The Big Bang: Media & Entertainment Year in Review

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The big bang began the day that Macworld San Francisco and the much larger Consumer Electronics Show (held in Las Vegas every January) overlapped. The CES show, at which Apple doesn’t exhibit, was in full swing when Steve Jobs stepped on stage at Macworld San Francisco and held up a small, silver and black device that took the wind out of the sails (and sales?) for many mobile handset manufacturers showing their wares at the Las Vegas Convention Center.

Even with a midyear ship date, the iPhone caused a huge stir beginning with its January introduction and continuing through the end of the year. It was released first in the U.S. as an exclusive AT&T offering, to great hype and long lines. It outsold all other smartphones combined in its first 3 months on the market. After a price reduction and introduction of an unlocked version to meet French and German legal requirements, the iPhone continues to push the envelope forward for mobile digital media, in no small part due to its widescreen capability, built-in YouTube support, and a fully functional browser. (Well, almost fully: The lack of Flash video playback is the glaring error that Apple at first excused for its lack of H.264, which Adobe nicely corrected at year end.)

Advertising Versus Subscription: Still an Issue
So how has the overall media and entertainment space fared this year? One good indicator comes in a report issued by Fitch Ratings, the venerable financial analyst. After noting the deterioration in the broader economic indicators, such as consumer confidence, high gas prices, and sluggish housing sales, and acknowledging that these and other factors could "weigh negatively on discretionary consumer spending and cause some marketers to curtail advertising spending," Fitch notes that non advertising-driven entertainment models would remain robust. This category, which contains things like movie theaters and music, is maintaining its own, and sales of online music and videos continue to increase significantly, led, as before, by the iTunes Store.

The report also notes that advertising-supported media, especially localized media such as newspapers and TV affiliates, are feeling the pressure of web advertising. According to the recent report, which came out before the writer’s strike crippled television’s ability to produce compelling fictional content, even the national television and cable networks would give up ground to online rich media advertising.

Fitch noted that "healthy political and Olympic spending" would keep traditional television advertising afloat in the upcoming year, and he warned not to count out the large broadcasters any time soon.

"Fitch believes geographic and product diversification (coupled with strong liquidity) moderate the volatility of consolidated cash flow and afford the conglomerates the flexibility to adapt as end-markets evolve … these companies have the flexibility to … return capital to shareholders, make prudent acquisitions and endure a cyclical downturn in several units concurrently while keeping their credit profiles intact." NBC serves as an example across several categories. The broadcaster owns U.S. broadcast rights to the Beijing Olympics, which will begin at 8 p.m. on Aug. 8, 2008, so Fitch suggests the company will bring in sizeable advertising revenues during that time frame.

Yet, with almost a year to go, the company also chose to engage in a very public dispute with Apple over iTunes video pricing. An NBC executive cited a desire to prevent Apple from having leverage to drive pricing models for online videos as it has for online music as the source of conflict. NBC’s intent—to use advertising models to push online playback of its televised series—seemed like a good plan, and all NBC video content was removed from the iTunes Store, except for a few shows that were distributed by independent producers or distributors.

NBC followed up by making the current episodes of its shows available on its own sites, using traditional advertising models to drive revenue. Within a week of the content being yanked from iTunes, though, a writer’s strike began that has since forced NBC to begin to give back advertising dollars as viewership drops off. Many of this season’s shows, the ones that NBC would show online with its advertising model, ceased production and ran the few episodes already completed or never even started production.

NBC accounted for almost 40% of iTunes video downloads, which means the broadcaster derived decent revenues from the purchases. But along came the perfect storm of issues, which now leaves NBC with a back catalog that it can sell only through physical DVD distribution or some other paid, online download sites—the very issues the writers struck over—and limited current advertising revenue from its "reality TV" replacement shows.

Will NBC recover? Absolutely. This morality play, though, drives home another point Fitch made: "[T]raditional media is expected to continue to cede share of overall spending as advertisers continue to experiment with and become more comfortable with emerging and alternative mediums (online banner/search, social networking, mobile, cinema, video game, etc.)."

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