Facing the Future

April 2009

India’s media-and-entertainment sector, a $13-billion revenue-generating franchise in 2008, has entered a period of correction and potential shakeout. This is welcome news. Growth without cost and prudent business models leads to bubbles and inflated values, both of which have characterized much of the Indian media story in recent times. This is especially true for the television sector, which generates half of the revenues that come from media and entertainment within India.

In terms of critical mass and access, India remains the premier opportunity within the Asia-Pacific region. There are more than 136 million TV homes in the country, out of which more than 90 million subscribe to cable and DTH satellite pay-TV ser-vices. This makes India the largest bona fide pay-TV market in the world—even larger than China. While the mainland has more than 150 million cable and satellite homes, the vast majority are utility-oriented, with only 4 million homes subscribing to genuine pay channels (as opposed to free-to-air product).

Digital migration is also occurring rapidly in India, with more than 12 million homes subscribing to digital pay-TV services from DTH and cable platforms by the end of 2008, which means that more than 8 million net new digital pay connections were added last year.

At the same time, fueled by a five-year economic boom, India’s ad market is slowly catching up with China’s. It has been growing at an average annual rate of more than 20 percent since 2003, driving profits and margins for dominant TV broadcasters feasting on a TV ad pie generating $2 billion per annum.

Finally, the regulatory framework has generally proved accommodating, with unlimited foreign direct investment (FDI) allowed in non-news media, including TV channels and movie businesses. The regulations permit ownership of  26 percent, including foreign indirect investment (FII), allowed in news; 49 percent in cable distribution; and 20 percent (FDI) and 49 percent (FII and FDI combined) in DTH. To be sure, the unevenness of the caps are illogical, but each gives an access to strategic international groups that is unequalled in much of Asia, including, most notably, China and Korea.

All of this has meant that the India media sector in general, and TV and movies in particular, have attracted heaps of foreign investment, with each of the global media majors (News Corp., Disney, Sony, Time Warner, NBC and Viacom) firmly entrenched in the market.

ECONOMIC BALANCE

Yet for all the growth and new market entrants that India has inspired, the economics of the marketplace have deteriorated in recent months. Competition has irrationally increased costs, especially for TV channels, with talent, production, acquisition, marketing and distribution expenses skyrocketing.

Meanwhile, onerous regulations have imposed severe controls on the market, limiting the ability of broadcasters to price and distribute their product to consumers and operators. At the same time, TV distribution platforms are unable to provide exclusive programming and remain limited in tiering options and implementing price increases for all-important digital packages.

As a result, the economic balance of the TV marketplace has been disrupted as the commoditization of content and distribution prevails. New entrants and even existing incumbents have been forced to pay carriage fees to both analogue and digital distribution platforms, and the subsequent economics of distribution rarely stack up, especially for new TV channel entrants.

In 2008, for instance, analysis from Media Partners Asia (MPA) indicates that TV channels extracted about $600 million in subscription fees, but close to half of this amount ($250 million) was spent on carriage fees.

The business of giving up-front money to distribution platforms to secure carriage and placement has become the norm for all common genres, especially the popular Hindi general-entertainment-channel genre. New entrants in the Hindi general-entertainment space, including Colors, from Network18’s IBN18 and Viacom; as well as NDTV Imagine, from NDTV and NBC Universal, have spent more than $20 million in their first year to secure distribution to at least 40 million homes. 

Spending on content by distribution platforms is also becoming commoditized because of regulatory price controls at the retail end. As a result, few of the dominant cable and DTH distribution platforms have much of a coherent long-term content strategy in place. The emphasis today is to spend on a few popular channels but generally shave costs for “discretionary” programming and limit other costs.

Just like in the U.S., inflationary carriage fees are not sustainable over the medium term. In the current context, only Star, Zee, Colors and REAL, the incoming Hindi channel joint venture of India’s Alva Brothers Entertainment—parent company of leading producer Miditech—and Turner Broadcasting, have the ap-petite and capital to continue funding increased distribution costs. As a result, carriage fees are likely to remain flat or show modest incremental growth. However, they will remain a reality in the marketplace over the medium term, especially as analogue dominates TV distribution and monthly per-subscriber fees for digital platforms remain low.

In the meantime, out of the 300 to 350 TV channels that are potentially available to Indian consumers, typically only 60 to 70 get carried on analogue platforms and up to 150 find their way onto digital. As for newcomers, higher costs and the reality of the downturn have put off many, including, most notably, Reliance BIG Entertainment, which has dramatically scaled down its TV launch plans, while niche international channels are either eyeing much smaller partnerships with the likes of NDTV (such as the music channel Trace and ITV Global’s British entertainment service Granada TV) or waiting for the current correction to be complete before evaluating whether they can compete and make money in a more rationalized marketplace.

MACRO WOES

At a macro level, the global downturn is having an impact. The economy had been growing at between 9 percent and 9.5 percent in real terms between 2004 and 2007, but it slowed to 7.5 percent in the calendar year 2008 and, according to consensus, will slow further to 5 percent in 2009 before a partial recovery to 6.4 percent in 2010.

The ad market grew by more than 20 percent in 2006 and 2007 but it climbed up 15 percent in net terms during 2008, according to MPA, and will see growth halved to 7.7 percent in 2009 as key categories reduce their spending. There could be even more downside in 2009 with some media buyers indicating that the TV ad market will grow 5 percent at best; they see flat growth as the most likely case.

MPA sees the overall ad market growing at an average annual rate of 10.7 percent between 2008 and 2013—still significant growth but lower than the historic trend rates of 15 percent to 20 percent. TV will continue to have more than 40 percent of the total ad pie, but its growth will slow in the near term, from 15.6 percent in 2008 to 6.6 percent this year, according to the MPA.

