Media & Entertainment: The sunrise sector
It’s truly the dawn of a new era of entertainment. For the Indian consumer it is a time of multiple choices as he can choose from a bouquet of over 300 channels on TV, several FM stations on radio and has a choice of 3-5 movies at multiplexes. For the entertainment industry is time to rake in the moolah as the share of consumer spend on entertainment is increasing and to gain mind share advertising companies are increasing spend. And for the government, it means more revenues by way of taxes. Sure the multiple choices come at an extra cost. But with technology having made significant advances and the quality of entertainment having improved, the Indian consumer is not complaining.
The turnover of the Indian entertainment industry is estimated at ~Rs250 bn in FY05 and likely to witness a CAGR of ~20% between FY04-10 to touch Rs606 bn by FY10. The highest growth is likely to be witnessed by Radio (~31% CAGR) followed by Television (~20% CAGR) and Films (19% CAGR). However, it’s the Television sector that would drive growth of the entertainment industry with a 65% share of revenues in 2010. The share of Radio in overall revenues of the entertainment sector in 2010 would be ~2% only. Over the same period (FY04-10), revenues of the Print Media industry would grow from Rs98 bn to Rs195 bn (12% CAGR).
A host of factors are likely to drive growth of the media and entertainment industry. Some of these are general to the entire industry while some are specific to a particular segment within the industry. For instance among the general economic factors, increasing consumer spend on lifestyle related products, especially entertainment, and rising urbanization would see demand for Television, Films as well as Radio go up, while rising literacy rates would translate into higher demand for Print Media. Among the more specific factors, the pace of reforms undertaken by each segment of the industry (for instance, films and television was opened up to private and foreign investment first and radio and print only recently) is meanwhile likely to determine the extent and rate of growth of each segment.
Even a slight increase in media penetration levels in lower economic classes (C, D, E1 and E2) is likely to see demand for media and entertainment, especially Radio and Films, increase substantially in absolute terms as the lower economic classes have a large population base. Whereas an increase in advertising spend (currently 0.34% of GDP which is one of the lowest in the world and lower than the global average of 0.98%) could result in substantial increase in revenues for this industry.
But apart from the economic factors driving demand for Entertainment and Media, the emergence of new distribution channels such as broadband, internet and wireless communication would also contribute significantly to the growth of this industry.
Television: entering a new growth channel
The Indian television broadcasting system is one of the most extensive systems in the world providing coverage to over 90% of India’s 900 mn people. Television has been the main contributor to the growth of the entertainment industry accounting for a 64% share of entertainment revenues in FY04. However, the growth of the television sector which was over 20% in the 1990s slowed down to less than 15% in the 2000s as the sector attained maturity. Analysts, however, believe that growth is likely to pick up to 20%+ levels over the next five years driven by demographic, technology and policy level changes.
Liberalization drove growth between 1991-2004: With the liberalization of Indian television in the 1990s, the number of channels multiplied from a single television channel in 1991 (Doordarshan), to over 100 by 2001 and over 300 by 2005. By 1998, most of the leading transnational media companies (eg. Star TV, BBC, Discovery, MTV, Sony, CNN, Disney and CNBC) were operating in India through cable and satellite networks.
However, most of these transnational companies had to adapt their content for Indian viewers. Star TV, which started operations in India in 1991, realized by 1993 that its US originated programming was reaching only a fraction of Indian viewers and to reach a larger audience, it would have to modify its content. It began by subtitling Hollywood films broadcast on its 24-hour channel in Hindi, followed this by dubbing popular US soaps in Hindi and in 2003 went into exclusive Hindi programming for its flagship channel Star Plus. The move to localize content saw Star TVs reach go up from 0.5 mn households in 1992 to over 19 mn households in 1999. By 2005, Star TV had a viewership of over 22 mn homes (90 mn viewers/week) with 80% of Indian viewers watching at least one Star channel. Following on Star TV’s footsteps, Walt Disney too has switched to dubbed Hindi programming on both its channels while ESPN-Star Sports has a dual Hindi feed.
With Indian viewers clearly preferring local content over international, the number of hours of television programming produced in India increased nearly five fold between 1991-96. The TV software segment’s revenues saw a 30%+ annual growth between 1999-2005 to Rs7 bn in 2005.
