/NWDA%20DCI%20global%20market%20report

Final report

Strands 4 & 5 – The Global Digital and Creative Sector NWDA July 2010

WM ENTERPRISE

Final report

Strands 4 & 5 – The Global Digital and Creative Sector NWDA July 2010

BIRMINGHAM OFFICE Wellington House 31-34 Waterloo Street Birmingham B2 5TJ T: 0121 262 5111 E: mail@wm-enterprise.co.uk

www.wm-enterprise.co.uk

BRADFORD

LONDON

MERSEYSIDE

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WM ENTERPRISE

Strands 4 & 5 – The Global Digital and Creative Industry

TABLE OF CONTENTS 1.

Introduction ........................................................................................ 1

1.1

Research objectives

1

1.2

Definitions

1

1.3

Methodology

2

1.4

Report structure

2

2.

Computer games ................................................................................. 4

2.1

Introduction

4

2.2

Global market outlook

5

2.3

Technology and market trends

6

2.4

Global business activity

9

2.5

Major national markets

12

3.

Recorded music .................................................................................. 23

3.1

Introduction

23

3.2

Global market outlook

24

3.3

Technology and market trends

25

3.4

Global business activity

28

3.5

Major national markets

30

4.

Marketing and advertising .................................................................. 50

4.1

Introduction

50

4.2

Global market outlook

51

4.3

Technology and market trends

52

4.4

Global business activity

53

4.5

Major national markets

55

5.

The film industry ................................................................................ 67

5.1

Introduction

67

5.2

Global market outlook

68

5.3

Technology and market trends

69

5.4

Global business activity

70

5.5

Major national markets

73

6.

6.1 WM ENTERPRISE

The software industry......................................................................... 85 Introduction

85

Strands 4 & 5 – The Global Digital and Creative Industry

6.2

Global market outlook

85

6.3

Technology and market trends

86

6.4

Global business activity

86

6.5

Major national markets

88

7.

The publishing industry ...................................................................... 90

7.1

Introduction

90

7.2

Global market outlook

91

7.3

Technology and market trends

93

7.4

Global business activity

95

7.5

Major national markets

97

WM ENTERPRISE

Strands 4 & 5 – The Global Digital and Creative Industry

LIST OF FIGURES Figure 1-1: Research Scope Figure 2-1: Global computer games expenditure, $m (2008 prices) Figure 2-2: Global market growth 2004-2013, $m Figure 2-3: Top 25 gaming companies, 2009 Figure 2-4: Major M&A activity, late 2008 to present Figure 2-5: Largest markets for computer games (% of global market) 2008 Figure 2-6: Country markets by sub-sector, 2008 Figure 2-6: Country markets by sub-sector, 2008 Figure 2-7: US market segmentation, $m Figure 2-8: Japan market segmentation, $m Figure 2-9: UK games market segmentation, $m Figure 2-10: South Korea games market segmentation, $m Figure 2-11: France games market segmentation, $m Figure 2-12: Germany games market segmentation, $m Figure 2-13: China games market segmentation, $m Figure 2-14: Spain games market segmentation, $m Figure 2-15: Canada games market segmentation, $m Figure 3-1: Global recorded music expenditure, $m (2008 prices) Figure 3-2: Global market growth of subsectors, 2004-2013, $m Figure 3-3: Market share of the four major record companies Figure 3-4: Major M&A activity from 2008 Figure 3-5: Largest markets for recorded music (% of global market) 2008 Figure 3-6: Country markets by sub-sector, 2008 Figure 3-7: Market ranking according to IFPI Figure 3-8: Repertoire origin of biggest national music markets Figure 3-9: Broader music industry by value (US$bn), 2008 Figure 3-10: US recorded music market segmentation, $m Figure 3-11: Japan recorded music market segmentation, $m Figure 3-12: UK recorded music market segmentation, $m Figure 3-13: Germany recorded music market segmentation, $m Figure 3-14: France recorded music market segmentation, $m Figure 3-15: Canada recorded music market segmentation, $m Figure 3-16: Australia recorded music market segmentation, $m Figure 3-17: Russia recorded music market segmentation, $m Figure 3-18: South Korea recorded music market segmentation, $m Figure 4-1: Global advertising expenditure, $m (2008 prices) Figure 4-2: Global market growth 2004-2012, $m Figure 4-3: Top 25 marketing and advertising companies, 2008 Figure 4-4: Major M&A activity, late 2008 to present Figure 4-5: Largest geographical advertising markets (% of global market) 2008 Figure 4-6: Country markets by sub-sector, 2008 Figure 4-6: Country markets by sub-sector, 2008 Figure 4-7: US market segmentation, $m Figure 4-8: Japan market segmentation, $m Figure 4-9: Germany market segmentation, $m Figure 4-10: UK market segmentation, $m Figure 4-11: China market segmentation, $m Figure 4-12: France market segmentation, $m Figure 4-13: Italy market segmentation, $m Figure 4-14: Brazil market segmentation, $m Figure 4-15: Russia market segmentation, $m WM ENTERPRISE

1 5 6 9 10 12 13 13 14 15 16 17 18 19 20 21 22 24 25 28 29 30 31 33 33 34 36 38 40 41 43 45 46 47 49 51 52 53 54 55 56 56 57 58 59 60 61 62 63 64 65

Strands 4 & 5 – The Global Digital and Creative Industry

Figure 4-16: Spain market segmentation, $m Figure 5-1: Global film expenditure, $m (2008 prices) Figure 5-2: Global market growth 2004-2013, $m Figure 5-3: breakdown of home video segment ($m) Figure 5-4: Top 10 production companies in the US/Canadian film market, 2009 Figure 5-5: Top 10 production companies in the UK market Figure 5-6: Major M&A activity, late 2008 to present Figure 5-7: Largest markets for filmed entertainment (% of global market) 2008 Figure 5-8: Country markets by sub-sector, 2008 Figure 5-9: US market segmentation, $m Figure 5-10: Japan market segmentation, $m Figure 5-11: UK games market segmentation, $m Figure 5-12: France film industry market segmentation, $m Figure 5-13: Germany market segmentation, $m Figure 5-144: Canada film market segmentation, $m Figure 5-15: Australia film market segmentation, $m Figure 5-16: Italy film market segmentation, $m Figure 5-17: India film market segmentation, $m Figure 6-1: Top 23 Software and Services companies in 2009 Figure 6-2: Global software revenues by region, 2008 Figure 7-1: Global publishing sales, $m (2008 prices) Figure 7-2: Global market growth 2004-2013, $m Figure 7-3: Change in sub-sector sales in 2008 Figure 7-4: Share of total revenue Figure 7-5: 20 largest publishing companies, by 2008 revenue Figure 7-6: Major M&A activity, late 2008 to present Figure 7-7: Country markets by sub-sector, 2008 Figure 7-8: US market segmentation, $m Figure 7-9: Japan publishing market segmentation, $m Figure 7-10: German publishing market segmentation, $m Figure 7-11: UK publishing market segmentation, $m Figure 7-12: China publishing market segmentation, $m Figure 7-13: France publishing market segmentation, $m Figure 7-14: Italy publishing market segmentation, $m Figure 7-15: Canada publishing market segmentation, $m Figure 7-16: Spain’s publishing market segmentation, $m

WM ENTERPRISE

66 68 69 70 71 72 72 73 74 75 76 78 79 80 81 82 83 84 87 88 91 92 92 94 95 96 98 99 101 102 103 105 106 107 108 109

Strands 4 & 5 – The Global Digital and Creative Industry

1.

Introduction

1.1

Research objectives A consortium led by WM Enterprise was commissioned by the Northwest Development Agency (NWDA) to undertake a series of research tasks to help map, understand and support the Digital and Creative Industries (DCI) sector in the region and beyond. This report summarises research into the global scope and scale of the DCI sector. The precise scope of this work, as specified in the tender, is shown in Figure 1-1 below.

Figure 1-1: Research Scope

Identification of ‘global’ change in the DCI market and the position of the Northwest businesses base within that change.

-

Assess the current and historical size of DCI markets at global and country level Identify the country markets that account for 80% of global DCI trade and breakdown by technology area Forecast global and individual country market growth Identify the DCI technology areas which offer most potential for export growth Identify trends of market change, forecasts of future change, geographical distribution of change

Identification of inward investment and trade opportunities linked to the changes in global markets and the already identified strengths of the Northwest DCI sector/subsectors.

-

Global FDI context for DCI European FDI projects analysis for DCI Cross border Mergers / Acquisitions trends in DCI Key industry and market growth trends and forecasts

This report is the final output of this strand of research.

1.2

Definitions

1.2.1

The Digital and Creative sector Definitions of the DCI sector vary considerably, and are subject to fluctuation over time. This is perhaps inevitable given the fast moving nature of the sector. The boundaries of the sector are also nebulous due to its cross-cutting nature, and the fact that some businesses may not see themselves as part of the sector (for example, where a product, such as training in a manufacturing environment, may be delivered through a virtual learning environment). Notwithstanding definitional challenges, NWDA has provided their definition of the DCI sector, which is being used throughout the workstreams for this research. This definition divides the industry into five sub-sectors:

§

ICT, including internet, telecommunications, mobile and enterprise software 1

Strands 4 & 5 – The Global Digital and Creative Industry

§

Interactive, including digital content, video (leisure) games, intelligent gaming and visualisation technologies

§

Broadcast media, including television, film, broadcast services and radio

§

Creative services, including advertising, design, marketing & PR, and media related sales activity

§

Music and digital audio Research for the international strands of this work has not been able to follow this bespoke definition precisely. For this reason, a separate list of sub-sectors was agreed as the focus for this research, one which matches more precisely available international data:

§

Computer Games

§

Recorded music

§

Advertising and marketing

§

Software

§

Publishing

§

Filmed entertainment

1.3

Methodology In line with the requirements for this research, the authors have drawn on secondary sources of information throughout this report. Global market research reports are commonly available, although access can be restricted and methodologies vary. The authors have attempted to balance a common approach across sectors, using larger scale market intelligence sources, with more detailed sector-specific information from specialist sources. Information on sources used is provided for each section.

1.4

Report structure Due to the unique definition of the wider research, of which this report is a part, it has not been possible to match accurately the bespoke definition to the global market picture. However, where possible similar definitions have been used to allow for read-across. The sections of this report cover, in turn, computer games, recorded music, marketing and advertising, film, and software industries. In line with the objectives of this element of the research, a common chapter structure is followed, providing: §

Definitions of the sector

§

An overview of the global market, including historical performance and forecast growth rates

§

Key trends in the market, and in the sector’s technology and business infrastructure

§

An overview of global business activity, identifying the market’s major companies, and recent mergers and acquisitions activity

2

Strands 4 & 5 – The Global Digital and Creative Industry

§

Summaries for the largest country markets (indicatively those that make up 80% of the global market by value, although this differs slightly from sector to sector)

3

Strands 4 & 5 – The Global Digital and Creative Industry

2.

Computer games

2.1

Introduction In this section, we provide an analysis of the global computer games industry. It is divided into the following sections: §

Global market outlook: an overview of the global market, both historic and future

§

Technology trends: major recent technological developments

§

Global business activity: developments in business structures and interrelationships, including identification of the major market companies, as well as significant recent mergers and acquisitions activity

§

Major national markets: a summary of the nine country markets that make up 81% of the global market

2.1.1

Definition We use the following definitions in this section. The definitions are based on the mechanisms by which games are played:

§

Console gaming: games are run on specific consoles, such as Xbox 360, Playstation 3, and Nintendo Wii

§

Online gaming: gaming takes place using the internet as the host, and play is via broadband-enabled computer

§

Wireless gaming: gaming occurs through a mobile phone

§

PC gaming: games are purchased specifically for installation on a personal computer Even with these definitions, some of the boundaries within the sector are blurred.

For example, online gaming can require the pre-purchase of software for a PC (such as World of Warcraft). Similarly, console games are increasingly able to hook players up around the world via the internet, providing an additional level of online game play.

Note: this definition does not include manufacturing of games hardware, such as mobile phones, PCs and consoles. These tend to be located in countries with low labour costs (China, Hungary, etc.) or the home base of the manufacturing company (Japan, Finland, etc.).

2.1.2

Sources of information The main sources of information from this section have included the following:

§

Global Outlook (PWC)

§

Screen Digest and other sector media reporting

§

Digital Content Sector Research (North West Vision and Media)

§

Identifying and Developing International Business Connections Between England’s Northwest and Selected High Growth Markets (NWDA) 4

Strands 4 & 5 – The Global Digital and Creative Industry

2.2

Global market outlook The global market for computer games has expanded considerably over the past five years, and looks set to continue on its growth trajectory for the foreseeable future.

Figure 2-1 shows historic expenditure and projected growth figures according to PWC analysis. While estimates of the sector’s global size vary, they are all positive.

For example, PWC forecasts a Compound Annual Growth Rate (CAGR) of 7.4% to 2013, and Business Insight predicts a CAGR of 8.9%1. This reflects a doubling in size of the market by value between 2006 and 2013, to more than US$70bn.

Figure 2-1: Global computer games expenditure, $m (2008 prices) $80,000

$70,000

$60,000

$50,000

$40,000

$30,000

$20,000

$10,000

$0 2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Source: PWC Global Outlook

Growth rates within sub-sectors of the games market are expected to vary over the next five years, reflecting market developments (Figure 2-2). While console gaming is anticipated to remain more than half of the global market by value (61% in 2008, falling to 56% in 2013), it is the online and wireless gaming segments that are expected to take a much greater share. This reflects changes in the way in which people are accessing games, i.e. away from consoles and ‘hard copy’ PC games towards mobile phone applications and online.

1

The Video Gaming Market Outlook: Evolving business models, key players, new challenges and the future outlook: Business Insights, 2009

5

Strands 4 & 5 – The Global Digital and Creative Industry

Figure 2-2: Global market growth 2004-2013, $m 80,000

70,000

4,096

60,000

13,404

50,000

4,344

13,679

7,028

40,000

8,251 30,000

20,000

4,675 1,635 2,590

39,712 30,394

10,000

18,877

0 2004

2008 Console

Online

2013 Wireless

PC

Source: PWC Global Outlook

2.3

Technology and market trends

2.3.1

Industry drivers Issues which will continue to drive global market growth across the games industry include the following:

2

§

The take-up of broadband: while common among highly developed countries, other parts of the world offer market growth – especially online gaming – as broadband coverage and usage expands

§

Availability of high quality wireless networks, and the development of more application-rich mobile phones are key to the development of the wireless gaming subsector

§

Simplicity of use and variety of games is extending the game user demographic to include older people and women. For example, in the US the age of the average game player is 35 years old and has been playing games for 12 years; the most frequent buyers of computer games are, on average, 39 years old2.

http://www.theesa.com/facts/index.asp

6

Strands 4 & 5 – The Global Digital and Creative Industry

The mainstream games industry also drives other sectors in the economy, for example: §

The ‘serious gaming’ sector, which applies game software and ideas to other areas, such as medical image mapping, and interactive training programmes

§

Sales of complementary products, such as High Definition and large screen televisions, are enhanced by increased interest in gaming, and its increasingly complex visual display requirements.

2.3.2

Console Console gaming is a mature market, and is expected to deliver small growth in the coming years. However, the console gaming market can deliver sizeable swings in value with the arrival in the market of strong sellers:

§

Software sales rise with a change in hardware prices or new consoles, and with the introduction of blockbuster titles. For example, Modern Warfare 2 had taken over $1bn by mid-January 2010, having been launched just three months earlier.

§

Hardware sales tend to spike with either a reduction in the price of existing consoles, or the introduction of the next generation (as happened in 2005/06 with the arrival of the Xbox 360, Playstation and Wii). However, industry experts believe that the next generation of consoles are likely to be two years off, or perhaps even more (console generations have so far tended to last five years).

Developing console games is an increasingly expensive undertaking (Modern Warfare 2 was believed to have cost $40-50m to develop). This is borne out by the integration activity seen in the global industry in recent years, with developers and publishers coming together, and the biggest players swallowing up large numbers of small development studios to build capacity.

The integration of an online environment into many consoles and games expands the gaming environment considerably in countries with strong broadband networks.

It also offers the potential to generate subscription revenues.

2.3.3

Online Online gaming is expected to be a growth sector in coming years.

3

§

Gaming via social networks, such as Facebook, has attracted large numbers of new people to gaming. However, the business models for delivering profit in this medium are as yet unclear.

§

MMOGs: The increasing popularity of Massive Multiplayer Online Games (MMOGs) is viewed as a risky but potentially lucrative future online market. The business value comes through subscriptions. Screen Digest reports that the MMOG market grew 22% in 2008 to $1.4bn in North America and Europe; it forecasts that $2bn will be spent globally on MMOG subscriptions by 20133. However, substantial investment is required up-front, and the market is already very competitive.

Subscription MMOGs: Life beyond World of Warcraft, Screen Digest 2009

7

Strands 4 & 5 – The Global Digital and Creative Industry

2.3.4

Wireless Wireless gaming, especially mobile gaming, is forecast to double in value between 2008 and 2013, according to PWC figures. In 2008, a decade after the first ‘snake’ game appeared on a mobile, the Multimedia Research Consultancy reported that global industry comprised in the region of 2,000 actively trading mobile games companies (including developers, distributors, portals and publishers)4.

More recent research by Gartner indicates that the global mobile games market will market will be worth US$11.4bn in 2014, broadly in line with PWC estimates5.

Gartner suggests that 70-80% of mobile applications downloaded by mobile users are games, although the majority are currently offered for free.

2.3.5

PC The market for PC games is expected to shrink over time, with the growth of online and wireless environments, and the increasing sophistication and power of consoles offering more attractive options to gamers. This is reflected in the reducing numbers of new PC games releases. However, there may be some exceptions, such as MMOGs which require an initial software purchase (such as World of Warcraft).

Software piracy has been a long running problem in the PC games market, dampening revenues in a number of markets, especially in Asia; alternative platforms reduce this revenue loss.

2.3.6

Future developments The games sector is a fast moving environment, and many previous forecasts about how the industry will develop have been proved wrong. Flexibility and adaptability should be watchwords for games business. However, in the short term, the following developments may be ones to watch:

4 5

§

3 dimensional gaming and advanced motion controls, building on 3D television developments, and the success of the Nintendo Wii

§

User-generated games, which are currently supported through sharing advertising revenue with online hosts (such as Kongregate)

§

Thought-controlled games, which have been in trial for a couple of years

The Global Mobile Games Industry Ten Years On, The Multimedia Research Consultancy, 2008 Market Insight: Mobile Gaming Expectations Boosted on Application Store and Smartphone Popularity, Gartner 2010

8

Strands 4 & 5 – The Global Digital and Creative Industry

2.4

Global business activity

2.4.1

Major sector companies Figure 2-3 lists the top 25 global gaming companies of 2009 by revenue, based on stock market listings, annual reports and corporate websites. Between them, they account for $33bn of gaming software revenues. When compared to PWC’s estimate of a $50bn sector (albeit likely based on different parameters), it suggests that the market is dominated by a relatively small number of companies.

For ten of the top 25 companies, games software sales account for less than half of all company revenues. This reflects the crossovers between various digital and media sectors, such as between games and entertainment (Disney); games and computer software (Microsoft); and games and gaming hardware (Nintendo). Japan leads the top 25 in company numbers (nine), followed by the US (eight).

