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Media
India
FICCI-Frames 2011 Part 1: C&S TV trends. We discuss key takeaways from FICCIFrames
2011, the flagship Indian media industry convention, for C&S TV: (1) robust
growth in advertising revenues in CY2010 to continue, led by (2) digitization and rising
penetration due to the rapid spread of DTH in India and (3) greater audience capture
due to regionalization; key risks include (4) rising competition and market
fragmentation as well as (5) media inflation (content, talent and distribution costs).
Finally, we summarize the views of industry leaders in the keynote address.
Advertising growth and digitization key industry drivers
FICCI-KPMG 2011 report highlights 17% growth in C&S TV advertising revenues in CY2010 and
projects a robust 16% CAGR in advertising revenues in CY2011E-15E; we believe CY2011 industry
revenues as well as expectations are conservative (Mindshare and Madison reported >20% growth
in C&S TV advertising in CY2010 with expectations of ~20% growth in CY2011E). The high
volume share of FMCG categories in C&S TV advertising and slowdown in FMCG spending may be
areas of concern, but (1) modest pricing power (post volume-led growth in CY2009-10) and (2)
rising SME spending will support growth.
Digitization continues to remain a positive key driver of for C&S TV, largely led by the rapid uptake
of DTH in rural areas (digital cable growth has been disappointing thus far) resulting in (1) rising
penetration and reach of C&S TV, (2) helping reduce (but not remove) the capacity bottlenecks in
analog cable network, (3) improving transparency levels in the value chain and (4) improving
engagement level with the consumer given wider content choice and improved quality. There is
evidence to suggest HD-DTH may be penetrating urban areas.
Rising market fragmentation and cost inflation are key risks
We have previously highlighted the risks to individual C&S broadcasters from rising competition
and market fragmentation. The latter trends tend to raise cost inflation despite strong advertising
and subscription revenue growth at the industry level. The Indian media industry went through a
phase of introspection and consolidation in CY2009 resulting in (1) reduction in irrational
competition (chasing illusionary profits) and (2) comprehensive cost control and in core business
and closure of unviable business by legacy, existing players. We can only hope that the lessons
learnt during the crisis can continue beyond just one year.
Regionalization, niche channels to result in wider audience
In a country like India with multiple languages, diverse cultures and varied audience, the strength
of regional and niche channels (more like regional and niche media) would be a safe bet.
However, the truth is that regional media in India has been given its due (by advertisers) only in the
last decade. The good news is that the trend has sustained given greater advertiser engagement
with regional media platforms supporting growth. Further, we expect relatively improved
performance of niche channels in the digitized environment, resulting in wider audience as well as
stronger engagement levels (more time spent on C&S TV) and supporting growth.
Keynote addresses live up to their name: Key opportunities and challenges
We summarize the key opportunities and challenges highlighted by industry leaders: (1) Mr. Uday
Shankar, Star India (foreign investment, talent issues), (2) Mr. Aroon Purie, India Today (need for
digitization, industry introspection), (3) Mr. Puneet Goenka, Zee Network (content, brands and
profitability) and (4) Mr. Raghav Bahl, NW18 group (convergence).
Robust advertising growth continues
Exhibit 1 presents advertising revenue growth projected by FICCI-KPMG across the various
media segments. India continues be an attractive media market with (1) low ad-spend-to-
GDP ratio with potential for growth, (2) strong growth in the domestic economy, (3) large
and growing middle-class (consumer class), (4) low but rising media penetration (all forms)
and (5) rising discretionary spending with greater disposable incomes in the hands of people
(urban and rural). In fact, media agencies such as Mindshare and Madison have reported
C&S TV advertising growth of >20% in CY2010 and project continued robust ~20% growth
in CY2011, ahead of FICCI-KPMG estimates. We expect advertising revenue growth to beat
expectations across media segments.
Exhibit 2 presents the top-10 advertisers on C&S TV in CY2010; FMCG advertisers (capturing
all top-10 positions in CY2010) have been the key driving force behind strong advertising
growth in C&S TV in CY2009-10. The slowdown in FMCG advertising has been highlighted
as the key risk to C&S TV advertising revenues; however, we see two mitigating factors,
notably (1) modest pricing power with broadcasters post largely volume-driven growth in
CY2009-10 and (2) increasing in advertising spending by SMEs and cyclical sectors such as
Automobiles and BFSI. Increased competition and fragmentation across upstream sectors
(including FMCG) will result in frothy advertising market.
