.
As always, the answer for the old guard is to innovate and to adapt to these rapidly changing times. With their trusted brands, their reputations and high-quality content, they are well placed to succeed if they are prepared to change and take advantage of what consumers like about commercial TV. So what do they like? Reliable entertainment at a given point in time which often appeals to the whole family (appointment to view), no-cost and advertising that can be high-quality, creative and informative – and something to talk about at work the next day. As mentioned previously, ad breaks currently represent 20-30% of the primetime product and therefore have a heavy influence on the perception of TV as a medium. Customers – particularly wealthier ones – are choosing channels that allow them to avoid intrusive, boring advertising, so there is an opportunity for the TV industry to increase the quality of ad breaks. They can do this by making ads less disruptive and more relevant – both to the consumer and to the channel. This is crucial for the ultimate survival of an industry whose days as the biggest broadcasting outlet are numbered.
It won’t have escaped your notice that the media landscape is – to use a somewhat overused phrase – changing at an unprecedented pace. 10 years ago, a BlackBerry was advanced, Apple had just released a new product called the iPhone and Facebook’s population was about the same size as Egypt’s. Fast forward to 2018 and BlackBerry is all but gone, the iPhone X uses facial recognition to unlock and the number of people who use Facebook is almost twice the size of China’s population – and it’s only one of a whole raft of social channels. This proliferation of technology is generating data that enables consumer understanding beyond the 2008 marketer’s wildest dreams, and governments around the world are clamping down on irresponsible use of that data.
Against this landscape, advertisers are grappling with consumers who are spending less time with traditional mass media, scattering the time they do spend with media across more and more communication channels. For advertisers the big challenge is trying to understand how to glean meaningful insights from the almost limitless amount of data and tools available to them, as expertise in this field is scarce. Furthermore, CMOs are under constant pressure to drive growth whilst at the same time reducing costs – costs which come from tools, the chain of middlemen, non-transparency, non-delivery of targeting, the wrong KPIs and of hiring experts – amongst many others.
All this has implications for media agencies, who are asking themselves where they stand in this strange new world. The kings of traditional media and audiences, they are having to adapt to a digital world in which small, agile specialist agencies and new tools are sprouting every week and using data to buy individual customers in real time, not audiences. Meanwhile, non-traditional competitors such as consultants and indeed media owners are harnessing the power of data to encroach on media agency territory. Advertisers are hiring a totally new type of talent, including data and content strategists, questioning as they do so if they can cut out the middleman – the media agency, at least when buying in certain channels which do not fit the way of working of the traditional media agency.
However, media agencies do have key attributes on which they can capitalize in order to survive and even thrive. The first, and perhaps most obvious, is their scale, both in terms of their footprints and their clout with media owners. This enables them to drive down costs and activate strategies efficiently and effectively, all over the world: that remains hard to resist for advertisers looking to make every cent work as hard as possible. The second is their experience: the institutional knowledge at the global agencies, earned over decades of creating and optimizing media strategies, is all but impossible for smaller, newer agencies and consultancies to replicate. Finally, there is a receptiveness to the fact that business-as-usual based on the last 25 years is no longer going to cut it: agency executives know that in order to survive, things have to change dramatically, and quickly. But changing an industry that has built up around the rather basic mechanics of mass media topped with a professional service layer is not an easy task.
In our dynamic, digital world, the most important change that media agencies can make to their model is to truly embrace technology and analytics and respond more quickly to the changing landscape. These juggernauts need to find a way to behave like smaller, nimbler agencies: true agility, backed up by mighty scale and institutional knowledge will be a heady, irresistible combination for clients whose eyes are being caught by the young things of the digital and analytics sector. Fundamental change like this is evidently a huge challenge but will be eased by hiring the right people: data, analytics and content experts will demonstrate that an agency is on the cutting edge of innovation and will be able to advise them on the twists and turns of the 21st century media landscape.
Some of the best media agencies that we work with are the ones who see themselves as partners to their clients, and not as a service supplier. They look beyond a media brief to really understand the client’s business challenges and work with them to deliver solutions to those challenges via marketing and media – not just media metrics. In this way, future-facing agencies are guiding their clients through myriad complexities, helping them find new competitive advantages.
A true partner is a trusted one – and trust in this case is born in part of transparency. In an age of programmatic buyingand new technologies such as blockchain and AI, the issue of transparency is becoming increasingly critical: media agencies must step up to the mark and strive for total transparency in all their activity and all other middleman involved on behalf of clients, otherwise a spirit of trust simply cannot exist. Above all, agencies must meet the requirements and expectations of clients, and remain accountable.