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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 remember a year ago? ................................................................................ 2 Our focus for this years study ..................................................................... 2 a note on the methodology for this years report ......................................... 2 What has changEd frOm last yEar ? .............................................. 3 a word on ad-spend trends ......................................................................... 3 megatrends .................................................................................................. 3 What arE thE challEngEs nOW ? ...................................................... 7 fragmenting ................................................................................................. 7 time effectiveness........................................................................................ 7 disruptive technologies ............................................................................... 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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ExECuTivE SummARy
REmEmBER A yEAR AgO ?
Will our industry have a future in 5, 10 or 50 years from now ? Is our industry being replaced by something else ? Is digital media the new way people will access information and companies will choose to communicate ? Our aim last year was precisely to try to find an answer to these fundamental questions by building an understanding of the different trends affecting each one of the paper end uses. In order to accomplish that we focused on End Use Trends understanding every single driver behind each trend by using a framework in which Report June 2011 6 factors were considered: End Use trends, Digital Media, Economic trends, Environment, Demographics and Advertising Expenditures. At the end of our study we concluded that although the outlook for the paper industry is challenging, we still have reasons to believe that it has a bright future if we focus on the right opportunities and confront challenges on a positive manner. We identified Coated Papers as the group with the best positive trends going forward. We also mentioned 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 successful and normally bring higher returns on investments.
Table of Content TABLE OF CONTENT 2 1. INTRODUCTION 3 2. METHODOLOGY 4 3. MEGA TRENDS 5 3.1. ADVERTISING TRENDS 7 4. TRENDS PER END USE 8 4.1. END USE DESCRIPTION 8 4.2. BOOKS 9 4.3. MAGAZINES 10 4.4. CATALOGUES 12 4.5. CORPORATE COMMUNICATIONS 13 4.6. OTHER PROMOTIONAL PRINT 15 4.7. ADDITIONAL TRENDS DETECTED FROM THE INTERVIEWS: 5. CONCLUSIONS 18 17
confidential

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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 favoring other media channels, especially digital media, we dont believe paper is being fully replaced by it. What we are experiencing now is the effect of a natural process companies are going through to embrace multimedia communication approaches. This adaptation is one of the main reasons for the migration out of paper. This migration will neither be a nonstop phenomena nor a full abandonment of paper, the future of our industry lies in between these two extremes.

OuR FOCuS FOR ThiS yEARS STudy

Were all our questions answered a year ago ? Mostly, but the world we live in is in constant change and we felt the challenges we were facing last year might have evolved or changed. In addition to this, the deeper understanding we gained from last year exercise open our minds to a new set of questions such as: f How digital media is affecting 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 suffering from decline in demand, over-capacity and tough competition ? If not, what can we learn from 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 years End Use analysis will not focus merely on updating and/or repeating what has been already learned and discovered a year ago, but instead we will be focusing on finding answers to this new set of 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 face that future 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 years study is much less focused on detecting specific trends per end use focusing only on the changes we have detected from a year ago and put them into context again.

A NOTE ON ThE mEThOdOLOgy FOR ThiS yEARS REpORT

This years study was also based extensively on a series of interviews and conversations we had with industry leaders of the paper value chain including printers, publishers, and brands owners and advertising agencies. A good number of 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 of similar industries we compared to ours and to learn something from what they have done (or are doing) to face the challenges of their own particular industry. The industries selected shared some similarities with ours such as: f They are a commodity industry f They are facing similar challenges such as overcapacity and decline in demand f They are facing a generalized industry threat from external forces (like digital media) After selecting a handful of industries to compare against we got close to one or two contacts within those industries and challenged our assumptions and learnings.
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whAT hAS ChANgEd FROm LAST yEAR ?

