The Battle for Premium Content - Reviewing the CEO Summit

The Battle for Premium Content - Reviewing the CEO Summit

The Delta Perspective

Authors:
Andrew Snead - Senior Partner, Americas
Sam Evans - Partner
Daniele Pe - Associate Partner

One World Trade Center - NYC, NY - October 5th, 2018


Delta Partners’ annual CEO Summit has established a reputation for bringing together leaders from across the telecoms, media and technology ecosystem to debate key strategic questions facing their organisations and the industry.

For 2018, the focal theme was ‘the battle for premium content’ in response to the major disruption playing out across an increasingly diverse ecosystem of traditional and non-traditional players. New actors have entered the stage forcing traditional companies to adapt their role and participation, both trying to harness and/or respond to new technology and shifts in consumption behaviour. The implications are multiple, including radically new business models (e.g. direct-to-consumer), escalating premium content costs and bold M&A moves.   

Beyond traditional telecom and media players, the event was attended by global tech companies (Amazon and Facebook) and major sport franchises (Manchester City, the NBA and Miami Dolphins). 

Several pivotal questions were debated throughout the day:

  • What is the relevance of premium content within the intensifying battle for consumer engagement?
  • How can content creators and distributors cut through the noise and distraction of the Internet to deliver appealing experiences? 
  • Beyond live rights, how can sports organisations create value from content?
  • What strategic posture should telecoms operators adopt (in relation to video) and should they invest in premium content?
  • Why have telecoms operators failed in their attempts to create compelling mobile video experiences?
  • How does the current regulatory framework need to adapt to meet the needs and implications of an increasingly complex digital economy? 

From the discussions, it is evident that the ‘battle for premium content’ remains comparatively embryonic – content producers are still adapting to mobile distribution, the true long-term content ambition of social media platforms is unclear, telecom operators are still deciding whether to build, partner or buy, and sports organisations are only now starting to think about how to leverage the Internet and direct-to-consumer models to monetise content. Equally, investors seem uncertain on how to reward or penalize the various moves taking place. Such dynamics are playing out in a largely 2D world. The maturing and adoption of augmented and virtual reality coupled with advancement in artificial intelligence will undoubtedly heighten the stakes and attention. 

The key takeaways: 

  • Live over non-live. Content is a major engagement driver but does not necessarily need to be premium. ‘Live’ is far more engaging than non-live
  • Small can be big. Building targeted content propositions (and related offers, such as merchandise) around fandoms can be valuable
  • Emotional attachment over engagement. The future winners will be those who can build and monetise genuine emotional attachment and passion
  • The latent potential of sports. There is significant upside potential in sports franchises. Maturing of direct-to-consumer coupled with tech evolution, such as VR, are possible triggers that can unlock fan monetisation
  • The 90-minute game could evolve. The continued reduction in attention span combined with interest in alternative viewing experiences potentially puts the traditional 90-minute soccer match at risk as the sole offering
  • Experience trumps content ownership. It’s not about content ownership being right or wrong, it’s about creating compelling, personalized experiences.
  • The industrial-age regulatory framework has run out of steam. A new digital-centric regulatory framework is required and, in keeping with the times, needs to be suitably agile  

The remainder of this document provides a summary of the discussion and key debates.

Tom Wheeler, Former US FCC Chairman

Regulatory framework: the industrial age is dead so why do we continue with an industrial age regulatory framework?

Tom Wheeler, ex-Federal Communications Commission Chairman, reflected on the growth of the digital economy and the rise of companies such as Google, Facebook and Apple who have become immensely powerful, not only financially, but socially and politically. Digital platforms have become a ubiquitous part of our culture, with far-reaching implications. While most of us benefit from the variety of digital services on offer as we order taxis or pizzas, it is becoming increasingly evident that some digital platforms have aided election interference, propagated disinformation and misused our personal data. So what? 

Tom outlined the need for a regulatory framework that is fit for our time. The existing framework, he argued, was designed for an industrial age that no longer exists. Instead, we need a regulatory framework that not only addresses the opportunities, challenges and implications of an increasingly complex digital economy but one that mirrors the working practices such digital players have helped create – i.e. agile, flexible and adaptive. 

Discussion focused on the fundamental question of whether digital companies need to be regulated and whether such regulation would kill the “permissionless innovation” that many, such as Eric Schmidt, have suggested is critical to their very being. Tom highlighted the benefits such innovation has afforded us, yet at the same time, resulted in “permissionless invasion and interference”.  