Advertising on television also saw a substantial increase post liberalization, with ad revenues increasing from $5,400mn in 1990 to Rs54.5 bn in 2005. However, Doordarshan’s share in total advertising revenues declined post liberalization with Star TV and Zee Telefilms eating into its share. It is estimated that ~20% of mass brands and ~50% of niche brands moved their advertising from Doordarshan to Star TV post liberalization. By 1993, just two years after liberalization, Star TV and Zee Tele together accounted for ~20% of the total advertising pie.
Demographics and technology to drive growth hereon: At the demographic level, growth over the next five years is likely to be driven by increase in urbanization, higher income levels and changing consumption pattern in favour of lifestyle products which in turn is likely to see penetration levels, especially in rural India, increase. In fact, if recent trends are an indication, rural demand is likely to be a significant driver of television sales. According to a recent report by KPMG (Focus 2010: Dreams to Reality), of the 25 mn households that bought television over the last three years, 19 mn (77%) were rural households.
Currently, television reaches only half the population of India ─ 78.9% of urban population and 39.8% of rural population. In all, only 105 mn Indian households of the total 191.96 mn households in India (Census of India 2001) have television, of which only 55 mn households have cable and satellite TV (PWC-Ficci report on the Indian Entertainment industry, 2006). Hence, even though the base is higher than what it was five years ago, the potential for growth of the television sector hereon remains enormous.
Apart from demographics, technology is likely to be a key growth driver for television. Introduction of alternate technology platforms like DTH and IP-TV, though currently facing resistance (on the cost-structure and licensing front), is expected to drive the next phase of growth from FY07-10. This is because these systems will not only increase transparency and make revenue share between different distribution segments (broadcasters, multi-system operators and local cable operators) more equitable, but also offer consumers greater addressability through the conditional access system (CAS). Currently, low subscriber declaration by LCOs allows them to corner bulk of subscription revenues (79%), leaving only 17% on the table for the broadcaster and 38% for the MSO. Greater transparency would also reduce disparities in cable subscription charges (which is Rs60/month for 100+ channels in rural and semi-urban areas v/s Rs300/month for the same number of channels in urban areas) that currently have no co-relation with quality or service.
Distribution segment will grow the fastest: An increase in the number of TV homes in Rural India and second TV homes in Urban India along with increase in subscription rates and demand for pay services will drive television revenues over the next five years.
The number of TV homes is likely to increase from 102 mn to 128 mn (C&S homes to go up from 50 mn to 90 mn) while average subscription rates are likely to go up from Rs130/month to Rs250/month over FY04-10. Increase in TV homes (number of subscribers) and subscription rates (with C&S homes likely to grow faster than TV homes and a percentage of C&S homes opting for CAS) would in turn result in an increase in subscription revenues from Rs78 bn in 2004 to Rs270 bn in 2010. Subscription revenues would thus see a 26.5% CAGR over 2004-10.
Television advertising revenues would meanwhile go up from Rs48 bn in 2004 to Rs106 bn in 2010 witnessing a 14.2% CAGR on the back of growing number of channels while TV software revenues would increase from Rs5.7 bn to Rs16 bn at a CAGR of 18.77% over FY04-10 on the back of rising demand for Indian (Hindi) content both from within India as well as from overseas.
Foreign investment will spur growth: A host of foreign collaborations were announced in the television industry during 2005 covering all areas of operation including broadcasting, distribution and content. Key among them were the Thomson Group’s tie up with VSNL, a Tata group subsidiary, for managing and delivering content for broadcasters and content providers. Meanwhile, regulations forced broadcasters including Walt Disney, ESPN-Star Sports, Star, Discovery to set up foreign investment subsidiary companies for content development and advertisement airtime sales. The distribution space saw the entry of foreign MSOs such as Hathway and Hindujas. And the television content space saw UK-based 3i and Mauritius based Americorp Ventures pick up equity stakes in Nimbus Communication.
