Economics: Winner-Take-Most Markets Digital markets are “winner-take-most” markets. For example, as shown in Figure 6, the top 10 internet companies (mostly Google GOOGL +1.16% and Facebook) commanded 75% of total digital advertising revenue. Interestingly, this ratio has been stable at 70% to 75% for the past 10 years. VideoEconomics. In digital video, the concentration of economics has proven similar. Digital video revenue has been growing at 35% annually, according to Magna Global, and YouTube commands about 30% of total revenue while Facebook commands the next largest slice at 10% of total.
Summary stats and conclusions from Laura Martin’s report yesterday include:
• Technology. Mobile data volumes rose by 60% year over year between 1Q15 and 1Q16, driven by smartphone adoption and video consumption, according to Ericsson. Cisco estimates that video will represent 80% of global Internet traffic by 2020.
• Consumer Adoption. Unique aspects of smartphones include: 1) they are always on; 2) they are always with the person who owns them; and 3) they are virtually never shared. Millennials say they are twice as willing to share their toothbrush than their smartphone. Because smartphones can be used out of the home, this creates “new windows of time” for content viewing, although videos viewed on small screens are typically short-form, 1-5 minutes long.
• Economics: Valuation. Companies with potential upside from global revenue streams will be valued 10-50% above companies limited to revenue sources from within a single country’s borders, we believe. Additionally, we expect companies that have two revenue streams to command 30% valuation multiple premiums above single-revenue stream business models.
Economics: OTT. Netflix, Hulu+ and Amazon Prime will represent an extra $4-8B of revenue to the $150B US TV ecosystem in 2016, we estimate.
• Economics: Few Winners. Digital ad markets are “winner-take-most” markets. The 10 largest online companies garnered 75% of total online ad revenue in 4Q15, about flat over the past decade. Online video is similarly concentrated with YouTube at 33% and FB at 10% of total digital video viewing minutes among adults 18 to 49 years old.
• Economics: Platforms. We calculate that content companies earn $0.30 per person for each hour of content viewed on linear TV. This compares to $0.11 per person for each hour of content viewed on Netflix and $0.03 per person per hour for content viewed on YouTube. The most revenue upside should accrue to US content companies that treat small screens as an adjacency to the $0.30/person/hour (dual revenue stream) linear TV platform.
• Economics: Reach. The top 20% of heaviest users of TV represent 52% of total TV minutes viewed. Digital media is much more concentrated, with the heaviest 20% of users (i.e., power users) representing 87% of total minutes of streaming video viewed on a PC and 83% of video minutes viewed on a smartphone. By implication, the high concentration of power users on digital platforms (i.e., narrowness of reach) negatively impacts their advertising attractiveness.
• Economics: Personal. Because smartphones are always with their owner and these devices are personal, this creates options for new types of content that could never exist in the home environment, where more than one person is often watching the TV simultaneously. Personalized content and advertising suggests greater targeting and pricing upside.
• What’s Next? Technology supercharges corporate lifecycles. Ubiquitous mobile device adoption by consumers threatens revenue of companies dependent on desktop revenue rather than mobile. Ad blocking endangers many internet sites’ revenue growth. In the video marketplace, we believe economics will be driven by engagement length, which in turn will be tied to immersive (i.e., mobile and social) content optimized for each device and consumer use case.
• Unbundling destroys $100B of market capitalization and even more value for consumers as channels below the top 50 disappear, we calculate. (Please see our report entitled “Valuing Consumers’ TV Choices.”)