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Follow the Surplus How U.S. Consumers Value Online Media The Connected World
Follow the SurplusHow U.S. Consumers Value Online Media
The Connected World
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Follow the SurplusHow U.S. Consumers Value Online Media
Jean-Manuel Izaret, John Rose, Neal Zuckerman, and Paul Zwillenberg
The Connected World
February 2013
Follow the Surplus2
U.S. consumers get more value from online media, net of the associated costs, than from offline media. This “consumer surplus” will continue to grow, with profound implications for media industry participants.
Consumer Surplus in Online MediaThe surplus consumers receive from online media amounts to approximately $970 per U.S. connected consumer per year; it is approximately $900 from offline media.
More Devices, More Access, More ValueDevice ownership is increasing and will continue to do so. With the increase in ownership comes a rise in usage—and perceived value.
Sharing the WealthMedia companies should explore such models of commercialization as advertising, direct pay, monetization of data, and using media as a driver of other revenues.
Consumers to Washington: Don’t Try to Fix ItAmerican consumers are much more excited about the potential rewards from online media than they are worried about the potential risks.
AT A GLANCE
The Boston Consulting Group 3
U.S. consumers realize large and growing value from online media. In fact, they now derive more value from online media—net of the associated costs—
than they receive from offline media, according to new research by The Boston Consulting Group. We call this measure of value “consumer surplus” and, for online media, it amounts on average to approximately $970 per U.S. connected consumer, or online user, per year—or about 2.5 percent of the average annual income in the U.S. The comparable consumer surplus for offline media is approximately $900. (See Exhibit 1.)
The consumer surplus from online media will continue to grow, driven by consum-ers’ appreciation for the expanding array and volume of high-quality content available in the online world. A proliferation of devices, many of them mobile and designed to facilitate greater consumption of online media, will further widen the
Annual online media consumer surplus
2,000
1,500
1,000
500
0
$1,132$967
$165
US$ per connected consumer in the U.S.
Perceived value Price paid Consumer surplus
Annual offline media consumer surplus
2,000
1,500
1,000
500
0
$1,600$904
$696
US$ per connected consumer in the U.S.
Perceived value Price paid Consumer surplus
Sources: BCG U.S. Media Consumer Survey (November 2012); BCG analysis.
Exhibit 1 | U.S. Consumers Receive Significant Surplus from Both Online and Offline Media
Follow the Surplus4
divide between the online and offline worlds. This shift has profound implications for all the participants in the media industry.
Shrewd media companies that build effective digital capabilities will enjoy more and bigger opportunities to extract some of this consumer surplus for themselves. The channels for realizing these gains include the established advertising model, new products and services, an increasing ability to charge for online content, and the still-evolving ecosystem for monetizing the massive volumes of consumer data that the Internet serves up.
Policymakers are likely to face an increasingly complicated and contentious land-scape, including more—and more vociferous—calls to act on issues such as person-al data protection and privacy. Since the Internet’s inception, U.S. policymakers have generally taken a light-touch approach, to which the marketplace has respond-ed favorably. Consumers appear happy taking responsibility for their online lives, and concerns in some circles over potentially uneven or unfair developments—the digital divide, for example—have mostly proved unrealized. Indeed, the Internet has shown itself to be a powerful equalizer across demographics.
This report examines how consumers’ consumption of media is migrating online and the implications of this shift for consumers, media and technology companies, and Internet policy and policymakers. It builds on BCG’s prior analyses of the In- ternet’s economic and business impact on countries and companies; findings from the earlier analyses are contained in other reports in BCG’s Connected World ser- ies. (A subsequent report, to be published later in 2013, will analyze the consumer-led changes taking place in the media industry in Europe.)
The changes taking place are significant, structural, and largely irreversible. We believe that they are also substantially beneficial. Companies can tap an enormous opportunity if they determine—sooner rather than later—how to master the complexity of the online landscape to extract the kind of value from products and services that they have long enjoyed offline.
Consumer Surplus in Online MediaAs everyone knows, Americans love media. Those we surveyed spend an average of 27 hours every week watching, listening, reading, playing, and hanging out virtually with their friends—roughly half the amount of time they devote to working or sleeping, and more time than they spend shopping, exercising, cooking, and garden-ing, combined. More and more of this media consumption takes place online— 44 percent, according to the research BCG conducted in November 2012.1 This shift is expected to continue, and online media consumption will soon surpass the 50 percent milestone, reflecting the ongoing rise in both available content and the number of devices owned by each consumer, especially mobile devices.
