GLOBAL MEDIA &

E N T E RTA I N M E N T C E N T E R

!@#

Media & Entertainment

The Digital Challenge
 Understanding the Digital
Header
Challenge
Text

Since Flash Gordon, 1984, and the earliest science fiction adventures, the “futurists” of the media
and entertainment industry have been providing pictures of an imagined life driven by technology and
change at warp speed. The future is here, and perhaps nowhere else as challenging as it is to the
Media & Entertainment (M&E) industry itself. No longer the stuff of fiction, the wild imaginings of a few
decades ago are driving the business models of today and heralding a tomorrow that will arrive at an
ever-quickening pace.

Accustomed to being at the helm of the creative process

and all the businesses that go with it, traditional M&E en-
terprises are finding themselves vying for advertising dol-
lars and audience share with more nimble and risk-com-
patible companies as well as with consumers themselves,
who are suddenly dictating not only what entertainment
they want, but when, how, and where they get it, and if
they’ll pay for it. Some are even creating the content and
distributing it themselves with exuberant naiveté.
The interval between the decay of the
old and the formation and establishment
of the new, constitutes a period of transi-
tion, which must always necessarily be
one of uncertainty, confusion, error, and
wild and fierce fanaticism.
- John C. Calhoun
A Disquisition on Government (1850)

Changes that seemed remarkable at the time look to have been inevitable, after the fact. Ten years
ago, who would’ve thought that Google would vie for recognition as one of the world’s most important
sellers of advertising space or that Apple could lay claim to having a major impact on the music busi-
ness? Who would have thought that homemade movies created on devices less expensive than some
toasters would be competing for viewer attention with miniaturized images of classic films broadcast
on telephones smaller than a Post-it Note? All that has come to pass. Hyperbole aside, embracing
and profiting from rapid technology change is one of the most pervasive challenges for M&E compa-
nies today.

While the “old” may not be “decaying,” as Calhoun suggested, with consumers becoming increasingly
dependent users of the Internet and its spin-off devices, M&E business models are undergoing seismic
shifts. There isn’t one right model by which companies old or new should operate. In the pre-digital
days, there was time to create, experiment, test, and tweak before significant changes or long-term
investments were made in equipment, operations, and content. Today, the accelerated pace of change
and the varying degrees at which the market adopts and adapts to new technologies is requiring that
business models be flexible and fluid. Considerations for capital investment, financial, operational, and
technological improvements carry not only the usual demand for risk mitigation but also the uncertain-
ties of balancing innovative and emerging new revenue opportunities with the cost, complexity, and
impact to existing operations.

3
Moreover, all this is taking place at an exponential rate. Massachusetts Institute of Technology (MIT)
computer scientist Raymond Kurzweil calls it the law of accelerated returns and suggests that at the
current rate of change, the next 25 years will bring a century’s worth of technological transformation.
While the infinite nature of his assertion will eventually find its own boundaries, the overall impact he
predicts is a near certainty.

Take competition, for example — one of the cornerstones of business. No longer is competition merely
a network vs. network or studio vs. studio or publication vs. publication battle. Technology has
rearranged the playing field so that M&E companies, ad agencies, Web-based businesses, and a host
of others must compete across the board for a share of both advertiser dollars and consumer leisure
and entertainment spending. All are trying to aggregate an audience, build some version of brand
loyalty, create economic value, and monetize the results.

Given the predominantly linear nature of the business models underpinning each of these sectors,
it was easier to monetize the components of the traditional value chain and track their success
— how many tickets, records, books, magazines, column-inches, or ad seconds were sold, what the
television ratings said. In much the same way that linear editing showed its limitations in the face
of emerging digital formats in the post production environment, linear tracking is becoming less and
less viable, perhaps even unreliable.

4
Transition State
But it’s more than technology that is having its way with the fundamental components of M&E. There
is the collective impact of the consumer to consider. Trying to harness the increasing and advanced
impact of these two immutable forces has given rise to three basic facts:

ƒ The pace of change shows no signs of abating.

ƒ The fundamental drivers (data networking advances, computing power and software, new
user interfaces, and ubiquitous storage) are on a perpetual curve of acceleration, as are
the consumer’s desire and ability to experience and create information, entertainment, and
interaction on their own terms.
ƒ Companies have to create cost-effective operational flexibility and an adaptive culture while
maintaining and building on their existing, profitable and embedded business models.

In the M&E business environment of today and with the proliferation of entertainment outlets, the
concept of a captive audience may well be a thing of the past. No longer simply waiting for the next
issue, installment, or iteration of some other-generated format, the consumer is leveraging technology
to insert him/herself into the creation component (user-generated content), the distribution and

5
delivery component (on-demand and myriad devices), and the audience aggregation component
(anytime/anywhere individual access). And since there are few if any universally accepted models,
processes or controls in place for accurately tracking this capricious consumer, the reporting
measurement and analysis component may seem like an insurmountable challenge, yet it’s one that
has to be met in order to achieve any realistic or relevant monetization.

