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Digital Disruption: How Media Gets From Acceptance to Adoption

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Have we reached an inflection point where new digital technologies are being widely embraced and integrated into companies' 2011 budgets and strategies?

That's the bet according to Phillip Asmundson, Delloitte Touche's chairman of US Technology, media and telecommunications practice. "There is less resistance to digital and more innovation of business models than I have seen in the past," Asmundson said. "More companies are talking about the opportunity than the threat."

Until now, many media and entertainment companies have been digitally defensive, spending time and resources to protect their legacy operations from encroachment rather than complement or extend their core businesses.

The strengthening of cash positions and balance sheets, as well as the mainstream adoption of digital interactivity, may position media players to invest in digital growth, trials and applications -- especially in a gradually improving economy. U.S. companies overall are sitting on nearly $2 trillion in cash, which could fuel mergers and acquisitions and segment integration rather than safer, less productive stock buybacks and one-time dividends.

In short, the time has come to invest in digital strategies and applications or lose more critical value to the new mobile, interactive standard. The pressing question: Will this reality be concretely reflected in 2011 budgets?

Major newspaper publishers will continue to aggressively roll out paywalls for value-added content and functionality that can command fees. "More than 80% of market capitalization of newspapers, music and Yellow Pages value chains have been destroyed as those industries have transitioned to digital platforms," observes Needham analyst Laura Martin.

Clearly, television and film content producers are scrambling to stay ahead of the curve as Netflix rapidly scales 10-fold over to two years into a $10 billion streaming media disruptor. Like Apple's ecosystem of devices, Netflix has raced to capture consumers, regardless of established subscription or advertisers' pricing expectations. It then lets the new economics play out.

Major media companies continue to have the largest audiences anywhere. Adding online viewing will give them a sustainable competitive advantage in the new world order. In an interactive marketplace, revenue generation is less about advertising and more about the e-commerce, casual games, apps and social networking that be leveraged off of fragmented premium audiences.

That's what Disney-ABC sees in extending its pact with Netflix to include streaming of hundreds of in-season and previous television episodes from ABC, Disney Channel and ABC Family. Disney does not view digital as an either/or proposition, but an additive.

Conversely, Time Warner CEO Jeff Bewkes last week complained that the "measly" $100,000 per TV series episode Netflix is willing to pay is "not attractive or incremental" compared with what they generate in syndication and on DVDs.

Netflix and other online services that cost $8 to $10 monthly per subscriber are a better place for content that has no further, higher monetization in other release windows," Bewkes said at last week's annual UBS media conference.

Maybe so, but Netflix is paying more than $2 billion in annual digital distribution fees, which is new money and media company pockets. So far, they appear to extend rather than erode the $35 billion in broadcast and cable TV advertising, $15.4 billion in local broadcast, $35 billion in cable affiliate fees and nearly $19 billion still generated by TV syndication, according to Barclay's Capital.

While the cable industry and regulators continue their squabble over Net neutrality, Netflix has nudged its way into the distribution spectrum, where it can generate immediate gains for content players straddling television's overall $48.5 billion base and nearly $3 billion in online advertising. Rather than playing an advertising card, Netflix flaunts premium consumers who pay for content and likely can be leveraged to create other value. How long before Netflix's special offers to its choice consumer base stretch into other premium product and service propositions?

Listening to comments from major media company executives at last week's annual Barclay's and UBS hosted conferences in New York underscored how matter of fact they have become about the digital disruption without knowing how to fully mine such opportunities.

In a cryptic analysis of broadcast network ratings and cross-platform audience distribution, CBS Research Vice President David Poltrack conceded that online streaming of programs may well provide more valuable than lucrative DVR playbacks to CBS.

On-demand digital allows us to take networks and magazines already successful, and make them "even more powerful" by creating new business models and incremental use, Bewkes said.

It is impossible to dismiss as a fad the 52% growth in Netflix subscribers this past year, since HBO has lost 1.5 million subs. Plus, more than 8 million iPads have been sold since its April launch and more than 1 million of Samsung's Galaxy tablet in just two weeks. By the end of 2011, the iPad is expected to generate more than 2% of all North American Web traffic, or more than twice what it does today, according to network provider Chitika.

If there is a gradual change in media companies' mindset, it hasn't yet translated into proactive participation on all fronts. But a passive acceptance of the digital reality and fee-paying consumers is, in itself, a far cry from where the industry has been. It's progress.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.