Digitization to drive subscription revenues
Exhibit 3 presents the projected strong growth in subscribers across the various C&S
distribution platforms in India by FICCI-KPMG. We highlight the sharp increase in C&S
penetration in India, driven by the rapid spread of DTH platforms notably in cable-dark and
weak-cable rural areas. FICCI-KPMG expects number of C&S households in India to increase
to 156 mn by CY2015E, higher than even ~140 mn TV households currently (thus assuming
conversion of all non-C&S rural TV households), in line with our expectations. Additionally,
digital cable is expected to increase to 29 mn households. The robust pace of C&S
penetration and digitization (voluntary, not assuming government-mandated digitization)
will drive revenues of MSOs, DTH platforms and broadcasters.
Exhibit 4 presents expected robust growth in advertising revenues and strong growth in
subscription revenues of broadcasters. We highlight that initial data suggests the viewers
consumption of C&S TV on digital is 15-30% more than on analog cable, thus supporting
higher viewership and advertising revenue growth. Additionally, DTH subscribers generate
~3X more subscription revenues for broadcasters versus analog subscribers, resulting in
higher pay-TV revenues, which along with greater carriage capacity would support niche
channel operations. Finally, DTH growth may be spreading beyond its rural roots into urban
markets led by HD-DTH platforms and robust cricket calendar in 1HCY11. This may also spur
cable operators to ramp up their digitization plans.
Regional channels set the pace
Large swathes of the Indian population communicate in languages other than English and
Hindi (so called national languages, see Exhibit 5). More important, with the multitude of
finely nuanced cultures, regional language entertainment is always going to be an important
piece of the Indian media environment. Yet, regional markets were ignored for the first
decade (1990s) of C&S TV in India; the next decade witnessed the emergence of South
Indian regional markets and the trend further strengthened with addition of Marathi and
Bengali language entertainment; Gujarati, Punjabi and Oriya are waiting in the wings.
Robust economic growth in Tier-2 & 3 towns coupled with changing consumption patterns
has supported advertising growth.
The trend of stronger-than-industry growth in advertising revenues of regional channels
(from a low base) continues. However, we would also highlight that the power ratio (ratio of
advertising share to viewership share) of regional channels has overtaken Hindi channels as
well currently and thus, it may not persist in perpetuity. Further, C&S penetration in regional
markets is very high (>90% in South Indian markets) certainly much ahead of the Hindi belt
resulting in limited scope for viewership expansion. Not surprisingly, regional GE segment
has modestly lost viewership share versus Hindi GE segment. Hindi GE broadcasters lost
pricing power on account of intense competition and market fragmentation; it may not be
long before a similar story to plays out in regional markets.
Fragmentation, cost inflation key issues
Exhibit 7 presents the realities of intense and sharply rising competition in the Indian C&S TV
segment; the number of C&S TV channels has exploded notwithstanding the limited
capacity in the analog cable network (100 channels) and even in DTH systems (~200-250
channels due to limited transponder capacity available currently). Rising competition has
resulted in loss of pricing power with legacy players with fragmentation across advertising
and subscription revenues. Consequently, advertising and subscription revenues of individual
broadcasters have seen robust but slower-than-industry growth, which remains relatively
strong on account of factors discussed previously.
Truth be told, competition has also resulted in (1) increasing viewership and (2) improved
engagement with existing viewership resulting in (a) market expansion and (b) faster-thanmedia-
industry growth in advertising revenues. We have seen examples of content and
creative innovation at program and channel level from both incumbents as well as new
entrants, supporting industry growth. However, the potential impact of rising competition
(~300 channels are waiting for government approval for launch) in the form of revenue
fragmentation as well as cost inflation cannot be neglected.
We discuss some key issues ailing the C&S TV industry notably government inaction on
regulation in the next section (industry leader-speak). However, rising cost inflation as a
result of rising competition is a real threat to industry and individual broadcasters’
profitability in the near term. Some savings on account of comprehensive cost control and
efficiency achieved during CY2009 remain but may not sustain for long. We discuss issues
related to talent development and costs in next section.