With the combined forces of technology and consumer conduct pushing at the current state model,
there are certain to be changes to the long-established structures. As lines increasingly blur, silos
disappear, changing into something that factors in both the impact of rapidly changing technology and
the input of the consumers and how they wield that technology.

The Executive Challenge

As M&E companies across the board respond to the growing demand for flexibility, many are experi-
menting with the best ways to determine what new technologies and innovative business strategies to
embrace and when. Virtually every new technology rolls out with exuberant claims that “everyone will
be using it in no time!” In reality, “overnight success” happens at varying rates. User-generated con-
tent and video-on-demand, for example, have been available for at least 10 years. But as the following
chart indicates, one has finally become a “hot trend” while the other reached that status more quickly
and is now approaching the mainstream phase of its life cycle.

Technology Life Cycle

Maximum IPTV subscribers

User-generated content

Mobile Internet
Technology Growth Rate

DVR households
Online video

Social networks
Podcasting

Video on Demand

MP3 players

Minimum
Introduction Hot trend Mainstream
Life Cycle Phase
0-4 Years
5-9 Years
10-15 Years
Source: Ernst & Young informed by data from eMarketer

6
 Header Text

Where technology is in its life cycle, however, is just one part of the equation. There are a range of de-
mographics that factor into the speed, depth and penetration of technology use. Not the least of those
factors is the age of the consumer. Younger users are the most avid and the earliest to adopt the latest
capability, as Forrester indicates in its April 2007 report, “Mobile Data Adoption Kicks into High Gear.”

But in an industry notorious for its focus on youth, the baby boomers are not a generation to be over-
looked. They comprise a demographic that has defined and dominated the marketplace for decades,
and one that may continue to exert influence in a demand for technology that addresses their changing
needs, preferences and lifestyles.

Youth are the Most Avid Users

“Which types of data services do you use?”

Any data services

Messaging
Download*
Internet*
Voting
Video*
Average: 44%
Average: 39%

Average: 21%

Average: 11%
Average: 8%
Average: 3%

Gen Yers Gen Xers Younger Older Seniors

Boomers Boomers

*Advanced mobile data activities

Source: Forrester's North American Consumer Technology Adoption Study Q3 2006 Survey
April 2007, Trends “Mobile Data Adoption Kicks Into High Gear”

Statistical data and demographics notwithstanding, the fundamental challenge still comes down to the
M&E executive — how to navigate the ever-changing landscape to separate the hype from solid busi-
ness drivers. Considering buyer’s age and the viability of technology isn’t enough; many more demo-
graphic overlays can affect consumer behavior and consequently drive corporate decisions. And the
critical outcome must be an operating model that is responsive and flexible enough to meet consumer
demands, yet studied and structured enough to meet regulatory requirements and shareholder expecta-
tions.

7
Rapidly Approaching Future State
The bilateral pressure from technology and consumers is bending M&E’s fundamental components out
of their linear, more contained environment and into a nonlinear model. There is neither starting point
nor finish line, and there are countless opportunities for interconnecting. Borrowing from the vocabu-
lary of technology, this nonlinear look at M&E components could be called its hyperstructure — where
both creators and consumers of content can move readily from one component of this multifaceted
model to another. In this configuration, it’s possible, even likely, that companies will try to achieve
excellence in all these components, no longer sticking to one niche or another.

Granted, this emerging M&E hyperstructure carries the risk of disintermediation — cutting out the
middle man and making the act of monitoring the end consumer much more difficult. But continuing
to blur the lines also drives innovation, and opportunities emerge for dynamic new partnerships and
joint ventures between multiple media organizations that would never have been considered in the
days before convergence.

Change doesn’t take place in a vacuum. Emerging digital business models will compress and change
content distribution platforms and economics, collapse workflows and require formation of new busi-
ness processes and functions. Established analog/linear business processes for content creation,
distribution, advertising sales, and audience targeting will alter in response to the dual pressures
exerted by digital change and technology in the consumer’s hands. Similarly, change won’t take place
all at once. As always, the challenge and opportunity for M&E executives is to optimize their assets
and creative ability, establish new revenues, and nurture competitive cost advantages — all while
navigating both the certainty and hype of unstoppable technology change and the unpredictable rates
of its adoption.

8
Who Can Win and How?
Not all technology changes are readily accepted and not all users adapt at the same rate of change.
Figuring out how consumers wield technology presents its own conundrum. Some companies may get
caught up in the speed of responsiveness and take an approach that has them trying to assimilate all
the new technologies that come around and chasing the attention of the early adopters. Others may
take a more measured and slower-paced approach, not wanting to be on the “bleeding edge” of tech-
nology with all its inherent risks. Even companies that already possess considerable creative talent,
compelling content, and profitable business models will face the challenges of burgeoning technology
and where it fits.