A wORd ON Ad-SpENd TRENdS
Looking only at the latest Zenith Optimedia forecast the situation doesnt look that bad. Global advertising expenditure is forecasted 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 flat with the exceptions of Austria, Finland and Germany where there is a small rate of growth pretty much in line with inflation. 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 different media is clear that Internet is by far the fastest growing medium. According to Zenith Optimedia Internet will grow on average 16% per year between 2011 and 2016. On an additional note, Social Media advertising on sites like Facebook, Twitter and LinkedIn accounted for almost 15% of all Internet display adspend in 2011. Zenith Optimedia expects social media advertising to grow at an average rate of 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 of print. Between 2001 and 2011 the internets share of global advertising rose by 14% while newspapers share fell 12% and magazines 5%. Newspapers share is still expected to keep declining whereas Magazines, the erosion is expected to stabilize by 2014. After internet, the second clear winner on the chart above is Television which has been able to maintain its share more or less stable (from 39.7% back in 2010 to a projected 40.4% in 2014) in an environment of general adspend growth, helping the medium to benefit from 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 from all media channels. If theres a difference its coming basically from 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

megatrends

Are the megatrends detected last year still applicable for our current environment? We believe the majority of them are still valid with some of them probably reducing a bit the level of severity and relevance. In order to simplify 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 of their solutions. This year we are at the inflection 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 afraid to accept the fast development of digital media are now pioneering revenue models in which digital media plays a very active (and strategic) role.

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70% traditional media

10% experimental new media Some of the findings are:

Companies more and more are embracing new media. f Out of the total marketing budgets around 70% of the budgets are dedicated to traditional media. Within this segment print plays a significant role f The next 20% of marketing budgets are dedicated to proven new media. (i.e. traditional internet advertising) Companies already recognize them as successful marketing channels and need to gain expertise quickly f The remaining 10% of the budgets are dedicated to explore innovative new media channels. In here we find all those channels that have failed to prove the ROI to companies so far, but have a big potential due to the popularity and innovation they bring.

20% proven new media

NETwORkEd SERviCE ECONOmy

This megatrend refers to the search companies are doing to find different ways to serve a customer with products and/or services that are complementary to the ones they are already providing. The driver behind this trend is the need to capture a higher proportion of the value within the industry. Reality is that due to the outlook of decreasing margins and tough demand expectations for the near and mid term future, companies need to find how to balance things out. At the end paper is a commodity and companies have less and less attributes to differentiate themselves, and additional value added services gives companies the opportunity to do this. Four different criteria have been found key in the process of selecting products, on that order:
1 Functionallity 2 Reliability

3 Price

4 Convenience

When customers cant find a differentiation in functionality between two products, they look at which company is more reliable. If all companies are equally reliable then customers will look for convenience. If a company doesnt add any convenience on top of their competitors then customers will turn to pricing to make a choice. When customers force 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 finding and adding additional functionality to the product or service a company offers making them more likely to avoid pricing as a differentiator.

digiTizATiON TRENdS
Although no significant change has emerged from a year ago in terms of the direction digitization and hardware development are taking, it is important to discuss the changes on the speed of 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-Readers and tablet computers: The impact e-Readers and tablet computers are having on our industry is not just related to the completely different ways users are interacting with content, but also in the way and easiness to access that content. EReaders and tablets technology made the transfer of content extremely easy, making it appealing for users to adopt it faster 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 of publishers. Long tail writers that had a harder time convincing publishing houses can nowadays skip a lot of intermediaries and are able to publish without too many issues. At the end smaller authors can publish whatever they want, well known authors cannot charge as much as they charged before for their work in other words, the playfield is leveling up.
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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 technology and content Somewhat related to the previous trend and to the fact that new devices are making the access of information extremely easy, this is also triggering the exchange and accessibility of tons of free content. Free content can be legal but also refers to all content being exchanged illegally. Piracy is having a big impact not only on revenue loss for the different industries affected by it, but is also causing delay on the surge of legitimate business models. Research done by PPA reveals that on average every time a digital edition of a magazine is legally paid for or accessed, there are a further 44 copies of pirated magazines being illegally downloaded. (To read the full article go to PPA website www.ppa.co.uk) 3. personalization Digitization is playing an important role on how personalized content and communications are getting done nowadays. Digitization is happening not only on professional circles but also on personal circles as well. The merge of personal with professional is opening the door to so many possibilities to personalize what you see and read on digital media channels. 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 of data and resources; resources that some companies dont have. Therefore personalization is still an initiative that hasnt been widely adopted as normal practice yet despite the clear benefits of using it.

