From challenge to opportunity - EY

From challenge to opportunity Managing the transition in Media

The inÕection point, when digital revenues eclipse those from traditional media platforms, is no longer beyond the horizon. Our survey* of M&E executives suggests that the milestone will be passed by most companies in 2015. Innovation and disruptive change continue to deÕne today’s media and entertainment (M&E) world. Social media, broadband and the rapid spread of smartphones and tablets have changed customers’ expectations and have created an astounding variety of new digital products and services. The impact is: Ź Blurring the divide between both content owners producers and distributors but also between media, technology, telecoms and consumer goods companies. Ź Shortening product life cycles such that ‘learn and launch’ is replaced by ‘launch and learn.’ Ź Transformation or obsolescence of traditional business and distribution models. Ź Shifting customer demands as audiences become the editors of their own media choices. Media executives are challenged to create value. For their stakeholders they must articulate a narrative that promises digital growth and they must deliver. At the same time, as they manage in a digital world, properly phasing legacy products and services as they ‘sunset’ or evolve, the same executives are required to accept ever greater and more diverse risks.

Disruptive change continues to challenge Addressing the rapid and pervasive digital transformation of the M&E sector continues to generate major challenges for companies. The incredible rate of change is matched only by its unprecedented scale. This is a treadmill of disruptive innovation. Content, platforms and devices are constantly evolving and customers are in control. But digital technology also provides an unprecedented opportunity to understand and connect with customers. No-longer the ‘make and sell’ model of traditional media but utilising deeper customer insights to ‘sense and respond’. To create iterative services that are personalised and delivered when, how, where and on whatever device customers want them. In response, business models are changing, with organisational structures adapting to the new requirements that digital imposes. Constant innovation is essential. That means silos and hierarchies are out and lean, agile, collaborative structures are the order of the day. Preparing for, and managing the transition in media requires: 1. Changing products and services 2. Organisational readiness 3. Capital optimisation * EY Digital Leadership Survey 2013

Changing products and services

1

Develop new products/offerings to go to market:

Ź Digital technologies can drive top and bottom line growth but they can also radically disrupt existing models and undermine competitiveness. Ź M&E companies need to maximise their options and mitigate risk by assembling portfolios of new products. They also need to be prepared to act on either failure or success with equal swiftness. Ź Questions to consider: 1. How are content creation, acquisition and distribution strategies evolving? 2. Is infrastructure and the digital supply chain optimised to fully exploit content in an anytime/ anywhere environment? 3. How are products and services adapting to increase and sustain customer engagement?

In what ways will technology drive growth for your organisation? (Rank the top three) Develop new products/ service offerings

58%

Get to market faster with new or evolved products

46%

Evolve existing products/ service offerings

45%

Develop new monetisation/ revenue stream

30%

Enable international expansion

29%

Improve our understanding and knowledge of the customer

28%

Enable a more direct relationship with the customer

26%

Exploit new distribution models

23%

Improve understanding of your organisation's performance

13%

Percentages shown represent digital leaders who ranked each choice Õrst, second or third. From challenge to opportunity

Source: EY analysis

2

Changing products and services

2

Re-examine and diversify pricing strategies for new revenue models:

How M&E companies monetise their assets is evolving and diversifying?

Ź Changing customer behaviour is creating innovative, new pricing models.

Evolution of revenue models

Ź Subscription models will remain but alongside micropayments, bundles, ‘freemium’ and on-demand all of which are increasingly part of a complex pricing mix.

% of respondents

26%

Changing revenue streams 28%

27%

Current

27%

Two or three years

of M&E CFOs identiÕed their single biggest challenge is convincing consumers to pay fair value for content. (Source: ‘Digital Sets The Agenda, Data Drives The Insights’, EY, 2014)

21%

20%

19%

13% 12%

Ź Questions to consider:

10% 7% 7%

1. What is the optimum pricing model to best monetise content and to support strategy? 2. How well understood are the proÕtability and cash Öow implications of new digital pricing models?

5%

Subscription

Rent

Own

Advertising

Micro payments

Other

Source: Digital Leadership Study Series and EY analysis, 2014

3

From challenge to opportunity

Changing products and services

3 The bundle jungle: e.g., UK propensity to bundle TV with telephony or broadband

2013

2004

42% 23%

In a survey on bundling the biggest reasons for a bundle, 60% value single customer service and 60% value single billing.

Manage and mitigate M&A risk:

Ź M&E companies are reviewing their portfolios for opportunities to grow their customer base and to enhance product and services or sell non-core assets. Ź Diminishing returns from organic growth, coupled with the availability of higher quality targets, are expected to drive larger deals, bringing greater M&A and Integration risks. Ź Poor integration is one of the leading causes of M&E deals not meeting expectations. Ź Questions to consider: 1. Does the appraisal process need to adapt to consider a wider set of value drivers? 2. Can the speed and quality of deal appraisals be improved? 3. Have integration methodologies to achieve rapid deal synergies been developed? 4. When is the best time to sell non-core activities?

