Insights Into The Future - An End Use Analysis - part 1

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FALL / 12

End Use Analysis 2012

An analysis of the paper

industry from the eyes of a paper producer

Alejandro Jose Mata Lopez



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TABLE OF CONTENTS

ExEcutivE summary................................................................................ 2

reebe e o? ................................................................................ 2

O o o e´ ..................................................................... 2

a oe o e eooo o e´ eo ......................................... 2

What has changEd frOm last yEar ? .............................................. 3

a wo o -e e ......................................................................... 3

mee .................................................................................................. 3

What arE thE challEngEs nOW ? ...................................................... 7

fe ................................................................................................. 7

te eeee ........................................................................................ 7

de teooe ............................................................................... 8

EcOnOmic EnvirOnmEnt in thE prEsEnt and nEar futurE ...... 10

lEarnings frOm OthEr industriEs ................................................. 11

hOW cOmpaniEs arE cOping With thOsE challEngEs ............... 14

cOnclusiOns.......................................................................................... 15



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REmEmBER A yEAR AgO ?Will our industry have a uture in 5, 10 or 50 years rom now ? Is our industry being replaced by something

else ? Is digital media the new way people will access inormation and companies will

choose to communicate ? Our aim last year was precisely to try to nd an answer tothese undamental questions by building an understanding o the dierent trends a-

ecting each one o the paper end uses. In order to accomplish that we ocused on

understanding every single driver behind each trend by using a ramework in which

6 actors were considered: End Use trends, Digital Media, Economic trends, Environ-

ment, Demographics and Advertising Expenditures.

At the end o our study we concluded that although the outlook or the paper industry

is challenging, we still have reasons to believe that it has a bright uture i we ocus

on the right opportunities and conront challenges on a positive manner. We identied

Coated Papers as the group with the best positive trends going orward. We also men-

tioned that the economic crisis pushed companies to adopt multimedia approaches

as a way to keep budgets under control but also has helped companies realize that

multimedia channel approaches are much more successul and normally bring higher

returns on investments.

Will our industry survive the next 5 to 10 years ? We strongly believe so. Will it survive longer ? Is our industry

being replaced by something else ? Although we are seeing some erosion avoring other media channels, es-

pecially digital media, we don´t believe paper is being ully replaced by it. What we are experiencing now is the

eect o a natural process companies are going through to embrace multimedia communication approaches.

This adaptation is one o the main reasons or the migration out o paper. This migration will neither be a non-

stop phenomena nor a ull abandonment o paper, the uture o our industry lies in between these two extremes.

OuR FOCuS FOR ThiS yEAR´S STudy Were all our questions answered a year ago ? Mostly, but the world we live in is in constant change and we elt

the challenges we were acing last year might have evolved or changed. In addition to this, the deeper under-

standing we gained rom last year exercise open our minds to a new set o questions such as:

f How digital media is aecting consumers ? And companies ?

f What is the role the current economic environment is playing on our industry ?f Is the paper industry the only “commodity” industry suering rom decline in demand, over-capacity

and tough competition ? I not, what can we learn rom other industries ?

f Is digital media the only disruptive trend on our industry right now ?

f How companies are coping with the situation ? (Including entire value chain)

This year´s End Use analysis will not ocus merely on updating and/or repeating what has been already learned

and discovered a year ago, but instead we will be ocusing on fnding answers to this new set o questions. Our

outmost objective is to build an understanding on where are we heading as an industry and how companies are

adapting their strategies and behaviors to ace that uture and secure a place in it.

As a consequence, and considering that what has been discovered a year ago in relation to end use trends is

still valid, this year´s study is much less ocused on detecting specic trends per end use ocusing only on the

changes we have detected rom a year ago and put them into context again.

A NOTE ON ThE mEThOdOLOgy FOR ThiS yEAR´S REpORTThis year´s study was also based extensively on a series o interviews and conversations we had with industry

leaders o the paper value chain including printers, publishers, and brands owners and advertising agencies.

A good number o companies that participated this year also participated a year ago, giving more traceability

to trends and changes.

Besides these interviews within the industry we conducted in depth analysis o similar industries we compared

to ours and to learn something rom what they have done (or are doing) to ace the challenges o their own

particular industry. The industries selected shared some similarities with ours such as:

f They are a commodity industry

f They are acing similar challenges such as overcapacity and decline in demand

f They are acing a generalized industry threat rom external orces (like digital media)

Ater selecting a handul o industries to compare against we got close to one or two contacts within those

industries and challenged our assumptions and learnings.