Figure 2-3: Top 25 gaming companies, 2009 Rank

Company

Software revenues $m

Year on year growth

Total revenues $m

Software revenue share

1

Nintendo

7,245

113%

19,886

36%

2

Activision Blizzard

4,622

73%

5,032

92%

3

Electronic Arts

4,268

29%

4,268

100%

4

Sony

2,603

N/A

87,701

16%

5

Konami

2,083

16%

3,318

63%

6

Namco Bandai

1,569

21%

4,738

33%

7

Microsoft

1,547

N/A

61,900

2%

8

Ubisoft

1,486

10%

1,486

100%

9

Take-Two Interactive

1,452

49%

1,452

100%

10

Sega Sammy

1,407

0%

4,535

31%

11

THQ

917

-17%

917

100%

12

Capcom

582

-3%

831

70%

13

Square Enix

565

6%

1,507

38%

14

Shanda Games

502

55%

522

96%

15

MTV Games (Viacom)

471

136%

14,625

3%

16

NCSoft

275

-21%

275

100%

17

Giant Interactive

233

5%

234

100%

18

Midway Games (bankrupt)

220

25%

220

100%

19

Disney Entertainment

213

32%

37,981

1%

20

Koei

212

-8%

291

73%

21

LucasArts

200

N/A

N/A

N/A

22

Atlus

191

N/A

191

100%

23

Changyou

189

485%

202

94%

24

NetEase.com

183

42%

436

42%

25

Atari

174

-17%

174

100%

Source: Top 100 Research Foundation

9

Strands 4 & 5 – The Global Digital and Creative Industry

2.4.2

Recent mergers and acquisitions activity Figure 2-4 shows the most significant global M&A activity in the games sector since late 2008, according to sector business media. A number of trends are evident from this information and more general sector information:

§

large scale entertainment companies have been acquiring smaller games development firms. This reflects the sizeable revenues on offer in the games market, both in total and relative to other entertainment sectors (such as music publishing), as well as the importance of tie-ins between games and other entertainment offers (such as movies)

§

vertical consolidation continues to occur in the industry, for example mergers between games developers to deliver a more substantial global presence and to raise the scale of operations to develop increasingly complex and expensive games The move into games provided via social networking sites is a growing area, but it is unclear as yet what the profitability will be like here, or what business model best suits the sub-sector.

Figure 2-4: Major M&A activity, late 2008 to present Companies involved

Value

Comment

Marvel became a whollyowned subsidiary of Disney in December 2009

The value of the newly merged company was estimated at US$4.3bn in December 2009

Disney has a welldocumented desire to become a major player in the global games market; the company has acquired seven development studios in the last four years - the move on Marvel is part of this ongoing strategy.

Japanese games developer Square Enix (Final Fantasy) acquired UK-based developer Eidos (Tomb Raider)

The acquisition values Eidos at £84m in March 2009

This acquisition is seen as an attempt at solidifying the presence of Square Enix in the EU/UK games market

Viacom

Viacom Inc has tried and failed to break into the games industry in the past, but it has now embarked on its second major foray into the sector, spending over $787m on acquiring games companies during the last three years or so and committing to spend an additional $500m on growing these assets.

Atari acquisition of games developer Cryptic Studios (Champions Online MMO)

The deal values Cryptic Studios at US$28m

Tecmo and Koei (Dynasty Warriors)

The two companies are coming together in a single holding company

The ‘merger’ appears to have been driven by fears over the current economic climate, and the perception

10

Strands 4 & 5 – The Global Digital and Creative Industry

held by both companies that they need to be a larger entity to compete in the global games market UK games developer Swordfish Studios sold by Activision to Codemasters/Monumental Games US serious games developer Virtual Heroes purchased by US technology company Applied Research Associates

Details not made public

The focus for both companies is the training/simulation market.

Difficult economic conditions contributed to Virtual Heroes’ acceptance of the deal

Electronic Arts acquired online/social network games developer Playfish

The acquisition values Playfish at US$300m

EA appear to view casual/social network gaming as a major growth area in the future. Playfish estimate that they have 60m active users per month

Sources: Screen Digest and other sector media

11

Strands 4 & 5 – The Global Digital and Creative Industry

2.5

Major national markets

2.5.1

Overview In 2008, nine countries accounted for 81% of the computer games market in 2008 (Figure 2-5). At $14bn, the US is the largest single national market for computer games by far: 28% of global expenditure in 2008, twice the size of Japan, the next largest market with 13%.

Figure 2-5: Largest markets for computer games (% of global market) 2008 30%

28%

19%

20%

13% 9%

10%

8%

7% 5% 4%

3%

3%

Ro W

a Ca na d

Sp ain

Ch in a

Fr an ce Ge rm an y

So ut h

Ko re a

UK

pa n Ja

US

0%

Source: PWC Global Outlook

Figure 2-6 overleaf shows how the top national markets differ in terms of sub-sector performance. For example, Germany has the highest proportion of PC games sales among the top nine countries, while China is dominated by the online gaming subsector. This reflects historical traditions of gaming: China is a new gaming market, and has taken to cheap and easily accessible online games very quickly.

12

Strands 4 & 5 – The Global Digital and Creative Industry

Figure 2-6: Country markets by sub-sector, 2008 100% 90% 80% 70% 60% 50% 40% 30% 20% 10%

Cons ol e

Onl i ne

Wi rel es s

a Ca na d

Sp ain

Ch in a

rm an y

Ge

Fr an ce

Ko re a

So ut h

UK

pa n Ja

US

0%

PC

Source: PWC Global Outlook

13

Strands 4 & 5 – The Global Digital and Creative Industry

2.5.2

United States The performance of the games industry in the US has been strong in recent years, outstripping the economy’s overall growth before the economic crisis, and employing 80,000 people in the computing and gaming sectors. In addition to PWC’s estimates (Figure 2-7), market research company NPD Group estimated that the US games sector was worth $11.7bn in 2008, but fell by 11% in 2009 to $10.5bn due to the recession6.

Start-up investment has also been hit by the recession. Venturebeat, a US innovation and venture capital monitoring website, reported 97 game start-ups raised $600m in 2009, down 36% from 937m (and 112 start-ups) in 2008. These are only disclosable investments, but and indication that activity has been hit by the downturn.7 According to the Entertainment Software Association (ESA), 74 million game software units were sold in the US in 1996; by 2008, 298 million units were being sold annually. Between them, five US states account for 70% of the industry’s total indirect employment: California (by far the largest), Washington, Texas, New York and Massachusetts8.

The US market is dominated by console gaming, and this pattern is expected to continue. The console games market in 2009 was dominated by products from Japanese firm Nintendo: according to NPD, it was responsible for seven of the top ten grossing console games of the year, six of which were for the Wii. Figure 2-7: US market segmentation, $m Segment

2004

2008

2013

Console

6,242

11,000

14,405

Online

559

1,605

2,166

Wireless

294

775

1,138

PC

1,105

708

625

Total

8,200

14,088

18,334

100% PC

80%

Wireless

60%

Online

40%

Console

20% 0% 2004

2008

2013

Source: PWC Global Outlook

6 7 8

http://www.npd.com/press/releases/press_100114.html http://games.venturebeat.com/2009/12/21/game-startup-fundings/ Video Games and the Economy, Entertainment Software Association 2008

14

Strands 4 & 5 – The Global Digital and Creative Industry

2.5.3

Japan Market Japan is a highly mature games market, and was the second largest country games market in 2008 behind the US (Figure 2-8). Japanese games analysts Enterbrain estimate that Japanese hardware and software sales fell in 2009 by a collective 6.9%, reflecting the impact of the recession9.

Industry The Japanese gaming industry accounted for nine of the top 25 sector firms in 2009.

Japanese games firm Nintendo is the dominant local figure in games hardware (Wii, DS) and software.

Moves in the Japanese games development industry to expand beyond the local market are expected to increase over time; the acquisition of Eidos by Square Enix is a case in point (Figure 2-4).

Figure 2-8: Japan market segmentation, $m Segment

2004

2008

2013

Console

3,040

3,358

3,775

Online

250

830

1,435

Wireless

300

1,474

3,154

PC

705

647

600

4,295

6,309

8,964

Total 100% PC

80%

Wireless

60%

Online

40%

Console

20% 0% 2004

2008

2013

Source: PWC Global Outlook

9

http://www.neoseeker.com/news/12742-enterbrain-japanese-gaming-market-shrunk-6-9-percent-in-2009/

15

Strands 4 & 5 – The Global Digital and Creative Industry

2.5.4

United Kingdom Market The UK games market was the third largest in the world in 2008, and the biggest European market (Figure 2-9). Console gaming dominates the retail market, accounting for some 60% of the total by value. Online and wireless gaming revenues are expected to rise in the coming years, but mostly at the expense of PC gaming.

According to market trends analysis by GHK, the UK games market exceeded movies (cinema and DVD) for the first time in 2009.10 Industry Reflecting the global nature of the industry, the Independent Games Developers Association (TIGA) reported in 2009 that 83% of UK game developers outsource at least one business process.11 The most commonly outsourced processes were in the fields of art, animation and programming.

Figure 2-9: UK games market segmentation, $m Segment

2004

Console

2008

2013

1,809

2,900

3,936

Online

167

665

1,153

Wireless

140

680

1,113

PC

333

376

344

2,449

4,621

6,546

Total 100% PC

80%

Wireless

60%

Online

40%

Console

20% 0% 2004

2008

2013

Source: PWC Global Outlook

10 11

http://www.telegraph.co.uk/technology/video-games/6852383/Video-games-bigger-than-film.html Download: outsourcing and offshoring, TIGA 2009

16

Strands 4 & 5 – The Global Digital and Creative Industry

2.5.5

South Korea Market At $4.2bn in 2008, South Korea is the fourth largest games market in the world (Figure 2-10). The profile across console, online and wireless gaming is more equally balanced in South Korea compared to other country markets. South Korea has the highest proportion of mobile gaming of any country, driven in part by the indigenous manufacture of mobile phones by Samsung and LG. An estimated 15m people play online games. Growth has been underpinned by strong network support: South Korea is recognised as one of the most ‘wired’ countries in the world, in terms of its wireless connectivity and usage of high speed broadband.

Industry South Korean gaming companies are not particularly well-known in the global market, with the possible exception of NCsoft. However, given the extent of gaming saturation in their home market, South Korean firms are expected to look towards expansion into the global market.

The expansion of the South Korean games industry received government support in 2008 with a commitment to spend $200m to help the sector become the third largest in the world, after the US and Japan.

Figure 2-10: South Korea games market segmentation, $m Segment

2004

Console

2008

2013

1,265

1,856

2,470

Online

420

1,190

2,071

Wireless

243

1,135

2,413

48

40

26

1,976

4,221

6,980

PC Total 100% PC

80%

Wireless

60%

Online

40%

Console

20% 0% 2004

2008

2013

Source: PWC Global Outlook

17

Strands 4 & 5 – The Global Digital and Creative Industry

2.5.6

France Market France is Europe’s second largest games market after the UK, and valued at $3.7bn in 2008 (Figure 2-11). Console gaming dominates the market (65%), and expected to continue to do so through to 2013 (63%).

Statistics provided by the national games industry association (Syndicat National du Jeu Vidéo) suggest that the French market declined by some 20% between 2008 and 2009 as a result of the economic downturn.12 Nevertheless, it is now the largest entertainment segment in the country, ahead of music and movies in overall value (software plus hardware).

Industry France has a strong games industry, underpinned by three large firms in the global top 25: Atari, Activision Blizzard (majority owned by French firm Vivendi) and Ubisoft. These firms have traditionally concentrated on the console and PC market, although Activision Blizzard is also responsible for the highly popular MMOG World of Warcraft. The games development sector as a whole is estimated to total around 130 companies and 5,000 jobs (2,000 in development and 3,000 in publishing).

The recent promotion of France as a place to locate for games development was underpinned by the government’s reclassification of the sector as an ‘art’, in order to benefit from tax credits.

Figure 2-11: France games market segmentation, $m Segment

2004

Console

2008 1,548

2,415

3,250

102

419

733

86

431

706

428

453

437

2,164

3,718

5,126

Online Wireless PC Total

2013

100%

PC

80%

Wireless

60%

Online

40%

Console

20% 0% 2004

2008

2013

Source: PWC Global Outlook

12

http://www.snjv.org/fr/industrie-francaise-jeu-/chiffres-cles-industrie.html

18

Strands 4 & 5 – The Global Digital and Creative Industry

2.5.7

Germany Market Germany had the third largest European games market in 2008, after the UK and France (Figure 2-12). Industry reports, however, suggest that Germany may have become the biggest market in Europe in 2009, as the German market did not suffer negative decline due to the recession, as happened in France and the UK13.

The games market in Germany may not continue to be as robust in future, if the current high profile campaign to ban violent games in the country is successful.

Such a ban could see the withdrawal from the market of some of the most successful console games, such as Modern Warfare 2, as well as MMOGs like World of Warcraft.

Industry Little information is available about the German games industry. There are no German companies in the top 25 global list.

Figure 2-12: Germany games market segmentation, $m Segment

2004

2008

2013

Console

792

1,693

2,286

Online

102

219

375

53

173

299

667

632

599

1,614

2,717

3,559

Wireless PC Total 100% PC

80%

Wireless

60%

Online

40%

Console

20% 0% 2004

2008

2013

Source: PWC Global Outlook

13

http://www.gamezine.co.uk/news/game-industry/germany-overtakes-uk-as-top-games-market-in-europe-$1318933.htm

19

Strands 4 & 5 – The Global Digital and Creative Industry

2.5.8

China Market The gaming market in China is overwhelmingly online. In 2008, online gaming accounted for 69% of the games market (Figure 2-13). Research company iResearch reported in late 2009 that the China online games market had increased 30% over the previous year, to a value of £2.5bn14. The number of active Chinese online gamers was estimated to be 60-70m during that period, around 20% of China’s internet-connected population.

Online gaming is expected to continue its dominance in China in the years to come, with revenue increases likely to be driven primarily by increased internet penetration within the country. More dramatic growth is expected in mobile gaming as its accessibility increases.

Industry Three Chinese games companies are in the top 25 global list (Figure 2-3): Shanda, Changyou and NetEase. A fourth – Tencent – is also a major player. All four develop, publish or host online games, but they also have other activities, partly for historical reasons but also to counteract the risks of online gaming development (not all online games are guaranteed ‘hits’). For example, NetEase offers blogging, bulletin board and email services; Shanda also publishes books.

Figure 2-13: China games market segmentation, $m Segment

2004

2008

2013

Console

56

88

118

Online

300

1,250

2,159

99

458

975

6

5

5

461

1,801

3,257

Wireless PC Total 100% 80% PC Wireless

60%

Online

40%

Console

20% 0% 2004

2008

2013

Source: PWC Global Outlook

14

http://english.iresearch.com.cn/views/Digital_Entertainment/DetailNews.asp?id=9077

20

Strands 4 & 5 – The Global Digital and Creative Industry

2.5.9

Spain Market The Spanish games sector was worth $1.65bn in 2008, making it the fourth largest European market. The market is dominated by console gaming (Figure 2-14).

Industry Detailed information on the Spanish games market and industry is difficult to identify. One source suggests that the industry only contains just 20 firms.15 Figure 2-14: Spain games market segmentation, $m Segment

2004

2008

2013

Console

553

1,135

1,516

Online

52

196

335

Wireless

44

208

339

PC

200

115

110

Total

849

1,654

2,300

100% 80% PC Wireless

60%

Online

40%

Console 20% 0% 2004

2008

2013

Source: PWC Global Outlook

15

http://www.idec.upf.edu/bcnplay/en/index.html

21

Strands 4 & 5 – The Global Digital and Creative Industry

2.5.10 Canada Market Compared to its US counterpart, Canada is a relatively small market for the games industry, yet it still comes in as the ninth largest national market in 2008. As with the US, console gaming dominates, and is expected to do so in the short to medium term.

Research by the University of Western Ontario (UWO) indicates that Canada has the greatest broadband reach of any country except South Korea, so the potential for expansion of online gaming is considerable16.

Industry UWO’s research also suggests that Canada is sixth in terms of size of games production. BioWare is a well-known Canadian games developer; global players UbiSoft and Electronic Arts also have studios in the country. EA Canada alone accounts for half of the country’s games developer revenues.

Within the Canadian industry of some 100 games firms (primarily developers rather than publishers), the largest clusters are Montreal and Vancouver (where UbiSoft and EA are based, which acts as a magnet for smaller developers and firms). The sector is estimated to support around 4,000 jobs.

The recent growth of the Canadian games industry has come with the active support of the government. Tax breaks and R&D credits have helped to encourage relocation, especially as a low cost base from which to target the huge US market.

Figure 2-15: Canada games market segmentation, $m Segment

2004

2008

2013

Console

421

881

1,130

Online

155

345

491

25

83

121

PC

110

81

72

Total

711

1,390

1,814

Wireless

100% 80% PC Wireless

60%

Online

40%

Console 20% 0% 2004

2008

2013

Source: PWC Global Outlook 16

http://publish.uwo.ca/~ncdyerwi/

22

Strands 4 & 5 – The Global Digital and Creative Industry

3.

Recorded music

3.1

Introduction In this section, we provide an analysis of the global recorded music industry. It is divided into the following sections: §

Global market outlook: an overview of the global market, both historic and future

§

Technology trends: major recent technological developments

§

Digital Industry: an overview of the recent trends and developments in the digital music market, particularly looking at digital piracy and new business models

§

Global business activity: developments in business structures and interrelationships, including identification of the major market companies, as well as significant recent mergers and acquisitions activity

§

Major national markets: a summary of the nine country markets that make up 79% of the global market

3.1.1

Definitions The following definitions used in this section and are based on the form of distribution of music:

§

Physical distribution: consumer spending on physical formats such as albums, single sound recordings and music videos

§

Mobile phone distribution: consists of music distributed to mobile phones and includes ringtones and well as music videos and full tracks that can be played on mobile phones. This category also includes a share of fees paid for bundled services which include music as part of the bundle

§

Internet distribution: music tracks and videos downloaded from the internet through licensed services

§

Digital total: mobile and internet distribution combined

§

Repertoire origin: proportion of the physical market (trade) value accounted for by each repertoire type. Classification is based on artist country of singing

§

Trade value: refers to record companies’ revenue, net of discounts, returns and taxes

§

Retail value: estimate of the final value paid by the customer of music products, inclusive of relevant sales taxes and retailer mark-up. Retail values are therefore higher than trade value.17 Note also that since retail values are estimates, they may vary from source to source.

Our market definition does not include fees paid by radio satellite providers. Nor does it include music publishing, live music performances or merchandising revenues. Spending is measured at retail, which can be substantially higher than wholesale or trade value revenues.

17

The extent of the difference varies from country to county, but according to the IFPI, global retail value of music was around 51 per cent higher than the trade value in 2008.

23

Strands 4 & 5 – The Global Digital and Creative Industry

3.1.2

Sources of information The main sources of information from this section have included the following:

3.2

§

Global Outlook (PWC). Data from this report is based on retail values

§

Recording Industry in Numbers 2009 (International Federation of the Phonographic Industry - IFPI). Data is based on trade value, unless otherwise stated.

§

Various national music associations, e.g. RIAA, RIAJ

§

Population: The World Factbook

§

Broadband lines: Point Topic

§

Internet users: Internet World Stats

§

Mobile Subscriptions: Mobile operator figures

§

Portable player users: Screen Digest, Futuresource Consulting Ltd

Global market outlook The music and digital audio industry has undergone significant changes in recent years as a result in the rise in availability of music in non-physical forms. Figure 3-1 shows global consumer expenditure on recorded music between 2004 and 2013.