From challenge to opportunity

4

Organisational readiness

4

Manage the transition to digital and Ônding the inÕection point:

Ź Traditional models are being eclipsed as the new takes over the old. M&E companies need to fully understand when and how to shift from one world to another and how to manage the transition. Ź This means placing strategic bets but doing so with as clear a picture as possible. Mastering data analytics is an imperative to improved decision-making and to making more informed investments in content, distribution, technology and monetisation models.

Ź Questions to consider: 1. What are the organisation’s strengths? Where is value within the organisation and how is this changing over time? 2. What will drive future, proÕtable growth and what is the pace at which this can be scaled and realised?

Our research shows … of digital leaders are likely to cut their legacy investments in order to support digital growth, compared with 45% of other businesses

65%

5

From challenge to opportunity

Organisational readiness

5

Create more agile corporate structures:

Ź Increased competition, rapid technology innovations and shifting customer habits require M&E companies to be more nimble and agile. Ź Having the tools, culture, processes and capabilities not only to respond but to pre-empt the changing landscape without harming the quality of existing products and services.

Ź Questions to consider: 1. How are digital business models impacting costs structures particularly Õxed costs and CapEx. 2. In what ways can the operational efÕciency and the cost base be optimised through outsourcing, shared services, optimised tax planning and legal structures?

Ź Enabling cohesion between legal, accounting, corporate governance and operational management functions. Ź Key enablers include: 1. Integrating data analytics and adopting new performance management metrics. 2. Developing cross-business line KPIs to incentivise collaboration. 3. Increased use of outsourcing and partnering to optimise speed of response.

66%

of M&E executives cite increasing Board attention on efÕciency and cost control. M&E companies that hired aggressively since the Õnancial crisis are now optimising skillsets and workforce to align to execution of growth plans. (EY 9/10 M&E Capital ConÕdence Barometer)

4. Aligning the organisational strategy and operational structure to the corporate (legal entity) structure for efÕciency. From challenge to opportunity

6

Organisational readiness

6

Execute change effectively whilst building an engaged workforce:

Ź Seventy four percent of companies say that they need to make signiÕcant changes to their operating model to remain competitive.

Ź At the same time, 64% of digital leaders prioritise creating a culture of innovation. This is driving the need to ‘buy-in’ new skills or develop in-house talent at an accelerated pace*.

Ź Organisations must be agile and leaders must shape them to be nimble, adaptable, and more networked. Typically this means changes to organisation structures, innovative talent retention strategies, robust approaches to planning and executing change in your organisation.

Ź Questions to consider:

Ź Businesses need to support the strategy of adapting to the change, of expecting change and then beneÕting from it. Ź Companies with high effectiveness in change management and communication are three and a half times more likely to signiÕcantly outperform less effective industry peers. Ź Striving for high employee engagement is a priority for management through investment in skills development and active talent management.

1. Is the organisation equipped and structured to deal with disruptive change? 2. What is its track record in adapting to change – is it able to assess the impact of strategic and operating model changes and understand how to prepare the business to deliver on these? 3. Does the organisation have talent management processes that include: clear performance management, career development and focuses on manager effectiveness.

* 2014 EY Digital Leadership Study Series

7

From challenge to opportunity

Capital optimisation

7

Adopt a strategic approach to capital raising:

Ź Credit conditions are improving, but access to debt capital is still far from straightforward. Ź A strategic approach to raising capital that maximises optionality, integrates tax-planning and takes operational considerations into account will underpin success. Ź Questions to consider: 1. What are the capital requirements of strategic objectives? 2. What is the potential role in capital raising of core and non-core assets across the entire portfolio? 3. What are the full range of available funding options and their business implications? 4. Are funding mechanisms sufÕciently pragmatic to capitalise on unplanned investment opportunities?

52%

M&E Executives view credit availability as improving vs. 36% a year ago. 44% of M&E Executives are now seeking to optimise their capital structures, vs. 34% a year ago.

From challenge to opportunity

8

Apply a strategic lens to Intellectual Property:

Ź A strategic IP lens can help an organisation save costs, generate income and release cash through the sale or licence of non-core IP to fund investment elsewhere. Intellectual Property strategies need to take account of patents, content and technical innovation to identify and drive value in each area. Ź M&E companies need to make sure that they know what IP they have and manage it cost effectively. Ź Questions to consider: 1. Is there overlooked or unexploited IP assets (e.g., archives of content/technology) that can become sources of new income if managed effectively and efÕciently? 2. Is there IP that does not map to areas of strategic priority that could be sold or licensed to others? 3. How has the commercialisation of know how been captured and considered? 4. Is IP aligned to where the company is going?