TableofContent

TABLE OFCONTENT 2

1 . INTR OD UCTION 3

2. METHODOLOGY 4

3. MEGA TRENDS 5

3.1. ADVERTISINGTRENDS 7

4. TRENDS PER END USE 8

4.1. END USE DESCRIPTION 8

4.2. BOOKS9

4.3. MAGAZINES 10

4.4. CATALOGUES 12

4.5. CORPORATE COMMUNICATION S 13

4.6. OTHER PROMOTIONAL PRINT15

4.7. ADDITIONAL TRENDS DETECTED FROMTHE INTERVIEWS: 17

5. CONCLUSIONS 18

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End Use Trends Report June 2011

ExECuTivE SummARy



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A wORd ON Ad-SpENd TRENdS

Looking only at the latest Zenith Optimedia orecast the situation doesn´t look that bad. Global advertisingexpenditure is orecasted to grow 4.3% in 2012, 5.3% in 2013 and 6.1% in 2014. In the Euro area adspend is

shrinking rapidly in problematic countries like Italy, Spain, Portugal and Greece. Elsewhere in Europe adspend

is rather fat with the exceptions o Austria, Finland and Germany where there is a small rate o growth pretty

much in line with infation. For the years to come, European adspend trends look a bit more promising than

2012 with a 2.3% growth in 2013 and a 3% increase in 2014.

When it comes to the dierent media is clear that Internet

is by ar the astest growing medium. According to Zenith

Optimedia Internet will grow on average 16% per year be-

tween 2011 and 2016. On an additional note, Social Media

advertising on sites like Facebook, Twitter and LinkedIn ac-

counted or almost 15% o all Internet display adspend in

2011. Zenith Optimedia expects social media advertising togrow at an average rate o slightly above 30% over the next

three years, achieving an 18.5% share in 2014.

According to the media agency, the rise on Internet adspend

has come at the expense o print. Between 2001 and 2011 the internet´s share o global advertising rose by

14% while newspapers´ share ell 12% and magazines 5%.

Newspaper´s share is still expected to keep declining whereas Magazines, the erosion is expected to stabilize

by 2014. Ater internet, the second clear winner on the chart above is Television which has been able to main-

tain it´s share more or less stable (rom 39.7% back in 2010 to a projected 40.4% in 2014) in an environment o

general adspend growth, helping the medium to benet rom the overall growth trend.

How does this adspend development picture compare to the one we presented a year ago? In general it is

very similar, TV and Internet were already showing the best growth rates rom all media channels. I there´sa dierence it´s coming basically rom print. Print is showing a slightly more negative outlook this time when

compared to a year ago when a more stable development was assumed to be the case, starting earlier than

2014 as is expected this time.

Megatrends

Are the megatrends detected last year still applicable or our cur-

rent environment? We believe the majority o them are still valid

with some o them probably reducing a bit the level o severity and

relevance. In order to simpliy this report and keep it as “to the point” as possible we will only discuss changes

on those megatrends that have (or might have) a higher impact to our industry. These megatrends are:

REdEFiNiTiON ANd CREATiON OF BuSiNESS mOdELS

A year ago we concluded that business models, especially those ones trying to incorporate the digital world

into them, were still under development. Companies (i.e. publishers) were not sure on why/how/when they

should jump and embrace digital as part o their solutions. This year we are at the infection point already in

which companies have a better understanding on what to do and how to do it. The same companies that a year

ago were araid to accept the ast development o digital media are now pioneering revenue models in which

digital media plays a very active (and strategic) role.

whAT hAS ChANgEd FROm LAST yEAR ?

megatrends



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Companies more and more are embracing new media.

Some o the ndings are:

f Out o the total marketing budgets around 70% o thebudgets are dedicated to traditional media.

Within this segment print plays a signicant role

f The next 20% o marketing budgets are dedicated to

proven new media. (i.e. traditional internet advertising)

Companies already recognize them as successul

marketing channels and need to gain expertise quickly

f The remaining 10% o the budgets are dedicated

to explore innovative new media channels. In here we

nd all those channels that have ailed to prove the

ROI to companies so ar, but have a big potential due

to the popularity and innovation they bring.

NETwORkEd SERviCE ECONOmy

This megatrend reers to the search companies are doing to nd dierent

ways to serve a customer with products and/or services that are comple-

mentary to the ones they are already providing. The driver behind this trend

is the need to capture a higher proportion o the value within the industry.

