India’s Next Steps

This article originally appeared in the MIPTV 2012 issue of TV Asia Pacific.

 

India has been the international media market to watch during the last few years, a position the populous nation will undoubtedly retain as digitization takes hold. With the government having set 2015 as the deadline for operators to make the switch from analog—a move that will translate into increased channel capacity—domestic and international media companies alike are rushing to take the pole position in a market with an estimated 125 million subscriber households.

 

Indeed, the global significance of India’s TV industry continues to grow. Analysis from Media Partners Asia (MPA) indicates that India is still a small piece of the global pie for the majors, though its importance is massive in the Asian context. This year, India will make up just 5 percent of global revenues for News Corporation and Sony (both long-established owners and investors in the market), but 65 percent to 75 percent, respectively, of their Asia-Pacific revenues. For others, like Discovery Communications and Time Warner, which are more reliant on mature markets such as Australia and Japan, India contributes about 30 percent to Asia-Pac revenues. Nevertheless, India is clearly a larger piece of the pie than it has been in the past and is a vital contributor to future growth.

How successfully India emerges as a profit engine for media companies will now depend on a number of key factors, including digitization; progressive regulatory change; consolidation and merger-and-acquisitions activity; and the growth of new markets.

 

The good news is that digitization is finally on its way. Having tried and failed in 2003 and 2006, the government is now intent on converting more than 100 million TV households (largely pay-TV subscribers) to digital over the next three years. Today, about 90 million of India’s 145 million or so TV homes still have analog cable services, about 5 million have digital cable and 30 million have digital DTH pay-TV services. In addition, close to 15 million homes have opted for free DTH services from DD Direct, a subsidiary of the public broadcaster Doordarshan. The government hopes the state-backed broadcaster will capitalize on digitization to expand the capacity of its free DTH platform to more than 100 channels.

 

No one really expects India to reach 100-percent digital penetration by the targeted date of mid-2015—after all, the time it has taken for most global markets has been around 10 to 15 years. But the key issue is that the government is unlikely to step back from its lofty goals, and the deadline has encouraged broadcasters and cable operators to work together to reap the benefits of digital conversion.

 

This year, the key focus is the first phase of digitization, which involves about 10 million homes in Delhi, Mumbai, Kolkata and Chennai. The government recently suggested that Phase 1 digital conversion would need to be completed by the end of June 2012. That will surely mean chaos for the next 6 to 12 months, but most industry insiders expect that by June of next year, 80 to 90 percent of Phase 1 homes will be receiving a digital multi­channel service either through DTH platforms—these viewers will likely benefit the most in the short term—or digital cable networks and DD Direct.

 

The impact on broadcasters and content providers should be significant, as subscription fees rise and the costs to secure carriage fall. Another key development is that for the first time, tiering and packaging of channels will come to India in a big way.

 

Increased affiliate fees will reduce dependence on ad revenues, which are linked to weekly television rating points (TRP). Broadcasters can also identify and launch dedicated channels for specific niches, which may have smaller advertising potential but can deliver healthy subscription premiums. At the same time, viewer adoption of certain programming tiers and specific channels will ensure healthy consumer competition in the content marketplace, while broadcasters will also come under increasing pressure to produce premium quality, distinctive content (potentially advertising-free) that has local relevance.

 

Digitization will also limit the rising carriage and placement fees paid by channels to cable operators, which now average north of $350 million per year. Meanwhile, according to MPA, pay-TV broadcasters received only $425 million in subscription fees from cable platforms in 2010, about 11 percent of overall cable-TV revenues. This number is expected to grow significantly in the future as digitization takes shape. Theoretically, a broadcaster’s share in the digital cable environment could increase to as much as 40 percent, versus 10 to 15 percent in analog. Large broadcast distribution networks, such as Media Pro, a joint venture of Zee and Star, have come together to encourage digitization, offering discounted rates to operators for packages of channels.

 

Advertising, of course, will always remain important, anchored to economic growth and the expansion in pay-TV homes. This year, forecasts are modest, with ad sales likely to grow by 8.7 percent, according to MPA data, against the background of a slowing economy. MPA also cites difficult comparisons with the first half of last year, which included the Cricket World Cup—held every four years—plus an extended Indian Premier League season.

 

The forecast growth this year will be driven primarily by multinational corporations investing in India and a stronger, fast-moving consumer-goods sector, and there could be upward revisions made in the ad forecast in the second half of this year. Significantly, before the first phase of digitization is implemented, broadcasters are already rolling out new niche channels in various genres, including comedy, action and non-cricket sports. This will attract advertisers who are willing to target and segment their audiences.

