In the interval, but ready for the next act FICCI-KPMG Media & Entertainment Industry Report © 2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. © 2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Foreword
Welcome to the 2009 edition of the Indian M&E Industry, prepared jointly by FICCI and KPMG.
In many ways, the year 2008 was a testing time for the industry. With the global economic slowdown affecting the advertising spends, sectors like TV, Print, Radio and Outdoor which depend on advertising revenues were affected. Further the liquidity crunch and the consequent lack of access to funds also affected the capacity expansion plans of players across various M&E segments.
However, behind every adversity lies an opportunity. Media companies are under pressure to change, innovate and re-examine their existing business models. Players need to draw upon new capabilities to survive in this environment. In immediate future, media corporates are likely to focus more operating margins, and assessing opportunities for consolidation, while building on core strengths.
The year was also full of interesting developments. While the GEC space witnessed the entry of new players, entry of new DTH players expanded the penetration of digital TV households. Print media space also saw multiple new launches and expansion activities in the first half of the year. Last year, was also the year where Indian players made their foray in the global arena, through big ticket acquisitions and joint ventures.
The dynamics of the industry are changing and the media universe is increasingly becoming more complex, specialized and fragmented. With companies increasingly leveraging cross media platforms and trying to realize synergies, there is a need for paradigm shift and examining the entire M&E industry from the point of view of common drivers, bottlenecks and challenges that affects players across the sectors. We have attempted the same through our detailed and reader friendly report.
FICCI takes this opportunity to thank KPMG, our knowledge partner, for devoting precious time and resources to prepare this report at our behest. We also acknowledge the valuable inputs provided by the members of the entertainment committee and all other associated agency and industry players who have provided information and support in preparation of the report.
Yash Chopra Kunal Dasgupta Chairman Co-Chairman FICCI Entertainment Committee FICCI Entertainment Committee
© 2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. “Our greatest glory is not in never falling but in rising every time we fall.” - Confucius
The advent of New Year 2009, has heralded interesting yet challenging times for the Media and Entertainment (M&E) industry as a whole. The Indian M&E industry—one of the fastest growing industries in the country over the past couple of years—is no exception. While 2008 showed growth for the industry on the whole, the last quarter of 2008 was impacted by the economic slowdown and liquidity crunch, and this is estimated to continue in the current year.
The year gone by, was one packed with several significant developments for the Indian M&E industry, including the entry of DTH players, growing acceptance of the digital TV distribution technology, the success of many small budget movies, and the rising competition in the regional space in print. Finally, it was the year when IPL proved that innovation in traditional formats resulted in runaway success!
On the other hand, the after effects of the global economic turmoil are being felt in India as well, and the economy is expected to grow at a significantly lower rate over the next 2 years (between 5 to 7 percent according to various estimates)1. Consequently, advertising spends, which constitute a significant portion of the M&E industry’s revenues have got affected, which in turn has resulted in a lower growth rate for the industry for the current year. Moreover, this trend is expected to continue in 2009.
Given the industry’s changing landscape and emerging challenges, the focus of industry players too is changing; with a strong emphasis on profitable growth in the current scenario. Hence, media companies are increasingly concentrating on strengthening existing operations and assessing options for growth through consolidation, while continuing to innovate.
Looking at the changing contours of the industry, there are certain drivers which are likely to have an impact across sectors, and we have examined these drivers in detail in this report. Factors like Narrowcasting, Regionalization, Internationalization, Organized Funding, Digitization and Deregulation have become the “buzzwords” in the industry, and we have focused on how these drivers are affecting various players across the M&E industry value chain.
The analyses and point of view presented in the report have been validated through extensive discussions with industry players. We take this opportunity to thank the industry players for making this endeavor possible.
Russell Parera Rajesh Jain Chief Executive Officer Head - Information, Communication & KPMG in India Entertainment KPMG in India
1 IMF, Cushman and Wakefield Report 2009
© 2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. © 2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Table of Contents
1. Indian M&E Industry: The Growth Story 01
2. Sector Snapshots 19
3. Narrowcasting 53
4. Regionalization 81
5. Digitization 101
6. Regulatory & Tax Environment 123
7. Internationalization 137
8. Deal Activity and Investment Trends 159
9. Changing Landscape in Audit for M&E 169
10. Internal Processes of M&E Companies 175
11. Way Forward: Sector wise key action steps 193
© 2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
Indian M&E Industry: The Growth Story 01
Indian M&E Industry: The Growth Story
The Indian M&E industry was one of the fastest growing • Favorable demographic composition and strong long sectors in the country in recent times, riding on the back of term fundamentals of the Indian economy. Unlike other a buoyant economy and extremely favorable demographics. countries, Indian economy is still growing, albeit at a A young Indian’s higher propensity for discretionary lower rate than before. Further, 70 percent of Indian spending has propelled more money flow in the leisure and population is below 30 years of age1, presenting a good entertainment activities giving a steady impetus to the M&E opportunity for marketers
industry. By embracing multiple platforms, expanding into • Advertising to GDP ratio in India is still at a low of 0.47 new geographies, and exploiting the potential of under percent, vis a vis developed economies like the U.S., penetrated geographies, Indian promoters have built a scale, where it is as high as 0.9 percent2 where they can now attract foreign media companies and • Media penetration in the country remains low. For investors. New content and delivery formats have emerged instance, there are still 359 million people in India who in the industry with new media gaining an increasingly can read and understand any language but do not read important role in the distribution portfolio of the players. any publication.3 This represents significant opportunity of expanding the market.
Succeeding in turbulent times At the same time, 2009-10 spells caution for industry players. The business imperatives in these times need to However, the market environment has become increasingly undergo change – with increased focus on new mantras challenging for the media and entertainment sector, on the such as the 10 shortlisted below:
back of economic slowdown and the consequent slowdown • User segmentation to provide increased options for in advertising revenues, especially in the last quarter of targeted messaging through niche vehicles 2008. At the same time, for an individual player, increased • Innovation and flexibility, in content, formats, delivery complexities have emerged on account of greater mechanisms and marketing to reach out to new fragmentation of audiences across media, and distribution audiences and advertisers in multiple ways platforms, and greater need for accountability and measurability demanded by advertisers. • Focus on optimizing margins, through re-engineering processes, structures, and working capital management Notwithstanding, over a 5 year period, we project a 12.5 percent growth for the sector on the back of the following • Leveraging IP to help ensure value maximization from factors: existing libraries
1 Census 2 SSKI Research, KPMG Analysis 3 IRS 2007 R2
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• Select market expansion given the trends in Size and Growth of the Industry regionalization, overseas markets and digital media The Indian M&E industry stood at INR 584 billion in 2008, a • Greater accountability, through demonstration of growth of 12.4 percent over the previous year. Over the effectiveness of media properties next five years, the industry is projected to grow at a CAGR • Establish standards for Corporate governance and of 12.5 percent to reach the size of INR 1052 billion by 2013. move towards greater professionalization
• Differentiation of brand through creation of strong Size of the Indian M&E Industry positioning, as required in competitive times
• For key players, market growth through consolidation, is increasingly an option under consideration, to ensure development of strategic portfolios with multimedia capabilities and synergies and finally…
• Producing salient content as always, remains key!
M&E Industry CAGR % CAGR % 2005 2006 2007 2008 2009 P 2010 P 2011 P 2012 P 2013 P (INR billion) (2006-08) (2009-13)
Television 163.3 182.5 211.3 240.5 13.8% 262.7 295.6 341.7 399.1 472.6 14.5%
Print 117.1 138.6 160.4 172.6 13.8% 183.9 197.9 216.0 239.3 266.0 9.0%
Film 66.9 81.7 96.4 109.3 17.7% 109.2 117.5 130.9 151.3 168.6 9.1%
Radio 4.9 6.0 7. 4 8.4 19.7% 9.2 10.3 11.9 13.9 16.3 14.2%
Music 8.3 7. 8 7. 4 7. 3 -4.4% 7. 5 8.0 8.7 9.5 10.7 8.0%
Animation 10.0 12.0 14.5 17.4 20.1% 20.0 23.3 27.8 33.1 39.4 17.8%
Gaming 2.2 3.0 4.4 6.5 44.6% 9.4 13.3 17.9 22.5 27.4 33.3%
Internet 2.0 2.0 3.9 6.2 45.2% 8.4 11.0 13.7 17.1 21.4 27.9% Advertising
Outdoor 10.0 11.7 14.0 16.1 17.3% 17.7 19.8 22.4 25.5 29.3 12.8%
Tot al Size 385 445 520 584 15.0% 628 697 791 911 1052 12.5%
Source: Group M, KPMG Interviews, KPMG Analysis Note: For the purpose of sizing, we have considered the following M&E sectors – Television, Film, Print, Music, Radio, Outdoor, Animation, Gaming and Internet Advertising.
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Advertising revenues is one of the main drivers behind the growth of the Indian M&E industry. Over the past 3 years, it is estimated to have grown at a CAGR of 17.1 percent. Going forward, the advertising industry is expected to exhibit a lower growth rate owing to the turbulent macro economic environment. We estimate that advertising revenues will grow at a CAGR of 12.4 percent over the next 5 years.
Indian Advertising Industry Advertising Industry CAGR % CAGR % 2005 2006 2007 2008E 2009 P 2010 P 2011 P 2012 P 2013 P (INR billion) (2006-08) (2009-13)
Television 51.9 60.5 71.1 82.5 16.7% 88.2 97.1 112.6 131.7 155.5 13.5%
Print 69.4 84.9 100.2 108.4 16.0% 114.8 123.8 136.5 153.6 174.3 10.0%
Radio 4.9 6.0 7. 4 8.4 19.7% 9.2 10.3 11.9 13.9 16.3 14.2%
Internet Advertising 2.0 2.0 3.9 6.2 45.2% 8.4 11.0 13.7 17.1 21.4 27.9%
Outdoor 10.0 11.7 14.0 16.1 17.3% 17.7 19.8 22.4 25.5 29.3 12.8%
Tot al 138.1 165.0 196.6 221.6 17.1% 238.4 262.0 297.1 341.9 396.8 12.4%
Source: Group M, KPMG Interviews, KPMG Analysis
To be able to appreciate the changing contours of this industry, it is better to take a closer look at some of the key drivers which have provided the necessary growth impetus and altered the industry dynamics.
Key Growth Drivers
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Socio Economic Environment = Demographics + Economic
India’s demographic composition ensures that it continues to remain an attractive market for various products and services. The high economic growth that India has been witnessing in the past few years has resulted in a transitioned demography with increased disposable incomes. India’s increasing GDP and consequent rise in income levels across urban, semi-urban and rural households, is leading to an increase in population of consuming class in India.
Changing Structure of Income Groups in India
Source: Marketing Whitebook 2008
However, global economic recession has affected the Indian economy too, with the GDP growth rate expected to fall in near future.
Percentage growth in India’s GDP
Source: World Economic Outlook Update, IMF, January 2009
Even at these rates, India’s growth rate is still estimated to be higher as compared to other regions of the world.
GDP Growth Forecast of Selected Countries
Country 2007 2008 2009P 2010P China 13.0% 9.0% 6.7% 8.0% India 9.3% 7. 3 % 5.1% 6.5% Japan 2.4% -0.3% -2.6% 0.6% U.S. 2.0% 1. 1 % -1.6% 1. 6 % Euro Area 2.6% 1. 0 % -2.0% 0.2%
World Output 5.2% 3.4% 0.5% 3.0%
Source: World Economic Outlook Update, IMF, January 2009
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As compared to some of the developed countries, India is in a better position since it is witnessing not a recession but a slowdown. Yet the fall in GDP is expected to adversely impact household and per capita income. As a result of 2 percent fall in GDP, in 2008-09 the reduction in household income maybe to tune of around INR 3200 and in 2009-10 it is predicted to reach around INR 7800. The loss in Per Capita Income is estimated to be around INR 650 and INR 1500 respectively in 2008-09 and 2009-10.4
With the high economic growth over the past few years, India’s spending patterns have been evolving, with basic necessities such as food and apparel continuing to decline in relative importance, and categories such as communications, education and recreation and health care increasing their share.
India’s Share of Wallet shifting towards Discretionary Items
Source: Marketing Whitebook 2008
With the recent economic downturn, it is expected that in the immediate run, some amount of discretionary expenditure is to be reallocated and there is likely to be a trading down of consumer expenditure. Yet, the consumer sentiments are expected to remain positive in the long run.
Further the favorable demographic composition augurs well for India. The average Indian consumer is getting younger. Around 70 percent of the country’s population is below 35 years of age.5 More than 50 percent of India’s population is likely to be under the age of 30 even in 2015.
Population Distribution across various age groups
Source: Euromonitor
4 “India’s GDP growth rate to go down by 2%”, Economic Times, November 2008 5 2001 Census, Euromonitor
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The emergence of India’s young middle class with greater earning power and higher disposable incomes signifies good potential for increased marketing and advertising spends in the country.
Further, the potential for further rise in advertising spends remains strong. In Advertising to GDP ratio, India is still far behind the likes of the U.S. and U.K. and even behind its Asian neighbor China.
Size of Adversement Industry as a percentage of GDP
Source: SSKI Research, KPMG Analysis
The lower ratio for India as compared to other nations is at least in part due to lower spending power per capita as compared to other nations. However the per capita income of the country has been rising steadily over the past few years.
Per capita income (USD) Growth in India’s per Capita Income
Source: Credit Suisse, Indiastat
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The advertisement spend to GDP ratio for India, has also therefore shown a slow but distinct growth trend in the past few years.
Advertisement spends as percentage of GDP
Source: Credit Suisse, KPMG Analysis
These important macro economic indicators have driven the growth of the M&E industry in India in recent times. It is believed that the fundamentals of the Indian economy remain strong, and the recent effects of the global economic downturn are likely to have a short term impact in India. In the long run, the Indian economy is expected to grow steadily, leading to continuous rise in the disposable income of the country.
Narrowcasting=Entertainment ‘niche’ Style
Over the past few years, the media industry has witnessed the emergence of new niche content genres across sectors – emergence of reality television, rising number of niche TV channels, cross over content in music and films as well as large number of magazine launches in the niche genres.
Narrowcasting involves segmentation of the target group and coming out with content, programmes and formats that appeals best to that target group, thereby enabling advertisers to reach out to a focus audience.
Going forward, the trend of narrowcasting is only expected to increase further and the industry is likely to see more audience fragmentation across a myriad of content genres.
The year 2008 also saw cricket emerging as a mainstream entertainment genre with the advent of Indian Premier League (IPL), which had an impact across the entire Indian M&E industry. IPL was positioned as a complete entertainment package to the audiences. The 8 teams’ tournament, which started with a glittering opening ceremony in Bangalore on April 18, 2008, riveted the attention of the family audiences for the next one and a half months. The telecast of the tournament’s final on 1st June garnered an average TVR of 9.86, which was historic for a domestic tournament and this was reflected in the advertising rates for the matches. Sports marketing, which is still at a nascent stage in India, is expected to grow rapidly now as broadcasters, encouraged by the IPL example, start aggressively selling cricket and other sports as entertainment packages.
6 TAM Media Research
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Regionalization = Local content in Local Language
There are two aspects to Regionalization. The first refers to providing content in regional languages and the second aspect refers to content providers catering to a specific geography by providing locally relevant content (local content pertaining to a consumer’s city, district or state and may or may not be in the form of one’s vernacular language).
In the past, growth in media consumption was largely coming from the metros. With the increase in the spending power of population living in smaller cities, now even the Tier 2 & Tier 3 towns are emerging as important growth centers. This has increased the demand for regional content, and companies are now increasing focus to cater to this demand. Regional content is emerging as one of the most significant aspects of customization of content, and hence is emerging as a significant growth driver for the M&E Industry.
Some of the recent trends in this aspect have been:
• Established players in the English newspapers space foraying into Hindi and vernacular languages
• Growth in regional channels and expansion of regional channel portfolio both by regional players as well as national players
• Emergence of city specific channels
Regionalization is likely to continue to be an important growth driver for the media industry. In Print Media, regional dailies are expected to grow faster than the national dailies-consequently; the sector may witness narrowing down of advertising rates differences between the two. In TV, costs associated with setting up of regional channels remain much lower than that of national channels and the difference between the advertisement rates is coming down, making setting up of regional channels an attractive proposition for broadcasters.
Internationalization = Indian Players, Global Ambitions
Indian players are no longer limiting their ambitions within India’s national borders. Similar to their global counterparts, who have been increasing their scale by entering the emerging markets, M&E companies in India too have started to eye international markets by targeting media consumers outside India. International demand for Indian content has been there for some time, with the telecast of Indian TV channels across the world, and Bollywood releases getting a significant share of their box office earnings from abroad. With the large NRI population base of about 25 million to serve,7 M&E companies continue to have a good opportunity to further increase their revenues from overseas markets. In fact, Indian companies are also now looking beyond the NRI diaspora and attempting to target the local audience in these countries as well.
7 Ministry of External Affairs
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Further, with two significant acquisitions of the foreign media companies in the current year, Indian players have taken the first steps towards establishing their presence in the mainstream global market.
Internationalization of Indian media can be characterized in three different ways-
• Production of content for global audience- both the NRI diaspora as well as the local audience in foreign countries. Some recent examples of this include:
• Launch of TV channels catering to local audiences in other countries- NDTV launched NDTV Arabia and NDTV Malaysia
• Foreign Editions of Indian Publications- Filmfare magazine launched its German edition in February 2008
• Co-production and production of Hollywood movies by Indian players- Both UTV and Reliance Entertainment announced their Hollywood ventures
• Providing media specific services to other countries- Animation sector has emerged as an offshoring hub for animation production work. Film Post Production is also showing good potential in this regard
• Acquisition/Partnerships/Strategic Alliances with media properties abroad. Two notable developments in this aspect are:
• Bennett Coleman & Co Ltd (BCCL) acquiring Britain’s Virgin Radio in June 20088
• Reliance Big Entertainment forming a Joint Venture with Steven Spielberg’s DreamWorks studio in September 20089
As Indian media companies look to expand their footprint, international consumption of Indian media is expected to be an important growth driver for the industry.
8 Company Website, Press Reports and Releases 9 Company Website, Press Reports and Releases
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Organized Funding = Capital + Corporatization
Earlier, the M&E industry was reliant largely on private and individual financing at high interest rates. However, over the past few years, the M&E industry has witnessed increased investments in the form of Public Issues, Strategic Stakes and Private Equity funding. These investments have come from both the established industry majors as well as private equity players, from the global as well as Indian market. Most of the organized funding from the global players has been concentrated on the medium of television.
Some such deals in recent times include:
• In January 2008, NBC Universal picked up 26 percent stake in NDTV Networks, the holding company for NDTV's entertainment and lifestyle channels, digital media and other interests for USD 150 million10
• In February 2008, Walt Disney Company increased its stake in UTV Software Communications from 14.9 percent to 32.1 percent by investing INR 8.05 billion. In addition to this, Disney also picked up 15 percent stake in UTV Global Broadcasting Ltd (UGBL) for about INR 1.19 billion11
• ICICI Ventures, Lehman and Goldman Sachs picked up around 15-20 percent stake in Bangalore-based outdoor advertising firm Serve & Volley (S&V) for INR 2.50 billion12
Gradually, more and more players in the industry are availing organized sources of finance. This is ushering an era of corporatization and professionalism. Availability of funds has also resulted in vertical and horizontal integration between different players in the value chain.
Now, with the economic downturn and the liquidity crunch, the overall availability of funding might take a hit in the short term but the long term prospects continue to be positive.
This availability of large sources of organized funding is an indicator of how the Indian M&E industry has come of age. However, it also means that smaller players in the sector might find it increasingly difficult to match the financial power of the big players who now have an abundance of capital. This is likely to lead to consolidation across sectors over the next few years.
10 Indiatelevision 11 Indiatelevision 12 Indiatelevision © 2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. Allrightsreserved. 13
Digitization = Analog into Digital
Digitization, the process of converting analog information into digital formats, has transformed many sectors of the global media industry.
Television, Films and Music industries have been the major beneficiaries of digitization. In the past few years, the Indian media industry has witnessed advent of digital TV distribution platforms – digital cable, DTH and IPTV, digitization of Film, Prints and music libraries, and sale of online and mobile music.
Digitization of television provides for a better quality of viewing experience for the consumers along with a greater bandwidth of channels, and at the same time, through add-on services, provides multiple monetization opportunities for the distributor. DTH has led the digitization drive in India so far with an expected 10 million subscribers by the end of 200813. Digitization of cable, which was earlier driven only by the mandatory imposition of CAS in certain parts of the country, is now happening in non-CAS areas as well as cable players look to tackle the increasing competition coming from digital distribution mediums like DTH. Commercial IPTV services have also started in the country and these provide another digital alternative to consumers. As these digital platforms garner a greater share of C&S users in India, it is likely to lead to a more organized and addressable distribution market in the coming years.
Digitization of Film Prints is having a major impact on film distribution, enabling greater number of prints to be distributed at a low cost thus shortening the theatrical window, and hence reducing piracy. Therefore, theoretically, a movie can be released in the metros and smaller cities and towns simultaneously. This reduces the potential losses caused due to delay in movie releases.
In the ailing music industry, sales of digital music are now showing potential of offsetting the impact of the rapidly declining physical unit sales and pushing the industry towards a healthier growth rate. In India, mobile music takes a large portion of the digital sales pie, and within mobile music, ringtone sales command a dominating share. Going into the future however, full song downloads on mobiles as well paid song downloads over the internet are expected to also become important revenue streams for the industry.
13 KPMG Analysis
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Convergence = Entertainment + Information + Telecommunications
Convergence refers to the mode of creating multiple touch points for the end consumer by delivering the same content via different media platforms. The Indian M&E industry is witnessing increasing convergence between Entertainment, Information and Telecommunications, fueled by the merging of functionalities of customer end terminal devices like Television, Personal Computers, and Mobile Phones to carry similar kind of content. Convergence is changing the traditional industry structures, existing business models and distribution mechanisms.
Some of the trends in convergence across the Indian Media and Entertainment space have been:
• Leading broadcasting houses like Star, NDTV and UTV creating separate divisions focusing on new media distribution channels
• Handset makers entering into tie-ups with music content sites as well as revenue sharing deals with telecom and music companies
• Print publications going beyond their offline formats to launch electronic versions of their newspapers and magazines and making their classified sections like jobs, matrimonies and homes available online
• Introduction of mobile and online ticket booking facility for cinemagoers along with the convenience of seat selection and launch of ticketing kiosks in multiplexes
• Film Production houses, like Rajshri and Eros making their library content available for paid online downloads
Convergence is expected to transform the landscape of the industry by enabling players to leverage cross media synergies and attract a whole set of new consumers. Advent of 3G services in India, may further aid convergence, by making the mobile phone a convenient access point for video and audio media.
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Deregulation = Policy + Framework
Regulations provide uniform framework and direction to the market in order to guide it towards being fair and efficient.
In India, till early 2000, most segments of the industry had grown to their present structure and size in a largely unregulated environment. Such growth had resulted in lack of consumer choice and creation of last mile monopolies, especially in the TV sector. These hard ground realities forced the government to take some positive steps on the regulatory front which provided a new wave of growth for the Indian M&E industry.
Some Regulatory Actions that spurred industry growth
• 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)
• Introduction of Conditional Access System (CAS) in Television
• Granting Industry status to Indian Film Sector in 2000 and permitting FDI up to 100 percent in film related activities
• Providing Entertainment Tax exemptions to multiplexes
• Relaxation of foreign investment norms in print media
• Roll out of Phase II of the Radio licensing policy in 2005, with a number of reforms including a more rational license fee structure
Source: TRAI, Press Releases
The industry continues to look at the government for more regulatory reforms that may bring in the new waves of growth.
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Outcome: New Market Expansion
All the above mentioned growth drivers put together have transformed the contours of the industry. Players are increasingly coming out of their traditional domains and establishing their presence in new areas. Further players from other sectors such as IT and Telecom are also entering the M&E sector. Competition and technological innovations have increased, and as a result, the overall M&E market is growing.
Technology and Competition are expanding the overall market
Technology has played a key role in influencing the entertainment industry, by redefining its products, cost structure and distribution. For instance, with the arrival of DTH, distributors are in a position to offer more channels, better picture quality and add-on services to the consumers. Similarly, digital cinema has enabled the industry players to release the film prints simultaneously across both the big cities and smaller towns, thus facilitating wider release of film prints and improved collections. Technology has thus transformed both the content delivery as well as viewership experience, besides providing new growth opportunities to the players.
As a result of the attractive growth opportunities, the industry is witnessing increased competition from the hitherto non competitors, such as players from the Telecom and IT sector. At the same time, new players are expanding the market size itself. For instance, entry of new players in the DTH space has expanded the DTH market overall. Back in 2005, when Dish TV was the sole pay DTH service provider, total number of pay DTH subscribers was 0.6 million. After the entry of Tata Sky, number of pay DTH subscribers more than tripled to reach 2.6 million by end 2006.14 At present, in a five operator scenario, total number of pay DTH subscribers is estimated to have reached 10 million households by the end of 2008.15 Similarly, entry of new players in Hindi GEC segment has resulted in increasing the Gross Rating Points (GRPs) for the segment. In a six player scenario, the Hindi GEC segment garnered 876 weekly GRPs during November 2007. About a year later, with three new entrants in the category, weekly GRPs for the month of October 2008 stood at 1135 points- an increase of 30 percent.16
Existing players are expanding across segments
14 Annual Reports, Press Releases 15 KPMG Analysis 16 SSKI Research © 2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. Allrightsreserved. 17
Faced with increased competition from new entrants, businesses are enhancing their scale of operations by expanding their footprints across sectors and geographies. Customer retention is also an imperative and companies are improving upon their product features, service offerings and value propositions. These activities are further enhancing the competition in the market place, as a result of which an array of media content, consumption and delivery choices are being presented to the Indian consumer.
A brief snapshot of some of the New Market Expansion activities of the industry players during the last two years is represented below. Market is defined by the geographical spread of a player, while product is determined by the portfolio offering of the player.
Increasing power of Media Aggregators
TV 18 enters Regional News Sun TV Forays into Film Production Broadcasting with IBN - Lokmat TV 18 forays into Print with the acquisition of UTV Motion Pictures to produce Infomedia
New Hollywood Movies
Radio City launches in Ahmednagar HT Media launches a job portal - shine.com
Times Of India enters Chennai Reliance Big Entertainment enters TV distribution
Miditech to start its
Market TV Broadcasting channel Dish TV offers free set up boxes to its consumers NDTV expands into GEC segment with Mail Today introduces its ‘First’ Supplement - Mail ‘NDTV imagine’ Today Property TV 18 forays into GEC segment with the launch of ‘Andhra Jyoti’ becomes the first language ‘Colors’ channel
Existing newspaper in Andhra Pradesh to go all color Dainik Bhaskar launches its Hindi Financial Newspaperer Existing New Product Source: Company Websites, Press Reports and Releases
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The Indian Media Industry, especially the TV and Film sectors, is seeing an increase in the power of content aggregators/distributors as distribution gets more organized. For instance, in TV distribution the bargaining power of MSOs and DTH players is high and they command high bandwidth fees for carrying channels in their networks. Similarly in Films, aggressive market expansion plans by established players like PVR, Adlabs etc. is leading to increase in the market power of organized exhibitors and they are in a position to bargain for better revenue sharing terms with the distributors.
With increased marketing spends, ambitious growth plans and by virtue of access to the end consumers, the power of these players may continue to increase in the near future.
Going forward, media players are likely to increasingly look to leverage their content across different media platforms, leading to the emergence of more media conglomerates. As the same time, competition is set to intensify further and the rapid rise in the number of players, may eventually lead to consolidation in most of the sectors.
© 2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. Allrightsreserved. Sectorwise
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Sectorwise Snapshot
In TV advertising, the growth up to now, was driven to a Television significant extent by increasing advertising spends from fast growing sectors such as telecom (although, in the wake of the recent economic downturn, even the fast growing The TV industry is one of the largest chunk of the Indian sectors are cutting down on advertisement spends) M&E industry and has transformed completely in the last few years. The number of channels beamed on the TV Top 10 TV advertising sectors by volumes screen of C&S viewers in India has exploded to over 450 Sector % share now from about 120 in 2003 . There has been rapid growth Food & Beverages 13 in the number of channels in news and other niche Personal Care & Hygiene 9 segments such as lifestyle, kids and infotainment apart from Services 6 GECs. Telecom/ISPs 6
In TV distribution, digital mediums have emerged in the form Hair Care 5 of DTH, Digital Cable and IPTV. Some of India’s biggest Banking and Finance 4 corporate houses have invested in the DTH sector. The Auto 4 subscriber base has seen rapid growth and we estimate the Personal Accessories 4 pay DTH market to have reached 10 mn subscribers by end Personal Healthcare 3 of 2008. The implementation of CAS in selected zones of Household Products 3 Delhi, Mumbai and Kolkata from 2007 gave an important Source: TAM AdEx (Data for 2008) push towards digitization of cable. By September 2008, there were 717,722 set top boxes installed in the mandatory On the whole, the television sector is estimated to have CAS regions of Delhi, Mumbai, Kolkata and Chennai2. Even grown at a CAGR of around 13.8 percent over from 2006 to in areas where CAS is not mandatory, the MSOs have 08. Within this, advertising has grown with an estimated already begun to digitize their cable networks. IPTV, another CAGR of 16.7 percent while subscription has grown at an digital distribution medium, is part of the growth plans of estimated CAGR of 12.4 percent. most major Indian telecoms and with commercial IPTV By the end of 2008, the industry is estimated to have services launched in Delhi and Mumbai in 2008, IPTV has reached a size of INR 241 bn, a growth of 13.8 percent over made a small beginning. 2007. Out of this, subscription is estimated to contribute around INR 158 bn to the industry size, while advertising revenues are estimated at around INR 82 bn.
1 Indiastat, KPMG Analysis 2 TRAI Indian Telecom Services Performance Indicators (July-Sep 2008)
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The major pain point for the broadcasters in recent times At the same time digitization of cable is likely to pick up has been the rapidly growing carriage fee market which shot pace, independent of whether CAS is implemented on a up from about INR 6 bn in 2007 to INR 12 bn in 2008 as wider scale or not (although, making CAS mandatory in 55 channels increasingly competed for premium placements3. big cities, as has been recommended by TRAI, could further However, the carriage fee market is expected to either quicken the process). We think it is possible that about 35 stabilize or drop from here on. mn cable households could be digital by 2013.
Over the next five years the growth is likely to be driven by Cable households in India a variety of factors. Digitization of distribution is expected to happen at a rapid pace and digital distribution platforms are likely to demand higher ARPUs. The DTH subscriber base is estimated to grow to around 28 mn by 2013, powered by the entry of even more new players which may make the market intensely competitive and force players to market themselves aggressively and keep the price points low.