Reality is that due to the outlook o decreasing margins and tough demand

expectations or the near and mid term uture, companies need to nd how

to balance things out. At the end paper is a commodity and companies

have less and less attributes to dierentiate themselves, and additional val-

ue added services gives companies the opportunity to do this.

Four dierent criteria have been ound key in the process o selecting products, on that order:

When customers can´t nd a dierentiation in unctionality between two products, they

look at which company is more reliable. I all companies are equally reliable then custom-

ers will look or convenience. I a company doesn´t add any convenience on top o their

competitors then customers will turn to pricing to make a choice. When customers orce

companies to go on to this last criteria is when margins are reduced, and is this stage the

one companies need to avoid.

Networked service economies are better in nding and adding additional unctionality to the product or service

a company oers making them more likely to avoid pricing as a dierentiator.

digiTizATiON TRENdS

Although no signicant change has emerged rom a year ago in terms o the direc-

tion digitization and hardware development are taking, it is important to discuss thechanges on the speed o such developments and on the speed at which our industry is embracing such

changes and innovations.

The main elements on digitization trends have to do with:

1. e-Reaers an tablet coters:

The impact e-Readers and tablet computers are having on our industry is not just related to the completely

dierent ways users are interacting with content, but also in the way and easiness to access that content. E-

Readers and tablets technology made the transer o content extremely easy, making it appealing or users

to adopt it aster than expected. In addition to this, this easiness to share content (similar to what happened

in the music industry) had a deep impact on the revenue models o publishers. Long tail writers that had a

harder time convincing publishing houses can nowadays skip a lot o intermediaries and are able to publish

without too many issues. At the end smaller authors can publish whatever they want, well known authorscannot charge as much as they charged beore or their work… in other words, the playeld s leeln .

1

Functionallity

3

Price

2

Reliability

4

Convenience

10% experimental new media

20% proven new media

70% traditional media



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A similar phenomenon can be seen with tablet computers. These devices changed the way people consume content

making it more personal… Content is more intimate, since it must literally be touched in order to be consumed

2. Free tecnolo an content

Somewhat related to the previous trend and to the act that new devices are making the access

o inormation extremely easy, this is also triggering the exchange and accessibility o tons o

ree content. Free content can be legal but also reers to all content being exchanged illegally.

Piracy is having a big impact not only on revenue loss or the dierent industries aected by it,

but is also causing delay on the surge o legitimate business models. Research done by PPA

reveals that on average every time a digital edition o a magazine is legally paid or or accessed, there are a

urther 44 copies o pirated magazines being illegally downloaded. (To read the ull article go to PPA website

www.ppa.co.uk)

3. personalaton

Digitization is playing an important role on how personalizedcontent and communications are getting done nowadays.

Digitization is happening not only on proessional circles but

also on personal circles as well. The merge o personal with

proessional is opening the door to so many possibilities to

personalize what you see and read on digital media chan-

nels. On the other hand companies are now realizing that in

order to have personalized approaches on their sales and

marketing approaches they need an enormous amount o

data and resources; resources that some companies don´t

have. Thereore personalization is still an initiative that hasn´t

been widely adopted as normal practice yet despite the clear

benets o using it.

mOBiLiTy

Mobility is becoming more and more important or our societies. Since the start o laptops some time ago to

the rise o mp3 players (like iPods), Smartphones, e-readers to the most recent surge o tablet computers, the

amount o activities we do “on the go” is increasing rapidly. Mobility is becoming part o the elements we as

consumers demand rom a variety o products and services nowadays.

According to several researches done by CompTIA, mobile device shipments eclipsed PC shipments or the

rst time during 2011. Tablet shipments are expected to exceed 100 million units in 2012, up 50 percent year-

over-year. Since 2009, mobile Internet usage has doubled every year. Annual mobile app downloads are pro-

jected to grow more than 10 times rom 2010 to 2015 – rom 10.7 billion to 183 billion. Eighty-ve percent o

executives work remotely at least occasionally; 53 percent work remotely requently.

mEdiA CONvERgENCE

Media convergence can be understood as the mix between computing, communications and content. In other

words, and as dened by Henry Jenkins, media convergence is the fow o content across multimedia plat-

orms, the cooperation between multimedia industries, and the migratory behavior o media audiences.

Television and internet are merging together more an more nowadays, through your television set you can do

much more things and consume content on a more interactive manner when compared to a couple o years

ago. On the other side, video streaming is making users utilize computers as a replacement or TV, this es-

pecially driven by the amount o video content available on the Internet and the ability video streaming gives

consumers to decide what and when to see. This trend is not stopping there, now with the emergence o tablet

computers even things like news are being dealt by social media platorms like twitter in a way that does not

quite replace newspapers, but brings additional value to readers.