In his view, the regulation of digital corporates needs to yield to a common, legally binding set of policies that govern the provision of digital services based on a set of core beliefs: privacy; marketplace competition; and operational openness. Discussion centered on the topic of personal data and how the ownership and exchange of such data should be both managed and regulated.

Much discussion followed but the fundamental question that remained was how to adapt an industrial age, 20th century regulatory paradigm for a 21st century digital reality and how to reinstate stability and security for both consumers and corporates. The notion Tom left the participants with was that the answer would likely be more appropriate and fit-for-purpose if the leaders of such digital organizations proactively step up to help architect it.

The new engagement: emotional attachment

Across the TMT industry, the increasing number of industry participants in the final ‘T’ – technology -, coupled with growing speed of change, is driving fragmentation and noise. We have a seemingly endless choice of applications and services competing for our attention and mindshare throughout the day (and night).

As such, operators, traditional content players, social media and technology platforms are all vying for ‘engagement’ - enticing customers via habit-forming products with the objective capturing mindshare in a meaningful way and, as a result, cross-sell and upsell product and services or drive ad revenue by harnessing customer data analytics. 

The Summit participants agreed that video content is arguably the veritable driver of engagement. It not only has the ability to attract subscribers to a specific service but can increase the time customers spend interacting with that service, boost the richness of the interaction and drive retention.

Is engagement enough – hasn’t the game shifted to creating emotional attachment and passion? 

However, engagement alone is insufficient. To truly cut through the noise and distraction of the Internet, and capture meaningful mindshare, the key objective must be the creation of emotional attachment and ‘passion’. Video content can do this by building an emotional connection, a sense of community or even tribalism in some cases. For instance, Manchester City has around 30-40 million Indonesian fans, of which a few million “live and breathe” the football club.  Star Wars has created a fandom of millions of dedicated followers globally that worship the franchise. They dress up for movies, spend thousands of dollars on gadgets, attend the multitude of conventions organized every year and have even created “Star Wars day” (May 4th).

Exhibit 1: drivers of engagement

Glenn Lurie, CEO of Synchronoss, moderated a panel featuring Tony Goncalves, CEO of Otter, and Ricky Van Veen, Facebook’s Head of Global Creative Strategy, which highlighted how success in the battle for engagement today means rethinking the meaning of the traditional engagement drivers - eyeballs and time - and expanding the concept to truly drive new levels of customer interactions. That’s when ‘passion’ and ‘emotional attachment’ start materializing.

Is blockbuster content the only way? Can targeted fandoms be a path to meaningful value creation?

Traditionally, attracting eyeballs required investment in exclusive and popular content – the ‘blockbuster’ type. Yet it is becoming clear this is not the only option. Identifying relevant niches and building targeted content propositions is a valid alternative. 

“Small can be big” as Derek Thompson, writer for The Atlantic and author of Hitmakers, said in his speech. The Internet has led to an understandable fascination with global audiences (i.e. hundreds of millions) yet meaningful value can be created from very targeted fan-centric experiences that talk to specific cultures (e.g. sports and fantasy). Getting this right requires a deep understanding of the fandom’s tastes, preferences and ‘code’.

As an example, Twitch shows the value in identifying a niche (e-games) and “super-serving it” through an end-to-end proposition all about gaming (from affiliates and partners programs, to special subscription services, a dedicated store and community boards) can result in attracting over 300 million active users monthly.

How can the engagement window be extended beyond the show time?

Enlarging the window of engagement beyond a 90-minute soccer match or the 30-minute show is paramount to building customer attachment while increasing the return on investment for content cost. 

Facebook is a clear example of this. Its content strategy focuses on video material that can drive ongoing interactions with the user base on an ongoing basis hence boosting time spent and advertising revenues. For instance, Facebook Watch’s “Red Table Talk” uses behind the scenes material and short content pills to encourage fan discussion beyond the weekly show, driving recurrent attention to the platform.

“Beyond the show time” was also used in reference to monetisation beyond media, such as merchandise, conventions or even theme parks to retain mindshare and drive additional monetisation. Sport leagues have traditionally used merchandise and while fandom-based media companies, like Otter, are now doing that too, Disney leads the pack. Disney has created a full ‘magical’ experience around its movies and makes about 33% of its revenue through theme parks and around 10% through merchandise.

L-R: Tony Goncalves, Otter / AT&T Warner Media; Ricky Van Veen, Facebook; Glenn Lurie, Synchronoss

How to increase the level of interaction?

The level of interaction is the new variable in the engagement equation. 