Content costs. We highlight key driving forces behind cost inflation on the content side
(1) rising prices of telecast rights of movie content (in a scenario where volume of film
content is limited) and (2) greater focus on expensive reality content (versus fiction
content, where cost increase has been nominal). Declining ratings given market
fragmentation have forced broadcasters’ hand.
Distribution costs. There is a fundamental and large supply-demand gap in analog cable
(capacity of 100 channels versus >500 operational channels) as well as DTH (200-250 SD
channel capacity) in India. Thus, the launch of news channels is putting additional
pressure on analog cable as well as DTH in India, resulting in higher carriage and
placement fees. Limited to only the cable networks so far, carriage fees is fast becoming a
reality for DTH platforms as well in India.
Keynote speakers address key issues
Mr. Uday Shankar, CEO, Star India Limited
Mr. Shankar highlighted two critical points in his keynote address notably (1) rampant
dearth of talent in the industry resulting in poor quality of content, (2) lack of equitable
foreign investment in media industry in India besides (3) the need for digitization. He
noted the strong growth in Indian media industry and C&S TV segment and highlighted
the general lack of investment (barring few exceptions) in talent development, which has
already become a structural bottleneck.
In our view, the need for investment in talent development is critical for any industry
and not specific to media industry. However, the strong growth in the industry puts
particular pressure on (1) maintaining performance levels in content and delivery as
well as (2) has implications for cost inflation for individual broadcasters. Legacy
players like Star, Zee and Sun have in-house development and training programs and
are insulated (to some extent) but this would become a major bottleneck for new
entrants if industry continues on its current growth path.
Mr. Shankar noted the considerable investments required in content and distribution to
achieve the full potential of the Indian media industry, and noted that domestic resources
may not be sufficient. More important, he highlighted (1) age-old opposition to foreign
investment in India based on (2) threat of bias in news content/reporting on account of
foreign ownership. He highlight that the truth (at least in India) was that domestic
ownership has proven to be equally biased (if not more) biased. He made a case for
strong regulatory mechanisms to check media bias in general.
Anecdotal evidence does support the view that media bias exists in India and
irrespective of ownership patterns and foreign investment. There is merit in higher
foreign investment levels given the investment requirement in content and
distribution (49% from current 20-26% currently) even if the government wishes to
keep sensitive segments (news) out of foreign control. Strong regulatory mechanisms
on the content side are the only real answer to potential media bias, irrespective of
domestic or foreign ownership, but the current regulatory mess (telecom, C&S TV
distribution) does not inspire much confidence.
Mr. Aroon Purie, Chairman, India Today Group
Mr. Purie, in his presentation titled the mess in broadcasting, highlighted the problems
with analog cable and the urgent need for digitization in India. The analog cable is
clogged with >500 channels vying for limited capacity on the network. Instead of
subscription revenues supporting content investments, carriage and placements fees is
acting as a drag (largest cost component for news channels). The government has been a
mute spectator to the problems of the industry.
In our view, digitization is a commendable goal and it has come at the opportune
time in India given increasing demand for regional and niche channels from Indian
population. However, we do not concur with the general trend of analog cable
network bashing. The LCOs and analog cable networks played an important role in
developing an 80 mn strong C&S TV household market, also resulting in creation of
Rs100 bn C&S TV advertising market, which has benefitted C&S broadcasters.
Digitization is the need of the hour, but as highlighted by one of the TRAI
representatives, LCOs and cable networks are an important constituent and their
existence cannot be wished away.
We concede that the government could have done a better job of managing the
growth of the sector in a regulated environment; TRAI became the sector regulator
only in 2003 (over a decade after the C&S TV industry came into existence in India)
and has since struggled with legacy issues (its track record in regulating new
segments such as DTH and HITS is not bad). However, we also highlight that
broadcasters have not uniformly supported digitization (opposed to regulation
enabling channel pricing on digital, addressable systems at 35% of analog cable).
Given the investment required for digitization (Rs250-500 bn as per various industry
estimates), C&S TV broadcasters cannot expect benefits without some investment on
their part (subsidized content for some time would suffice).
