The ‘secret sauce’ for media companies to realise higher valuation multiples
Earlier this month the tech and media industries came together at the Consumer Electronics Show (CES) in Las Vegas for their annual love in. After all these years of tech/media convergence they remain uncomfortable bedfellows, a couple in a relationship who don’t speak the same language, don’t share the same values or really understand each other. However for media industry’s sake at least, this broken relationship needs to be mended, and the innovations being showcased at CES provide a clue on how to do it.
Growing and well documented momentum around OTT video (highlighted by YouTube and Netflix in their CES keynotes) means that media companies can’t rely on growth from traditional advertising and subscription revenues. With new competitors snapping at their heels, and a looming battle to win the digital video customer, their best chance of success lies in creating breakthrough innovation in the origination, packaging and commercialisation of content.
New products being showcased in Vegas across a range of industries provide some lessons on how to deliver innovation, and to stay relevant in a fast changing market.
The most interesting innovations on display at CES were delivered by companies with ambitions to reimagine customer experiences, a long term investment horizon, an unrelenting focus on what drives customer value, and a willingness to disrupt legacy businesses.
By way of illustration Volkswagen showcased a driverless car that uses mapping technologies to get to its destination delivered via a strategic partnerships with tech company MobileEye. Sportswear company New Balance showcased customised insoles delivered via three printing technology that give runners a perfect fit via a partnership with Intel. Closer to home fitness company Pelaton continued to make waves with its high end exercise bike with internet enabled video screen offering access to cycling classes. Users who buy this product can compete ‘live’ against cycling enthusiasts from anywhere in the world.
What connects all of these innovations is lateral, creative thinking about how emerging technologies can solve customer problems, excellence & agility in product development, a repacking of the ‘customer offer’ and a recognition of the need to partner with the tech industry to deliver the very best experiences and to innovate at scale.
This approach has been notably absent in many media content companies. Few have demonstrated the capability and strategic vision to deliver breakthrough innovation. For organisations that have creativity baked into their DNA they have been surprisingly conservative in thinking and approach. In the TV and film business the format and type of content being produced, and the commercial model to support it has hardly changed in the past 25 years. This conservatism is at odds with the significant changes experienced over the past 5 years in consumption of media, with the latest research indicating that in the UK 33% of households have an OTT subscription and 10% of all video viewing is now on-demand.
The media companies that will prosper in the future will be those that embrace the innovation agenda. For those that are willing to take the plunge, it will be a tough journey and will require a change in mindset, culture and capability. However the prize for those that get it right will be a platform for growth, materially higher valuation multiples, and a pathway for mitigating the risks associated with a flat legacy business.
Those that embark on this journey will start by thinking differently about where their competencies really lie. They will build the insights to reimagine what content and experiences are really valued by customers, and how best to package media content IP. This entrepreneurial process has, as Robert Kyncl from YouTube pointed out at CES, parallels with development of cable tv networks in the 1990’s.
Traditional storytelling and factual entertainment paradigms will continue to prevail. However we’ll also see a new wave of media companies using their content creation skills to deliver services that offer practical value to audiences previously poorly served. They’ll do this by combining different media into one experience, by taking advantage of emerging technologies, and by building product skills to deliver personalised, social and mobile friendly content.
Up and coming mobile app developers provide some proof points on how to create experiences that deliver this kind of utility. I’d highlight Mindfulness app Headspace which offers guided meditations via audio streaming and support materials for a monthly subscription. Millions of users worldwide use this app to destress. Early learning app ABCMouse, which offers a fun and structured way for young children to learn reading, writing and arithmetic for a monthly fee. And exercise app FitnessBuddy which offers the ability to create a personalised program, access thousands of video workouts, track progress and join an online community of like minded people who like to workout. All of these app developers have found that by focusing on customer utility they have the ‘special ingredient’ ‘to get consumers to pay for content on-line.
‘New wave’ media companies that have real expertise in bringing together video, text, games, and community and in one engaging experience across multiple products and genres don’t currently exist at scale, but the race is now on to build them.
Smart investors like the Chernin Group are doing pioneering work in this space (via investments in Headspace, Scopely, and new digital platform Ellation. However incumbent media companies that aggressively and intelligently partner in the tech space have the potential to be the frontrunners in this race.
Organisations that bring together the creative, production, and tech skills to build a product development platform will be at a natural advantage. Partnerships between tech and media companies are the optimal way (at least in the short term) to bring these capabilities together, and the tech partnerships we saw at CES in the auto, sports and fitness industries provide a template on how to do this.
Whilst media companies have lagged behind on innovation they have a number of untapped advantages. Not only do they have the tools and track record to build brands, they are home to some of the brightest and most creative brains, and have used technology to create (in feature films and TV shows) some of the most important innovations of last century. Given innovation is an intrinsically creative process involving lateral thinking, solving problems, dreaming about the art of the possible and bringing different disciplines together, media content companies should have a head start. They’ve found the right model to nurture talent like David Bowie that pushed boundaries. They now have the opportunity to build on this foundation to create an environment where product innovation can flourish, and to develop the execution skills to develop new scale digital businesses.
By taking a leaf out of David Bowie’s book and not settling for more of the same, embracing reinvention, and staying one step ahead they’ll have the chance to accelerate growth and increase multiples. The media companies that pursue this approach and build the capability to execute well will increase average valuation multiples from 10x to at least 13x EBITDA as investors reassess their future prospects. As Bowie famously said, "tomorrow belongs to those that can hear it coming."
Daniel Winner has helped to build over 10 scale digital businesses in both the Media and Tech industries for organisations including Amazon, Lovefilm, Vodafone, Sky and the BBC.
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