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Media convergence will bring unimaginable opportunities to companies that understand the value and poten-

tial o this development. What we are seeing now is just the tip o the iceberg and with every new technological

development, more opportunities are created or smart companies to exploit. But we are still not there yet.Even consumers are expressing some level o resistance to convergence. A clear example o this resistance

can be seen in the development o digital magazines. Beore we started the end use study this year we had

the impression that digital magazines that were oering much more interactivity through video streaming, au-

dio and interactive content were better positioned to capture the attention o consumers than those that were

basically replicating their printed versions through PDF les digitally. This was actually not the case and con-

sumers are not better served with ancy applications or their mobiles or tablet computers…. Some customers

are happier with a simple PDF version o their avorite publications. Some o the reasons behind this strange

development might be the eeling o having something that has a start and an end.

iNFORmATiON OvERLOAd

The exposure we have to digital media has increased exponentially since its origin,

especially through social media. This is creating a eeling o overexposure. There is

much more inormation out there, and our ability to cope with it is being challenged.

It is not strange to hear that people are now taking a step back and thinking twice

on how much time they are spending consuming digital inormation. Some o us are

having the eeling o suering some sort o inormation overload.

This inormation overload has triggered the idea o seeing the evolution o social media as a growing bubble

(like the internet bubble o the late 90´s and early 2000) that has the risk o bursting down. Despite the amazing

growth social medias have had in the past years, this might have come to an infection point already. Major so-cial media rms that have gone public are suering rom lack o perormance in the eyes o the investors, who

were expecting explosive growth rates that were not reached. Facebook stocks have gone down 26% since it

started trading back in May 2012, Groupon down 66% since their IPO back in November 2011, Pandora also

showing a decline o 43% and Zynga down 69% rom their IPO´s in June and December 2011 accordingly.

This brings us consider a hype in the digital media development. We believe people are overestimating the

impact o digital media in the short term. Digital media is growing and growing ast, but the main challenges

our industry is acing right now have little to do with it, but more with the economic situation and intrinsic chal-

lenges o our own particular industry segments. Without a doubt digital media will have a tremendous impact

on our industry, and we might ail to see the degree and severity o the challenge that lies ahead o us.



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Although it is true that global macro-trends indicate

that with each new day there are more and more

people living in urban areas (increasing with this theamount o potential customers a company can tar-

get), the huge choice that customers have not only

in terms o brands and substitute products but also

on the media channels they have available to communicate with is growing… and probably growing even

aster than urban populated areas. This is creating a phenomenon in which companies are clearly ghting or

capturing the attention o consumers even more than beore. The concept o consumer´s attention becoming

probably the most precious commodity or organizations came up a couple o times during our interviews this

year, especially those on the Western European economies.

As you can observe in the chart besides this media rag-

mentation is mainly coming rom the ne ea reol-

ton we are going through, a revolution that accelerated

ater the nancial crisis o 2008-2009. This revolution ischaracterized by a development on new technological de-

vices such as iPads and Smartphones, but also a develop-

ment on Media Platorms like Facebook, Twitter & Google.

We can also extract rom the chart above the act that the

time spent on all media channels as a whole is increasing,

although not equally. The amount o choices consumers have access to (especially lately) is increasing and as

such; consumers need to decide where to spend the time. This brings the necessity or companies to under-

stand time spent and eectiveness o each media.

Out o these two dimensions time spent has been studied and measured ar more than eectiveness. This rep-

resents an issue since the only way to visualize the true potential o each media channel and really understand

how consumers are utilizing and interacting with each channel is by looking at these two variables together.

Looking rst at the time spent per media we can

clearly observe that the clear winners are TV and In-

ternet (Mobile and Web). Besides this, it is clearly evi-

dent that the two media channels with most imbalanc-

es rom all are print and mobile. This imbalance would

suggest that the migration rom print to mobile (tablets,

smartphones, etc.) is just starting and will still continue

or some time until adspend and time spent matches

better or these two channels. Despite the act this de-

velopment is a possibility, eectiveness brings things

more into perspective.

According to the Direct Marketing Association, telemarketing and direct mail surpass any digital channels in

generating the highest conversion rates. Response rates or direct mail to an existing customer averages 3.4%

whilst or an email the average is 0.12%. This means that or every 1,000 customers receiving both direct mail

and emails, on average 34 will respond to the direct mail piece while at the same time only 1 customer will

reply to the email approach.