Perhaps less evident—and more important—is the economic value, or surplus, that U.S. consumers receive from online media. This surplus is the value consumers themselves place on a media-related activity or product over and above what they pay for it.2 The fact that this surplus is already higher than that derived from offline
Media companies can tap an enormous
opportunity if they determine how to
master the complex-ity of the online
landscape.
The Boston Consulting Group 5
media is somewhat extraordinary given that the current revenues generated by online media represent less than 15 percent of the total revenues generated by the media industry, based on various estimates.
The surplus consumers derive from each of the seven categories of media we exam- ined—books, radio and music, U.S. newspapers and magazines, TV and movies, video games, international newspapers and magazines, and user-generated content (UGC) and social networks—varies widely. (See Exhibit 2.) The highest surplus ($311), accounting for about one-third of the online total, comes from UGC and social networks accessed through such platforms as Facebook and YouTube. Con-sumers put a high gross value on this content, and the direct cost to them is mini-mal (often nothing). Books fall at the opposite end of the spectrum: they generate the greatest offline surplus, even when fast-selling e-books are taken into account.
Across all the seven categories combined, users perceive about 40 percent more gross value from offline media, but the costs of consuming those media are four times greater than they are for online content. For example, although consumers see substantially greater gross value in offline movies and TV shows, they receive greater online surplus from this category because the cost of online consumption is so much lower. In video games, players get a substantial surplus online—where access to gaming sites is cheap compared with the cost of buying or renting expen-sive offline games. The total perceived value of newspapers and magazines is
Offline
1240
128147
261315
Online
Annual consumer surplus
User-generated content (UGC)1
andsocial networks
Video gamesTV and moviesU.S. newspapers/magazines
Books Radio and music International newspapers/magazines
311
38
126159
11913283
US$ per connected consumer in the U.S.
Sources: BCG U.S. Media Consumer Survey (November 2012); BCG analysis.Note: Due to rounding, categories above total $968 (online) and $903 (offline) rather than the true values of $967 and $904.1Examples of UGC are YouTube and Wikipedia.
Exhibit 2 | Consumers Perceive Widely Varying Surplus by Category of Online and Offline Media
Follow the Surplus6
higher offline, but the surplus is similar for online and offline media, owing to the substantially higher cost of offline publications.
In terms of the hours spent per week, the patterns of media consumption in the U.S. are remarkably consistent—especially for online media—across age, gender, and region. But what people are doing while they are online can vary. For ex- ample, men and women consume the same amount of online media—12 hours a week (men consume slightly more offline media)—but men listen to significantly more music online while women enjoy more online interaction through UGC and games. According to the Entertainment Software Association, 47 percent of all video and computer game-players are women, and women over age 18 are among the industry’s fastest-growing demographics. King.com, the company behind the top game on Facebook, designs many of its online social games for women over the age of 35.
While it is hardly surprising that younger Americans consume more hours of media than older Americans, the differences across age groups are not substantial (they range from 25 to 29 hours per week), and older consumers are holding their own—and then some—in certain categories. Americans over age 55 spend more than 90 percent of their gaming hours online—much higher than the 64 percent spent by gamers age 18 to 34. These older gamers spend 3.3 hours per week playing online, compared with only 2.7 hours for their younger counterparts.
Because it allows content purveyors to segment their offerings to a nearly infinite degree, the Internet exerts a similarly strong pull on users across demographics. It levels the playing field: all consumers—whoever or wherever they are—can find something of interest online. This effect is reflected clearly in the regional differenc-es seen in media consumption. Although rural consumers in the U.S. spend more time consuming offline media—17 hours a week compared with 14 hours by urban dwellers—urban, suburban, and rural dwellers alike spend exactly the same amount of time with online content—12 hours per week. The patterns are consis-tent across most media categories.
More Devices, More Access, More ValueDevice ownership is increasing and will continue to do so across all income catego-ries. Proliferation is driven first by the desire for mobile access, then by fragmenta-tion of use—that is, consumers using different devices for different purposes in different situations throughout the day. (This fragmentation continues a trend that our research into the tablet market surfaced some 15 months ago.) The initial means through which the average U.S. consumer accesses online content is general-ly a desktop or laptop PC. As the consumer acquires more devices, online media consumption rises, as does the perceived value and surplus.
The average consumer today owns 2.9 devices—almost double the average number they owned three years ago—and expects to own 4.1 devices in three years’ time. (See Exhibit 3.) Put another way, fewer than 20 percent of consumers owned three or more devices three years ago; more than 50 percent currently own three or more; 73 percent expect to own three or more in the foreseeable future.