Policies need a re-look: In terms of policies, the most significant development was the appointment of the Telecom Regulatory Authority of India (TRAI) in 2004 as a regulator for the television industry (with its scope increased to cover broadcasting and cable services) after the Supreme Court in 1995 held that the government’s monopoly over broadcasting was unconstitutional. However, TRAI’s role so far has been restricted to providing recommendations to the government most of which (including those relating to rates for free-to-air and pay television channels) are still pending with the Information and Broadcasting (I&B) ministry. Meanwhile, though FDI has been allowed in various segments of the television industry (100% in software production, 49% in cable networks, 49% in DTH ─ of which strategic FDI is only 20% ─ and 26% in news channels), the cap on foreign investment clubs FDI and FII investment in most cases, which has hindered FDI flows into this sector. Apart from this, issues relating to double taxation of foreign telecasting companies (which earn ad revenues from India) and foreign satellite companies (which charge a satellite usage fee from broadcasters) and absence of cross-media ownership rules are also acting as deterrents to foreign investment.
Radio: the fastest growing segment
One of the last sectors in the media & entertainment industry to be opened up to FDI, Radio which was liberalized in 1999-2000, has seen a sharp increase in the number of radio stations since then. Though AM frequencies are still controlled by AIR, opening up of some of the FM frequencies and the relative success of channels that were launched has attracted a huge number of players. Nearly 338 licences for FM channels have been granted so far across 91 cities. And the number is likely to increase with the convergence of technologies, with platforms like satellite and internet addressing different distribution channels through a single delivery chain. For eg: cell phones which double up as FM radios.
Plagued by losses: Radio was the first form of broadcasting to be introduced in India with the first private radio service being introduced in Madras in 1924. Though initially operated by a private entity, it was taken over by the British government when it went bankrupt in 1930 and in 1936 was renamed All India Radio (AIR). In 1947 when India gained independence, Radio continued to be government controlled and operated as a department under the Ministry of Information and Broadcasting.
The last 5-6 years has seen Radio being progressively opened up but even today it continues to be dominated by AIR ─ AIR covers 91% of the country by area and 99% by population. Opening up of FM frequencies in 1999 has seen 21 private FM stations in 14 major cities become operational. But the number of channels operational account for less than 20% of the licences made available (bids were called for 108 FM frequencies in 40 cities for a 10-year period) and are significantly lower than the number of licences issued (~37). This is because the annual licence fee (which had to be paid over and above the licence fee charged at the time of issuing a licence) was significantly higher than the earning capacity of most industry players which along with high manpower costs (as most of the talent was drawn from high-wage industries like television, advertising and FMCG) made operations unviable.
Ad revenues earned by Radio channels being one of the lowest in the world ─ ad spend on radio as a share of total ad spend in India is just 2% as against the global average of 8% ─ and highly skewed towards a handful of advertisers (11% of the advertisers accounted for 60% of revenues) could cover only 50% of operating expenses and many channels were forced to shut down.
Potential remains untapped: This, however, does not mean that the FM radio sector should be written off. The sector not only enjoys wide coverage (180 mn sets reach 99% of India’s 1 bn population) but is also one of the most cost effective (advertising on radio costs just 15% of what it does on television). Further, with the median age of India’s population at just 24 years (making it one of the youngest in the world), radio should be a major beneficiary. This is because, younger audiences, especially those below the age of 25 years form bulk of radio listenership worldwide which in India’s case translates into a captive audience of 650 mn. The easy availability of FM radio sets at affordable prices (Rs40-150) and its compatibility with cell phones meanwhile offer radio the highest scope for mass penetration among all sectors of the entertainment industry.