Pay DTH subscriber base
Source: KPMG Interviews, KPMG Analysis
IPTV is expected to take some time to catch up as infrastructure is built to support it on a wider scale. It is estimated to add 4 mn subscribers by 2013.
Source: KPMG Interviews, KPMG Analysis
3 KPMG Research, KPMG Interviews
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IPTV Subscribers
Source: KPMG Interviews, KPMG Analysis
With digitization of distribution, bandwidth constraints might get removed, and the rapid growth in the number of channels is likely to continue. Thus from the consumers’ point of view, apart from better picture and sound quality, digitization may also lead to an increasing choice in channels across both mass entertainment and niche categories. These factors are likely to push up the average TV viewership time. The impact in this regard is already visible. The average daily time spent by viewers in watching television has gone up.
Average time spent watching television
Source: TAM Peoplemeter System; TG: CS 4+ years; Markets: All India
At the same time, TV and C&S penetrations is also likely to continue to grow at a steady rate. By 2013, the total number of TV owning total households in India is estimated to be about 149 mn and around 85 percent of these are estimated to be C&S subscribers.
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Distribution of TV Households
Source: KPMG Analysis
Driven by rising ARPUs (from digital distribution) and increasing C&S penetration, subscription revenues are likely to grow at a higher CAGR of 14.9 percent over 2009-13 compared to 12.4 percent over 2006-08.
On the other hand, due to the slowdown in the economy and the consequent cut down on advertisement spends by companies across sectors, advertising revenue is likely to suffer especially over the next 2 fiscals. Growth in advertising is estimated to be lower at 13.5 percent CAGR in 2009-13 compared to 16.7 percent in 2006-08.
On the whole, the television industry is projected to grow at the rate of 14.5 percent over 2009-13 and reach a size of INR 473 bn by 2013.
“I believe there is a tremendous opportunity to provide the Indian TV viewers ground breaking services high fibre capacity coupled with minimal investment. The Indian customer is going to use fibre for a lot of different things, fibre and STB is going to make that possible.” J S Kohli, Managing Director & CEO, Digicable Networks Pvt. Ltd.
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Size of Indian Television Industry
TV Industry CAGR CAGR 2005 2006 2007 2008E 2009p 2010p 2011p 2012p 2013p (INR bn) (2006-08) (2009-13) Subscription 111.4 122.0 140.2 158.1 12.4% 174.5 198.5 229.1 267.4 317.1 14.9% Revenues Advertisement 51.9 60.5 71.1 82.5 16.7% 88.2 97.1 112.6 131.7 155.5 13.5% Revenues Total Industry 163.3 182.5 211.3 240.5 13.8% 262.7 295.6 341.7 399.1 472.6 14.5% Size
Source: Group M, KPMG Interviews, KPMG Analysis
Putting Things in Perspective
Television Sector: Growth Drivers Television Sector: Challenges
• Rapid growth in the number of digitized households • Under declaration of subscribers by cable operators • Steady increase in ARPUs realized through digital resulting in large subscription revenue losses for the distribution platforms broadcasters • Growth in the number of channels, especially in niche • Lower growth in TV advertising due to the economy and regional categories slowdown and the consequent cut in advertisement • Growth in the number of TV and C&S households spends • Delay in implementation of mandatory CAS in other parts of the country, inhibiting the growth of digital cable • Increasing content costs for TV channels, as the broadcasting space gets overcrowded • Intense competition and inability of DTH companies to increase ARPUs thus affecting their bottomlines • Shift of advertisng share from major sectors like TV and Print towards alternate fast growing sectors like radio and internet
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Filmed Entertainment
Filmed Entertainment is the most pervasive and visible segment within the industry since it is the primary content source for Music and Radio besides being a major contributor to the TV segment. Hence its impact is not restricted to one sector alone.
India’s Film industry is one of the largest in the world with more than 1000 movie releases and over 3 bn movie goers annually.4 However factors such as poorly developed revenue streams, excessive reliance on domestic box office collections and inefficiencies prevalent across the value chain, resulted in relatively low revenues for the industry. The industry was also highly fragmented with independent producers and single screen theaters dominating the value chain. Poor infrastructure facilities, high entertainment taxes and long theatrical windows, resulted in India being a highly under-screened and under priced market.
Over the past three-four years, the industry has witnessed tremendous changes. These changes have positively affected the players in the value chain-producers, distributors and exhibitors. Availability of organized funding, advent of multiplexes and increasing overseas collections have led to improved realizations for the industry. Over the past couple of years the business of film making had changed due to corporatization, increasing production costs, spiraling actor fees and high acquisition costs for content. With the recent economic slowdown the film industry is witnessing some of the earlier excesses being brought down to a more realistic level playing field. The industry is also enjoying greater acceptance and recognition in the global arena as is evident by the recent success of films like Slumdog Millionaire and deals between DreamWorks-Reliance, Disney-UTV, Warner-People Tree Films etc. In terms of technological advancements and content, animation and special effects have gained in significance in recent times, “Besides competitive pricing, while small budget movies have been doing well in the market. With Moser Baer a key driver for unlocking the entering the market, DVDs and VCDs have become affordable and Home Video potential of home video has come to stay. Hence the domestic theatrical lifecycle of movies has gone business, and tackling piracy down, while due to ever expanding budgets and increasing market spends, the head on, will be the further break even point of movies has increased. compression of release windows” Harish Dayani, CEO - Entertainment Division, Moser Baer
4 SSKI Report on India Media and Entertainment Industry, 2007
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Size and Growth
The filmed entertainment sector is estimated to have grown at a CAGR of 17.7 percent over the past 3 years. The industry is estimated to reach INR 109.9 bn in size in 2008, a growth of 13.4 percent over 2007. The performance was mainly driven by increased realizations from the home video market as well Cable and Satellite rights(C&S), which have been estimated to grow by 23 percent and 15 percent respectively over the past year5. C&S acquisition costs witnessed a decline in the second half of 2008, a trend which is expected to continue in the next year. In terms of number of hit films, 2008 was not as good as 2007 with many of the big releases failing at the box office and IPL matches affecting the occupancy levels at cinema halls. A marked improvement was witnessed in the last quarter of 2008, with big ticket releases leading to increased footfalls and occupancy rates in cinema halls. Consequently, the domestic box office collections have been estimated to grow by 12 percent to reach INR 80.2 bn in 2008.6
The industry is projected to grow at the CAGR of 9.1 percent over the next 5 years, and reach the size of INR 168.6 bn by 2013. It is estimated that the growth rate of the industry may remain flat in the next year owing to less number of releases, lesser occupancy rates and lesser realizations from C&S rights and ancillary revenue streams.
Size of Indian Film Industry
Source: KPMG Analysis
5 KPMG Analysis 6 KPMG Analysis
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CAGR CAGR Film Industry (INR bn) 2005 2006 2007 2008 2009p 2010p 2011p 2012p 2013p (2006-08) (2009-13)
Domestic Theatrical 52.05 62.11 71.49 80.21 15.5% 78.81 83.70 92.74 108.22 119.80 8.4%
Overseas Theatrical 5.30 5.71 8.71 9.77 22.7% 10.75 12.12 13.86 16.0 18.65 13.8%
Home Video 4.29 6.43 7. 0 1 8.63 26.3% 9.84 11.31 12.90 14.47 16.06 13.2%
Cable & Satellite Rights 3.31 4.97 6.21 7. 1 4 29.2% 6.43 6.88 7. 5 7 8.40 9.41 5.7%
Ancillary Revenue Streams 2.01 2.45 2.94 3.53 20.7% 3.35 3.52 3.80 4.18 4.68 5.8%
Total Industry Size 66.95 81.66 96.36 109.29 17.7% 109.18 117.53 130.86 151.28 168.60 9.1%
The performance is expected to be mainly driven by improved contributions from overseas box office collections and growth in home video segment. Cable & Satellite rights would continue to remain an important revenue stream, even though owning to cost rationalization by TV broadcasters, the acquisition costs is expected to stabilize. Regarding domestic box office collections, capacity expansion by the organized exhibition players is likely to lead to increase in number of multiplexes across the country. The additions to existing capacity are not likely to be up to the same levels as anticipated due to the overall liquidity crunch and the slowdown in construction sector. Still, increase in number of multiplexes is expected to lead to improved realizations owing to better occupancy rates and higher Average Ticket Prices (ATPs) at these multiplexes. Further, to some extent, increase in number of digital screens across the country is expected to facilitate wider release of film prints as well as better occupancies in smaller centers. However the number of film releases is expected to reduce in 2009 owing to the liquidity crunch and shortage of funds and the consequent widening of gap between commencement of production and release of films.
Number of Multiplex screens
Source: Industry Interviews,KPMG Analysis
Domestic box office collections are likely to continue to remain the dominant revenue source for the industry. However, other revenue streams may continue to grow at a faster rate.
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Composition of Film Revenues
Source: KPMG Analysis
The performance of the sector primarily depends on content. Even though the supply side factors are encouraging, it is ultimately the number of patrons visiting cinema halls that affects movie collections. The sector also has to contend with competition from other sub sectors. 2008 was a case in point, when the movie collections from the months of April to June were affected due to IPL telecast; traditionally the summer season has been amongst the most revenue generating ones for the industry. Low to medium budget movies do have upside potential but that does not imply that the success ratio in the movie making business is improving. Since there is no sure shot formula guaranteeing a hit in the box office, production houses have to balance their product portfolio with a judicious blend of big, medium and small budget movies. Ensuring steady future cash flows has also assumed significance in recent times, and hence valuation of library content also becomes important.
One of the biggest challenges facing the industry is the bane of piracy. According to industry sources, piracy is an INR 20 bn market, and its share of the total home video market is only increasing.7 Industry players and the government need to come together for stronger enforcement of anti piracy laws. If piracy is controlled, the revenue earning potential of the sector is significantly higher.
“With an extremely tight liquidity market, and given the fact that the multiplex business is highly capital intensive, the focus is going to be on improving margins, which would come by upping spends at the screens, increasing ticket admits and lower rental payouts. We see a slow down in the roll out and deliveries of new malls, which would impact the start of new multiplexes in the year ahead.” Shravan Shroff, Managing Director, Fame India
7 KPMG Interviews
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Putting Things in Perspective
Filmed Entertainment Sector: Growth Drivers Filmed Entertainment Sector: Key Challenges
• Expansion of multiplex screens resulting in better • Managing cost of production and arresting the fall in realizations profitability levels • Increase in number of digital screens facilitating in wider • Increased competition from other media and major film prints releases events like IPL affecting occupancy rates in theaters • Enhanced penetration of home video segment, primarily • Increased pressure for supply of film content causing the in the sell through segment quality of content to suffer • Increase in number of TV channels fuelling demand for • Home video piracy and illegal movie downloads affecting film content, and hence resulting in higher C&S the legitimate revenue collections acquisition costs • Regulatory hurdles like different entertainment tax rates • Improving collections from the overseas markets in different states, antiquated Indian Cinematograph Act etc.
Print Media
The Indian Print Media sector is currently passing through one of its most dynamic phases with most players expanding their footprints beyond traditional regions, strong FDI investments pouring into the industry and multiple print media models being experimented by the players. The structure of the Indian Newspaper industry continues to be highly fragmented and regional dominant. Of the total print publications in the country, around 90 percent consists of Hindi and other vernacular languages8. Regional dominance is not typical of only vernacular papers; even English news dailies have managed to gain dominance only in specific pockets. Large print media players like HT Media, Jagran Prakashan, Dainik Bhaskar, Eenadu or Deccan Chronicle have region-specific reach.
Advertising revenue continues to be the key growth driver behind the industry as declining readership and increasing competition has led the players to further reduce their cover prices. As a result, this sector has been the most affected by the slowdown in advertising due owing to the recent downturn. Further, due to rising newsprint costs, players were compelled to undertake multiple advertisement rate hikes during the first half of 2008, which on one hand improved per unit realizations from advertising, but on the other hand made the media an expensive proposition for most advertisers.
The sector witnessed a lot of action in 2008, especially in the first half, with the spurt in the number of specialty magazines, launch of niche newspaper supplements, as well as aggressive portfolio and geographic expansion by different companies, both in the national and regional space. Both the newspapers and magazine players also displayed increasing tendency to
8 Indian Readership Survey
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aggressively compete with each other to reach their target audience. More newspaper players have started to introduce niche supplements to counter the onslaught of specialty magazine launches. These developments benefited both the consumers, due to increased availability of choices and better product quality, as well as the advertisers due to better chances of reaching the target audience.
With a readership base of over 250 mn, India is the second largest print market in the world9. However, this market is still under penetrated for a country with a population in excess of 1,200 mn and highly fragmented with over 60,000 newspapers printed in 22 languages10. The low penetration of the print market provides a significant growth opportunity with 359 mn who can read and understand any language but do not read any publication11. With an 85 percent reach in the urban markets (SEC A and B) and an abysmal 33 percent reach in rural markets (SEC C, D and E), we believe that a major growth opportunity lies in the vernacular markets.
The Indian Print Media industry is estimated to have grown by 7.6 percent in 2008 and reaching around INR 172.6 bn in size. The corresponding size was INR 160.4 bn in 2007. The performance of the sector was affected by the recent economic slowdown, which has affected advertising industry. Advertising revenues is estimated to have increased by 812 percent over the previous year to reach INR 108.36 bn in 2008. The sector has been adversely affected by the economic meltdown, and the advertising rate growth has been lower than TV due to higher exposure to real estate, auto and travel, and lower FMCG contribution. Further, enhanced competition has also led to fall in average cover prices which have countered the rise in circulation volumes for the players. Circulation revenues have only risen by 7.4 percent over the year to reach INR 64.3 bn. The sector is thus estimated to have grown by a CAGR of 13.8 percent over the past three years, a growth rate which is still higher as compared to the single digits growth witnessed in other nations.
The industry is projected to grow at a CAGR of 9 percent over the next five years and reach around INR 266 bn in size by 2013.
9 MRUC 10 Registrar of Newspapers of India 11 India Readership Survey 12 Group M
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Projected Size of Indian Print Media Industry
Source: Group M, KPMG Interviews, KPMG Analysis
Advertising will increase its dominance as the primary revenue source of the industry and is expected to constitute around 66 percent of 2013 revenues. Growth in advertising would be driven by increasing advertising spends by emerging sectors like Organized Retail, Telecom and Education. At a CAGR of 10 per cent, advertising revenues will grow at a faster rate as compared to the CAGR of 7.4 percent for the circulation revenues. While advertising revenue is basically related to economic growth in the country, the circulation revenues is expected to grow owing to structural growth drivers like rising penetration, higher
Top 10 Print advertising sectors by literacy levels and improving affordability of the medium. volumes The top 10 sectors contributed around 65 percent share of overall Print Sector % share advertising in 2008. Education 15 Newspaper publishing would continue to dominate Print Media and is expected Services 12 to comprise around 92 percent of the total revenues of the sector in 2013. Banking/Finance/Investment 10 Newspaper publishing is expected to grow at the compounded annual rate of 9.1 Auto 7 percent over the next five years and is projected to reach INR 245.4 bn by 2013. Retail 5 The magazine publishing segment is expected to grow at a compounded annual rate of 8.1 percent over the next five years, and is projected to reach INR 20.5 bn Durables 4 in size in 2013. Personal Accessories 3
Corporate/Brand Image 3
Personal Healthcare 3
Media 2
Source: Indiantelevision
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Print Media break-up by Segments
Print Industry CAGR CAGR 2005 2006 2007 2008 2009p 2010p 2011p 2012p 2013p (INR bn) (2006-08) (2009-13)
Newspapers 108.0 128.3 148.3 158.7 13.7% 169.0 181.8 198.5 220.4 245.4 9.1%
Magazines 9.1 10.3 12.1 13.9 15.4% 14.9 16.2 17.6 18.9 20.6 8.1%
Total Industry 117.1 138.6 160.4 172.6 13.8% 183.9 197.9 216.0 239.3 266.0 9.0% Size
Source: Group M, KPMG Interviews, KPMG Analysis The ongoing economic slowdown poses a huge challenge for the sector owing to its heavy reliance on advertising. Also, with television fragmentation, print advertising’s cost advantage has been marginalized; existing print players wanting to survive this market need to move away from a single medium model to a multi medium model. Magazine players need to focus on arresting the declining readership levels.
Putting Things in Perspective...
Print Media Sector: Growth Drivers Print Media Sector: Key Challenges
• Sustained growth in advertisement revenues due to • Increased competition from news channels as well as increased advertising spends by the emerging sectors new media like internet and mobile such as Education, Organized Retail and Telecom • Adverse impact on advertising revenues due to a • Improving literacy levels in the country prolonged economic slowdown • Optimization of cover prices leading to improved • Continuous rise in newsprint costs penetration and growth in sales volume • Continuing decline in readership figures, especially in • More launches in the niche segment, like newspaper case of magazines supplements and specialty magazines, by players
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Radio
Radio advertisement spends account for about 4 percent of the total advertising spends in India today, having grown from just 2 percent in 200413. The growth has been propelled by the emergence of the private FM industry in India.
In terms of sheer reach, the Indian radio industry has been dominated by the state owned All India Radio (AIR), which covers 91 percent of India's area and reaches 99 percent of the population14. However, the turning point for the industry came with the Phase 2 privatization reforms when the government rationalized the licensing fee by fixing it at 4 percent of the gross revenues (or 10 percent of the Reserve (One-Time-Entry-Fee) OTEF, whichever was higher). This, for the first time, made the business model viable for companies, and consequently many large corporate houses entered the private FM business. From 21 operational private FM stations before the phase 2 licensing, the number of stations shot up to over 205 by the March 200815. The industry now boasts of players such as Radio Mirchi and Big FM with a pan-India presence.
Consequently, the radio industry is estimated to have grown at an impressive CAGR of 19.7 percent over 2006-08.
It is estimated to have reached a size of INR 8.4 bn by end of 2008, a growth rate of 13.5 percent over the previous year.16
Growth in the future is likely to come through continued increase in the number of radio stations after phase 3 licensing, further liberalization of regulations as well as better ability of the radio stations to sell advertisement space.
TRAI has given some very important recommendations for phase 3 licensing of the sector. These recommendations, if accepted by the government, could give a new growth push to the sector. Some of the important recommendations are concerned with allowing radio stations to broadcast news (this has already been given a go-ahead by the I&B Ministry), increasing FDI limits to 49 percent from the current 20 percent, allowing networking within the radio stations owned by the same company, permitting tradability of licenses and allowing ownership of multiples frequencies. The recommendations could help in improving the operational efficiencies of radio companies, getting in more foreign investments in the sector as well as moving the industry from being centered on a single genre (i.e. hit music) to offering more differentiated content. Emergence of niche radio stations could also help the industry in attracting new listeners and driving up overall radio listenership.
13 KPMG Analysis 14 KPMG Indian Entertainment Industry - Focus 2010 Report 15 Indiastat 16 KPMG Analysis
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Introduction of a new performance metric tool for the sector- RAM (Radio Audience Measurement) - is also expected to aid the growth in radio advertising. Even though another radio listener measurement tool-Indian Listenership Track (ILT) - already existed in the market, but the advent of RAM provides another option to both advertisers and radio stations. Both RAM and ILT are expected to aid the growth in radio advertising by making the measurement of return on investment for advertisers more scientific and assessable, and thus allowing radio stations to sell themselves better.
Further, the size of the radio advertisement industry as a percentage of the total advertisement industry in India is still pretty low at about 4 percent.17 This is against a global average of about 8 percent.18 Also, the ratio of local to national advertisements is skewed in favor of national, contrary to global trends, indicating a large scope for growth in the local advertising segment.
Ratio of local to national advertisements on Radio
Source: Industry
As regional businesses in India start to spend more aggressively on advertising to build brand consciousness, they are likely to turn to media like radio and print which are highly cost effective for regional advertisement campaigns.
However at the same time, like TV and Print, radio is also likely to feel the pinch of overall reduced advertisement spends in a slower growing economy. Already, in the quarter ending December 2008, advertisement volumes on radio declined by 14 percent compared to the same quarter a year ago19.
On the whole, the radio industry is expected to grow at a CAGR of 14.2 percent over 2009-13 (compared to 19.7 percent over 2006-08) and reach a size of INR 16.3 bn by 2013.
17 KPMG Analysis 18 KPMG Indian Entertainment Industry - Focus 2010 Report 19 “Slowdown forces FM radios to cut advertisement rates by 10-15%”, Business Standard, February 2009
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Size of Radio Industry
Radio Industry CAGR CAGR 2005 2006 2007 2008 2009p 2010p 2011p 2012p 2013p (INR bn) (2006-08) (2009-13) Total Industry 4.9 6.0 7. 4 8.4 19.7% 9.2 10.3 11.9 13.9 16.3 14.2% Size
Source: Group M, KPMG Interviews, KPMG Analysis
Putting Things in Perspective...
Radio Sector: Growth Drivers Radio Sector: Key Challenges
• Increase in the number of radio stations due - around • Adverse impact on revenues due to a possibly prolonged 700 new licenses expected to be issued to Private FM slowdown in the economy stations in Phase 3 • Overcrowding of FM stations especially in metros and • Expected regulatory reforms that are likely to improve inability/reluctance of the stations to differentiate profitability and stimulate foreign investments amongst themselves in terms of content • Emergence of robust audience measurement tools which • Stiff competiton from print for local advertisements could further catalyze growth in radio advertisement spends • Growth in locally targeted advertising on radio
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Music
The advent of the MP3 format, proliferation of the internet and peer-to-peer networks and the widespread availability of portable music devices created a paradigm shift in the way users accessed and consumed digital music worldwide. These trends initially had a crippling effect on the worldwide music industry in terms of the significant revenue erosion resulting from free access to digital music.
The global music industry was initially slow to respond, but with supportive legislation, strict law enforcement, effective technology partnerships, innovative marketing and adaptation of its business model in line with consumption habits were able to turn their fortunes around. The challenges facing the Indian music industry are not unlike those faced by their global counterparts and need urgent attention by following global best practices suitably adapted to factor in the nuances of the Indian consumer mindset.
The size of the Indian music industry was estimated at around INR 7.3 bn in 2008, down from INR 8.3 bn in 2005, implying a degrowth of 4.8 percent during the period. One of the primary reasons for this degrowth has been the erosion of sales of physical formats, a trend which is expected to continue well into the future. The industry therefore will have to bank on revenues from digital distribution, broadcast and public performance licensing revenues not only to compensate for declining physical sales but also drive growth going forward.
A number of factors are eating into the revenues of the music industry. With the number of music enabled portable devices on the rise, the practice of loading portable storage devices with unauthorized, unlicensed music – a practice commonly referred to as “sideloading” is emerging as a substantial threat to industry revenues. Add to that the classical piracy of physical music formats and more recently compact discs with unlicensed music is hurting the industry.
Physical formats such as audio cassettes and compact discs, which accounted for approximately 87 percent of industry revenues in 2005 currently account for just under 60 percent in 2008. A consistent volume degrowth of physical formats coupled with factors such as price erosion, piracy and a robust growth in non- physical formats such as mobile value added services has contributed to the changing revenue mix. Going forward physical revenues are expected to decline at a CAGR of 9 percent between 2008 and 2013. While the actual degrowth of formats such as audio cassettes is expected to be much higher, this is likely to be partially offset by initiatives taken by some leading music companies such as Sony BMG, T-Series and SaReGaMa to release MP3 music on compact discs at price points similar to that of the ubiquitous audio cassette.
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The Indian digital music market is estimated at INR 1.8 bn in 2008. Digital music distribution is mainly restricted to India’s rapidly growing telecom segment, largely through ring tones and caller ring back tunes. As mobile and broadband penetration in India continues to grow and with the rollout of high speed 3G data services, the market for other digital distribution platforms such as a-la-carte downloads, streaming and music subscriptions will evolve, as it has in other markets worldwide. For example, in the United States, which has a broadband penetration of over 22 percent and mobile penetration of 88 percent in 200820, digital music sales accounted for 39 percent of total music sales in 200821. This changing shift from physical to digital is also expected to contribute positively to margins in the near term, since distribution costs for digital formats is far lower than that of physical formats.
Licensing revenues from radio and television which accounted for 2.5 percent of total industry revenues in 2005 accounted for about 5 percent of total industry revenues in 2008. Licensing revenues from television and radio is expected to increase from INR 386 mn in 2008 to INR 921 mn in 2013 at a CAGR of 19 percent. A new genre of music based television reality shows are likely to drive growth in this segment going forward.
The public performance segment with revenues of INR 173 mn in 2008 is expected to more than double to reach INR 378 mn by 2013. This growth is likely to be driven by improvement in live event infrastructure, increasing public awareness of copyright and intellectual property laws , corporatization of the retail and real estate segments and greater action on the part of law enforcement agencies (with support from industry players) to ensure compliance.
Overall, the industry is expected to grow at a modest CAGR of 8.0 percent between 2008 and 2013 to reach INR 10.7 bn by 2013.
In 2008, total music sales in the United States across all formats registered a 10.5 percent annual growth to hit an all time high of USD 1.5 billion22, compared to 2002 when the industry was degrowing at 10 percent23. Much like their US counterparts, Indian music companies need to adapt to the changing business environment brought about by technological advances and changing consumer patterns to replicate this trend.
20 Frost & Sullivan 21 IFPI Digital Music Report 2009 22 Nielsen Soundscan 23 IFPI
© 2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. Allrightsreserved. 39
Size of Indian Music Industry
Source: KPMG Analysis
Music Industry (INR CAGR CAGR 2005 2006 2007 2008 2009p 2010p 2011p 2012p 2013p bn) (2006-08) (2009-13) Physical 7. 2 5 6.34 5.55 4.86 -12.5% 4.37 3.93 3.54 3.19 2.87 -10.0%
Digital 0.86 1. 11 1. 4 4 1. 8 8 30.0% 2.44 3.22 4.19 5.24 6.55 28.4%
Television and Radio 0.21 0.26 0.32 0.39 22.5% 0.46 0.56 0.67 0.78 0.92 19.0%
Public Performances 0.03 0.07 0.12 0.17 75.3% 0.21 0.25 0.29 0.33 0.38 17.0%
Total Industry Size 8.3 7. 8 7. 4 7. 3 -4.4% 7. 5 8.0 8.7 9.5 10.7 8.0%
Source: KPMG Interviews, KPMG Analysis
Putting Things in Perspective...
Music Sector: Growth Drivers Music Sector: Key Challenges
• Increase in digital sales, on the back of increasing mobile • Inabilityof the music companies to negotiate better and broadband penetration; shift from polyphonic ring revenue share terms with mobile operators tones to true tones and full track downloads • Sorting out issues related to licencing of rights with • Introduction of subscription based model for broadcating and radio companies downloading and streaming of music • Sustained revenue leakages through digital piracy with • Growth in parrallel economy – companies are working increasing internet and broadband penetrations in India collectlively with vendors for side-loading of music in • Failure of adoption of a paid online music download cafes and kiosks or on chips / memory cards / handsets model given the presence of internet based free illegal and other points of consumption song download alternatives • Reduced revenue leakages due to piracy, through • Inability to regularise the parallel economy of low-cost proactive legislative and enforcement action by law sideloading alternatives for portable music devices enforcement agencies and music companies through innovative marketing and pricing • Differentiating on price, content and volume on a per unit • Public awareness and enforcement of laws against basis vis-à-vis the pirated unit copyright infringement and violation of intellectual • Development of regional music catalogs by music property rights. companies
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Outdoor
Outdoor Media, also referred to as out of home (OOH) media, includes all types of advertising that reaches the consumer while he or she is outside the home. The sector primarily comprises four segments:
• Billboards- These are the standardized large format advertising displays. They include Street Hoardings, Posters, Wall Murals, Bulletins, Spectaculars as well as Digital Outdoor Media
• Street Furniture- These are displays at public amenity for eye-level viewing or at curbside. Some of the common forms include Signages, Information Kiosks, Bus Shelters panels, Mall displays, etc.
• Transit- These are displays affixed to moving vehicles or positioned in the common areas of transit. This segment covers advertising displayed in airports, railway stations, taxi-carriers, bus interiors, etc.
• Alternative Mediums, which cover other advertising in other places such as Rest Area Panels, Stadium and Arena displays, Vending Cart Umbrellas, etc.
Globally, the OOH sector has outperformed the overall advertising industry and accounts for around 5.6 percent of the overall advertisement spend.24 However in India, the growth of Indian OOH sector has been traditionally hampered by the unorganized and fragmented nature of the sector.
However with the recent thrust on infrastructure development in the country over the past two-three years, OOH is acquiring scale and emerging from the margins of advertising. The government is investing heavily in infrastructure projects and seeking private participation. City development in India is riding on the back of advertising support from OOH media companies. Local governments and municipal bodies have discovered value in making outdoor companies invest in basic infrastructure development in lieu of media rights to those properties, a standard practice in much of Europe and the U.S. This is fueling the growth of the sector, as a result of which it is increasingly attracting organized investments, both from the national and regional players. Further, the sector is becoming far more organized and has seen significant changes with emergence of new segments such as airports, ambient media, digital mediums etc.
24 Zenith Optimedia Report, 2008
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OOH media has grown at a CAGR of 17.3 percent over the past 3 years, and is estimated to have reached INR 16 bn in size in 2008, a growth of 15 percent over 200725. The sector’s performance was affected in the second half of the year owing to the overall economic slowdown. It is projected to grow at a CAGR of 12.8 percent over the next 5 years and reach a size of around INR 29.3 bn by 2013.
Projected Size of Indian Outdoor Industry
OOH Industry CAGR CAGR 2005 2006 2007 2008 2009p 2010p 2011p 2012p 2013p (INR bn) (2006-08) (2009-13)
Total Industry Size 10.0 11.7 14.0 16.1 17.3% 17.7 19.8 22.4 25.5 29.3 12.8%
Source: KPMG Interviews, KPMG Analysis
Outdoor is a city centric and a local medium, and due to increased infrastructure development activities in the Tier 2 and Tier 3 cities, industry players are expected to focus more on these cities in future. OOH advertising is likely to grow at a faster rate in these smaller cities and towns, owing to the cost effectiveness of outdoor advertising in these towns in terms of outdoor advertising. Also, with local authorities and municipal corporations beginning to frame guidelines to regulate the sector, OOH is expected to get more organized over a period of time.
Currently, the growth is mainly in Tier 1 towns, with metros accounting for more than half of the total OOH market. Industry sectors spending the most on this medium include Telecom, Media & Entertainment and Financial Services companies26.
25 KPMG Analysis 26 Industry Inputs
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Cities that contribute the most to OOH Advertising
Source: GroupM, KPMG Analysis
With increase in consumer spends and intensified infrastructural development activities in Tier 2 and Tier 3 towns, penetration in these smaller towns are likely to drive the growth of OOH in the future. With retail development and consumer boom, Ambient Media is also expected to gain significance. Further, the sector is expected to witness increasing vertical segmentation in future, as players move towards owning IPR for their OOH creatives.
