Time to face a new reality
State of the MENA media market — Part 2
This is the 2nd part of a 3 part analysis on MENA’s media market. Follow this link for part 1.
The way forward
Today’s industry dynamics are fundamentally different from the ones in the pre-internet era. Media companies that have been left behind must act now and evolve their businesses before it is too late. Embracing digital platforms by offering better digital solutions for consumers isn’t enough though. What is even more important is to make the business models fit for the future.
The first business question that any media company today has to answer is whether revenues should predominantly be driven by other businesses (e.g. advertisers) or directly by consumers (e.g. subscribers).
The real value of quality content
In order to do so, it is important to be honest about the value of media content, particularly expensive “quality content”.¹ There is no doubt that unique quality content is valuable for consumers and society overall but what about the true value of unique quality content for advertisers? Advertisers don’t want to be associated with low quality content that tarnishes their brand and there are benefits to being associated with top content. However, after a certain quality² threshold is reached the incremental benefit for advertisers slows down, particularly as quality often comes at the expense of reach, a metric advertisers care a lot about.
As a result, the value of showing your ads next to expensive quality content is limited. What matters a lot more to advertisers is reaching their target audience at scale with demonstrably impactful advertising solutions.
It is also very important to be honest about the type of “quality content” consumers are actually willing to pay for and what monetizing this content directly from consumers means. This is not just important because the Middle East and North Africa has traditionally struggled to monetize media via subscriptions but also because the subscription market is getting extremely crowded. In this environment, it is crucial to offer a unique product and to be better than others at acquiring and keeping customers. The New York Times has been taking this to heart more recently and demonstrated that a business turnaround is possible, even for one of the oldest publications in the world.
Pareto’s misinterpretation
There is another crucial reality that anyone in the media and advertising supply chain should take to heart. It has to do with 19th century economist Vilfredo Pareto and the misinterpretation of the business principle that was named after him.
The pareto principle (also known as the 80/20 rule or the law of the vital few) states that, for many events, roughly 80% of the effects come from 20% of the causes. This led to a widespread believe in the ad industry that winning over a few, large brands is the key to success. While winning over the biggest clients might have worked in a pre-internet era, where the potential business pool was limited, it isn’t enough anymore in a world with millions of potential customers.¹
Yet, the majority of ad-based media companies and agencies in MENA focus predominantly on solutions for large brands. By doing so, they leave a massive SMB market — that also happens to be one of the fastest growing parts of the ad pie — almost exclusively to the digital duo.
It’s time for new business models
Many media companies in the Middle East and North Africa have neglected their business models far too long and have to act now.
Niche publishers
Niche publishers, including those that service local news, should stop creating generic filler content that is meant to support an ad and inventory based business model. Today’s advertisers have better alternatives and consumers aren’t willing to pay for generic content.
Instead, these publishers should invest the money that is saved by eliminating obsolete functions, into capabilities that matter for subscription businesses: truly unique content that customers are willing to pay for as well as expertise in customer acquisition and retention.
A major advantage of this model is that the addressable market for unique content becomes global rather than being constrained to a country or region. A good example for this is Stratechery, the newsletter by Ben Thompson I referred to previously. Stratechery has subscribers in more than 85 countries that are paying $10 a month for 3 pieces a week by a sole contributor based in Taiwan. I am one of the subscribers and have gathered a lot of inspiration (including for this article) from Stratechery.
If there is room for profitable quality journalism from a company as lean as Stratechery, there should also be room for more quality content from countries as small as Bahrain or Kuwait. In fact, subscriptions in the internet era should allow for the journalistic variety that a region as diverse as MENA deserves but that an ad-based business model that was primarily focused on the largest markets (Saudi, UAE, Egypt) couldn’t sustain.
Large scale publishers
Publishers with enough scale can focus on an ad-based business model but need to be realistic about their monetization expectations and cost structure.
We established earlier that reach, ad formats, targeting and measurement are the key factors that advertisers care about. Most publishers in the region lag behind in these areas and building a best-in class in-house solution is cost-prohibitive without massive scale. That is where partnerships and third-party solutions come in. DMS, Choueiri’s digital arm for example, is bundling the inventory of publishers to achieve scale and has invested in its targeting and measurement capabilities. Google, Facebook, Twitter and Co also provide solutions for publishers to tap into their targeting capabilities and valuable SME demand.
Unfortunately, the advertising yields many MENA publishers achieve via proprietary or third party solutions aren’t high enough to support their businesses. If that is the case, it is time to face an uncomfortable truth: Either costs can be reduced enough to make the business model viable or an ad-based business model was the wrong approach for a company with this cost structure and scale in the first place.