In addition to this, in the latest IPC study ocus on media eectiveness was ound that magazines drive con-

sumers towards purchase. It was also ound that magazines are considered to be highly engaging and trusted;

and they are the media most likely to hold consumer´s attention.

Disruptive Technologies

whAT ARE ThE ChALLENgES NOw ?

a e e e te se e e

tv print WEB radiO mOBilE

43%

40%

29%

6%

16%

22%

11%9%

1%

23%



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What is a disruptive technology? And why is important or us to be aware o the ones develop-

ing in our industry ? First o all, a disruptive technology is basically the term used to describe a

new technology that unexpectedly displaces an established one. Disruptive Technologies haveseveral characteristics that I summarize as ollows:

f They normally underperorm existing technologies. This underperormance is not only technically speak-

ing, but also economically speaking. (Small in size and low margins)

f They need to have a trajectory o improvement that might someday make them competitive on the

upper mainstream markets where existing technologies and market leaders dwell.

Because o these characteristics disruptive technologies start emerging normally at the bot-

tom o the industry where new entrants and small companies have a good match with them.

Big and leading companies normally are ocusing on the most attractive segments (higher

margins and volumes) and it is extremely dicult or them to dedicate resources elsewhere.

With this denition in mind, we present two o the clearest disruptive technologies on our industry nowadays:

Digital Media and Digital Printing. Both technologies are (or were) disruptive when they entered our industry,

although both are on very dierent stages on their lie cycle. Digital Print has been among our industry or sev-

eral years now, and when it emerged it had exactly the same characteristics that convert a new technology into

a disruptive one. Digital Print has been evolving since then and has been moving up the industry ladder more

and more; up to the point that nowadays represents a clear challenge to the mainstream leading technologies

on our industry. Digital Media is on a much earlier stage, a stage in which the technology as such is still not

that attractive to big companies since the market size or it and revenue models behind are yet not there. But

the speed at which Digital Media is developing makes us believe it will start climbing upwards the industry in

the years to come.

Digital Media or our industry summarizes thedevelopment o Digital Platorms like Google,

Facebook, Twitter, etc. and the development

o new devices such as tablet computers (i.e.

iPad) and Smartphones. These two sub-seg-

ments have a very dierent impact on our in-

dustry. Digital Platorms have a higher impact

on Commercial Print end use; this is due to the

act that sites like Facebook are more and more being used or commercial purposes. Companies are discov-

ering the huge value o personalization and reach they can have with these media platorms. New Devices have

a higher impact on publishing end uses, especially driven by the impact tablet computers and e-readers are

having on magazines and books. Although it is true that Smartphones are having some level o impact on a

couple o commercial end uses (like coupons, inserts and fyers), the driver behind this smartphone penetration

on commercial print has more to do with Media Platorms running through Smartphones than the device alone.

The reason why we still mention digital print in this analysis is due to the act that we believe the approachtaken by some o the industry players to cope with it and benet rom the benets o a disruptive technology

like digital print might not be the most adequate ones. We will explore some o the possibilities and ways com-

panies have come to adopt to make disruptive technologies great success stories.

How do companies cope with it? Clayton M. Christensen describes in his book “The Innovator´s Dilemma”

describes the approach several successul companies have adopted to ace and transorm these disruptive

technologies into amazing success stories. In a nutshell what he advises managers acing disruptive technolo-

gies to do is to:

DISRUPTIVETECHNOLOGIES

puBLiShiNgimpacted more by deces

COmmERCiAL pRiNT

impacted more byt



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1. Give responsibility or disruptive technologies to organiza-tions whose customers need them so that resources will fow

to them. (Being customers the one dening at the end who and

what receives resources within an organization)

2. Set up a separate organization small enough to get excited

by small gains. (In the beginning)

3. Plan or ailure, as the best strategy to ace disruptive tech-

nologies will evolve together with the technology.

4. Don´t count on breakthroughs, move ahead early and nd the

market or the current attributes o the disruptive technology.

Companies that ollow this path have better chances to make them a great success story. On the other hand,

companies that have ailed to address them on a structured manner have ailed to capitalize on the benets

disruptive technologies are bringing to the industry and sometimes have lost the way on how to keep their

leading position in their respective industries. Sometimes companies have completely ailed to adapt to dis-

ruptive technologies and have been pushed completely out o the industry.

Now the question remaining or each one o us is what do we do now? How do our strategies compare to the

ones successul companies adopted to cope and benet rom disruptive technologies? What are the changes

we need to consider in our strategies?



