CEOs Worldwide Say Broadband Access and Fierce Competition Are Redefining the Businesses of Communications,Entertainment, and Enabling Technology

Global Study by Ernst & Young and Cap Gemini Ernst & Young Predicts Companies that Recognize Changes and Take Necessary Risks Will Prevail

PARIS, FRANCE (MARCH 19, 2001) - Digital broadband access and fierce competition among communications, entertainment, and enabling technology companies are prompting a total transformation of current business models, according to Business Redefined: Connecting Content, Applications, and Customers, a global study released today by the firms of Ernst & Young and Cap Gemini Ernst & Young. The study, based on 128 in-depth CEO and executive interviews and analysis of secondary data from more than 100 information sources around the world, found the next few years marked by a profound blurring and restructuring across communications and entertainment as well as the technologies enabling these industries, with winning companies taking advantage of the unprecedented opportunities these changes create.

Nearly two-thirds of the CEOs surveyed in the study cited broadband connectivity as the most significant immediate factor influencing the way customers will experience entertainment and communications and utilize technology over the next few years.  "Broadband connectivity will be the tide that lifts all ships," announces one CEO, summarizing the prevailing sentiment.

"Business Redefined offers unique insight into the future of communications, entertainment, and the enabling technologies behind those industries - from the CEOs who are leading those industries," says Stephen E. Almassy, global vice chair of Technology, Communications, and Entertainment for Ernst & Young.  "Through our discussions and feedback from the CEOs, we know that many companies are now making the bold moves needed to exploit new opportunities in content creation, packaging, and distribution, as well as value-added network services."

The study points to dramatic changes in both consumer and business content production and distribution - whether the content in question is movies, news, software, or business applications. These changes are precipitated by the availability of widespread broadband network access ranging from DSL and 3G wireless speeds to direct fiber connectivity.  According to Business Redefined, households currently connected with broadband access "consume" over 20 percent more entertainment time than households without high-speed access.  "Broadband is snacking technology. With broadband’s convenience you will eat more," quips one CEO.  That increase is compounded by the study’s prediction that, after years of delays, the rapid deployment of broadband connections is finally beginning to happen. As one CEO says, "Broadband will be everywhere, and it will be reliable, available, and low cost."

The rise in household consumption, however, represents only part of the escalating demand for content and services.  Research in the study predicts that by 2004 nearly 80 percent of large companies - compared to 65 percent today - will have fiber connections to their buildings.  Even mid-sized businesses with 100 to 499 employees are driving demand: 54 percent are expected to have fiber-optic access by 2004, up 35 percent from current levels.

"Business Redefined underscores that virtually everything is changing - business models, distribution channels, market acceptance, and pricing," states Alexandre Haeffner,  CEO of Telecom Media Networks an industry practice at Cap Gemini Ernst & Young.  "The opportunities are unprecedented.  The big challenge for CEOs will be to recognize the opportunities and take the risk to try to exploit them."

The report also finds that the fierce new competition, anticipated in a predecessor study in 1999 has actually arrived.  This is feeding the CEOs’ increased concern and uncertainty about the future.  For example:

• The incumbent network operator in Hong Kong has lost 39 market share points in the last five years;
• Australia’s incumbent has lost 33 points over the same period;
• Incumbents in the U.K. and New York state have each shed 13 points; and
• In entertainment, from October 1998 to July 2000, industry associations launched major lawsuits against emerging competitors that threatened traditional industry business models.

Among the study’s other major findings and predictions:

• The explosion of digital broadband access means multiple new revenue opportunities for content producers, the creators of entertainment, news, software, and business applications. As one CEO reflects, "Technology will fundamentally reshape the way content can be delivered and stored." Content producers who want to capitalize on the new opportunities will apply creative new approaches to advertising as well as take full advantage of the mix of revenue generators including content subscription, pay-per-use, time-specific pricing, mobile content, and digitization of existing content.
• Online advertising is in a sort of purgatory right now, and CEOs surveyed expressed frustration that it hasn’t come near its promise. But they’re generally upbeat about advertising’s long-term prospects. "Advertising in the digital world will be a lot more effective. Consumers will have a choice to either remain anonymous and receive content for a premium, or surrender some personal information and receive the content with some personally targeted ads," predicts one CEO.
• Research in the study supported CEO optimism about advertising’s long-term prospects. However, this time the spending will be led by traditional, not dot-com, companies. 
• Fierce competition is forcing content producers to re-examine their businesses in light of the new business opportunities. Content producers who had been distributing their content for free or with traditional pricing will be migrating rapidly to other models, such as subscriptions and per-transaction pricing and time-sensitive pricing. "The future of content will be about having on-demand access to it, not ownership of the physical medium," indicates one CEO.
• Content Packagers have emerged as a pivotal point of value creation. A powerful new Internet business model has expanded into the offline world. The term Content Packager was coined during the original study, 18 months ago, to describe an Internet business model in which an electronic intermediary helps people find what they’re looking for by matching its knowledge of the customer against its knowledge of information and applications.  Examples of this new generation of off-line Content Packagers includes cable and satellite companies who are introducing content-on-demand, manufacturers of set-top boxes who allow viewers to define the content they want and strip out programs and advertising they don’t, and online exchanges for businesses and consumers.  The study even identifies application service providers (ASPs), who are prepared to redefine the delivery of a whole new type of business application, as potential Content Packagers.
• Network players finally have to place their bets on services. Network operators, with their core network franchises imperiled, must diversify into value-added services in order to survive.  Revenue from data transmission is growing 18 percent per year, but that growth rate is beginning to slow and the prices are falling so rapidly that network operators are experiencing declining returns on their network investments.  On the other hand, CEOs have noticed that revenue from communications-based services is expected to balloon by an average of 68 percent per year for the next four years.  With investor valuations of network-based application and service companies at 20 to 80 times revenue while network operator valuations languish at just two to four times revenue, CEOs clearly view the shift from infrastructure build-out towards services as critical. 
• Four implementation challenges guard the gates to a company’s success.  Winning the war for talent, building an agile organization, focusing on the customer, and improving operational support systems surfaced as the universal business challenges shared by CEOs in the communications, entertainment, and enabling technology industry sectors.  More than 40 percent of CEOs ranked launching new services or extending existing offerings among their top implementation challenges, with 32 percent citing the need to recruit the right talent as a priority.  "Our industry’s fundamental flaw is ignoring the customer," said one CEO. 

Business Redefined: Connecting Content, Applications, and Customers is a global study, by Ernst & Young and Cap Gemini Ernst & Young, into key industry issues and an outlook on the future through the prism of CEOs and other executive leaders from 128 companies across the communications, entertainment, and enabling technology industries. The study sponsors

synthesized in-depth CEO interviews and analyzed secondary source data from more than 100 information sources around the world to provide fact-based analysis and additional insight into the convergence of the communications, entertainment, and enabling technology industries. More than the results from a survey or a conference report, Business Redefined builds on a 1999 groundbreaking predecessor report of the communications industry, which used a similar methodology and CEO interview format.

Ernst & Young and Cap Gemini Ernst & Young are separate firms.

Ernst & Young, a global leader in professional services, helps clients to quickly and confidently make financial decisions. Its 77,000 people in more than 130 countries have the industry and financial experience to provide fresh perspectives on operating in the new economy. Ernst & Young offers traditional audit and tax services, as well as customized services in corporate finance, online security, risk management, the valuation of intangibles, and e-business acceleration. In addition, legal services are available in various parts of the world where permitted. A collection of Ernst & Young’s latest ideas on the new economy can be found at www.ey.com/tce

Ernst & Young refers to the U.S. firm of Ernst &Young LLP and other members of the global Ernst & Young organization.

Cap Gemini Ernst & Young is one of the largest management and IT consulting firms in the world. The company offers management and IT consulting services, systems integration, and technology development, design, and outsourcing capabilities on a global scale to help traditional businesses and "dot companies" continue to implement growth strategies and leverage technology in the new economy.  The organization employs more than 59,000 people worldwide and reports global revenues of about 8.5 billion euros (2000 pro forma).

More information about individual service lines, offices, and research is available at www.cgey.com

Telecom Media Networks

Telecom Media Networks, an industry practice of Cap Gemini Ernst & Young, focuses on the consulting needs of communications service providers worldwide.

More information is available on www.cgey.com/TMN