Expenditure on recorded music declined every year since 2004 and is forecast to continue declining until 2012 before rising slightly in 2013. A decline of 9.6% in 2008 was the largest fall in the past five years. Spending on physical formats, which still accounts for the bulk of expenditure, fell by 17.3%.

Figure 3-1: Global recorded music expenditure, $m (2008 prices) $40,000

$30,000

$20,000

$10,000

$0 2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Source: PWC Global Outlook

24

Strands 4 & 5 – The Global Digital and Creative Industry

As might be expected, the recent performance of the sub sectors has varied significantly. Figure 3-2 shows the evolution of these sub sectors. Legitimate digital services and piracy have pushed physical distribution in to decline: expenditure fell by 39% between 2004 and 2008, and is forecast to decline by an annual average of 12.5% up to 2013. Spending on digital formats, meanwhile, rose by 581% between 2004 and 2008. Mobile phone distribution was the larger of the two digital markets during this period, accounting for 56% of expenditure in 2008. However, bundled services, low-cost or free mobile music and side loading from lower-cost internet services will cut in to the paid mobile market, particularly in North America and EMEA, whilst wider access to broadband will continue to boost internet sales. These changes mean that internet distribution is forecast to overtake mobile phone distribution in 2010, and continue to pull away in subsequent years.

Figure 3-2: Global market growth of subsectors, 2004-2013, $m 40,000

35,000

738 382

30,000 4,264 25,000

3,367

6,006

20,000 36,208 8,801

15,000 21,962

10,000

11,254

5,000

0 2004 Physical distribution

2008 Internet

2013 Mobile phones

Source: PWC Global Outlook

3.3

Technology and market trends

3.3.1

Key changes Issues which will continue to affect global market growth across the recorded music industry include:

§

The take-up of broadband: while common among highly developed countries, other parts of the world offer market growth in internet distribution as broadband coverage and usage expands 25

Strands 4 & 5 – The Global Digital and Creative Industry

§

The adoption of graduated response systems, which involve Internet Service Providers issuing warning to file sharers that escalate in severity will discourage piracy and increase legal downloading from the internet

§

Bundled and low cost mobile music will cut in to revenues generated by mobile phone distribution. Increased usage of mobile phones, particularly in Asia Pacific and Latin America will provide some resistance to a decrease.

3.3.2

The digital industry In 2009, for the first time, over a quarter of record companies’ revenues came from digital channels, with total revenues generated by the digital market estimated at $4.2bn. Aside from the electronic games sector, the music sector is generating far greater value from the online and mobile market than any sector in the creative industries. The digital industry still faces many barriers to growth. Digital piracy is the biggest challenge, but others such as problems with publishing rights and consumer reluctance to make payments online are also holding back growth.

3.3.3

Digital Piracy Peer-to-peer (P2P) file sharing is the application producing most internet traffic – ahead of web browsing, media streaming, email or instant messaging. Although P2P technology has been of great interest to music companies as a profitable legitimate business tool, it has also been a vehicle for mass copyright infringement. File sharing is particularly prevalent among younger consumers. While 16% of the general internet population in Europe file-share on a regular basis (the UK figure is 15%), among 15-24 year olds this figure jumps to 34% – three times the proportion of 1524s consuming music via legitimate services.

A number of studies by academics and the music industry have found that filesharing has a significant impact on recorded music sales, including studies by Michael (2006), Rob & Waldfogel (2006) and Liebowitz (2006). One well-publicised study by Oberholzer and Strumpf (2004) found no link between the fall in music sales and illegal downloading, although their findings have been discredited by a number of their peers18. Research suggests that the availability of free music is the driving force behind the growth of digital piracy, as opposed to, for example, a lack of good legal alternatives: in the UK, 71% of respondents to a survey who said they file-shared citied ‘because it’s free’ as their main reason for doing so.19 Graduated response systems have become the music industry’s main hope of curtailing the prevalence of music piracy. Under this system, the holders of accounts identified as being used for infringements are sent notices by their ISP. If ignored, an escalating series of warnings would result, culminating in a temporary suspension of internet access for those who continue to share files illegally. According to a 2009 survey by Entertainment Media Research, 45 % of consumers who download music illegally would definitely stop and a further 35% stated they would probably stop under these regulations.

18

E.g. this study was reviewed by Liebowitz who concluded that ‘it is probably something of an understatement to say that their results did not hold up well under this re-examination’ (How Reliable is the Olberholzer and Strumpf Paper on File Sharing, 2007) 19 Entertainment Media Research

26

Strands 4 & 5 – The Global Digital and Creative Industry

3.3.4

New business models A wide range of new business models are being pursued in the search to find the best way to monetise the opportunities presented by digital distribution, as well as to address the different ways people wish to consume music. Internet service providers (ISPs) are increasingly looking to become commercial partners of music companies in developed countries in an attempt to retain customers in an increasingly saturated broadband market. Mobile handset manufacturers, including Nokia and Sony Ericsson, have recently begun to offer unlimited music services bundled with mobile phones. A further development has been the growth of advertisement-supported services that offer music streaming to fans at no cost, such as Spotify. Premium, advertisement-free services are also offered for a monthly subscription fee.

The ‘à la carte’ download model, pioneered by iTunes, is proving to be the most popular model for internet downloading, preferred to subscription services offered by some companies. Up until recently, digital rights management (DRM) software was widely placed on tracks downloaded on the internet which restricted the buyer’s ability to play the track on different mobile devices and limited the number of copies that could be made. The recent agreement of music companies to remove this software is set to increase demand for downloading music online. In addition, variable pricing of downloadable music tracks has increased the conversion of track purchases to album sales.

27

Strands 4 & 5 – The Global Digital and Creative Industry

3.4

Global business activity

3.4.1

Market Structure There are a large number of different types of economic activity taking place in the music industry, meaning that the revenue generated from retail music sales is distributed between a number of agents. Firstly, there are artists and composers writing, recording and performing music. A composer assigns their copyrights to a publishing company. Publishers license the use of these copyrights to record companies who record them. Record companies exist to either facilitate an artist by providing financial and organisational structures to support the recording, manufacture, distribution and promotion of an artist’s recorded work. In the physical format market, major recording companies generally have manufacturing and distribution structures in place, whereas independent record companies typically have to sign a deal either with a major recording company or an independent distribution company in order to get their music in to shops. In addition, artists and composers are generally represented in their dealings with record companies by a manager.

Figure 3-3 shows the market share of the four biggest record companies, which totals 71.7% between them. These four are generally referred to as the ‘major’ record companies, with others often being referred to as independent record companies.

Figure 3-3: Market share of the four major record companies Record Company

Market Share

Universal Music Group

25.5%

Sony Music Entertainment

21.5%

EMI Music Group

13.4%

Warner Music Group

11.3%

Source: IFPI, 2005

There has been a series of mergers and acquisitions which has reduced the number of major record companies from the six that existed in 1998. Universal Music Group (UMG), which up until 1996 had been trading under Music Corporation of America (MCA), acquired Polygram Records in 1998. Sony Music Entertainment then merged with Bertelsmann Music Group in 2004 to become Sony BMG, before Sony acquired BMG’s stake in the venture (see below). Ownership of the major record companies has also switched through a number of takeovers by media conglomerates (Vivendi bought UMG) and private equity firms (Terra Firma bought EMI). To complicate things further, these takeovers do not always involve a music company being fully acquired: sometime parts of the target business such as publishing or distribution arms will not be included in the deal. Warner Music Group became the only standalone music company to be publicly traded in the United States in May 2005 and currently has a market capitalisation of around $1.1bn.

28

Strands 4 & 5 – The Global Digital and Creative Industry

3.4.2

Recent mergers and acquisitions activity Figure 3-4 below shows the key merger and acquisitions that have taken place in the recorded music industry from 2008 onwards.

Figure 3-4: Major M&A activity from 2008 Companies involved

Value

Comment

Apple iTunes acquired Lala

Tech Crunch estimated that Apple paid $17m for Lala on 7 December 2009, although estimates vary: All Things Digital reported the price at $80m

Lala had recently signed a deal with Google to help power Google’s Music Onebox - a new kind of Google search result that will let you instantly stream songs directly from Google’s results page

MySpace acquired iLike in August 2009

Undisclosed but Tech Crunch estimated the deal to be worth $20m

The deal signified MySpace’s desire to regain ground by moving away from linear social networking to support a wider range of activities

Estimated at around $1m, although that price did not cover all of iMeem’s assets

iMeem was reportedly running out of cash after several advertising deals didn’t meet projections. The deal also sealed a large loss for Warner Music Group, which had previously invested in iMeem, as well as iLike.

MySpace acquired iMeem in November 2009

Bertelsmann Music Group (BMG) merged with Kohlberg Kravis Roberts & Co in July 2009

The two companies merged to form a global music rights management business

Sony Corporation bought Bertelsmann’s 50% share of the joint venture Sony BMG in August 2008

The joint venture was originally formed in March 2004 when Sony Music Entertainment merged with Bertelsmann Music Group.

Following the acquisition in 2008, the company was renamed Sony Music Entertainment

Sony paid the Bertelsmann Group $1.2bn

Source: TechCrunch and other sector media

29

Strands 4 & 5 – The Global Digital and Creative Industry

3.5

Major national markets

3.5.1

Overview The nine largest national markets for recorded music accounted for 79% of global sales in 2008. The US and Japan were the two largest markets and accounted for half of the global sales alone, with the UK and Germany each accounting for eight per cent. Figure 3-5 shows the ten largest recorded music markets in the world.

Figure 3-5: Largest markets for recorded music (% of global market) 2008 30%

28%

22%

21%

20%

10%

8%

8% 5% 2%

2%

2%

1%

RO W

Ko re a

So ut h

Ru ss ia

ia

Au st ra l

Fr an ce Ca na da

Ge

rm an y

UK

pa n Ja

US

0%

Source: PWC Global Outlook

breaks down the largest national markets in to the subsectors. The most noticeable feature of the figure is the domination of the digital music industry in South Korea, with physical distribution only accounting for a little over ten per cent of sales. Aside from South Korea, physical distribution accounts for around 70% of sales in the US, the UK, Japan, Canada and Russia, with shares in Australia and France around 85%.

Physical distribution is still very prevalent in Germany, accounting for over 90% of music sales in 2008.

30

Strands 4 & 5 – The Global Digital and Creative Industry

Figure 3-6: Country markets by sub-sector, 2008 100% 90% 80% 70% 60% 50% 40% 30% 20% 10%

Phys i ca l di s tri buti on

Internet

Ko re a

So ut h

Ru ss ia

ia ra l

a

Au st

Ca na d

Fr an ce

rm an y

Ge

UK

pa n Ja

US

0%

Mobi l e phone

Source: PWC Global Outlook

One point regarding these markets is that the IFPI and PWC estimates are different, leading to some differences in ranking depended on which figures are used.

31

Strands 4 & 5 – The Global Digital and Creative Industry

Figure 3-7 shows the largest markets according to the IFPI, with their corresponding trade and retail values. In terms of ranking, Italy replaces Russia in eighth and Spain replaces South Korea – which is ranked 18th according to the IFPI – in ninth. Russia is ranked 12th by the IFPI based on trade value, although it is the ninth largest on retail value. The two sources largely agree with each other with regards to the other seven markets on the list, with the only notable discrepancy being Japan, where PWC’s estimate of retail value is around $1bn larger than the IFPI’s.

32

Strands 4 & 5 – The Global Digital and Creative Industry

Figure 3-7: Market ranking according to IFPI Country

Trade Values, US$m

Retail Values US$m

US

4,976

8,597

Japan

4,109

5,600

UK

1,845

2,430

Germany

1,627

2,355

France

1,049

1,559

Canada

456

600

Australia

389

578

Italy

326

462

Spain

302

490

Source: IFPI

Repertoire Origin Figure 3-8 shows the repertoire origin of the physical music consumed in each of the main national markets. The proportion of national music markets that are served by domestic artists varies significantly between countries. At one end, the USA buys 93% of its physical music from domestic artists, whereas the figure for Canada is just 20%. Simply looking at the domestic repertoire figure does not therefore always give a reliable indicator of the strength of the wider domestic music industry. First, the size of the national market needs to be considered, and second, some countries have a greater preference for compilation CDs (which could be made up of songs from domestic artists) and classical music.

Figure 3-8: Repertoire origin of biggest national music markets 100% 90% 80% 70% 60% 50% 40% 30% 20% 10%

Classical

US A

UK

ea Ko r

ss ia Ru

th

International

So u

Domestic

Ja pa n

Ge rm

an y

e an c Fr

Ca na da

ai la

0%

Au st r

3.5.2

Compilation

Source: IFPI

33

Strands 4 & 5 – The Global Digital and Creative Industry

The broader music industry Music companies are driving a broader music industry that is worth over $160bn worldwide, according to the IFPI, which also estimates that over two million people are employed globally within this wider definition. Figure 3-9 illustrates the sectors that are connected to the recorded music industry, along with their value. Radio advertising, whose value is greater than the recorded music industry itself, is driven by consumer demand for radio stations, which is at least partly due to the music that is played by the stations. Other sectors, such as portable and home audio systems, derive their demand through consumers’ desire to play recorded music on a variety of platforms.

Figure 3-9: Broader music industry by value (US$bn), 2008 Br oa der Mus i c I ndus tr y Va l ue, 2 0 0 8 35 30

US$ (Bn)

25 20 15 10 5

Re

us ic

io

Au d

co r

de d

o

m

ad ve rt

is i n

g (re ta ho Po i l) m rta e bl sy e st di em git s al pl Liv ay M e er us m s ic M us al us i c in ic se st TV ct ru or /m m en ag t a M s in sa us le e ic s ad re v la e rt te is i d ng vid eo ga m es P Pe ub rfo l is hi rm ng an ce ri g ht s

0

Ra di

3.5.3

Source: IFPI

The overall music industry grew by 0.6 per cent in 2008, with increased revenue from home and portable audio players and the live music industry offsetting the fall in sales from of the recorded industry itself.

34

Strands 4 & 5 – The Global Digital and Creative Industry

3.5.4

National Markets This section provides data and information on the largest recorded music markets according to PWC. In order to provide a comprehensive view on these markets we discuss data from the IFPI and a range of other sources such as national recording associations.

3.5.5

United States Market

Digital indicators (millions) Population

303.8

Internet users

248.2

The US is the largest market for music recording, Broadband lines 79.1 accounting for 28% of global sales at retail level.

261.5 Physical distribution is in steep decline, with 2008 sales Mobile subs at less than half the levels in 2004. Major retail chains Portable player users 101.0 such as Tower Records and Sam Goody have already closed, and music is being allocated less shelf space in retailers such as Wal-Mart.

This trend is exemplified by iTunes overtaking Wal-Mart to become the largest music retailer in the US. The US digital market, which accounts for 47% of the global digital market, is driven by online consumption – particularly the downloading of single tracks. The use of iTunes in the US is very widespread: 87% of digital music buyers used iTunes to download music in 2008; the second most popular source was Amazon with 16%. In 2008 NPD estimated that 36 million consumers downloaded at least one song legally from an ‘a-la-carte’ service, such as iTunes or AmazonMP3.

This translates in to one in every five internet uses, showing there is still plenty of potential for the user base to grow. Moreover, this figure of 20% surpassed the share of internet users who downloaded a song illegally (18%) for the first time. The availability of digital music without copyright protection will further drive the internet market, although the mobile phone market growth will be stunted by the bundling of mobile music.

Data from the Recording Industry Association of America (RIAA) shows that fulllength CDs accounted for around 78% of music sales in the US, falling from a peak of 91% in 2002. Digital downloading has risen rapidly and accounted for 13% of sales in 2008. Despite the value of music sales in the US declining, total unit consumption of music increased between 2007 and 200820.

More music sales are taking place in non-traditional retail environments. For example, Starbucks has expanded its presence in the music market to include select "Hear Music" coffeehouses with listening stations and an expanded retail selection, and creates Starbucks branded compilation CDs with new and established artists.

Industry Of the physical music that the USA consumes, 93% comes from domestic artists – the highest figure of all major markets. Universal Music Group (UMG), the world’s largest recording company and also a publisher and distributor of music , has its headquarters in New York, but is owned by French media conglomerate Vivendi. As is to be expected with such a large domestic artist base, there are a number of 20

The Recording Industry Association of America, 2008 consumer profile

35

Strands 4 & 5 – The Global Digital and Creative Industry

relatively large independent record labels and independent record companies account for over 30% of digital music sales21. Starbucks Entertainment, which had been producing and retailing compilation CDs since 1999, jointly formed a music label ‘Hear Music’ with Concord Music Group in 2007 which has been growing in popularity. Walt Disney also has a music arm, Walt Disney Records. They have used their existing brand to target children and families and are the only record company to top the IFPI’s best-selling global album chart for two years in a row (2006, 2007).

IFPI figures show that retail value of the recording industry at around 70% higher than the trade value. This means that the distribution and retailing of music – the two key activities that are downstream from record companies – account for over 40% of the price paid by the consumer.

Figure 3-10: US recorded music market segmentation, $m 2004

2008

2013

Physical distribution

12,154

5,758

1,953

Internet

303

1,824

3,970

Mobile phone

271

816

673

Digital total

574

2,640

4,643

Total

12,728

8,398

6,596

100% Digital total

80%

Mobile phone

60%

Internet

40%

Physical distribtuion

20% 0% 2004

2008

2013

Source: PWC Global Outlook

21

Australian music office

36

Strands 4 & 5 – The Global Digital and Creative Industry

3.5.6

Japan Market

Digital indicators (millions) Population Internet users

127.3 94.0

Total spending on recorded music in Japan has held up Broadband lines 30.3 well in Japan, with revenues increasing up until 2007 Mobile subs 110.6 before falling slightly in 2008 and 2009. Unlike in the US and Europe, music sales outperformed other Portable player users 13.4 entertainment sectors in 2008. Japan’s music industry is expected to resume growth in 2011 and overtake the USA in 2012 to become the world’s largest consumer of recorded music. Japan has the largest mobile music market in the world; at $2.1bn in 2008, it accounts for 51% of the global mobile market. The strength of the mobile market reflects the fact that mobile phones are the predominant means of accessing the internet in Japan. Growth has also been sustained by Label Mobile, a joint venture between 12 record labels that runs all of its stakeholders’ mobile commerce activities. Moreover, wireless network upgrades

by NTT DoCoMo and the introduction of the iPhone provide the platform required for future growth.

The prevalence of mobile-based piracy has continued, with 35% of mobile users accessing illegal sites to download mastertones (sophisticated ringtones) or full tracks via their mobiles. As many as 60% of 16-19 years olds illegally downloaded music content in 2009, up from 45% in 2006. The AIAJ estimated that around 410m music files were downloaded illegally in Japan in 2008, while less than 42m units of music were downloaded via licensed online services. However, Japan’s digital piracy rate is still significantly lower than the global average: 40% of all digital downloads in 2008 were unauthorised compared with a global rate of 95%. A consortium of trade firms in the music and film industry and ISPs are considering adopting a graduatedresponse system which would help to curtail illegal downloading and provide a boost for legal internet distribution.

Industry Domestic repertoire sales continued to do better than international repertoire, with an 80% share of the market. Two Japanese artists were among the top ten selling global single digital singles tracks– Thelma Aoyama and GreeeeN. Sony Music Entertainment, the second largest major record company, is ultimately owned by the Sony Corporation, a Japanese company, although it is controlled by Sony Music Corporation, a US subsidiary of Sony. High demand for domestic repertoire music provides opportunities for independent record labels in Japan; Sony Music Entertainment Japan operates as an independent record label in Japan, directly owned and controlled by Sony Corporation. There are a number of other successful Japanese independent music labels, such as Columbia Music Entertainment which had sales of 18,435m yen ($179m) in 2008/9, and Avex Marketing which produced three of the top fifty selling albums in 2008. A range of general entertainment companies in Japan also operate music businesses as subsidiaries, such as Geneon Universal Entertainment Japan, and Tokuma Japan Communications.