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On this section we could talk about the economic situation in Europe and the possible scenarios we can acein the near and mid term uture, but that discussion will not dier rom any other orecasting report available in

the market. Instead, we have decided to summarize what is the sentiment among the companies that partici-

pated on this year´s study.

During our talks to the dierent companies we wanted to have a eeling on

the expectations companies were having or the second hal o the year

and or 2013. Although there seems to be a common denominator among

all companies (including Sappi) to believe that the second hal o the year

will remain challenging, there´s seems to be a split between companies

thinking positively and companies thinking negatively about the short and

mid term economic trends.

On the one side you have Publishing (mainly magazines) who are o the be-lieve that situation is not as bad as economic indicators are showing… they

believe their industry is somehow isolated rom macroeconomic trends

since books and magazines are perceived as one o the last items people

will cut rom their budgets in times o crisis.

“Magazines gives people distraction and entertainment at low cost”

On the other side you have companies more associated to commercial print purposes. Companies on this

segment are more prone to see macroeconomic indicators as a measurement o what might come in the near

uture. When economies are doing bad there´s a normal trend or companies to cut cost and delay non-core

investments. Several companies reported customers being extremely careul on any expenditure they do, lead-

ing to delays and cutbacks on projects and communication initiatives.

“If companies are good, they will cut expenses to improve even further their margins. If companies are doing bad they will cut expenses to try to mitigate margin erosion”

“We are in the middle of a radical transformation of our industry and the decline trend will continues for a couple of years more”

Despite this, there is a sub-segment within commercial print that seems to perorm good

when economies are under pressure: retailing. Retailers normally do better in times o crisis

as more people is driven to lower cost alternatives. This increase in the amount o customer

drives more communication expenditures

When it comes to 2013, although a lot o companies made the note that its still too early to

have certainty on what 2013 will bring, the general eeling is that there will be some sort orecovery at some stage during the year. This recovery, although marking probably the start o

better times to come aterwards, will not be enough to compensate the challenging times the

industry has gone through so ar.

At the end is clear or everybody that economics in one way or another are having an impact on our industry.

For some is more positive, or some others is more negative. Reality also shows that uncertainties on the Eu-

ropean economic landscape will not ade away as ast as everybody would like. Economies on countries like

Poland, Spain, Greece and Ireland are still going to weight down the overall European economic sentiment

indicator keeping the alert mode on companies or the time being.

ECONOmiC ENviRONmENT iN ThE pRESENT

ANd NEAR FuTuRE



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In our search or answers and insights that can help us understand the reality and challenges our industry is

going through we realized we are not alone. There are several other industries with similar characteristics as

ours that are going through (or have gone through) similar situations. We elt there is a lot we can learn romtheir successes and ailures. Reason why we dedicate part o out End Use Analysis this year to understand

what companies on other industries did right and what went wrong.

We basically ocused on industries that experienced similar market shocks

as we are acing now such as new technologies (disruptive technolo-

gies??), declining demand, overcapacity, etc. In addition to this we also

ocus on industries that have some structural similarities such as be-

ing in the commodities segment and have some similar degree o

competition. At the end o an extensive research we took learnings basically rom

three industries, which are the music, postal services and lm industries.

For practical reasons we will only analyze in detail one o these industries on this

report and will summarize the learnings out o all industries at the end o the segment.

In the last 30 to 40 years the music industry has gone through a series o radical changes on their value chain.

All these changes were somehow link to new technologies, and although companies struggled to adjust to

these new technologies, at the end each new technology helped the industry keep moving orward creating

more and more value or the companies within the industry. This sequence o technological breakthroughs

carrying over the industry along with their development stopped during the last decade with the most re-

cent technological development…. talaton. Beore this phenomena the music industry value chain was

about content creation with everything that this entails (rom artist management to recording and reproduc-

tion), publishing, distribution and retailing. (In the chart below you can observe a simple representation o how

the music industry value chain was conormed beore the digital revolution) But thanks to digitalization and

the convergence that came with it, the value chain on the music industry changed signicantly during the last

ten years. Nowadays artists have much more power over the value chain and can even distribute their music

directly to nal consumers completely skipping all intermediaries that existed in the old value chain structure.

Four companies dominated the market at that time; the our o them were huge in terms o size and muscle out

small rms that tried to enter the musical mainstream. Ater 2003, right when digitalization started to disrupt

the music industry value chain, the advantages o the big companies started to ade away. The best explana-

tion we have or this decline is due to the act that their business models didn’t cover the entire value chain.

