Winners, losers and scapegoats
State of the MENA media market — Part 1
This is the 1st part of a 3 part analysis on MENA’s media market. Here are part 2 and part 3.
Introduction
As Facebook’s first Managing Director for the Middle East and North Africa, I experienced the digital transformation of the region’s media and advertising industry first hand.
Many commentators characterize the current state of the media and ad ecosystem as dire, blaming power hungry Google and Facebook for the seemingly fragile state of the market. This view is too short sighted though since the underlying challenges many companies face are predominantly a function of business models that don’t fit the current time.
As long as companies adjust their business models and governments take their responsibility seriously, there is a tremendous opportunity to provide consumers with the best media experience ever and for companies of all sizes to flourish.
Sizing the market — Let’s get some numbers straight
Before digging deeper into the region’s business model challenge, let’s look at the key revenue sources of media companies.
Advertising — Its not all bad news
Let’s start with the good news first. The state of the ad market, which so many media businesses in the Middle East and North Africa rely on, isn’t as bad as most expert suggest. The narrative of most analysts goes something like this: “Due to the reduction in oil prices in 2014 and the political instability in the region in the years to follow, ad spend in MENA¹ today is roughly at the level it was after the global financial crisis in 2009. Somewhere in the range of 3.0–3.5 billion USD.”
Most analysts agree that digital advertising was the only winner over the last years and estimate that it will make up about 40% of ad spend ($1.3B) in 2019. This would imply that the Middle East and North Africa still lags behind advanced economies such as the US where digital is expected to account for 54% of ad spend.²
In reality, the ad market probably fared considerably better because the impact of mobile advertising and SMEs is still being underestimated.
A closer look at the publicly available advertising ARPU (average revenue per user) of big tech companies and their user numbers in MENA suggests that Facebook and Google will probably generate $1B+ each in 2019. The same analysis would suggest that a smaller player like Snap will comfortably surpass the $100m dollar mark.
After adding other sizable companies like DMS³, Twitter and Microsoft and factoring in that this doesn’t represent all players, an estimated $2.5B in digital ad spend starts to look like a conservative estimate.
This implies that the overall ad market is probably $4.5B+⁴ and that MENA’s digital share is 55%-60% - which puts it ahead of the U.S as a percentage.
It also implies that the share of Google and Facebook — 75%+ of digital and 40–50% of overall ad spend — is higher than in the US (about 60% digital share), at least for now. Smaller players like Snapchat and Twitter have demonstrated good momentum and with new players like TikTok and Amazon⁵ ramping up their ad services internationally, competition will increase again.
This paints a rather rosy picture for large international tech companies, particularly the digital duo (Google and Facebook), but also a much bleaker one for everyone else. Traditional media companies and local digital publishers are taking less and less share of the pie.
Direct to Consumer — Advertising’s little brother
While most media markets around the world rely on a balanced mix of advertising and DTC (direct to consumer) revenues, the Middle East and North Africa is a notable exception.
Pay-TV — a major industry in most parts of the world — never really took off, in part due to the unique challenges the region is facing in terms of piracy. New competition from OTT (over-the-top) services that provide their product over the internet (bypassing traditional distribution) are also not helping the matter. According to a recent research report⁵, pay-TV in the region’s 13 Arab-speaking countries fell from US$1.25 billion in 2016 to US$1.06 billion in 2018.
While SVOD (subscription video on demand) offers a lot of promise, it is still in its infancy. A recent estimate suggests that 2018 revenues for MENA barely surpassed $300M.⁷
These numbers demonstrate just how reliant the region has traditionally been on advertising revenues.With a bigger and bigger share of ad revenues going to large international tech companies⁸, the big question is, how will the rest of the ecosystem survive?
Looking for explanations (and scapegoats)
The impact that the internet had on the media industry often gets described as a simple shift of consumer attention from traditional media forms like newspapers to the desktop and then the smartphone. However, the impact was much deeper. It didn’t just impact consumer behavior, it also changed the industry dynamics fundamentally.
