Consumer behavior is rapidly changing, with “digital” activities growing rapidly in every sphere (see text box below). In the US, 48 percent of all the video viewed is now either “time-shifted” (using DVRs or video on demand) or “device-shifted” (from television sets to laptops, tablets, or mobile phones). Music is even more digital, with just over two-thirds of usage from streaming services, MP3 files, and satellite radio, leaving traditional AM/ terrestrial FM radio with a mere 32 percent share. On the communications front, mobile phones have overtaken landline voice, even among consumers aged 55 to 64. These changes in user behavior have and will continue to disrupt existing industry value chains and economics, creating many opportunities and risks for stakeholders.
Six “digi-shifting” trends
McKinsey’s research with and among leaders in the telecoms, media, and technology (TMT) sector tracks the cross-platform and cross-device behaviors of tens of thousands of consumers each year in both developed and emerging markets around the globe. Findings from the fifth and most recent year of research highlight six major ongoing consumer trends that are further compelling this shift to digital and reshaping TMT and related industries.
Achieving real and measurable returns on social networking marketing efforts will be a continuing challenge for players across the spectrum.
Device shift – from PCs to mobile/touch devices. Smartphones are fast becoming ubiquitous, with penetration of about 60 percent in the US. Just over 30 percent of US Internet-equipped households now have a tablet as well, and the rest of the developed world is close behind. Mobile phones and tablets now account for around 44 percent of all personal computing time, having nearly doubled since 2008. Most device manufacturers and their major retail partners are already experiencing the implications of this shift.
Communications shift – from voice to data and video. E-mail and telephonic voice have fallen from over 80 percent to about 60 percent of the telecoms “communications portfolio,” while time spent on social networks has doubled to take over a quarter of all user communications time. And when consumers do use their phones, only about 20 percent of the time is for talking (down from over 60 percent just five years ago). The majority is used for more data-centric activities such as streaming music, browsing Web sites, and playing games. Mobile carriers in particular face challenges in reorienting their business models to focus on data rather than voice minutes. The US market has many lessons for the rest of the world in this area.
Content shift – from bundled to fragmented. Thanks primarily to powerful search tools, the “long tail” of media and content (whether text, video, classifieds, products for sale, etc.) is accessible to anyone. Thus, some of the value in traditional “bundles” (newspapers, network TV stations, or big-box retailers) has been eroded. The way mobile phones are used illustrates this well. The number of apps installed (typically for a specific, single purpose) has doubled to over 30 per phone from 2008 to 2012. Spending on these apps is, however, highly fragmented, and growth potential remains very uncertain. Challenges abound for both content owners and marketers in reaching and engaging audiences that access such eclectic, fragmented media.
Social shift – from growth to monetization. Social networking represents almost a quarter of all Internet time (up 10 percentage points since 2008) and reaches over 75 percent of all Internet users. But for the first time, we have seen small declines in both total audience and levels of engagement in developed economies. This is a remarkably fast climb to maturity, given that major players like Facebook, LinkedIn, and Twitter have yet to celebrate their tenth birthdays. Facebook and LinkedIn now face the quarterly earning pressures of the public markets as well. At the same time, businesses of all shapes and sizes are actively trying to use social media as part of their marketing efforts. Achieving real and measurable returns on these efforts will be a continuing challenge for players across the TMT spectrum.
Video shift – from programmed to user-driven. Traditional live, linear television consumption remains relatively flat on an absolute basis, but has slipped on a relative basis. It now represents just 65 percent of all video viewing for US consumers on their television screens and 52 percent across all screens. Time-shifted DVR content – watching video on PCs and over-the-top Internet video services such as Netflix – makes up much of the balance. The increase in all varieties of time-, place-, and device-shifting video options will continue to pressure traditional advertising-supported business models for distributors, advertisers, and content owners in the value chain.
Retail shift – from channel to experience. Despite its tremendous growth and transformation of the retail landscape, e-commerce only accounts for about 5 percent of all retail sales. As connected mobile devices proliferate, their potential to transform the shopping experience (both in the store and online) is the next opportunity. About half of all smartphone owners now use their devices for retail research – and although only few today, significantly more consumers will soon be using smartphones and tablets to complete their transaction as well. The combination of mobile retail and true multichannel integration will have a transformative effect on the retail experience and ring in the era of Retail 3.0.