Higher growth rate required: If the growth in licence fees continues at the current rate (15% p.a.), the FM radio sector would have to grow at ~40% p.a., nearly double the rate at which it is currently growing over the next three years. This would imply a higher share of FM ad revenues in the total ad spend pie of the media and entertainment sector. Since the global average is 8% (of total ad spend) for radio and 5-8% for media categories in the growth stage, in the short to medium term (2-3 years), the FM radio industry’s CAGR could be in excess of 60%. This means that over the next 2-3 years the industry has the potential to touch a turnover of Rs9.6 bn. Assuming that in the medium term (~5 years), the industry attains maturity and its ad revenues increase to account for 10% of total M&E ad revenues (globally in the mature phase radio advertising revenues account for 10-12% of total M&E ad revenues) the turnover of the industry could go up to Rs12,000 mn from Rs3,144 mn in FY05, a CAGR of 31% over FY05-10. But given the existing size of the industry (21 stations in 14 cities), achieving this growth will be close to impossible, at least under the existing licencing regime. A CII-KPMG study thus estimates that the industry would have to grow in size from 21 stations in 14 cities to 300 stations in 100 cities. Assuming an investment of Rs40 mn per radio frequency, this would require an additional investment of Rs11 bn according to the study. To achieve break even the minimum growth rate for a radio station would have to be in the region of 40% p.a. over a three-year period.
Policies need to be reviewed: To help the radio industry achieve a turnaround, TRAI has suggested that the current licence fee regime be replaced by an entry fee + revenue sharing one (4% of gross revenues) and existing players be allowed to migrate to the new model. Apart from this, TRAI has also suggested that the foreign investment regime be reviewed and FDI investment in areas like news and current affairs be allowed up to 26%. In addition to this, TRAI has recommended that restrictions on owning multiple stations in the same city by the same player be lifted and licence fees for niche channels be rationalized. However, the government has opposed TRAI’s recommendation to move to the revenue-sharing model claiming that it is difficult to monitor revenues and opposed TRAI’s suggestion to grant multiple licences to the same player in a particular city.
Films: Multiplex screens & digital cinema to drive growth
After being given industry status in 2000, all spheres of the Indian film industry (production and post production, distribution and exhibition) saw an increase in corporatisation. As a result of corporatization, the industry’s turnover which was in the region of Rs60,000 mn in 2000 (Arthur Anderson-FICCI report, 2001) increased to ~Rs 98,600 mn in 2005. As the trend in corporatization continues (2005-06 saw several exhibition and production companies go public), the 20%+ growth witnessed by the industry over the last two years is likely to pick up. Though different segments of the industry would witness different growth rates, the overall industry size is likely to touch ~Rs194,300 mn by 2010 witnessing a CAGR of ~25% in revenues over 2005-10.
#1 in volume but lags in revenues: One of the oldest segments of the Indian entertainment industry, films (motion pictures) were first introduced in India in 1896. Since then, the industry has come a long way. In fact, in terms of number of movies produced (estimated at >1,000/year v/s 70% of the admissions in Asia-Pacific) India ranks first in the world. This is because with movie tickets priced at less than US$0.40 (US$6.41 in the US), the country’s 1 bn strong population visits a movie theatre at least once in three months. Despite this however, the industry lags in terms of revenues accounting for just 1% of global film industry revenues.
Box office collections to drive growth: The Indian film industry earns bulk of its revenues from box office collections, which account for a share of 86% in the overall revenue pie (77% domestic box office; 9% overseas collections). Apart from this, the industry earns ~6% of its revenues from the home video segment and 9% from selling
rights to mobile companies, television broadcasters and television distribution companies (MSOs and DTH players). Till now, growth in domestic box office collections have been constrained by low average price of movie tickets (at Rs18-19) and occupancy rates at theatres (~35%). However, since multiplexes came up, both ticket prices (multiplexes charge Rs50-80 per ticket v/s Rs17 charged by single screen theatres) and occupancy rates at theatres (as multiplexes have a better ambiance and other draws) have seen an increase. Though the share of multiplexes in the total number of screens is just 2%, given the growth rate in multiplexes and in view of the aggressive roll out plans announced by film exhibition companies, their share could easily go up to 8% of total screens over the next five years (plans for 400+ additional screens have already been announced by four of the leading players ─ PVR, Shringar, Inox and Essel).