While the MENA region has always had to struggle with relatively small ad and pay-TV markets, times were pretty good for most professionally run media and advertising companies in the pre-internet era. Sure, incumbents had to adapt when consumers shifted part of their attention to new forms of media (e.g. from radio to TV) but there was one constant for newspapers, magazines, radio and TV stations: the amount of media companies was limited. Therefore, competition was limited and returns were very healthy.⁹
Before the advent of the internet, distribution was very expensive: printing presses, truck fleets and broadcast licenses required massive upfront investments and the market could only sustain so many profitable print, radio and TV companies. In addition, large media companies in the the Middle East and North Africa benefited from significant economies of scale and a measurement ecosystem that favored incumbents.
Media in the internet age
The internet transformed three elements of the media industry drastically:
- Media supply: Media supply increased dramatically. Some content became free (e.g. user generated content) and a lot of the remaining content was commoditized.
- Consumer demand: Demand increased as new forms of media allowed people to consume media anywhere and anytime. At the same time consumer attention shifted to new types of businesses that fulfilled core needs better than traditional companies (e.g. Google to find information, Anghami to improve the commute, Facebook to fight boredom).
- Media distribution: Distribution costs (for digital goods) and transaction costs were reduced massively. This eliminated a massive barrier to entry and allowed customer relationships at unprecedented, global scale.¹⁰
This led to an environment where the most successful “media” companies are massive, demand-driven networks that match unprecedented amounts of content with a global consumer base. Ben Thompson, the author of a popular tech and media newsletter, termed these companies (e.g. Google, Facebook and Netflix) “Aggregators”.¹¹ A key differentiator in this environment is the filtering, curation and personalization of the limitless amount of content for a global consumer base.
Aggregators don’t rely on limited and costly distribution as a barrier to entry. They have their own set of competitive advantages, which are a lot more relevant in the internet era: strong network effects, high switching costs, bargaining power with suppliers, economies of scale and, yes, also recently introduced government regulation.¹²
These competitive advantages of aggregators reinforce themselves: A massive user base makes a platform attractive for media suppliers who are willing to commoditize and modularize their content to reach these consumers. The additional media supply makes the platform even more attractive for users and so on. This virtuous cycle means that just like in the good old days a handful of winners tend to take most. But now they tend to take most at a global level, not a local one.
While aggregators enjoy very strong barriers to entry they are not untouchable. Aggregators are fundamentally demand driven and rely on their strong user base to succeed. That means that the user experience (including but not limited to strong content)¹³ is their key differentiator and also the best way for a new entrant to dethrone the market leaders.
Advertising in the internet age
The internet also changed four key elements of the advertising industry — the life-blood of MENA’s media ecosystem — dramatically:
- Supply/Ad inventory: An unprecedented increase in media supply led to a massive increase in ad inventory.¹⁴ Far better targeting and measurement mean that real value is now attributed to superior targeting, superior formats and superior measurement. The value of undifferentiated ads today is effectively zero.
- Demand/Advertisers: The number of advertisers and the demand for advertising increased substantially due to the elimination of barriers to entry for consumer brands¹⁵, particularly SMEs.
- Intermediaries/Agencies: Direct access to online advertising tools and the concentration of digital consumer attention around Google and Facebook made media agencies less relevant for an increasing number of digital first advertisers.
- Buyer/Supplier Concentration: The increased number of advertisers and the concentration of consumer attention and quality inventory with fewer companies meant more power for top suppliers.¹⁶
Ad agencies provide a good example for the last point. In the pre-internet era, the vast majority of advertising spend was flowing through the large media agencies. The agencies delivered value to advertisers by providing expertise, by simplifying the fragmented media ecosystem¹⁷ and by reducing advertising prices. After all, agencies bundled the demand of the biggest advertisers to improve their leverage over ad suppliers. On digital, however, a much smaller part of the overall ad spend flows through media agencies and as a result their leverage decreased considerably.
Take WPP, for example, by many measures the biggest ad agency in the world. In 2018, Martin Sorrell, its longtime CEO, declared that WPP had spent $5B on Google and $2B on Facebook in the previous year. That may sound like a lot but bearing in mind that they have hundreds of clients among the Fortune Global 500¹⁸ and that Facebook’s and Google’s ad revenues exceeded $135B that year it isn’t.