The Boston Consulting Group 7
With the increase in device ownership comes a rise in usage. In the U.S., the num-ber of hours spent consuming online media jumps 50 percent when people start using a second connected device, which is often their first mobile device. Usage plateaus with the addition of a third and fourth device, but rises again for consum-ers owning five or more devices, by as much as 25 percent.
As users acquire new devices, these additions often include e-readers or Internet-enabled smart TVs, which accelerate the conversion of offline media to their online equivalent and result in users spreading their time online across a widening array of devices. (See Exhibit 4.)
And the range of Internet-enabled devices continues to expand. Among the new products on display at the 2013 Consumer Electronics Show in Las Vegas were Android-based refrigerators and car stereo systems. Panasonic already markets an Internet-connected rice cooker. The future of connectivity of devices would appear to have few bounds, which puts an added burden on media creators to understand how consumers are using them and to create products that can be consumed across multiple devices.
More significant than the growing number and type of devices is the fact that the more devices U.S. consumers own, the higher the perceived value of online media.
Mobility devices
Category-focuseddevices 0–2
3–5
69
14
14
14
14
14
14
14129734 244
15
37
34
85
10
22
28
23
13
5
12
21
23
18
15
8
13
19
19
18
16
9
15
16
17
15
29
6+
Average number of devices
100
80
60
40
20
0
Desktop
Owned 3 years ago Own currently (2012) Expect to ownin 3 years
1.5 2.9 4.1Number of devices owned
100
80
60
40
20
01 2 3 4 5 6 7
Mobilitydevices
Stationarydevice
Stationary deviceLaptop E-readerSmartphone Game consoleTablet Smart TV
Category-focused devices
11
% of respondents owning specified number of devices
19
46
8
46
43
30
27
81
Ownership by device (%)1
Sources: BCG U.S. Media Consumer Survey (November 2012); BCG analysis. Note: Due to rounding, percentages do not always total 100.1Distribution of devices owned, broken down by device type (e.g., 34% of people who own two devices own a desktop).
Exhibit 3 | Consumers Are Using More—and More Types of—Devices
Follow the Surplus8
Owners of multiple devices report big increases in value from online media con-sumption. (See Exhibit 5.) The relationship among users, devices, and the media they consume is far from simple or linear, however—and this complexity is likely only to increase with more devices and more content. For example, as U.S. users add more devices, their consumption of games and UGC remains relatively flat even though the time they spend with e-books and online movies jumps consid- erably.
These findings are consistent with other industry trends. When the final numbers become available, PC sales in 2012 will show the first annual decline in 11 years, according to IHS iSuppli, as consumers and businesses continue to shift their spending to smartphones and tablets. U.S. consumers now spend more time using apps on smartphones and tablets than browsing the Web, according to Flurry Analytics. IDC projects that the market for Internet-enabled devices will double from more than 1.8 billion units in 2011 to nearly 4 billion units in 2015.
Sharing the WealthThe migration of media online will likely pick up speed in the coming years. Consumers all but demand it. They are excited about the changes taking place and are enthusiastic about what these changes mean for them. Nearly 70 percent of the U.S. consumers surveyed reported having increased access to higher-quality online
% of total online consumption by device
100
80
60
40
20
0Desktop/laptop Smartphone Tablet/e-reader Smart TV Game console
TV RadioMusicMovies
Newspapers/magazines UGC and social networksGamesBooks
15
5
10
17
93
19
21
93375
53
9
11
24
13
26
6
9
20
20
45
16
37
4
37
28
68
73
21
13 1
2
% of totalconsumption 70 11 12 2 5
Sources: BCG U.S. Media Consumer Survey (November 2012); BCG analysis.Note: Due to rounding, percentages do not always total 100.
Exhibit 4 | Consumers Manage Their Media Consumption Across a Proliferating Set of Devices
The Boston Consulting Group 9
content than they had three years ago. Nearly two-thirds of respondents (62 per-cent) cited the unique nature of such content as a major reason to go online. Content—and content monetization—will follow.
As the consumer surplus for online media grows, media companies and their partners in advertising and marketing will redouble their efforts to seize their share. They will need to keep focusing on both new and existing models of com-mercialization.
Advertising. This has been the most successful channel for online revenue to date, and it will continue to garner double-digit revenue increases. But it also faces big challenges. Advertisers need to move beyond static banners to more engaging means of presentation. Many publishers, such as usatoday.com and The Huffington Post, are pushing to reinvent online advertising with, among other initiatives, large, video-enabled ad formats. Opportunities abound to personalize messages—down to a single individual—and target them by that individual’s current location or even current activity.