37

Strands 4 & 5 – The Global Digital and Creative Industry

Figure 3-11: Japan recorded music market segmentation, $m 2004

2008

2013

5,402

4,348

2,657

4

130

328

Mobile phone

261

2,117

3,671

Digital total

265

2,247

3,999

5,667

6,595

6,656

Physical distribution Internet

Total 100% 80% Mobile phone Internet Physical distribtuion

60% 40% 20% 0% 2004

2008

2013

Source: PWC Global Outlook

38

Strands 4 & 5 – The Global Digital and Creative Industry

3.5.7

United Kingdom Market

Digital indicators (millions) Population

60.9

Internet users

41.8

Steep price cuts for physical music have helped to slow Broadband lines 17.4 its decline in the UK. Coupled with strong digital Mobile subs 74.3 growth in 2008, this has helped limit the loss in retail revenue to 5%. In 2008 an agreement between ISPs Portable player users 19.0 and the recording industry was reached in which ISPs would send out thousands of letters to illegal downloaders and promoted legitimate services. The fight against digital piracy in the UK has recently been given a further boost with the Digital Economy Bill becoming law in April 2010. Amongst other things, this bill brings in legislation that requires ISPs to reduce online copyright infringement. This will help curtail the illegal download market – which cost the UK music industry £180m in 2008 – and improve the prospects for the UK’s internet distribution market, which is already the second largest in the world behind the USA. Adding to the wide variety of digital services available in the UK, ‘Comes with music’ from Nokia is an example of music packages being bundled with mobile phone contracts. The cost of songs is included in the package but users do not directly pay for the music.

Industry British artists accounted for 49% of artist album sales and releasing all of the top five selling albums in the UK of 2008, three of which also made the global top ten. UK artists accounted for one in ten album sales in the USA in 2008, and their global share of sales was 10% in 2008. Figures from the IFPI shows that only 36% of physical music units in the UK sold are made by British artists. However, this low figure mainly reflects consumers’ demand for compilation CDs – which produced four of the top ten selling albums in 2008 – rather than a reliance on international repertoire.

Music retailers have been under pressure recently, with their number falling by 7.7% between 2005 and 2008. The recession has also forced two of the biggest UK independent distribution companies into administration. Entertainment UK, Woolworths’ distribution arm, delivered up to 30% of physical music in the UK22.

Pinnacle Entertainment, which had a 4.3% share of the UK music market in 2007 according to BPI, went in to administration in December 2008.

EMI, the fourth largest record company in the world, is a British company. EMI was acquired by Terra Firma capital partners in 2007 for £4.2bn after a dramatic decline in sales. EMI is still performing poorly, reporting a $1.75bn loss in 200923 and losing some of its top artists such as Radiohead and the Rolling Stones. It has until June 2010 to raise £360m to repay a loan, or Citigroup, the creditor, may seize control of the company.

The strong domestic market supports a number of successful independent record companies such as XL Recordings, Domino and Ministry of Sound, which has recently started operating in the US. Up until 2007, Sanctuary Records was the largest 22 23

http://news.bbc.co.uk/1/hi/7755443.stm http://www.guardian.co.uk/business/2010/feb/04/emi-music-announces-massive-loss

39

Strands 4 & 5 – The Global Digital and Creative Industry

independent record company in the UK and the world’s largest music management business. However, Sanctuary was bought by Universal Music Group in 2007 after entering financial difficulties.

Figure 3-12: UK recorded music market segmentation, $m 2004 Physical distribution

2008

2013

3,544

1,791

900

Internet

15

450

872

Mobile phone

35

165

147

Digital total

50

615

1,019

3,594

2,406

1,919

Total 100% 80% Mobile phone

60%

Internet Physical distribtuion

40% 20% 0% 2004

2008

2013

Source: PWC Global Outlook

40

Strands 4 & 5 – The Global Digital and Creative Industry

3.5.8

Germany Digital indicators (millions)

Market

Population

82.4

Internet users

55.2

Sales of physical recorded music in Germany have been Broadband lines 23.4 more resistant to pressures from the digital markets Mobile subs 101.2 than elsewhere in the world, with sales only falling by 17% between 2004 and 2008. As a result, physical Portable player users 17.4 distribution still accounted for 93% of music sales in 2008. The introduction of CDs with enhanced material including booklets and attractive additional content has helped maintain sales in the physical sector.

Demographics are another reason behind the relative strength of the physical market in Germany: the median age in 2008 was 43, and 40% of the German population is over 50. The slower take up of digital music among the 50+ age group has allowed physical distribution to maintain its grip on the German music market.

The digital market, currently very weak in Germany, is expected to offset the decreases in physical sales by 2012; it is also expected to overtake the UK as the third largest market for music in the world in the same year. The majority of digital sales that do take place are transacted over the internet (as opposed to mobile, for example), with single tracks attracting the majority of consumer spending.

Industry Domestic repertoire accounts for just over 50% of physical music sales in Germany.

There is little information on German record companies, although the IFPI reports the major firms to be Edel, Indigo, Soulfood Music, SPV and ZYX Music.

Figure 3-13: Germany recorded music market segmentation, $m 2004 Physical distribution

2008

2013

2,549

2,122

1,537

Internet

16

116

498

Mobile phone

NA

44

41

Digital total

16

160

539

2,565

2,282

2,076

Total 100% 80% Mobile phone Internet Physical distribtuion

60% 40% 20% 0% 2004

2008

2013

Source: PWC Global Outlook

41

Strands 4 & 5 – The Global Digital and Creative Industry

3.5.9

France Market

Digital indicators (millions) Population

64.1

Internet users

36.2 Sales in the physical distribution market have plunged Broadband lines 17.5 in France, falling by 41% between 2004 and 2008. The digital market has yet to take off in France, with Mobile subs 58.1 physical music forms accounting for 89% of the total Portable player users 11.6 market despite declining sales. Falling physical sales coupled with a stagnant digital market meant that overall sales fell by 11% in 2008, although even this is an improvement on the 15% fall in 2007. The future doesn’t look much brighter, with PWC predicting the market to continue falling at an annual rate of just over 7% up to 2013.

One reason for the lack of digital activity is the relatively low level of internet users: 36.2m out of a total population of 64.1m24. Another is the high level of internet piracy: an estimated 18% of the French Internet population currently download music on a monthly basis via peer-to-peer services25. The French Government has acted decisively, and legislation has been introduced to create a graduated response system whereby customers who ignore the first two warnings to cease illegal downloading having their internet access suspended for up to a year. France is now also experimenting with new ‘music access’ models with partnerships between labels and ISPs/mobile operators. This will help internet distribution to grow in popularity, although mobile distribution is expected to remain low.

Industry Local repertoire fell more sharply than international sales in 2008, which now represents 57 % of the French market. Universal Music Group, the world’s largest record company, is owned by French media conglomerate Vivendi. France’s largest independent record distributor is Wagram Music, which holds around 5% of the market share in France and is also among the top ten distributors in Europe.26 It is also one of the largest independent recording companies in France, along with others such as Pschent and Harmonia Mundi.

24 25 26

Internet World Stats Jupiter research http://www.wagramdigital.com/wagrammusic.html

42

Strands 4 & 5 – The Global Digital and Creative Industry

Figure 3-14: France recorded music market segmentation, $m 2004 Physical distribution

2008

2013

2,337

1,377

622

4

88

351

Mobile phone

20

88

85

Digital total

24

176

436

2,361

1,553

1,058

Internet

Total 100% 80% Mobile phone

60%

Internet Physical distribtuion

40% 20% 0% 2004

2008

2013

Source: PWC Global Outlook

43

Strands 4 & 5 – The Global Digital and Creative Industry

3.5.10 Canada Market

Digital indicators (millions) Population

33.2

Internet users

28.0

Sales of recorded music have been in decline for Broadband lines 9.6 considerable time in Canada, with revenues down by Mobile subs 21.1 51% since they peaked in 1998. Canada lacks a modern copyright regime that is effective at preventing piracy Portable player users 8.2 in the digital age. This has meant continued uncertainty about what kind of activities are acceptable on the internet under Canadian law, and has led to widespread file-sharing. This in turn provides insufficient incentives for businesses to release digital services in Canada, further reducing the potential for the digital market to grow. Similarly, weak laws and enforcement contribute to extensive physical counterfeiting in Canada.

Having said this, the entry of Apple iTunes to the Canadian market has helped stimulate legal downloading online. As in the US, digital rights management (DRM) software had been an additional impediment to the growth of internet sales. A deal in 2009 between Apple and the major music companies led to music companies eliminating DRM. In return Apple agreed to a variable pricing policy for different labels, depending, for example on how old a music track is.

Industry Canadian record companies generated $145m in 2006, an increase of 7.5% on the previous year. Foreign controlled recording companies saw their revenues fall from $611m in 2005 to $545m in 2006.27 Only 20% of Canada’s physical music came from domestic repertoire, the lowest figure of any major music market. Some of Canada’s larger independent record companies include Nettwerk Productions and Sonyn Union both of which operate internationally.

27

Sound recording and music publishing data, 2005-2006

44

Strands 4 & 5 – The Global Digital and Creative Industry

Figure 3-15: Canada recorded music market segmentation, $m 2004 Physical distribution Internet Mobile phone Digital total Total

2008

2013

846

451

156

10

121

389

6

52

47

16

173

436

862

624

592

100% 80% Mobile phone

60%

Internet Physical distribtuion

40% 20% 0% 2004

2008

2013

Source: PWC Global Outlook

45

Strands 4 & 5 – The Global Digital and Creative Industry

3.5.11 Australia Digital indicators (millions)

Market

Population

21.0

Internet users

16.7 Physical distribution accounts for 86% of the recorded Broadband lines 6.7 music market in Australia. Low physical piracy has helped sustain this high proportion, although the figure Mobile subs 21.3 mainly reflects the lack of growth of digital sales rather Portable player users 5.0 than resilient physical sales, which fell by almost 40% between 2004 and 2008. The entrance of iTunes into the Australian market has boosted digital sales, which rose by 46% in 2009 according to the ARIA. However, the growth in digital sales will fail to offset the decline in physical distribution through to 2013. The mobile market has failed to take off, only accounting for around 4% of the overall market.

Industry Australian artists released 16,324 tracks in 2008, which accounted for 17% of the 94,436 tracks that were released in Australia.28 Domestic music makes up around a third of all acts in the Australian charts, although the majority of top selling albums come from overseas artists.

Festival Mushroom records was the largest Australian-owned record company until 2005 when it became financially insolvent and ceased trading. The top remaining record companies include Inertia, MGM and Stomp, which is also one of Australia’s biggest independent distributors.

Figure 3-16: Australia recorded music market segmentation, $m 2004 Physical distribution

2008

2013

815

568

305

Internet

*

71

234

Mobile phone

8

23

23

Digital total

8

94

257

823

662

562

Total 100% 80% Mobile phone

60%

Internet Physical distribtuion

40% 20% 0% 2004

2008

2013

Source: PWC Global Outlook

28

AMPCOM annual report, 2007-2008

46

Strands 4 & 5 – The Global Digital and Creative Industry

3.5.12 Russia Digital indicators (millions)

Market

Population

140.7

Internet users

32.7 PWC estimated that the retail value of the recorded Broadband lines 7.3 music industry in Russia grew by 17% in 2008, with strong growth in the mobile market offsetting the Mobile subs 163.7 decline in physical distribution. However, IFPI figures Portable player users 4.9 suggested it declined by 2.4% based on trade values – the discrepancy in figures is likely to reflect different definitions of music value, and measurement error. Although there are improvements in the retail sector in Russia, particularly with a growing number of outlets in Moscow and St. Petersburg, film DVDs are gaining a greater share of the growing entertainment industry.

Russia has the third largest mobile market, behind Japan and the US. The vast majority of mobile market sales are ringback or mastertones. The relative dominance of the mobile market over internet distribution is partly a result of mobile phones being much more widely used than the internet in Russia: there are only 32.7m internet users, whilst there are 163.7m mobile subscriptions in Russia.

Russia acquired the most broadband subscribers in 2008, but the country only had around 5 broadband lines for every 100 people in 2009.

Industry In terms of repertoire on a units basis, sales are split 72% domestic, 25% international and 3% classical. There is little information on Russian music firms. The IFPI RIN 2009 report, which lists the main independent record companies for almost every of the 60 countries included in the report, fails to list any for Russia.

Figure 3-17: Russia recorded music market segmentation, $m 2004

2008

2013

569

402

213

*

20

107

Mobile phone

12

185

132

Digital total

12

205

239

581

607

452

Physical distribution Internet

Total 100% 80% Mobile phone

60%

Internet Physical distribtuion

40% 20% 0% 2004

2008

2013

Source: PWC Global Outlook

47

Strands 4 & 5 – The Global Digital and Creative Industry

3.5.13 South Korea Market

Digital indicators (millions) Population

48.4

Internet users

36.8 Like much of the Asia Pacific region, South Korea’s high Broadband lines 15.5 rate of piracy means that legitimate physical distribution accounts for just 13% of the music market.

Mobile subs 44.5 The National Assembly amended the Copyright Law in Portable player users early 2009 to include provisions which establish graduated sanctions against repeat online infringements. In 2009 the government unveiled plans to invest $91m to boost music industry sales. Part of the plan was to create a Korean version of the US Billboard chart and a K-pop award in a bid to ‘globalise’ the country’s music industry. These moves have been credited for the rise in CD sales in 2009 for the first time in five years. However, sales of physical music formats are set to continue falling, accounting for only 4% of the market in 2013.

Because physical distribution already accounts for a small proportion of the market, the growth in the digital market is able to offset its decline. South Korea is the only ‘top nine’ country that has seen its music industry grow every year since 2004, and this trend is expected to continue. A National High-Speed Downlink Packet Access network was introduced in 2007 and has facilitated the growth in mobile sales.

Industry The retail value of music in South Korea is more than double the trade value of music, i.e. over half the amount paid by consumers goes to distributors and retailers.

Under half of physical music consumed in South Korea is made by domestic artists, although international repertoire only accounts for a quarter leaving just over one quarter of the market for classical and compilation. This is probably due to classical music being more resilient to a switch from away from physical distribution due to the older average age of its consumers. The biggest independent record companies include SM Entertainment, which also operates in Japan, and Loen Entertainment.

48

Strands 4 & 5 – The Global Digital and Creative Industry

Figure 3-18: South Korea recorded music market segmentation, $m 2004 Physical distribution

2008

2013

138

55

22

Internet

12

218

299

Mobile phone

28

136

186

Digital total

40

354

485

178

409

507

Total 100% 80% Mobile phone Internet Physical distribtuion

60% 40% 20% 0% 2004

2008

2013

Source: PWC Global Outlook

49

Strands 4 & 5 – The Global Digital and Creative Industry

4.

Marketing and advertising

4.1

Introduction In this section, we provide an analysis of the global marketing and advertising subsector industry. It is divided into the following sections: §

Global market outlook: an overview of the global market, both historic and future

§

Technology trends: major recent technological developments

§

Global business activity: developments in business structures and interrelationships, including identification of the major market companies, as well as significant recent mergers and acquisitions activity

§

Major national markets: a summary of the ten country markets that make up 78% of the global market

4.1.1

Definition The definitions used in this section are based on the types of outlet used for marketing and advertising:

§

Print: covering all forms of print advertising in newspapers and magazines

§

Television: traditional commercials placed between programmes, and also longer format ‘infomercials’

§

Radio: commercial formats similar to those used on television

§

Outdoor: the use of billboard advertising on rented hoardings in areas with a high throughput of people or vehicles

§

Internet: this encompasses a range of online advertising formats, including banner ads (which appear on websites); contextual ads (associated with search engine results); email marketing; and classified advertising.

Note: in the ZenithOptimedia forecasts which are used predominantly in this section, there is a sub-sector for cinema advertising. This comprises less than 1% of the market and has not been included.

4.1.2

Sources of information The main sources of information from this section have included the following:

§

Advertising Expenditure Forecasts, March 2010 (ZenithOptimedia)

§

Global Outlook (PWC)

50

Strands 4 & 5 – The Global Digital and Creative Industry

4.2

Global market outlook The marketing and advertising sector has been hit particularly hard by the global economic downturn. Figure 4-1 shows how a global market worth over $400bn to 2008 fell by more than 10% by 2009. The prospects are for limited growth for the next four years: ZenithOptimedia forecast Compound Annual Growth Rates of 1.8% and 2.7% in 2011 and 2012, following a stagnant 2010.

Figure 4-1: Global advertising expenditure, $m (2008 prices) $500,000

$400,000

$300,000

$200,000

$100,000

$0 2004

2005

2006

2007

2008

2009

2010

2011

2012

Source: ZenithOptimedia

The relatively static picture of overall advertising expenditure globally is not reflected in the proportional changes in the significance of various advertising mediums (Figure 4-2). In particular, the rise of the internet as a vehicle for advertising (from 3.9% of the market in 2004, to 10.4% in 2008) has largely been at the expense of print media (down from 43.4% in 2004 to 37.1% in 2008). This trend is set to continue.

51

Strands 4 & 5 – The Global Digital and Creative Industry

Figure 4-2: Global market growth 2004-2012, $m $500,000 50,947

$450,000

83,896

32,116 $400,000

15,660 23,574

$350,000

34,607

31,708

37,614

35,896

$300,000 185,813 $250,000

154,314

199,730

$200,000 $150,000 $100,000

175,067

181,139

2004

2008

139,475

$50,000 $0

Print

TV

Radio

2012 Outdoor

Internet

Source: ZenithOptimedia *excludes cinema advertising, worth less than 1% of total global market

4.3

Technology and market trends Issues which are likely to drive short-to-medium term growth across the marketing and advertising industry include the following: §

Improved value for money in advertising and marketing campaigns, driven by the global economic downturn. From a creative perspective, the industry also expects a less brash flavour to advertising; restraint and value are increasingly seen as watchwords in the industry, reflecting underlying economic conditions

§

Cross-media campaigns, driven by the twin elements of more advertising and marketing routes to market (especially with the rise of the internet, mobile and gaming as advertising mediums), and the focus on value for money

§

The rise of mobile advertising, with the significant growth of smartphones such as the iPhone

§

A better understanding of return on investment especially through mobile and internet advertising, such as through the development of new ways of measuring advertising value; 2D barcodes is a good example of this

§

Commercialisation of social networking, which has attracted intense interest from advertisers and consumer businesses, but which has not yet generated many tangible business returns 52

Strands 4 & 5 – The Global Digital and Creative Industry

4.4

Global business activity

4.4.1

Major sector companies Figure 4-3 lists the top 25 marketing and advertising companies of 2009 by revenue, according to an annual research exercise conducted by Advertising Age. In total, the revenue from these firms in 2009 totalled US$46.9bn, equating to some 10% of the global market according to ZenithOptimedia forecasts. This suggests that the market is highly fragmented among many other smaller players.

Figure 4-3: Top 25 marketing and advertising companies, 2008 Rank

Company

HQ

Revenue ($m)

1

Omnicom Group

US

11,377

2

WPP Group

UK

10,820

3

Interpublic Group

US

6,191

4

Publicis Groupe

France

5,872

5

Dentsu

Japan

2,951

6

Havas

France

1,841

7

Aegis Group

UK

1,826

8

Hakuhodo DY Holdings

Japan

1,337

9

aQuantive

UK

442

10

Asatsu-DK

Japan

430

11

MDC Partners

Canada/US

424

12

Sapient Corporation

US

406

13

Carlson Marketing

US

390

14

Epsilon

US

300

15

Aspen Marketing Services

US

278

16

Cheil Communications

South Korea

256

17

George P Johnson Co.