With the onset of commoditization and macro pressures, earnings and valuations have predictably diminished. MPA’s stock index for more than ten publicly traded India media companies registered almost an 80-percent decline last year and is already down 20 percent in the year to date through February 2009.

While valuations are becoming more reasonable, earnings are likely to remain soft over the next 12 to 18 months. With the notable exception of Sun TV, the dominant broadcaster in southern India, most major broadcasters are likely to see earnings dip during 2009. Indeed, only Sun, Zee and Star India are making any real money in Indian electronic media these days, with the integrated and diversified UTV leading a second tier of emerging companies.

In spite of winning a lucrative long-term sports franchise in the Indian Premier [cricket] League (IPL), Sony is still struggling due to the poor performance of its entertainment networks. One piece of good news this year has come, ironically, with the addition of Colors—Sony’s Hindi-­language general-entertainmentrival—to OneAlliance, Sony’s channel-distribution joint venture with
Discovery. Elsewhere, Network 18’s IBN18 and TV18 remain strong franchises, but the company’s profitability remains scarce due to the large cost structure around Colors. NDTV Imagine and INX, the parent company of the channels 9X and 9XM, face a challenging time ahead.

Stronger and more sensible business models are likely to prevail over the medium term with more emphasis on subscription and non-ad-dependent revenue streams; innovation in programming; and more focus on underpenetrated regional markets within India.

At the same time, as the industry looks to extract more value from content and value-added services, there are signs that price-distorted competition and regulation is becoming more rationalized. This may lead to more segmented pricing structures, which will, in turn, allow for more flexible business models and the growth of niche, differentiated TV channels.   

COLORS INNOVATES

The biggest story in the Indian TV market in recent months has been the successful launch of Colors into the highly competitive Hindi entertainment segment. The channel has used marketing and content innovations, as well as high-cost driver programs, to establish itself as a close second behind Star Plus in the Hindi general-entertainment channel space. It has overtaken Zee TV and is easily ahead of established players such as Sony and Sahara, as well as the new entrants NDTV Imagine and 9X.

As a result, a two-tier structure prevails in Hindi general-entertainment channels today: Star, Colors and Zee versus the rest. Colors is already generating about $7 million in monthly ad sales and is likely to gain further momentum as ad rates increase in line with ratings growth. Rates for Colors are still 30 percent below that of Zee TV. Significantly, subscription fees are also expected to start coming in as Colors becomes an encrypted pay channel after March 2009.

Colors’ cost base and funding are the primary concern, with operating losses expected to amount to some $80 million in the fiscal year ending March 2009. Higher ad-sales growth and sub fees could see it reach breakeven by March 2010, an attractive opportunity for future potential investors.

REGIONAL OPPORTUNITIES

The single biggest TV opportunity remains a slice of India’s growing regional markets, which continue to outperform the national market in terms of growth. The six regional-
language markets within India currently generate about $500 million per annum in TV advertising, contributing about a quarter to the overall TV ad market. And the share of advertising revenue for regional language channels (25 percent) is far less when compared with their viewership share (40 percent), implying plenty of upside for the future.

Sun, Zee and Star India are likely to benefit the most in the short term. In spite of more competition, Sun continues to dominate the South (especially the Tamil market) and makes more money than any other broadcaster in Indian TV today. Zee is also making decent money from regional markets and has recently entered Tamil, Telugu and Kannada markets. It’s facing serious competition from Star, which has entered the Marathi and Bengali segments, and is moving on aggressive plans for South India through a joint venture with Jupiter Entertainment, giving it an attractive national footprint.

In the short term, the costs of competition are likely to prove somewhat corrosive. In recent months, the cost to acquire movies and other regional content, as well as to retain talent, has been rising markedly as the large national players expand aggressively in the regional genre. 

DISTRIBUTION DILEMMAS

DTH has helped spread digital pay TV in India and has acted as a catalyst for investment, consolidation and digitization in the fragmented cable industry. At the end of 2008, there were close to 11 million digital DTH pay-TV subscribers in India, another 6 million on free DTH from Doordarshan (via DD Direct), and more than 1.5 million digital cable TV homes. Analogue cable TV distribution dominates the field, with more than 80 million homes, but by 2013, MPA expects all digital platforms (including IPTV) to have penetrated close to 50 percent of the TV households in India.

The key in the future is making money from distribution. For cable, last year’s influx of capital from private equity has dried up amid the downturn, but the emergence of three strong MSOs—the profitable Hathway, the ambitious DEN and the acquisitive Digicable—should set a strong foundation for the future.

Five DTH pay-TV platforms, backed by the might of the Tatas, Reliance, Zee, News Corp., Sun TV, Bharti, Astro and Temasek, among others, will rack up around $450 million in operating losses (in aggregate) this fiscal year. Some, most notably the Tatas and Astro, may no longer wish to fund the current extent of losses amid such a poor macro environment. Others, such as News Corp. and Zee, remain long-term believers, while Reliance and Bharti are searching for ways to monetize sooner rather than later. 

Part of the problem is low monthly fees (less than $4 per month with discounts down to $1) and rising subscriber acquisition costs. Encouragingly, some players are looking to develop segmented pricing models, with higher-end programming tiers and bundled value-added services. Break-even periods will likely stretch to another three to five years and will surely involve mergers and acquisitions. In the near term, however, high volumes and low ARPUs will prevail.

Vivek Couto is the executive director of Media Partners Asia, a Hong Kong–based research firm focusing on media and telecommunications in Asia.