Finally, the mess in broadcasting has come about despite clear (and worsening)
warning signals over time. The limited capacity of analog cable has always been a
structural roadblock but the number of channels has reached >500 currently over
the past decade (the robust uptick in digitization due to DTH is a relatively recent
phenomena). In any industry, a demand-supply mismatch of this magnitude results
in industry shakeout, with even existing players shutting down unproductive capacity.
Barring few exceptions, that has not been the case in Indian media and the situation
continues to remain challenging.
To his credit, Mr. Purie admitted to the perverse business models prevalent in the industry
(too many channels, high dependence on advertising revenues) and lack of unity among
C&S TV broadcasters to tackle urgent issues (declining ad rates, unsustainable increase in
inventories, carriage and placement fees as well as the push for digitization in India). He
made a strong case for lobbying efforts to tackle some of these issues at the level of the
government and others at the level of the industry. We only hope that C&S broadcasters,
being the biggest potential beneficiaries of digitization, present concrete and more
incentive-oriented solutions than otherwise. In our view, the government certainly has a
more constructive role to play (it also benefits from greater tax revenues) with uniformity
and level-playing field through regulations.
Mr. Puneet Goenka, MD & CEO, Zee Network
Mr. Goenka summarized the long-terms trends in the C&S TV industry, notably the
dominance of the national broadcaster (DD) till the 1980s, emergence of private
broadcasters with diversified content and multi-channel offerings in the 19990s and
further, emergence of digital platforms as well as pickup in regional and niche channels in
the 2000s with convergence (premium content on alternative delivery systems such as 3G
and BWA) a potential theme for the future (2010s). Though viewer preferences for drama,
movies and sports have sustained, the maturity of the audience demands differentiation
in the essence as well as treatment of content. The evolving distribution models may also
force C&S broadcasters to keep the smaller screens in mind (besides audience likes and
dislikes) while creating content. Finally, he called for building great brands with focus on
content but keeping profitability in mind.
Mr. Raghav Bahl, MD, Network18 Group
Mr. Raghav Bahl stressed the importance of the internet/digital segment and focused
attention on the future of media (convergence). He highlighted the experience of the
NW18 Group, which has tried to build a diversity of strong brands including in the
internet segment. While C&S TV would always have its place under the sun due to the
large screen and community viewing factor, individual and time-shifting content may go
digital and interactive on potential multiple small screens (Tablets, Smart-phones). The
media network of the future may not be just a C&S TV network but a mesh of mass
entertainment and niche platforms.
Even as the emergence of digital new media is inevitable, we cannot help but notice
(1) the audience fragmentation and (2) the limited success of traditional media
houses on new media. It is a peculiar catch-22 situation for traditional media brands
with (1) limited choice but to embrace new media as consumers do so but (2) lack of
clear monetization models and (3) limited success with investments so far (16 of the
top 20 websites in India are global, 3 out of 4 local are unprofitable). We do not
expect new media to be a threat to traditional media in India for the medium term
(5-10 years) given the growth potential for all media forms in India. However, these
are issues traditional media (ad-supported, content-oriented) will do well to address
sooner rather than later. NW18 Group has done reasonably well in this regard and it
makes a useful case study for industry players .
Retain moderately positive view on C&S broadcasters
Exhibit 8 presents the valuation summary of broadcasters under our coverage; we maintain
our moderately positively stance on Indian broadcasters on account of (1) continued robust
advertising environment in general and (2) continued strong DTH growth as well as potential
subscription revenue benefits from mandatory digitization with (3) relatively fair valuations
(20X FY2012E consolidated EPS for Zee Entertainment and 19X FY2012E consolidated EPS
for Sun TV Network; however, Zee is attractively valued at16X FY2012E EPS based on core –
ex. sports – business). Strong advertising spends on cricket also provide comfort on
continued robust advertising environment.