mOBiLiTy
Mobility is becoming more and more important for our societies. Since the start of laptops some time ago to the rise of mp3 players (like iPods), Smartphones, e-readers to the most recent surge of tablet computers, the amount of activities we do on the go is increasing rapidly. Mobility is becoming part of the elements we as consumers demand from a variety of products and services nowadays. According to several researches done by CompTIA, mobile device shipments eclipsed PC shipments for the first time during 2011. Tablet shipments are expected to exceed 100 million units in 2012, up 50 percent yearover-year. Since 2009, mobile Internet usage has doubled every year. Annual mobile app downloads are projected to grow more than 10 times from 2010 to 2015 from 10.7 billion to 183 billion. Eighty-five percent of executives work remotely at least occasionally; 53 percent work remotely frequently.

mEdiA CONvERgENCE
Media convergence can be understood as the mix between computing, communications and content. In other words, and as defined by Henry Jenkins, media convergence is the flow of content across multimedia platforms, the cooperation between multimedia industries, and the migratory behavior of 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 of years ago. On the other side, video streaming is making users utilize computers as a replacement for TV, this especially driven by the amount of 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 of tablet computers even things like news are being dealt by social media platforms 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 potential of this development. What we are seeing now is just the tip of the iceberg and with every new technological development, more opportunities are created for smart companies to exploit. But we are still not there yet. Even consumers are expressing some level of resistance to convergence. A clear example of this resistance can be seen in the development of digital magazines. Before we started the end use study this year we had the impression that digital magazines that were offering much more interactivity through video streaming, audio and interactive content were better positioned to capture the attention of consumers than those that were basically replicating their printed versions through PDF files digitally. This was actually not the case and consumers are not better served with fancy applications for their mobiles or tablet computers. Some customers are happier with a simple PDF version of their favorite publications. Some of the reasons behind this strange development might be the feeling of 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 feeling of overexposure. There is much more information 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 information. Some of us are having the feeling of suffering some sort of information overload.

This information overload has triggered the idea of seeing the evolution of social media as a growing bubble (like the internet bubble of the late 90s and early 2000) that has the risk of bursting down. Despite the amazing growth social medias have had in the past years, this might have come to an inflection point already. Major social media firms that have gone public are suffering from lack of performance in the eyes of 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 of 43% and Zynga down 69% from their IPOs in June and December 2011 accordingly. This brings us consider a hype in the digital media development. We believe people are overestimating the impact of digital media in the short term. Digital media is growing and growing fast, but the main challenges our industry is facing right now have little to do with it, but more with the economic situation and intrinsic challenges of our own particular industry segments. Without a doubt digital media will have a tremendous impact on our industry, and we might fail to see the degree and severity of the challenge that lies ahead of us.

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whAT ARE ThE ChALLENgES NOw ?

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 the amount of potential customers a company can target), the huge choice that customers have not only in terms of brands and substitute products but also on the media channels they have available to communicate with is growing and probably growing even faster than urban populated areas. This is creating a phenomenon in which companies are clearly fighting for capturing the attention of consumers even more than before. The concept of consumers attention becoming probably the most precious commodity for organizations came up a couple of times during our interviews this year, especially those on the Western European economies. As you can observe in the chart besides this media fragmentation is mainly coming from the new media revolution we are going through, a revolution that accelerated after the financial crisis of 2008-2009. This revolution is characterized by a development on new technological devices such as iPads and Smartphones, but also a development on Media Platforms like Facebook, Twitter & Google. We can also extract from the chart above the fact that the time spent on all media channels as a whole is increasing, although not equally. The amount of 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 for companies to understand time spent and effectiveness of each media. Out of these two dimensions time spent has been studied and measured far more than effectiveness. This represents an issue since the only way to visualize the true potential of each media channel and really understand how consumers are utilizing and interacting with each channel is by looking at these two variables together.
43% 40%
ad spend per media time spent per media

29% 22% 16% 11% 6% 9% 1% 23%

more into perspective.

tv

print

WEB

radiO

mOBilE

Looking first at the time spent per media we can clearly observe that the clear winners are TV and Internet (Mobile and Web). Besides this, it is clearly evident that the two media channels with most imbalances from all are print and mobile. This imbalance would suggest that the migration from print to mobile (tablets, smartphones, etc.) is just starting and will still continue for some time until adspend and time spent matches better for these two channels. Despite the fact this development is a possibility, effectiveness brings things