The Indian OOH sector has been traditionally dominated by billboards, which currently accounts for around 60 percent of total advertising spends in the sector27. This segment is under pressure in urban centers with Chennai already banning them and speculation about Bangalore & Delhi placing further curbs. The battle for billboards is set to shift to smaller cities. The share of billboards is expected to reduce going forward as they increasingly become more regulated. However it is still going to remain the largest segment within OOH.
OOH Segment Share in 2008
Source: Industry Inputs, KPMG Analysis
27 KPMG Interviews, KPMG Analysis
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One of the biggest challenges that the sector faces today is the lack of a central regulatory governing OOH media. Rules and regulations vary from state to state, which inhibits standardizations across locations and leads to unregulated growth. Lack of a standard scientific metric to gauge the results effectiveness of the medium is another bottleneck. In this regard, the initiative by the Media Research Users Council (MRUC) of conducting an Indian Outdoor Survey across the top 10 cities in India28 can set a good precedent and is expected to benefit the sector as a whole. Further the ongoing liquidity crunch has forced many real estate developers to go slow on construction activities, thus affecting the supply of retail space29. This is likely to affect the spread of Ambient Media.
Putting Things in Perspective...
Outdoor Media Sector: Growth Drivers Outdoor Media Sector: Key Challenges
• Enhanced levels of infrastructure development activities • Lack of a central authority to regulate the sector in the country, especially in Ttier 2 and Tier 3 cities • Lack of a scientific metric to measure the effectiveness • Audience fragmentation in traditional media of the medium • Higher spending on OOH from sectors such as Telecom • Fast changing regulatory framework- in case there are and Media and Entertainment more interventions to ban Billboards in other cities as well, the performance could be adversely affected • Slow down in construction development and reduction in expansion plans of malls
“For OOH, the opportunity for unprecedented growth is now – when the entire user base is desperately seeking cost efficiencies without sacrificing reach or impact or innovativeness” Alok Jalan, Managing Director, Laqshya Media
28 MRUC Website, KPMG Interviews, Press Releases 29 Economic Times, “DLF stalls a fourth of its projects to save costs”, February 2009
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Animation and VFX
At an estimated size of INR 17.4 bn in 2008, the Indian animation industry is miniscule as compared to the global animation industry with estimated revenues in excess of INR 153030 bn by 2010. However, the Indian animation industry has been growing rapidly with an estimated CAGR of 20.1 percent31 in 2006-08. It is estimated to reach a size of about INR 39 bn by 2013.
Size of Indian Animation Industry
Animation Industry CAGR CAGR 2005 2006 2007 2008 2009p 2010p 2011p 2012p 2013p (INR bn) (2006-08) (2009-13)
Total Industry Size 10.0 12.0 14.5 17.4 20.1% 20.0 23.3 27.8 33.1 39.4 17.8%
Source: KPMG Interviews, KPMG Analysis
Among the different segments of the animation industry, the animation production services segment is estimated to grow the fastest with a CAGR of 21.9 percent in 2009-13.
“This is an industry still in its nascent stage but with huge potential so any person with commitment will reap huge benefits” Seemha Ramanath, Managing Director, Crest Animation Studios Ltd.
30 Animation Express.com 31 KPMG Estimates
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Size of Indian Animation Industry
Source: KPMG Analysis, KPMG Interviews
Increased outsourcing from overseas countries due to an inherent cost advantage, maturity of international animation studios, emphasis on IP creation and attractive domestic opportunity have been the principal growth drivers for this sector. Hence, services income comprises approximately 60 percent 32 of the total animation industry in India. Television production, direct to DVD production and international feature films productions comprised the core business repertoire of local animation houses. Increasing international demand led to the proliferation of studios in the Indian market. However, large animation players such as Crest, Tata Elxsi that primarily relied on services operations are graduating to co-production deals to reduce their dependence on servicing and create an IP library.
The commercial success of “Hanuman”, based on mythological content, proved that there is a growing market for locally generated animation content. Realizing this potential, a number of global players have started tapping the Indian market either independently or through co-production deals. In 2008, film studios such as Yashraj Films, Percept Picture Company, pure play animation players such as Crest, DQ Entertainment and media conglomerates like Disney, MGM, Paramount indicated their intent to exploit this market through locally produced content. Hence, product creation as a percentage share of the animation industry is slated to increase.
In 2008, post production companies also grew at a steady rate but witnessed significant competition from countries such as South Korea, Taiwan, Philippines and China. To mitigate threats from other low cost countries and maintain international quality and standards leading Indian companies decided to acquire front end operations either through acquisitions or strategic tie ups. For example, Pixion acquired two London studios, Men-from-Mars and Molinare33.
32 KPMG Estimates 33 Animation express
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Growth Drivers
1. Building Brand India
India with it’s rich heritage, culture and a large talent pool, has the potential in creating content for Indian as well as global audiences in transferring 5000-year- old time tested stories into new media. The mythology centered animation films released in the last few years including the likes of Hanuman, Hanuman Returns and Bal Ganesh are indicators of this trend. The Indian animation industry has used mythology to start narrating to the Indian audience. As the industry evolves and the audience matures, locally developed characters would gain domestic and international acceptance.
2. Outsourcing Advantage
Significant cost advantage due to low cost labor and availability of English speaking employees makes India a favorable outsourcing destination for global production houses. Out of the total revenues generated by Indian animation studios, over 70 percent34 are derived from outsourcing. The major work outsourced includes the creation of animation and lip synchronizing which is labour intensive and requires lesser creative quality. Thus, Indian studios are able to provide cost effective and quality services to global clients. A downturn in the global economic environment will cause major production houses like Walt Disney, Paramount, IMAX, Sony Pictures, Pixar and Warner Brothers to reduce their cost of production by outsourcing operations to low cost countries like India. Cost of producing a full length animated movie in the U.S. is USD 100-125 mn as compared to USD 25-30 mn from outsourcing to India.35
3. Established Indian Animation Industry
One of the drivers for the growth of the industry is that it has already in place for the past 20 years. With more than two decades of existence, local animators have acquired international processes and systems, quality control methods and technological infrastructure to build intellectual property comparable to international benchmarks.
4. Changing viewership habits
Increasing disposable incomes and demographic changes has resulted in a break away from appointment viewing to user defined viewing. The leader of the house no longer controls the remote control. Households have graduated to 2-3 television sets with viewing segmented on each television set by genre.
34 KPMG Estimates 35 KPMG Estimates
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Challenges
1. Categorized as a service industry
One of the major challenges of the Indian animation industry is the fragmentation of animation companies spread across the value chain. Most of the small and medium Indian companies are satisfied with providing outsourced services. Hence, the collective capacity of the Industry has been categorized as a service industry and not as a product industry.
2. Infrastructure Investment
With its Asian competitors making significant investments to develop their animation sectors, the Indian animation industry should be able to attract local as well as foreign investors in order to boost infrastructure development. Many small and medium companies are unable to attract institutional funding or bank lending due to the nature of the animation industry where projects stretch for longer durations.
3. Developing Talent Pool
The industry also faces the challenge of investing more to improve its local talent and meet the needs of the animation industry for more skilled workers. Despite the large number available graduates to work in the industry, the number of skilled animators is still low. Considerable investment in time and resources are needed in order to hone the skills of new animators. This dilemma is largely attributed to lack of training in relevant animation skill-sets of graduates and entry–level employees.
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Gaming
The gaming industry can be divided into 3 separate segments – Mobile Gaming, Console Gaming and PC & Online Gaming.
Mobile Gaming
The Indian mobile gaming segment, estimated at INR 1.4 bn in 2008 in terms of end user revenues has not lived up to the potential. Enamored by its potential, a number of players had entered the market in 2003-04. Plagued by a number of issues such as content discovery and revenue leakages and after seeing a wave of consolidation in 2006-2007, the Indian gaming segment in India is currently dominated by a few players such as Indiagames, Nazara, Hungama Mobile and Jump Games which constitute over 80 percent36 of the industry revenues.
Mobile gaming in India has two main revenue streams. The first is the development, publishing and porting of mobile games by Indian games companies for distribution in Indian and overseas markets, either directly or through telecom operators. The second is development work undertaken by Indian game development companies for overseas developers/publishers. These typically range from art outsourcing and animation, to late stage development activities such as game testing and porting. More recently, Indian companies have also started getting involved in core code development activities.
While the mobile gaming segment has tremendous potential, a number of factors have historically limited the segment from achieving the growth foreseen by the industry at large.
A key catalyst to industry growth is the ability of the stakeholders to create awareness of their products to end users. Given the distribution dynamics for mobile content in India, most mobile games are downloaded off telecom operators’ decks making the availability of a mobile data connection a basic necessity. The problem with this is two fold:
• Technology: Historically, a large proportion of mobile phones in India were not capable of handling data and therefore did not form part of the addressable market for mobile content.
• Discovery: Secondly, unlike western countries, where telecom operators bundle mobile connections with handsets, in India handsets and mobile connections are sold separately. Handsets were seldom programmed with operator settings required to access data and moreover, data packages were subscription based (even for on-deck browsing) which required activation by a subscriber. This created a multitude of problems in terms of discovery of
36 KPMG Research
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mobile content, since only high-end evolved users could actually activate and subscribe to rich media content on their mobile phones.
• Consumer Education: Given the rate of monthly subscriber additions (average of around 9.4 mn per month37 in 2008), telecom operators are presently more focused on customer acquisition than marketing of on-deck content. Lack of such marketing initiatives by the telecom operator implies that even users with data active handsets often get excluded from the addressable market since they are not aware of the existence of on-deck data content.
Console Gaming
Console gaming is the largest money churner in the global market and is gaining prominence in India too. In 2008, the Indian console gaming segment registered total revenues of INR 4.1 bn which is expected to go up to INR 9.4 bn in 2013 on the back of favorable demographics, rising urban disposable incomes and new generation consoles penetrating the Indian market. Organized marketing, which was missing some years ago, has led to a new demand among the Indian consumers for console gaming. It has gone from being a product for the cult group to a more lifestyle oriented product.
Secondly, easy availability and affordability of consoles has led to a growth in this market. The fall in console prices from approximately INR 25,000 in 2006 to approximately INR 7,500 for older hardware and INR 13,000 – 20,000 for current hardware makes them an attractive buy for the non-user to plug and play.
However, high customs duties and indirect taxes have made legitimate console hardware and software approximately 40 percent more expensive than grey market imports. Secondly, the release windows in India for popular games do not coincide with global launches. Early adopters and active gamers therefore turn to grey market imports and pirated software to ensure that they get to play their favorite titles on the latest hardware.
Price point for games is very important in India. Steep prices of new games around USD 50 in U.S. plus a steep import duty in India make the games expensive for end user. Also, console gaming faces stiff competition from mobile and PC gaming since the latter are relatively cheaper.
In India, console gaming has been more of an urban phenomenon whereas mobile gaming with its increased reach (urban and rural) and ease of access has the potential to evolve much quicker than console gaming. With a reach of over 80038 mn telecom subscribers in India in 2013, mobile gaming is expected to be a significant competitor to the console gaming market in India.
37 TRAI 38 KPMG Estimates
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PC and Online Gaming
PC games have been around for a very long time too. In the 1980s, the high cost of console games was beyond the reach of the average Indian households. The purchase of the computer by a household meant that the father would use it to type official documents with teenagers and young adults popularizing games such as Quake, Prince of Persia, Doom, Wolfenstein 3D, etc. Today, the PC gaming market has grown to INR 978.6 mn and expected to grow at a CAGR of over 36 percent through 2013. The primary growth drivers for PC games in India are the growing broadband subscriber base, multifunctional nature of PCs and availability and price points of PC game titles.
With over 6539 mn PCs the penetration rate is increasing at 20 percent per annum thus expanding the market for PC gaming in India. Moreover, the younger generation is getting hooked to PC gaming due to the rise in the number of gaming cafes in the neighborhood including the entry of players such as Reliance. The number of gaming cafes with the latest gaming PCs for playing single player as well as multiplayer games outnumbers gaming cafes that have consoles like the PS3 or Xbox 360.
PCs being far more multifunctional than consoles attract a wider user base than consoles. Moreover, the number of PC game titles available in India far outnumbers those of console games, particularly when it comes to multiplayer online games. Price points of PC game titles are lower than console titles making this segment attractive for a wider group of users across socio-economic classifications. The price point advantage, however, is partially offset by the high entry cost of PCs, especially high end gaming PCs and the obsolence factor, whereby PC’s require frequent upgrades to play the latest game titles. Consoles, on the other hand, have longer refresh cycles.
Even though the metros have seen some improvement, poor infrastructure base for high speed internet connectivity is the biggest challenge facing the online gaming community in India. Ping and Frame Per Second (FPS) are often judged by players to be deciding factors during gameplay and must therefore be optimum. ISPs and hosting servers must therefore maintain fast servers and robust infrastructure to maintain speedy connections. In the absence of a conducive gaming environment the gamer will look at alternate media to satisfy his gaming urge.
39 IAMAI
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Online advertising though growing is being slowly accepted by advertisers in India. In game placements and games focused on advertiser products are too early for this market and advertisers have not been able to monetize this feature. Advertisers are relying on banner advertisements alone but they cannot be deployed during game play since they would interfere with the gaming experience.
Communities do exist in India but they have not assumed scale similar to the western world. In India, communities are extensions of a group of friends or family members. The online community format where gamers with similar interests from different geographies come together is still at a nascent stage and will take 3-4 years to develop.
Overall Market Size
The overall gaming market in India is estimated at INR 6.5 bn in 2008 and is expected to grow over four-fold to reach INR 27.4 bn in 2013 at a CAGR of over 33 percent. The Indian gaming market, though growing at a healthy rate, is dwarfed by the size of the gaming market in developed countries such as the US which stands at USD 37 billion40 in 2008. Factors such as a young population, rising disposable incomes, increasing PC and wireless users are attracting domestic and international gaming companies, developers, publishers to this market.
Size of the Indian Gaming Industry
Source: KPMG Analysis, KPMG Interviews
40 NPD Group via www.itfacts.biz
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Gaming Industry CAGR CAGR 2005 2006 2007 2008 2009p 2010p 2011p 2012p 2013p (INR bn) (2006-08) (2009-13)
Mobile 0.5 0.6 0.9 1. 4 37.4% 3.2 5.8 8.7 11.4 13.4 57.0%
Console 1. 2 1. 8 2.7 4.1 50.9% 5.0 5.9 7. 0 8.0 9.4 18.0%
PC & Online 0.4 0.6 0.8 1. 0 33.5% 1. 2 1. 6 2.2 3.1 4.6 36.2%
Total Industry Size 2.2 3.0 4.4 6.5 44.6% 9.4 13.3 17.9 22.5 27.4 33.3%
Source: KPMG Analysis, KPMG Interviews
Putting Things in Perspective...
Gaming Sector: Growth Drivers Gaming Sector: Key Challenges
Mobile gaming Mobile Gaming • Increasing telecom base and arrival of 3G: India telecom • Skewed revenue sharing agreements with mobile base is expected to grow from 347 mn subscribers in operators: Because of the direct billing relationship with 2008 to 815 mn subscribers in 2013 at a CAGR of 19 the end user, operators in India typically get 60-70 percent41. The expected rollout of 3G services will percent of the revenues for VAS while content creators provide efficient, high speed data networks to mobile get only 15-20 percent gamers Console Gaming • Decreasing voice ARPUs: Given the declining ARPUs • High customs duties and indirect taxes: These make from voice services, mobile value added services will legitimate console hardware and software about 40 assume increasing significance as additional revenue percent more expensive than grey market imports. sources to offset this decline • Release windows for popular games do not coincide with Console gaming global launches: Early adopters and active gamers • Demographics and Rising Incomes: India is a young therefore turn to grey market imports and pirated country with over two-thirds of its people aged under 35 software (the primary target segment). This coupled with the rising PC Gaming disposable incomes in urban India and the increasing • Piracy: Piracy is and will continue to remain the biggest consumerism makes a good case for growth in the threat for PC games, because of ease of high street console gaming segment in the next few years availability of illegal CDs at rock bottom prices. Moreover PC and Online Gaming with growth of broadband, downloading of pirated games • Increasing broadband penetration: The number of through internet and P2P networks are likely to hurt the broadband subscribers in India has increased from 0.7 industry mn in 2004 to 4.942 mn by September 2008 and continues to grow rapidly – this will help in driving online gaming • Strong marketing and distribution: Mainstream advertising as well as the strong distribution network of gaming chains such as Reliance Webworld has attracted many young people in urban areas to PC gaming – such chains will continue to drive growth in the PC gaming segment in the future as well
41 IAMAI 42 IAMAI
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Narrowcasting
ability to broadcast a much larger number of channels, the Narrowcasting: Niche is in broadcasters had more freedom to launch niche channels which generally earn lesser revenue per broadcast hour than GECs. Besides, niche channels have also started to garner Micro-segmentation of the Indian Market higher realizations and a premium for reaching out to their
One common trend seen across media sectors in India target audience. today is the growing importance of niche content. Besides This has led to a self propelling effect. As the viewers are targeting the masses, the M&E industry players have began getting more choices in terms of content, TRPs of hitherto to focus on the “classes” as well. popular dramas/soaps have witnessed a decline and reality shows, talent hunts, game shows etc. have broken into the Top 100 TRP list -a list that used to feature only soaps Different Propellers behind different Sub earlier. The viewership of channels considered as niche Sectors categories such as news, kids and infotainment has also
Different factors have influenced the advent of niche content risen over the years. across different sectors. In Television, the primary driver has The trend is similar for Films. A few years ago, niche films- been the sharp increase in the number of satellite channels; often referred to as parallel cinema- used to have limited total number of channels has increased from about 120 in takers in terms of distribution and viewing. It was important 2003 to over 400 by the end of 20081. This in turn, has been for a movie to have mass appeal to be even considered facilitated by the digitization of TV distribution. Mediums financially viable. The two main reasons for the same were such as DTH and digital CAS allow the distributors to low priced tickets and under declaration of cinema goers in provide a much larger number of channels to the the then prevalent single-screen theaters. Hence the consumers. This crowding of channels on television has had distributors made money only if the number of people two direct implications. One, with the plethora of GECs watching a movie was high. Therefore there was not much offering the same standard genre of content (i.e. daily experimentation with the scripts, since most of the films soaps), both new and old GECs resorted to content were made keeping mass audiences in mind. Further, due differentiation in order to gain viewership. Secondly, with the to budget constraints, producers had to rein in the
1 Industry, Indiastat
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production, distribution and marketing costs of niche across topics such as Travel, Lifestyle, Healthcare, movies. As a consequence, in spite of garnering critical Automobiles, Food, Heritage and Culture etc. The spurt of appreciation, these films did not see box office success. magazine titles in India is mostly a result of international magazine publishers aggressively investing in the Indian The emergence and increasing popularity of the multiplex market, after the government opened up 100 percent format has given a new lease of life to the niche category of foreign ownership rights in the non-news and special cinema in India. These multiplexes, which sometimes have interest categories in print media. As a result of the screens with seating capacities starting from as low as 100, opportunities available, several foreign magazine publishers allow the exhibitors to experiment with the non-mainstream set up shop in India. This also prompted established national movies. Such movies usually do not have a large audience players such as India Today and Outlook to expand their and by releasing such films in theaters with smaller product offering. capacity, the theater can manage reasonable capacity utilizations even with lesser number of people. This helps The spurt in niche magazines is also powered by the them maximize the potential of any film irrespective of its country’s changing economics and a new generation of budget and star cast. Ticket prices in multiplexes are also highly brand conscious consumers. With global luxury much higher as compared to single screens, with no under- players also gradually establishing their presence in India, declaration of revenues. This provides a platform for there was a need for more targeted advertising. The niche thematic exclusivity and creativity to the producers since model has got more advertisers interested as they are now they can now make movies keeping only a particular class able to focus their spending. Further, players with a range of of audience in mind. publications can create baskets of advertising rates across various properties; this helps to attract and retain a diverse The print sector too is witnessing a lot of content variety in set of advertisers under one roof. the newsstands-especially in the case of magazine publishing. Taking a cue from their foreign counterparts, Indian magazine publishers are launching niche magazines across diverse genres, targeted at different segments. While earlier it was news and film magazines that used to dominate the newsstands, the current publications range
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Emerging Genres across sectors
Driven by these factors discussed above, the Indian M&E industry has witnessed great variety in terms of new and innovative content being introduced over the past two years.
Emerging Genres across Sectors Sector Niche Genres Programming Channels • Reality Television • Lifestyle TV • Talent Hunts • Spiritual • Game Shows • Kids Channels • Mythologicals • Entertainment News • Small Budget Movies • Horror and Kids Genres Film • Remakes and Sequels • Movies being adapted from Books • Specialty Magazine Genres- Home and Lifestyle, Men, Travel etc. Print • Supplements • Very limited niche content right now because of regulatory Radio issues. However, in future, niche stations based on talk shows, English music and Retro Hindi music is likely to emerge Animation • Mythology-based Films Source: KPMG Research and Analysis
TV – Growth of Niche Channels and Reality Television
Two important developments have taken place in the past few years as far as TV content is concerned. Firstly, there has been a strong growth in the number of channels which come under niche categories such as News, Kids, Infotainment, Spirituality and Lifestyle.
Two factors have driven this growth. Firstly, the viewership share of mass entertainment channels has been on a downward trend (although the trend has been reversed for Hindi GECs in 2008 on account of the new GECs launched expanding the market itself).
Viewership share of GECs
Source: TAM Peoplemeter System (TG: CS 4+, All India)
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At the same time, the viewership share of certain niche segments has increased.
Viewership share of Niche Channels
Source: TAM Peoplemeter System (TG: CS 4+, All India)
New niche channels are being launched today have created whole new genres in the Indian TV market. Some examples are “E24” - a 24 hour Bollywood news channel launched by BAG Films, 2 channels launched by TV18 – “Topper Channel” - an education centered channel for high school students and “Homeshop18” - a home shopping channel. Many niches like men’s channels, cookery channels, home and housekeeping channels and weather channels are yet to be fully explored and there may be new channel launches in these genres as well in the near future. For instance, the Indian Meteorological Department has already short listed three TV networks for launching a dedicated weather channel.
Some niche channels launched on Indian television in 2008
Genre Channels Media Company
Lifestyle NDTV Good Times NDTV
Business UTVi UTV
Neo Sports Nimbus Communications Sports Star Cricket Star
Kids Chutti TV Sun
Bindass Movies UTV
Movies World Movies UTV
NDTV Lumiere NDTV
Hindi news News 24 BAG Films
English News NewsX INX Media
Education Topper TV 18
Entertainment News E24 BAG Films
Source: Annual Reports, Company Website ,KPMG Research
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It is important to note that in absolute terms, GECs still garner a much greater share of viewership than any other category of channels. Having a GEC in the bouquet gives the broadcaster an umbrella brand around which niche channels can be developed. Three new Hindi GECs were launched between November 2007 and July 2008 – NDTV Imagine, 9x and Colors. The launch of these channels has expanded the size of the market itself resulting in a 30 percent increase in weekly GEC GRPs in the target Hindi speaking markets from November 2007 to October 2008. At the same time, due to fragmentation of viewership, the combined absolute viewership of the older GECs has fallen by around 12 percent in the same period2.
Gross rating points of GECs
Channel GRP (Nov 07) GRP (Oct 08) Star Plus 356 271 Zee 254 194 Sony 102 113 Sahara + Star One + Sab 164 193 NDTV Imagine 74 9x 57 Colors 233 Tot al 876 1135
Source: exchange4media.com, SSKI 2008, KPMG Research
Viewership share between GECs Viewership share between GECs (November 2007) (October 2008)
Source: exchange4media.com, SSKI 2008, KPMG Research
Of the new GECs, Colors has been an exceptional performer and has moved up to the number two slot banking on new, interesting and differentiated content with shows like Ballika Vadhu (social drama), Jai Shri Krishna (mythological), Big Boss (reality) and Ek Haseena Ek Khiladi (dance talent) which have scored high on TVRs.
2 exchange4media.com, SSKI 2008, KPMG Research
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In terms of genres, mythology and reality shows have been quite successful. Analysis of original programming on GECs, throws light on this trend. Reality, game and talent shows take about 14 percent of the pie today compared to about 5 percent in 20043.
Original programming on GECs (2004) Original programming on GECs (2008)
Source: KPMG Analysis
3 KPMG Analysis
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Apart from advertising revenues, such shows also provide other alternate revenue streams to the broadcaster. Some of these are listed below:
Alternative revenue sources for Reality Shows
Applications Revenue Model Current Usage
Mobi-tones, Mobi-Pixs, Mobi-Video, Mobi- Flat Fee per download High Logo, Audio Samples, Audio tracks
SMSs, Mobi-tones, Mobi-Pixs, Mobi- Video, Mobi-Logo, Audio Samples, Audio Revenue sharing High tracks, Alerts, Games, Chats, Clues, Event Entry, Voting Merchandising – CDs, Books, Videos, Commission on Sales Low DVDs, Tickets, Fan memorabilia
Games, Video On Demand (VOD), Pay per play Low Highlights clips
Source: Industry Sources, KPMG Research
In this regard, revenue from interactive services i.e. Peer-to-Application (P2A) and SMS – generated by reality shows forms a significant revenue source for broadcasters. Of the total P2A market of about INR 10.3 bn, broadcasters get a share of about 25 percent. This translates into an INR 2.6 bn revenue stream, or about 3 percent of the total advertisement revenues of broadcasters4. It is likely that the P2A market might keep growing over the next few years, mirroring the steady growth in mobile penetration.
Mobile P2A revenues for Broadcasters (INR bn)
Source: Credit Suisse 2008, KPMG Analysis
Among the game show formats, many of the bigger game shows in India have been hosted by Bollywood stars and are based on global game show formats. Worldwide, the roll-out of global entertainment formats is getting faster, with broadcasters increasingly seeking tried and tested formats with a proven track record of success.
4 Credit Suisse, 2008
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Some Indian Television Shows based on Global Formats
Show Channel Global Format Country of Origin Kya Aap Panchvi Pass Are you smarter Star Plus U.S. Se Tez Hain than the fifth grader
Dus Ka Dum SET The Power of 10 U.S.
Big Boss (Season 2) Colors Big Brother Netherlands
Khatron Ke Khiladi Colors Fear Factor Netherlands
Source: KPMG Research
The popularity of international format based game shows among Indian audiences can be judged from the fact that Viacom18’s new channel ‘Colors’ primarily banked on a reality game show- ‘Khatron ke Khildai’- as its launch pad. After the first season of Fear Factor got over, the channel replaced it with another international format reality show- Big Boss, which too became popular and consistently featured in the Top 50 programmes list5.
Indian content production houses can take a cue from this and develop their own formats and content that can travel in the global marketplace. That is what keeps international content companies like Endemol in strong financial health (In 2006, 75 percent of Endemol’s revenues came from non-scripted format shows6).
The mythology genre is another attraction for channels that have re-discovered a steady demand for such shows among the Indian audience. Ramayana was aggressively promoted by NDTV Imagine before the channel went on air in January 2008. From February 2008, SET began to air re-runs of Sanjay Khan's Jay Hanuman for which it procured the rights from Doordarshan. Following the lead, 9X (another new GEC, launched by INX) launched its version of Mahabharata in July 2008.
However, to put things in perspective, soaps still dominate the TVR listings. For instance among the Hindi GEC shows, among the emerging genres (mythology and reality) discussed, 11 shows made it to the Top 50 programmes (across all channels) versus 22 soaps. (based on TAM Ratings for the week from Jan 4 to Jan 10, 2009)7.
Hindi GEC shows among Top Television Programmes
Source: TAM Top 100 programmes (04 Jan – 10 Jan, 2009)
5 As per TRPs provided by TAM Media Research 6 Endemol Investor Roadshow (March 2007) 7 Indiantelevision.com
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In fact between 2006 Q1 and 2008 Q1, soaps actually increased their overall TVR share on television from 39 to 48 percent8. Given the family oriented Indian culture, it is likely that soaps may continue to dominate the TRPs in the future as well, but reality, gameshows and talent hunts have clearly demonstrated their ability to attract new audiences to a channel (which a good lineup of soaps can then help to retain).
It is not just GECs that have been altering their programming to suit the new tastes of audiences, the news channels too have experimented with new content (and new packaging of content) over the past few years in an effort to win the TRP race. Lifestyle shows which track the page 3 parties, Bollywood and Hollywood shows, automobiles related shows etc. are some of the new content shown on English news channels. The Hindi channels, on the other hand, have heavily banked on ‘tabloid’ content such as crime shows that rely heavily on sensationalism. They also try and package news more attractively, often using animations to explain news events.
The following charts give an indication about the content variety prevalent in news channels.
Programming Content on English News Channels (Jan- Programming Content on Hindi News Channels (Jan-June June 2008) 2008)
Source: TAM Media Research, KPMG Analysis Source:TAM Media Research, KPMG Analysis
The news channels in India have evolved from being serious and purely information centric to providing both information and entertainment in the same package in an effort to gain more eyeballs.
8 Industry sources, KPMG Research
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Films: Small is Big-Growing Popularity of Multiplex Movies
In the Film Entertainment sector, numerous small budget movies are being made today, keeping in mind a specific audience class and their tastes. While the gross realizations of the big budget films are much more considering the huge sums spent on making them, the “non-commercial” movies are considered relatively much less riskier today with the possibility of a higher return on investments. This has prompted even the large and established production houses to experiment with scripts and get into making small budget films- termed as “multiplex movies”- to capture the increasing niche audience for such films. Some of these films have turned out to be blockbuster runaway hits. For instance, “Bheja Fry” was a small budget film made by Rajat Kapoor at a reported cost of INR 6 million9 and netted 12-13 times its investment at the box office10. In 2008, “Mithya”, another small budget film made at a budget of INR 22.5 mn grossed more than twice that amount11. Towards the latter half of the year, small ticket movies like “A Wednesday” and “Welcome to Sajjanpur” have all done well at the box office.
Some Multiplex Movies released in recent times
Net Collections Film Year of Release Status (INR Mn)
Pyaar ke Side Effects 2006 130 Average
Khosla ka Ghosla 2006 70.9 Average
Honeymoon Travels Private Ltd 2007 180 Average
Bheja Fry 2007 79.3 Hit
Mithya 2008 54.9 Hit
Aamir 2008 30.2 Hit
Rock On 2008 265 Hit
A Wednesday 2008 105.7 Hit
Welcome to Sajjanpur 2008 104.4 Above Average
Source: Boxofficeindia
The year 2008 saw a spate of small budget releases, most of which have been critically acclaimed. The increase in the number of such films shows that small budget movies have come to stay in India.
9 Indiantelevision 10 Indiaboxoffice 11 Indiantelevision
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Trend of Remakes and Sequels Catching Up in Films
Since 2007, remakes have become especially popular. Remakes of successful old Bollywood films like Don, Sholay and Umrao Jaan have hit the screens. Sale of remake rights thus emerged as another revenue earning opportunity for film- rights owners. For instance, producer Boney Kapoor bought the remake rights of Telugu Film Pokhiri while Mukta Arts sold the remake rights of its film “Karz” to T Series. With players increasingly inclined towards legitimate remake versions, remake rights can become a significant source to monetize film library content.