8

Capital optimisation

A focus on IP can serve to drive and enhance real value

Value

IP Filing Management

IP Commercialisation

Ź Limited licensing Ź Legal and royalties protections Ź Opportunistic Ź Focus on business development monitoring Ź Focus on ‘within infringements market’ monetisation

IP Optimisation

IP Strategy Driven

Ź Cross market licensing Ź Portfolio reviews Ź Correlation and market analysis Ź Framework for decision making

Ź IP protections Ź Lifecycle management Ź IP securitisation Ź ‘Pay per use model’

Focus on IP monetisation

9

From challenge to opportunity

Capital optimisation Key areas for media clients to focus efforts onto improve net working capital Clearly deÔned cash elements within client contracts

Ź How and when to bill (include speciÕc dates, or day of the month) Ź Client payment terms Ź How, when and what needs happen to get paid (including PO process)

From challenge to opportunity

Proactive debt collection

Accrued Revenue and WIP

Ź Manage customer payment to agreed terms

Ź Expedite receipt of POs in line with Contracts

Ź Tailor approach to collections and follow up activities (size of client, level of exposure and historic payment behaviour)

Ź Tighten processes to focus on speed to bill Ź Regular review of Accrued Revenue and WIP aged balances Ź Tightly control any work performed whilst awaiting PO

Consistent supplier payment practices

Ź Apply standard operating procedures to interactions with suppliers Ź Only make Payments when contractual due date conditions are met Ź Manage pass through costs to achieve cash neutrality

10

Capital optimisation

9

Focus on working capital optimisation:

Ź Our research highlights signiÕcant variations in working capital performance between different companies in the M&E sector. This suggests substantial room for improvement. Ź Whilst the M&E industry has generally improved working capital management by focusing on issues such as billing and cash collections, there are many additional areas of focus that they could address. Ź Questions to consider: 1. Is working capital managed as a strategic initiative? 2. What are the working capital trade-offs that need to be made between ‘lean’ and ‘agile’? 3. Have employee compensation been aligned with appropriate working capital performance measures?

11

From challenge to opportunity

Capital optimisation

10

Demonstrate value to stakeholders:

Ź Investors are increasingly aware of the impact of digital on business models and expect boards to clearly articulate their vision. Ź Shareholder activism is on the rise. Boards need to understand how their business is perceived and how well their strategy is seen as likely to deliver growth and value to shareholders. Ź Questions to consider: 1. Is there a clearly articulated digital strategy and is this well understood by investors? 2. As the business evolves, what is changing about the metrics and value drivers? 3. Do shareholders understand how the executive team is managing the balance of digital with legacy media operations and the value implications? 4. How is emerging technology being used to reduce costs, increase customer penetration and drive value?

From challenge to opportunity

12

Sector insights Sustaining Digital Leadership (January 2014)

Digital Leadership Study Series from EY’s Global Technology Center and Global Media & Entertainment Center Report No. 2

Sustaining digital leadership! Agile technology strategies for growth, business models and customer engagement

Media & Entertainment

May 2014 | ey.com/ccb

Capital ConÕdence Barometer

10th edition

10th M&E Capital ConÕdence Barometer (May 2014)

An industry on the move

Digital Leadership Study Series from EY’s Global Technology Center and Global Media & Entertainment Center Report No. 1

Digital Agility Now (June 2013)

Digital agility now! Creating a high-velocity media and entertainment organization in the age of transformative technology

Change leadership in media and entertainment

Change Leadership in M&E (October 2013)

Enabling transformation in a creative culture

M&A

Increased dealmaking

Economic outlook

Resilient conÕdence buoyed by strong business fundamentals

Access to capital

Deployment of capital points to an industry on the move

5/19/2014 7:19:33 PM

In the decade of the customer, knowing your customer means owning your data Data ownership and domain consollidation in digital analytics today

13

In the decade of the customer, knowing your customer means owning your data (September 2013)

Media & Entertainment sector insights

Under cyber attack: Global Information Security Survey 2013 (February 2014)

From challenge to opportunity

Contact details Transaction Advisory Services: Media and Entertainment, UK&I Nik Eyton

Will Fisher

Martyn Whistler

Capital & Restructuring E: [email protected] T: + 44 20 7951 9862

Media and Entertainment Leader E: wÕ[email protected] T: + 44 20 7951 0432

M&E Global Sector Analyst E: [email protected] T: + 44 20 7980 0654

Olivier Wolf

Sharon Stotts

Justin Prichard

Strategy E: [email protected] T: + 44 20 7980 9169

Advisory E: [email protected] T: + 44 121 535 2590

M&A E: [email protected] T: + 44 20 7951 1862

Paul New

Ronan Garvey

Simon Edel

Working Capital E: [email protected] T: + 44 20 7951 0502

Debt & Financial Advisory E: [email protected] T: + 44 20 7951 4960

IP Strategy E: [email protected] T: + 44 20 7951 9904

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