The media and entertainment (M&E) industry has long been called upon to adapt to technology change: the “small screen” of living room TVs supplanting the “big screen” of movie theaters, and then the “mini-screen” of mobile eclipsing both. Take the expanding reach and market value of gaming, with universities now offering e-sport scholarships. Or Amazon’s swift emergence as a major studio and content creator. Add to that Facebook’s hyper-personalized ad-serving and Netflix’s data mining to finely tailor content offerings to customer tastes and you have a completely reconstituted M&E industry.
Yet, even though M&E companies were among the earliest adopters of advanced digital technologies, it’s as if they’ve only just begun. Some would say they’re experiencing the “second half of the chessboard” conundrum, in which an exponentially growing factor begins to significantly impact business strategy (akin to doubling the number of grains of rice on each of the 32 squares of a chessboard). If the industry once thought that digitizing its products and services was the endgame, M&E players now realize they’ve only made their first few moves.
To better understand the pressures facing M&E businesses and the progress they’re making on adapting their strategies, processes and business models for the future of work, Cognizant’s Center for the Future of Work surveyed 350 top executives at leading M&E companies. We found that with their running start, and despite the critical business challenges of heavy consolidation and profit pressures, M&E businesses are now poised to expand their digital mastery across their business, operating and technology models to significantly impact market performance.
Our research uncovered seven key findings that illuminate the work ahead for M&E organizations as they expand their digital efforts beyond the customer interface.
Digital is seen as a pervasive lever for competitive performance — and (too often) a source of unwarranted confidence for M&E incumbents. In the race for digital leadership, established players believe they are catching up to — even surpassing — those “born digital,” notably via M&A strategies. In our research, however, digital natives continue to outperform incumbents on digital revenue. Traditional M&E companies may believe they will be ahead of their competitors by 2022, but they can’t rest their laurels on their current digital progress.
The “end of the beginning” is in sight, and now the real work ahead begins. Most M&E companies in our study expect to put the finishing touches on the first phase of their digital transformation within two to three years, with gaming, advertising and cable businesses leading the pack and music and film companies lagging behind. This is no time, however, for leaders to halt their innovation investments. What might seem whimsical today won’t seem so far-fetched tomorrow.
True digital leaders — those with an integrated front- and back-end and strong digital growth and innovation — are rare in today’s M&E industry, accounting for just 3% of the companies studied (see Figure 1). These “digital sprinters” exhibit a variety of winning behaviors, such as building a culture of innovation and instilling a vision that focuses on the customer. These leaders reward “intrapreneurship” and define leadership roles. However, finding and nurturing the right digital talent remains a challenge, particularly in segments such as gaming and film.
Concerns about data security and business alignment are the largest barriers to operating as a truly digital entity. Nearly 40% of respondents cite misalignment of goals between IT and business operations, as well as between business and investment objectives.
Spending on new technology is slated to increase by 50% in five years. Across sectors, the M&E industry now invests an average of 10% of revenue on technology, which is somewhat less than in many industries. While M&E companies said they will increase spending to nearly 15% by 2022, this figure is behind our study’s cross-industry Work Ahead digital technology spending benchmark, which indicates that by 2020, companies will increase investments an average 16.6% of their annual revenue.
Nearly 80% of respondents cited mobility as the technology trend with the broadest impact over the next two years, with the use of wearables rising, especially in gaming (92%). AI, augmented reality (AR), virtual reality (VR) and blockchain are all expected to play important roles. AI was cited as particularly critical for advertisers (73%) and publishers (66%), while AR/VR will be critical in the gaming (89%), broadcasting (70%) and film (78%) segments by 2020. To leverage game-changing technologies in the near term, businesses will need to adopt a fail-fast attitude and willingness to experiment broadly.
Creative destruction in digital is tough but unavoidable. Adapting the business models required for the work ahead is complex, and even paradoxical, for M&E players. On the one hand, they need to reinvent their business; on the other, they need to prop up sagging margins to meet shareholder expectations. New digital channels have forced fast shifts in strategy and revenue models. The return on investment is real for companies that realign their business around being digital. On average, digital leaders expect revenue to rise just over 5%, with costs rising just 4.6% in the last year.
Recommendations for the Work Ahead
Our research reveals that most traditional M&E companies are onto the next critical phase, one that will require them to embrace digital as a tool for transforming their end-to-end operations and business models. Much work awaits the industry — for established titans and born-digitals, alike:
Leverage established-business strengths (such as depth of content offerings and breadth of distribution) to catch up to — and surpass — born-digital businesses.
Although start-ups had an early business advantage, traditional M&E players believe they are now neck-and-neck with their born-digital competitors. For example, born-digital companies report that 25.5% of their revenue is derived from digital channels vs. 23.8% for traditional companies. Thanks to years of digital innovation, M&E incumbents believe they are now ahead in digital maturity. In fact, 48% said they expect to be digital leaders by 2022, markedly more than the 36% of born-digital outfits.
Keep moving the needle.
When it comes to digital maturity, our study reveals a normal bell curve, with 54% of respondents saying their companies are behind or on par with the competition; another 46% believe their companies are ahead. But by 2022, just about all M&E companies believe they will be of above-average maturity — which is not mathematically possible. Digital transformation is a moving target, not a destination. It pays to be realistic.
Make organizational changes to forge a path to digital leadership.
Data security, misalignment of investment and business goals, poor teamwork between IT and business heads, and organizational resistance are just some of the stumbling blocks to expect. Anointing a digital leader and establishing a dedicated team is one way to move past these challenges; another is to remove the lines of demarcation between “digital” and “business operations” in favor of a boundary-less organization.
Manage the virtuous circle of digital investment.
M&E businesses should take a lesson from digital leaders inside and outside the industry, which are spending far more than the 10% average on technology (up to nearly 16%), but are seeing greater returns due to the compounding impact of their digital investments (invest more, grow more, then invest even more). We recommend at least 20% of technology budgets be geared toward digital innovation.
Begin now to experiment with advanced technologies as “entertainment” morphs into “experiences.”
Digital winners will leverage game-changing technologies over the next two to five years. Wearables will rise in mobile’s wake, and gaming engines for developers are galvanizing the emergent experiences of the AR space as the entertainment economy quickly gives way to the experience economy. In an industry that revolves around information and ideas, AI will have a major impact, as will blockchain when its use cases come to light.
If your organization feels it is doing “well enough” now, sustaining or redoubling those efforts may still not be enough moving forward. Bold moves are required to heighten contact, augment creativity and cultivate attention spans. The changes to come will make today’s M&E trends such as cord-cutting, paywalls, Slingbox, Apple TV and targeted advertising seem quaint. Like a good gamer, don’t be caught playing checkers — it’s time to start playing chess.
To learn more, read “The Work Ahead The Second Half of the Chessboard: Media & Entertainment Is Nearing ‘the End of Digital’s Beginning,” visit The Work Ahead or Media & Entertainment sections of our website, or contact us.