They were mainly related to Recording, Reproducing and Distribution, areas in which digitalization had a major

impact.

Digitalization has changed the way we listen and consume music. To begin with, we have the development on

portable devices (MP3´s around 1997, the iPod back in 2001, iPhone in 2007), which have brought mobility to

the way we listen to music. As a consequence o this mobility, big digital libraries emerged like Napster (1993)

and iTunes (2003) came along bringing one o the rst changes on the way we consume music… we stopped

buying complete albums and started buying single songs instead. The evolution has not stopped there as with

new developments like Spotiy we are changing our conception o “owning music” to the idea o only “lending”the music we want to hear. Only time will tell i this is the right approach or the industry… what is denitely

clear is the act that the industry will not stop changing anytime soon. As a last point we will use to show how

the industry has changed is the act that all companies that in a way emerged rom this new media wave have

come to realized that artists can´t be treated as commodities. Instead, they need to be cultivated and taken

care o. There´s a lot o value companies were (and some still are) loosing due to the lack o interest in cultivat-

ing artists through proper Artist Management solutions.

LEARNiNgS FROm OThER iNduSTRiES



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This change brought several companies to its knees and orced them to re-think not just the way they were

used to do business, but to re-think what is the value added they were brining to the industry… in a way, they

were orced to re-discovered the reasons to exist within the industry value chain and understand the reasons

why the industry will allow them to survive.

Sooner or later all companies embraced digital media. Especially on

distribution channels, an area in which all o them had a lot o power,but also an area on which they relied on strongly to generate rev-

enues. The clear winners on this new technological wave were mainly

companies outside the traditional music industry; in a way all were

new entrants. The only company out o the big our to adapt and

benet rom the radical changes happening was Warner Music. They

realized they needed to expand their products and services to cover

the entire business value chain and to avoid being in the middle, area

in which margins were going to be squeezed. Were they successul?

In a way yes they were, although due to the act they weren´t an early mover, they hindered their potential and

ailed to capitalize the maximum gains possible.

Remember our discussion about disruptive technologies beore? Does digital media in the music industry

sounds like this? Indeed, digitalization was, and still is, a disruptive technology or the music industry. It shows

the clear characteristics o being one… inerior to existing technologies in the beginning but with high growthrates that allowed it to catch up with mainstream technologies sooner or later, and also the act companies that

adopted it started rom the bottom o the industry slowly climbing upwards as digitalization matured within the

industry. Was digitalization the only disruptive technology the music industry has aced throughout the years?

Well not really. But as stated beore, digital media had its peculiarities in the way it aected the industry.

This is how disruptive technologies look like in the music indus-

try. On the ollowing chart you can appreciate the dollars spent per

capita on the dierent media channels the music industry has been

exposed to. It’s clear to see that with the emergence o a new tech-

nology the previous ones start to diminish at about the same speed

as the new one is taking over.

When looking at the total revenues o the industry is also clear tosee how up to the development o the CD, the industry kept growing



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together with the technology. In act CD´s have been one o the most protable (high margin) technologies the

industry has ever seen. The success o CD´s was replaced by the tremendous eect o Digital Media.

The development o Digital Media has been extremely ast, growing like no other technology has done in the

past. In order to compare with previous technologies we bring the ollowing interesting acts and gures :

f Cassettes took around 18 years to reach their maximum level o

units sold ; Digital needed less than 2 years to reach that level

(Cassette peak)

f CD´s took around 16 years to reach the peak; Digital reached that

level (CDs peak) in about 3 years

f So ar Digital needed a bit more than 5 years to reach what, until

now, seems to be the peak o digital

A visual representation o the speed at which digital media penetrated the music industry can be seen on the

ollowing chart. The start o each technology line has been adjusted to refect the time when each technology

rst appeared on the industry. Although at rst look this development might indicate great news or the indus-

try, the extremely low revenues being generated by digital media (a problem we have started to state earlier

already) has completely eroded the potential benets rom the volume increase the industry has seen thanks to

the emergence o digital media channels. To compare how protable is each one o the dierent technologies

we have calculated the revenues per single unit sold. And although this method doesn´t take into consideration

the signicant cost dierences between them, it does bring some light into how big has been the challenge or

the industry to adjust and develop revenue models around Digital Media. The average revenues per unit sold

or CD´s is almost 14.5 USD per unit sold, whereas Digital don´t even reach the 2 USD per unit sold threshold.

What this meant or the music industry is the act that they needed to produce more volume by earning more

or less 85% less than beore. How they accomplish it ? Well in act this is one o the several issues, like piracy

control, the industry is still working to solve once and or all.