As stated before, platforms like Facebook use video content to drive social-media consumption. The same applies to other applications like Snapchat and Instagram. Ensuring a high degree of interaction is fundamental to driving the networking effect and drawing the player to live casting or shows. Live content generates 7 times more engagement than non-live.

Beyond live content, personalization came back as a relevant driver of interaction level. “Customers react better to personalized messages,” said one Summit guest, but there was agreement that immersive experience could be the next big thing in terms of driving interactivity. New technologies and technology applications - like 360° cameras, multiple screen environment and AR/VR - are proven to increase emotional engagement by as much as 27% and extend sessions by 34%.

How do achieve all this in an innovative manner?

“To sell something surprising, make it familiar; to sell something familiar make it surprising”. This beautifully simple quote from Derek Thompson talks to the reality of consumers being torn between a curiosity about new things and a fear of anything too new.

It’s based on MAYA - Most Advanced Yet Acceptable - a design ethos from famed 20th Century industrial designer Raymond Loewy, who believed that customers gravitate towards products that are bold but familiar and instantly comprehensible. Customers want new things as they tire of the same-old, but they develop scepticism about unfamiliar concepts and buzzwords. Finding the balance between the two - the eureka “optimal newness” - is key to cutting through the noise, establishing and building engagement, emotional attachment with the customer.

Exhibit 2: immersive video experience concept and benefits

 

Sports - the evolution of 90 mins

L-R: Sam Evans, Delta Partners; Matthew Higgins, RSE Ventures, Miami Dolphins; Christine Pantoya, NBA; Ferran Soriano, City Football Group

In the ‘battle for premium content’ sport has been, and will continue to be, a focal point. With the value of live rights continuing to increase, Internet players becoming acquirers and new distribution approaches emerging driven by IP and mobile broadband connectivity, there will be ever more ways to monetise.

The Summit heard from Ferran Soriano, CEO of City Football Group, who shared the dual opportunity and challenge faced in monetising an international fan base beyond the sale of content rights at a league level and commercial sponsorships. Manchester City has more than 400 million followers globally, yet it struggles to effectively monetise the passion of this base. The value created by an effective commercial strategy built off the existing content assets Manchester City has today would not be marginal – creating $1 per fan would increase City Football Group’s revenues by more than 50%.

Exhibit 3: sports rights inflation

 

Following Ferran’s presentation, there was a panel discussion including Christine Pantoya, EVP Mobile at NBA and Matthew Higgins, Vice Chair at the Miami Dolphins discussing the evolution of sports content. During the discussion, three strategic questions were addressed:

How much further room is there for increases in rights value?

Given the failure of the English Premier League’s (EPL) recent auction to increase rights value, there was a debate about whether sports rights are reaching their peak value. Participants involved in rights acquisitions explained the process of internal valuation of sports content and being able to walk-away if they could not achieve a fair value. The impact of OTTs participating in sports rights auctions was also discussed with a divergent view whether this would be inflationary to prices or allow sports leagues to better monetise their international rights in markets where there may not be clear pay-TV demand. However, there was consensus was that OTT’s participation in sports content is at a nascent stage and the market is yet to see the full extent of their strategies.

What opportunities are there to evolve the sports content proposition?

The ‘elephant in the room’ for the future of sports content is whether future generations with such a high level of digital distraction will have the attention to watch a match or race in full. This stimulated the debate on whether it is the sport itself or the presentation of the content that should evolve, with consensus being on the latter as the ‘integrity’ of the sport is crucial for engagement. The NBA’s offering to allow fans to buy only the final quarter of a game was highlighted as an example of how traditional sports broadcasting can evolve.  The opportunity for sports leagues and teams to distribute ‘direct-to-fan’ was seen as an emerging opportunity for these organisations to take greater control over content development and segmenting the offering to different parts of their fan bases.

Are VR and gaming the next two growth opportunities for sports content?

There has been much hype about VR as a potential new frontier for sports content. Although the opportunity was recognised, Summit participants felt a nearer term opportunity is through the development of eSports and gamification of sports content. Regarding the latter, gamification was seen as a key driver of engagement that can be leveraged in both the physical attendance environment and remote viewing. VR was identified as a longer-term opportunity with innovation still required in hardware to improve the cost economics, viewing experience and network infrastructure.

Exhibit 4: commercial revenue per fan – a new metric?