Whether an art or a learned skill, successfully forecasting adoption rates and discerning hype from
reality out of the range of applicable technologies will become increasingly critical competencies for
M&E leaders and the new technology-savvy executives who will support them. Flexibility will be a criti-
cal component of the ongoing evolution of successful business models, infrastructures, and strategies.
While it is still important to have a five-year vision, gone are the days when C-suite executives could
formulate a five-year plan and diligently follow it through.

These are some of the questions that can begin to define what this flexibility will look like:

ƒ How do I cost-effectively create, store and access digital content throughout all
channels?
ƒ How do I more effectively measure and consistently report on audience aggregation?
ƒ What critical changes to our systems, business processes, and controls will be
necessary?
ƒ How will new digital endeavors get to positive cash flow and sustainable margins?
ƒ How will management, external, and third-party reporting change as the measurement of
digital revenue streams become increasingly material and complex?
ƒ What are the regulatory and compliance implications of all of this change?

Although concrete answers may be somewhat elusive, exploring and finding practical and flexible
approaches to these key issues is critical to establishing sustainable, incremental revenues with real
margins in a time of increasing infrastructure and operating cost pressures, uncertainty, and hype.

Ernst & Young can help you address these issues..

9
Ernst & Young Contacts

Americas Japan
Steve Almassy Paul Macaluso Noriharu Fujita
San Jose, CA Los Angeles, CA Tokyo, Japan
+1 408 947 5533 + 1 213 240 7040 +81 3 3503 1113
stephen.almassy@ey.com paul.macaluso@ey.com fujita-nrhr@shinnihon.or.jp

Karen Angel Bud McDonald Asia-Pacific

Los Angeles, CA Stamford, CT
+ 1 213 977 5809 + 1 203 674 3510 Farokh T. Balsara
karen.angel@ey.com bud.mcdonald@ey.com Mumbai, India
+91 22 403 56550
Howard Bass Feisal Nanji farokh.balsara@in.ey.com
New York, NY New York, NY
+ 1 212 773 4841 + 1 212 773 2370 Bryan Zekulich
howard.bass@ey.com feisal.nanji@ey.com Sydney, Australia
+ 61 2 9248 5833
Beth Bemis John Nendick bryan.zekulich@au.ey.com
Los Angeles, CA Los Angeles, CA
+ 1 213 977 3208 + 1 213 977 3188
beth.bemis@ey.com john.nendick@ey.com Europe
Mark Besca Chris Pimlott Vincent De La Bachelerie
New York, NY Los Angeles, CA Paris, France
+ 1 212 773 3423 + 1 213 977 7721 + 33 1 46 93 62 05
mark.besca@ey.com chris.pimlott@ey.com vincent.de.la.bachelerie@fr.ey.com

Heather Briggs Kevin Reilly Alan Flitcroft

Los Angeles, CA New York, NY London, England
+ 1 213 977 4219 + 1 212 773 2074 + 44 20 7951 3494
heather.briggs@ey.com kevin.reilly@ey.com aflitcroft@uk.ey.com

Glenn Burr Gregg Sutherland Gerhard Mueller

Los Angeles, CA Denver, CO Munich, Germany
+ 1 213 977 3378 + 1 720 931 4435 + 49 89 14331 13108
glenn.burr@ey.com gregg.sutherland@ey.com gerhard.mueller@de.ey.com

Neal Clarance Tim Teagle Bruno Perrin

Vancouver, BC Los Angeles, CA Paris, France
+ 1 604 648 3601 +1 213 977 3216 + 33 1 46 93 65 43
neal.g.clarance@ca.ey.com tim.teagle@ey.com bruno.perrin@fr.ey.com

Mike Fischer Kenneth Walker

New York, NY Woodland Hills, CA
+ 1 212 773 7553 + 1 818 703 4748
michael.fischer@ey.com kenneth.walker@ey.com

Alan Luchs
New York, NY
+ 1 212 773 4380
alan.luchs@ey.com
About Ernst & Young
Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 130,000 people
are united by our shared values and an unwavering commitment to quality. We make a difference by helping our
people, our clients and our wider communities achieve potential.
For more information, please visit www.ey.com
Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate
legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.

This publication contains information in summary form and is therefore intended for general guidance only. It is not
intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor
any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any
person acting or refraining from action as a result of any material in this publication. On any specific matter, reference
should be made to the appropriate advisor.

ERNST & YOUNG www.ey.com

© 2008 EYGM Limited.

All Rights Reserved.

EYG no: EA0012