The industry hasn´t ound an answer to all the challenges Digital Media brought with it. In the meantime the

industry has lost about 50% o the revenues the industry had on their peak year.

Ater reviewing the Music Industry in detail, here is a summary o the learnings we extract rom this portion o

our End Use study :

Companies have ound ways to capture more “ value creation pockets” within their

industry

When the industry shrank the most …new technologies started to kick in replacing

mainstream technologies

Intermediaries were constantly squeezed in the middle

The most succesul companies try to cover as much as possible rom the whole

industry to benet rom every area o it

Being an early mover can be the dierence between merely survival and success

Embrace change as challenge. Not as threats



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Although there´s no single answer on how companies are reacting to the challenges described on this report,

there´s at least a clear eeling that companies must do something now to secure a better uture. Here are a

couple o ideas that emerged throughout the study :

Cost cttn: almost all companies that we have interviewed had in a way or another cost cutting strategies.

Some companies as a response to the critical situation they are acing right now, some others as a cyclical way

to make sure their cost structure remains robust and competitive.

An ale ae serces: During the length o the study we saw a couple o companies adopting this

strategy to increase their margins. One-stop solutions are the most common way to apply this strategy. We

saw how Warner Music tried to cover the whole industry value chain in an attempt to ght back the revenue

crash experienced by the industry. On the print and paper industries similar solutions have been observed with

traditional printers embarking into the pre and post press heavily, integrating even some times purely advertis-

ing and logistics solutions to their oerings to customers.

Bln ne reene oels: This trends goes on all dierent directions. Wehave seen traditional printers heavily embracing and investing into digital media.

But also we have seen some other printers looking or alternatives to expand to

more protable business areas like packaging. Publishers are also waking on the

same direction with more and more o them mixing activities that in the past were

done by advertising agencies

According to the Proessional Publishing Association (PPA) publishers are getting

more and more comortable with the current business models. In the past a lot

o them were araid and were reacting negatively to digital media developments,

mainly because they ailed to see how they could benet rom such development.

Nowadays publishers have a better understanding on what role digital media can

play on their revenue models and actively developing new ways to capture rev-

enues rom this emerging media channel.

“It is a mistake for companies not to focus on digital solutions, but also a mistake to focus only on digital approaches forgetting about traditional media.”

What everybody is realizing is the act that the traditional revenue models that used to work in the past are no

longer valid or the current situation. Companies need to avoid being merely intermediaries, as is in this seg-

ment where the pressure on margins is greatest.

“To be in the middle of the industry is the worse place to be. Margins are being squeezes constantly and all players on that area will either disappear or will be forced to move to other areas of the industry… most of them pushed into niche markets.”

In addition to the evolution o business models… there´s also a better understanding on how digital mediacan help traditional media being more eective. In the UK market there´s an emerging trend towards smaller

average circulations, giving an indication that a tighter targeting due to higher personalization might be helping

publishers to keep costs under control.

hOw COmpANiES ARE COpiNg wiTh ThOSE ChALLENgES



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What all o this means to our industry? It’s clear that our industry is still going through a series o challenges.

These challenges, although not completely new to us, are continuously changing. This only increases the need

or companies to re-think their strategies and action plans to react to those challenges on a more requentbasis. We have seen this evolution in action throughout the two years we have been doing this study so ar.

Companies are learning rom successes and mistakes made in the past and adjusting their course o actions

accordingly.

Besides this inner learning cycle, companies are more and more interested to compare themselves with similar

companies on other industries. This as an eort to accelerate their learning curves and be better prepare or

what the uture might bring.

uncertant is still the only constant on our projections to the uture. What is evident is that companies are get-

ting extremely good in learning how to cope with that uncertain environment. Companies are less araid to ace

uncertainty. This or sure will bring better chances or everybody to decide to see uncertainty as a challenge

and an opportunity to improve rather than a threat and something that needs to be avoided.

For us in the paper industry, as long as we see all new developments (digital media more than any other) as an

opportunity rather than a threat, our industry will discover the path to work together with these new develop-

ments and will secure a bright uture. I we ail to do so then our uture will be ull with obstacles and bigger

threats.

We sincerely hope that the discussion and topics we have included in this report helps everybody to have a

resh point o view on how companies are coping with these and other challenges.

Printed on Magno Satin 135 g/m2 and Magno Satin 200 g/m2

CONCLuSiONS



Documents

Insights Into The Future - An End Use Analysis - part 1