 

Competition in Hindi general-entertainment channels (GEC), a genre dominated by big guns such as Star (owned by News Corp.), Sony, Viacom-backed Colors, and the domestic giant Zee, remains intense. There has also been a change in the pecking order of the top Hindi GECs, with Sony climbing up to the number two spot (behind number one player Star Plus), while Colors has slipped to number four behind Zee. Imagine TV, owned by Turner, is yet to show a sustained improvement after management and structural changes implemented last year.

 

Looking to extend their dominance beyond the GEC category, larger networks, such as Star India, have started investing heavily in other genres, especially Hindi movies. Star Gold in particular has become aggressive in beefing up content by securing telecast rights to new releases. Furthermore, new launches in other genres, such as the music networks MTunes and Sony Mix, and the creation of ultra-niche genres—­English entertainment with BIG CBS, AXN and Star World, among others—are fragmenting viewership.

Future increases in digital penetration will continue to fuel the growth of factual and lifestyle niche entertainment as well as home-shopping channels. Factual and lifestyle channels in particular have great potential to enlarge the ad pie. However, it has to be said, the current base in small—about 13 factual channels currently garner less than 2 percent of the ad market. Nonetheless, a player such as Discovery has set the template for profitable growth in India, built on localization, regional feeds and HD offerings.

 

Competition will increase as new local lifestyle channels enter the market, with A+E Networks most recently investing heavily to launch HISTORY in the fourth quarter of last year in conjunction with joint-venture partner Network18. Regional and HD feeds will further help boost viewership and ad share for the genre.

 

Sports also remains critical, but the potential growth for the genre on television will depend on the mass adoption of sports beyond cricket (i.e., football, basketball, tennis, Grand Prix). Many channels have been priced out of the cricket-broadcasting market.

 

The rise of the regional markets is a pervasive theme in Indian TV, reflected in viewership shares as well as increasing ad volumes. For instance, outside of South India, regional channel viewership for the state of Maharashtra has increased from 10 percent to 25 percent, while more than 45 percent of overall viewership in West Bengal is of regional channels.

 

Investments in regional channels have become key for many media groups, especially for the national networks like Zee and Star India. Zee’s regional business now contributes about 20 percent to annual sales and close to 25 percent to its profit. Star India has spent more than $300 million since 2009 to acquire and develop regional networks. As a result, profits have grown substantially over the past two years, with regional channels contributing almost 40 percent to earnings.

 

One of the biggest developments in the regional-­channels business came in January when the conglomerate Reliance Industries Ltd. (RIL), under the leadership of Mukesh Ambani, made a landmark deal involving Network18, TV18 Broadcast and Eenadu Group. Eenadu Group operates 12 regional channels in the South under the brand ETV, which generates about $100 million in revenues per year.

 

Following the deal, TV18 will own 100 percent of ETV’s five regional news channels, 50 percent of ETV’s five regional entertainment channels (with an option to increase to 100 percent) and 24.5 percent of ETV Telugu channels, with an option to increase to 49 percent. To fund the transaction, Network18 issued shares to RIL’s subsidiary Independent Media Trust. RIL is likely to emerge as the largest shareholder in Network18 and TV18. Through the deal, RIL also gains national and regional content from ETV and Network18 for its 4G broadband platform, which is likely to launch commercially in 2014.

 

The ETV deal pushes Network18 into the fast-growing, profitable regional space. The ETV acquisition potentially also strengthens Sun18, Network18’s channel-distribution joint venture with Sun TV (a leader in South India).

 

Mergers, acquisitions and joint ventures have become increasingly important as the industry starts to consolidate. Last year, India’s largest TV businesses, Star and Zee, seemingly at loggerheads since their last equity joint venture fell apart more than a decade ago, united to form Media Pro, which brings together Star Den (Star’s existing alliance with the cable MSO Den Networks) and Zee Turner (Zee’s existing venture with Turner). 

 

The theory behind Media Pro is simple: create more scale to generate more value by bringing together 68 pay-TV channels across multiple genres and markets. This will help raise subscriber declarations. Media Pro could also indirectly force some level of last-mile cable consolidation and digitization among cable systems. With enhanced scale, Media Pro can look to switch off non paying or pirate cable operators, as the combination of Star and Zee channels will have significant leverage in northern India and also in regional markets. The main challenge is bringing two different corporate cultures together.

 

Increased consolidation is likely on its way in pay-TV distribution over the next two to three years, especially among cable operators (after Phase 1 digitization), sports channels (Neo Sports, ESPN Star Sports) and DTH operators. Elsewhere, Viacom has the option now to buy more of Colors, while Disney continues to pour money into India, spending more than $1 billion over the past seven years, including the recent acquisition of the film, television and gaming studio UTV Software Communications.

 

Most of Disney’s value in India today is attached to UTV, whose key business pillars rest on a cash-generative movie business and a gaming division with potential, though its broadcasting business continues to generate losses. Now led by the serial dealmaker and entrepreneur Ronnie Screwvala, Disney should be on the course toward value creation—though India is always full of surprises.