According to the Direct Marketing Association, telemarketing and direct mail surpass any digital channels in generating the highest conversion rates. Response rates for direct mail to an existing customer averages 3.4% whilst for an email the average is 0.12%. This means that for 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 focus on media effectiveness was found that magazines drive consumers towards purchase. It was also found that magazines are considered to be highly engaging and trusted; and they are the media most likely to hold consumers attention. Disruptive Technologies

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DISRUPTIVE TECHNOLOGIES

What is a disruptive technology? And why is important for us to be aware of the ones developing in our industry ? First of all, a disruptive technology is basically the term used to describe a new technology that unexpectedly displaces an established one. Disruptive Technologies have several characteristics that I summarize as follows:

f They normally underperform existing technologies. This underperformance is not only technically speaking, but also economically speaking. (Small in size and low margins) f They need to have a trajectory of improvement that might someday make them competitive on the upper mainstream markets where existing technologies and market leaders dwell. Because of these characteristics disruptive technologies start emerging normally at the bottom of the industry where new entrants and small companies have a good match with them. Big and leading companies normally are focusing on the most attractive segments (higher margins and volumes) and it is extremely difficult for them to dedicate resources elsewhere. With this definition in mind, we present two of 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 different stages on their life cycle. Digital Print has been among our industry for several 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 for 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 for our industry summarizes the puBLiShiNg development of Digital Platforms like Google, impacted more by Facebook, Twitter, etc. and the development of new devices such as tablet computers (i.e. COmmERCiAL pRiNT iPad) and Smartphones. These two sub-segimpacted more byt ments have a very different impact on our industry. Digital Platforms have a higher impact on Commercial Print end use; this is due to the fact that sites like Facebook are more and more being used for commercial purposes. Companies are discovering the huge value of personalization and reach they can have with these media platforms. 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 of impact on a couple of commercial end uses (like coupons, inserts and flyers), the driver behind this smartphone penetration on commercial print has more to do with Media Platforms running through Smartphones than the device alone. The reason why we still mention digital print in this analysis is due to the fact that we believe the approach taken by some of the industry players to cope with it and benefit from the benefits of a disruptive technology like digital print might not be the most adequate ones. We will explore some of the possibilities and ways companies have come to adopt to make disruptive technologies great success stories.

devices

How do companies cope with it? Clayton M. Christensen describes in his book The Innovators Dilemma describes the approach several successful companies have adopted to face and transform these disruptive technologies into amazing success stories. In a nutshell what he advises managers facing disruptive technologies to do is to:

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1. Give responsibility for disruptive technologies to organizations whose customers need them so that resources will flow to them. (Being customers the one defining 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 for failure, as the best strategy to face disruptive technologies will evolve together with the technology. 4. Dont count on breakthroughs, move ahead early and find the market for the current attributes of the disruptive technology.

Companies that follow this path have better chances to make them a great success story. On the other hand, companies that have failed to address them on a structured manner have failed to capitalize on the benefits 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 failed to adapt to disruptive technologies and have been pushed completely out of the industry. Now the question remaining for each one of us is what do we do now? How do our strategies compare to the ones successful companies adopted to cope and benefit from disruptive technologies? What are the changes we need to consider in our strategies?

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ECONOmiC ENviRONmENT iN ThE pRESENT ANd NEAR FuTuRE

