NZInstitute BB report: Digital media benefits are underestimated

Continuing a series of comments on the excellent NZ Institute Broadband report, we turn to page 8: Digital media.

NZ Institute estimate $800m in extra benefits, with the tree showing $680m to $1.03bn. Here’s the top half:

NZ Institute

Let’s look the right hand sides.

Current cost base = $2.1 billion.

The source for this is unclear, but stats NZ is listed as one of the sources, so let’s assume that this is derived from the total revenue from digital media companies in New Zealand.

But, err, what is a digital media company? Is Stuff a digital media company? (it is after all part of Fairfax, a media company, and is in the Fairfax NZ “Digital” group). The box further down the page shows numbers from film and video games, and also shows ‘over $2bn” for film, so are we to assume that ‘Film’ is the Digital Media space? If so then the report misses the online media space, which is growing really quickly, and is also suffering from the shonky broadband.

But back to the definition, which is mainly film. The next assumption is that 80% of the revenues from these film industry companies is costs. But is that low margin fair? It seems not to me when you take Peter Jackson’s various successful empires into account, empires which no doubt have much higher margins.

Moreover, are the numbers sustainable, or do they assume that Peter Jackson will keep delivering LOTR scale hits? Without digging deeper into the source data, I’d assume that the actual historical costs are lower than $2.1bn, and suspect that the revenue over the next few years for film will be lower. (While sincerely hoping that they are higher, and that Wellywood can keep growing.)

Productivity gains: 15-20%

These gains are all about reduction in time to move and manipulate data, not about increased sales, which is tracked further down the page. If this productiviety gain is true, then I’m shocked that the cost structure of the movie industry is so biased towards the movement of data.

Indeed, it is surely is a relatively small part of the industry costs, 3 simultaneous locations LOTR productions not withstanding. Perhaps Weta Digital has big costs in this area, but surely what data transfer solutions they have now are adequate for most of their work, else they would have flown the coop years ago.

I’m also dubious about ‘productivity gains’ as this implies that people will be able to do more in less time. I would imagine that people are not currently sitting idle watching data move at a snail’s pace, but are concurrently working on whatever data that they have on the local servers, and at local speeds. The increased broadband speeds will certainly increase speed of delivery to the internal and external customers by reducing waiting time, but not necessarily increase the amount of work done per individual, or even the costs (aside from BB costs).

NZ Institute

The second half of the tree estimates growth benefits from better broadband. I feel it is really understated.

Firstly, let’s bring back the online media industry. Last year the ASA tallied $65m of online advertising, and the latest numbers imply we’ll hit $120m or more in 2007.  That’s pretty good, but over in the UK the online penetration is over 10%, which would imply over $220m in online advertising income.

I estimated in a conference presentation a few months back that the difference in speed of online advertising penetration between here and more advanced countries has meant the industry lost $500m or so of income over the last few years (total, not annual. Annual would be about $160m last year). That income would have spawned any number of innovative online media companies, some no doubt with world wide appeal.

This to me is where the growth is – not just the transfer of advertising spend, but the creation of companies fueled by NZ dollars that can compete around the world. This is the sad loss we have suffered, and will continue to suffer unless something is fixed.

But back to the tree, which is film focussed. Frankly I guess that the film industry here gets by on reputation, not speed of delivery. However, I’m willing to bow to the industry experts and accept a 5-8% kicker. This could be in Weta Digital (and spin off’s) post production work perhaps.

Published by Lance Wiggs

@lancewiggs