Driving consumers directly to commerce has always been a major promise of online advertising; it is nearing reality. These same prospects, however, raise multiple issues related to data ownership and privacy, which we explore further in the next section. Display, form, and function present new problems in an increasingly mobile world with more and more devices. Still, our research shows that 71 percent of
2,000
1,500
1,000
500
01 2 3 4+
Number of devices owned
Annual online media consumer value per connected consumer in the U.S. (US$)
41%
$667$942
$1,322$1,721
40%
30%
Sources: BCG U.S. Media Consumer Survey (November 2012); BCG analysis.
Exhibit 5 | Adding More Devices Leads to Higher Perceived Value of Media
Follow the Surplus10
surveyed consumers preferred viewing advertising over paying for a product, and another 23 percent said they were ambivalent about the trade-off.
Direct Pay. The long-standing ethos that everything online should be free has probably been overstated. In our experience, consumers are increasingly willing to pay for content—particularly for content that is unique, is rare, or is perceived to be a bargain. Most TV and movie providers already charge for on-demand viewing and episode downloading as well as for cable access. Broadcasters are adopting cable-like subscription models.
Even in the hard-hit print media sector there are signs of change. Newspaper and magazine companies are pushing monetization models that not only include paywalls but also combine print and digital subscriptions, charge extra for high-de-mand content, and put limits on free access. Gannett’s all-access model of content subscription, introduced in 2012, “has resulted in significant growth in company-wide circulation revenue, the first increase since early 2007,” according to the company’s announcement of third-quarter 2012 earnings. David Carey, president of Hearst Magazines, told employees in January that the company had 800,000 digital-only subscribers in the U.S. at year-end 2012.
Data Monetization. Many see this as the Holy Grail of online commerce, a market that could run into the trillions. We have argued before that the wealth of data from a global maze of digital sources represents an asset class potentially every bit as valuable as a commodity such as oil. But to have real value, data, like oil, must be processed. There is symmetry to this proposition: consumers supply the raw material, they are the primary beneficiaries of the processing, and they place a high value on the products and services that result—online media is one ex- ample.
This is a complex issue, however, not least because much of the data collected online are far from literally “personal”—they are often pseudonymous and aggre-gated. Moreover, consumers have free access to all manner of media without having to trade personal data. Still, as we have argued elsewhere, the ultimate size of the future value and growth of the data market depends, in large part, on the trust that consumers have in the use of data about them. In our research on online media, 47 percent of survey respondents told us they are willing to accept this bargain, 20 percent said they want no part of it, and one-third of consumers said they are unsure whether they want to trade personal data for free access. This last group needs to be assured that they can trust the marketplace and its other participants—and it won’t hurt to reassure the 47 percent either. There is still much work to be done to establish the requisite trust foundation.
Media Content as a Driver of Other Revenue Streams. Apple invented this model, using its iTunes service, first in music then in other media, to drive skyrock-eting hardware sales. Others have followed suit. Major consumer-products compa-nies, such as Nike, are developing games and apps aimed at enhancing the experi-ence that their consumers have with their brands. Microsoft is pursuing partnerships with entertainment content providers to help turn its Xbox gaming system into a hub for all home entertainment.
Consumers are increasingly willing to pay for content—par-
ticularly for content that is unique, is rare, or is perceived to be a
bargain.
The Boston Consulting Group 11
Commerce represents a huge opportunity for media companies. Because their con- tent can serve as a powerful incentive for purchase, many magazines are making forays into online commerce in their vertical categories: fashion, home decor, and cosmetics, for example. On the other side of the equation, online commerce players use editorial content to provide the kind of guidance valued by consumers in choosing what to buy. Net-a-Porter’s “Fashion Fix” site is one example.
No single channel will emerge as “the winner.” Smart companies will seek to make profitable use of as many as possible. Many will find that they need partners with different capabilities to compete, and new ecosystems of content providers and “monetizers” will emerge. Meanwhile, the consumer—checking for new content continually on his or her smartphone, tablet, or Internet-enabled fridge—will lap it all up.
Consumers to Washington: Don’t Try to Fix ItThe Americans we surveyed view the Internet and the potential for online content in highly positive terms. A majority believes that the Internet promotes U.S. culture abroad. They value its openness and are uncertain about the prospect of greater regulation. While approximately one-third of survey respondents told us that they want regulators involved in ensuring the quality of media content, more than three-quarters said they feel it is their own responsibility to filter for accurate online content, and they think they have the capability to do so effectively. By a margin of some five to one, U.S. consumers said they are more excited about the potential rewards than they are worried about the potential risks.