$5B and $2B represent about 5% of Google’s and Facebook’s 2017 advertising revenues and this percentage probably declined further since then. This means that the big 5 agency groups combined today probably account for less than 25% of the digital duo’s ad revenues.
All of this doesn’t mean that agencies or large brands aren’t relevant for the digital duo or other digital players. 25% of $135B+ is still a lot of money, the upside potential is huge¹⁹ and both agencies and large brands play an important thought leadership role in the marketing world. That is why Google and Facebook have teams that focus exclusively on servicing these clients and agencies. However, it implies a large shift in power and means that large clients or agencies are unlikely to get a lot of extra concessions (e.g. rates, solutions) apart from better service.
The reduced bargaining power of agencies and large brands could lead to the conclusion that advertisers are worse off in this environment because they have to endure higher prices. However, this hasn’t proven to be true as of yet.
Demand for advertising increased in the internet era but supply expanded even more. This reduced the average cost clients have to pay to reach consumers. When Scott Galloway, a well-known critic of big tech, argued at the DLD Munich conference earlier this year that advertisers are worse off because of Google and Facebook, Martin Sorell corrected him saying:
“Google, Facebook, Amazon deliver good value and demonstrably good value… the consumer has benefited, and the advertiser has benefited as a result…”²⁰
While the cost of online impressions and views provides a comparable benchmark, it only tells part of the story. After all a business doesn’t really care about the cost to reach someone. It cares about the ROI of advertising. It cares about customer acquisitions, conversions, changes in perception and sales. With the advent of the internet, it wasn’t just the amount of ad inventory that increased but also the effectiveness, particularly for companies that rely on targeted advertising. That implies that the supply of “desired outcomes” increased even more than a simple ad inventory perspective would suggest. This, in return, means that the price advertisers have to pay for these desired outcomes decreased even further than a mere cost-based perspective would suggest.
Despite the supplier concentration, as of today, advertisers seem to be better off than a few decades ago.
Winners and losers
What does all of this tell us about the health of the MENA media ecosystem as a whole then? How have the different stakeholders fared in the internet era?
Winners:
- Consumers: Consumers today have access to more relevant content than ever, and they are paying less for it. The main trade off is that more and more of their data is used to optimize the user experience and advertising.
- Advertisers: Advertising has become cheaper and more effective, particularly for smaller companies.
- Aggregators: The large aggregators are clear winners. Companies like Google and Facebook generate healthy excess returns and even though Netflix is still cash flow negative, the market forecasts strong returns for the winning subscription-based aggregators too.
- Content creators with differentiation or scale: Content creators like UAE-based Khalid Al Ameri were able to benefit from the internet era. Not only has the internet’s cheap distribution allowed many new types of creators to emerge but it has also become much easier for them to reach a global audience.
Losers
- Intermediaries/Agencies: Agencies have lost some of their USPs and some of their bargaining power. However, structurally the internet era also provides new opportunities for intermediaries and value added services.
- Undifferentiated media companies: Media companies that provide undifferentiated solutions are among the biggest losers, particularly in MENA where revenues are so reliant on advertising. This includes many traditional media companies but also new digital upstarts.
- Content creators without differentiation or scale: The amount of content that is available today is unprecedented. For content creators without a differentiated product or a strong brand this means they have become a commodity.
Overall, the picture suggests that the current situation is much better than most commentators claim. Sure, excess returns have shifted dramatically within the value chain but there is more supply and more demand overall and most consumers of media and buyers of advertising seem better off.
Does this mean then that the outcry about the fragile state of the media and advertising market in the Middle East and North Africa is totally unjustified? No. There are specific problems that need to be addressed to assure a healthy ecosystem in the long term:
- The current, advertising-focused business model in MENA makes it very difficult to monetize quality journalism and local content. This could lead to a situation where less local content and quality news is created.
- In a media market like MENA that is largely free, more and more consumer data is used not only to improve the experience but also to improve advertising. While most consumers seem to be fine with this, the bigger question is whether they are provided with clear enough information to assess the full tradeoffs.
