Digital economy update 02 Mar 2018 Digitalisation of media

Key points

• Where music lead the way, video content is now following.  The industry is being reshaped by the rampant digitalisation of media itself a product of the booming digital economy, where data analytics and personalisation of consumer products are becoming the keys to success. 
• Access to cheap connectivity, near limitless cloud storage and the creation of advanced devices has led to the rise of video-on-demand ("VOD") services and the revolution of content viewership. 
• Personalisation of services has become the cornerstone of successful digital products. Consumers now expect customised services that are delivered instantaneously, seamlessly and cheaply.
• VOD providers are using complex data analytics to recommend personalised content to subscribers not only as an acquisition and retention tool but also to increase their revenues through increased subscriptions, but also through targeted advertising.   
• Legislators have struggled to keep up with the rapid digitalisation of the media industry. The European Commission is currently drafting legislation aimed at regulating VOD services and levelling the playing field with traditional broadcasters.
• Although data analytics gives VOD providers a market edge, it also presents legal issues and challenges, such as increased data protection, cybersecurity and data ownership and rights risks.
• Traditional broadcasters must embrace digitalisation or risk being eclipsed by VOD providers. Broadcasters can maintain and expand their consumer bases by  aggregating and analysing consumer data to create personalised products. 

Introduction

Video is being digitalised at a rapid rate, with the rise of digital platforms and products revolutionising the way people consume content. While it is undeniable that VOD services, like Netflix and Amazon Prime Video, have changed the game, they are part of a bigger story. The digitalisation of media is a product of the booming digital economy, where data analytics and personalisation of consumer products are becoming the keys to success. 

Digitalisation

Before focusing on the digitalisation of media, it is important to understand the prevalent rise of the broader digital economy. The digital economy is expanding globally at an exponential rate and has eclipsed traditional markets across the globe. In the UK alone, businesses belonging to the digital economy have grown by 30% in the past five years and the digital sector has outperformed the traditional economy overall. Digitalisation is enabled by a combination of:

• cheap ubiquitous connectivity;
• cheaper and smaller hardware (with computing power expanding in accordance with Moore’s law);
• cloud based storage; and
• new technologies (such as virtual and enhanced reality, robots, AI, machine learning and blockchain).

These are the foundations and basic infrastructure of the digital economy, which can be deployed together with data analytics to increase efficiency, decrease costs and create new businesses and revenue streams. 

The media industry is just one of many industries that has been disrupted by businesses deploying the tools of the digital economy to create new products and services that have entirely revolutionised consumption habits and patterns. 

Change in viewer habits

Access to cheap ubiquitous connectivity, the almost endless capacity of cloud storage and the creation of advanced devices has led to the rise of VOD services and a revolution in viewing patterns.

In the past, the linear broadcasting model only granted viewers access to films and television shows on their television sets at scheduled times. Now, audiences have access to a plethora of films, television shows and starts from content via VOD services and can choose to watch content at anytime, anywhere on a range of devices.

The increased flexibility provided by the digitalisation of media has created two new forms of content consumption: binge watching (watching entire seasons or multiple episodes in one sitting) and bite-sized snacking (watching short form content on platforms like YouTube).¹ Further, it has created a trend where subscribers are cancelling bundled subscriptions and instead choosing à la carte options by only subscribing to VOD providers that host content they actually watch, rather than paying for multiple channels they do not. Amazon has taken advantage of this trend by launching Amazon Channels, a platform that allows its Amazon Prime subscribers to buy individual subscriptions to more than 40 channels, including ITV Hub, Eurosport Player and Discovery, for a small monthly fee. 

Ofcom's annual Communications Market Report 2017 revealed that 79% of adults in the UK use catch-up technology (e.g. BBC iPlayer) or VOD platforms (e.g. Netflix) to binge watch. Bingeing is most popular among a younger demographic with 53% of those aged between 12 and 15 binge weekly, compared to just 16% of those over 65 years old. For that older age group, 59% prefer a traditional release of one episode per week. VOD providers have used this type of data to cater to both audiences by releasing whole new seasons of some shows at once, but also releasing a new episode a week of other shows. The hype that occurs when Netflix releases an entire new season evidences the impact it has had on this new consumer culture. 

Personalisation

Digitalisation has allowed the media industry to develop and adapt to evolving consumer demand. Consumers now expect customised services that are delivered instantaneously, seamlessly and cheaply. Personalisation of services has become the cornerstone of successful digital products. 

VOD providers have taken advantage of cheap, ubiquitous connectivity to provide personalised platforms to a plethora of different audiences simultaneously and separately. VOD providers expand and maintain their subscriber base by offering subscribers libraries of content that have been tailored to suit their individual preferences. VOD providers use complex data analytics to recommend personalised content to subscribers as as an acquisition and retention tool. 