Creators
The same logic holds true for “creators” (aka influencers) too. Creators have the advantage that their organizations tend to be pretty lean and that their endorsement can influence brand perception and purchasing behavior more than other contextual factors. However, as consumers get used to the fact that influencer marketing effectively is advertising and clients start demanding more transparency, the things that matter for ad-funded publishers will also matter for influencers: Scale, targeting, formats and measurement. Creators that lack this capacity will, therefore, either have to build it themselves or work with 3rd party companies that can provide it.
Successful creators have another monetization advantage over many traditional publishers. In the eyes of consumers, their content and brands are unique, allowing the influencers to develop direct to consumer (D2C) revenue streams. Huda Beauty’s D2C business has grown to encompass more than 200 products across five categories⁴ and is a great example for the global opportunity that is available to successful creators from MENA today. Social media companies know about the importance of influencers for their platforms and will only try to support these efforts further⁵. Traditional niche and scale publishers should follow these developments closely and explore if there is room to develop new DTC revenue streams too.
Ad-supported TV
Similar to publishers with scale, TV channels in the region need to realize that consumers care deeply about the user experience and that advertisers predominantly care about results. That means that linear TV as a consumer proposition and advertising as core revenue model probably aren’t the right approach for the future.
MENA’s TV companies and sales houses have tried to address some of their shortfalls over the last years. MBC, for example, launched channels for individual countries in North Africa that allowed better targeting and new revenue opportunities from advertisers that are only interested in a specific country. However, due to its structural disadvantages it will be very difficult for linear TV to catch up with the ad targeting, measurement and user experience that digital players provide.
So what about the prospects of advertising video on demand (AVOD) then? AVOD could provide brand safety, premium inventory and strong ad formats while solving many of the user experience, personalization, targeting and measurement issues linear TV has. Shouldn’t this be an attractive option for consumers and advertisers alike? The short answer is that it does indeed provide an attractive alternative for advertisers and for many lower and medium income households in MENA that can’t afford expensive subscriptions. There is an important caveat though. AVOD doesn’t change the fact that advertisers end up putting less weight on content than on results. In a world where advertising prices are set by aggregators that provide good results with low content costs, AVOD providers will either have to make compromises on their margins or the cost/quality of their content.
Consumer-supported TV
For high quality TV, particularly story-driven entertainment with meaningful content costs, direct monetization via the consumer seems to be a better approach. Either by becoming one of the top subscription-based players in MENA or by creating content that helps the top players to differentiate their offerings. It is encouraging to see that MBC, which has traditionally been very reliant on advertising, has recently been doubling down on both subscriptions and differentiated, local content.
According to a recent analysis, SVOD revenues in MENA (excl. Turkey and Israel) are expected to increase from around $300M in 2018 to $1.2B in 2024.⁶ Piracy should eventually also become more manageable, particularly as SVOD offerings start to offer real convenience benefits over pirated solutions. While $300m and $1.2B are still relatively small numbers, it is a section of the media market that offers a lot of promise.
Fortunately, monetizing the consumer doesn’t mean subscriptions are the only leg to stand on. For story-driven TV, monetization via character rights, i-tunes sales, theme parks and merchandise should play a bigger role too. I assume that this was a big contributor in Disney’s decision to build their own subscription service and to price it cheaper than many had expected. For Disney controlling the promotion and exposure of their key properties (something that wasn’t possible on Netflix) and therefore controlling the fate of non-subscription based D2C revenues was just as important as revenues from content sales and subscriptions.
The case of live TV and sports
The only “traditional” TV audience use cases that international aggregators in MENA haven’t solved for yet are live TV and sports. Rights for sports and live TV are often exclusive and very expensive and it is unlikely that aggregators would be able to recoup these costs through advertising alone. The exclusivity of the content in combination with the mass appeal makes a combination of affiliate or subscription revenues and advertising a feasible business solution. That is why it isn’t a surprise that Abu Dhabi Media recently acquired the rights to UFC content in the region and that MBC bought the F1 rights for the next 5 years. The content is unique and very appealing. However, making F1 content available on free to air rather than trying to use it to build a sustainable subscription, affiliate and events business, that is merely supported by advertising, would be a mistake in my humble opinion. While piracy is a real challenge today, it will hopefully become less of an issue in a world that is moving towards OTT (over-the-top) solutions. The fact that unique and expensive content has more value for consumers than for advertisers on the other hand seems like an irreversible truth.