- The concentration of power with big international tech companies could lead to a future situation where these companies maximize returns over consumer/advertiser surplus.
- Media aggregators are an increasingly important part of the economy. This is where a lot of growth and innovation is happening. The winner takes most dynamics in media could lead to a situation where the leading players become complacent and stop innovating.
Granted, some of these issues, particularly points 3 and 4 are “maybes” and so far, there is little evidence that this is occurring. However, we still need to be aware of these risks and mitigate them sooner rather than later.
What should be done then to manage these concerns? More on this here in the the 2nd part of this analysis.
Footnotes
[1] For the purpose of this report the definition of MENA excludes Turkey and Israel since these countries are typically considered to have separate media/ad markets.
[2 https://www.emarketer.com/content/us-digital-ad-spending-will-surpass-traditional-in-2019
[3] DMS is the digital sales arm of Choueiri Group. Choueiri Group is the ad sales representative for a many major media companies and was considered the most dominant supply side ad player in MENA before the rise of Google and Facebook.
[4] For the market sizing, I focused on advertising that is spend with classical media companies as well as tech companies that operate in a grey zone between media and tech. Other, sizeable forms of marketing (e.g. trade/shopper marketing) that don’t support the media and content ecosystem were not taken into account.
[5] Amazon is considered the biggest challenger to Google and Facebook and is expected to take a whopping 9% share in the US this year. https://www.emarketer.com/content/us-digital-ad-spending-will-surpass-traditional-in-2019
[6] https://www.digitaltveurope.com/2019/01/21/digital-tv-research-mena-pay-tv-impacted-by-bein-dispute/
[7] https://www.broadbandtvnews.com/2019/01/28/mena-svod-revenues-to-triple/
[8] Benedict Evans makes compelling arguments why companies like Netflix should be classified as TV companies rather than tech companies: https://www.ben-evans.com/benedictevans/2019/7/31/Netflix. However, for reasons of simplicity, I have used the more commonly used “tech” classification here.
[9] One could argue that there has traditionally been an oversupply of free-to-air TV in MENA and that the market was very competitive. However, for many channels profitability wasn’t the main objective. There were only a limited number of TV channels with meaningful ratings and the margins of these professionally run channels were healthy.
[10] Ben Thompson summarizes these dynamics well in his articles. For example here: https://stratechery.com/2017/publishers-seek-antitrust-exemption-news-versus-advertising-a-better-solution-for-publishers/
[11] Defining Aggregators, Sept 2017, https://stratechery.com/2017/defining-aggregators
[12] The jury on the impact of regulation is out but early indicators suggest that government regulation will provide large tech companies with additional barriers to entry. GDPR, for example, does have consumer benefits but it also represents an additional cost that large players can deal with much easier than new entrants.
[13] A strong user experience includes all elements of a user’s experience not just the design or functionality of an app or website. Finding all of your friends can add to the user experience of a social network, for example. Finding your parents can add or diminish the user experience, depending on who you ask.
[14] In an environment where media inventory is basically limitless the only limiting factor to ad inventory are eyeballs. Since consumers effectively have access to a smartphone 24/7 and because cross-platform media consumption has become standard behavior, the actual ad inventory increased substantially.
[15] The internet eliminated two major barriers to entry for small companies: 1) Shelf space used to be limited and controlled by the biggest brands. AWS, Souq and other online sales platforms effectively made shelf space unlimited. 2) The best advertising solutions and rates used to be reserved for the biggest advertisers. Google and Facebook eliminated the price differentials and provide small advertisers with the same tools big ones ones have.
[16] It is important to point out that not all suppliers gained power in the internet era. Many traditional advertisers have lost eyeballs and most don’t offer strong solutions for SMEs. It is particularly Facebook and Google that gained power in the equation. As Twitter and Snap are improving their SME offering their power vs suppliers is increasing too.
[17] This function was in part also fulfilled by Choueiri Group.
[18] https://www.wpp.com/about/at-a-glance
[19] Many large advertisers still rely heavily on traditional media. This represents a massive opportunity for the digital players.
[20] https://www.youtube.com/watch?v=Dizm1nyzFrI, minute 22 onwards
