The Future of Video

[Pages:34]Jason Hirschhorn: @jasonhirschhorn Matthew Ball: @ballmatthew Tal Shachar: @tweettal

The Future of Video

Q2 2016

1

So what's the future look like?

Agenda:

1. Where the Video Industry was (and why) 2. The Underlying Fragility of Pay TV Today 3. What's Driving this Change (and what that means) 4. The Digital Future of Video Services

2

The Traditional Video Ecosystem was Defined by its Constraints

Severe bottlenecks to content production and distribution reduced industry competition and consumer choice

Bottlenecks

Sources: REDEF Analysis

3

...And These Constraints Were Terrific for Anyone in the Business

For almost all content creators, there was only one path to audiences ? and audiences had only one path to video. This enabled phenomenal growth and (virtually unstoppable) profitability in television

Inflation-Adjusted Pay TV Ecosystem Revenues

(US Only)

150B

Network Ad Revenues

Affiliate Fees

125B

Net Pay TV Revenue

100B

75B

? Thanks to its reach, immersive experience and record levels of consumption, television quickly became the most valuable medium on earth

? It was also highly concentrated, with a clear business model (eyeballs) and immense barriers to entry

? Furthermore, there was no "failing out" of carriage, no struggle to find revenue and ease discoverability

? For all its critics, growth remains robust by 2016

50B

25B

Box Office

0B 1980 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14

Sources: SNL Kagan

4

Even Today, Pay TV Subscriptions Have not Materially Declined

Despite rampant coverage of `cord cutting', the number of US Pay TV subscriptions has remained around 99M for close to a decade ? an astounding 85% penetration rate

100M

Total Pay TV Subscriptions

(US Only)

90M

80M

70M

60M

50M

40M

30M

20M

10M

0M 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Sources: MoffettNathanson

5

So what's the future look like?

But TV's dominance is coming to an end...

6

(1) Audiences are Moving on from Traditional TV

No matter how strong CPMs remain or long-term carriage agreements are, no industry can sustain the type of "volume" losses currently experienced by the TV business; engagement is the leading indicator to cord cutting

Change in Time Spent Watching Traditional TV by Age Group

(Live + VOD + DVR, Based on Q2s)

10%

65+

+8% 5%

50-64

0%

+1%

Change in Hours Spent Watching Traditional TV per Month

16

(Live + VOD + DVR, Q2 2016 v Q2 2010)

2

-5% -10% -15% -20% -25% -30% -35% -40%

2010

Sources: Nielsen

2011

2012

2013

2014

2015

US POP. -11%

35-49 -13%

2-11 -22%

25-34 -30%

12-17 -40%

18-24 -42%

2016

-16 -18 -23

-39 -41

-48 US POP. 65+ 50-64 35-49 25-34 18-24 12-17 2-11

7

(2) TV Ad Spend Will Soon be Hit by Digital

If digital ad spend continues to grow, it will need to eat into TV's share of advertising; contrary to popular belief, new mediums do not "grow" the total amount of ad dollars available; ad spend is zero-sum

100% 90% 80% 70% 60% 50% 40%

Share of Major Media Advertising Spend by Medium

(US Only)

Television Newspaper Magazines

Radio Digital Mobile

World War 2

Total National Ad Spend as a Percentage of GDP

(US Only) 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0%

30%

1.5%

20%

1.0%

10%

0.5%

0% '30 '35 '40 '45 '50 '55 '60 '65 '70 '75 '80 '85 '90 '95 2000 '05 '10 '15

0.0% 1930 1940 1950 1960 1970 1980 1990 2000 2010

Sources: Bloomberg, eMarketer

8

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