Netflix, for example, collects viewing data from its global audience of over 100 million subscribers. With this data, Netflix can make informed decisions about subscribers' behaviours and interests. For instance, algorithms may be used to monitor when subscribers pause, rewind, or fast forward content, what day and time subscribers watch content (i.e. Netflix has found people watch TV shows during the week and films during the weekend) and what device subscribers use to watch content. Netflix uses this data to recommend targeted content to each subscriber. 

Personalisation keeps subscribers engaged with the platform and maintains subscriptions. As soon as credits roll on a Netflix show, it automatically offers to play the next episode or when a film finishes, it offers viewers recommendations of other films that viewers may enjoy.

Data, data, data

Data is the currency of the digital economy. Data analytics has been the key to the success of the VOD providers. The collection and analysis of subscriber data had enabled VOD providers to personalise platforms and design products tailored for the modern consumer.

Netflix began using data analytics to predict viewing habits in 2006, when the company offered a $1 million prize to the creator of the best algorithm for predicting how its customers would rate a film based on their previous ratings. This model was aimed at consistently serving subscribers with desired content to maintain their interest in the platform. 

Netflix used data analytics to predict the original success of House of Cards. Before bidding £100 million to buy the rights to House of Cards. Netflix used subscriber data to deduce that: (a) many subscribers watched the David Fincher directed film The Social Network from beginning to end; (b) the British version of House of Cards was popular; and (c) those who watched the British version House of Cards also watched Kevin Spacey films and/or films directed by David Fincher. Netflix was so confident in its data analytics, that it bucked the convention of producing a pilot and immediately commissioned two seasons comprising of 26 episodes. Every aspect of the production under the control of Netflix was informed by data – even the range of colours used on the cover image for the series.

House of Cards was not only a critical success, it was a financial success too. According to The Atlantic Wire, the lure of House of Cards brought in two million new U.S. subscribers in the first quarter of 2013 (7% increase over the previous quarter) and one million new subscribers from elsewhere in the world. These 3 million subscribers almost paid Netflix back for the cost of House of Cards within the first year of release.² 

When a network green lights a show, there is a 35% chance it succeeds and a 65% chance it gets cancelled.³  According to Netflix, 93% of its original series have been renewed.⁴  These statistics alone show the critical importance of data analytics to the success of VOD providers. 

Commercialisation of data

Data analytics has not only contributed to VOD providers' commercial and critical success, it has also given VOD providers access to a lucrative revenue stream through targeted advertising. The rich data that each VOD provider collects about its subscribers has made it easier than ever to align advertisers with their target audiences. VOD providers have been using new and alternative methods of advertising based on their data analytics. A predominant form is native advertising. 

Native advertising is a form of paid media where the advertising is inserted into the natural form and function of the user experience. Data is used to map and identify a brand's target audience and integrate the advertisements into the content that the target audience reads or watches. It has the added advantage of embedding adverts within the content that the user engages with, without disrupting/interrupting their overall experience in the way that traditional advertising would. For example, Netflix partnered with the Wall Street Journal to create an in-depth reporting platform "Cocainomics". This platform was hosted on the Wall Street Journal's website and comprised content related to  the financial and logistical aspects of running a cocaine cartel, as a method of subtly advertising the first season of Narcos. It provided fans of the show with an opportunity to fact check Narcos and learn more about Pablo Escobar and the Columbian drug trade. When launching the second season of Narcos, Netflix partnered with Wired to tell the story of the technologies were used to bring down Pablo Escobar.

As well at native advertising, VOD providers also use product placement by integrating products into the content. For example, Amazon Prime partnered with real-estate listing company, Zillow, in for Hand of God – in the show a character used Zillow when deciding to move house. 

VOD providers are also using their data analytics to explore merchandising opportunities for their hit shows.  VOD providers are partnering with manufacturers and retailers to split the revenue generated through merchandise sales. For example, Netflix has entered into lucrative toys and merchandise business and has already started selling Stranger Things merchandise in partnership with popular retailers.

The law is struggling to keep up

Legislators have struggled to keep up with the rapid digitalisation of the media industry. Currently, in the UK, traditional broadcasters are subject to far wider and more impactful regulation than VOD providers. The European Commission is trying to address this issue through its review of the Audiovisual Media Services Directive ("AVMSD"), the framework that governs the EU-wide coordination of national legislation regarding all audiovisual media, including traditional TV broadcasts and on-demand services.