U.S. policymakers and regulators have thus far allowed a vibrant and beneficial market to develop. Temptations to intervene loom, however. The Internet is getting bigger, more complex, and more unwieldy. It is pushing new, important, and diffi-cult issues to the fore, among them privacy, piracy, protection, security, “net neutral-ity,” and taxation. Some are rising to the level of noisy public argument. The 2011 debate over SOPA—the proposed Stop Online Piracy Act—is one example; resis-tance to proposals put forth at the International Telecommunication Union Decem-ber 2012 conference in Dubai is another.
U.S. consumers are pointing to the age-old admonition about not fixing things that aren’t broken. They are happy with the current state of play, confident in their capability to deal with the potential risks, and enthusiastic about the future. Moreover, the Internet is one bright spot for economic and job growth in a mature media industry fighting a difficult economy. Since peaking at just more than 2 million in 2000, the number of jobs in traditional U.S. media companies has been dropping by about 2 percent a year. At the same time, employment at “pure-play” Internet companies—even after coming through both the 2001 dot-com collapse and the 2008 financial crisis—has shown good growth through volatile times: 6 percent a year, on average. This job growth has accelerated to double-digit rates for the last five years.
Online jobs (including paid freelance workers) accounted for about 35 percent of total media positions in 2011. We expect this figure to approach 50 percent by 2015
By a margin of some five to one, U.S. consumers said they are more excited about the potential rewards of the Inter-net than they are worried about the potential risks.
Follow the Surplus12
as the number of online jobs increases by about 12 percent a year to approximately 1.1 million, while employment in traditional media remains flat or slightly declines.
The first American newspaper was published in 1690. The first storefront movie theater opened in 1906. Commercial radio took hold in the 1920s,
followed by television two decades later. At each stage, America’s love affair with media took a quantum leap forward, and the industry embarked on a new and dynamic chapter.
The media industry in the U.S. seems primed to enter another golden age. This one, like the ones that came before, is being led by new technology and new possibilities that consumers enthusiastically embrace. The challenges are big and complex, but there’s abundant opportunity for those companies that present new products, pricing, and packaging designed to appeal to consumers in an increasing-ly online era.
Notes1. Consumption hours are calculated using the November 2012 results of the BCG U.S. Media Consumer Survey. This analysis is based on the Internet-enabled population and includes only those hours of consumption attributable to personal use; that is, it excludes educational and business-related use.2. The consumer surplus quantifies the benefit of an activity or product to consumers that exceeds what they pay for that activity or product. We measure what is called the “equivalent surplus”—the amount of additional income that consumers would need to receive to generate the same value they get from the activity or product. Quantifying this value is inherently difficult. To elicit reliable valuations, we use a methodology that asks consumers to choose the most and least valuable offering from different groups of media-related activities or products. By including opportunities to save different amounts of money among the options presented, we are able to use statistical methods to derive a monetary value for each activity or product.
The Boston Consulting Group 13
About the Authors Jean-Manuel Izaret is a partner and managing director in the San Francisco office of The Boston Consulting Group. You may contact him by e-mail at [email protected].
John Rose is a senior partner and managing director in BCG’s New York office. You may contact him by e-mail at [email protected].
Neal Zuckerman is a partner and managing director in the firm’s New York office. You may con-tact him by e-mail at [email protected].
Paul Zwillenberg is a partner and managing director in BCG’s London office. You may contact him by e-mail at [email protected].
AcknowledgmentsThe authors are grateful to David Dean and Cenk Sezginsoy for their insights and assistance in preparing this report. They would also like to acknowledge the contributions of the following col-leagues: Ranjavati Banerji, Gaby Barrios, Christine Chiou, Emmanuel Huet, Mimi Gehl, James Purnell, Paul Ridley, Erik Stiller, and Susanne Winkler. The authors would like to thank David Duffy for his help in writing the report and Katherine Andrews, Gary Callahan, Mary DeVience, Kim Fried-man, Angela Goldberg, and Sara Strassenreiter for their contributions to its editing, design, and production.
For Further Contact If you would like to discuss this report, please contact one of the authors.
To find the latest BCG content and register to receive e-alerts on this topic or others, please visit bcgperspectives.com.
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© The Boston Consulting Group, Inc. 2013. All rights reserved.2/13
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