However, we highlight the impact of CWC and IPL in 4QFY11-1QFY12 but potentially in
2QFY12 as well (seasonally weak quarter coming on the back of above-average advertising
spending in 4QFY11-1QFY12 on cricket). In the long run, we remain concerned about
competition and fragmentation in the Indian C&S TV segment, which may result in potential
negative surprises in earnings and valuations.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Media
India
FICCI-Frames 2011 Part 1: C&S TV trends. We discuss key takeaways from FICCIFrames
2011, the flagship Indian media industry convention, for C&S TV: (1) robust
growth in advertising revenues in CY2010 to continue, led by (2) digitization and rising
penetration due to the rapid spread of DTH in India and (3) greater audience capture
due to regionalization; key risks include (4) rising competition and market
fragmentation as well as (5) media inflation (content, talent and distribution costs).
Finally, we summarize the views of industry leaders in the keynote address.
Advertising growth and digitization key industry drivers
FICCI-KPMG 2011 report highlights 17% growth in C&S TV advertising revenues in CY2010 and
projects a robust 16% CAGR in advertising revenues in CY2011E-15E; we believe CY2011 industry
revenues as well as expectations are conservative (Mindshare and Madison reported >20% growth
in C&S TV advertising in CY2010 with expectations of ~20% growth in CY2011E). The high
volume share of FMCG categories in C&S TV advertising and slowdown in FMCG spending may be
areas of concern, but (1) modest pricing power (post volume-led growth in CY2009-10) and (2)
rising SME spending will support growth.
Digitization continues to remain a positive key driver of for C&S TV, largely led by the rapid uptake
of DTH in rural areas (digital cable growth has been disappointing thus far) resulting in (1) rising
penetration and reach of C&S TV, (2) helping reduce (but not remove) the capacity bottlenecks in
analog cable network, (3) improving transparency levels in the value chain and (4) improving
engagement level with the consumer given wider content choice and improved quality. There is
evidence to suggest HD-DTH may be penetrating urban areas.
Rising market fragmentation and cost inflation are key risks
We have previously highlighted the risks to individual C&S broadcasters from rising competition
and market fragmentation. The latter trends tend to raise cost inflation despite strong advertising
and subscription revenue growth at the industry level. The Indian media industry went through a
phase of introspection and consolidation in CY2009 resulting in (1) reduction in irrational
competition (chasing illusionary profits) and (2) comprehensive cost control and in core business
and closure of unviable business by legacy, existing players. We can only hope that the lessons
learnt during the crisis can continue beyond just one year.
Regionalization, niche channels to result in wider audience
In a country like India with multiple languages, diverse cultures and varied audience, the strength
of regional and niche channels (more like regional and niche media) would be a safe bet.
However, the truth is that regional media in India has been given its due (by advertisers) only in the
last decade. The good news is that the trend has sustained given greater advertiser engagement
with regional media platforms supporting growth. Further, we expect relatively improved
performance of niche channels in the digitized environment, resulting in wider audience as well as
stronger engagement levels (more time spent on C&S TV) and supporting growth.
Keynote addresses live up to their name: Key opportunities and challenges
We summarize the key opportunities and challenges highlighted by industry leaders: (1) Mr. Uday
Shankar, Star India (foreign investment, talent issues), (2) Mr. Aroon Purie, India Today (need for
digitization, industry introspection), (3) Mr. Puneet Goenka, Zee Network (content, brands and
profitability) and (4) Mr. Raghav Bahl, NW18 group (convergence).
Robust advertising growth continues
Exhibit 1 presents advertising revenue growth projected by FICCI-KPMG across the various
media segments. India continues be an attractive media market with (1) low ad-spend-to-
GDP ratio with potential for growth, (2) strong growth in the domestic economy, (3) large
and growing middle-class (consumer class), (4) low but rising media penetration (all forms)
and (5) rising discretionary spending with greater disposable incomes in the hands of people
(urban and rural). In fact, media agencies such as Mindshare and Madison have reported
C&S TV advertising growth of >20% in CY2010 and project continued robust ~20% growth
in CY2011, ahead of FICCI-KPMG estimates. We expect advertising revenue growth to beat
expectations across media segments.
Exhibit 2 presents the top-10 advertisers on C&S TV in CY2010; FMCG advertisers (capturing
all top-10 positions in CY2010) have been the key driving force behind strong advertising
growth in C&S TV in CY2009-10. The slowdown in FMCG advertising has been highlighted
as the key risk to C&S TV advertising revenues; however, we see two mitigating factors,
notably (1) modest pricing power with broadcasters post largely volume-driven growth in
CY2009-10 and (2) increasing in advertising spending by SMEs and cyclical sectors such as
Automobiles and BFSI. Increased competition and fragmentation across upstream sectors
(including FMCG) will result in frothy advertising market.