US

213

18

Healthstar Communications

US

213

19

LBI International

Sweden

212

20

Media Square

UK

196

21

inVentiv Communications

US

192

22

Cossett Communication Group

Canada

190

23

Harte-Hanks Direct

US

181

24

Clemenger Communications

Australia

174

25

Doner

US

173

Source: Advertising Age

53

Strands 4 & 5 – The Global Digital and Creative Industry

4.4.2

Recent mergers and acquisitions activity Figure 4-4 shows the most significant global M&A activity in the advertising and marketing sector since late 2008, according to sector business media. A number of trends are evident from this information and more general sector information:

§

An industry survey by AdMedia Partners suggests that M&A activity is expected to rebound in 2010 as the market is viewed as having a number of acquisition opportunities, and a number of acquiring firms are cash rich.29 Respondents – all senior executives, considered North America to hold the most potential, followed by China

§

Acquisition volumes are high in and around evolving marketing sectors, such as mobile and social media, with large scale marketing and advertising firms seeking to establish a foothold in potentially lucrative future markets. However, the individual value of these acquisitions is low, due to the small scale of many of these digital developers and platforms Figure 4-4: Major M&A activity, late 2008 to present Companies involved

Value

Comment

Google acquired mobile advertising firm AdMob in 2010

US$750m

The acquisition was initially held up by an antitrust investigation. Google hopes to develop innovative mobile applications to improve ad search and connection

Apple acquired Quattro Wireless in 2010

US$250m

This is a similar move to Google’s, with Apple acquiring a wireless advertising platform

WPP acquired TNS in 2008

£1.1bn

WPP’s acquisition of the market research firm required EU clearance over concerns about market influence in Europe. The deal involved an asset swap with Nielsen

Publicis acquired Razorfish from Microsoft in 2009

US$530m

This deal brought the number one and two largest digital advertising firms together

Sources: Various sector media

29

M&A Prospects for Media, Marketing Services and Digital Marketing Firms, AdMedia Partners 2009

54

Strands 4 & 5 – The Global Digital and Creative Industry

4.5

Major national markets

4.5.1

Overview In 2008, ten countries accounted for 78% of the global advertising market (Figure 4-5). At $170bn, the US is far and away the largest single national market for advertising: 39% of global expenditure in 2008, nearly four times the size of Japan, the next largest market with 10% ($44.9bn).

Figure 4-5: Largest geographical advertising markets (% of global market) 2008 40%

39%

30%

22% 20%

10%

10% 6%

5%

4%

3%

3%

3%

3%

2%

0%

Source: ZenithOptimedia

Figure 4-6 overleaf shows how the top national markets differ in terms of sub-sector performance. For example, Brazilian and Italian markets are more heavily dominated by television, and Germany by print media.

55

Strands 4 & 5 – The Global Digital and Creative Industry

Figure 4-6: Country markets by sub-sector, 2008 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

TV

Radio

Print

Internet

Other

Source: ZenithOptimedia

56

Strands 4 & 5 – The Global Digital and Creative Industry

4.5.2

United States The recession has had a marked impact on the advertising market in the US in the last two years. Advertising expenditure fell by 12.9% from 2008 to 2009, affecting all major media vehicles except the internet, which saw a 14.1% rise over the same period. Traditionally high-spending industries such as automotive and retail have reduced their advertising budgets because of the economic downturn.

The ongoing growth of mobile and internet consumer activity has meant that traditional media in the US are struggling to access new consumers, especially through print. Similarly, TV advertising is expected to remain flat for 2011 and 2012.

In response to the challenge from the new routes to market, the print media, and especially magazines, have been developing their digital and mobile capabilities. For example, the first video advert appeared in an edition of Entertainment Weekly in late 2009. Diversification is also being sought through the growing popularity of ereaders (Kindle, ipad, etc.), although some of these products are not capable of handling adverts.

Figure 4-7: US market segmentation, $m Segment

2004

2008

2012

TV Radio Print Internet Other Total

55,504 20,364 71,294 8,688 5,636 161,486

57,849 19,218 67,587 17,823 7,739 170,216

54,973 16,290 40,984 31,424 8,165 151,836

Other Internet Print Radio TV

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2004

2008

2012

Source: ZenithOptimedia

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4.5.3

Japan 2009 was the second year of declining advertising expenditure in Japan, reflecting the wider economic conditions. In traditional media, the decline has been ongoing for five consecutive years. Expenditure in some industries has seen particularly large declines, such as energy, machinery, cars, finance and insurance. Foodstuffs and cosmetics fared better with single digit declines.

As with other developed countries, the proportion of the advertising market taken by the internet is expected to increase considerably over time, up from 15% in 2008 to 22% in 2112 in a static overall market. Dentsu reported that, in 2009, the mobile advertising segment performed more strongly than web advertising.30 Figure 4-8: Japan market segmentation, $m Segment

2004

2008

2012

TV Radio Print Internet Other Total

19,772 1,737 14,057 1,755 4,887 42,208

18,471 1,499 11,952 6,756 6,268 44,946

17,071 1,193 7,983 8,856 4,741 39,844

Other Internet Print Radio TV

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2004

2008

2012

Source: ZenithOptimedia

30

Advertising Expenditure in Japan, Dentsu 2009

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4.5.4

Germany The German advertising market was the third largest in the world in 2008, and the biggest European market (Figure 4-9). Germany’s advertising market remains dominated by print media to a much greater extent than other countries in the top ten (57% of the market, compared to 40% in the US, the next largest), although this is expected to shrink, with the inexorable rise of internet advertising.

Forecasts for the German market in the short term are quite positive, reflecting the country’s relatively positive economic position, with low unemployment and returning growth.

Figure 4-9: Germany market segmentation, $m Segment

2004

2008

2012

TV Radio Print Internet Other Total

5,652 905 15,473 397 1,269 23,696

5,909 1,041 15,641 3,657 1,291 27,539

5,564 1,010 13,851 4,956 1,151 26,532

Other Internet Print Radio TV

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2004

2008

2012

Source: ZenithOptimedia

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4.5.5

United Kingdom Press advertising revenue has suffered in the UK in recent years, with figures for 2009 estimated to be 20% down on the previous year. Newspapers continue to struggle with the impact of the internet, and the concern that content available on the web is not attracting sufficient revenue. The Times’ recent announcement to introduce a ‘paywall’ for its content will be watched carefully by others to see whether it offers a credible means of generating income and offsetting the losses on its physical copy.

Radio advertising has been relatively constant, and is forecast to continue broadly on this track. This reflects growing listening figures and the growing footprint of digital radio.

Figure 4-10: UK market segmentation, $m Segment

2004

2008

2012

TV Radio Print Internet Other Total

6,285 858 11,054 1,298 1,638 21,133

5,950 802 8,968 5,277 1,799 22,796

5,839 743 6,469 5,985 1,681 20,717

Other Internet Print Radio TV

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2004

2008

2012

Source: ZenithOptimedia

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4.5.6

China The growth of the Chinese economy, in spite of the global recession, can be seen in the forecast increasing advertising revenues through to 2012. ZenithOptimedia forecast a 62% increase in the advertising market from 2008 to 2012, with the internet being the main beneficiary (the segment will grown from 14% to 31% of the market over the same period.

Figure 4-11: China market segmentation, $m Segment

2004

2008

2012

TV Radio Print Internet Other Total

4,195 474 3,613 337 1,800 10,419

7,217 983 5,378 2,726 2,591 18,895

11,448 1,289 4,673 9,544 3,728 30,682

Other Internet Print Radio TV

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2004

2008

2012

Source: ZenithOptimedia

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4.5.7

France The overall size of the advertising market in France is expected to plateau at around 2004 levels through to 2012. The internet was the only medium that grew in 2009, and its share of the overall market is expected to continue to grow – from 15% in 2008 to 21% in 2012 – predominantly at the expense of print advertising.

Two firms in the top ten global marketing and advertising companies are French.

Publicis and Havas operate in many business areas of the sector, including advertising, marketing communications, direct marketing and public relations. They are global companies, with operations across Europe and North America.

Figure 4-12: France market segmentation, $m Segment

2004

2008

2012

TV Radio Print Internet Other Total

4,691 1,149 5,382 724 1,684 13,630

4,967 1,086 4,097 2,124 1,962 14,236

4,533 1,004 3,214 2,905 1,894 13,550

Other Internet Print Radio TV

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2004

2008

2012

Source: ZenithOptimedia

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Strands 4 & 5 – The Global Digital and Creative Industry

4.5.8

Italy Like France, the Italian advertising market is expected to remain broadly at 2004 levels through to 2012. Only radio and the internet are expected to see a rise in their share of the national market. In line with other countries, the internet is expected to make the most of declines elsewhere, especially in print, up from 4% in 2008 to 7% in 2012. This is a smaller proportion of the market than other similar sized markets, such as the UK and France. This is mainly due to the dominance of the television segment in the Italian industry.

Figure 4-13: Italy market segmentation, $m Segment

2004

2008

2012

TV Radio Print Internet Other Total

6,808 703 3,973 161 569 12,214

6,887 842 3,939 491 525 12,684

6,650 844 2,995 831 422 11,742

Other Internet Print Radio TV

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2004

2008

2012

Source: ZenithOptimedia

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4.5.9

Brazil Brazil is the only South American country to appear in the top ten by size of advertising market. The Brazilian market is forecast to show sizeable growth in the coming years, increasing by 30% from 2008 to 2012. This reflects its status within the BRIC group of large, rapidly developing countries.

Television dominates the advertising market, and is expected to continue to do so with 64% of market share in 2008 and 63% in 2012. The internet is expected to be the fastest growth area, but from a small base: up from 4% in 2008 to 6% in 2012.

Figure 4-14: Brazil market segmentation, $m Segment

2004

2008

2012

TV Radio Print Internet Other Total

2,941 207 1,196 77 232 4,653

7,384 498 2,896 415 371 11,564

9,396 633 3,564 973 461 15,027

Other Internet Print Radio TV

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2004

2008

2012

Source: ZenithOptimedia

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Strands 4 & 5 – The Global Digital and Creative Industry

4.5.10 Russia Like its BRIC counterparts, China and Brazil, Russia’s advertising market has expanded rapidly in recent years. However, underlying economic problems mean that the forecast into the coming years is for a slight decline in the overall value of the market. Television and the internet will be the winners in terms of segment market share, up from 50% and 6% in 2008 to 55% and 11% respectively in 2012.

Figure 4-15: Russia market segmentation, $m Segment

2004

2008

2012

TV Radio Print Internet Other Total

1,700 250 1,200 35 725 3,910

5,585 563 2,316 708 1,970 11,142

5,516 389 1,496 1,097 1,477 9,975

Other Internet Print Radio TV

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2004

2008

2012

Source: ZenithOptimedia

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Strands 4 & 5 – The Global Digital and Creative Industry

4.5.11 Spain Spain is the fifth member of the EU in the top ten largest national advertising markets. Like so many of its neighbours, the overall size of its advertising market is not expected to grow over the next two year. Traditionally dominated by print advertising, Spain is forecast to see growth only in the internet segment – up from 9% in 2008 to 19% in 2012.

Figure 4-16: Spain market segmentation, $m Segment

2004

2008

2012

TV Radio Print Internet Other Total

3,918 791 3,291 138 707 8,845

4,513 940 3,112 893 790 10,248

3,735 845 2,183 1,750 623 9,136

Other Internet Print Radio TV

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2004

2008

2012

Source: ZenithOptimedia

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5.

The film industry

5.1

Introduction In this section, we provide an analysis of the global film industry. It is divided into the following sections: §

Global market outlook: an overview of the global market, both historic and future

§

Technology and market trends: major recent technological and market developments

§

Global business activity: developments in business structures and interrelationships, including identification of the major market companies, as well as significant recent mergers and acquisitions activity

§

Major national markets: a summary of the nine country markets that make up 80% of the global market

5.1.1

Definition The following definitions are used in this section. They are based on the mechanisms by which films are bought and viewed:

§

Box Office: Consists of consumer spending at the box office for theatrical motion pictures

§

Home Video: Includes spending on rentals of videos at rental stores and other retail outlets, and the purchase of home video products through retail outlets and online stores. It also includes online rental subscription services, such as those that deliver physical DVDs by mail, and online streaming services whereby films are downloaded by a broadband internet connection.

This chapter does not record sales of music videos, which appear in the recorded music chapter; neither does it include video-on-demand, pay-per-view, or movie distribution by cable, satellite or telephone companies.

5.1.2

Sources of information The main sources of information from this section have included the following:

§

Global Outlook (PWC)

§

UK Film Council Statistical Yearbook

§

Various national film associations

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5.2

Global market outlook Figure 5-1 shows global consumer spending since 2004, forecast to 2013.

Expenditure fell by 3 per cent in 2005, and has only seen modest increases since.

Growth is forecast to pick up strongly as the economic recovery kicks in, with a compound average growth rate of 4 per cent between 2009 and 2013. The box office market will be boosted by the growing presence of 3D films, which can command higher prices than 2D films. The sale of domestic televisions that support 3D films will also boost home video market spending, although it may be some time before such televisions are available to the mass market. For now, Blu-ray HD videos will help to offset a declining DVD market. Faster broadband speeds and devices that allow TV viewing will propel a small digital download market. Piracy will continue to satisfy a proportion of consumer demand for films, holding down spending on legitimate forms. Finally, an important but wholly unpredictable driver of consumer spending on films has been, and will continue to be, the quality of releases and their appeal to consumers.

Figure 5-1: Global film expenditure, $m (2008 prices) $110,000

$100,000

$90,000

$80,000

$70,000

$60,000

$50,000 2004

2005

2006 2007

2008

2009

2010

2011

2012

2013

Source: PWC Global Outlook

A decline in the home video market between 2004 and 2008 has been responsible for the sluggish growth in expenditure, whilst spending at the box office grew by 9.6 per cent over the same period (Figure 5-2). Both segments are expected to attract strong growth in consumer expenditure to 2013, although box office will continue to grow at a faster rate than home video. By 2013 box office spending is expected to account for 37 per cent of film industry revenue, up from 31 per cent in 2004.

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Figure 5-2: Global market growth 2004-2013, $m 120,000

100,000

80,000 64,454 60,000

55,585

56,966

40,000

20,000

37,711 25,838

28,340

2004

2008

0

Box Office

2013

Home video

Source: PWC Global Outlook

5.3

Technology and market trends

5.3.1

Box Office One of the key recent developments in the box office segment has been the transition to digital projection. Physical film prints traditionally used to screen the movie are being replaced by an electronic copy contained on a storage device, such as a high-capacity hard drive and server. Although digital projectors are more expensive than traditional projectors, screening films on them is substantially cheaper. One film print needs to be developed for every cinema in which it is shown, which, if widely distributed, can lead to costs in the millions. Digital copies can be produced and distributed for a tiny fraction of the price, significantly reducing distribution costs. Digital projectors also produce better picture quality and digital copies of films do not deteriorate as physical prints do.

Perhaps more importantly, converting cinema screens to digital is a step in making screens capable of showing 3D films, which can command higher admission prices.

A major driver of box office spending in any one year is the quality of film releases. A few big blockbusters can be the difference between a good year and a bad year for the box office. Such a driver is obviously unpredictable, so has not been factored in to the forecasts given in this chapter.

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5.3.2

Home video Spending on Home Video entertainment comprises of a number of components, as shown in Figure 5-3. Physical sell-through (consumer retail purchases of videos) accounts for the majority of spending, with in-store rentals accounting for most of the remaining chunk. Spending on in-store rentals is expected to decline, however, whilst online rental subscriptions are forecast to grow at an annual rate of 18 per cent between 2009 and 2013. Digital downloads are expected to grow rapidly, at a CAGR of 37 per cent, but the prevalence of piracy and the small starting base means it will be some time before they attract a significant proportion of consumer spending on filmed entertainment. The spread and increase in speed of broadband – which is particularly important for films due to large file sizes –and stricter enforcement of digital copyright protection will drive this segment and it could become an important source of revenue in the future.

Figure 5-3: breakdown of home video segment ($m) Home Video segment

2008

2013

Physical sell-through

34,708

38,774

In-store rentals

17,691

17,562

Online rental subscriptions

2,900

6,702

Digital downloads

286

1,416

Total

55,585

64,454

Whilst the physical sell-through component has been adversely affected by the economic downturn – impulse purchases, which are important to retail sales of videos, are on the front line of cuts when consumers tighten spending – the rental market has a slight counter cyclical element to it as it represents a relatively cheap form of entertainment.

Longer term drivers of the home video market include the distribution of films in Blu-ray format, which allows the recording and playback of High Definition (HD) video, as well as the storage of large amounts of data. Although the recession has dampened spending on Blu-ray players, they will become increasingly common in homes, providing a greater platform for growth of Blu-ray disks. This will propel the physical sell-through and rental components as spending on DVDs decline.

5.4

Global business activity

5.4.1

Structure of the film industry There are five main stages in film production:

§

Development – the script is drafted

§

Pre-production – preparations are made for the shoot; the cast and crew are hired, locations are selected and sets are built

§

Production – the raw elements for the finished film are recorded

§

Post-production – the film is edited, the sound track is produced, sound effects are designed and visual effects are added 70

Strands 4 & 5 – The Global Digital and Creative Industry

§

Sales and distribution – the film is marketed, cinema screenings are organised and home media material is produced Typically, the script will be written by an individual or group of individuals, who will then approach a film production company to undertake the three production stages.

The biggest film production companies distribute their own movies, whereas smaller ‘independent’ studios will often hand the distribution functions to a separate distributor (often one of the major producers/distributors) – similar to the structure of the music industry.

5.4.2

Major sector companies The table below gives the biggest distribution companies in the US/Canadian film market - there does not appear to be a single source of data for global revenues of film companies. The top six US companies are generally known as the ‘majors’, with others labelled independent producers.

Figure 5-4: Top 10 production companies in the US/Canadian film market, 2009 Films released

Box office revenue ($m)

Market share

US

36

2,133

20.0%

20th Century Fox

US

22

1,461

13.7%

3

Paramount Pictures

US

16

1,460

13.7%

4

Sony Pictures

Japan/US

22

1,419

13.3%

5

Buena Vista

US

23

1,206

11.3%

6

Universal

US

21

898

8.4%

7

Summit Entertainment

US/UK

11

480

4.5%

8

Lionsgate

Canada

12

402

3.8%

9

Fox Searchlight Pictures

US

11

246

2.3%

10

Weinsten Co.

US

9

175

1.7%

Rank

Distributor

1

Warner Bros

2

Country

Source: The Numbers

Figure 5-5 overleaf shows the largest film companies serving the UK market.

Collectively, the top ten companies take 94.5 per cent of UK box office revenue, although they only account for 38 per cent of releases. Entertainment is the UK’s largest distributor, with a market share not far behind some of the major US production companies.

