2009 Year-end Thoughts on the US Communications & Media Industries

by CSMG
December 2009

“This time, like all times, is a very good one, if we but know what to do with it.”
- Ralph Waldo Emerson

As 2009 draws to an end, we look back on the last 12 months and consider what awaits in the coming year. The year began with financial turmoil and economic gloom across all sectors. Within the telecoms and media markets there was uncertainty around the resilience of both consumer and enterprise spending.

As the year unfolded the sector found itself relatively shielded from the impact of the macroeconomic environment. However, the downturn accelerated many underlying trends, including:

• Shifting of advertising spending away from traditional media and toward new media.
• Cord cutting in the residential voice market, increasing the number of wireless-only households.
• Consolidation of network operators, with large operators continuing to gain scale and opportunistically acquire distressed operators.
• Implementation of cost-cutting measures by network operators, often focused on process automation and a move of customer touch points online.
• Recession-led enterprise slow-down in telco and IT spend, coupled with continuing investments converged networks, VoIP, applications, wireless and Ethernet services that provide more for less. 

2009 also saw important government and regulatory announcements in the US. The American Recovery and Reinvestment Act of 2009 allocated $7.2B in funding to accelerate broadband investment and adoption with a focus on expanding access to underserved areas and user groups. After some delay, the transition to digital terrestrial TV occurred in June. Finally, the FCC initiated proceedings in three major areas – net neutrality, access reform, and wireless spectrum allocations – where decisions in 2010 are expected to have major ramifications for our industry.

Across the sector we also noted a number of trends with critical strategic implications for the broader industry. Though few of these trends are “moving the needle” for our clients from a financial perspective in 2009, CSMG believes that these trends will have a profound impact on future industry evolution.

• Rise of connected devices. 2009 saw the parallel surge in demand for all in one devices (e.g., smartphones, netbooks) and specialized devices (e.g., e-readers, GPS systems). Product launches from consumer electronics vendors and heavy promotion by network operators and retailers are fuelling consumer uptake of data-centric networked devices. This remains an early stage development with significant future promise for vendor and network operators.
• Application stores everywhere. Application stores took off in an effort by network operators, device vendors, and others to replicate some of Apple’s success. Smaller developers and brands found new routes to mobile audiences as new application categories were created. The trend toward openness and collaboration in mobile markets was materially accelerated by these new developments.
• Voice became an App. Several major players launched VOIP offerings for fixed and mobile broadband users. Consumer options for bypassing operator-supported voice service grew in availability, functionality, and ease of use. US mobile operators Verizon Wireless, Sprint, and AT&T (via the iPhone) enabled VOIP apps from Google and Skype across a number of smartphones.
• Proliferation of social networking. Beyond consumers, where the social media explosion is hardly new, businesses saw the potential of social networks and social media techniques in many internal and customer-facing areas (e.g., advertising, branding, PR, and customer care). Social networking functionality became embedded within other applications and content (e.g., communication apps, content sites), and may soon become a feature, rather than a standalone content/media category.
• Shift to the cloud. Beyond all of the hype, a small but growing number of consumers and businesses became comfortable with cloud-based services, applications, and content. Notable examples on the consumer side include Google Docs and Lala’s cloud-based music library service (which was acquired by Apple in December 2009). Uptake of cloud services signals acceptance of the delivery model (and its inherent cost/benefit tradeoffs), and offers a clear indication of mounting user expectations for broadband service availability.

Our Predictions for 2010

In developing these predictions, we have focused on disruptors – developments and pressures that challenge the status quo. Rather than attempting to describe the overall market condition in 2010, we offer our firm’s view on the key drivers of change. Along with this forecast, we pledge to offer an honest scoring of our predictions at the end of the calendar year.

1. The amount of content available for free on the Internet declines as more content providers follow the lead of providers such as News Corp. Google’s recent move to limit repeated access to content supports this trend, as does market research indicating consumer willingness to pay for online content. Comcast’s acquisition of NBCU may be the impetus for new content monetization models, which could span content owners and Internet service providers. Through all of this, we expect micropayments to emerge as a new revenue source for content providers.
2. Technology spending by consumers and businesses will rebound. One important driver is the release of Windows 7, which will release pent-up demand for hardware and drive a new cycle of hardware upgrades. In turn, greater PC capabilities will open the way for faster adoption of Internet video and more use of computers as home theater PCs.
3. Enterprises will accelerate adoption of video to support regular business activities. Activities such as personnel training, video conference calling, and communication with external partners will increasingly be supported by video. Mobile ad-converged (fixed + mobile) services will become increasingly available and support this trend.
4. Defying the conventional wisdom, we expect to see some signs of cord-cutting of pay TV service. The growing variety and accessibility of Internet video content will drive some consumers to cancel their pay TV subscriptions outright. Though we do not expect this trend to impact the mainstream consumer market in 2010-11, some MSOs will begin to target residential cord cutters. Looking forward, all MSOs will need to consider the cord-cutting threat and develop concrete strategies for value preservation.
5. Funding for mobile marketing will rise as advertisers look to new media to engage with customers. However, the increased spending is unlikely to be on traditional advertising-based formats such as banners and SMS, and instead will be in new forms such as promotional apps and video.
6. In the US, cable MSOs will prioritize business segment growth and move further up-market to serve larger SMBs. MSOs will pursue this strategy to counter maturation in their core product areas. This strategy will be supported by investment in DOCSIS over Ethernet, plant extensions, and selective CLEC acquisitions.
7. The Android operating system will gain significant market traction. Windows mobile will face further pressure as Android becomes the de facto OS choice among smartphones and mid-level OEMs.
8. Cross-platform content offerings will expand significantly. The cross-platform video market will remain chaotic in 2010 as the explosion of solutions and offers continues. We don’t anticipate any clear winner from the array of competing offers from hardware vendors with web-connected devices (TVs, game consoles, DVRs, Blu-Ray players, Internet VoD boxes), software players (Microsoft, Yahoo!), and service providers (Verizon, AT&T, MSOs)
9. Connected specialized devices will increase in variety and adoption, spurred in part by the success of the e-readers in the consumer space. Vertical initiatives such as mHealth will begin to gain traction. Wireless operators will continue to increase their focus on M2M and build up focused business units. Vendors will experiment with models for supplying devices and supporting usage, employing a mix of direct-to-customer and operator-assisted distribution models.
10. Carbon efficiency will become more important across the industry as consumers and businesses become increasingly aware of green credentials. More players will start to refurbish and recycle older devices and equipment, rather than continually encouraging customers to upgrade or buy new devices. These initiatives will remain early-stage and relatively isolated in 2010, with a more transformative industry shift towards green expected to take many years.

With these observations, we at CSMG wish you a happy and prosperous New Year and welcome your views on our predictions.