Digitization to drive subscription revenues
Exhibit 3 presents the projected strong growth in subscribers across the various C&S
distribution platforms in India by FICCI-KPMG. We highlight the sharp increase in C&S
penetration in India, driven by the rapid spread of DTH platforms notably in cable-dark and
weak-cable rural areas. FICCI-KPMG expects number of C&S households in India to increase
to 156 mn by CY2015E, higher than even ~140 mn TV households currently (thus assuming
conversion of all non-C&S rural TV households), in line with our expectations. Additionally,
digital cable is expected to increase to 29 mn households. The robust pace of C&S
penetration and digitization (voluntary, not assuming government-mandated digitization)
will drive revenues of MSOs, DTH platforms and broadcasters.
Exhibit 4 presents expected robust growth in advertising revenues and strong growth in
subscription revenues of broadcasters. We highlight that initial data suggests the viewers
consumption of C&S TV on digital is 15-30% more than on analog cable, thus supporting
higher viewership and advertising revenue growth. Additionally, DTH subscribers generate
~3X more subscription revenues for broadcasters versus analog subscribers, resulting in
higher pay-TV revenues, which along with greater carriage capacity would support niche
channel operations. Finally, DTH growth may be spreading beyond its rural roots into urban
markets led by HD-DTH platforms and robust cricket calendar in 1HCY11. This may also spur
cable operators to ramp up their digitization plans.
Regional channels set the pace
Large swathes of the Indian population communicate in languages other than English and
Hindi (so called national languages, see Exhibit 5). More important, with the multitude of
finely nuanced cultures, regional language entertainment is always going to be an important
piece of the Indian media environment. Yet, regional markets were ignored for the first
decade (1990s) of C&S TV in India; the next decade witnessed the emergence of South
Indian regional markets and the trend further strengthened with addition of Marathi and
Bengali language entertainment; Gujarati, Punjabi and Oriya are waiting in the wings.
Robust economic growth in Tier-2 & 3 towns coupled with changing consumption patterns
has supported advertising growth.
The trend of stronger-than-industry growth in advertising revenues of regional channels
(from a low base) continues. However, we would also highlight that the power ratio (ratio of
advertising share to viewership share) of regional channels has overtaken Hindi channels as
well currently and thus, it may not persist in perpetuity. Further, C&S penetration in regional
markets is very high (>90% in South Indian markets) certainly much ahead of the Hindi belt
resulting in limited scope for viewership expansion. Not surprisingly, regional GE segment
has modestly lost viewership share versus Hindi GE segment. Hindi GE broadcasters lost
pricing power on account of intense competition and market fragmentation; it may not be
long before a similar story to plays out in regional markets.
Fragmentation, cost inflation key issues
Exhibit 7 presents the realities of intense and sharply rising competition in the Indian C&S TV
segment; the number of C&S TV channels has exploded notwithstanding the limited
capacity in the analog cable network (100 channels) and even in DTH systems (~200-250
channels due to limited transponder capacity available currently). Rising competition has
resulted in loss of pricing power with legacy players with fragmentation across advertising
and subscription revenues. Consequently, advertising and subscription revenues of individual
broadcasters have seen robust but slower-than-industry growth, which remains relatively
strong on account of factors discussed previously.
Truth be told, competition has also resulted in (1) increasing viewership and (2) improved
engagement with existing viewership resulting in (a) market expansion and (b) faster-thanmedia-
industry growth in advertising revenues. We have seen examples of content and
creative innovation at program and channel level from both incumbents as well as new
entrants, supporting industry growth. However, the potential impact of rising competition
(~300 channels are waiting for government approval for launch) in the form of revenue
fragmentation as well as cost inflation cannot be neglected.
We discuss some key issues ailing the C&S TV industry notably government inaction on
regulation in the next section (industry leader-speak). However, rising cost inflation as a
result of rising competition is a real threat to industry and individual broadcasters’
profitability in the near term. Some savings on account of comprehensive cost control and
efficiency achieved during CY2009 remain but may not sustain for long. We discuss issues
related to talent development and costs in next section.