Further, like its Hollywood counterparts, Bollywood too has begun to cash in on its success by making sequels of box office hits. Sequels of films like “Golmaal Returns” and “Sarkar Raj” have been released in recent times and received well by the audience.
Advance Booking- Celluloid Adaptations of Books
Another emerging genre in filmed entertainment is the instance of popular books being picked up for film adaptations. The bond between books and cinema is an old story for Hollywood, where some of the cult films have been based on bestsellers.
Some Hollywood Movies adapted from Books
To Kill a Mockingbird Jurassic Park Schindler’s List Wuthering Heights Ben Hur A Passage to India Sense and Sensibility 2001: A Space Odyssey Gone with the Wind Harry Potter Series Jurassic Park Lord of the Rings Series
Source: KPMG Research
This trend has recently picked up in Bollywood. October 2008 saw the Box Office release of ”Hello”, which was the celluloid adaptation of Chetan’s Bhagat’s “One Night @ The Call Centre”. Though the film was not a box office success, the trend has picked up in the movie industry with a slew of releases based on fiction being lined up for the future.
Some forthcoming movie releases being adapted from Books
Film Producer Book Author Zoya Red Chillies The Zoya Factor Anuja Chauhan
3 Idiots Vidhu Vinod Chopra Five Point Someone Chetan Bhagat
The Japanese Wife Aparna Sen The Japanese Wife Kunal Basu
Source: KPMG Research
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The performance of these films at the Box Office are expected to determine whether more film makers come forward and adapt more of bestselling fiction for celluloid depiction.
Growing popularity of mythology-based animation films in India
Television is not the only sector that has re-discovered the appeal of mythology for the Indian audience. The Indian animation industry too has found mythology to be an attractive proposition; it has banked largely on the tried and tested mythological genre to venture into end-to-end in-house productions. The table below lists some of the mythology-based animation movies produced by Indian studios since 2005.
Mythology-based animation movies produced in India
Movie Producer/Animation Studio Year of Release
Hanuman Silvertoons 2005
Krishna ECATS, Media Solutions 2006
My Friend Ganesha Radiant Animation 2007
Bal Ganesh Shemaroo Entertainment 2007
Hanuman Returns Percept Picture Company 2007
My Friend Ganesha II Radiant Animation 2008
Source: KPMG Research
For an industry that is plagued by lack of creative talent for the conceptualization of good original animation content, the rich mythology and folklore of India provides a good source of inspiration. The main challenge lies in making these stories location, religion, language and culture neutral so that these animation films can be sold to audiences across the world.
“These are exciting and challenging times for the Indian film industry. Audiences have shown a propensity to experiment with new genres, revenue streams have increased and new markets have opened up; at the same time B2B revenues are under pressure, liquidity is tight and marketing costs have increased with media becoming more fragmented and cluttered. Navigating these waters will require some steady hands on deck and the next few years will determine who will sink or swim.” Siddharth Roy Kapoor, CEO, UTV
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Print-Spurt in Special Interest Magazines
In the print sector, even though the readership surveys have reported decline in the overall readership of magazines, emergence of specific genres is fuelling the growth trajectory of magazines. Review of readership growth in 10 select magazine genres taken together indicate that readership has grown by 28.1 percent in 2006 over 200512. The table below summarizes the growth story of the niche genres.
Magazines - Readership Growth across selected genres Total Readership (Figures in ‘000)
Sum of Sum of Genre % Increase NRS 2006 NRS 2005 Auto 485 320 51.6
Business and Finance 2,628 1,926 36.4
Career and Education 4,707 2,743 71.6
Fashion and Lifestyle 11,271 7,033 60.3
General Interest 59,389 50,271 18.1
Healthcare 1,413 519 172.3
Men's 211 96 119.8
Sports 9,144 5,650 61.8
Travel 802 505 58.8
Women's 30,637 25,310 21
Tot al 1,21,618 94,963 28.1
Source: NRS, Exchange4Media
Industry players also seem to agree that the growth of the sector depends on niche genres. Accordingly, in continuation of the previous year’s trend, the magazine market saw a healthy growth in the year 2008 with many niche titles taking off across genres and languages.
12 NRS, Exchange4Media
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Some Niche Launches in Magazines in 2008 Title of the Genre Publishers/Distributors Magazine Fashion and Lifestyle Twenty Onwards Media Traffic Life
World Wide Media-Mondadori Group Grazia Women Dainik Bhaskar Group She
Living Media Group-Conde Nast Men GQ Publications
Auto Living Media Group-Axel Springer Auto Bild
Celebrity News Outlook Group-Time People Bangalore City Centric Premier Entertainment and Media Happenings
MW.Com India Pvt Ltd-Wenner Media; Rolling Stone; Music Media Transasia India-Alpha Media Group Blender
Food and Agriculture Delhi Press Farm ‘n’ Food
Business and Finance Outlook Group Outlook Profit
IT Magazine IDG Media Windows World
Heritage and Culture Heritage India Communications Heritage India
Home and Interiors World Wide Media Group-BBC BBC Good Homes
Source: KPMG Research
With increasing competition from magazines, newspaper publishers have also started segmenting newspaper readers. Over the past year, the Print Media Market has witnessed increasing proliferation of compact, smaller format dailies like Mint, Metro Now, Mail Today and most recently the Hindustan Times Café in Mumbai. Even the Hindi language media joined the bandwagon with the launch of iNext by the Jagran Group, and Amar Ujala Compact from the Amar Ujala Group. Newspapers-both national and regional are also increasing their selection of supplements, which focus on specific topics of interest. Besides targeting the youth and female readership, compacts and supplements also help in tapping those advertisers who normally go to magazines as well as in chaining those segments of readers who are most susceptible to defecting to the competition.
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Radio- A Long Way to Go
Private FM radio in India continues to be dominated by the mass entertainment category i.e. Bollywood and regional music. There have been a few experimentations in recent times, like the Meow FM station launched in 2007, catering specifically to a female audience and having a large portion of airtime devoted to talk shows. However such channels continue to be exceptions rather than the rule. The reason is fairly simple - multiple frequencies in the same city for the same station are prohibited. As a result, radio stations prefer to take the safe mass segment route rather than experiment with niche content.
Globally, the situation is quite different. Radio thrives on the back of niche and local advertising. High listener loyalty and listeners relating to a particular radio channel are considered the key characteristics that draw advertisers to radio. In the U.S., for example, with over 10,000 commercial radio stations, players operate across genres like news, sports, talk shows, fashion, religion, etc13. More than 40 percent of the total audience is for talk, information and news related content14. Even within music, the stations operate across multiple niche and sub niche music formats.
With the TRAI recommendation of allowing radio stations to hold multiple frequencies within a district15, we believe the private FM space in India might also see an emergence of niche channels, when a policy change regarding the same is implemented by the government. In the metros at least, the need for niche channels is already being felt with the increasing fragmentation in the listenership of mass music oriented channels. According to industry sources, within the niche segments, stations centered on talk shows and retro Hindi music are expected to have a good appeal amongst Indian audiences.
13 BBC News – Country Profile: United States of America 14 Press Reports 15 “Tune in for bouquet, FM radio may do a TV”, The Financial Express, Feb 26, 2008
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Break up of sports marketing business in India Sports as an Entertainment Genre
Sports marketing, which includes both marketing of sports events and teams as well as using sports to market non-sports products, is today a business worth INR 20 bn in India (out of which cricket alone accounts for INR 18 bn)16. Also, very importantly, it is growing at a rapid pace of 20 percent a year compared to the global average growth of 5 percent a year17. While developed countries have a mature sport marketing industry, in India the industry has just started to take
Source: Brand Reporter off.
Media and Sports – Mutual Interdependence
The symbiotic relationship between Media and Sports has proved durable because of mutual benefits to both. The sports business is based on the idea that people are willing to pay to watch others play, and television expands the audience vastly, from thousands inside the stadium to millions outside. For broadcasters, more eyeballs mean more subscribers and advertisers. Broadcasters need not just broadcast, but they can venture out to own their own sports properties. For instance, Essel Group (Zee Network), started the private cricket league ICL, and owns the property.
The marriage between sport and broadcasters, though long and successful, has been changing in a number of ways. First, the fragmentation of audiences among hundreds of channels has given the most popular sports enormous bargaining power. Sports are one of the few things that still have people tuning in by the mn. As the number of channels has multiplied, large audiences have become much harder to find, but Sports has retained its ability to generate eyeballs for the broadcasters. In fact, the average time spent watching sports channels in C&S households has been increasing steadily.
Hindi Mass News Channels Sports Channels
Source: Brand Reporter- In the Fast Lane, TAM Peoplemeter System
16 Brand Reporter, 2008 17 The Economist, 2008
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With the growth in sports viewership, the number of advertisers have also risen steadily. The number of advertisers in the sports genre grew at a CAGR of 32 percent from 2005 to 2007. Consequently, the size of the sports genre in terms of advertising revenues stood around INR 7 bn in FY2008 as against INR 5 bn in FY200518.
Growth in Sports Advertising
Source: exchange4media,KPMG Analysis
As a result of the growth in advertising revenues from sports, the scramble for sports broadcast rights has also been getting frantic. Two years ago Nimbus, a media and sports marketing company, paid USD 612 mn for the rights to India’s international matches and domestic cricket until 201019. ESPN Star broadcasts events staged by cricket’s global governing body, including World Cups; it paid more than USD 1 bn for the global rights between 2007 and 2014.20
Cricket still the dominant sport in India
In India, sports and cricket are almost synonymous. Among the three mega sport events in recent years in India, TV viewing of Cricket World Cup 2007 was highest (113 mn) followed by Olympics 2004 (65 mn) and FIFA Football World Cup 2006 (39 mn)21. This was in spite of the fact that India crashed out early in the Cricket World Cup. On the whole, cricket garnered about 65 percent of the total sports viewership pie in 2007. 22
It is no surprise therefore that one of the most popular Indian sports event in recent times that caused ripples in the entire Indian media industry and brought Sports as a mass entertainment genre into the limelight was the Indian Premier League – a 44 day extravaganza that was based on the Twenty20 format that has truly caught the imagination of the cricket lovers both in India and outside.
IPL has modelled itself after the English Premier League (EPL), the top football league in England. Though a domestic league, like EPL, IPL was intended to be a global business with global investors, global players and a global broadcaster.
18 exchange4media 19 Indiantelevision 20 “ESPN-Star edges out Nimbus, wins ICC global rights for $1.1billion”, The Financial Express, December 2006 21 The Economist, 2008 22 TAM © 2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. Allrightsreserved. 72
EPL was started in 1992, and has since transformed English domestic football from a provincial sport played on beach-like pitches in half-empty and rickety stadiums to an international phenomenon. Billionaires from the world over queue up to buy English football clubs. One of them is steel tycoon Lakshmi Mittal, who has picked up 20 percent stake in the club of Queens Park Rangers. Russian billionaire Roman Abramovich also infused funds and turned the also-ran Chelsea FC into a champion club. According to Forbes, the Chelsea team was worth USD 339 mn in 2004. By early 2007, after two Premiership titles, its value had risen to USD 537 million23.
Taking a cue from the success of the EPL brand, the BCCI too hired IMG, a global sports management firm, to study the professional sports leagues in the U.S. and Europe and model its IPL business24.
Advent of IPL might actually be a precursor of the formation of private sports leagues in India. It is the presence of private sports leagues worldwide that have made acquisition of sports rights as a lucrative broadcasting property. In India too, such private leagues are expected to boost acquisition costs, and consequently advertising rates. An example of this was ESPN STAR Sports bagging exclusive Global Commercial Rights for all matches in the Twenty20 Champions League (a domestic tournament which is to feature the leading provincial teams from India, Australia, South Africa, England and Pakistan) for 10 years at a whopping USD 975 mn. This makes the tournament the highest value cricket tournament in the world on a per game basis; given that the Champions League is to have fewer matches -215 to 250 as compared to 600 in the IPL-the per-match cost works out to INR 170 mn to INR 200 mn compared to under INR 70 mn for IPL25. This in turn, implies that the channel has to sell the advertising rates for these matches at even higher rates than IPL to break even. Clearly, with sports emerging as a powerful entertainment genre post IPL, the scale of the game is changing rapidly.
23 The Economist,2008 24 The Economist 2008 25 “ESPN-Star bags Champions League T20 rights for $975m”, Business Standard, September 2008
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Emergence of IPL as a hot Media Property: Will this Sustain?
Going by the response generated in its inaugural edition, IPL seems to have truly redefined the concept of sports in India. In a country where cricket is already considered to be a religion, the domestic Twenty-Twenty (T20) tournament further added to its popularity by providing a judicious blend of the game, celebrities and entertainment. In the process, IPL presented cricket as a complete entertainment package, and arguably succeeded in attracting new viewer segments into the game’s fold. The game also provided a big boost to the advertising industry. According to estimates, IPL is expected to bring in INR 11.9 bn every year, generate TV advertising worth INR 6.5 bn a year, get sponsorships (both team and central) worth INR 2.9 mn a year, gate receipts of INR 1.75 mn a year as well as stadium advertising of INR 800 mn a year26.
Monetization and Marketing of Brand IPL
The IPL innovativeness was marked with the format itself: IPL was the first ‘official’ league form of cricket in the country. Besides, T20 is a compact form of cricket where each team bowls 20 overs. As a result, matches typically last about as long as a baseball game-just around three hours or so. The next departure from tradition came with the teams: not the usual state-based units of Indian cricket but a mere eight city-based “franchises” created specially for IPL, with a mix of Indian and international cricketers. Scarcity created value as first the franchises, and later the players were “auctioned”. The 8 franchises bid a combined USD 723 mn (INR 29 bn) to own these clubs. The Indian Captain, MS Dhoni, went to Team Chennai for the top price of INR 60 million27. In a sport with no culture of inter-club matches, these amounts were astronomical.
Franchise Owners and their respective bids
Franchise Owner(s) Price (INR Bn)
Mumbai Indians Reliance Industries 4.48
Royal Challengers, Bangalore UB Group 4.46
Hyderabad Deccan Chargers Deccan Chronicle 4.28
Chennai Super Kings Indian Cements and N Srinivasan 3.64
Delhi Daredevils GMR Holdings 3.36
Preity Zinta, Ness Wadia, Karan Paul(Apeejay Surendra Group) and Kings XI Punjab 3.04 Mohit Burman(Dabur)
Shahrukh Khan , Juhi Chawla and Kolkata Knight Riders 3.03 Jai Mehta(Red Chillies Entertainment)
Rajasthan Royals Emerging Media 2.68
Source: Industry Sources,Press Releases
Twenty percent of these proceeds were to go to IPL, 8 percent was to be allocated as prize money and 72 percent was to be distributed to the franchisees. The money is to be distributed in these proportions until 2012, after which the IPL is supposed to go public and list its shares. The franchises get 80 percent of the league’s television revenues in the first two years, declining to 50 percent from year 11. They also receive 60 percent of central sponsorship for the first 10 years and 50 percent thereafter28. Over time, they have to generate their own money from sponsorship, licensing and so forth, some of which is to go back into the central pool.
26 Businessworld, 2008 27 KPMG Research 28 Businessworld, 2008
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Another thing that the organizers did differently was to approach the entire project as something that could generate as much interest – on prime time– as a soap or a reality show may have done. The IPL package was custom made for prime-time television. The camaraderie between players who had hitherto been considered arch rivals and the presence of star team owners further contributed to the excitement. The tournament’s introduction and its subsequent impact on the sports world left aside, IPL also proved to be a good media property for monetization. A consortium consisting of India's Sony Entertainment Television (SET) network and Singapore-based World Sport Group acquired the 10 year global broadcasting rights of IPL for USD 1.026 bn (over INR 42 bn). As part of the deal, the consortium is to pay the Board of Cricket Control in India (BCCI) USD 918 mn for the television broadcast rights and USD 108 mn for the promotion of the tournament29. After securing the bid, Sony-WSG then re-sold parts of the broadcasting rights geographically to other companies. Below is a summary of the broadcasting rights around the world.
Summary of Broadcasting Rights of IPL
Winning Bidder Regional Broadcasting Rights Duration
SET-World Sports Global Broadcasting Rights 10 years for INR 42 Bn
Network Ten Free-to-air television in Australia 5 years at INR 350-400 Mn
Setanta Sports United Kingdom and Ireland on a subscription basis 5 years
Arab Digital Distribution Middle East broadcast rights on ADD's ART Prime Sport channel 10 years
Rights to distribute on television, radio, broadband and Internet, for Willow TV 5 years the IPL in North America SuperSport South Africa Broadcast Rights Terms not released
GEO Super Pakistan Broadcast Rights Terms not released
Canadian broadcast rights. Aired on ATN's CBN & ATN Cricket Plus Asian Television Network channels on a subscription basis. Aired on XM Radio's ATN-Asian 5 years Radio as well Source: Press Releases, KPMG Research
Impact on the M&E Industry
The acquisition cost was then considered steep for a domestic tournament. SET has to pay USD 316 mn (INR 12.6 bn) in equal installments over the initial 5 years and USD 608 mn (INR 24.3 bn) for the next 5. That means SET had to pay about INR 2.53 bn to BCCI in 200830. However, with the success and popularity of the tournament, the investment seems to have paid off for the broadcaster. The league, screened every evening in a prime slot at 8 pm pulled in viewers in large volumes. As per TAM ratings, the final of IPL on 1 June 2008 fetched Max an average of 9.8 TVR. The two semifinals, too, delivered ratings of over 6 each. The 44 day tournament achieved an average of 4.7 over 57 matches on SET Max, showing that audience interest was sustained throughout the long tournament, which was a concern at the beginning. These ratings were unprecedented for a domestic cricket tournament. Further, the huge viewership that the matches gained pushed up advertisement rates for 10-second spots to INR 5-10 lakhs, which was marked at INR 2 lakhs per 10 seconds at the start of the tournament31. ESPN Star Sports had charged about INR 7.5-10 lakhs for 10-second spots for the India-Pakistan T20 World Cup final last September, which delivered a TRP of 15.9.32
29 “Sony-WSG consortium bags IPL rights”, Business Standard, January, 2008 30 Businessworld,2008 31 Businessworld,2008 32 Industry Sources
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MAX reaped in the benefits of the leap in viewership which pushed it to the number 1 slot on channel viewership share basis during Q2 2008 during the broadcast of IPL.
Channel Share of MAX
Source: TAM
IPL provided good opportunities for marketers33. FMCG companies like ITC, Mother Dairy and Nestle, insurance companies, Pizza Hut and Cipla were the leading advertisers during the first edition of the tournament. Many players- like the suiting major S Kumar’s Nationwide who were the apparel sponsors of Team Jaipur-entered at the later part of the tournament, after gauging its success and popularity. Franchisee owners also spend money on marketing and promoting their respective teams, and in turn generated revenue from Team Sponsorships. Industry players are unanimous in their views that IPL has acted as a big driver for advertising spends this year.
IPL also affected other segments of the industry. In Television, TRPs of other channels in the Prime Time Slot got affected. News channels had focused programming dedicated to IPL matches. In films, big banners postponed their releases due to lesser movie goers in cinema halls; traditionally summer vacations have been one of the most productive seasons for the film industry due to higher footfalls. Like the International Cricket Council (ICC), other media segments are also seriously considering keeping a separate IPL window every season! Clearly, the IPL has shown that it has a lot of potential to deliver high returns for the broadcaster, the team franchise owners and the sponsors.
In a nutshell: Why was IPL a success that it turned out to be?
The way in which IPL was conceptualized, visualized and organized holds a lesson for marketers. There were four main reasons for the tournament’s successes:
• It started off on a scale that was likely to make an impact
• The organizers got specialist marketing firms like IMG involved well in advance
• The marketing was PR led
• The tournament was efficiently marketed to consumers.
IPL has given a whole new dimension to sports and sports marketing in India.
33 Industry Sources
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Future perfect in the immediate run
Gauging by the industry reaction, IPL is expected to continue as a prime driver in the M&E industry for the coming year. Further, advertising rates for other cricket telecasts are also expected to increase since the IPL rates are also expected to be used as future reference points by the broadcasters. Many retail majors plan to tie-up with IPL franchisees, given the fact that the business format of IPL is modeled on the English Premier League, which has built its properties through retail tie-ups and merchandise. Industry Players also plan to capitalize on celebrity brand ambassadors and merchandising. Celebrity endorsed branded T-shirts, sunglasses, wallets and travel bags are expected to be promoted in a big way.
In the long run
IPL’s ability to sustain and grow its popularity in the long term depends on the ability of individual franchises to “break out” and become large media properties on their own. Franchisees may have to increase their marketing and promotional spends to effectively monetize their fan base and build brands out of their respective teams. Franchises also need to think about how to maintain fans’ interest when there are no matches to watch. Even though the success of the domestic cricket league tournament has been unprecedented, ratings show that it still trailed the T20 World Cup Final in terms of viewership34. In the future too, till team loyalties build up, the ratings for IPL are expected to trail those of international matches. Meanwhile, apart from finding more team sponsors, franchisees may try to increase the mix of premium seating in their home stadiums, and generate revenues from Food and Beverages (F&B).
Further, the league itself is set to expand with the addition of 4 new franchises from 2009-10. This is likely to take the total number of teams to 12 and is expected to automatically increase the scale of the tournament. In turn, it is also likely to provide more opportunities for advertisers.
For the immediate future however, even as India waits for the next edition of IPL, pure business logic makes the tournament pretty compelling for the advertisers and media buyers in India, and in turn an exciting prospect for the M&E industry. For the franchisees too, buying an IPL team is proving to be a good investment decision. Even in the short term, they can fully or partially offload their stakes in their respective teams, and get a premium over their purchasing consideration. A good example of this, is the recent decision of the Deccan Chronicle to sell its stake in an IPL team.
34 “IPL final fails to chase India-Pakistan score in T20 World Class clash”, The Economic Times, June 2008
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Other Sports are not far behind, gradually catching up in terms of Popularity
Even though cricket is still the mainstay in Indian sport, India is gradually moving from a one sport market to a multi-sport market with support from the Indian government and corporates.
The growth in the viewership of other sports has been driven by two main factors:
• Launch of several new sports channels in India, acquiring and marketing properties across other sports, internationally
• Indian sportsmen doing well internationally in sports other than cricket
As a result, other sports like Formula 1, Tennis, Soccer and Golf are catching up in popularity and gaining viewership in the country. They also provide attractive opportunities for advertisement and sponsorship, because they largely cater to SEC A and B, and are therefore often able to provide two-three times ROI for advertisers when compared to cricket35.
Formula One
Viewership of Formula One in India
Source: exchange4media
• India now has its own F1 Team – Force India – owned by Vijay Mallya – this is likely to drive up the popularity of the sport in India
• Grand Prix is expected to make its debut in India in 2010 or 2011 (a circuit for the same is being developed at Noida). Once it does, it’s expected to create a lot of interest in the sport among Indian audiences and further drive up viewership.
Economic Times, June 2008 35 Industry inputs
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Tennis
Viewership of Tennis Grand Slams in India
Source: exchange4media
• With Sania Mirza, Leander Paes and Mahesh Bhupathi doing well in international tournaments, the popularity of tennis has grown, particularly in the Metros and the SEC A and B audience
• Big international events such as The Kingfisher Airlines Tennis Open (part of the ATP international series) organized in Mumbai in 2006 and 2007, have also played big role in increasing the popularity of the sport in India.
Soccer
Viewership of FIFA World Cups in India
Source: exchange4media
• India is one of the last significant untapped markets for soccer in the world. Soccer viewership in India is increasing by about 20-25 percent annually36
• The viewership for English premier League (EPL) is no longer restricted to West Bengal, Goa or Kerala but is spread across India. In fact, English Premier League clubs such as Manchester United (Man U) are seeking to expand their commercial interests in India. Of Man U’s estimated 333 mn followers worldwide, 20 mn live in urban India37.
36 exchange4media 37 The Economist, 2008
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Apart from these, Golf, Boxing and Hockey are the other sports which are expected to grow in viewership driven by the good performances of Indian sportsmen on the international scene in recent times. Besides, the Commonwealth Games which is scheduled to be held in India in 2010 is further expected to boost the marketing opportunity for sports in the country38. The games are expected to be revenue neutral, so the cost of organizing might have to be offset by ticket sales, advertising revenue and broadcast rights. Broadcast rights and event marketing agency Fast Track has been appointed to represent the International Broadcast Rights by the Organizing Committee of the Delhi 2010 Commonwealth Games. Broadcast deals with Network Ten and Foxtel in Australia, and TVNZ in New Zealand have already been negotiated.
Conventionally, both public and private enterprises have funded sports as part of their corporate social responsibility. The new sports entrepreneurs are, however, looking at running sports teams and events as business. In order to further boost sports as a business in India, there is a need to exploit it more aggressively across multiple formats – such as contests, events and activations. Digital and mobile platforms have also not been used beyond score updates and download. Live streaming and interactive gaming is yet to take off. Contests and fantasy leagues are slowly taking shape but still have a long way to go. These revenue streams can add significantly to the sports business in India, if exploited aggressively.
38 Press Reports
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Future Implications
The Indian M&E industry continues to witness the emergence of new content genres across different sub sectors. The concept of universal content no longer holds true and players are investing in building a differentiated content portfolio to help ensure consumer loyalty. Building up of a diverse content basket could also act as a risk mitigating mechanism for the players.
The impact of emerging content variety on the industry is summarized in the table below.
Emerging Content Genres: Implications for Players
Sector Effects of Emerging Content Genres Implications
• Companies need to evaluate benefits of portfolio approach (be it across film • Players are increasingly diversifying into genres, a TV channel portfolio, multiple magazines ) - in an environment of All Media different genres and building a product increasingly segmented audience preferences. A portfolio gives benefits of portfolio heding risks, while still being able to aggregate media for advertisers and getting cost synergies in operational areas
• Increasing programming (time) share of new genres such as Reality TV, Talent Hunts, Game Shows etc. • Channels need to build up a diverse programming library, comprising a • Significant share of new genre shows in judicious blend of conventional and new genres. With the increased choices Top TVR lists available to consumers, measures to help ensure customer loyalty are • Spurt in the number of niche channels for TV becoming increasingly important diverse TGs, such as Kids, Infotainment, • Increasing costs for broadcasting rights of sports events - Broadcasters Lifestyle etc. need to undertake a cost benefit analysis and determine an effective price • Increasing viewership share of niche before acquiring the rights for a particular event category channels • Emergence of Sports as a mainstream Entertainment Genre
• Production houses need to mitigate their risk by striving to ensure that they • Small budget, ‘multiplex movies’ have have the appropriate portfolio mix of big, medium and small budget movies become viable due to audience in their content pipeline acceptance • Protection of IPR rights and valuation of library content has become all the • Film Makers experimenting in new genres Film more significant due to future revenue potential through remakes, sequels such as Kids, Horror, Sci-Fi etc. etc. • Celluloid Adaptations of Books are being • Need to identify consumer preferences and gauge audience acceptance for experimented with different genres before going ahead with productions, in view of increasing costs of movie making
• Rise in the number of supplements • Need for players to help ensure adequate monetization of supplements by offered by both English and Regional effective targeting of advertisers Newspapers Print • Need for careful understanding of content preferences of target segment, • Increasing number of specialty magazines and comprehensive evaluation of their market potential before launching a in English segment, by both existing new magazine to capture a niche audience players and new entrants
© 2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. Allrightsreserved. Regionalization
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Regionalization
Context – the great Indian regional story
Regional media has been an important growth driver for the Higher growth rate in 5-40 lakhs plus population towns Indian media industry in the past few years. Established national players are expanding their regional footprint, existing players are diversifying their portfolio offerings and the regional media space is witnessing a host of investments from established players as well as venture capitalists and private equity investors.
One of the major factors behind such high interest levels in regional media is the significantly untapped market in Tier 2 and Tier 3 cities and lower socio-economic groups that tend to be the primary consumers of regional media. Source: IRS 2007 R2
We examine this in greater detail below. Thus, Tier 2 and Tier 3 cities are showing a higher growth in number of households as compared to the larger Tier 1 cities (cities having population of more than 40 lakhs). As a Increasing significance of Tier 2 and Tier 3 result, it is estimated that by 2025 population of both Tier 2 cities and Tier 3 cities put together will be as much as Tier 1 Of the urban areas, Tier 2 cities having population of 10-40 cities2. Hence, these cities are increasingly emerging as the lakhs are witnessing the highest growth rate in the number focus area for marketers. of households.1 These cities witnessed a growth of 7.4 percent growth in the number of households in 2007 over 2005. Tier 3 cities having a population in between 5-10 lakhs witnessed 6.9 percent growth in the number of households from 2005 to 2007 as compared to a 6.6 percent growth rate in cities having a population greater than 40 lakhs.
1 IRS 2007 R2 2 Marketing Whitebook 2008
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Estimated 2025 Urban Population (in millions) Higher consumption potential in rural areas
Even though 70 percent of Indian households reside in rural India4, marketers, advertisers and consequently media players have traditionally focused more on urban areas. The perception was that although in absolute numbers the rural population is more than urban population, consumption power is still concentrated in urban India.. This paradigm has gradually changed now and not without good reason. In absolute terms, the size of the middle and higher income households in rural India was expected to be double that of Source: Marketing Whitebook 2008 urban India in 2007.5 The increasing purchasing power of Tier 2 and Tier 3 cities is Number of Middle and Higher Income Households also evidenced by the socio-economic data, with these cities witnessing growth in the number of people belonging to the upper socio-economic classes.
Growth in Population of SECs across cities
SECs 40 lakhs + 10-40 lakhs 5-10 lakhs 1-5 lakhs 50K – 1 lakh <1 lakh A 106 105 104 98 94 96 B 97 96 101 98 94 97 C 100 95 97 100 94 95 D 99 98 100 103 105 98 E 100 107 101 100 104 105 Source: National Council for Applied Economic Research (NCAER) Note: Data Points indexed between 2005-2007 Source: IRS 2007 R2 A higher number of middle and high income households has Currently, top 6 metros constitute only 30 percent of the resulted in higher growth in per capita consumption in rural total consumption of goods and services in India. However, areas. Per capita consumption in rural areas went up by 12 these 6 metros constitute 60 percent of the total media percent in 2005-06 as compared to 9.8 percent in urban spends3. This is an anomaly that is bound to change given India.6 the growth potential of Tier 2 and 3 cities due to an increase in the numbers as well as the increasing purchasing power of the population residing in these cities.
3 NCAER, Group M, “Social Changes and the Growth of Indian Rural Market: An Invitation To FMCG Sector" by S John Mano Raj, Dr. P Selvaraj, 2007 4 2001 census, IRS 2007 R2 5 NCAER 6 National Sample Survey Organisation (NSSO) © 2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. Allrightsreserved. 85
Hence, rural India offers a tremendous potential for marketers, advertisers and media players alike. Again, due to differences in the media consumption habits and language preferences of rural people, media players have to target and engage these audiences in a different way as opposed to target groups in urban areas.
