Will Digital Revenue Ever Replace What It’s Displacing?

We’re fairly certain television is being reinvented, but that doesn’t mean digital revenues can ever replace the analog ones they’re running out of town. Yes, maybe NBC CEO Jeff Zucker, in his grandstanding against Steve Jobs and the rest of the future, is right. As he often puts it, “We can’t trade analog dollars for digital pennies.”

In a report released Monday that knocked a few percentage points off big media companies’ stock prices, Lehman Brothers’s Anthony DiClemente said he doubted the reigning content kings would be able to maintain their revenue due to new forms of distribution.

We dug deeper into the report to figure out exactly how much money Lehman thinks is being lost, gained, and left by the wayside. First of all, DiClemente is skeptical that online advertising could replace television advertising, to the point that advertising doesn’t figure heavily into his report.

As he puts it,

DVR penetration is still “only” 26% and rising, but directionally and over time, we cannot continue to take the view that enough people watch commercials upon DVR playback to justify the secular growth of the TV advertising business over the long-term.

And in part because media companies rarely — if ever — give details about their digital revenues, DiClemente says he’s not convinced there’s much there.

I wouldn’t be as quick to discount advertising, but it’s important to recognize that a lot of advertising numbers have historically been crap, with pricing based on promises of “reach” and other fuzzy math extrapolated from circulation numbers and Nielsen ratings. Advertising will find its place in new media, but it may be a necessarily smaller chunk of its former self because accountability will only continue to improve online.

Based on our own tracking of industry statistics, U.S. broadcast television advertising alone was worth $46.6 billion in 2007, while online video advertising was worth $471 million.

DiClemente does see legitimate money in payments for movies, in a comparison of sales and rentals of DVDs versus digital copies. However, it’s still not enough to compensate as consumption habits shift online over time.

The firm expects total studio DVD rental and sales revenue for studios to decline at a compound annual growth rate of -19.7 percent, to $3.3 billion in 2015 from $17.5 billion in 2007. Meanwhile, total video on demand and iTunes revenues for studios are expected to rise with a CAGR of 29.6 percent, up to $2.5 billion in 2015 from $319 million in 2007 (when Lehman doesn’t even count any studio revenue for iTunes movie sales/rentals).

So if that all works out, studios would be making $5.8 billion from sales of movies and TV shows in 2015, down from $17.7 billion today.

OK, so what are the potential implications?

  • It could be that the audience comes away from the studios into more niche, focused content creators. That might be nice.
  • It’s hard to make creativity more efficient, so it could lead to dumber, more sure-bet movies and TV shows. That would not be nice.
  • But at the same time, ridiculously inflated budgets would be evolved out of the system. That seems like the natural order of things.
  • As people find it easier to not pay for content, monetization methods could get more personal. But while personal sometimes means helpful and relevant, much of the time it means invasive and insidious.