As these trends continue to shape the TMT landscape, players in this space will want to pay close attention to how this shift alters the value chain. Leaders would be well served to keep three key principles in mind as they evolve their digital strategies and business plans:
Averages hide incredible diversity in consumer behavior, necessitating microsegmentation. As has already been demonstrated numerous times, conducting a simple age-based segmentation provides high-level insight into the digital divide of different consumer needs and usage patterns. However, managers should take that segmentation several steps further to strengthen sales, operations, product development, and other key customer-facing business processes. Incorporating product- and brand-specific usage, spending, attitudes, and needs can make developing a far more nuanced segmentation possible. This highly segmented approach will be needed to win and maintain customer relationships.
Value is not equally distributed or accurately priced. According to the “80/20” rule, about 80 percent of value typically comes from around 20 percent of customers, regardless of business type. For TMT companies, this general truth can be even more extreme. In some cases (such as social gaming or digital news subscriptions), digitization has led to an even smaller share of the overall customer base driving nearly all of the revenue (Exhibit 1). Identifying these high-value users – whether on the Web site or in the store – will become a critical capability. For one digital publisher, very occasional visitors accounted for about 80 percent of the audience, but less than 10 percent of the total page views for advertisers. Understanding the detailed behavior of the remaining 20 percent of highintensity users enabled the company to successfully introduce a tiered-access subscription model while maintaining the overall size and breadth of the advertising audience. Digital marketing tools can also be immensely valuable in reaching these high-value customers with the right touch points. One mobile operator, for example, found that its highest-spending customers disproportionately used the e-commerce channel for both sales and service. The operator’s response was to build a set of targeted products and service offers specifically tailored to that segment. This not only lowered the company’s cost to serve, it improved satisfaction with those higher-value customers who used their preferred service channels.
Structural changes begin gradually – then they boomerang. Hemingway’s observation on how people go broke is as relevant today as it was right after the Great Crash. Short-term economic and industry factors often mask long-term structural problems that lead to gradual – and then very sudden – reversals. Consider that the newspaper industry enjoyed its most profitable decade in the late 1990s and early 2000s, even as online-only competitors for classified and display advertising grew in scale and market power. Similarly, the recording industry shipped a record number of CDs during the very dot-com boom that paved the way for digital music’s eventual takeover (Exhibit 2).
In hindsight, these reversals may seem obvious, even predestined. Yet in real time, understanding and acting on the probable contours of change requires reflection and deep insight into customer behaviors, industry dynamics, and feedback loops. For example: when lower customer volumes no longer support the fixed cost base required, providers often respond by increasing prices for the remaining customers, feeding a vicious cycle and accelerating the unraveling.
TMT’s winning digital strategy
With an understanding of the trends driving the changes in the TMT landscape and a sense of their wide-scale implications, company leaders can begin to shape their future strategies. Five strategic considerations in particular can enable them to capitalize on the shift instead of conducting business from behind the curve:
Stay close to users by investing in customer insight. Customer behavior is rapidly changing, demanding strong market intelligence and customer insight functions. Innovative teams should integrate emerging digital, social, and mobile tools into more traditional “voice of the customer” processes to effectively build feedback loops into key business functions, such as product development and sales. Never before has this been easier.
Build a competitive edge with deep analytic skills. As segments get smaller and more distinct, the need to use data to optimize product development and marketing will only grow. Leading players will test and measure just about everything, and big data systems will support and guide them.
A long-term value-creation agenda requires both attracting millennials and serving the older, larger customer base.
Make business models more robust to reflect consumer diversity. Focus and breadth are both needed. In other words, focus on the 20 percent (or 2 percent) that drives the economics and build diversity into business models to address the remaining 80 to 98 percent.
Ensure investments are clearly aligned with consumer shifts. Executives need to clearly communicate the “what” and the “why” of strategy and operations and tie this to current opportunities. But most companies will also need to make sure legacy platforms and businesses get the management attention they deserve.
Reward superb execution skills. A potential downside of big data and analytics is that the analysis goes on too long and the market opportunity evaporates or is seized by a competitor. To avoid this trap, top management’s focus needs to be on delivering the products and services that will serve and delight their customers – today and tomorrow. Looking at these behavior shifts and at the group that is leading the change, it is clear that for many big TMT players, an inability to connect with millennials will probably mean being out of business in ten years. At the same time, not being able to hold on to their older, larger base of customers means they will likely be out of luck a whole lot sooner than that. This is a very interesting marketing and sales challenge for agencies and marketing directors, but an existential challenge for top C-level executives and strategists with a long-term value creation agenda. The digital platform is growing rapidly in importance in the areas of communications, entertainment, and retail. Regardless of the industry, a nuanced understanding of customer preference and a business model aligned with these insights will be necessary for most organizations to prosper in an all-digital world. This is as true for those currently on top of their industries as for laggards. Both will also need to prepare for the generational, transformative changes in the market as maturing millennials replace retiring baby boomers as decision makers for household spending – and business investments for that matter.