Low Media penetration in smaller towns and rural areas
Despite the significant consumption potential of smaller towns and rural areas, the reach of the media is relatively lower in the smaller category towns and cities while larger cities are reaching saturation in terms of growth in media reach. Hence, these smaller towns offer good potential for growth in media consumption.
Media Reach among different Town Categories
Source: IRS 2007 R2
Further, overall Media7 Reach is much lower in rural areas as compared to urban areas.
Media Reach
Source: IRS 2007 R2
7 Note: Media=TV+Print+Radio+Cinema+Internet
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Implications on Media Players
To summarize, media players are looking at a diverse set of target groups for sustaining a higher growth rate and hence need to practice effective consumer segmentation and targeting to reach these audiences. Tremendous media growth opportunities lie in significantly untapped target groups of population in smaller town and rural India, as well as amongst lower socio economic classes. Since the economic profile and media consumption habits of these people are different from that of the conventional consumers of the media companies, there is a need to target them in a different way. These consumers want content that is relevant to them, in a language that they are comfortable with.
Regional Trends in TV
In the TV sector, both national level broadcasters like Star and Zee, as well as regional level players like Sun and Raj continue to invest heavily to provide more content choices to the audiences which prefer languages other than Hindi and English. Regional content assumes special significance in the South since it accounts for the largest proportion of TV viewing households in India (about 32 percent8). Regional language channels account for 35 of the top 100 shows on television according to TAM Peoplemeter data for the week beginning 18 January, 2009 to 24 January, 20099.
8 Exchange4media.com 9 Indiantelevision.com
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One likely impact of the increase in consumption of regional content on television could be an increase in the value of library content of national broadcasters. Any broadcaster with a good content library can have it dubbed in other languages for broadcast. This has two advantages; first, the production cost is much lesser than building the content from scratch, and second, the risk is minimized as the content has already proven been successful in another language.
Domestic Content Syndication – A significant opportunity for ancillary revenues
Channels such as Zee, Star and Sahara already have syndication deals in rich Non-Resident Indian (NRI) concentrated countries such as the U.S. and the U.K. However, it’s the domestic syndication market that is now beginning to catch on.
New GEC entrants such as NDTV Imagine are betting big on syndication with dubbed versions of its top show – Ramayana - being aired on the South Indian channels - Gemini TV in Andhra Pradesh, Sun TV in Tamil Nadu and Surya TV in Kerala.
This could add directly to the bottom-line as the costs involved for dubbing the existing library content into other languages are relatively low.
In fact, creative teams of various channels are now actively conceptualizing shows with the goal that they should be able to generate multiple syndication opportunities.
However, as a whole, domestic syndication still remains a relatively unexplored area in Indian television. Therefore, over the next few years, as producers look to maximize their revenues by repurposing content, domestic syndication is likely to offer them a strong revenue potential.
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Hindi Powerhouses expand their regional presence
Given the over crowding and the resulting fragmentation in the Hindi segment with the spurt in the number of GEC and other channels launched in recent times, it has become even more important for the broadcasters to diversify their risk by exploiting the full potential of the regional segment. Hence in recent times, several regional channels have been launched by the established players of the Hindi broadcasting industry.
Regional Channels of National Players
Mainstream Player Existing regional channels (before 2005) New regional channels
Zee Gujarati (GEC) Zee Telugu (GEC) Zee Marathi (GEC) Zee Kannada (GEC) Zee Zee Bangla (GEC) Zee Tamizh (GEC) 24 Ghante (News) 24 Taas (News) Star Vijay (GEC) Star Mazaa (News) Star Star Ananda (News) Network 18 IBN Lokmaat (News)
Source: KPMG Analysis
Zee entered into the Tamil GEC space in 2008 with Zee Tamizh - this is the one of the most competitive market in the South right now with the domination of Sun TV. Zee already has Kannada and Telugu GECs. The channel further strengthened its presence in the Bengali market by acquiring 26 percent stake in Sky B (Bangla) Pvt. Ltd., the company which runs Bengali infotainment channel Akaash Bangla, in November 200810. Previously it had acquired a 60 percent stake in Bengali news channel 24 Ghanta from Sky B.
10 “Zee News India acquires 26% stake in Sky B”, Business Standard, November 2008
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The Star network too has ambitious plans for expansion in the South Indian market and has formed a joint venture with Jupiter Entertainment called Star Jupiter to target south Indian audience. Under the agreement Star Jupiter will have a majority stake in Asianet Communications Limited (ACL) which currently broadcasts channels in Kannada (Suvarna), Telugu (Sitara) and Malayalam (Asianet, Asianet Plus).11 Vijay, the Tamil language general entertainment channel, currently operated and owned by Star, is also to come under Star Jupiter.
Reliance ADAG is planning a simultaneous foray into the regional and Hindi broadcasting space. The company intends to launch a bouquet of regional channels along with the launch of its mainstream Hindi channels.
For a new entrant into regional markets, it’s important to identify which regional markets offer the greatest opportunity.
Evaluation of Regional Market Opportunities
Parameter Gujarati Marathi Punjabi Kannada Tamil Telugu Malayalam Bengali
Size of target audience
Purchasing power of target audience Advertising size and revenue potential
Number of players present in the space Source: KPMG Analysis * The table presents a snapshot of the situation as on October, 2008. The parameters like the one Key: relating to competition are constantly subject to change with number of new regional channels being launched every year. Therefore, these must be re-evaluated frequently. - least favourable - Slightly favourable
- Moderately favourable In general, the basic strategy followed by new entrants in the regional markets is to first establish their presence in the regional market through a GEC, a news - Highly favourable channel and a movie channel before getting into more niche categories. Sun, the - Most favourable leading channel in South India, has followed the same strategy in the past.
11 “STAR Jupiter to hold majority stake in Asianet”, The Economic Times, November, 2008
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Growth of niche channels in Regional Markets
The regional market itself is getting sub-segmented as it gets more mature, and increasingly the advertisers are also beginning to differentiate. Consequently, the well established regional players are now targeting niche channel segments to further augment their network viewership. Sun TV’s Tamil kids channel Chutti TV has been quite successful and it has plans to launch kids’ channels in other South Indian languages as well. Raj TV has added Raj News to its Tamil network with an estimated investment of INR 200 million, adding to its Tamil general entertainment channel Raj TV, music channel Raj Musix, and Raj Digital Plus. Raj is also planning music channels in Telugu, Malayalam and Kannada.12
Some Niche channels of Regional players in South India
Genre Channels of Regional players Language
Sun Music Tamil
SS Music Tamil, Telugu, Kannada, Malayalam Music Gemini Music Telugu
Udaya 2 Kannada
K TV Tamil Movies Teja TV Telugu
Sun News Tamil
Jaya Plus Tamil
Raj News Tamil
Kalaignar TV Tamil
Mega TV Tamil
TV9 Telugu
ETV 2 Telugu
NTV News Telugu
News TV5 News Telugu
Gemini News Telugu
Asianet News Malayalam
Indiavision Malayalam
Manorama News Malayalam
People TV Malayalam
TV9 Kannada
Suvarna Kannada
Udaya Varthegalu Kannada
Kids Chutti TV Tamil
Source: CompanyWebsites, Press Releases KPMG Research
12 Indiantelevision
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Regional News rules the roost
News, clearly, the focus area is on the regional niche segments, with as many as 17 news channels catering to the 4 regional language markets in South India (as of September 2008). The growth in the regional news market has been exceptional over the last three years. The advertising volume on regional news channels (including Marathi, Bengali, South Indian) in 2006 was 17,682 seconds. The amount virtually doubled in 2007 to touch 31,167 seconds.13
Apart from the subcontinent, these channels also have viewership in Sri Lanka, China, the Middle East, th U.K., Canada, Europe, Australia and parts of South Africa and the U.S. because of tsignificant presence of Indian origin population in these countries, especially those from South India.
The other big regional markets are Marathi and Bengali. The Bengali market has an added advantage that channels targeting West Bengal are also watched in neighboring Bangladesh, making it lucrative for broadcasters.
Niche news channels are not the only focus of regional players; they also continue to expand their presence in the southern GEC market. Asianet launched its Telugu GEC Sitara in October 2008. It already has GECs in Malayalam and Kannada.
Regional Trends in Cinema
India is one of the biggest movie markets in the world with over a 1000 movie releases every year. While the mainstream commercial cinema might be dominated by the Hindi language, Indian states too, have their own production Market Share by number of releases houses.
South Indian Cinema Market
South India is a big market in terms of number of movie releases. The four southern states comprising of Andhra Pradesh, Tamil Nadu, Karnataka and Kerala together account for over 50 percent of the total films released in India.14 After Bollywood, Telugu film industry, referred to as Tollywood, is one of the biggest in India in terms of the number of movies produced and released per year. About 200 films are made every year of which around 20 are the big budget films15- typically big banner films with the best star cast, relatively better quality Source: Central Board of Film Certification, of shooting and typically and socially acceptable themes. A big budget film KPMG Analysis typically has a budget of about INR 120-200 million, with around INR 30-40
13 Brand Reporter 14 KPMG Analysis 15 KPMG Interviews, Cental Board of Film Certification
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million each paid as remuneration to the leading actors and director of the film. While a budget film has a production cost of about INR 40 million, smaller films have a budget of around INR 10-30 million16. Apart from Telugu, Tamil, Kannada, Malayalam, Marathi and Bhojpuri are some of the other important regional languages in which films are made in India. The budget of these regional films are very small as compared to Bollywood, where the production costs of big budget films range between INR 300-600 million. The average time to market for a big budget Telugu Film is 10 months as opposed to 15-18 months taken for a Bollywood film.17
Opportunities in Exhibition
In the exhibition space too, the uneven geographical distribution of the theaters in India gives the four southern Indian states an advantage. Andhra Pradesh, Kerala, Karnataka and Tamil Nadu together account for about 60 percent of the total theaters in the country, while housing just 22 percent of the population18. This provides a canvas for wider film releases there. Further, with mall development activities picking up in the southern region, multiplex players have also started to foray into the southern market. Companies like Pyramid Saimira have made investments to acquire and upgrade single screen theaters in South India. Going forward, the aggressive plans of the multiplex players to expand their presence in the southern market is expected to increase the average ticket size and improve the collections of regional movies, thus providing a further boost to regional cinema in the country.
Corporatization of Regional Cinema
Given the huge market potential as well as cost advantages, the regional film industry has also started to attract the attention of leading players from the Hindi film industry. For instance, in 2007, Adlabs released their first Tamil film ‘Kireedam’, which was a joint co-production with Sujatha Cine Arts. Eros International acquired a 51 percent controlling stake in Ayngaran, a Tamil home video and distribution arm. UTV also entered the Telugu film sector with a deal for two movies with Mahesh Babu, one of the biggest Telugu film stars; and a co- production deal with Indira Productions for two Telugu films. The company also acquired Andhra Pradesh theatrical distribution rights to “Atidhi”19. 2008 saw more such investments. Ultra, whose core business lies in acquiring and marketing of home video rights of Bollywood films, forayed into regional cinema by announcing plans of investing INR 200 million for producing and distributing Marathi and Gujarati films. Reliance Entertainment also made an entry into the Kannada film industry by signing two film projects there. Reliance’s music label- Big Music-also acquired the music rights of two Kannada films20. These
16 Industry 17 Industry 18 Film Federation of India 19 Company Website, Press Releases
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developments augur well for the industry, and are gradually ushering in an era of corporatization in the regional industry, a la Bollywood.
With the availability of funds, many of these regional films are now being released on a scale comparable to Bollywood, and as a result earning relatively more in theatrical revenues. The Tamil film ”Chandramukhi” grossed INR 800 million on box office. Another Tamil blockbuster “Shivaji: The Boss” was released in 800 cinemas across the country.21 Many of the leading artists from Bollywood are also working in regional films. South has always been a popular destination for Bollywood directors and actors; other cinemas have also started picking up now. Leading Hindi film industry stars like Amitabh Bachchan and Ajay Devgan have acted in Bhojpuri films. This has further changed the perception of regional cinema in the eyes of the audience.
Way Forward
Industry players agree that the main problem plaguing regional cinema is not the absence of quality content or talent pool, but lack of effective marketing and promotional activities. Establishing organized industry forums can help regional films do much bigger business. The Government can also help promote regional cinema by providing a level playing field. For instance, in Andhra Pradesh there is a price cap of INR 100 on ticket prices as well as a restriction on the screening of more than 4 shows per screen. This hampers the growth of organized exhibition players. Removal of such restrictions can go a long way in promoting the industry. Industry players also need to take up these issues in appropriate forums for the development of regional cinema in the country.
20 Company Website, Press Releases 21 Regional Cinema – Needed, efficient marketing & promotion” Exchange4media, March 2008
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Regional Trends in Print
Readership-Dominance of Regional Players
The Indian Print industry is highly fragmented. Hindi language newspapers comprise 44.6 percent, while English language newspapers comprises of a mere 7.4 percent of the total registered dailies.22 Hindi is the most widely known language followed by English, Marathi, Tamil and Telugu23.
The market has seen newspapers rolling out editions and providing region focused content in an attempt to increase circulation. This is because of the increased significance of regional media in recent times. Readership and circulation is directly correlated with literacy levels, which have increased from 62.5 percent in 2002 to over 73 percent in 200724. Moreover, 69 percent of India’s population is rural25. With faster literacy growth rate in rural areas, print media circulation is likely to grow faster in regional print. Moreover, both the readership surveys, Indian Readership Survey (IRS) and National Readership Survey (NRS), have reiterated the dominance of language publications over those of national publications over time. The readership figures of IRS 2008 Round 2(R2) survey goes on to strengthen this fact. Times of India (ToI) is the only English newspaper among the top 10 dailies in India. Out of the total readership of the top 10 daily newspapers each in English, Hindi and Vernacular category, English gets the least readership share at 11 percent26.
Total Newspaper Readership in India
Source: IRS 2008 R2 Survey, KPMG Analysis
22 Registrar of Newspapers in India 23 IRS 2007 R2 24 NRS,IRS 25 Census 26 IRS 2008 R2 © 2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. Allrightsreserved. 95
Even in magazines, only 1 among the 10 most read Indian magazines belongs to the English language. Total Magazine Readership in India
Source: IRS 2008 R2 Survey, KPMG Analysis
Readership figures clearly show consumer preferences for regional press. Hindi is the most read language in the country followed by Tamil, Malayalam and Telugu.
Brand Extensions by National Players in the Regional Segment
Sensing the immense potential of regional players, established national players are leveraging their brand value to enter into the regional space and have chalked out aggressive plans in the regional space. HTML announced plans to launch revamped version of Hindustan in 200827. The Times Group, after having launched a Gujarati version of its business daily ‘Economic Times’ in 2007, further introduced a Hindi version of the same in 2008. Its competitor Business Standard also introduced the Hindi edition of its financial daily in the same year28.
Rapid Expansion by existing players
The regional print space has also witnessed a huge flurry of new launches with established players leveraging their existing strengths to roll out into newer geographies, which are otherwise dominated by a few highly entrenched players. For instance, Dainik Bhaskar launched six editions in Chhattisgarh; Bhilai, Jagdalpur and Ratlam in Madhya Pradesh and strengthened its North India presence with launches in Punjab, Haryana, Chandigarh; Shimla in Himachal Pradesh; and Pali and Nagpur in Rajasthan. Hindi daily Hari Bhoomi launched its Jabalpur edition in October 2008.29
Further, like their national counterparts, players are expanding their brand portfolio by venturing into specialty genres. For example, Dainik Bhaskar launched its Hindi financial daily, Business Bhaskar, in June 2008. Business Bhaskar, in turn went into an expansion drive for within a month of its launch the daily had 13 editions spanning Madhya Pradesh, Chhattisgarh, Punjab, Haryana and Chandigarh.30
27 “HT Media announces launch of Hindi daily”, DNA, May 2008 28 Company Website, Newswatch.in 29 exchange4media 30 exchange4media
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Regional players going National
With success achieved in their respective markets, regional players are gradually targeting higher Socio-Economic classes in larger towns as well to increase their national reach. One of the ways adopted for the same is diversification into the English segment. For instance, the Jagran Prakashan (JPL) group launched a compact bi-lingual daily i-Next in Lucknow and Kanpur, targeting SEC AB readers of 18-35 years of age.31 The newspaper uses a combination of Hindi and commonly used English words keeping in mind the spoken language of the targeted group in mini-metros.
Similarly, the Dainik Bhaskar group has also built up a portfolio of brands comprising of Dainik Bhaskar, Divya Bhaskar, DNA, Business Bhaskar launched in 2008 and DB Star-the latter 2 also launched in 2008. In early 2008, the Dainik Bhaskar Group also launched a fortnightly weekly magazine titled ‘She’ for women.32 The magazine was primarily targeted at women in SEC A and B category in Madhya Pradesh, Chhattisgarh, Rajasthan, Punjab, Haryana and Chandigarh. Sakaal Group, publishers of the Marathi Daily Sakal, launched the English daily Sakaal Times in Pune in May 2008.
The other way by which players are planning to expand their national reach is through launching editions from big cities like Delhi and Mumbai. Deshbandhu, one of the oldest newspapers in Madhya Pradesh and Chhattisgarh, launched its national edition in Delhi in April 2008.33 Besides being made available in Delhi and NCR, circulation was also meant for selected cities in Bihar, Uttar Pradesh, Himachal Pradesh, Uttarakhand, Haryana, Punjab and Rajasthan.
Narrowcasting in Regional Space too
Like their English counterparts, regional players are also moving towards narrowcasting. The first example is an increase in the number of supplements offered by the players. For instance, Naidunia offers six supplements to capture niche readers. Fortnightly supplements “Sehat” and “Spectrum” cater to health and children. A supplement for women appears every Wednesday and one on careers every Thursday. The supplement on Friday covers glamour, movies, TV and fashion. In addition, there is a regular Sunday features supplement.34
There were instances of launching niche magazines as well. The ToI group launched a monthly health magazine titled ‘Jeevet Sharad Shatam’, on May 2008.35 The niche magazine is targeted at 40- plus women.36 The content includes clinical issues related to women and general health remedies.
In the newspaper space, the regional sector has also witnessed the emergence of tabloids. Hindi afternoon tabloid DLA was launched in Agra in May 2007.37
31 exchange4media 36 exchange4media 32 exchange4media, Company Websites 37 exchange4media 33 exchange4media 34 exchange4media, Company Website 35 exchange4media, Company Website
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Since then, it has also launched four similarly priced editions in other cities. Increasing competition reducing cover prices
Aggressive competition in the regional print media space has resulted in an inevitable price war. The enhanced competition, in turn, resulted in an inevitable price war. Since players are venturing into each other’s geographic turf, the market is getting fragmented and established players in a particular region are reducing their rates as a strategy to retain their circulation base. One illustration was to be seen in June 2008 in Dehradun, when leading players there- Amar Ujala, Dainik Jagran and Hindustan- reduced the cover prices of their respective editions by INR 1; price of all the 3 newspapers fell from INR 3 to INR 2. Similarly, when ToI entered the Chennai market, existing players responded by reducing their prices to counter the increased competition38.
Localization of Content in Newspapers
Traditionally, the extent of national and regional coverage in the Indian Print Media has been far greater than local news. The situation seems to be changing now with newspapers, both national and regional, increasing the coverage of local and regional news.
As means of overcoming of space constraint in the main issues, players have increased the number as well as frequency of city centric supplements. The main issues of most national dailies have been carrying daily supplements like a ‘Delhi Times’ or ‘HT City’ in the metro towns. But with smaller centers and towns also emerging as significant centers for media consumption, players have started extending supplement issues to these towns as well. Hence, supplements like ‘Gurgaon Plus’ or ‘Patna Times’ have become a regular feature now.
As a large scale extension to the concept of supplements, players have leveraged the distribution power of their mother brand to launch full fledged new city centric newspapers. Times Group’s ‘Mumbai Mirror’ and the HTML-BCCL promoted ‘Metro Now’ are some of the pointers in this direction. The strategy is mostly a defensive one since in most cases; the aim is to prevent the exodus of subscribers from the main group in the face of increasing competition. But the very fact that national players seem to take recourse to the localization strategy for retaining their market reiterates the increasing power of local content.
Some new players have also emerged who tend to concentrate purely on the local market. One example being the English Language Compact “Deccan Post”, which was launched in the twin cities of Hyderabad and Secunderabad on February 200839. Essentially a Hyderabadi Weekly, the publication was meant to reflect the typical ”Deccan” culture, tradition and cuisine; essentially an “out and out” local newspaper. Similarly in the magazine space, Premier Entertainment &
38 “TOI’s launch all set to heat up Chennai”, Livemint, April 2008 39 exchange4media 40 exchange4media
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Media Pvt. Ltd. unveiled “Bangalore Happenings”.40 As the name itself suggests, the magazine was targeted at providing a comprehensive city guide of Bangalore, its hotels, restaurants, spas, resorts, bookstores, music stores, cultural institutes, airport and places of tourist interest.
Hindi and other vernacular dailies are perceived to be more local friendly as compared to their English counterparts. That is the reason why regional advertising is growing at a relatively faster pace. Of course, with his enhanced aspirations and increased purchasing power, the rural consumer has also become the new target group of the marketers. With that, advertisers have realized the need for local campaigns and hence media planners are finding the regional media attractive to reach the local consumers. Newer and localized sectors such as education, retail, and jewellery are tapping into this market. Newspapers, through their classified sections, have traditionally been the popular choice of these sunrise sectors. Now with the increasing market segmentation and the focus being on micro-customers, city specific editions and customized local content, newspapers are gaining more favor among these sectors.
Advertising: The primary driver behind the scenes
Interestingly, for all the heated action in regional print media, the activities of the players are advertising driven. Geographical expansions and brand extensions enhance the ability of the players to derive synergies from common editions and as a consequence, build brand equity. Hence, players can offer the benefits of Ad-bundling to the advertisers. Advertisers remain the primary reason behind the players increasing their color proportion and investing in quality improvements; customers are the means through which these brands attract advertisers. Print has always been a high volumes game and low pricing game, with the cover prices insufficient to recover total costs. Hence these players are highly dependent on advertising to recover their costs and improve margins. Traditionally Hindi and other Vernacular dailies used to have higher cover prices than their English counterparts. However, with the regional market also getting fragmented, players have dropped average cover prices to improve circulation, and hence there is the need to improve the look and feel of the paper in order to provide value for money to the advertisers.
At the prevailing advertising rates, an English reader is valued 9 times more than a Hindi reader and 13 times over a vernacular reader. The language garners only a 25 percent share in circulation while still accounting for 48 percent share in advertising.41 This anomaly is expected to get corrected and the difference in Advertisement rates between national and regional press is expected to come
41 “TOI’s launch all set to heat up Chennai”, Livemint, April 2008
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Per Reader Economics for Newspapers
Language Advertising Circulation Total
English 2099 728 2827
Hindi 233 208 441
Vernacular 157 203 360
Premium of English Over Hindi 9.0x 3.5x 6.4x
Premium of English over Regional 13.4x 3.6x 7. 9 x down as the regional media begins to get its due importance. Source: ICICI Securities
Implications- More Monetization of Regional Media
Growth in Regional Advertising
The consumer shift towards regional media is borne out by the growth trends in regional advertising. Until some time ago, there was a substantial mismatch between the viewership/readership numbers and advertising revenues for the regional media players. The regional media seldom got their share of advertising revenues congruent to the viewership or readership numbers. All that is changing now and the gap between the share of advertising revenues and viewership is decreasing, resulting in higher revenues for regional media.
Media planners find the regional media attractive for a number of reasons. Especially in TV the share of regional advertising on television is substantial. According to AdEx India, during 2008, national and regional channels were used in an advertising ratio of 58:42. Share of Advertisement Volumes in 2008
Source: TAM Adex
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The growth in regional advertising today, is quite significantly, by new advertising sectors such as education, hospitality, real estate and jewellery – which often are mostly local brands and therefore advertise through local advertising campaigns.
Going forward, as the importance of regional media grows across the M&E sub sectors, the difference in the advertising rates between the national and regional media is expected to narrow down further and hence advertising spends are expected to be much more evenly spread between the two media. For the media companies this is likely to mean an increasing focus on innovation and customization to create specific content for regional media audiences.
Sector Effects of Regionalization Implications
• Rapid growth in the number of regional • Demand for regional content is likely to channels continue to grow and even Hindi content • Consistent rise in Advertising revenue houses may increase exposure to regional share of regional channels in the total TV content development to exploit the advertisement pie growing demand • National Broadcasters venturing into • As regional markets begin to saturate, regional space by launching regional there might be need for a careful TV channels evaluation of market potential of a • Regional players strenghtening their particular region before launching a new product portfolio by launching niche channel channels • Enhanced significance of library content • Launch of city centric channels by national because of the ability to dub good content players and exploit it in different languages. Need for proper valuation of the library content.
• Improving collections of regional cinema • Need for the regional industry players to due to expansion of multiplexes organize themselves and get themselves • Trend of corporatization picking up, with heard in appropraite industry forums Bollywood players venturing into regional • Quality of regional cinema is likely to cinema improve due to infusion of funds • Cross Pollination of talent between • Players to enhance their production costs Film Bollywood and Regional Cinema to attract new talent as well as match international standards • Imperative for players to enhance marketing spends to match the popularity of Hindi Cinema, both within the country and abroad.
• Increased competition due to both national • Need for evaluating market potential and regional players venturing into each before expanding into particular territories other’s territories • Advertising revenues to further grow for • Established players expanding their Hindi and regional players, leading to need product portfolio by adding new languages for more effective targeting of advertisers Print • Competition leading to reduction in cover and efficient advertising inventory prices, and thus leading to price wars utilization • Rise in the number of supplements due to • Imperative for players to effectively locally relevant content gaining in monetize the supplements. significance
© 2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. Allrightsreserved. Digitization
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Digitization
Digitization has also been a focus area for TRAI for the past Introduction two-three years and it is with this goal that it has brought in
Digitization of media is playing a major role in transforming regulations to pave the way for Conditional Access System the face of the Indian entertainment and media industry. (CAS), DTH, HITS and IPTV.
In Television, advent and increasing penetration of digital delivery platforms implies a multi channel and multi Increasing Penetration of Digital Delivery distribution platform, alongside an addressable system for Platforms the broadcasters. Digital solutions in Filmed Entertainment have helped the producers to reach relevant audience and One of the most important developments in the TV increase the number of prints without additional costs. The distribution industry has been the introduction of mandatory music industry is bullish on digital music platforms offsetting CAS by the government in specified areas of Delhi, Mumbai the decline in physical sales in outdoor media, the players and Kolkata since 2007. However, the system has met with are now gradually shifting from traditional hoardings to other limited success. The adoption rate of set up boxes in the forms of outdoor advertising such as digital signages like CAS mandated areas was around 38 percent in these 3 1 LED’s and LCD screens. Digitization is thus transforming the cities on a combined basis by the end of 2007 . Since a set industry across sectors. up box is not required to view Free to Air (FTA) channels, many of the households have actually opted to receive only FTA channels2. However, for the first time consumers in Digitization in TV these 3 cities got a say in what they wanted to watch and pay for (CAS had been introduced in Chennai earlier from The Indian TV distribution space is evolving fast.Past three- September 2003 onwards3). four years, we have seen the Conditional Access System being introduced which gave the necessary impetus to It is actually the entry of DTH players that has given a strong digital cable, the advent of 5 DTH players which together are push towards the digitization of TV distribution. One of the expected to have garnered 10 million subscribers by the end reasons for the high penetration of DTH vis-à-vis digital of 2008, and the commercial launch of IPTV. cable is the high adoption of DTH in rural areas. This is mostly owing to the penetration of DD Direct+, a Free to Air (FTA) DTH service provider, in these areas. As a result, total
1 TAM Media Research 2 TRAI 3 “Conditional Access System – Wait for a clearer picture”, The Hindu Business Line, September 2003
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number of digital homes in Rural India, at 6 million, was Sky, Sun, Big TV and Airtel Digital TV. There is an aggressive more than three times that of Urban India which stood at 1.8 marketing push by the new players, which is likely to million households as of August 20074. expand the DTH market in a big way. Cable networks, facing the heat due to competition from DTH players with Number of Digital TV Households in India ambitious growth targets, seem to have realized the need to digitize and to grow to a bigger scale if they want to survive. Multi System Operators (MSOs) are going into a digitization drive to upgrade their networks to a digital format. Consolidation of MSOs is also under way. For instance, Hathway is taking the inorganic route for expansion. In March 2008, it acquired a controlling interest in two mid- sized cable TV companies as part of its strategy to expand its footprint and limit the challenge of new MSOs entrants5.
Source: IMRB and TAM Study and Estimates Another MSO, Digicable Network (India) acquired a 51 percent stake in Kolkata-based CableComm as part of its Digital Divide between Rural and Urban India strategy to expand in the eastern region of India in June 20086.
With TRAI recommending 100 percent mandatory cable digitization within the next 5 years7, the digitization and consolidation trend among MSOs is expected to continue in future. Total number of Digital Pay TV households (including digital cable, DTH and IPTV) in India is projected to grow at the compounded annual rate of 35.4 percent to reach 71 million by 2013, or about 56 percent of the total Cable and Source: IMRB and TAM study estimates, KPMG Analysis Satellite Households in India. Share of subscription revenues Digital penetration shot up further in 2008, especially due to coming from digital platforms is likely to be even higher at increased competition in the Pay DTH space. With the entry about 64 percent on account of higher ARPUs in digital of Reliance Communications and Bharti, there are currently distribution8. five private players operating in this segment - Dish, Tata
4 IMRB and TAM Study Estimates 5 “Hathway acquires 51percent in Bhaskar's cable TV arm and Gujarat Telelinks “, Indiantelevision.com, March 2008 6 “Digicable acquires 51percent in CableComm”, Indiantelevision.com, June 2008 7 “TRAI sets 5 year timeframe for digital cable TV”:, The Hindu Business Line, July 2008 8 KPMG Analysis, KPMG Interviews
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Although in terms of absolute numbers, cable is expected to exhibit a small growth, reaching 90 million subscribers from about 72 million now, in terms of market share, it is expected to fall from about 84 percent now, to 71 percent by 2013, in face of stiff competition from attractively priced and aggressively promoted DTH and IPTV services9. A strong growth driver for DTH and IPTV is also likely to come when CAS is implemented on a larger scale across Indian cities, as has been suggested by TRAI. Consumers, who had been sticking to analogue cable simply out of inertia, may then be forced to make a choice between either CAS based digital cable or DTH or IPTV.
Pay TV Household in India
Source: KPMG Analysis, KPMG Interviews
DTH – Stiff Competition keeps ARPUs low
India being a price conscious market, has helped ensure that players here have had to compete with each other on the basis of price.
