RBC Insights – Media & Telecom
Drivers of Change
The internet-driven evolution of content creation is a major force reshaping the media and telecoms sector. The content generated by consumers already significantly exceeds the content generated by companies and retailers. As an example, YouTube users now produce more content in 21 minutes than Hollywood does in 12 months.
One result of this is, of course, a reduction in the number of people watching television or going to the cinema. But while this presents clear challenges for traditional media companies, others are looking to benefit from the opportunities – either by providing their own content services, or by tapping into user content in order to gain a deeper understanding of their customers. There are other forces at work. Consumer expectations of instant content without an explicit cost has prompted digital platforms to focus on advertising, with the result that the internet is advertised much more heavily than the real world. Programmatic advertising allows buyers to set parameters for targeted consumers, while Google, Facebook and Amazon are using customer data sets to allow advertisers to target with increasing granularity. Looking forward, virtual reality (VR) and augmented reality (AR) are set to create new opportunities for entertainment companies to create immersive content experiences in the coming years. And developments in personalized content are likely to be enabled by combining social media tracking and content platform algorithms.
VR is the focus of considerable interest, while autonomous vehicles may bring new avenues for entertainment, advertising and telecoms in the future. Meanwhile, personalization is a major area of opportunity where content is concerned. The combination of data and analytics with production could help to drive a feedback loop between viewership data and entertainment creation processes. Alongside advances in animation and VR, and the licensing of Hollywood talent in digital spaces, this may enable pilots to be created quickly for testing against target audiences.
The combination of social media tracking and content platform algorithms could also bring greater opportunities to personalize content and recommendations for individuals – resulting in a better user experience, stickier customer relationships and more word-of-mouth recommendations. Netflix is already experimenting with the creation of software-edited trailers personalized for each subscriber.
Strategic imperatives for Success
In order to succeed in the coming years, companies in this sector will need to embrace new models as well as leveraging their existing strengths. For one thing, companies will be monitoring the development of new forms of entertainment – the potential impact of autonomous cars on media consumption is one key area of interest.
Media companies will also need to take advantage of models that support more direct interactions with consumers, as well as tapping into global markets for content. Leaders in this area are already making use of Artificial Intelligence (AI) and Machine Learning (ML) for everything from content promotion to adaptive streaming, and are seizing opportunities to reduce bandwidth costs. Telecoms companies, meanwhile, may need to invest in upgrades to fixed/fiber and mobile networks in order to meet bandwidth demands, as well as taking advantage of opportunities for cost reduction brought by new technologies.
There is also much to be gained by embracing new partnership opportunities. Indeed, many drug developers have already partnered with AI-focused drug discovery platforms. And while medical systems have historically been positioned as competitors, data sharing between different parties can open new opportunities to boost knowledge and reduce consumer healthcare costs.
Technology is set to have a major impact on this sector. Telecom operators are set to benefit from increased data consumption as 5G is deployed, over the top (OTT) video increases and VR is adopted. The rise of AI/VR-driven personalized platforms may lead to the rise of data-intensive applications, driving robust data growth. Developing and monetizing a smart pipeline (?) is therefore likely to be a focus. Telecom operators are also likely to partner on machine to machine (MTM) and IoT applications such as smart homes and autonomous cars.
Company specific thoughts:
Canada is set to be a global leader in mobile 5G. We expect BCE and TELUS to deploy an extensive fiber-to-the-home (FTTH) footprint, alongside mobile 5G deployments by the cable companies(?). This will strengthen Canada’s global position across new applications in areas such as machine to machine (M2M), IoT, VR and AI.
However, traditional media companies such as Corus, Torstar, Transcontinental and Yellow are likely to struggle as advertising and marketing services spend shifts away from traditional media. And mass VR adoption may place downward pressure on content demand from content companies such as DHX Media, Entertainment One and Corus. Thomson Reuters’ data-rich legal, tax and accounting businesses are ripe for AI – but significant investment will be needed to remain competitive and sustain pricing power.
Media, Entertainment & Ad Agencies
The Golden Age of content benefits consumers more than it benefits the media sector. The internet allows content to be delivered instantly and cheaply – and internet-based companies are capitalizing on this in different ways, from providing content services to learning more about customers. The result: a fragmented market, with fewer people viewing traditional television or visiting movie theaters. The rise of ad-free zones like Netflix and Amazon Prime is also a challenge for ad agencies. Meanwhile, competition is fierce among big-balance sheet entrants – and is likely to crowd out some traditional players.
Company specific thoughts:
Among these challenges, one area of opportunity is Direct To Consumer (DTC) which allows media companies, like The Walt Disney Company (DIS), to interact with customers more directly. Meanwhile, DIS’ pending merger with Twenty-First Century Fox indicates the company’s intention to reshape itself for future challenges. As such, we view DIS as the media stock best suited to weather the continued uncertainty as it continues to invest heavily in its core capability: high value storytelling.
Innovation from global internet companies is driving greater demand for bandwidth, which telecoms, cable and tower companies are well placed to supply – although the regulatory focus on end-user pricing has negatively impacted industry returns. At some point, regulatory oversight could ease as a result of privacy concerns and a shift away from globalization, allowing operators to unlock inherent scale advantages. Meanwhile, AI, ML and big data technologies should allow operators to reduce costs, simplify systems and improve customer experience, resulting in cost savings.
Company specific thoughts:
The new data economy will require a step-change in data storage and connectivity. Existing telecom, cable and tower operators such as Cellnex and Inwit are well placed to meet demand, alongside new neutral communications infrastructure providers. Where services are concerned, Vodafone is investing heavily to benefit from opportunities brought by big data, AI and ML to transform legacy cost structures and customer experience. Following strategic acquisitions, Video on Demand has segment leadership (albeit relatively small) and is well placed to benefit from new end-user revenue streams.