After a mixed year for Britain's entertainment and media industries, their fortunes are about to change, according to a new report. It also concluded that consumers are going to change with them.
Revenues in the UK's entertainment and media market (E&M) are forecast to grow 20 per cent over the next four years, driven by the internet, mobile phones and a recovery in the advertising market. The research by PricewaterhouseCoopers estimates that by 2014 the sector will be worth $87.7bn (£59.5bn).
It added: "The industry has reached a defining moment: Re-evaluating and redefining its business models in ways that will ultimately redraw the value chain."
The Global Entertainment & Media Outlook 2010-2014, released today, covers sectors from television, music, film and video games to radio, publishing and advertising. It predicts that the industry will shrug off last year's decline in revenues brought on by the downturn and grow worldwide from $1.3 trillion last year to $1.7 trillion in four years' time.
Global consumer spending fell 0.5 per cent in 2009 as the recession squeezed spending on music, glossy magazines, newspapers and books. The falls offset gains made through TV licence fees, as well as the growth of pay TV, films and video games. PwC predicts video games will be the fastest growing industry over the next four years, followed by pay TV.
Phil Stokes, head of entertainment and media at PwC, said 2009 was a "pretty poor year for the entertainment and media industry, with very few bright spots". The advertising recession proved particularly brutal for E&M. In the UK, revenues plunged 11.5 per cent to $19.8bn, but the market is likely to return to growth this year. The first half was lifted as companies took advantage of historically low prices, as well as the desire to advertise around the World Cup. Yet uncertainty remains over the second half of the year.
PwC predicts that the fastest growth in advertising will be seen on the internet. The UK's online ad market is forecast to rise 10.5 per cent by 2014, by which stage revenues will be $9.3bn.
At the same time television advertising should grow 4.3 per cent to $6bn. PwC's report said: "Free digital terrestrial TV and high definition growth will expand audiences and boost broadband, while new online streaming sites and web enabled TV sets will drive online TV advertising."
Mr Stokes said: "In large part, the advertising bounce-back this year was driven by the economy; the question is, how will it affect business models? Consumer behaviour is clearly changing."
He said many ad-funded businesses were affected when the recession hit, forcing companies to look at alternative methods of funding. He highlighted the so-called "freemium" model. Online music streaming services including Spotify and We7 offer users access to songs for free, as long as listeners put up with a certain number of adverts every hour. They are also offered an alternative premium service: paying a subscription fee for ad-free listening. "More and more, people are willing to pay for the subscription," Mr Stokes said.
Change in the entertainment and media industry is expected to be driven by the rise of smartphones, including Apple's iPhone, devices by BlackBerry, and Android devices such as the Nexus One, which are capable of browsing the internet, sending emails, downloading songs and viewing video content. PwC predicts the devices will come of age as a "consumption platform" for the entertainment and media industries by the end of next year. The analysts predict that the number of people accessing the internet through mobile devices will rise from 500 million last year to 1.4 billion by 2014.
The rise of content available on these devices has prompted advertisers to put increasing resources into mobile advertising. UK spending on mobile ads is expected to grow from $111m last year to $524m in 2014.
The report said: "The tipping point is fast approaching at which usage, subscription and advertising revenues for content services will migrate quickly towards mobile platforms. In some markets it has already happened."
This is against the backdrop of the "growing dominance of the internet over all content consumption," PwC said. "No segment of E&M will be immune to blurring with the internet." The group pointed to the rise of web enabled TV as evidence of how the internet is changing the industry.
The rise of broadband at home – PwC predicts 25 million homes will have the service by 2014 – and mobile internet means "people are interacting online with each other more each day. In the UK it is still early days," Mr Stokes said. The next four years will continue to see the rise of digital technology across all of the sector. PwC said: "The current advances in technologies and consumer behaviour are unprecedented in their speed and also in their simultaneous impact across all segments."
The group added that while it predicted that the recession would accelerate the adoption of digital, "the pace of change has proved to be even quicker than we imagined". Digital revenue streams are estimated to rise to just over a fifth to a third by 2014 and will provide "most of the industry's future growth," the report added.
Mr Stokes said: "Consumers are changing. We studied if, when young people grew up, they were adopting their parents' behaviour. It absolutely was not the case."
The country is seeing the rise of the "Martini mentality" with the demand for content across different platforms, he said. Echoing the tagline from the drink's adverts, he added consumers "want content any time, any place, anywhere".
Video games on the rise
The video games industry was a victim of the downturn in 2009, despite optimists suggesting just a year earlier that it may be recession proof. Sales soared before the start of the economic turbulence, helped by consoles such as the Nintendo Wii which encouraged a whole new category of gamers, but there was a pronounced wobble last year.
Despite the release of best-sellers such as Call of Duty: Modern Warfare 2, Fifa 10 and the sequel to Assassin's Creed, sales of games for consoles, PCs, online and wireless, as well as video game advertising, fell 7.7 per cent to $3.8bn (£2.6bn).
Richard Wilson, the chief executive of video game industry body Tiga, said: "There was a dip last year as consumer spending tightened because of the recession. It turned out the market wasn't recession proof."
PwC believes the market has shaken off the dip and is predicting 10 per cent growth over the next four years to $5.3bn. It said growth in the console markets would come through new games for the Wii as well as Sony's PlayStation 3 and Microsoft's Xbox 360. There will also be growth in the handheld market, with interest in the forthcoming 3D version of Nintendo's popular DS device. "The market is returning to growth partly as the UK economy enters a recovery phase. People have more to spend and there is a strong body of gamers out there," Mr Wilson said.
The biggest growth in the industry is expected with the rise of online gaming. The market is in its infancy, with PwC predicting an industry that doubled in three years to $655m in 2009, to break the $1bn barrier by 2014. Mr Wilson said: "Many companies are looking at online as the business model is very attractive. It is cheaper to develop and sell the games." The rise in popularity of online games such as Zynga's FarmVille, which users play on Facebook, and the recent release of Playfish's EA Sports Fifa Superstars, has convinced more developers to target the market. This has partly been driven by the rise of households with broadband, which has increased the digital distribution of all content.
This is also fuelling the growth of video game advertising, where companies actually take out adverts which are incorporated into the game. That market, which currently stands at $111m, is expected to almost double to $211m in the next four years. PwC expects the next generation of consoles to be introduced from 2014, spurring renewed interest in the gaming sector. Mr Wilson said: "New platforms are being developed along with the new games and new genre of games."
This also includes a rise in content for phones. The growth of smartphones, such as the iPhone and the devices powered by Google's Android operating software, has driven demand for wireless games. The rise of apps has proved particularly lucrative for developers. While sales are set to thrive, Mr Wilson warned that the government has to act to avoid letting the UK's development industry crumble. He called for similar tax breaks to the UK film industry, which would bring in an extra 3,500 graduate level jobs to 13,500. Without government action, he said, cost-cutting would leave the industry at 7,000 by 2014.