Sun Direct, the new entrant in the DTH in the beginning of 2008, was able to garner 1 million subscribers in 200 days from just 4 southern states with a low subscription pricing model. The network launched 4 regional basic tiers consisting of over 100 plus channels specific to each southern state (Tamil basic, Telugu Basic, Kannada Basic and Kerala basic) at the rate of INR 75 per month. In addition it launched add on packages starting from as low as INR 1010.
Following this, Dish TV also slashed its setup box price. A new Dish TV connection in South India was available for INR 1990 (plus INR 200 as installation charges) from the earlier INR 2950 (plus INR 200)11. Tata Sky too dropped its set-top box (STB) price by 50 percent to INR 149912.
9 KPMG Analysis, KPMG Interviews 10 “Dish TV to take on Sun Direct”, Indiantelevision.com, July 2008 11 “Dish TV to take on Sun Direct”, Indiantelevision.com, July 2008 12 “Tata Sky slashes set-top box prices by 50percent”, Indiantelevision.com, February 2008
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Reliance Communications and Bharti Airtel entered the DTH segment in August and October 2008 respectively. Like other players, both of them offer multiple entry as well as multiple subscription packages.
In a highly competitive market, it’s difficult for any player to keep prices significantly higher than others. At the same time, the players can’t afford to have subscription rates much higher than those of cable. Also, paid add on services such as video-on-demand are yet to truly take off in India and the demand for such services remains low.
As a result of these factors, the ARPU for DTH in India remains low at around USD 3-4 per month versus about USD 21 for most of the big DTH players in Asia Pacific and between USD 60 to 80 in U.S., U.K. and Australia.13
Although competition in the Indian DTH market is likely to keep the DTH ARPUs low in the short term, in the medium to long term we think it is likely that ARPUs may pick up as add-on services will catch up in India as the consumer becomes better prepared to pay more for better quality of services.
ARPU for DTH Services
Source: KPMG Analysis
“Digitization is not something that suddenly happens one fine day. It is already happening and will continue to permeate increasingly in every aspect of the media business causing a multi-dimensional impact. Media organizations have the choice to either lead digitization or be led by it. At the same time, the challenge for the media sector as a whole is to help shape an economically sensible and sustainable digital environment that is value-additive rather than value-destructive for the sector as a whole.” Anuj Poddar, Sr. Vice President – Strategy & Business Development, Viacom 18 Media Pvt. Ltd.
13 KPMG Research
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Pay TV ARPUs – India vs. Rest of the World
The average pay TV ARPU in India, at around USD 4, remains low by global standards, coming in the second last position among the major Asia Pacific nations.
Pay TV ARPUs (USD)
Source: Credit Suisse, KPMG Research
However a more careful analysis based on ARPUs as a percentage of per capita income, indicates that India is placed somewhere in the middle among these nations.
Pay TV ARPUs as Percentage of Per Capita Income
Source: Credit Suisse, KPMG Research
Therefore, no significant “correction” in the ARPU is expected in the near future. However, as discussed earlier, we do think it is likely that ARPUs start picking up from 2010 onwards, largely on account of increased usage of add-on services associated with digital distribution mediums (Digital cable, DTH and IPTV) as well as a cooling down of the highly competitive environment in TV distribution that exists today.
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IPTV takes off
The Aksh-MTNL foray into IPTV services in Mumbai and Delhi have taken commercial IPTV services a step forward in India. This was followed with an Aksh and BSNL joint venture for IPTV services in smaller cities like Jaipur and Jodhpur. These IPTV services have been set at very attractive levels with subscription charges varying between INR 100 and INR 200 per month (depending on the city). The setup box is free and available against a refundable security deposit of INR 99914. At such price points and with unique features like time shifted viewing (a viewer is able to see any programme telecast in the last few days at a time of his convenience), IPTV is competitively priced with other distribution services – Cable and DTH. However, the quality and reliability of the service provided continues to be an issue and has inhibited good adoption rates till now15.
In January, 2009, Bharti also announced its foray into the IPTV segment. It offers triple play services (land line + broadband + IPTV) at INR 999 per month after a one time installation charge of INR 399916.
Triple Pay opportunity for Indian Telecoms
The average pay TV ARPU in India, at around USD 4, remains low by global standards, coming in the second last position among the major Asia Pacific nations.
Revenue break-up in triple pay services
Service ARPU (in INR)
Landline 200
Internet 400
IPTV 200
Total 800
Source: Industry, KPMG Analysis
In this break up, the IPTV ARPU has been assumed conservatively but if add-on services such as video-on-demand were to take off in India, the average ARPU from the IPTV segment could be significantly higher.
14 Icontrol.in 15 Industry 16 Airtel.in
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HITS: A new growth opportunity
The other new technology, that is being looked at positively by TRAI is Head End in the Sky (HITS) because of the acceleration it can bring to the spread of both digitization and conditional access in India.
HITS is similar to DTH services; in both these platforms of digital cable, channels are distributed at one go through a satellite. But unlike DTH, where the end-user is the consumer, the HITS end-user is a cable operator, who then delivers the signals to the end consumers.
Once I&B Ministry comes out with detailed regulations for the sector, many new players are likely to enter the market and start competing with the DTH, Cable and IPTV companies for a share of the Pay TV distribution pie. WWIL of the Essel Group is the only HITS licensee currently, although it is yet to begin commercial operations17.
Mobile TV: Television content on the Mobile screen
Mobile television refers to provision of television channels and content on portable devices such as mobile phones. This content can be same as that broadcasted on ordinary television or may be content specifically made for mobile phone viewing.
In 2007, Public broadcaster Doordarshan launched its mobile TV pilot with handset major Nokia and Samsung, on the DVB-H platform18. The service offered eight free channels, including DD National, DD News, DD Sports and services in some regional languages. In August 2008, state run telecom operator MTNL also launched mobile TV services. The TV service on mobile handsets 'MTNL-TV' is available in Delhi and the NCR for MTNL customers, and provides 20 channels at INR 99 per month19.
Industry players are bullish on the prospects of Mobile TV in India, the anticipated allocation of 3G spectrum services in India in 2009 is to allow live streaming of video content on 3G enabled mobile handsets. The stake holders, mobile service providers and television content providers are also likely to be looking at different business models for monetization of mobile TV and revenue sharing. Both fee- based and free, advertisement driven provision of mobile TV services are likely be experimented with. However, in the short term, mobile TV services in India are likely to have limited penetration as only a small proportion of mobile phone owners have handsets capable of live video streaming. Most of the 3G phones sold in India are in the INR 10,000 and above price range20.
17 “Wire and Wireless ready for HITS operations”. Economic Times, April 2008 18 “Doordarshan launches mobile TV pilot service”, Televisionpoint.com, May 2007 19 “MTNL launches MTNL-TV for mobile”, Techtree.com, August 2008 20 KPMG Research
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Digitization in TV – Advantageous for both Industry and Consumers
One of the prime potential benefits of digitization of television signals is in overcoming the bandwidth constraints of the analog networks. This has played an important role in driving the growth in the number of television channels. Digitization is also leading to a more organized and addressable distribution market. This is ultimately expected to increase subscription revenues for the broadcasters.
Increasing channel bandwidth through digitization
Most of the Cable TV Networks in India deliver TV channels in analog mode to the subscribers. In the beginning cable operators were able to show only 6-14 analog channels on their networks due to limited bandwidth. Since then, the capacity has been enhanced by extending the bandwidth of the Cable TV distribution system. From a bandwidth of 225 MHz in the early days of Cable TV, the networks has progressively enhanced their capacity to 300 MHz, 450 MHz, 550 MHz, 750 MHz and now to 860 MHz, which is the largest available bandwidth for Cable TV Networks worldwide. In the future this could get enhanced to 1000 MHz. The bandwidth of cable systems and maximum possible analog channels on such systems are given in the table:
Carrying Capacity of Bandwidths
Bandwidth(in MHz) Maximum number of Analog Channels
300 36
450 54
550 67
750 92
860 106
Source: TRAI
In metros, most of the cable TV homes receive 65 to 90 channels using a combination of optical fiber and coaxial cables. Such cable networks are being gradually introduced throughout the country. In fact, presently cable TV services in most of the cities serve up to 60 channels over a 550 MHz bandwidth. These networks typically cater to 5000 customers per head.
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The smallest Cable TV Networks in the country may typically deliver up to 30 channels over a 300 MHz bandwidth.
Since channel carrying capacity of the cable network even in its highest bandwidth slot of 860 MHz is just 106 channels, the only feasible option left to enhance the channel carrying capacity is digitization of network. A single analog video signal occupies 8MHz of bandwidth on the cable. By using bandwidth efficient digital modulation techniques such as Quadrature Amplitude Modulation (QAM), data rates in excess of 56Mb/s can be transmitted within 8MHz band. Using Motion Picture Expert Group (MPEG) compression techniques, a high quality video signal can be compressed into 3-4Mbps data stream. Therefore, by upgrading a cable plant from analog to digital TV transmission, one can achieve more channel capacity. The 800 MHz of available downstream bandwidth in a modern cable plant could, in theory, support over 1000 channels of video services with MPEG and other compression techniques.
In DTH services, the channel carrying capacity for all the existing service providers is at least 50 percent higher than the 106 channels upper limit for analog cable. The channel carrying capacity on DTH depends on two factors – the number of transponders and the digital compression technique used.
With MPEG-2 compression, around 12-15 channels can be carried per transponder. Therefore with 12 transponders each (as on July 2008), the 2 biggest DTH players in India – Tata Sky and Dish TV had maximum capacities of 150 plus channels. With MPEG-4 compression, the number of channels per transponder increases to more than 20. Thus, the recently launched Big TV DTH service by Reliance is offering 200 plus channels with its 8 transponders to start with.
Source: TRAI
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Access to more number and better quality of channels remain the top two reasons the consumers are opting for DTH technology.
Key Reasons for Consumers opting for DTH
Source: IMRB and TAM-S Digital Studies
These figures indicate that add-on features such as gaming and Video-on-Demand (VoD) are yet to catch up with the consumers.
As a result, for services like Movies on Demand, one of the challenges that the DTH players face is getting into revenue share deals as they can't pay high minimum guarantees. On the other hand, revenue share deals are not attractive for the content suppliers if they don’t see high volumes.
However, the industry continues to be bullish about the potential of add-on services to add to the ARPUs in the near future.
Apart from DTH and IPTV, these and other add-on services can be offered on digital cable as well. For instance in North America, which like India, is a cable dominated distribution market, about 50 percent of Internet connections are provided by Cable TV operators22 resulting in fierce competition between telecom operators and Cable TV operators providing various value-added services. Therefore, digitization of cable sector in India is also expected to enable a much wider scope for such services in comparison to what exists today and significantly increase the ARPUs for cable players.
We think that it is possible that such value added services offered by digital distribution players may pick up in India from 2010.
21 “TRAI proposal urges cable operators to digitize networks”, The Hindu Business Line, July 2008
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The Digital Consumer
The year 2008 was when Digital TV viewing in India came to its own. With increase in digital penetration and sample sizes in key markets crossing the reporting threshold, TAM started reporting digital households as a separate analysis target group from August 2008. This further reiterated the growing significance of Digital Households for the M&E industry.
A survey to measure the TV viewing habits of a digital consumer lead to the following conclusions:
1. A Digital Viewer watches more channels as compared to an analog one. This was measured by percentage of channels contributing to 80 percent viewing time
Number of Channels contributing to 80 percent viewing time
Target Group No of Channels
Digital Viewer 43
Analog Viewer 31
Source: TAM
2. Digital homes spend more time on TV.
Time Spent on TV per day No of Channels Target Group (minutes per day)
Digital Viewer 186
Analog Viewer 150
Source: TAM
A Digital viewer spends 25 percent more time on watching TV per day. Therefore, as digital TV distribution continues to increase its share in the C&S subscribers’ pie, one can expect a corresponding increase in the average TV viewing times as well.
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Digitization in Films
Digitization of Film technology is expected to change the face of “traditional” cinema business. Digital cinema encompasses every aspect of the movie making process, from production and post-production to distribution and projection. While investment in exhibition infrastructure is increasing theatrical capacity, digitization of distribution is helping filmmakers maximize revenues. In the global context, while digital cameras are nothing new, and post-production houses have been using digital equipment to edit and master movies and animation for some time, the all-digital distribution and projection of movies has only recently arrived to complete the chain. Over the past two-three years, such technologies have also made their presence felt in India. Indian film content is increasingly going digital with use of more graphics and visual effects. Besides, the distribution mechanism is undergoing a change with the advent of digital cinema, which envisages providing a high definition cinematic experience.
Use of Digital Technology in Film Making
Over the past two years, an increasing number of films in India have used the Digital Intermediate (DI) technology, whereby a film gets converted to digital format and affords more control of colors and images as well as room for the adjustment of image structure. Consequently, there has been increasing instances of use of computer graphics imaging, 3D animation and VFX technology in films. During 2008, Adlabs through a technology tie-up with Israel- based Cinema Park Networks (CPN), opened India’s first 6D entertainment center-The Cinema Park- in Agra. At present, the screening is meant for educational movies catering to foreign tourists, students and families. The technology-driven visual effects and acoustics of 6D combine strikingly real three- dimensional images with the senses of smell, sound, touch, motion and, above all, interactivity. This provides a unique cinematic experience to the viewer. If the concept is successful, more exhibitors and post production studios might be keen to go for usage of such advanced digital technologies in future.
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Digital Cinema –The Technology
Film Industry has witnessed the arrival of digital technology in cinema over the past two years. Digital Cinema replaces celluloid films with digital projection. Movies are filmed and then stored on digital media such as hard disks or servers. These are then distributed through physical media such as DVDs or are transmitted to digital cinema with the help of high-speed networks (satellite or optical fiber). At cinemas, these movies are beamed using special digital projectors.
This technology implies several advantages for the Film Industry. The theater server has the capacity to store multiple digital movies, thus allowing flexibility to run multiple movies even for single screen theaters. In addition, cost per copy of digital print-at INR 3,500-5,000- is much less as against cost per copy of physical print, which stands at INR 65,000-70,000 (excluding the cost of the projector)23. Moreover this streamlines the distribution of cinema through satellite technology to geographically remote places. This reduces the scope of piracy and more number of people get to see the original print in lesser amount of time. The industry thus, could derive significant economic benefits from the digitization process.
The Economics of Cinema Prints- How does Digital Cinema Help?
The Scene two years earlier….
Producing a Bollywood Film can cost anything between INR 20-600 million. Whatever the size of the producer’s wallet, there’s a cost that remains constant-INR 65,000-70,000 for making a single print. For 500 prints it works to around INR 30-40 million or around 20 percent of the total cost of big budget movies24. For a small budget movie, the cost of the same works out to be even more than the total cost of production!
In Hollywood, the dynamics are different. Budgets are so high that the cost of making 4,000 prints is generally, merely 5 percent of the total cost. So, it becomes easy for a distributor to carpet bomb cinemas with a new release and recoup investments on the first weekend. In India, however, to even attempt carpet bombing, a producer might need at least 1000 prints.
It is this cost that earlier used to compel low-budget filmmakers in India to create just about 50-60 prints. The big production houses managed 50025. Even with superb logistics in place, they used to at best, hope to reach out to 600 cinemas in the first week.
This inability to launch nationally in the first week lies at the root of Bollywood’s problem. Films are typically launched first in urban areas. After that the prints are shifted to second rung theaters. Later, they are shipped to what are called B and C class towns. By the time a movie hits these towns, it can take as long as five months. At the end of the day, producers and cinema hall owners lose because the economics of movie making don’t allow them to reach out to their audience ahead of the pirates. So revenues from the smaller centers and towns were almost non-existent for the filmmakers.
23 ufomoviez.com 24 India Brand Equity Foundation 25 India Brand Equity Foundation
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The Solution…Digital Cinema and how it could help
Digital Cinema, at its core, works on the principle of simply eliminating prints. Once a cinema hall signs up with a Digital Cinema Technology Provider, such as UFO or Real Image, it installs high end computers, digital projectors and a smart card with a password. The movie is broadcast via high speed satellite links to the cinema hall where it resides on the computer. The smart card comes programmed with licenses from the producer. So, if a hall is authorized to telecast a film 35 times over one week, it can do just that. At the end of 35 shows, the movie deletes itself—unless the license is extended.
The computer can store as many as 12 movies. For a single screen owner, it translates into an ability to screen different movies at different times. Rural India apart, it is the kind of thing that has given a new lease of life to single screen cinema halls even in big cities. In the past they had to stick to running a single movie. Now they have the flexibility to show different movies at different times.
Hence, cinema owners are more receptive to exhibit small budget films, and producers get the benefit of simultaneous theatrical window across the country.
The ‘Glocal’ Indian Model of Digital Cinema
Digitization has taken off in Indian Cinema due to the adapted technology that the Indian players have brought to India. In the western countries, mostly the D Cinema kind of digital technology has been adopted. D Cinema refers to digital screens adhering to system specifications as prescribed by Digital Cinema Initiatives (DCI). DCI standards help ensure a uniform and high level of technical performance, reliability and quality control, with the final cinematic viewing experience being better than the normal analog 35 mm films. Globally D Cinemas are the norm; they are the only format in which Hollywood Films are released today26. In India too, players such as PVR and Adlabs are making efforts to introduce the D-Cinema type of digital format screens in India
For all its advantages, the high end D Cinema comes out to be expensive for small centers theater owners in India. The cost of DCI approved equipment comes out to be USD 125,000 and the Hollywood model of upfront investment by theater owners renders this technology financially unviable for small scale cinema operators27. Further, the technology had to be rugged enough to take care of erratic and unstable electric supply and the dusty environments. Consequently, the Indian market evolved its own business model that has facilitated wide spread adoption of digital cinema.
Majority of the screens that have gone digital have not been sold the high end D cinema but the E-Cinema technology, which is about 10 percent poorer in quality but comes at about a third of D Cinema’s cost.28 Also in most cases, cinema owners do not have to make up front investments for cost of projectors and other infrastructure requirements; all the logistical arrangements are borne by the technological players, in return of revenue sharing arrangements.
26 “Multiplexes: Big picture ahead”, India Infoline, April 2006 27 “Multiplexes: Big picture ahead”, India Infoline, April 2006 28 “Multiplexes: Big picture ahead”, India Infoline, April 2006
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For instance, Real Image sells cinema system against a down payment of around 10 percent while UFO Moviez collects a fee per show (INR 200 from the distributors and INR 250 from the exhibitors) while retaining ownership of the systems29. Both get the rights for on-screen advertising, in some cases a bigger revenue component than digital cinema solutions. Thus, unlike Hollywood which views digital solutions as a quality investment device, digital cinema is more of a cost saving instrument in India, which explains the business model novelty.
D-Cinema vs. E-Cinema
D-Cinema vs. E-Cinema
Parameter D-Cinema E-Cinema
Quality Equal to or better than 35 mm Below analog quality Expensive Price Inexpensive (USD 20000-50000) (USD 1,00,000-1,50,000)
Developed For Cinema Market Video Market
Driver Quality Price
Source: “Multiplexes: Big picture ahead”, India Infoline, April 2006
Impact on the Film Industry
This ‘glocal’ model has led to an explosion in penetration of digital screens in India- the rate of adoption in India is higher than those in the developed countries. Players such as Real Images and UFO have equipped around 1800 theaters in India with digital technology and have aggressive expansion plans till 2010.30 At present, penetration of digital screens in India is higher than that in U.S.
Penetration of digital screens
Source: Credit Suisse, KPMG Research
29 “Direct to theater”, Outlook Business, May 2008 30 KPMG Interviews
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This has facilitated wider release of film prints, since movies now can be released both in big cities and smaller towns simultaneously. Some of the biggest hits of 2008 were released with relatively higher number of prints. In December 2008, the movie “Ghajini” was released with 1200 prints, the highest number of prints so far for a Bollywood film31.
Digitization has brought in a revolution in the way films are distributed and exhibited in India-The number of prints of recent hits that has been released in the digital theaters-over and above the ones released in non-digital format give another indication of the things to come.
Some Prominient Bollywood Releases in Digital Theaters Film Digital Theaters Singh is Kingg 415 Rab ne Bana Di Jodi 400 Sarkar Raj 372 Heyy Babyy 340 Tashan 322 Love Story 2050 320 Jodha Akbar 302 Bhool Bhulaiya 297
Source: UFO Moviez, " Films take the Digital Route to hit Jackpot", Times of India, August 2008
With the economic slowdown and the consequent focus on containing costs, we believe that digital cinema with its lesser recurring costs may gain even wider acceptance.
Advantages of Digital Cinema Wider release of films and reduction in time to Smaller centers in Tier 2 and Tier 3 towns can attract more audiences and charge market higher ticket prices. This restricts losses due to piracy and adverse reviews. Entails one time investment in cost of digital prints; cost per copy of print is much Savings in cost of prints lower than physical prints. Optical prints deteriorate in quality over time; digital prints retain their quality and Durability of Films hence pictures do not get distorted on transportation. A distributor thus does not have to spend on re-prints to provide quality in case a film does well. High definition content production software guards against piracy. Also, digital Reduces Piracy cinema reduces the theatrical window by facilitating simultaneous releases in smaller towns. This leads to higher theatrical occupancies, thus curbing piracy. Wider release of films promotes early recovery of investments- higher occupancy Improved Profitability results in costs getting spread over a larger patron base resulting in better profitability. Old classics can be re-released in digital format; this adds a potential new revenue Conversion of Old Films stream for the producers and/or copy right owners. Digital Cinema eliminates the cost of print. This means that even small budget and local language films can be produced and distributed widely at lower cost. Similarly, Promotes Parallel and Regional Cinema art films, which have a limited audience, can be shot in digital format and released digitally in select theaters, keeping the financial viability in mind.
31 “Why Ghajini is a lesson in PR”, DNA, December 2008
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The Indian Market displayed a great level of maturity in taking care of high investments and other related problems faced in developed countries like the U.S. Going forward, both D and E Cinemas are expected to co-exist in India, with a players advocating and promoting both these technologies. However, with the Tier 2 and Tier 3 towns emerging as next growth centers and India being a price sensitive market, E Cinema may have a higher rate of adoption, owing to its early head start and aggressive growth plans by players, at least in the short to medium term. By 2013, it is estimated that there might be around 7000 digital screens in India32. This is expected to result in higher reach of films and higher realization per film, thus increasing the financial viability of movies.
Digitization in Music
Music companies in India continue to digitize their music catalogues for licensed delivery of content over the internet and mobile. Digital music sales are now showing potential to offset the declining physical unit sales and drive growth of the industry.
Online Music Content
Music companies now offer their music library on multiple third party websites apart from their own website for a fee based download.
However the online music industry faces a major challenge in the form of illegal file swapping services. Extensive violation of copyright and digital stream ripping are hurting the industry hard.
Players have started to put efforts in addressing these issues. For instance, in 2007 T Series filed a case against YouTube.com and its parent company Google Inc. for infringement of their copyright; the company was successful in obtaining an interim restraint against YouTube and Google. In 2008 as well, the company filed a case against Yahoo Inc. and its Indian subsidiary Yahoo Web Services (India) Pvt. Ltd for infringement of their copyright caused by unlicensed streaming of T Series’ copyright works on Yahoo's portal33.
Growth in Mobile Music
Bulk of the digital sales in India comprises of mobile music and within this ringtones download occupies the dominant share.
In future, songs embedded in handsets are also expected emerge as a significant revenue stream for music companies. For instance, a handset may be offered with certain number full track downloads (the price of which is to be covered in the cost of the phone) with further options of downloading new songs for a fee.
32 Crisil – State of the Industry, October 2007 33 “T-Series continues fight against piracy”, Buzz18.com, July 2008
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Digital Formats in Outdoor Media
Over the past two years, digital formats in outdoor advertising like LCD and LED screens have gained wider acceptance. The year 2008 witnessed the introduction of new formats and technology in OOH, through international standards Bus Q, digital media introduction in housing complexes, cafes, restaurants, malls, office complexes, airports and in retail stores. Cost effectiveness and scalability are the two main advantages that digital billboards offer over the traditional formats in case of OOH advertising. Digital billboards are expected to expand the effective out-of-home inventory because multiple ads can be shown on the same display, generating many times the revenue of a traditional billboard. Further, with big cities like Chennai, Delhi and Bangalore putting a ban on street hoardings, players are betting on putting digital signages in malls for effective engagement of customers. Industry players believe that since hoardings and billboards alone may not be able to capture enough consumer attention, customer engagement has to come through interactivity.
However, Digital Media is yet to fully pick up in India. The current conversion rate from static to digital hoardings is 7-10 percent.34 There are two main pre requisites for the widespread adoption of Digital Media:
• Availability of suitable infrastructure
• Separate content for digital medium.
Most of the established players have already started to address these issues. There are currently around 10-12 players operating in the digital outdoor media space; many of them are in the process of setting up in house creative teams to design commercials especially for this medium. From 2011 onwards, digital formats are expected to dominate the OOH media space and provide a big impetus to OOH advertising. This is expected to lead to consolidation of the industry and wiping out of the smaller, unorganized players.
“The number of music listeners have not reduced, but music buyers have. If digital music has to affirm its footing in India as it has begun in the rest of the world, then we need a strong judicial system on an urgent basis that protects the IPR of the creative assets and its creators.” Kumar Taurani, Chairman & Manging Director, Tips Industries
34 KPMG Interviews
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Convergence: Accessing media across devices
One direct impact of digitization has been convergence of media over the last few years giving consumers the convenience of accessing audio and visual media content (in digital formats) across multiple devices including PCs/laptops, MP3 players and mobiles in digital formats.
The potential market for convergent media content is sizeable and growing. There are about 12.24 million active internet users in India, out of which 4.90 million are broadband subscribers. Mobile penetration is even more promising. There are about 315.31 million mobile subscribers out of which about 88.27 million users logon to the internet form their mobile35.
The increasing penetration of the PC and the mobile phone has opened up numerous opportunities for media companies to provide content such as music, news and entertainment for access on these devices. There are multiple models that can be followed to monetize this content such a one time download fee, subscription fee or ad-supported free content. Given the way media consumption has evolved over the internet and mobile phones and the easy access available for free illegal content on the internet, the users now expect the media content such as music to be free. In this scenario, the third option – free advertisement supported content is likely be a good bet for media companies at least till the time digital piracy is brought under control.
With the convenience it offers to the end consumer, media consumption on PC, mobile phone, digital music players and other devices may naturally continue to command an increasing share of the medic consumption time of consumers that have access to these devices. Recognizing this, Indian media companies are adapting themselves to serve this new consumer demand.
For instance, NDTV has consolidated its web and mobile properties under NDTV Convergence, a wholly owned subsidiary which is focused exclusively on providing content for the internet, mobile phone and new media platforms such as IPTV. Its mandate includes both repackaging NDTV’s television content for consumption on the internet and mobile phones as well as developing exclusive properties for these domains.
Similarly UTV New Media, the digital media arm of UTV Software Communications has focused on creating content for its web properties and on acquiring rights for digital music and creating assets such as images, ring tones and videos around it. Its web properties include the personal finance portal UTVi, entertainment portal UTVatplay and properties such as Techtree which were brought under its umbrella through the acquisition of Indian technology company IT nation. For the first half of FY 2009, new media accounted for 3 percent of UTV Software Communication’s total revenues36.
35 TRAI, The Indian Telecom Services Performance Indicators July – September 2008 36 UTV Investor Presentation, November 2008
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Implications of Digitization
Undoubtedly, digitzation is set to transform the media industry in India by enhancing the quality, the speed and scope of delivery as well as the user interactivity of various media formats. In the following table, the implications of digitization on the different sectors of the media industry are summarized.
Digitization: Implications for the Industry
Sector Effects of Digitization Implications • More choice available to consumers due to greater • Lesser under declaration of subscriber base leading to number of channels increase in subscription revenues for the broadcaster • Enhancement of over all TV viewing experience due • Increase in average TV viewing time due to better viwing TV to better picture and sound quality experience and more channel choice • Potentially higher ARPUs for digital distribution players • Availability of multiple add-on services apart from because of ability to offer add-on services standard channel subscription packages
• Wider release of prints with simultaneous release in • Higher occupancies can facilitate quicker recovery of smaller centers investment and enable more film releases • Shorter theatrical windows • Universal reduction in the theatrical life of a film in cinema halls-status of the film can be decided in the first week itself Film • Advanced visual effects and technology • Reduction in piracy in Tier 2 and Tier 3 cities • Post Production works are likely to gain increased significance, with enhanced time and budget allocations
• Alternate revenue streams available to music • Increasing share of revenues for music companies coming companies to compensate for declining physical unit from digital music sales • Better bottomlines for music companies as digital music • Companies making their entire music libraries sales involve lower costs to the company because of more available on the internet for legal download cost effective distribution. • Rapidly growing mobile music market in India with a • Even further fall in physical unit sales as digital music Music large percentage of mobile music revenues coming catches on from ringtone downloads currently but expected increase in the share of full track downloads in the medium to long term • Clubbing of mobile music and mobile services/handsets emerging as an effective revenue stream for music companies • Increasing use of digital signages vs traditional • Customers may expect more interactivity in the medium hoardings • Cost of doing business to increase, and smaller businesses are likely to suffer. Consolidation might set in and the industry is likely to become more organized in the future Outdoor • With increasing costs and outlay involved, more efficient metrics of performance effectiveness are likely to emerge, which can help in attracting advertisers
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Regulatory and Tax Environment
Government intervention by way of regulations also stems Introduction from its planned objectives (laid down in the Five year plans). Regulations may be brought out to help ensure that the objectives are achieved as per the government design. Media plays an important role in dissemination of Furthermore, the need for huge investments also calls for information, thereby stimulating development in any clear regulations to generate investor confidence. country. The significant function assumed by the media industry has been primarily responsible for regulatory Historically, media has been kept under check. The sector is intervention in this sector. Our country’s past experience still regulated and has not been opened for foreign manifests that effective regulations (which may be formed participation as much as other sectors. This has been due to through a consultative approach) contribute to the growth media’s inherent power of influencing public opinion. This and competition in any sector (e.g. telecom). The current strength gives media immense responsibility too. regulatory structure in M&E sector demonstrates a drive in Governments of several developed nations have provided for the same direction. checks on media (helping ensure control of media firms in the hands of residents of their country, conservative Several factors have been responsible for regulatory approach on media acquisitions etc.) by way of regulations. intervention in the sector, which have contributed to furtherance of consumer interest, viz. In today’s times, growth and objectives of the sector can only be achieved responsively if transparency, involvement • Making available new alternative technology platforms of the stakeholders (in formulation of the regulations) and for accessing the broadcasts (e.g. DTH, IPTV) changing consumer behavior, tastes and technology are
• Quality of services given due consideration.