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Figure 5-5: Top 10 production companies in the UK market Rank

Distributor

Country

Films released

UK box office revenue (ÂŁm)

market share

1

Universal

US

31

117.7

18.6%

2

Paramount

US

26

162.4

17.0%

3

Sony Pictures

Japan/US

22

119.4

12.5%

4

Warner Bros

US

21

105.2

11.0%

5

Walt Disney Studios

US

19

95.3

10.0%

6

20th Century Fox

US

26

90.2

9.4%

7

Entertainment

UK

22

75.9

7.9%

8

Momentum

UK

23

33.2

3.5%

9

Lions Gate

Canada

21

23.9

2.5%

10

Pathe

France

19

19.8

2.1%

368

53.7

5.5%

Others

5.4.3

Recent mergers and acquisitions activity Figure 5-6: Major M&A activity, late 2008 to present Companies involved Marvel Entertainment became a wholly-owned subsidiary of Disney in December 2009

DreamWorks splits from Paramount, September 2008

Value

Comment

Around $4bn

Marvel, the creator of comic book names such as X-Men, Spider Man and the Incredible Hulk, had revenues of $678 in 2008 and employed around 300 people.

Deal reported at around $1.1bn, with Indian Conglomerate Reliance ADA investing $550m for a 50 per cent stake

Paramount had acquired DreamWorks for $1.6 bn in 2005. On leaving Paramount, the company signed a distribution deal with Universal, but now distributes its films through Disney

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5.5

Major national markets

5.5.1

Overview In 2008, nine countries accounted for 80% of the computer games market in 2008 (Figure 5-7). A massive 41 per cent of global expenditure occurs in the US market, which was worth $34.6bn in 2008. Japan is the next largest with a ten per cent share of global expenditure, with an eight per cent share making the UK the third largest market.

Figure 5-7: Largest markets for filmed entertainment (% of global market) 2008 50%

41% 40%

30%

20%

20%

10% 10%

8% 4%

4%

4%

3%

2%

2%

Ro W

In di a

ly Ita

ia

a

Au st ra l

Ca na d

Fr an ce Ge rm an y

UK

pa n Ja

US

0%

Source: PWC Global Outlook

Figure 5-8 overleaf shows how the top national markets differ in terms of sub-sector performance. With the exception of India, where box office spending dominates the film industry, home video accounts for the majority of consumer spending in all of the countries shown. The same is true of the rest of the world as a whole, although only marginally so.

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Figure 5-8: Country markets by sub-sector, 2008 100% 90% 80% 70% 60% 50% 40% 30% 20% 10%

Box offi ce

Ro W

In di a

ly Ita

ia ra l

a

Au st

Ca na d

Fr an ce Ge rm an y

UK

pa n Ja

US

0%

Home vi deo

Source: PWC Global Outlook

5.5.2

United States Market Box office spending held up relatively well during the recession, increasing by 1.5 per cent in 2008 and 4.5 per cent in 2009. The transition to digital projection will make distribution and screening of films more efficient and conversion of digital cinemas in to 3D-capable venues will open up a powerful new way to attract consumers.

There are currently around 5,000 digital screens in the United States, although not all have been upgraded to 3D. In October 2008 five film studios entered a $1bn deal with Digital Cinema Implementation Partners to convert 15,000 screens in the US to digital. The venture was subsequently derailed due to insufficient financing; stifling the growth of box office revenues. Average ticket price projection in the US is expected to increase at a 4.6 per cent CAGR, up from $7.18 in 2008 to $9 in 2013 as lucrative 3D screenings become more prevalent.

The Motion Picture Association of America estimated combined box office revenues for the US and Canada at $9.6bn in 2008 and $10.6bn in 2009, marginally below PwC’s estimates. 3D films generated $1.14bn in revenue in 2009, up from $0.24 in 2008. Eight 3D films were released in 2008, 20 in 2009 and 30 are scheduled for release in 2010.

Physical sales of film, which are more pro-cyclical than other components of filmed entertainment, fell by 9 per cent in 2008 and by a further 6 per cent in 2009. Prices 74

Strands 4 & 5 – The Global Digital and Creative Industry

of Blu-ray players have begun to fall – some are available for less than $300 – which will increase the prevalence of the Blu-ray format, particularly when consumer spending picks up.

Industry As well as having the largest consumer market, the US dominates the production of global filmed entertainment in terms of revenue generated. The US is second to India in terms of the number of feature films produced each year; in 2006 465 films were produced in the US, compared with over 1000 in India.31 In 2009 518 films were produced by US studios.

The US motion picture and television industry supports 2.5 million jobs, with 115,000 business operating in the production industry.

Total worldwide feature film revenue for major U.S. studios is expected to soar from $34.9 billion in 2007 to $41.6 billion by the end of 2011 - with the U.S. contributing nearly half of that, or $20.4 billion in revenue.

Figure 5-9: US market segmentation, $m Segment

2004

2008

2013

Box Office

9,215

9,791

12,645

Home Video

25,432

25,015

28,263

Total

34,647

34,806

40,908

100% 80% Home video

60%

Box Office

40% 20% 0% 2004

2008

2013

Source: PWC Global Outlook

5.5.3

Japan Market The home video market in Japan accounts for 78 per cent of Japanese spending on films; the largest share of the nine countries examined in this section. Over two thirds of the home video market is accounted for by rental of videos, with physical sales taking a relatively small share.

Average box office admission prices in Japan are just over $12, and they are likely to continue rising as 3D screenings become more common. Moreover, high-end

31

UNESCO Institute for Statistics 2009

75

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cinemas, with luxury rooms, large seats, concert-style speakers and accordingly high ticket prices, are also attracting interest.

According to UNIJAPAN, box office spending generated 194,836bn Yen ($1,883bn) in 2008, down 2.8 per cent on the previous year. Despite this, 138 new cinema screens were built in 2008, taking the total number to 3,359.

Industry 418 Japanese films were released in 2008, exceeding the 318 imported films that were released over the course of the year; a trend that has been occurring since 2006. Toho is the largest film producer in Japan, and generated 73.9bn Yen ($714m) from box office sales in 2008 – 37.9 per cent of total box office revenue. Warner Brothers, a US production company, is the second largest producer in the Japanese markets, with the next three largest producers all Japanese owned32.

Co-production of films – whereby producers from different countries pool their resources to create bigger budgets – has been slow to take off in Japan. This is partly because the biggest Japanese producers already generate significant revenues from the Japanese market and have little need to team up with foreign companies. Coproduction activity has picked up since 2006, however, with the Government initiative J-Pitch helping to support Japanese film companies collaborate with overseas producers.

Figure 5-10: Japan market segmentation, $m Segment

2004

2008

2013

Box Office

2,038

1,882

2,164

Home Video

6,664

8,568

8,268

Total

8,702

8,738

10,432

100% 80% Home video

60%

Box Office

40% 20% 0% 2004

2008

2013

Source: PWC Global Outlook

32

Kinema Jupo Film Institute

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Strands 4 & 5 – The Global Digital and Creative Industry

5.5.4

United Kingdom Market PwC data show 2008 was a bumper year for box office revenues which increased by 4.6 per cent on 2007, as a rainy summer in the UK and Mamma Mia, the highest grossing film in UK history, drove people to the cinema. A surge in Christmas sales of Blu-ray disks (40 per cent of Blu-ray sales in 2008 occurred in December) boosted the sell-through market in the UK; the only market in Western Europe to record an increase in this segment.

The conversion of cinema screens to digital is also gaining momentum: Cineworld is converting more than 70 screens to digital, and Odeon and UCI have converted 30 screens to support 3D films.

The UK also downloads the most digital films from the internet in Europe, accounting for a third of the download market in 2008. This market is forecast to grow rapidly in the coming years, with a predicted CAGR of 82.8 per cent between 2009 and 2013.

The UK film council estimated box office revenues reached £850m ($1562m) in 2008, up 3.5 per cent on the previous year. The home video market generated £2.56bn ($4.74bn) in 2008. Mamma Mia also took the sell-through market by storm, selling 5 million DVDs to become the highest ever selling DVD in the UK. Industry In the UK the Film Council Development Fund is investing £15m a year to encourage the development, production and completion of UK feature films. The Innovation Fund, due to launch in autumn 2010, will work with the Film Fund to unlock innovation across the production sector but will also ensure the UK Film Council can support digital opportunities across all areas including new ways of getting films to audiences, investing in innovative business models, distribution and delivery platforms, research and development and market intelligence.

UK films, including co-production, accounted for 21 per cent of releases and 31 per cent of market value in 2008, an increase of 2 per cent on the previous year. The US is the biggest producer of films for the UK market, accounting for 38 per cent of released. Europe accounted for 2.3 per cent and India 14.4 per cent. UK films took a 15 per cent share of the £28bn global box office market, generating £4.2bn in revenue. UK films accounted for 9 per cent of releases in North America and took 16 per cent of the revenue. Just under 4 per cent of these were co-productions between the UK and USA33.

33

2009 UK Film Council Statistical Yearbook

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Figure 5-11: UK games market segmentation, $m Segment

2004

2008

2013

Box Office

1,414

1,583

2,166

Home Video

5,432

4,921

6,220

Total

6,846

6,504

8,386

100% 80% Home video

60%

Box Office

40% 20% 0% 2004

2008

2013

Source: PWC Global Outlook

5.5.5

France Market Although a strong roster of local film releases in 2008 helped to boost box office revenues by 7 per cent, a declining home video market meant that overall consumer spending in the film industry fell in 2008. Piracy is absorbing a significant chunk of consumer demand for home video; it is estimated that half a million films are downloaded illegally every day. The French Government has implemented measures to curb internet piracy, as described in the Recorded Music chapter.

Annual cinema attendance fell from 188.8m in 2008 to 184.0m in 2009. The first six months of 2010 has seen relatively buoyant box office admissions – up 14 per cent on the first half on 2009.In the first quarter of 2010, France spent EUR345.8m ($506m) on Blu-ray and DVDs. Blu-ray represents 10.2 per cent of this, up from a 7.2 per cent share in Q1 2009. DVD prices have been falling due to decreased demand for the home-video market has a whole and the emergence of a substitute project in the form of Blu-ray. The average price of a DVD fell by 15.2 per cent to EUR8.74 ($12.8) in 2009.34 Industry Cinema was born in France in 1895; accordingly there is a strong local film industry.

It has also benefited from a comprehensive support system at the filming, production and distribution stages, organized under the aegis of the National Centre for Cinematography (CNC), which redistributes the funds obtained from a tax on box-office takings, sales of video cassettes and television broadcasts.

34

Centre National du Cinema et de l’image animee

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The market for French films is estimated at 38.5 per cent in the first 6 months of 2010, down from 39.9 per cent over the same period the previous year. U.S films have taken a 52.3 per cent share.

French films generated EUR171.8m ($252.0m) from the home video market in 2009, down from EUR176.0m (EUR 257.5m) in 2008. The 2009 sales represented 21.5 per cent of the home video market, with US films accounting for 63.2 per cent.4 Figure 5-12: France film industry market segmentation, $m Segment

2004

2008

2013

Box Office

1,667

1,665

2,060

Home Video

3,150

2,141

2,092

Total

4,817

3,806

4,152

100% 80% Home video

60%

Box Office

40% 20% 0% 2004

2008

2013

Source: PWC Global Outlook

5.5.6

Germany Market As in France, a strong performance by local films in 2008 boosted box office admissions in Germany. Coupled with only a slight decline in the physical sellthrough market, the film industry grew overall in 2008.

Industry In the first half of 2008, the market share of German cinema productions came to 33.9% of total box office takings, the highest figure since 1992, when the German Federal Film Board (FFA) started keeping records. The industry received a boost primarily in the form of the German Federal Film Fund (DFFF), initiated in 2007 by the Commissioner for Culture and the Media, Bernd Neumann. It has an annual budget of €60 million and has hitherto allocated over €110 million in grants to 179 projects. These grants have in turn resulted in subsequent private investment of over €700 million. It not only promotes German films, but also international productions in which Germans are involved. As a result, Fox is expanding its German operations, Universal began a German-language operation, and Fremantle Media announced plans to re-launch UFA Cinema and make eight German films annually beginning in 2010.

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Figure 5-13: Germany market segmentation, $m Segment

2004

2008

2013

Box Office

1,307

1,163

1,462

Home Video

2,598

2,385

2,522

Total

3,905

3,548

3,984

100% 80% Home video

60%

Box Office

40% 20% 0% 2004

2008

2013

Source: PWC Global Outlook

5.5.7

Canada Market There are currently only 100 digital cinema screens in Canada which has held back box office growth both because the relative inefficiency of operating standard screens and because of the small platform on which to launch 3D films. Cineplex Entertainment and National CineMedia are converting most of their theatres to digital. The majority of screens in Canada are expected to be converted to digital over the next few years, boosting potential box office revenue.

The online distribution market is coming to life in Canada. Although the online market generated just $1m in 2008, compound CAGR between 2009 and 2013 is estimated at 109 per cent, taking revenue up to $40m in 2013. This will be supported by Canada’s high broadband penetration which provides a large potential market for the streaming and downloading of films.

Industry Canadian theatrical production totalled $273m in 2008, a decrease of 7 per cent on the previous year, with 82 film releases. Foreign funding financed 11 per cent of the total cost of producing these films, with the average budget of Canadian films coming in at $3.4m. The Canadian film industry directly created an estimated 2,700 FTE, and supported a further 4,200 FTEs in other industries.35 Film production in Canada had a bad start to 2010. Core Digital, an animation and post-production company in Toronto, shut its doors, and the Canadian Screen Training Centre in Ottawa, an industry leader in training people for film and video production, announced it would be closing for good.

35

Canadian Film and Television Production Association, 2009

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The Canada Feature Film Fund (CFFF), established in 2000 and administered by Telefilm Canada, is the federal government’s main program for the support of the Canadian theatrical feature film industry and the single largest source of financing for Canadian theatrical production. In 2007/08, the CFFF provided approximately $90 million in financial support to the development, production, distribution and marketing of Canadian feature films. This funding from the CFFF triggered an additional $153 million in feature film financing from other public- and privatesector sources.

Figure 5-144: Canada film market segmentation, $m Segment

2004

2008

Box Office

2013

847

777

952

Home Video

2,491

2,660

3,275

Total

3,338

3,437

4,227

100% 80% Home video

60%

Box Office

40% 20% 0% 2004

2008

2013

Source: PWC Global Outlook

5.5.8

Australia Market Australia recorded its second consecutive double-digit annual growth percentage in 2008, buoyed in particular by a strong home video market. Online subscription rental has also been growing rapidly since 2004 and is expected to generate $136m in 2013. Films have begun to be released simultaneously on DVD and video-ondemand which has depressed prices slightly, but Blu-ray spending is expected to stimulate home video spending over the next few years. In cinemas, conversion to digital and 3-D is picking up. Early 3-D releases such as Journey to the Centre of the Earth enjoyed high levels of interest among consumers and generated high box office revenues.

Screen Australia estimated the physical sell-through market to be $1,318m in 2009.

Box office spending was estimated at $895.4m, the second highest annual total ever recorded. Attendance rates have been falling, however. In 2007, 67 per cent of Australians over the age of 14 went to the movies at least once – the lowest rate since 1994 and the third successive year of decrease.

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Industry The 50 Australian films that screen in 2009 earned $54.8m in 2009, representing around 5 per cent of the box office, up on the five-year average of 4 per cent. Of the 4,616 films released on video in 2008, just 2.5 per cent were Australian films36. A new government incentive plan, known as the producer offset, offers a 40 per cent rebate for approved film productions. It is hoped that this will attract greater investment in international and local films.

According to the Australian Bureau of Statistics Service Industry Survey of the Australian film and video production and post-production services industry, there were 2,492 businesses in the industry at the end of June 2007 – almost 6 per cent less than 2003. These companies employed around 13,500 workers.

Since 2000/01 foreign films have spent an average of $133 million in Australia, peaking at $258 million in 2004/05. In 2007/08, expenditure was $105 million, the same as the previous year but below the eight-year average. However, foreign feature production dropped significantly in 2008/09. In 2008/09 it totalled $359 million, above the nine-year average of $299 million.

Figure 5-15: Australia film market segmentation, $m Segment

2004

Box Office

2008

2013

758

791

945

Home Video

1,200

1,614

2,166

Total

1,958

2,405

3,111

100% 80% Home video

60%

Box Office

40% 20% 0% 2004

2008

2013

Source: PWC Global Outlook

36

Screen Australia

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Strands 4 & 5 – The Global Digital and Creative Industry

5.5.9

Italy Market The film industry in Italy has been stagnant since 2004. Only 2007 saw a slight increase with declines in all others, with both box office and home video spending stuttering.

Industry Domestic films in Italy typically account for just over 20 per cent of film revenue, with the USA taking around 60 per cent of the market share.37 Figure 5-16: Italy film market segmentation, $m Segment

2004

Box Office

2008

2013

967

910

1,125

Home Video

1,248

1,012

1,053

Total

2,215

1,922

2,178

100% 80% Home video

60%

Box Office

40% 20% 0% 2004

2008

2013

Source: PWC Global Outlook

5.5.10 India Market Film industry spending in India is dominated by cinema: 92 per cent of revenue came from the box office in 2008. The filmed entertainment sector is estimated to have grown at a CAGR of 5 percent over the past 3 years. KPMG estimates industry revenues of around INR 89 billion ($2,036m in 2009, representing 14 per cent growth on 2008. Over the next 5 years, the industry is projected to grow at the CAGR of 9 percent and reach the size of INR 137 billion ($3,181) by 201438.

New multiplex construction and digital conversions are expected to provide a platform for this strong growth. BIG Cinemas announced plans to convert 500 screens to digital, with more than half of all screens in India expected to be digital by 2013. Digital conversions and a rapidly growing middle class will boost admissions,

37 38

Observatoire Européen de l’Audiovisuel, Cinecittà Holding FICCI and KPMG, March 2010

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and prices are forecast to increase at an annual rate of 12.5 per cent between 2009 and 2012.

Industry There are almost no pan-Indian film companies, and it makes little sense to talk of a single Indian film Industry. Although ‘Bollywood’ (the informal name for Hindilanguage films made in Mumbai) dominates the market in terms of revenue, it is just one part of the Indian film industry. Different regions speak different languages, have their own cinematic culture and vary hugely in urbanisation and wealth.

Indian cinema took a leap forward in 2001 when the government gave it industry status, meaning banks were allowed to lend to it. Previously, the lack of finance had prevented experimentation and it was suspected that cash from criminals was used to finance many movies. UTV software, the parent company of India’s second largest film company, is a prime example of how far the industry has come. UTV has a budget of up to $12m for each film, and spends around 40 per cent of it on marketing – a similar figure to Hollywood studios.

A significant source of revenue are Non-Resident Indians, with the main export markets being the US, UK, Canada, the Gulf States and South Africa. Some western movie companies are currently targeting India as a growth area. Sony Pictures was among the first, investing in Bollywood musical fantasy Saawariya, and Warner Bros added India to the list of territories in which it co-produces local-language films when it entered into partnership with Ramesh Sippy Productions and Orion Pictures.

Figure 5-17: India film market segmentation, $m Segment

2004

Box Office

2008 1,023

1,625

3,014

79

134

493

1,102

1,759

3,427

Home Video Total

2013

100% 80% Home video

60%

Box Office

40% 20% 0% 2004

2008

2013

Source: PWC Global Outlook

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6.

The software industry

6.1

Introduction In this section, we provide an analysis of the global software industry. It is divided into the following sections: §

Global market outlook: an overview of the global market, both historic and future

§

Technology and market trends: major recent technological and market developments

§

Global business activity: developments in business structures and interrelationships, including identification of the major market companies, as well as significant recent mergers and acquisitions activity

§

Major regional markets: a summary of the regional markets for software The main source for this section is The Software Report 2009 from Oxford Economics, which NWDA had sourced separately, in advance of this report’s research. It provides a very comprehensive view of the software market, and its headline messages are summarised here, along with additional information from other industry sources. Due to the nature of this particular source, the information is not available in the same form as other chapters of this report. Where possible, we have attempted to keep the structure the same.