Content costs. We highlight key driving forces behind cost inflation on the content side
(1) rising prices of telecast rights of movie content (in a scenario where volume of film
content is limited) and (2) greater focus on expensive reality content (versus fiction
content, where cost increase has been nominal). Declining ratings given market
fragmentation have forced broadcasters’ hand.
Distribution costs. There is a fundamental and large supply-demand gap in analog cable
(capacity of 100 channels versus >500 operational channels) as well as DTH (200-250 SD
channel capacity) in India. Thus, the launch of news channels is putting additional
pressure on analog cable as well as DTH in India, resulting in higher carriage and
placement fees. Limited to only the cable networks so far, carriage fees is fast becoming a
reality for DTH platforms as well in India.
Keynote speakers address key issues
Mr. Uday Shankar, CEO, Star India Limited
Mr. Shankar highlighted two critical points in his keynote address notably (1) rampant
dearth of talent in the industry resulting in poor quality of content, (2) lack of equitable
foreign investment in media industry in India besides (3) the need for digitization. He
noted the strong growth in Indian media industry and C&S TV segment and highlighted
the general lack of investment (barring few exceptions) in talent development, which has
already become a structural bottleneck.
In our view, the need for investment in talent development is critical for any industry
and not specific to media industry. However, the strong growth in the industry puts
particular pressure on (1) maintaining performance levels in content and delivery as
well as (2) has implications for cost inflation for individual broadcasters. Legacy
players like Star, Zee and Sun have in-house development and training programs and
are insulated (to some extent) but this would become a major bottleneck for new
entrants if industry continues on its current growth path.
Mr. Shankar noted the considerable investments required in content and distribution to
achieve the full potential of the Indian media industry, and noted that domestic resources
may not be sufficient. More important, he highlighted (1) age-old opposition to foreign
investment in India based on (2) threat of bias in news content/reporting on account of
foreign ownership. He highlight that the truth (at least in India) was that domestic
ownership has proven to be equally biased (if not more) biased. He made a case for
strong regulatory mechanisms to check media bias in general.
Anecdotal evidence does support the view that media bias exists in India and
irrespective of ownership patterns and foreign investment. There is merit in higher
foreign investment levels given the investment requirement in content and
distribution (49% from current 20-26% currently) even if the government wishes to
keep sensitive segments (news) out of foreign control. Strong regulatory mechanisms
on the content side are the only real answer to potential media bias, irrespective of
domestic or foreign ownership, but the current regulatory mess (telecom, C&S TV
distribution) does not inspire much confidence.
Mr. Aroon Purie, Chairman, India Today Group
Mr. Purie, in his presentation titled the mess in broadcasting, highlighted the problems
with analog cable and the urgent need for digitization in India. The analog cable is
clogged with >500 channels vying for limited capacity on the network. Instead of
subscription revenues supporting content investments, carriage and placements fees is
acting as a drag (largest cost component for news channels). The government has been a
mute spectator to the problems of the industry.
In our view, digitization is a commendable goal and it has come at the opportune
time in India given increasing demand for regional and niche channels from Indian
population. However, we do not concur with the general trend of analog cable
network bashing. The LCOs and analog cable networks played an important role in
developing an 80 mn strong C&S TV household market, also resulting in creation of
Rs100 bn C&S TV advertising market, which has benefitted C&S broadcasters.
Digitization is the need of the hour, but as highlighted by one of the TRAI
representatives, LCOs and cable networks are an important constituent and their
existence cannot be wished away.
We concede that the government could have done a better job of managing the
growth of the sector in a regulated environment; TRAI became the sector regulator
only in 2003 (over a decade after the C&S TV industry came into existence in India)
and has since struggled with legacy issues (its track record in regulating new
segments such as DTH and HITS is not bad). However, we also highlight that
broadcasters have not uniformly supported digitization (opposed to regulation
enabling channel pricing on digital, addressable systems at 35% of analog cable).
Given the investment required for digitization (Rs250-500 bn as per various industry
estimates), C&S TV broadcasters cannot expect benefits without some investment on
their part (subsidized content for some time would suffice).