• Checking monopolistic trends (e.g. specifying ceiling rates for pay channels)
• Commercial aspects (as between network operators and broadcasters), inter-alia, under reporting of subscribers by the cable operators, offering of channels by the broadcasters as a bouquet rather than a-la-carte etc.
• Piracy.
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Snapshot of Regulatory Interventions Proposals/ Sector Parameter Earlier Now Implications recommendations1 Television Uplinking Separate uplinking - Consolidated - Telecom Regulatory The recommendation makes Guidelines guidelines for: Uplinking Guidelines Authority of India provisions for: a) News and current dated December 2, (TRAI) has given its a) Television channels without any affairs channels 2005 (for television recommendation in subscription fee (to cable operator channels and SNG/ respect of issues etc.) b) Non-news and DSNG) relating to: current affairs channels b) Enhanced coverage of local a) Private terrestrial c) Satellite News issues, events etc (against primarily TV broadcast the coverage of national issues by Gathering (SNG)/ Digital services Satellite News the satellite channels) Gathering (DSNG) b) Mobile television c) Additional mode of accessing activities services television channels being explored (in mobile TV) Foreign a) Television channels: a) Television channels TRAI has also given Investment (i) News and current - Same as earlier its recommendations limits2 affairs television b) Cable network - on foreign channels - 26 percent Same as earlier investments limits for broadcasting (ii) Television channels c)DTH: 49 percent sector. TRAI has other than (i) - 100 (FDI + FII); FDI not to recommended 3 percent exceed 20 percent increase in foreign b) Cable network- 49 investment limit: percent a) For cable network c) No Direct-to-home to 74 percent (‘DTH’) guidelines4 b) For DTH- 74 percent (Incl. FDI) Downlinking No Downlinking Downlinking policy - Mandatory for television channels guidelines guidelines announced to get registration - Foreign channels made to have local presence in India
Note: The above information is updated up to December 31, 2008
1 TRAI has been following a consultative approach (with the industry stakeholders) in respect of several issues confronted by the Industry, thereby involving such stakeholders in the policy formulation process. After receiving the comments from the stakeholders, TRAI releases its recommendations to the concerned Ministries 2 Foreign Investment in the broadcasting sector (radio, television, DTH etc.) allowed under the ‘approval route’ only. 3 Additional conditions include, inter alia, ownership of at least 51 percent of total equity by largest Indian shareholder (as defined in the Uplinking guidelines) 4 The Union Government decided to permit DTH TV service in Ku Band. The prohibition on the reception and distribution of television signal in Ku Band has been withdrawn by the Government vide notification No. GSR 18 (E) dated January 9, 2001 of the Department of Telecommunications (DoT).
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Snapshot of Regulatory Interventions Proposals/ Sector Parameter Earlier Now Implications recommendations Television Legislation for Programme and Same as earlier Broadcasting Services The bill is detailed content etc. Advertisement code Regulation Bill, 2007 and incorporates included under the suggests a the provisions of Cable Television comprehensive content the Cable Act. Networks code, cross media However, there is (Regulations) Act, holdings6, public a need to address 1995 and Cable service obligation and the concerns of all Television Networks establishment of the stakeholders. Rules, 1994 [the broadcasting regulatory Cable Act] authority of India
Regulator No separate regulator TRAI appointed as a broadcasting Appointment of a and cable services regulator with regulator effect from January 9, 2004 facilitated addressing of isuues faced by the industry. It has also brought more transparency in the policy making process Pricing - Not regulated - Conditional Access System (CAS) - Choice to regulations/ - Channels offered in implemented in Chennai and some consumers to pay Choice of bouquets (than a-la- parts of Mumbai, Delhi and Kolkata for the channels channels for that they watch carte) - Pricing caps7 on consumers - Transparency for a) Pay channel in CAS areas (INR the broadcasters 5.35 per channel per subscriber) as the number of b) Amount payable per month in subscribers can be Non-CAS areas is to range between known INR 82 and INR 278; and - Better for the c) Pay channels offered to DTH consumers as the operators (at 50 percent of the discretion of the rates at which channels are offered cable operators for non-CAS areas) would not be - Provision of channels on a-la-carte functional basis made mandatory - Regulations - Interconnect agreements governing between broadcasters and network interconnect operators (DTH, cable operators agreements etc) governed8 by TRAI enable acquisition of content by distributors on competitive terms Sharing of feed Based on commercial Mandatory5 sharing of live feeds in - Revenue leakage with public arrangements; not respect of sports programmes of for private broadcasters mandatory national importance channels - Availability of important sporting events to the masses
Note: The above information is updated up to December 31, 2008
5 Provided under the Guidelines for Uplinking from India. Further mandated by Sports Broadcasting Signals (Mandatory Sharing with Prasar Bharti) Act, 2007 6 TRAI has issued a consultation paper dated September 23, 2008 on ‘Media Ownership’ to gather industry’s views on the issues of cross media and ownership restrictions 7 TAs per the Telecommunication (Broadcasting and Cable) Services Tariff Order, 2004 (as amended till date) 8 The Register of Interconnect Agreements (Broadcasting and Cable services) Regulation, 2004 [as amended]; TRAI also issued its Consultation Paper on Interconnection Issues on 15 December 2008 to deal with, inter alia, issues arising with the advent of new technologies, viz. IPTV, HITS
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Snapshot of Regulatory Interventions Proposals/ Sector Parameter Earlier Now Implications recommendations Television Principal Cable Television Additional guidelines - TRAI has issued The recommendation is likely to Legislations Networks include: recommendations for: help to regulate the cable industry, (Regulations) Act, attract foreign investment and - DTH guidelines9 a) the restructuring of 1995 and Cable cable TV services; become more competitive. It is Television Networks - Internet Protocol also expected to make available an Rules, 1994 Television (IPTV)10 b) Headend-In-The-Sky alternate form of distributing 11 (HITS) television channels for the cable operators.
Films & Principal - Indian Copyright Act, Amendments in the The amendments proposed, inter Music Regulations 1957 (‘Copyright Act’) Copyright Act proposed alia, include ‘digital rights - Cinematograph in the year 2006 management’ and aspects Act,1952 emanating from India’s membership of the World Trade - Policy for import of Organization (WTO). It is likely to Cinematograph films make the Copyright Act more etc. stringent and in compliance with the international scenario. Foreign 100 percent FDI in 100 percent FDI Removal of entry level conditions Investment film allowed subject allowed in with no may allow more tie-ups/ foreign to entry level entry level conditions players to come into the country. conditions Co-production Treaties with Italy. Further treaties with Treaties with China and Such treaties enable the Agreements U.K. and France Germany and Brazil Canada in process development of film industries of (Treaty) both the countries and further economic and cultural exchanges. Treaties also accord status of a ‘national film’ to the co-produced film. Print Media Principal - The Press and Additional guidelines/ Editions of foreign newspapers Regulation Registration of Books regulations include: could be made available to the Act, 1867 - Guidelines for Indian readers (which were earlier - The Registration of publication of imported into the country). Newspapers (Central) facsimile editions of However, there is no facsimile Rules, 1956 foreign newspapers edition in India till date. - Guidelines for - Indian newspapers can procure syndication material (photographs, cartoons arrangements By etc.) from foreign publications newspapers The government’s decision to allow - Guidelines for Indian editions of foreign news etc publication of Indian magazines may result in reduction editions of foreign in prices of such magazines and technical/ scientific/ also inclusion of Indian content/ specialty magazines/ advertisements in such journals/ periodicals publications. - Guidelines for Publication of Indian Editions of Foreign Magazines dealing with News and Current Affairs
Note: The above information is updated up to December 31, 2008
9 Telecom Disputes Settlement Appellate Tribunal (‘TDSAT’) has recently ruled that it is not mandatory for a DTH operator to carry all the channels on its network 10 Ministry of Information and Broadcasting (‘MIB’) has issued guidelines on IPTV which, inter alia, provides for the following: - No registration required in case of: a) Telecom licensees having a license to provide triple play services; b) Internet Service Providers (‘ISP’) having net worth of more than INR 1000 million and having permission to provide IPTV services; and c) Registered cable operators. - Telecom service providers and ISPs to pay license fee based on adjusted gross revenue as applicable from time to time; - Prior approval of the government (or licensing authority) required for adding any new value added service to the network. 11 Government of India had, in the year 2003, issued permission to two companies to operate HITS service for fast implementation of CAS. However, this service has not taken off so far. © 2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 129
Snapshot of Regulatory Interventions Proposals/ Sector Parameter Earlier Now Implications recommendations Print Media Foreign Not permitted Indian entities The present foreign investment Investment publishing: a) limit brings a level playing field in Newspapers/ Indian the news segment of television editions of foreign broadcasting and print media. magazines etc. dealing with news and current affairs – 26 percent b) Scientific/ technical journals etc- 100 percent c) Publication of facsimile edition of foreign newspapers 100 percent. Above limits of FDI are permitted with prior approval of the Government Radio12 License fee Fixed license fee - One-Time Entry - OTEF for a district; - Enhanced viability of the regime (with 15 Fee (OTEF) for a city and14 stations as annual fee aligned percent escalation 13 with the size of the market ; and - Annual fee-based on every year) - Annual fee-based higher of 4 percent of The recommendation for on higher of 4 gross revenue and 2.5 changing the geographical basis percent of gross percent of OTEF of licensing- city to district may further augment viability. revenue and 2.5 Concessions for percent of OTEF stations in North-East However, MIB considers that and Jammu &Kashmir such shift from city to district may not be possible in view of the some operational issues involved15. Multiple Restriction on - Restriction on - At least 3 [excluding The recommendations are likely licenses multiple licenses in a multiple licenses in a All India Radio (AIR)] to: city city channels in any district - Increase competition; and - Cap on total to be allotted to different entities; - Provide for differentiated channels held by a content to the consumers licensee in the - Cap (per licensee) of country fixed at 15 50 percent of total However, MIB does not favor percent of all channels in a district removal of cap of 15 percent of channels all channels in the country and - No all-India cap recommends that total number of channels owned by a licensee should not be more than 40 percent of all channels in a city
Note: The above information is updated up to December 31, 2008
“MRUC is expected to release first set of data from Indian Outdoor Study by March – April, 09. This would overcome the biggest challenge faced by OOH media and is definitely expected to kick off a significant industry growth phase”
Indrajit Sen, President, Laqshya Media
12 TRAI has issued draft guidelines on satellite radio which, inter alia, provides for annual fee of 4 percent of gross revenues, FDI up to 74 percent; provision of subscription based services only (no commercial advertising), specific news broadcast of All India Radio and certain channels of Prasar Bharti. 13 As per the Policy on expansion of FM radio broadcasting services through private agencies- Phase-II issued on July 13, 2005 14 Recommendations in respect of all parameters for radio have been given by TRAI on Phase-III of FM radio broadcasting 15 These are MIB’s views on TRAI’s recommendations on 3rd phase of FM radio broadcasting
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Snapshot of Regulatory Interventions Proposals/ Sector Parameter Earlier Now Implications recommendations Radio Foreign No FDI Foreign investment (FDI/ Foreign Investment - Increase in options of mobilizing Investment permitted portfolio) to the extent of 20 in stations funds (portfolio percent permitted16 broadcasting: - Foreign radio players may also investment to - News and current participate in India through direct the extent of 20 affairs- 26 percent investment in the Indian company percent - Other than News and with their expertise further allowed) and current affairs – augment the operational efficiencies 49 percent The recommendation is likely to bring consistency and a level playing field in the news and current affairs segment of broadcasting (print, television and radio). MIB agrees with TRAI’s proposals
Provision of Not permitted Not permitted Content sourced The recommendations are expected news and from AIR, to make the stations more viable current affairs Doordarshan (DD), and extend the dissemination of authorized TV information to the masses. channels etc MIB is open to airing of news allowed, without bulletins of AIR or DD only. It has any substantive also listed certain broadcast change categories that shall be treated as non-news/ current affairs, viz. sports event commentaries, traffic and weather information, etc.
Networking Not permitted - Not permitted between two Networking allowed - Increasing the viability and quality (simultaneous without prior licensees within a licensee’s of content in smaller cities broadcast of approval - Allowed by a licensee for own network only The recommendation is likely to same content) stations in category C and D further reduce the cost of content cities17 within a region only. for the operators. MIB has accepted the TRAI’s proposal. However, it has also suggested ensuring at least 20 percent broadcast to be in the local dialect of the city
Outdoor Regulations No formal - Supreme Court (SC) had - Central There is a need for appropriate Advertising regulatory code banned hoardings in Delhi in government has policy/ regulations across the 18 at the union 1997—on grounds of road also asked state country which has been absent till level; states safety governments to now. It is imperative to bring uniform have their own - Municipal Corporation of Delhi impose a ban on norms at national level. policies (MCD) sets up an Urban hoardings - West Bengal Graphics Forum on April 30, Prevention of 2003 for regulating outdoor Defacement of advertising and evolving a new Public Property advertising policy for the city Act - Delhi Outdoor advertisement policy 2008 approved by SC - Chennai High Court banned hoardings etc. to help ensure road safety in 2006 (upheld by the SC in 2008)
Note: The above information is updated up to December 31, 2008
16 Additional conditions include, inter alia, ownership and management control of more than 50 percent of paid up equity by an Indian individual or company 17 Categorization based on size of population in a city as per the FM Radio policy (Phase-II) 18 News articles and web search
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Certain tax related aspects- Direct tax
Deduction of expenses for film producers/ distributors
Specific rules have been provided under the Income Tax Rules, 1962 [Rule 9A & 9B] in relation to deduction of expenditure on production of films/acquisition of distribution rights therein. As per the prescribed rules, a film producer who sells the entire exhibition rights of the film is entitled to a deduction of the entire cost of production incurred by him in the year in which the Censor Board certifies the film for release in India. A similar deduction is also available for a film distributor for outright sale of the distribution rights acquired by him. Other conditions also exist in case of partial sale/exhibition.
Tax issues for foreign television channels/telecasting companies (FTC)
The two primary sources of revenue for FTC’s, inter alia, is income from the sale of advertising airtime on the TV channel and subscription revenues. Under the domestic tax law, income of the FTC’s is taxed in India in case they constitute business connection in India.
In case an FTC operates from a country with which India has a tax treaty, it is taxable in India only if it constitutes a Permanent Establishment (PE) in India.
The provisions of a tax treaty apply to the FTC to the extent they are more beneficial as compared to the provisions of the domestic law. The term ‘business connection’ is widely interpreted and is based on case laws. The definition of PE is generally narrower as compared to the term business connection. In case the FTC has a business connection/ PE in India, the profits attributable to such presence in India need to be computed. In case the FTCs do not maintain country wise accounts, then this could pose considerable difficulty in computing the profits which can be taxed in India.
Subscription revenues are usually collected by the Indian distributors and subsequently paid to the FTCs. The Indian tax authorities are contending that the payment of subscription fees repatriated to the FTC’s are liable to tax withholding considering the same to be royalties.
Some other issues which the TV channel companies need to consider is withholding taxes on the payments made in respect of uplinking and use of
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transponder and satellite space. The withholding tax issues may arise on account of characterization of payment as royalty or fees for technical service, existence of permanent establishment/business connection of the non-resident payee (e.g. satellite company) in India.
In the past, Indian tax authorities have held that payments made by a TV channel company to a non-resident company owning satellites towards lease of transponder capacity is in the nature of ‘royalty’ for use of process under the tax treaty. On this issue, there are two contradictory decisions issued by the Tax Tribunal in the case of Asia Satellite Telecommunications Co. Ltd.19 and Pan AmSat International Systems Inc.20). As per one decision, such payments have been regarded as in the nature of royalty based on the provisions of the Act (no treaty benefit available), while as per another ruling, the same has been regarded as “royalty” based on the interpretation under the India-U.S. tax treaty.
Recently, the tax authorities have taken a view that the processes involved in the receipt and transmission of signals by the transponder on the satellite is a secret process and that a transponder is ‘equipment’. The issue creates uncertainties for the stakeholders in relation to the withholding tax implications. It is pending before the Courts and continues to remain contentious.
Permanent Establishment exposure
The downlinking guidelines issued by Ministry of Information and Broadcasting, Government of India (MIB) mandate that either the applicant company should be the owner of the channel or it should have exclusive marketing/ distribution rights for the territory of India, which includes rights to advertisement/subscription revenues for the channel. In case it has such rights, it should also have the authority to conclude contracts on behalf of the channel for advertisements, subscription and programme content. It is necessary to comply with the aforesaid conditions to obtain approvals from the MIB.
However, conforming to the aforesaid conditions may lead to an exposure of creation of a Permanent Establishment (PE) of the foreign company in India.
Some important aspects relating to Transfer Pricing (TP)
Given the increased linkages between the Indian media players with their counterparts across the globe (coupled with the impressive growth achieved and targeted for the sector), the transactions between Indian players and their related
19 [2002] 85 ITD 478 (Del.) 20 [2006] 9 SOT 100 (Del.)
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parties overseas have increased manifold. Such related party transactions come under the purview of TP regulations and require the same to be carried-out at arms-length. These regulations prescribe mandatory documentation which needs to be maintained annually.
In the recent past, a number of companies in this industry have been scrutinized closely by the Indian TP administration on account of related party transactions. In the case of Star India (P) Ltd., the Mumbai Tribunal held that a robust/detailed Functions, Assets and Risks analysis is critical to support adequacy of the arm’s length price concept. In addition, the concept of a transaction specific approach has also been emphasized in this ruling and it has been confirmed that the choice of tested party in an economic benchmarking analysis depends on the level of complexity of the transacting entities along with the availability and reliability of the data.
An important element that has also evolved is the use of TP methodology in the determination/attribution of profits to Permanent Establishments in India. Towards this end, the Mumbai High Court, in the case of SET Satellite (Singapore) Pte. Ltd.21 held that in case the correct arm’s length price is paid to a dependant agent in India, no further income would be taxed in the hands of the foreign enterprise having a Dependant Agent Permanent Establishment (DAPE) in India – i.e. payment of the arm’s length price to the dependant agent would extinguish the tax liability of a foreign company having a DAPE in India.
TP policies should be based on a thorough functional and economic analysis that identifies the various functions including the value drivers, risks and location of the company assets. The existence of TP documentation, alongside policy and procedures documentation, could streamline the discussions with Indian tax authorities. In addition, establishing a robust set of TP policies and guidelines could help to proactively identify and effectively manage new TP exposures that are created as a result of business expansions, acquisitions, restructuring, etc.
21 [2008] 307 ITR 205 (Mum.)
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Tax Incentives
In India: Special Economic Zones (SEZ)
The SEZ regime in the country allows tax breaks (subject to fulfillment of certain conditions) to eligible entities on export earnings for a period of 15 years (in a phased manner). The benefits are available to entities operating in various sectors and can be explored for media activities such as content development/ animation/ film restoration etc. However, feasibility of the same needs to be analyzed on a case to case basis.
Overseas Incentives
As Indian media companies reach for a global footprint and target audiences worldwide, an appropriate overseas presence may be deemed necessary. The same mandates analysis of tax laws of various jurisdictions (including fiscal and other incentives that some countries may provide for media companies) to manage the global tax incidence.
Latest development for FM Radio companies
The Union cabinet has recently permitted private FM radio companies to restructure their businesses before the five-year lock-in period. Accordingly, the Government has now allowed mergers, demergers, setting-up of subsidiaries and amalgamation in FM Phase II Policy on fulfillment of certain prescribed conditions22. This could help such companies consolidate their businesses and make them more efficient. Further, TRAI in its recommendations on Phase III of FM radio broadcasting has, inter alia, suggested that dilution of ownership beyond 51 percent should be permitted after the expiry of three years from the date of operation of the station, with a written approval from the Ministry of Information & Broadcasting.
22 As per news articles on the matter, the prescribed conditions include continuance of minimum 51 percent holding by majority shareholders or promoters
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Certain tax related aspects- Indirect tax
Central and state levies
There are levies, central as well as state, which directly affect the media and entertainment industry- central levies being central excise duty, customs duty and service tax and State levies being state-VAT and entertainment tax. Of the various indirect taxes applicable in the media sector, service tax and state-VAT merit special attention. Applicability of these taxes on programme production, in- film placements, grant of various rights such as distribution rights, theatrical rights, cable and satellite rights, sale of airtime for advertisement purposes, recording/editing of programme, sale/lease of programme content, etc are becoming increasingly contentious and leading to disputes with authorities.
Applicability of State VAT on Sale of a Film
Factors such as interplay of multiple indirect taxes, availability of various options for computation of tax, frequent evolution of concepts in taxation through changes in law and judicial rulings, have given rise to complex tax issues in this space. For example, a High Court has held that production and sale of a film resulted in creation of a work of art and not sale of goods. However, some other state-VAT laws have included films as 'goods' liable to sales tax. Further, certain states levy state-VAT on intangibles like copyright and also on grant of film rights to use/hire. There is need for greater consistency and uniformity in taxation for such an important industry.
Service Tax
Service tax is levied on provision of certain notified categories of services (including broadcasting, cable, development and supply of content, sound recording and video production services). Service Tax being an indirect tax, normally the service provider recovers the service tax from the service recipient. However, in some cases such as services provided by non-residents, goods transport agencies, sponsorship services etc., the reverse charge mechanism is applicable (i.e., the obligation to pay service tax is that of the service recipient and not of the service provider). A mechanism23 for credit of input service tax and central excise duty on input services, inputs and capital goods is also put in
23 CENVAT Credit Rules, 2004 24 Notification 12/2007 dated 1 March 2007
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place by the Government. Effective from 1 March 2007, subject to fulfillment of specified conditions, exemption24 is granted from levy of service tax to services provided for granting right to authorize any person to exhibit cinematograph film, the content of the film being in digitized form and is transmitted through use of satellite to a cinema theater.
Entertainment Tax
Entertainment tax is levied on various modes of entertainment such as on film tickets, cable television, live entertainment, etc. India has one of the highest rates of entertainment tax across the globe and there has been a constant cry from the stakeholders to reduce it. Recently, some states have granted exemption from entertainment tax to multiplexes.
Other challenges
The key challenge under indirect tax regime in India includes analysis of transactions and identification of the indirect tax implications on such transactions and entities involved. Some typical transactions include:
• Internet services (e.g. sale of space, including ”content” provided to telecom companies, e-mail subscription services, e-commerce transactions, etc.)
• Taxability of subsidiary/agent in India where the principal broadcasting agency is outside India
• Sale of advertisement time/space by media companies to advertisement agency and subsequent sale from agency to advertisers
• Transactions involving transfer of right to use film/programme content
• Special transactions (e.g. cost sharing arrangements, import of technology, sharing of telecom revenues generated through contests/opinion polls, hiring of equipments for film production, etc.).
24 Notification 12/2007 dated 1 March 2007
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Internationalization
No longer are the Indian M&E players confining themselves Finally, year 2008 witnessed one of the biggest landmarks in to domestic shores for their target consumers; they are Indian M&E industry when two of the biggest Indian media increasingly reaching out to global audiences. Indian media players acquired media properties abroad. The move was companies, especially in the television and film segments significant since the acquisitions were not merely aimed at continue to target the 25 million NRI diaspora1 settled in providing synergies to Indian operations or targeting the various parts of the world. Indian population but establishing a distinct brand identity abroad. These acquisitions reiterated the increasing global Estimated size of overseas Indian Community ambitions of Indian Media Inc.
In a nut shell, the aspect of internationalization covered in this chapter involves the following distinct aspects:
• Producing content catering to the NRI diaspora
• Targeting the mainstream global audience
• Indian companies emerging as an off shore hub for media services
• Acquisition of foreign media properties.
* Only countries with over 500,000 people of Indian origin are shown Source: Ministry of External Affairs (Data as on December 2006) Targeting NRI Diaspora However, now that the industry has few established players who have the necessary capital and are eager to increase their scale of operations, media companies have begun to TV: Broadcasting across Foreign Shores produce content not just for the NRIs but also for the With more than 25 million NRIs spread across the globe, mainstream global audience in other countries. the international market is an important source for Indian At the same time, global demand for media services from broadcasters to augment their domestic revenues. Today, India is also growing. Animation has been at the forefront, leading Indian broadcasters typically have a presence in with India emerging as a major outsourcing destination due foreign markets through distribution tie ups. For instance, to its cost advantage. Film post production has also shown Indian broadcaster Zee has channel bouquets in Europe, potential in this regard. North America, Africa, Middle East and South East Asia.
1 Ministry of External Affairs
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Apart from Zee, some of the other Indian broadcasters there were cases of certain movies like “Taal”, “Yaadein” beaming to different parts of the world are NDTV, UTV and “Dil Se” which were either flops or did average Global Broadcasting (UGBL), TV18, Aaj Tak and regional business at domestic bourses but were otherwise big hits language players like Sun, Eenadu and Asianet. (Star and overseas4, thus allowing the film makers to recover their Sony too have global distribution networks but they are in money. In more recent times, “Kabhi Alvida Na Kehna” and any case part of multinational media companies). Besides “Don” performed relatively better overseas vis-à-vis the the conventional cable networks, broadcasters also rely on domestic market; they were top two Bollywood releases at new platforms like IPTV to distribute their content. For the U.K. box-office in 20065. instance, UGBL recently entered into an agreement with IPTV service provider, The New Media Group (TNMG), to Overseas vs. Domestic Box Office Collections of some launch 3 of its channels on TNMG’s IPTV platform, ”World Indian Films On-Demand” in Japan, Australia and New Zealand from Net Overseas Domestic Domestic Overseas August 1, 2008. Viacom18 also joined hands with TNMG, to Film Earnings Collections Verdict Verdict (INR Million) enable its newly launched GEC channels “Colors” to be (INR Million) seen via the IPTV service World On-Demand2. Dil Se 86.6 Flop 83 Hit
Taal 255 Average 137.5 Hit
Above Films: Bollywood riding high on overseas Yaadein 133 Flop 91 collections Average Don 501 Hit 320 Blockbuster Indian films have always been a favorite with the NRI Kabhi Alvida All Time 464 Hit 445 diaspora. Therefore, as the number of NRIs has increased Na Kehna Blockbuster substantially worldwide, the popularity of Indian Films has Source: India Box office Database also increased abroad.
A few years back, Bollywood film makers saw overseas U.K. and U.S. are the top two overseas markets respectively collections as too marginal a revenue source to be for Indian films in terms of both box office collections as considered important. “Dilwaale Dulhaniya Le Jayenge”, well as the number of releases. released in 1995, was the first wake up call. With an overseas realization amounting to INR 90 million in U.K. and INR 175 million worldwide3, the movie was termed as an all time blockbuster in the overseas market. In later years,
2 Company Website, Press Releases 3 Boxofficeindia 4 Press Releases 5 Boxofficeindia © 2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 141
The importance of overseas collections for Indian films can be gauged from the fact that many of the big Indian film distributors such as Yash Raj, UTV, Adlabs and Eros have established their distribution offices overseas. In 2008, UTV Motion Pictures, with its releases in the U.S. grossed USD 5.48 million in the first 28 weeks of the 2008 and emerged amongst the top 20 film distributors in North America (the only foreign language distributor in the top 20 list).6
Crossover and Drama dominate overseas market
While movies across genres have been largely popular overseas, ‘crossover’ and ‘drama’ movies have done especially well. An analysis of top 50 movies in terms of overseas collections over a period of 5 years reveals that the overseas audience has a maximum preference for movies belonging to these genres.
Overseas Releases –What has worked at Overseas Box Office
Source: KPMG Analysis Note: 1 Analysis done on top 50 movies in terms of overseas collection over a period of 5 years 2 Box Office performance based on the size of collections 3 Size of the circle represents relative average net adjusted collection in the overseas market
6 Company Website, Press Releases
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Online and Overseas Editions of Print Media
Almost all leading newspapers and magazines in India (both English and other languages) have their online editions, providing free access to the latest news and analysis. These electronic versions are used by advertisers to target Indians living abroad. Almost 80 percent of hits on these websites come from the NRI diaspora.7
Globally, electronic versions have emerged as separate revenue models for the print media players; their content is also differentiated from that in the offline versions. However in India, electronic versions have originated more as a brand building and brand salience medium. Currently, the e-papers are just electronic reproductions of the offline editions.
Many national and regional newspapers also publish their overseas editions targeting the NRI population.
Overseas Edition of some Indian Newspapers
Newspaper Frequency Country/City
Sandesh Weekly Chicago
Anand Bazaar Patrika Fortnightly Average
Malaya Manorama Daily Bahrain, Dubai
Madhyamam Daily Bahrain, Dubai
Gujarat Samachar Weekly New York
Divya Bhaskar Fortnightly New York
Source: KPMG Analysis
Indian magazine players too have started to come up with their international editions. For instance, Filmfare launched its German edition as part of its effort to spread readership in international markets. The magazine is published in German language as well.8
7 KPMG Interviews 8 exchange4media
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Targeting Mainstream Global Audiences
Dedicated TV programming for local audiences abroad
Apart from targeting the NRI population by beaming Indian content in other countries, broadcasters have now begun to take things to the next level, and are starting to offer dedicated programming for the local audiences in these countries.
Zee Network, for example, has Zee Astro which is broadcast in the South-East Asia in the local Bahasa language. NDTV too has launched two channels specifically for markets outside India – Astro Awani in South-East Asia in 2006 and NDTV Arabia in the Middle East. While NDTV Arabia is in English, Astro Awani is primarily in Bahasa.9 Both channels carry locally relevant infotainment programming.
Films: Looking beyond the diaspora
It’s no longer just the NRIs that have a taste for Bollywood movies. Increasingly, non Indian movie audiences in different parts of the world are discovering the charm of Bollywood song-and-dance routines and melodramas. The striking popularity of Indian films among non Indian audiences in Asia, the Middle East and Europe show that Hindi films reach beyond the barriers of language, culture, and religion, and are a truly global media. Key markets for the film industry include India’s neighboring and culturally similar countries such as Pakistan, Sri Lanka and Bangladesh. Besides the Indian diaspora in these countries, there is a great demand for Bollywood content among the local audience there. Pakistan, for example, has a 165 million strong population that has a keen interest in Bollywood films. With Pakistan relaxing laws against the theatrical release of Indian films, the country has emerged as very big potential market for Hindi film industry. Indian films are already popular there and people understand the language as well. Similarly, countries like Bangladesh (147 million strong Bengali speaking population), Sri Lanka (3.8 million Tamils), Malaysia (2.3 million Tamil speakers), Singapore, UAE, and Fiji also have good potential for different regional Indian films, as has been proven by the popularity of Indian television channels in these countries.
Besides these culturally similar countries, popularity of brand Bollywood has also improved in new markets such as Israel and Poland. Also, countries such as Indonesia, Malaysia, Thailand, Germany, Russia and China, all of which consume dubbed Hollywood content, offering good market potential for Bollywood films as well.