On this section we could talk about the economic situation in Europe and the possible scenarios we can face in the near and mid term future, but that discussion will not differ from any other forecasting report available in the market. Instead, we have decided to summarize what is the sentiment among the companies that participated on this years study. During our talks to the different companies we wanted to have a feeling on the expectations companies were having for the second half of the year and for 2013. Although there seems to be a common denominator among all companies (including Sappi) to believe that the second half of the year will remain challenging, theres 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 of the believe that situation is not as bad as economic indicators are showing they believe their industry is somehow isolated from macroeconomic trends since books and magazines are perceived as one of the last items people will cut from their budgets in times of 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 of what might come in the near future. When economies are doing bad theres a normal trend for companies to cut cost and delay non-core investments. Several companies reported customers being extremely careful on any expenditure they do, leading 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 perform good when economies are under pressure: retailing. Retailers normally do better in times of crisis as more people is driven to lower cost alternatives. This increase in the amount of customer drives more communication expenditures When it comes to 2013, although a lot of companies made the note that its still too early to have certainty on what 2013 will bring, the general feeling is that there will be some sort of recovery at some stage during the year. This recovery, although marking probably the start of better times to come afterwards, will not be enough to compensate the challenging times the industry has gone through so far. At the end is clear for everybody that economics in one way or another are having an impact on our industry. For some is more positive, for some others is more negative. Reality also shows that uncertainties on the European economic landscape will not fade away as fast 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 for the time being.

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LEARNiNgS FROm OThER iNduSTRiES

In our search for 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 felt there is a lot we can learn from their successes and failures. Reason why we dedicate part of out End Use Analysis this year to understand what companies on other industries did right and what went wrong. We basically focused on industries that experienced similar market shocks as we are facing now such as new technologies (disruptive technologies??), declining demand, overcapacity, etc. In addition to this we also focus on industries that have some structural similarities such as being in the commodities segment and have some similar degree of competition. At the end of an extensive research we took learnings basically from three industries, which are the music, postal services and film industries. For practical reasons we will only analyze in detail one of these industries on this report and will summarize the learnings out of all industries at the end of the segment. In the last 30 to 40 years the music industry has gone through a series of 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 forward creating more and more value for the companies within the industry. This sequence of technological breakthroughs carrying over the industry along with their development stopped during the last decade with the most recent technological development. digitalization. Before this phenomena the music industry value chain was about content creation with everything that this entails (from artist management to recording and reproduction), publishing, distribution and retailing. (In the chart below you can observe a simple representation of how the music industry value chain was conformed before the digital revolution) But thanks to digitalization and the convergence that came with it, the value chain on the music industry changed significantly during the last ten years. Nowadays artists have much more power over the value chain and can even distribute their music directly to final consumers completely skipping all intermediaries that existed in the old value chain structure. Four companies dominated the market at that time; the four of them were huge in terms of size and muscle out small firms that tried to enter the musical mainstream. After 2003, right when digitalization started to disrupt the music industry value chain, the advantages of the big companies started to fade away. The best explanation we have for this decline is due to the fact that their business models didnt 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 (MP3s around 1997, the iPod back in 2001, iPhone in 2007), which have brought mobility to the way we listen to music. As a consequence of this mobility, big digital libraries emerged like Napster (1993) and iTunes (2003) came along bringing one of the first 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 Spotify we are changing our conception of owning music to the idea of only lending the music we want to hear. Only time will tell if this is the right approach for the industry what is definitely clear is the fact 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 fact that all companies that in a way emerged from this new media wave have come to realized that artists cant be treated as commodities. Instead, they need to be cultivated and taken care of. Theres a lot of value companies were (and some still are) loosing due to the lack of interest in cultivating artists through proper Artist Management solutions.

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This change brought several companies to its knees and forced 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 forced 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 of them had a lot of power, but also an area on which they relied on strongly to generate revenues. 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 of the big four to adapt and benefit from 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 successful? In a way yes they were, although due to the fact they werent an early mover, they hindered their potential and failed to capitalize the maximum gains possible. Remember our discussion about disruptive technologies before? Does digital media in the music industry sounds like this? Indeed, digitalization was, and still is, a disruptive technology for the music industry. It shows the clear characteristics of being one inferior to existing technologies in the beginning but with high growth rates that allowed it to catch up with mainstream technologies sooner or later, and also the fact companies that adopted it started from the bottom of the industry slowly climbing upwards as digitalization matured within the industry. Was digitalization the only disruptive technology the music industry has faced throughout the years? Well not really. But as stated before, digital media had its peculiarities in the way it affected the industry. This is how disruptive technologies look like in the music industry. On the following chart you can appreciate the dollars spent per capita on the different media channels the music industry has been exposed to. Its clear to see that with the emergence of a new technology the previous ones start to diminish at about the same speed as the new one is taking over. When looking at the total revenues of the industry is also clear to see how up to the development of the CD, the industry kept growing
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together with the technology. In fact CDs have been one of the most profitable (high margin) technologies the industry has ever seen. The success of CDs was replaced by the tremendous effect of Digital Media. The development of Digital Media has been extremely fast, growing like no other technology has done in the past. In order to compare with previous technologies we bring the following interesting facts and figures : Cassettes took around 18 years to reach their maximum level of units sold ; Digital needed less than 2 years to reach that level (Cassette peak) f CDs took around 16 years to reach the peak; Digital reached that level (CDs peak) in about 3 years f So far Digital needed a bit more than 5 years to reach what, until now, seems to be the peak of digital f