The European Commission adopted the legislative proposal amending the AVMSD on 25 May 2016 (the "Proposal"). The Proposal will first aim to create a level playing field in the promotion of European works by obliging VOD providers to reserve at least 20% share in their catalogues for European works and to ensure adequate prominence of such works. Currently, European TV broadcasters invest around 20% of their revenues in original content, whilst VOD providers invest less than 1%. The European Commission wants TV broadcasters to continue to dedicate at least half of viewing time to European works. The proposal also clarifies that Member States are able to ask VOD providers available in their country to contribute financially to the production of Europeans works.

The Proposal will also require VOD providers to protect minors from harmful content and to protect all citizens from incitement to hatred.

The European Parliament has also recently introduced the cross-border portability regulation,⁵ that will enable consumers to access their VOD services when they travel in the EU in the same way they access them at home from 1 April 2018. This means that UK residents travelling in an EU Member State will not be geo-blocked from accessing UK only subscriptions, such as BBC iPlayer or their UK specific Netflix library.  

Further, as part of the European Commission's launch of the Digital Single Market regulatory framework, the European Commission has launched a tender for a 16-month study regarding "online platforms" and the role and challenges raised by algorithmic decision-making. The project aims to raise awareness on the issues around the role algorithms play in the digital society and identify the most appropriate responses and design appropriate policy tools. The results of this study could have an impact upon the future regulation of media and VOD services.

Legal risks and challenges

Although data analytics has generated great success for VOD providers, the collection and analysis of data presents legal risks and challenges. VOD providers use metadata to predict viewing habits and personalise platforms in order to attract and retain customers. Metadata, put simply, is data that provides information about other data. Metadata is a record of information on the who, what, where, when and how a subscriber uses a VOD platform. 

The implementation of the General Data Protection Regime ("GDPR") on 25 May 2018, will create the largest challenge for VOD providers with subscribers located in the EU. Metadata falls under the GDPR definition of personal data and will therefore be regulated by the GDPR. VOD providers may need to wholly transform their data analytics practices to become compliant with the GDPR or run the risk of becoming liable to pay fines of up to €20 million or 4% of their annual turnover if in breach. To become compliant, VOD providers may be required: 

To notify their subscribers about what data is being collected about them and obtain explicit consent from subscribers to collect and use their data for the reasons notified to them by the VOD providers

Grant subscribers the right to access their personal data being processed by the VOD provider; and 

Ensure that any third party data processors used by the VOD providers are also compliant with the GDPR.

As well as data protection considerations, VOD providers need to consider a number of legal issues that could arise in respect of their use of data and data analytics. For example, cybersecurity is a primary concern. VOD providers must ensure that the vast quantities of data that they collect from subscribers is extremely secure and have robust policies in place to prevent and respond to hacking and data leaks. 

Further, VOD providers may face legal challenges relating to the control and ownership of their subscriber data. VOD providers must ensure that they possess the rights to use and commercialise the subscriber data they collect to create lucrative returns (i.e. through targeted advertising). VOD providers must ensure that they clearly articulate their rights to use subscriber data in their privacy policies and their platform's terms of service. Further, data ownership and rights must be clearly defined in any business-to-business transactions entered into by VOD providers. If VOD providers fail to obtain the necessary rights to use subscriber data for their own commercial purposes, they will not be able to take advantage of the highly valuable data they collect. 

In the future, VOD providers may also face legal challenges related to the ethical and philosophical considerations surrounding their use of subscriber data. These include situations where data is used for purposes beyond the purpose for which the subscriber's consent relates. A recent example of such difficulties arose when Apple fought the FBI's demands to mine data stored on a terrorist's iPhone in the US.  

Join the revolution

With the rise of the VOD platforms seeming unstoppable, traditional broadcasters and platform providers will have to embrace digitalisation or risk becoming eclipsed.The days of providing a bundle of channels through a curated EPG may well be numbered.

There are many avenues that traditional broadcasters can take to accelerate digitalisation of their businesses – build an VOD platform in-house, acquire a business or technology that can provide them with a VOD platform, or enter into a strategic partnership with existing VOD providers.  

As a first step, however, all traditional broadcasters should aggregate and analyse the copious amount of data that they have on their customers. Using this data, they can find ways of personalising their services to match the appetites and desires of their consumers to offer them customised products. 

Traditional broadcasters will also need to ensure that they understand the legal risks and challenges associated with VOD platforms and data analytics. Traditional broadcasters and VOD providers must ensure that they are complaint with all personal data related regulations and have the appropriate rights to use customers' data for their own commercial purposes. 

The rampant success of VOD services in today's digital economy demonstrates the impact of that data analytics and personalisation can have on the success of any business. 

With special thanks to Katherine Velos (London) for her contribution.