Other forms of media
While publishing and TV are just two of many media types, the underlying business model logic and trends remains the same for other media forms.
In Audio, for example, traditional radio now has to compete with aggregators like Anghami, Spotify and YouTube. In the case of music there is one notable difference to other media forms though: The supply is controlled by a small number of labels. This means that aggregators in this space have less power over supply and higher marginal costs in the form of marginal payouts to record labels.
This also explains why leading aggregators like Anghami and Spotify are aggressively entering the podcast market. Podcasts can not only provide services like Anghami and Spotify with exclusive, differentiated content, they are also largely controlled by individual podcasters. This improves the bargaining power for aggregators, the business economics and the ability to monetize the aggregated supply through subscriptions and advertising.
It is the responsibility of every media company in the region to adapt their business models to the new rules of the game. When done properly the future is much brighter than it might seem.
B2B business models
So far, most of my recommendations for media companies in the Middle East and North Africa referred to consumer-facing businesses. There are also many B2B business models that play an important part for the ecosystem. Some of them are evolving to stay up-to-date (e.g. the agency business model) and some of them are still in their infancy and offer a lot of untapped potential.
To draw an analogy for the latter from the commerce world: in my humble opinion, the biggest challenger to Amazon’s commerce philosophy isn’t Walmart or Alibaba but Shopify. Shopify leverages the economies of scale that come from servicing 800K+ businesses to provide highly differentiated brands with cost effective tools and infrastructure that make a niche D2C approach(that circumvents companies like Amazon) viable. In return, Shopify was able to build a business that is worth close to $40B (as of Sept 11, 2019).
The same “faceless” enabler model should offer a lot of untapped opportunity in the D2C media space too. The recent investment of a16z (a major venture capital firm) into Substack, a company whose goal it is to help writers publish newsletters and monetize them via subscriptions, is testament to that.
The responsibility of aggregators
What about aggregators then, the companies that have been blessed with the highest consumer attention and margins in this new era? Do these companies have no responsibility to create a more level playing field and to support other forms of media?
Just like the winners of old — leading TV stations, newspapers, sales houses and agencies — the winners of new don’t have a responsibility to design a competitive or fair market per se. That is the role of the government (more on that later). However, it is the responsibility of these companies to play by the rules and to act in good faith when no rules are established yet. This means:
- restraining from anti-competitive behaviour
- limiting “rent seeking”⁷ when revenues are shared with other media companies
- keeping consumer data safe and providing transparency (and where possible optionality) about the usage of data
- paying their fair share of taxes in the countries they operate in (a responsibility that applies to all multinationals not just tech companies by the way)
It also means that tech companies have to consider potential negative externalities⁸ (like the possibility of misinformation campaigns by bad actors) more than they did in the past. New, internet-enabled means to communicate and to distribute and consume media, provide society with incredible benefits. The benefits to consumers in MENA are arguably even higher than in the US or Europe. However, new forms of communication and media can also have bad consequences that are not taken into account in private markets and that governments haven’t created rules for yet. Leading tech and media companies have a particular responsibility to think a lot more about these negative use cases so that the good that technology does can be amplified and potential harm can be minimized.
The responsibility to create a healthy media ecosystem does not lie entirely with the private sector though. Governments also have an important role to play. More on this here in the third part of this analysis.
Footnotes
[1] The definition of media content quality will always lie in the eye of the beholder. I am differentiating between quality and non-quality content by asking whether it provides real value to consumers, businesses or society overall. The probably clearest expression of value by consumers is their willingness to pay for said content because it is entertaining or useful. In the case of businesses, value is provided if content improves the commercial performance and in the case of society when it has positive side effects, for example, by making its citizens better educated and informed.
[2] To clarify: I am not referring to the quality of the actual advert here but rather to the quality of the content the advert appears next to.
[3] Take Facebook, for example. There are more than 90 million small businesses and more than 7 million active advertisers on Facebook today.
[4] https://www.entrepreneur.com/article/338195
[5] Youtube, Instagram and Tiktok all presented new d2c monetization products (ranging from memberships and merchandising to paid for comments) this year.
[6] https://www.broadbandtvnews.com/2019/01/28/mena-svod-revenues-to-triple/
[7] “rent seeking” in this context occurs when a company attempts to leverage its resources or market position to procure an unwarranted monetary gain from a third party without creating additional wealth to society.
[8] Negative externalities are negative effects on society that aren’t being considered sufficiently in a private market. An example would be the negative effect that smoking can have on the people around you.