Some sector activity in this section will be duplicated in the section on the Games industry, given that the sector is heavily focused on application software development.

6.1.1

Definition There is considerable variety in the use of language to describe the many segments of the software market. The Software Report suggest up to 87 different segments, or 19 broader segments. For this ‘high level’ report, we use the following broad definitions of the software market, based on a simplified three tier architecture:

6.2

§

Systems software: helps the hardware to run properly, by powering servers, computer utilities, device drivers, etc.

§

Middleware: the linking software between a system and the user-end application, including web server software, and tools to help develop applications

§

Application software: primarily end-user software, such as word processing and spreadsheet tools, and more specific and tailored business applications (such as for ERM and CRM systems)

Global market outlook The Software Report notes that the global software market in 2008 was worth approximately $238bn, or one fifth of the global IT market (sourced from data collected by the European Information Technology Observatory). It reports also that 85

Strands 4 & 5 – The Global Digital and Creative Industry

this is likely to rise to $245bn by 2009, an increase in 9.3%, and faster than the IT sector as a whole.

A separate source (Datamonitor) reported in 2009 that the global software market was worth $304bn, which reflects the differences in and difficulties of defining the sector. Datamonitor forecast a 50% increase in the value of the global market to 2013, to $457bn, with the Americas accounting for 43% of the market’s value.

6.3

Technology and market trends The Software Report highlights the key market and technology trends, drawing on other key sector sources such as Gartner. The key drivers are forecast to be: §

§

§

§

6.4

Internet-related software, including: o

Cloud computing, widely-tipped to be a major area of development in the near future, affords reduced software and hardware costs by sharing a software infrastructure that remains remote from a user’s computer. The key primary driver for cloud computing is in the ubiquity and speed of internet connections available ‘on the go’, such as via wi-fi and 3G

o

Social media platforms and applications (‘Web 2.0’) which are only just becoming targeted and used by enterprises for their own applications, and as a route to their customers

Changing patterns of work, which change the demands made of software, such as: o

Virtualisation software, which allows remote users a similar service to that which would be normally available if they were in the office with a computer physically connected to the server

o

Open source software, which opens up software coding to anyone interested in adapting or amending it. This can be a cost-effective way of software development and, potentially, produce better quality software on the basis that the number of developers available is not limited by the size of the company that produced the initial code

A continued effort by firms to drive down the costs of IT, made all the more crucial by the effects of the economic downturn. This might include the following: o

Outsourced software services, i.e. the ownership and management of software by third party providers, which helps to reduce cost

o

CRM systems, designed to make the most of a firm’s customer base.

Support for the growing popularity of mobile telecommunications and gaming: o

For businesses, this includes developments of applications for smartphones such as the iPod and Blackberry, as well as the underlying software architecture for such devices

o

More detailed information on developments in gaming is provided elsewhere in this report

Global business activity 86

Strands 4 & 5 – The Global Digital and Creative Industry

6.4.1

Major sector companies Figure 6-1 shows the top 25 “Software and Services” companies in the world by sales and market value in 2009, according to Forbes39. The top four largest companies, and 15 of the top 25, are based in the US, underlining American dominance of the software market.

Figure 6-1: Top 23 Software and Services companies in 2009 Company

Country

Sales ($bn)

Market Value ($bn)

IBM

United States

103.63

123.47

Microsoft

United States

61.98

143.58

Oracle

United States

23.53

78.42

Google

United States

21.8

106.57

Softbank

Japan

27.82

13.26

SAP

Germany

16.11

38.47

Accenture

Bermuda

25.68

21.04

Computer Sciences

United States

17.11

5.26

Yahoo

United States

Capgemini

France

CA

United States

Tata Consultancy Svcs

7.21

18.45

12.71

4.25

4.32

8.79

India

5.7

9.2

Infosys Technologies

India

4.16

13.79

Fiserv

United States

4.74

5.09

Wipro

India

4.98

5.93

Symantec

United States

6.22

11.35

Adobe Systems

United States

3.58

8.75

Affiliated Computer

United States

6.37

4.55

Activision Blizzard

United States

3.03

13.11

Intuit

United States

3.06

7.32

Cognizant Technology

United States

2.82

5.37

VMware

United States

1.88

8.11

Tencent Holdings

China

0.52

10.42

Check Point Software

Israel

0.76

4.61

Source: Forbes.com

6.4.2

Recent mergers and acquisitions activity The Software Report, drawing on information from Zephyr, reports on cross border M&A activity into Europe between 2004 and 2008. It notes 791 acquisitions during this time, although activity was more subdued from 2007 onwards, due to the global economic crisis.

US firms were the most likely acquirers in Europe (53% of deals by number), followed by UK companies (7%). Targets were most likely to be located in the UK (around 30%) and Germany (12%).

39

Does not include Semiconductors or Technology Hardware firms

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The low level of recent M&A activity has also been witnessed in the US, although recent research by PwC suggests that an upswing should be expected, both in value and volume. The US Technology M&A Insights 2010 report suggests that the year on year fall in M&A deals was 53% at $53bn. However, they reported a surge in M&A activity towards the end of the year, and early 2010 moves have included: §

The merger of Oracle and Sun Systems, which was completed in early 2010

§

Ongoing purchasing activity by Oracle, which seems keen to compete head-to-head with market leaders IBM and Microsoft. Recent purchases have included AmberPoint, a US developer of service-oriented architecture (SOA) management applications, and Convergin, an Israel telecoms application developer

§

The purchase by IBM of Initiate Systems, a data integrity software application developer for the healthcare and government markets PwC has forecast that the sectors most likely to see greatest consolidation in 2010 are cloud computing providers, real time search developers, security and communications developers.

6.5

Major national markets The Software Report does not provide a breakdown of all country markets, however it does include information on the key regions.

The US is the most significant market by far in terms of production and consumption of software. In 2008, the US accounted for 37% of global software revenues, compared to 34% in Europe as a whole (Figure 6-2).

Figure 6-2: Global software revenues by region, 2008

19% 37%

USA Europe

10%

Japan Rest of World

34%

Source: The Software Report

While the domination of the US market is expected to continue, other reporting highlights the increasing importance of BRIC economies (Brazil, Russia, India, China).

Datamonitor have reported that the software market in these countries grew by 21% from 2005 to be worth $19bn in 2009, with India seeing the largest rise. The company forecasts the market value will increase by a further 15% from 2009, to 88

Strands 4 & 5 – The Global Digital and Creative Industry

reach $39bn in 2014. The broader story here is that developing markets offer potential for future growth, both as sources of software development, and as customers for software products.

In Europe, three countries account for about 60% of the region’s software market: Germany, the UK and France. The UK is the largest market in per capita terms. While the Software Report suggests that growth rates have been limited in Western Europe in 2009, markets in Central and Eastern Europe have demonstrated much more vigorous growth. This is driven by a need to service a growing local market, as their economies develop, and also as a base for the delivery of off-shore IT services.

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7.

The publishing industry

7.1

Introduction In this section, we provide an analysis of the global publishing industry. It is divided into the following sections: §

Global market outlook: an overview of the global market, both historic and future

§

Technology trends: major recent technological developments

§

Global business activity: developments in business structures and interrelationships, including identification of the major market companies, as well as significant recent mergers and acquisitions activity

§

Major national markets: a summary of the nine country markets that make up 81% of the global market

§

Regional implications: reflections on the structure of the regional sector, and how it might exploit overseas opportunities

7.1.1

Definition Broadly speaking, publishing is the activity of producing and disseminating literature or information. Publishers add value to authors’ work by selecting and editing content, physically or digitally producing and distributing material and marketing the final product to potential purchasers. There are three sub-sectors of publishing, and several distinct activities and corresponding sources of revenue within each subsector. Definitions of each sub-sector and activities included are set out below:

§

Magazine and Newspaper publishing: Revenues in this sub-sector come from circulation spending (i.e. sales to consumers) as well as advertising revenues paid by featured businesses to the publishers. Spending on both physical and digital formats are included

§

Consumer and educational book publishing: consists of retail spending on consumer books; spending by schools, government agencies and students on elementary, high school and college textbooks, including graduate-level textbooks; and spending on electronic books (e-books). Audio books fall under print sales

§

Business-to-business publishing: consists of spending on business information, print and online directory advertising, advertising in trade magazines and websites, and trade magazine circulation spending. It also includes spending on print and electronic professional books. Spending on business information falls under three categories: ·

Financial information – involves securities, economic and credit data

·

Marketing information – used to sell products or services or monitor sales e.g. mailing lists

·

Industry information, consisting of market intelligence provided by data and content

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Strands 4 & 5 – The Global Digital and Creative Industry

7.1.2

Sources of information The main sources of information from this section have included the following:

7.2

§

Global Outlook (PWC)

§

National and international publishing associations

§

Identifying and Developing International Business Connections Between England’s Northwest and Selected High Growth Markets (NWDA)

Global market outlook As can be seen from Figure 7-1, publishing sales are very sensitive to the economic cycle. Global publishing sales had been growing rapidly in the years before the recession, with revenue increasing by around 10 per cent between 2004 and 2007.

Publishing sales started to decline in 2008 before falling (year-on-year) by around 9 per cent in 2009. This is significantly greater than the overall percentage decline in global output. Publishing sales are expected to fall to around $480bn in 2010 before stabilising in 2011 and recovering thereafter.

Figure 7-1: Global publishing sales, $m (2008 prices) 570,000

550,000

530,000

510,000

490,000

470,000

450,000 2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Source: PWC Global Outlook

Figure 7-2 below breaks the publishing industry in to its three subsectors. Magazines & newspapers is the biggest sub-sector; magazines and newspapers generate

91

Strands 4 & 5 – The Global Digital and Creative Industry

revenue both from the sales of the literature and the sales of advertising space, whereas books can only generate revenue through retail sales.

Figure 7-2: Global market growth 2004-2013, $m 600,000

500,000 171555 151,240

152945

400,000

300,000

115266

103,113

118493

200,000

257,959

262,744

2004

2008

241,412

100,000

0

Mag & news

Books

2013 Bus-to-Bus

Source: PWC Global Outlook

Figure 7-3: Change in sub-sector sales in 2008

Figure 7-3 shows the impact of the Change in sales, Sub-sector recession on each of the three sub2008-2009 ($m) sectors. The fall in advertising revenues Magazine & newspaper -26,155 was the main driver behind the fall in Books -2,977 magazine and newspaper revenues; consumer spending fell relatively little.

Business-to-Business -20,036 Firms’ advertising budgets were cut back Total change -49,168 both because falls in sales would have dented companies’ cash-flow but also because advertising would have been less profitable for firms as consumers would have been less sensitive to it as they were reducing spending. Business-to-business sales experienced the largest year-on-year percentage decline, with publishers’ revenue falling by 11.7 per cent. This was driven by a large fall in business information and in particular by the collapse in trading of financial information as investors’ propensity to invest in the sort of risky assets that makes such trading profitable disappeared. Publishers’ revenues from books meanwhile help up relatively strongly, with both consumer spending and education institution spending experiencing relatively small declines.

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Strands 4 & 5 – The Global Digital and Creative Industry

7.3

Technology and market trends

7.3.1

Industry drivers Like other creative industries, digital technologies are starting to have a large impact on the publishing industry and will continue to do so in the future. The high fixed costs and low marginal costs that are a feature of publishing has made the transition from print to digital particularly rocky, as publishers cannot respond to falling revenues simply by cutting back production; major restructuring is required to get costs down. The general trends and fortunes of each sub-sector is covered below.

7.3.2

Magazine & Newspaper An increase in the range of digital platforms on offer will continue to drive revenues from digital publishing. As ownership of ‘smart’ phones such as the iPhone becomes more widespread, there is likely to be increasing demand for online subscriptions to magazines or newspapers as consumers will find such subscriptions more useful now that they can access them on-the-move. Tablet computers provide another digital platform that is likely to be used to view magazine and newspaper content online.

Another key development is the choice by some newspapers to charge for online content. Charging for online content has typically been confined to specialist newspapers or magazines, such as The Economist or the Wall Street Journal.

However, the Times and the New York Times, for example, have recently announced that they will begin to charge for access to online articles. The Times, for example, will initially charge £1 for a day’s access or £2 per week. Publishers have been driven to introduce charges because of steep declines in advertising revenues. Between the first quarter of 2003 and the second quarter of 2007, online advertising revenue for American newspapers grew by more than 20 per cent a year. Since then revenues have fallen sharply; in the third quarter of 2009 American newspapers earned 17 per cent less from online advertising than they had done a year earlier40. Making such changes has been considered risky; some news outlets, such as the BBC and CNN seem likely to continue to provide free online news and a poll by Harris Interactive found that three-quarters if Britons would switch to an alternative free news source if their favourite website began charging. However, some publishers, such as the Financial Times, have made the switch successfully already (The FT says revenues from digital subscribers rose by more than 30 per cent last year) suggesting that there is potential for this new business model to work.

7.3.3

Books The rise of new digital platforms is having an increasing impact on the book publishing sector. Tablet computers, such as the Kindle and the ipad, are likely to be a bigger driver of e-book purchasers than smart phones due to the better reading experience on the larger devices.

Amazon, the creator of the Kindle, currently dominates the sales of digital books.

However, the high-profile release of the iPad, first in the US and then in Europe, is likely to challenge Amazon’s position and lead to a change in the pricing model which is currently operated. At the moment a ‘wholesale’ pricing model is used

40

The Economist; The year of the paywall, January 5 2010

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Strands 4 & 5 – The Global Digital and Creative Industry

between book publishers and Amazon, whereby the online retailer pays publishers for the right to sell books and then decides what it charges the public for them.

Amazon prices many new e-book titles and bestsellers at $9.99, at which price they often make a loss on the sales of the e-books but gain increased revenue from sales of the Kindle. However, for publishers this means that there is pressure to reduce the prices of print books. In order to line up lots of bestselling titles for the iPad, Apple has agreed to an ‘agency model’ under which publishers set the price at which their e-books are sold, with Apple taking 30 per cent of the revenue generated. With the entrance of the iPad taking some of Amazon’s bargaining power away, Amazon has reportedly agreed to similar terms with several big publishers41. Even though this is likely to reduce publishers’ revenue from e-books sales, publishers believe that the improved retention in print sales will more than outweigh the loss.

7.3.4

Business-to-business Figure 7-4 shows the share of total revenue each component of business-to-business publishing had in 2008. All components are strongly linked to the economy. Demand for business-to-business publishing is a derived demand: it is driven purely by its ability to generate sales for firms in other sectors, unlike the other two subsectors which attract spending because they provide a final product to consumers.

Figure 7-4: Share of total revenue Activity

% share, 2008

Business info

50.6

Directory advertising

20.2

Trade magazines

16.4

Professional books

12.9

Sales of business information, which accounted for over half of the sub-sector in 2008 and is generally used by firms to develop marketing strategies, fell by 12 per cent in 2009 and advertising revenues fell even further.

The short to medium-term performance of business-to-business spending is therefore strongly dependent on the speed of the wider economic recovery.

Business-to-business publishing sales are particularly reliant on developed counties, so it will be the performance of these countries that will largely determine spending.

The switch to digital advertising is also likely to erode business-to-business revenues: the increase in sales on digital formats is unlikely to offset the fall in unit price that digital advertising attracts compared with print.

41

The Economist; E-publish or perish, March 31 2010

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Strands 4 & 5 – The Global Digital and Creative Industry

7.4

Global business activity

7.4.1

Major sector companies Figure 7-6 lists the 20 largest global publishing companies, based on revenue in 2008. Just five of these companies have a strong presence in book publishing: UK’s Pearson (with its Penguin group), Germany’s Bertelsmann (with Random House and the ever ailing “Club” business), France’s Hachette Livres (which is also a strong player in education), Spain’s Planeta (having acquired France’s #2, Editis), and Italy’s De Agostini. All of these companies are based in Europe, as are many of the remaining 20 largest companies.

Figure 7-5: 20 largest publishing companies, by 2008 revenue Rank

Company name

Parent company

Nationality

Revenue, 2008 (£m)

1

Pearson

Pearson

UK

5,044

2

Reed Elsevier

Reed Elsevier

UK/NL/US

4,586

3

Thomson Reuters

The Woodbridge Company

Canada

3,485

4

Wolters Kluwer

Wolters Kluwer

NL

3,374

5

Bertelsmann

Bertelsmann

Germany

2,980

6

Hackette Livre

Lagardere

France

2,159

7

McGraw-Hill Education

McGraw-Hill

US

1,794

8

Grupo Planeta

Grupo Planeta

Spain

1,760

9

De Agnostini Editore

De Agnostini Editore

Italy

-

10

Scholastic

Scholastic Corp

US

1,499

11

Houghton Mifflin Harcourt

Education Media and Publishing Group

US/Cayman Islands

1,712

12

Holtzbrinck

Verlagsgruppe Georg von Holtzbrinck

Germany

-

13

Cengage Learning

Apaz Partners et al

UK

1,172

14

Wiley

John Wiley & Sons

US

1,139

15

Informa

Informa

UK

1,028

16

HaperCollins

News Corp

US/AUS

944

17

Shogakukan

Shogakukan

Japan

927

18

Shueisha

Shueisha

Japan

902

19

Kodansha

Kodansha

Japan

886

20

Springer Science and Business Media

Cinven and Candover

UK/Ger/Italy/France

880

Source: Publishing Perspectives

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Strands 4 & 5 – The Global Digital and Creative Industry

7.4.2

Recent mergers and acquisitions activity Figure 7-6 shows the most significant global M&A activity in the games sector since 2008, according to various sector business media. A number of trends are evident from this information and more general sector information: Figure 7-6: Major M&A activity, late 2008 to present Companies involved Groupo Planeta acquired French publisher Editis in May 2008

EQT acquired Springer Science and Business Media in December 2009

Thomson acquired Reuters, the deal was finalised in April 2008

Pearson acquires Medley Global Advisors (MGA) in February 2010

Pearson acquired English Wall-Street English in April 2009

Reed Elsevier acquired ChoicePoint in February 2008

Value

Comment

Groupo Planeta paid EUR1.026bn

Editis, the second largest French publisher, had a strong presence in literature, educational and reference publishing. The deal was the largest acquisition in France by a foreign media group.

Deal estimated to be between EUR100m and EUR150m

Swedish Private Equity firm EQT paid significantly less than the EUR400m that the SSBM was originally valued at, but the value reflects the EUR2.2bn of debt that EQT inherited from the acquisition.

Around $17bn

Along with Bloomberg, Thomson and Reuters were the major players in the “terminal market” providing news and data on financial markets. The newly formed Thomson Reuters was estimated to have 34 per cent of the market share, with Bloomberg controlling 33 per cent.

Undisclosed but MGA’s assets were estimated at $7.3m at the end of 2009

MGA was a leading provider of macroeconomic policy intelligence to financial market institutions. The acquisition enhanced the portfolio of services offered by Pearson’s Financial Times

Reuters reported the deal to be worth $145m

Wall-Street English was China’s top English Language Training school. The deal strengthened Pearson’s presence in China’s English learning market, having already been running Longman Schools.

$4.1bn

ChoicePoint had a leading position in providing data and analytics to the attractive insurance sector.

Reeds Elsevier is the parent company of Lexis Nexis Risk Information and Analytics Group.