A visual representation of the speed at which digital media penetrated the music industry can be seen on the following chart. The start of each technology line has been adjusted to reflect the time when each technology first appeared on the industry. Although at first look this development might indicate great news for the industry, the extremely low revenues being generated by digital media (a problem we have started to state earlier already) has completely eroded the potential benefits from the volume increase the industry has seen thanks to the emergence of digital media channels. To compare how profitable is each one of the different technologies we have calculated the revenues per single unit sold. And although this method doesnt take into consideration the significant cost differences between them, it does bring some light into how big has been the challenge for the industry to adjust and develop revenue models around Digital Media. The average revenues per unit sold for CDs is almost 14.5 USD per unit sold, whereas Digital dont even reach the 2 USD per unit sold threshold. What this meant for the music industry is the fact that they needed to produce more volume by earning more or less 85% less than before. How they accomplish it ? Well in fact this is one of the several issues, like piracy control, the industry is still working to solve once and for all. The industry hasnt found an answer to all the challenges Digital Media brought with it. In the meantime the industry has lost about 50% of the revenues the industry had on their peak year. After reviewing the Music Industry in detail, here is a summary of the learnings we extract from this portion of our End Use study :

Companies have found 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 succesful companies try to cover as much as possible from the whole industry to benefit from every area of it Being an early mover can be the difference between merely survival and success Embrace change as challenge. Not as threats

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hOw COmpANiES ARE COpiNg wiTh ThOSE ChALLENgES

Although theres no single answer on how companies are reacting to the challenges described on this report, theres at least a clear feeling that companies must do something now to secure a better future. Here are a couple of ideas that emerged throughout the study : Cost cutting: 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 facing right now, some others as a cyclical way to make sure their cost structure remains robust and competitive. Adding value added services: During the length of the study we saw a couple of 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 fight 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 advertising and logistics solutions to their offerings to customers. Building new revenue models: This trends goes on all different directions. We have seen traditional printers heavily embracing and investing into digital media. But also we have seen some other printers looking for alternatives to expand to more profitable business areas like packaging. Publishers are also waking on the same direction with more and more of them mixing activities that in the past were done by advertising agencies According to the Professional Publishing Association (PPA) publishers are getting more and more comfortable with the current business models. In the past a lot of them were afraid and were reacting negatively to digital media developments, mainly because they failed to see how they could benefit from 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 revenues from 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 fact that the traditional revenue models that used to work in the past are no longer valid for the current situation. Companies need to avoid being merely intermediaries, as is in this segment 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 of business models theres also a better understanding on how digital media can help traditional media being more effective. In the UK market theres 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.

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CONCLuSiONS
What all of this means to our industry? Its clear that our industry is still going through a series of challenges. These challenges, although not completely new to us, are continuously changing. This only increases the need for companies to re-think their strategies and action plans to react to those challenges on a more frequent basis. We have seen this evolution in action throughout the two years we have been doing this study so far. Companies are learning from successes and mistakes made in the past and adjusting their course of 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 effort to accelerate their learning curves and be better prepare for what the future might bring. uncertainty is still the only constant on our projections to the future. What is evident is that companies are getting extremely good in learning how to cope with that uncertain environment. Companies are less afraid to face uncertainty. This for sure will bring better chances for 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 developments and will secure a bright future. If we fail to do so then our future will be full with obstacles and bigger threats. We sincerely hope that the discussion and topics we have included in this report helps everybody to have a fresh point of view on how companies are coping with these and other challenges.

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

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