Leaping online media's $24 billion value gap

Business Spectator

There is a $24 billion difference between the value that consumers place on the online media they consume and what they actually pay for it, according to a new research report. Whether consumers, or someone else, can be induced to at least reduce that gap is, of course, the $24 billion question that media executives are obsessed by.

The report, from the Boston Consulting Group, describes that gap as a "consumer surplus". It could equally be regarded as a transfer of value from media businesses to consumers, although the actual extent of the transfer is probably over-stated given that some forms of online media – the news media in particular – generate third party revenues from advertising and digital transactions.

Nevertheless, it does tend to highlight the extent of the challenge, and the opportunity, of creating viable online business models.

The report also, however, indirectly puts the difficulties some traditional media businesses are already having as they confront the economic challenges posed by the internet into perspective. The online sector is still in its infancy. While, according to the report, the number of Australian websites has more than doubled, to more than two million, since 2007 and the amount of time the average Australian spends on line has more than trebled in the last decade, online media revenues grew from two per cent of total media revenue in 2007 to only seven  per cent in 2011.

While the share of all media revenue might still be modest, the growth between 2007 and 2011 wasn't. Where total media revenue grew at a compound average annual rate of only three per cent, online media grew at a compound average annual rate of 34 per cent.

BCG expects total media revenue to grow at a four per cent compound annual rate over the next four years, but digital revenues to grow at a compound average annual rate of 25 per cent per year and account for 14 per cent of total media revenues in 2015.

Perhaps the surprising conclusion provided by the report is that offline media still has growth in it, albeit modest growth. The bulk of that comes from television, where BCG expects growth of 17 per cent, but music, books, games, performing arts and movies are also expected to grow strongly. Only magazines are expected to lose revenue, while newspapers are expected to stabilise but not regain any of their lost revenues.

While the impact of the online media is still expected to be relatively modest in 2015, with 14 per cent of the total media revenue base, it is worth considering how disruptive digital media businesses have been already with half that revenue share. Offline media might still dominate but the growth in online media of all kinds is not just changing consumers' behaviours but has had a leveraged impact on the economics of offline media.

It is noteworthy within the report that BCG says that the online media consumers most value are content portals like YouTube, iTunes and BigPond which effectively give consumers the power to choose their content, and when they want to access it, rather than have it chosen for them in the traditional media models. The highest level of online consumer activity, however, was reading newspapers and 91 per cent of the time those were Australian newspapers.

That latter finding, and a broader conclusion that Australians generally prefer Australian content, is quite interesting given that the internet provides access to global content – and is quite relevant in the context of the federal government's convergence review and its tentative proposals that the existing local content requirements for broadcast media should be extended to online media.

The other significant finding of the report is that there is a potential for a ‘trade surplus' in online content. In videos, BCG says, international viewers consumed eight times as much Australian content as Australians did in the second half of 2010 and US viewers alone consumed twice as much. It sees similar potential for e-books – in 2001 630,000 e-books were sold by Australian publishers, an increase of 1260 per cent in three years.

The roll-out of the national broadband network and the increasing penetration of smartphones and tablets has the potential to turbo-charge internet usage and its impact on off-line media over the rest of this decade and beyond. The challenge for offline media in the near term won't be to maintain its revenue base but will be how to position itself to profitably participate in the explosive but inherently lower-margin growth online and capture at least some of the latent value in that gulf between what consumers pay for their new media experiences and what they think they are worth.