Sources: various publishing sector media

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Strands 4 & 5 – The Global Digital and Creative Industry

7.5

Major national markets

7.5.1

Overview In 2008, the nine largest national markets for publishing accounted for 76 per cent of the global market (Figure 7-7). The US was by far the biggest national market, with a third of global publishing revenue being derived from the US alone. The second biggest purchaser of publishing goods, Japan, constituted around nine per cent of the global market, closely followed by Germany with eight per cent. The UK was the fourth largest national market, with seven per cent of global sales.

Figure 7-7: Largest markets for publishing (% of global market) 2008 40 35

30 25 20 15

10 5

Ro W

Sp ain

y

a Ca na d

Ita l

Fr an ce

Ch in a

UK

Ge rm an y

pa n Ja

US

0

Source: PWC Global Outlook

Figure 7-7 overleaf shows how the top national markets differ in terms of sub-sector performance. Business-to-business sales dominate the North American markets of US and Canada, respectively accounting for around 45 and 55 per cent of the national market. In the two biggest Asian markets, Japan and China, business-tobusiness contributes less than 20 per cent of total publishing sales. With the exception of Canada, the book market constitutes a larger proportion of the smaller markets than it does with the top four biggest. This suggests that the book market may reach its peak earlier at an earlier point in the development of publishing markets than the other two sub-sectors. Business-to-business publishing does seem to be correlated to output per head, with a bigger share of publishing in the more developed countries. This would make sense, as it is in these richer economies that

97

Strands 4 & 5 – The Global Digital and Creative Industry

there are greater incentives for firms to invest in obtaining consumer and other business information in order to develop strategies.

Figure 7-7: Country markets by sub-sector, 2008 100% 90% 80% 70% 60% 50% 40% 30% 20% 10%

Ma g & News

Books

Sp ain

a Ca na d

ly Ita

Fr an ce

Ch in a

Ge

UK

rm an y

pa n Ja

US

0%

B2B

Source: PWC Global Outlook

7.5.2

United States Market The US is the biggest purchaser of publishing goods in the world, with particularly strong demand for business-to-business publishing. PWC estimates that there will be an overall decline between 2009 and 2013 at a compound annual growth rate of -1.1 per cent. Consumer and educational books is the only segment that is expected to rise up to 2013, with sales in the magazine & newspaper and business-to-business sub-sectors falling significantly.

Magazine spending has been hit hard during the recession. The real estate collapse and weak auto-mobile market led to drastically reduced demand for publications serving the home and automotive markets. Firms have reduced advertising in magazines, choosing instead to maintain a presence on television. Newspaper sales have been badly affected as well; many of the smaller publications are struggling and some have switched to online-only or adopted ‘power days’ selling strategies – concentrating circulation on selected days of the week. A rising number of newspapers and magazines have designed websites specifically for mobile phones; this couples with the rise of smart phones is likely to drive mobile subscriptions to magazines & newspapers significantly upwards over the next few years.

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Strands 4 & 5 – The Global Digital and Creative Industry

The electronic book market in the US has been bolstered by the introduction of new eReaders. Amazon’s Kindle saw unit sales of half a million in 2007, whilst Sony’s reader sold around 300,000. These figures have been dwarfed by sales of the iPad which reached one million just 28 days after its launch – although this is a more general media browsing device as opposed to a specialised eReader.

Industry Six of the top twenty largest publishers are US-owned or part-owned. IBISWorld, a market research firm, estimates that book, magazine and newspaper publishing generated $105,724m revenue in 2009, adding around $52,694 to US GDP. Around 475,000 people were employed in 2009, earning total wages of $34,475m.

The Association of American Publishers (AAP) estimated that U.S book publishers had sales of $23.6bn in 2009, down 1.8 per cent from $24.3bn the previous year.

Sales have rebounded so far in 2010 however, with sales at the end of March up on the end of the year. Over 410,000 new book titles were published in the US in 2007, and a total of 3 billion books sold.

US newspapers are gradually recovering after severely struggling through the recession, and the changes that were forced upon the industry have made it more stable. Newspapers’ revenue sources are now more evenly balanced between circulation and advertising (in 2008 87 per cent of American newspaper revenues came from advertising – in Japan, for example, just 35 per cent of revenue is dependent on advertising). Newspapers have also streamlined their coverage, with local papers sticking to local issues, leaving national story coverage to a few large publications. At Gannett, a US publisher, 46 local titles now carry national and international news from USA Today, the firm’s national paper.

Figure 7-8: US market segmentation, $m Segment

2004

2008

2013

Mag & news

81,809

71,010

56,584

Books

28,563

30,945

32,044

B2B

72,841

81,032

68,538

Total

183,213

182,987

157,166

100% 80% B2B Books Mag & news

60% 40% 20% 0% 2004

2008

2013

Source: PWC Global Outlook

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Strands 4 & 5 – The Global Digital and Creative Industry

7.5.3

Japan Market Magazine and newspaper spending is the dominant sub-sector in Japan, accounting for over 60 per cent of publishing spending. Japan has a large online and mobile advertising market, with digital advertising revenues increasing by 63 per cent in 2008. Growth slowed to three per cent in 2009 but double-digit increased are expected to return in future years. Newspapers in Japan are prohibited from discounting prices, and publishers operate a Retail Sales Price Maintenance (RSPR) system which allows them to determine the subscription fees which delivery agents charge – this means that the price of a given newspaper is fixed across Japan.

Publishers sell to wholesalers who typically have an eight per cent price margin, who in turn sell to bookstores who then typically mark prices up by 22 per cent. Japan’s aging population is helping to dampen the decline in newspaper sales, as older people have a higher incidence of newspaper readership.

There were 78,555 new book titles released in Japan in 2009, up 2.9 per cent on the previous year. In total, there were around 840,000 titles in print in 2009. There are some 3,400 magazines circulating in Japan, with five of them generating unit sales of more than one million per issue.

Imports of publications in Japan (books, newspapers and magazines) was estimated at 40.1bn Yen in 2008, down 11 per cent on previous years42. Exports, meanwhile, were valued at 14.7bn yen.

Industry There are around 4,000 publishers in Japan, with 80 per cent located in Tokyo.

Collectively they generate around 2 trillion yen (xx dollars). Most medium sized publishers produce both books and magazines; with the latter providing a steady flow of income. Comics (Magna) and weekly magazines are the main staples of the publishing industry in Japan.

In addition to RSPR, Japan also operates a Contingent Sales System under which wholsesalers and bookstores can return any unsold titles to publishers within a given timeframe (usually six months of purchase). This has the benefit of allowing bookstores to stock a wide variety of titles without the risk of overpurchasing, but transfers the risk to publishers who can see their profits hit when they overproduce certain titles. This is a significant weight on Japanese publishers, and some have given bookstores a greater margin but have transferred some of the burden of returning books to bookstores.

42

Customs and Tariff Bureau, Japanese Ministry of Finance

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Strands 4 & 5 – The Global Digital and Creative Industry

Figure 7-9: Japan publishing market segmentation, $m 2004

2008

2013

Mag & news

31,701

29,076

24,474

Books

8,020

9,077

9,246

B2B

8,846

9,131

7,150

Total

48,567

47,284

40,870

100% B2B

80%

Books

60%

Mag & news

40% 20% 0% 2004

2008

2013

Source: PWC Global Outlook

7.5.4

Germany Market Publishing had been growing relatively strongly in Germany prior to the recession, driven in particular by the business-to-business subsector which was benefiting from accelerating economic growth.

German publishers have been apprehensive about putting content online A number of eBook readers have been introduced in Germany, including BeBook, eSlick, and the PRS-505 from Sony. In 2007 the Libreka! Project was launched, providing a scanning service for participating publishers that assists consumers in finding books. In 2009 a service called Txtr was launched. This allows users to access a virtual library via a mobile device. Despite these developments, there is still little revenue being generated by eBooks in Germany. One of the main reasons for this is that eBooks are priced at hardcover rates, reducing their attractiveness to consumers.

Industry The German publishing industry is well organised: firms rallied together to the Government to draft legislation that would create new copyright for digital content.

This should help them to extract more revenue from search engines and news aggregators – the shift of revenue to these types of firms has been one of the major problems for publishers. German publishers have also been reluctant to put content online which has helped to prevent the leakage of revenue.

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Strands 4 & 5 – The Global Digital and Creative Industry

Figure 7-10: German publishing market segmentation, $m 2004

2008

2013

Mag & news

19,849

19,543

18,353

Books

10,054

9,366

9,220

B2B

14,107

16,636

15,539

Total

44,010

45,545

43,112

100% B2B

80%

Books

60%

Mag & news

40% 20% 0% 2004

2008

2013

Source: PWC Global Outlook

7.5.5

UK Market Declines in revenues earned by the newspaper and magazine industry are leading the overall decline in the UK publishing industry. Business-to-business publishing revenues are also set to decline, whilst book sales look to be stable.

Sales of men’s magazines have declined significantly over the past few years whilst women’s titles, which are more dependent on subscriptions, have held up relatively well. Covermounts, whereby publishers give away CD’s or other products with magazines or newspapers have been becoming more prevalent in an attempt to reverse the declining sales. A number of housing magazines have ceased circulation as a result of the housing market decline, which led to large cuts in advertising revenues.

The UK is the only significant market for eBooks in Europe, accounting for a third of all sales in the continent in 2008. Amazon’s Kindle launched in the UK towards the end of 2009 and the iPad recently entered UK markets in May 2010.

Industry The UK is one of the leading producer of published materials in the World, owning or part-owning five of the top twenty publishing companies. Pearson, the World’s largest publisher is a UK company, employing 37,000 people worldwide and generating sales of £5,624m in 2009. Pearson is a major player in all three publishing sub-sectors, operating the Penguin Group in the book market and the Financial Times Group which generates revenue in both newspaper and business-to-businness publishing.

102

Strands 4 & 5 – The Global Digital and Creative Industry

There are over 8,000 publishing companies in the UK, employing around 164,000 people. Book, journal and electronic publishing contributes over £5 billion to the domestic economy.43 UK publishers sold an estimated 763m books in 2009, at a value of £3503m. Exports accounted for around £1203m of these sales; exports make up around 38 per cent of total sales – more than any other nation. The US is the biggest purchaser of UK books exports, followed by Ireland and Germany.

The magazine and newspaper industry, which had been growing rapidly over the last couple of decades, declined between 2004 and 2008. The barriers to entry are fairly low in terms of starting production, and the existence of a strong newstrade distribution system and full-service distribution houses, as well as subscription fulfilment companies, which enable magazine publishers to outsource a great many functions, means that the barriers to the distribution chain are also relatively low.

Although circulation spending has remained fairly robust, advertising revenues have been falling as advertisers migrate to the web. Circulation sales accounts for around 40 per cent of revenue for national newspapers and just 20 per cent for regional publications.

Figure 7-11: UK publishing market segmentation, $m 2004

2008

2013

Mag & news

18,833

17,678

14,626

Books

5,949

6,331

6,231

B2B

12,186

12,876

10,849

Total

36,968

36,885

31,706

100% B2B

80%

Books

60%

Mag & news

40% 20% 0% 2004

2008

2013

Source: PWC Global Outlook

7.5.6

China Market The publishing industry has been growing rapidly in China, driven in particular by magazine and newspaper sales. Rising incomes has increased demand for consumer publications and a number of international titles have recently started circulation in China. The 2008 Beijing Olympics also provided opportunities for expansion, with increased circulation and adverting related to the event. Although the growth has slowed during the recession, it has still remained positive.

43

Department for Business, Innovation and Skills. This figure represents value added i.e. revenue minus costs (except staffing costs)

103

Strands 4 & 5 – The Global Digital and Creative Industry

Digital publishing in China Generated RMB5.3bn ($773m) in 2008, an increase of 46 per cent on the previous year.44 The General Administration of Press and Publication (GAPP) expected this figure to rise to RMB7.5bn in 2009, with cell phone publishing being a key driver of this growth. Online gaming has also helped to drive publishing sales, via increased demand for associated books and magazines.

In 2006 legislation established Xinhua News Agency as both the exclusive agent and regulator of foreign data providers. Xinhua subsequently launched its own data service in competition with foreign providers, leading to protests from foreign providers. In 2008 Xinhua’s regulator status was taken away, opening the business information publishing market to greater foreign competition.

A 2008 survey found that 49 per cent of those aged between 18 and 70 read books in China. For all published material, including digital publications, the figure was 70 per cent45.

Industry Until 2002 all Chinese publishing houses were state owned. Since then, step-by-step reforms have been introduced and the state has steadily withdrawn its presence from the publishing sector. As of 2008 there were 579 publishing houses in China.

The 2005-10 5 year plans in China called for publishers to offer content online, and in 2008 around 90 per cent had established digital publishing services. The state still maintains significant control over granting publishing licences: only one new publishing house entered the market between 2007 and 2008.

Chinese publishers produced 275,668 books in 2008, with 15,000 new titles. Book exports generated $31.31m, a five per cent decline on the previous year. The distribution system of published materials is stunting growth of the publishing industry: the value of undelivered books within the state owned system adds up to EUR6.7bn. 46

44 45 46

China Digital Publishing Fair The 2008 Survey of Reading Behaviour, China Press and Publishing Journal General Administration of Press and Publication

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Strands 4 & 5 – The Global Digital and Creative Industry

Figure 7-12: China publishing market segmentation, $m 2004 2008 Mag & news 9,317 14,057 Books 7,339 10,205 B2B 3,299 5,317 Total 19,955 29,579

2013 17,487 12,493 6,996 36,976

100%

B2B

80%

Books

60%

Mag & news

40% 20% 0% 2004

2008

2013

Source: PWC Global Outlook

France Market The French newspaper & magazine industry was hit in 2007 when a ban on retail advertising on television was lifted, leading to a shift away from advertising in magazines & newspapers. The economic downturn then depressed France’s entire publishing industry in 2008. In an attempt to revive the industry, the government introduced EUR600m stimulus programme that included a one year free magazine subscription to all teenagers in France, a tax break for home delivery and a doubling of Government advertising in magazines. These measures have helped limit the industry to one of the smallest decreases in Europe in 2009.

Gallica 2 provides digital access to title from the National Library of France as well as from other copyrighted books. Individual publishers are also introducing digital versions of books on their website that allow users to sample books online.

Industry The French publishing industry has a high degree of concentration. Hachette, Frances largest publishing firm and the sixth largest in the world, has a turnover of over $2bn. Editis, the second largest French publisher, was acquired by Spanish firm Planeta, in the largest deal in France by a foreign media group. Editis had a strong presence in literature, educational and reference publishing.

105

Strands 4 & 5 – The Global Digital and Creative Industry

Figure 7-13: France publishing market segmentation, $m 2004

2008

2013

Mag & news

9,317

14,057

17,487

Books

7,339

10,205

12,493

B2B

3,299

5,317

6,996

Total

19,955

29,579

36,976

100%

B2B

80%

Books

60%

Mag & news

40% 20% 0% 2004

2008

2013

Source: PWC Global Outlook

7.5.7

Italy Market Although currently the dominant sub-sector in publishing, magazine & newspaper sales have been falling and their share of total sales will continue to diminish.

A survey in 2005 found that, of those aged over 6, only 42 per cent brought at least one book during the year. Although this represents a slight increase on previous years, this proportion still lags behind many other EU countries.

Publishers have been investing more in their websites in order to attract high online advertising revenues. Two of Italy’s biggest publishing companies, RCS MediaGroup and Gruppo Editoriale L’Espresso, have formed the Premium Publisher Network, a consortium to sell online advertising. The network allows advertisers to reach 40 per cent of the country’s total online advertising audience with a single purchase of advertising space.

Industry In 2003 there were 5,700 publishing companies in Italy (book, magazine and newspaper), with total employment in the industry at 34,000.

Italy maintained a positive trade balance with $53.7 million in exports and $38.7 million in imports of books.

106

Strands 4 & 5 – The Global Digital and Creative Industry

Figure 7-14: Italy publishing market segmentation, $m 2004

2008

2013

Mag & news

10,517

11,064

9,991

Books

5,327

6,278

6,241

B2B

2,931

3,389

2,945

Total

18,775

20,731

19,177

100% 80% B2B Books

60%

Mag & news

40% 20% 0% 2004

2008

2013

Source: PWC Global Outlook

7.5.8

Canada Market Business-to-business publishing generates over half of publishing revenue in Canada.

Book sales accounted for just 13 per cent of revenue in 2008. The relatively small part that books play in the Canadian publishing industry means that it is vulnerable to the widespread declines in the other two sub-sectors. The Canadian publishing industry is forecast to decline over the next few years despite a relatively strong economy compared to other developed nations.

The digital market in Canada is weak, but is expected grow quickly in the coming years. The Kindle, which is the dominant electronic book platform in many countries, is yet to arrive in Canada, as is the Sony eReader. However, Indigo has recently introduced an electronic book service which allows users to download books to smart phones and computers.

Industry In order to support the publishing industry, the Canadian Government has introduced the Book Publishing Industry Development Program. The program provides financial support and training to authors and publishers, in an attempt to foster a viable Canadian book industry that publishes and markets Canadianauthored books. Magazine publishers are eligible to be beneficiaries of the Canadian Periodical Fund which will provide $70.8m of support. Moreover, postal delivery of magazines is subsidised by the Publications Assistance Programme.

Canada’s publishers also enjoy protection from overseas competition. Booksellers are required to buy books from either Canadian branches of multinational publishers 107

Strands 4 & 5 – The Global Digital and Creative Industry

or Canadian owned distributors. They are not permitted to buy from a U.S. company unless the book is not available from a Canadian company or if the Canadian company’s price exceeds the guidelines set for a Canadian price differential, which is the exchange rate plus 10%. In 2008, however, the appreciation of the Canadian Dollar against the US dollar meant that this differential was often exceeded.

Canadian publishers lost sales during this time but in late 2008 the Canadian Dollar fell in value and the issue subsided.

The Canadian Newspaper market is much more competitive than the US market, with many cities being served by a number of papers. This competition has led there to be a large number of free daily newspapers, which constitute a third of total newspaper circulation.

Figure 7-15: Canada publishing market segmentation, $m 2004

2008

2013

Mag & news

4,328

4,343

3,687

Books

1,468

1,647

1,716

B2B

6,302

7,022

6,149

Total

12,098

13,012

11,552

100% 80% B2B Books

60%

Mag & news

40% 20% 0% 2004

2008

2013

Source: PWC Global Outlook

7.5.9

Spain Market Book publishing contributes around 35 per cent of total publishing revenue in Spain, one of the largest proportions in Europe. A report by the Federation of Publishers’ Guilds of Spain estimated book sales to total EUR3.1bn. Exports of books generated EUR554m, giving the sector a trade surplus of EUR311m.

Advertising in newspapers and magazines declined rapidly in 2008. A number of newspapers have either had to close or reduce circulation in order to reduce costs in the face of declining revenue. Spain’s ongoing economic problems are likely to mean that this tend will be prolonged, putting further pressure on publishers.

A survey estimated that 56 per cent of the Spanish population read a book in 2007, with 41 per cent of readers declaring themselves as frequent readers.

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Strands 4 & 5 – The Global Digital and Creative Industry

Industry The six largest publishing firms - Planeta, Circulo-Plaza, Anaya, Santillana, Océano and SM – account for 64 per cent of industry turnover. In 2007 the publishing sector was directly responsible for employing 15,467 individuals.

Figure 7-16: Spain’s publishing market segmentation, $m 2004

2008

2013

Mag & news

6,043

6,324

6,219

Books

4,218

4,539

4,565

B2B

2,198

2,537

2,211

Total

12,459

13,400

12,995

B2B Books Mag & news

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2004

2008

2013

Source: PWC Global Outlook

109

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