Finally, the mess in broadcasting has come about despite clear (and worsening)
warning signals over time. The limited capacity of analog cable has always been a
structural roadblock but the number of channels has reached >500 currently over
the past decade (the robust uptick in digitization due to DTH is a relatively recent
phenomena). In any industry, a demand-supply mismatch of this magnitude results
in industry shakeout, with even existing players shutting down unproductive capacity.
Barring few exceptions, that has not been the case in Indian media and the situation
continues to remain challenging.
To his credit, Mr. Purie admitted to the perverse business models prevalent in the industry
(too many channels, high dependence on advertising revenues) and lack of unity among
C&S TV broadcasters to tackle urgent issues (declining ad rates, unsustainable increase in
inventories, carriage and placement fees as well as the push for digitization in India). He
made a strong case for lobbying efforts to tackle some of these issues at the level of the
government and others at the level of the industry. We only hope that C&S broadcasters,
being the biggest potential beneficiaries of digitization, present concrete and more
incentive-oriented solutions than otherwise. In our view, the government certainly has a
more constructive role to play (it also benefits from greater tax revenues) with uniformity
and level-playing field through regulations.
Mr. Puneet Goenka, MD & CEO, Zee Network
Mr. Goenka summarized the long-terms trends in the C&S TV industry, notably the
dominance of the national broadcaster (DD) till the 1980s, emergence of private
broadcasters with diversified content and multi-channel offerings in the 19990s and
further, emergence of digital platforms as well as pickup in regional and niche channels in
the 2000s with convergence (premium content on alternative delivery systems such as 3G
and BWA) a potential theme for the future (2010s). Though viewer preferences for drama,
movies and sports have sustained, the maturity of the audience demands differentiation
in the essence as well as treatment of content. The evolving distribution models may also
force C&S broadcasters to keep the smaller screens in mind (besides audience likes and
dislikes) while creating content. Finally, he called for building great brands with focus on
content but keeping profitability in mind.
Mr. Raghav Bahl, MD, Network18 Group
Mr. Raghav Bahl stressed the importance of the internet/digital segment and focused
attention on the future of media (convergence). He highlighted the experience of the
NW18 Group, which has tried to build a diversity of strong brands including in the
internet segment. While C&S TV would always have its place under the sun due to the
large screen and community viewing factor, individual and time-shifting content may go
digital and interactive on potential multiple small screens (Tablets, Smart-phones). The
media network of the future may not be just a C&S TV network but a mesh of mass
entertainment and niche platforms.
Even as the emergence of digital new media is inevitable, we cannot help but notice
(1) the audience fragmentation and (2) the limited success of traditional media
houses on new media. It is a peculiar catch-22 situation for traditional media brands
with (1) limited choice but to embrace new media as consumers do so but (2) lack of
clear monetization models and (3) limited success with investments so far (16 of the
top 20 websites in India are global, 3 out of 4 local are unprofitable). We do not
expect new media to be a threat to traditional media in India for the medium term
(5-10 years) given the growth potential for all media forms in India. However, these
are issues traditional media (ad-supported, content-oriented) will do well to address
sooner rather than later. NW18 Group has done reasonably well in this regard and it
makes a useful case study for industry players .
Retain moderately positive view on C&S broadcasters
Exhibit 8 presents the valuation summary of broadcasters under our coverage; we maintain
our moderately positively stance on Indian broadcasters on account of (1) continued robust
advertising environment in general and (2) continued strong DTH growth as well as potential
subscription revenue benefits from mandatory digitization with (3) relatively fair valuations
(20X FY2012E consolidated EPS for Zee Entertainment and 19X FY2012E consolidated EPS
for Sun TV Network; however, Zee is attractively valued at16X FY2012E EPS based on core –
ex. sports – business). Strong advertising spends on cricket also provide comfort on
continued robust advertising environment.
However, we highlight the impact of CWC and IPL in 4QFY11-1QFY12 but potentially in
2QFY12 as well (seasonally weak quarter coming on the back of above-average advertising
spending in 4QFY11-1QFY12 on cricket). In the long run, we remain concerned about
competition and fragmentation in the Indian C&S TV segment, which may result in potential
negative surprises in earnings and valuations.
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