Multiplexes to expand revenue base: As multiplexes charge ~3x what is charged by single screen theatres, their share in value terms (@Rs50/ticket) would increase from ~6% in 2005 to 24% in 2010 (assuming a 5% increase in average ticket price) with number of screens assumed to remain constant on account of low occupancy rates and the possibility of some theatres closing down. A higher share of multiplex screens and upgradation of existing screens into digital cinemas (as the cost of upgrading a theatre to digital format is Rs1 mn only) would result in average ticket prices going up from Rs17 now to Rs31. This along with marginal increase in admissions (by ~200) due to higher occupancy rates could result in domestic box office collections increasing from Rs75,920 mn in 2005E to Rs130,200 mn in 2010E even if the share of domestic collections in the overall pie goes down to 67%, given a higher growth rate by the home video segment which is likely to see its share in the revenue pie go up from 6% in 2005 to 14% by 2010. (See table on pg 44 of FICCI-PWC report).
Organized funding would reduce cost: Since the sector was given industry status in 2000, the number of films that went in for organized sector funding has been on the rise with corporates accounting for ~50% of the films produced. Organized financing has significantly reduced the average financing cost in the sector as well as the risk with banks financing 50-70% of the project budget. However, despite revenues of the industry trending upwards and cost of production trending downwards, earnings would come under pressure as a 60% average entertainment tax (one of the highest in Asia) shaves off a large proportion of theatre ticket receipts.
Music: on a slow track
The Indian music industry appears to be following in the footsteps of the global music industry, which has been in recession for nearly four years. While globally the industry is undertaking several cost cutting measures to get back on track and making a slow recovery, in India a reduction in offtake of cassets/CDs on the one hand and stagnant cassette/CD prices on the other have resulted in degrowth.
Moreover, the last few years have also seen remixes and music videos of original soundtracks gain more popularity than the original soundtracks. And, this in turn, has reduced sales of original music companies. Piracy has meanwhile been taking away ~42% of the industry’s revenues. Thus, though the audio-video market has been growing at nearly 300% p.a., the same growth is not reflected in legitimate industry sales. Huge production of CDs / DVDs far in excess of demand for the same has only resulted in increasing the incidence of piracy. Apart from physical piracy, digital piracy (thanks to MP3 technology and PC penetration) is also on the increase with easy availability of free downloads from various sites.
Current revenue mix: Currently the industry derives 92% of its revenues (estimated at Rs7,000 mn in 2005 by PWC) from music sales and the rest from non-physical formats ─ 5% from ringtones and 3% from royalties. Of the 92% that it generates from music sales, nearly 60% comes from film music (40% new movies; 20% old movies). With piracy accounting for 42% of revenues, the music industry industry which has already seen its share in the overall entertainment industry shrink to 3.3% in 2005 could see its share go down even further to 1.2% by 2010. PWC estimates the industry to grow at 1.7% CAGR over FY04-10 and touch a turnover of Rs7,400 mn by FY10.
Innovative service offerings could help increase revenues: While the Indian industry has been focusing on curbing piracy by enforcing checks (~Rs40 mn is spent by 50 music companies towards this) and lobbying for legal changes (amendment of the Civil Procedure Code and introduction of the Optical Disc Law), the US industry is turning to innovative service offerings to increase revenues. For instance, Apple Computers, which launched a music store called iTunes, sells individual song downloads for 99 cents and has sold over 200 mn songs to date from its 1 mn song collection. Audio books, exclusive tracks, customized playlists /on-demand videos, internet accounts (that can be accessed from anywhere), monthly subscriptions or pay-per-song facility etc offered by service providers in the US have helped the music industry generate higher revenues.
While the entertainment industry itself is likely to see its revenues go up from Rs209,300 mn to Rs605,700 mn over FY04-10, the traction witnessed by various segments of the industry would in turn drive revenues of several sub-sectors. For instance, increase in TV penetration and migration to digital format would see sales of the TV hardware & equipment (HDTV, set top boxes) sector increase. While demand for Indian content and outsourcing would see demand for industries, such as animation, increase. The growth in films would meanwhile go hand-in-hand with the growth in multiplexes (exhibition companies).
The entertainment industry would meanwhile be driven by Integration and Convergence. While integration would increase once cross-media-ownership regulations are in place, convergence with its ability to collapse previously distinct media distribution channels (broadcast/cable television, radio, print and online) into a single delivery chain has already started defining industry trends. Increased standardization of networks and devices to use the internet protocol and rising broadband penetration has seen an increase in convergence and while convergence has helped some industry segments see an increase in growth rates, some like music have seen revenues decrease.