Following the panel, Indy Car racer James Hinchcliffe participated in a fireside chat where he offered the sportsman’s perspective. He shared insights on how digital media and mobile distribution are providing opportunities to connect directly with fans and engage audiences, especially those beyond the traditional core. He also shared his view of the relevance of motorsports as a pioneer for sports content to evolve into VR and gaming. For example, placing a 360º camera on a car or using AR gaming technology could allow fans to get as close as possible to actually participating in the sport. Through gaming, specifically, the lines between e- and reality are blurred and, unlike other sports such as football, it could become the on-ramp for future drivers.

Exhibit 5: the future content experience

 

Content strategies

Gavin Patterson, BT

Towards the end of the day, the discussion moved towards traditional telecom operators and their respective approaches to content strategy. There is clear evidence of bifurcation within the industry in terms of approach towards content ownership. Some players, such as AT&T, Telia and Telefonica, are buying content companies and/or establishing their own in-house content production units. Others, such as BT, have placed bets on premium content rights ownership (e.g. EPL) while others, such as Verizon and Deutsche Telekom, have sought to compete on the curation and enablement of content via partnerships, placing an ever-increasing emphasis on network quality and a differentiating consumption experience.   

Several questions and threads were explored.

Who is right, AT&T or Verizon?

Some representatives suggested that while various operators subscribe to the thesis of vertical integration, the motivation behind certain deals have been equally grounded in financial objectives (such as revenue diversification and dividend coverage). This aside, it was acknowledged that operators clearly have different beliefs and on the question of who is right, the result was mixed. This is further exemplified by exhibit 6 below. Others felt there is no single right or wrong answer. “It depends on the constituent market and operator-specific factors, but success is more likely determined by the operator’s ability to build differentiating and compelling experiences, irrespective of content ownership position,” said one. Some executives felt that exclusive premium content remains a game-changer in terms of driving broadband switching and managing churn and, as such, justifies a more progressive content acquisition stance. 

Is the battle futile? Will large internet and technology players ultimately win?

A third group offered a more sobering and provocative notion of the future. It painted a futile battle against the large technology platforms (i.e. FAANG), who have disproportionately larger balance sheets on which to compete and outbid traditional players; global audiences that afford a dramatically different economic paradigm in terms of production cost per subscriber; multi-faceted and asymmetric business models that use content investments as acquisition and engagement hooks to be monetised via other business lines; greater technology expertise (analytics, neural networks etc.) to inform future content production and personalization strategies. 

One participant theorised that Amazon et al. are “in test mode, lying in wait” and suggested we’ve yet to see anything even close to the power and influence they’ll inevitably unleash.  It was clear several people in room subscribed to this view.

What is the investor sentiment towards content and distribution integration? 

Questions were raised in relation to convergent deal investor sentiment and whether investors were rewarding or penalizing progressive moves. Exhibit 7 (next page) was shared and supported the general view that the jury is still out and generally investors are not fully convinced of the value creation potential.  It was noted that each case has its own specific constituent factors - scale, geographic coverage, market conditions and broadband installed base inter alia - and would therefore be received and rewarded differently. The dialogue shifted towards performance fundamentals and evidence of content investments translating into tangible results.

Gavin Patterson, CEO of BT, provided an insightful perspective on the BT Sports and EPL story and highlighted the tangible impact the EPL deal had in terms of broadband acquisition and churn. To what extent can content deals increase ARPU (as opposed to being yet another money pit to sustain broadband and connectivity revenues), mused one observer. In response, one of the operator CEOs shared an interesting exercise his team had undertaken in one of their home markets, which suggested customers are willing to pay an additional €5-15 a month for augmented reality content experiences, supporting the view that new experiences offer operators the opportunity to finally increase ARPU, a prospect that has evaded many.

Exhibit 6: content strategy bifurcation

Johan Dennelind, Telia Company

Can operators build a scale content play?

Beyond discussions on strategic direction and investor sentiment, Summit participants highlighted several further challenges that they are facing within their organisations as they develop approaches to content. The highest level of consensus concerned developing the capabilities of a ‘MediaCo’ within the traditional telecoms organisation, as well as managing Boards and Investors to help them understand the investment rationale and payoff of such strategies. Further organizational and governance education is required with industry leaders keenly looking out for success stories to use as reference cases.

Exhibit 7: reactions to key acquisitions

 

Closing remarks

In closing, the summit reinforced the irrefutable relevance of content to the different ecosystem players and their respective business models but also the uncertainty that exists on key questions such as the “right” strategic posture for operators, the true ambition (and threat) of the large technology players and the path to unlocking value across sports. It is clear we are in the early stages of a truly disruptive era where the rewards will continue being redistributed and where new opportunities will continue to arise, largely fashioned by technology. Interesting times. 

Video

Delta Partners - TMT Advisory and Investment