9 Company Website, Press Releases
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It is also worth mentioning that in recent times, western film makers have started noticing Indian cinema and are making movies with India centric theme and artists. The success and popularity of ”Slumdog Millionaire”, with its Indian locales, artists and music underscores the growing influence of Indian Cinema and augurs well for Bollywood movie makers targeting the global audiences. Clearly, Bollywood is a much bigger brand today than few years back. The development of this brand and the awareness about Bollywood has been catalyzed by many factors in recent times:
• Indian producers aggressively promoting their films in international film festivals such as Cannes
• Increasing use of foreign locations in Indian films
• Increasing coverage given to Bollywood in the western media
• Indian film award functions such as IIFA which are held at an international scale outside of India.
To unlock the true potential of overseas markets however, film companies need certain key capabilities:
• Allocating sufficient time and budgets for market research in the overseas market to understand the content preferences of the overseas audience
• Modifying the existing content before releasing in overseas markets. For example, the longer length of Indian films acts as a deterrent for acceptability by western audiences. This can be taken care of by crisp editing of content
• Allocating more time at the post production stage so that the end output is technically comparable to a Hollywood film and meets international standards. At present, filmmakers in Bollywood allocate only one-fourth the time taken by Hollywood for post production work10
• Entering into tie-ups and alliances with agents who have the right relationships with major distributors along with an understanding of different markets and theatrical revenue streams. Similar alliances and a more focused approach to distribution and marketing of DVDs, VCDs, etc. are required to tap the potential of the overseas home video segment
• Investing heavily in marketing and promotion of Indian films abroad. Bollywood allocates only around 10-15 percent of its total budget in marketing, vis-à-vis 30 percent in Hollywood.11 Ensuring a wider release of Indian prints in mainstream theaters abroad is critical for bringing overseas audiences, due to which marketing assumes significance
10 KPMG Analysis, KPMG Interviews 11 KPMG Analysis, KPMG Interviews
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Production and Co-Production of Hollywood Films
Apart from aggressively selling Bollywood in the U.S., Indian film studios and distributors have now begun to make their mark in an even more fundamental way – by getting into the production of Hollywood films themselves. Similar to their western counterparts like Sony, Disney and Warner Bros, who are co- producing Indian movies; Indian film companies are also looking at overseas ventures. Increased corporatization has also brought the confidence in the Indian players to extend their influence outside of Indian borders.
One of the companies at the forefront in this regard is UTV Motion Pictures, which has already co-produced three Hollywood films.
Hollywood Films co-produced by UTV
Film Year of Release Co-Producers
Cine Mosaic, Entertainment Farm, Fox The Namesake 2007 Searchlight
I Think I Love My Wife 2007 Fox Searchlight, Zahrlo Productions
Blinding Edge Pictures, Barry Mendel The Happening 2008 Productions, Spyglass Entertainment, Fox Searchlight
Source: Company Website,KPMG Research
In 2006, UTV Motion Pictures had also signed a USD 30 million deal, with Will Smith’s production company Overbrook Entertainment and Sony Pictures Entertainment to produce two films12. According to the agreement, UTV and Overbrook are to co-produce two films and Sony Pictures Entertainment is to distribute the movies worldwide, excluding India.
Another company with ambitious global expansion plans is Reliance’s Big Entertainment. In May 2008, it announced its plans to make 10 Hollywood movies13. In order to do this, Reliance has signed deals with the production teams of the Hollywood stars Nicolas Cage, Jim Carrey, George Clooney, Tom Hanks and Brad Pitt.14 The company is also pursuing opportunities in the movie exhibition sector around the world. In the first half of 2008, it bought over 230 cinemas in the U.S. and another 50 in Malaysia. The company has also bought some theaters in Mauritius and Nepal.15
12 “UTV to produce films with Fox, Sony”, The Times of India, August 2006 13 Company Website, “Reliance Big Entertainment lays out a USD 10 billion game plan”, Livemint.com, May 2008 14 Company Website, “Reliance Big Entertainment lays out a USD 10 billion game plan”, Livemint.com, May 2008 15 Company Website, “Adlabs forays into Malaysia”, Business Standard, May 2008 © 2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 146
Co-production agreements with other countries-How do they help?
India has signed film co-production treaties with Germany, Britain, Italy and Brazil. The advantages of such treaties for film makers of both countries are generally in terms of access to technical expertise and production standards, tax benefits and access to finance.
Other than access to subsidized finance, a co-production treaty signed with one country also allows both parties to avail the advantages of other co- production treaties that the respective countries may have. For instance, as per the Indo-U.K. treaty the Indian producers can take advantage of the six co- production treaties that U.K. is already a signatory to, namely South Africa, New Zealand, Australia, Jamaica, France and Canada while U.K. can similarly leverage India’s agreement with Germany, Brazil and Italy.
There are other advantages as well. The U.K. treaty, for example, provides for the co-productions to be given national status in both countries. According to the agreement, both countries also intend to waive off import or export duties on any equipment necessary for production.
However, among the conditions in the agreement, at least 25 percent of the total production expenditure incurred on filming activities must take place within U.K. This poses problems for Indian producers as production costs in U.K. are extremely high.
This condition is likely to increase budgets by 25-30 percent. So, even the 25- 30 percent exemption might get negated. However, for a film that needs to be shot in Britain because of the script demands, the treaty is likely to help in reducing the cost through tax incentives.
Going one step ahead, the global market expansion plans of film production houses have proceeded beyond co-productions; companies have started embarking on the path of solo productions. For instance, UTV Motion Pictures has ventured into its first solo Hollywood production titled ‘The Ex-Terminators’ starring Heather Graham. It is the first ever solo Hollywood production by an Asian film company. Reliance has also announced plans to produce an American Gangster movie titled ‘Broken Horses’, to be directed by Indian film maker Vidhu Vinod Chopra. Such Hollywood productions by Indian producers are also expected to open the doors for Indian directors and technicians to work in Hollywood.16
Not only will their Hollywood projects open up additional revenue streams for the Indian film companies, but will could also help Bollywood work with advanced techniques on a bigger scale. At present, the Indian film industry, with releases of around 1000 movies a year, produces twice the number of Hollywood movies. In sharp contrast however, Hollywood has ten times the sales. If the principles that
16 Company Website, Press Releases
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the Indian film companies learn from their Hollywood experiences are applied to India’s film industry, it could certainly help make bigger movies, targeting a more global audience.
“I believe that this is Off-shoring hub for Media Services the best time for the
Indian VFX industry. With Although a late entrant on the scene, the Indian media and entertainment (M&E) booming growth rates of industry is catching up in the outsourcing trend. Outsourcing of media and the domestic entertainment related services accounts for a very small proportion of the global outsourcing market, but is witnessing rapid growth in the last few years, both entertainment industry through captive centers as well as third party outsourcing. The major drivers for and untapped potential of offshoring to India are cost savings and the availability of suitable talent.
Hollywood,the Indian Companies such as Reuters, Chicago Tribune, Sony, Yahoo, Walt Disney, Viacom visual effects/post and AOL are offshoring a variety of services to India. While a large proportion of production business is the work is in standard services like IT, HR, finance and accounting, customer relationship and supply chain management, offshoring is being tried in fairly niche reaching closer to a point areas such as publishing and editorial services, animation and visual effects and where it will be gaming development.
recognised as a Some areas of opportunity for M&E outsourcing going forward are, powerhouse of talent • Indian newspaper publishers, graphic design companies and publishing BPO offering international vendors are poised to exploit a USD 3 -5 billion opportunity in the newspaper technology and quality outsourcing segment17, by providing services to media companies
standards” • Media companies in India are leveraging the growing opportunity in areas such as editing, digitization and closed captioning, re-purposing, archiving and meta- Namit Malhotra, Managing tagging of content Director, Prime Focus • Global entertainment companies are increasingly partnering with Indian creative houses to send a significant part of their digital production and post production work to processing studios in India
• Gaming studios in India are being outsourced gaming development work for various media such as personal computers, consoles, internet as well as mobile phones
Of these, the animation and film post production sectors are discussed is detail in the following sections.
17 “U.S. Newspapers may opt for outsourcing”, The Times of India, Spetember 2008
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Animation industry as an Outsourcing Hub
India is one of the major animation production centers of the world. It has a distinguished track record in business process outsourcing and the wide array of generic advantages of outsourcing to India also accrue to animation production.
Major markets and export centers for Animation
Major Markets Major Export Centers
U.S. South Korea
France Taiwan
Japan India
Canada China
Philippines
Source: KPMG Analysis
Share of India in animation outsourcing market
Source: ”Animation Industry set to Accelerate”, Crisil Research, May 2008, KPMG Research
Animation production consists of four main stages – conceptualization, pre- production, production and post-production. In the outsourcing model, the pre- production and conceptualization is generally handled in countries like U.S., France and Canada after which the labor-intensive production process is outsourced to the Asian studios including those in India.
The outsourcing of the production stage of the value chain has become a norm in the global industry because of the considerable cost advantage. Production is a labor intensive process, and because the cost of talent is much lower in the Asian nations, places the outsourcer at an advantage.
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Typical Cost Breakup for creating an Cost per hour of animation animated featuremarket
Source: KPMG Analysis Source: KPMG Analysis, KPMG Interviews
Apart from the cost advantage, splitting the production process and distributing it between studios also helps cut down the production times through parallel processing.
Moving up the value chain - The business growth model
While outsourcing constituted a large portion of the revenues of the industry in the past, the Indian animation industry is now maturing and is targeting co- production opportunities with international studios and at the same time increasing focus on end-to-end in-house productions where they can retain the IPR with themselves.
For Indian animation movies, mythology has so far provided an easy content source and one that has already proven to be successful. These movies have had a good appeal among the Indian audiences, for whom these were primarily made. However, the Indian animation industry is already taking the next step and many of the new projects are based on non-mythological subjects and target a more global audience.
Upcoming Indian Animation Features
Animation Category Animation company & Producer
Alibaba Film UTV Motion Pictures
Bommi & Friends TV Series Image Ventures
The Secret of Seven Sounds Film Kahani World
Sultan-The Warrior Film Orccher, Adlabs
Source: KPMG Research
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This is a movement in the right direction and to become truly global and extract maximum value from animation production chain products. The Indian animation industry has to create content that is location, language and culture neutral and has universal appeal. The market for global animation properties with good content is enormous and this is the market that Indian animation industry should be targeting in the long term.
Biggest grossing animation films
Worldwide Box Office Earnings Animation Film Year of Release (USD Billion)
Shrek 2 2004 881
Finding Nemo 2003 865
Shrek The Third 2007 791
The Lion King 1994 783
Kung Fu Panda 2008 633
Source: IMDB
Potential to emerge as a major Offshoring Hub for Film Post Production Services
Post-production services are a key component for Hollywood films where the post-production (including visual effects) can cost over 50 percent of a VFX-rich film’s total budget. With spiraling labor costs and reduced timelines, international production houses/VFX houses are looking to outsource part of the work to other studios to be able to sustain the demand variants of their local industry.
India has the potential to emerge as a major outsourcing hub for post production work. Indian post production studios provide a whole gamut of services including scanning, editing, sound, special effects and film packaging. Apart from technical know-how and talent, India’s competitive edge comes from people’s fluency with English language. Also, the cost differential for India in comparison to the U.K. market is as high as 6-8 times and 3-4 times for the U.S. market.18 Hence, there is substantial cost reduction to do offshoring in India. Therefore, overseas production houses and special effects studios are beginning to outsource work to India to cut costs. Studios like Ramoji and Prime Focus have been providing post- production facilities to many Hollywood Productions. For instance, in 2007,
18 KPMG Interviews
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Mumbai-based Prime Focus did the entire post production work for the Hollywood Film “28 Weeks Later”. The company subsequently also worked on visual effects for the British independent film- “Tales of the River Bank.” Tata Elxi’s visual computing lab (VCL) is working with several Hollywood studios in this regard.19
The fastest growing area of post-production outsourcing is visual effects. Indian technicians that work in this field are experts in producing and editing special effects for a wide variety of projects including independent films as well as big- budget blockbusters. Recognizing this potential, Hollywood studios are either entering into partnerships with the Indian studios or opening their offices in India. In 2005, Barrie M. Osborne, the producer of Hollywood films such as “Lord of the Rings”, “The Matrix”, and “Face-Off”, had entered into partnership with N Madhusudhanan, an Indian visual effects specialist, and founded a visual effects studio in India to produce films globally and create a high caliber of three- dimensional and special effects for those films. More recently, in 2007, the Oscar- winning special effects for the 2007 Hollywood blockbuster “The Golden Compass” were put together in Indian headquarters of Rhythm & Hues (R&H), the leading Los Angeles-based special effects studio. The company has now opened another studio in Hyderabad.20
Another area of good potential in post-production services is digital film restoration. Film restoration is a highly laborious process and a very expensive job in the west. Some of the films are not restored due to the prohibitive costs, and because they cannot be commercially exploited. However in India, the digital restoration can be done at fraction of the cost. The Indian post-production studios are well versed with the digital technology and have showcased their capabilities by restoring the black and white classic Mughal-e-Azam in technicolor. Besides, Indian studios can also offer value added services such as color grading and movie packaging at highly competitive prices. Chennai-based Prasad Labs is one of the notable players engaged in digital restoration work for Hollywood studios.
“We see 2009 as a major metamorphosis for the industry. The market will dictate that premium content; strong stories and world class execution is going to bring the best results to the ‘studios’ such as EROS. The number of global releases will increase and we see almost 6 to 7 such products from our stable. The value addition through digital and VFX technologies is going to make a big difference to the scale and packaging going forward. Finally, niches such as regional and boutique content will also see a huge growth with the emerging distribution paradigms.” Biren Ghose, Executive Director, Eros Pictures India
19 Company Website, Businessofcinemas.com 20 Company Website, Press Releases
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In summary, Indian studios offer a number of advantages to foreign studios looking to outsource post production services:
• Modern facilities/equipment- after the granting of industry status, the film industry has witnessed an influx of organized funding, which has led to the emergence of studios which have invested in developing their post production services
• Availability of skilled technical staff at lower costs
• Ability to operate 24/7 through shift work, which leads to greater utilization of assets
• Ability to provide highly competitive digital restoration and visual effects/services.
One of the notable weaknesses for Indian post production studios has been the lack of adequate professional courses in the field. There is no specialized full time accredited courses on film post-production in India. Most of the courses being offered are by software training institutes such as Arena, NCST and NIITs. Most of these are short term courses where they train the students only on the software and training on aesthetics and artistic side of post-production is missing. The industry needs to come together and proactively start courses to cope with this problem.
The Business Growth Model for the global market
There exists a good potential for outsourcing of post production work from the western countries, since the proportion of special effects required in these films are increasing. Especially in Hollywood, several big budget movies are using a lot of special effects – in action-oriented films such as the last episodes of The Lord of the Rings and Star Wars, almost every shot may have had a digital effect. And yet, while volumes have increased, release schedules have not changed. So the amount of workload for post production have increased, with the time allocated remaining the same. Studios are thus breaking projects into multiple facilities to handle the volume of work and release the film on schedule, and are thus looking for outsourcing the post production services. India is well positioned to obtain some percentage of this outsourced work, provided players can demonstrate capabilities which are at par with their competitors in the U.S., Canada or elsewhere.
To unlock its full potential as a post production hub, Indian studios have to move beyond the cost positioning and aggressively target getting high end post production work from the best of global studios. This can be achieved by opening up/acquiring studios abroad. Opening up a studio in foreign shores helps in establishing the right contacts and managing customer requirements during a
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project, and thus helping in securing more work. Once the studio/producer sees physical infrastructure in place abroad, and is assured of the quality a VFX studio can offer him, he can clearly understand the value proposition of getting the work done in half the time and at lower costs by sharing work with the Indian studio. Some players, like Prime Focus have successfully adopted this path. Further, the workload can be divided between the Indian and foreign offices. For example, the post production work for 28 weeks later was shared between Primefocus’s London and Indian Studios; Rhythm & Hues regularly outsources work to its center in India.
Acquisition of Foreign Companies
Indian corporates are marching into the global arena and are taking small steps to become net exporters of deals to the developed world. KPMG analysis of deals between emerging and developed economies since 2003 shows there were 322 completed deals where Indian buyers have acquired companies in the major developed economies, as compared to 340 deals completed in the opposite direction.21
Post production and animation and gaming are some of the segments that have seen a constant stream of acquisitions in the recent past. In 2006, Prime Focus, an integrated end-to-end post-production and visual effects service company acquired a 55 percent stake in VTR Group, a European media service company, at an estimated 4.7 million pounds. Shortly thereafter, Prime Focus also bought Clear Post Production, a visual effects company, and merged it with VTR.22 The idea was to help ensure a constant flow of work by setting up a pipeline in Western markets. In 2007, Prime Focus further acquired two North American companies- Post Logic Studios and Frantic Films VFX, and thus added new facilities in Los Angeles, New York, Vancouver and Winnipeg.23 The aim was to provide clients in the U.S. better value proposition by offering a complete back end facility in India.
In gaming and animation, UTV’s acquisition of U.K.- based Ignition Entertainment in 2006 and U.S.- based True Games Interactive in 2008 have been some of the notable acquisitions.24
However, in the past year, the two most significant developments have been in radio and films - with Times Group acquiring U.K.’s Virgin Radio and Reliance entering into a 50:50 Joint Venture with DreamWorks.
21 KPMG 2008 report on Emerging Markets International Acquisition Tracker 22 Company Website, Press Releases 23 Company Website, Press Releases 24 Company Website, Press Releases
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The Virgin Radio deal was significant because an Indian media company re- branded and re-launched a new entertainment brand. The target here was not the Indian diaspora but the local U.K. audience, Virgin being Britain's first national commercial rock radio station. This was the first instance, where an Indian media company was acquiring a foreign property to target the global audience. The acquisition was a key entry point into the vibrant British radio market and reinforced the growing power and international presence of Indian media companies.
Times Acquisition of Virgin Radio-
On June 2008, the Times Group, through its wholly owned subsidiary- Times Infotainment Media Limited (TIML), acquired Virgin Radio Holdings and its subsidiaries in the U.K. from Scottish Media Group (SMG) Plc for an all cash consideration of GBP 53.2 million (INR 4.48 billion). It was the first ever overseas acquisition by the Times Group in the media space.
Virgin Radio is Britain's first national commercial rock radio station which reaches 2.7 million listeners every week. It operates under an FM license in London, an AM license in the rest of the U.K. as well as a digital radio station that operates online at virginradio.co.uk. It is also commonly held to be the first radio station in Europe to broadcast on the internet, a feat it pulled off in 1996. It was a distress sale by SMG and hence the deal was financially attractive for the Times Group; TIML closed the deal at almost a quarter of what SMG had paid in 2000 to acquire the radio station. According to the terms of the deal, TIML did not gain the right on the Virgin brand and hence does not retain and use the original brand name after a period of 90 days from the transaction. TIML is to manage the station along with the Irish radio consultancy company, Absolute Radio, and is also committed to invest GBP 15 million for the re-branding of the radio station, over the next two years. TIML subsequently re-launched the radio station as Absolute Radio from September 2008. Going forward, the station is also expected to diversify into new areas like stand-alone branded properties, event ownership, TV and customer transactions like music subscriptions, downloads and ticketing.
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There are certain key benefits from the deal for the Times Group:
• Entry point and foothold in what is considered as the most mature and sophisticated radio market in the world - the U.K. market. Virgin owned one of Britain’s three commercial radio licenses
• Gaining the requisite experience for operating the digital radio medium. Digital medium and radio on net are big in the west and Virgin is especially strong on the digital front with an online music subscription service, online video and mobile applications - Its online revenues comprises about 25 percent of all online revenues in the U.K. radio market
The deal was perceived in the western media as a sign of things to come from India and other emerging markets. Traditional media companies in the United States, Western Europe and Japan have been struggling with falling advertising rates, a gloomy economic environment and competition from the Internet. But newspaper, television and radio companies in emerging markets are expected to expand.
Source: Company, Press Reports and Releases
September 2008 witnessed another important milestone in Indian M&E industry, when Reliance Big Entertainment and Steven Spielberg’s DreamWorks SKG inked a USD 1.2 billion deal to set up a new DreamWorks Studio, based in Los Angeles. As per the terms of the deal, the new studio is to be a 50:50 Joint Venture - the first such instance between a Hollywood entity and a Bollywood company - and thus marked the biggest union between the two industries till date.25
25 Company, Press Reports and Release
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Reliance Joint Venture with DreamWorks SKG- A ‘Big’ Step for Indian Cinema
September 2008 witnessed a marriage of Bollywood and Hollywood of significant proportions in the history of cinema. Iconic Hollywood director Steven Spielberg's DreamWorks SKG film studio signed a deal with Reliance ADA Group's entertainment arm, Reliance Entertainment as per which Reliance agreed to pump USD 500 million into DreamWorks that can enable the DreamWorks team end their association with Paramount Pictures and float a new USD 1.25 billion film studio that could produce more than 30 films over the next 5 years (the funding is contingent on the additional money being raised as debt). According to the deal, DreamWorks is to henceforth function as a 50:50 joint venture between Spielberg, current DreamWorks Chief Executive, Stacey Snider and Reliance Big Entertainment. Spielberg retained the rights to the name DreamWorks and affixed it to the new entity. Viacom’s Paramount Pictures had bought DreamWorks in 2006 for USD 1.6 billion with the aim of using the company as a creative engine to reinvigorate Paramount, but was looking for buyers to save on overhead costs. Reportedly, prior to DreamWorks' exit, Paramount was paying USD 50 million a year in overheads for DreamWorks.
The deal was hailed as one of the most important deals in the history of Indian cinema - not only due to the size, but also due to its impact. Spielberg is one of Hollywood’s most successful directors of all time. Some of his well-known films are “Raiders of the Lost Ark”, “ET” and “Jurassic Park”. DreamWorks has an impressive track record of producing box office successes like “Saving Private Ryan”, “Dreamgirls”, “Gladiator” and “Transformers”. The deal is expected to benefit both DreamWorks and Reliance Entertainment as the former is to have access to a stable source of financing from Reliance, while the latter is to hold distribution rights in India for future film releases by DreamWorks across platforms- theaters, television, DTH and Home Video - for a period of six years. Further, the company is able to tap Spielberg’s popularity to expand its presence in the U.S. market. Reliance Entertainment does not have any creative control over the studio.
The deal is expected to give a further boost to Reliance Entertainment’s global ambitions. Earlier in March, through its exhibition arm Adlabs, Reliance had bought several multiplexes in the U.S., giving it 250 screens in 28 North American cities, including New York, Los Angeles, Chicago and Washington D.C. The company had also bought another 50 theaters in Malaysia, and some theaters were also taken over in Mauritius and Nepal. Also in the May 2008 Cannes Film Festival, Reliance Big Entertainment had announced production deals with some of the biggest names in Hollywood such as Brad Pitt, George Clooney, Tom Hanks, Jim Carrey and Nicholas Cage.
The new deal comes in the wake of a financial crunch in Hollywood, with the industry looking to foreign investors to replace the funding that has now reduced from Wall Street due to the prevailing economic downturn.
Source: Company, Press Reports and Releases
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From the perspective of India Media Inc., these deals were significant due to the scale of their ambitions, since both these companies did not go down the well trodden Asian diaspora route and chose the more expensive, intensely cut-throat, mainstream audience route instead, to enter the global market. These acquisitions signified the foray of aspirational Indian media companies outside their ethnic comfort zones. Besides signifying India Inc.’s increasing thrust towards climbing new frontiers, the acquisition underlines the fact that geography, language and cultural barriers no longer count for Indian industry. Such aggressive acquisition of foreign properties have also set precedents for other Indian M&E companies, and it is expected that these two deals may be the precursors of many more such international acquisitions by Indian players. However, there are some important points which Indian media companies need to consider before acquiring a foreign media property.
Points to consider for evaluating acquisition of a foreign Target Brand
Synergy with acquirers Assessing market conditions Product category evaluation Target brand performance existing portfolio
Ascertaining market size Assessing market size Analysis of the brand’s Experience and expertise and growth potential of and growth potential of historical performance of the acquirer to operate the overall M&E industry the product category and pace of growth in that particular category of the target
Organization’s capabilities Risk return analysis of the Awareness, salience and required to support the Evaluate key oppurtunity oppurtunity presented by recall of the brand among growth plans of the areas in the market the product category its target audience target brand and whether the acquirer possesses these capabilities
What are the areas What are possible Target’s performance Whether expected where the company can avenues for the target to vis-à -vis the intensity of returns commensurate use its current capabilities leverage its existing competition faced in the with investment levels to differentiate in the capabilities /brand image? market required market?
Acquirer’s abilities and How have international Evaluating existing change readiness to What are the final set of content producers distribution capabilities of handle the risk and oppurtuinities to be diversified and grown in the brand and future challenges arising out of pursued scale? inventory pipeline integration of two different cultures
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Implications for Players
For the industry players, international forays provide access to more mature and sophisticated western media markets, which results in a more competitive orientation and outlook. This also encourages Indian media companies to absorb and imbibe the best practices of their foreign counterparts. Knowledge and resource sharing across geographical boundaries can help in building up the skill and capability base of the Indian companies which can eventually equip them to take on the best in the world market.
Internationalization also represents potentially lucrative new market opportunities for the Indian M&E industry as a whole. As competition in the domestic market increases and the industry gets more fragmented, international markets present a good risk mitigating and revenue augmenting option for the Indian players. Leading industry players across the world, like News Corporation and Sony Pictures Entertainment have created and established global networks. Indian media companies are also now beginning to show that they have global ambitions. Synergies, access to funds, favorable regulatory mechanism and trade agreements can help give further impetus to the industry in this direction.
Internationalization - Implications for Players
Sector Effects of Internationalization Implications
TV • Steadily increasing penetration of Indian • Steadily increasing international revenue stream for broadcasters channels abroad (meant for NRI audiences) • After a sufficient scale has been built in India, big broadcasters in India can start launching across multiple distribution platforms channels catering to mainstream audiences in other countries and create international television • Launch of channels by Indian broadcasters brands such as the ones that Star and Sony have created that cater to local audiences in other • Need to understand the content preferences and tastes of target audience, be it NRI or countries global mainstream, and have a programming mix tailor made for them
Film • Increasing popularity of Indian films among • Need to understand the type of content that works for the NRI audience, and develop the NRI diaspora content accordingly • Bollywood films have started making • Imperative for players to tie up with marketing/distribution agents abroad to secure release in inroads amongst the mainstream global mainstream theaters and unlock the potential of the overseas home video market audience • Technical and creative quality of the film should be able to match international standards; • Established players in Bollywood venturing accordingly time and cost allocation at the script development and post production stage into co-production and production of needs to go up Hollywood films • Players need to aggressively market themselves in international markets as well as • Indian post production studios can develop international film festival forums; marketing spends abroad to increase as a potential off shoring destination for foreign studios
Print • Players have launched overseas editions of • Need for evaluating the target market potential and consumer preferences before getting into newspapers and magazines particular territories • Online editions of Print media targeted • Players need to effectively tap advertisers abroad to capitalize on their reach among the Indian primarily for the NRI audience diaspora • Need for players to effectively monitize their online versions
Animation • India has a share of about 8 percent in the • Because of the excessive dependence on the outsourcing model right now, there is a risk global animation outsourcing market that the Indian industry may lose a large portion of it’s revenues if outourcing dips. This could • About 80 percent of the revenues of the happen if other alternative outsourcing hubs emerge or if India begins to lose its cost Indian animation industry comes from advantage due to higher talent costs because of talent demand outstripping supply outsourcing work • The Indian industry uses world class software and technology as it handles outsourced • As a result, India has a thriving and fast animation production of some of the biggest international studios growing aniamtion industry inspite of low • Because of the already existing high quality infrastructure, their remains a big untapped local demand potential for Indian animation studios to develop their own global IPs. The demand and market for such global animation properties is huge as witnessed by the box office collections of animation films produced by studios such as Walt Disney and Pixar
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© 2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Investment Trends
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Deal Activity and Investment Trends
M&A Activity: Media and witnessed 1 cross border deal valued at USD 105 mn. Some of the model profitable media companies worldwide 1 Entertainment are conglomerates with presence across the media value chain such as News Corporation, Disney, Time Warner, Viacom and NBC Universal. These conglomerates have been Overall deal volumes registered a 25 percent drop in 2008 able to create value by the exploitation of their content but the number of M&E deals increased from 59 to 85 as libraries across media platforms thereby aggregating their compared to 2007. In 2008, the 85 deals were valued at customer base and addressing diverse media consumption USD 1.7 billion as compared to 59 deals in 2007 at USD 1.0 patterns. billion. Among the main trends in the sector that is driving M&A The sector witnessed 36 private equity deals as compared activity is the creation of specialized media and multimedia to 27 in 2007, with deal values amounting to USD 496 mn. holding companies that include print and publishing M&A activity registered 49 deals at USD 636 mn as companies, internet resources, radio, TV and a number of compared to 32 deals in 2007. The Indian media sector other media assets. continued to explore international synergistic opportunities In India too, several companies such as UTV; Network18; recording 12 cross border deals amounting to USD 612 mn. Reliance Big Entertainment; Bennett, Coleman & Co. and In 2008, television continued to attract investor interest NDTV have expanded their presence across the media value through 24 deals at USD 380 mn. As compared to 7 deals chain. These domestic conglomerates have seen increased for USD 22 mn in 2007, film and content production interest from their global counterparts as evidenced by registered 10 deals valued at USD 775 mn in 2008. Viacom’s joint venture with Network 18, Time Warner’s Investors were attracted by one of the only growing print investment in Miditech, Disney’s investment in UTV markets in the world with 10 deals at USD 91 mn in the Software Communications and NBC Universal’s investment same year. Alternate media platforms such as out of home in NDTV Networks plc. attracted foreign investment of USD 124 mn through 7 deals. In 2008, the investors capitalized on the MVAS space through 10 deals valued at USD 94 mn due to the increasing subscriber growth potential of this medium. In 2008, radio
1 Bloomberg, Research Reports, Mergermarket
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“2009 will also be a year of consolidation and mergers. Half the TV broadcast industry is already in fire sale mode in India. Similarly, Cinema exhibition space is poised for consolidation, since economies of scale is a prime value driver in this business.” Rajesh Sawhney, President, Reliance Entertainment
Television Broadcasting Television Distribution
Historically, television has been the largest value creator in The television distribution segment has not witnessed too the Indian media and entertainment sector on the back of much deal activity in 2008 with Morgan Stanley and India robust advertising growth, and it is no surprise that this Infrastructure Holdings Fund’s USD 60 mn investment in segment has seen a flurry of deal activity from private Hathway Cable and Datacom being the only significant equity and global media conglomerates alike. Key reported investment this year7. transactions in 2008 include Disney’s acquisition of a 15 This segment is plagued by a number of inefficiencies which percent stake in UTV Global Broadcasting2, NBC Universal’s are impediments to value creation. In addition, some of the acquisition of a 26 percent stake in NDTV Networks plc for measures taken by the government such as implementation USD 150 mn3, Merrill Lynch’s investment of USD 30 mn in of CAS have not seen the level of enforcement and Zoom Entertainment Network and News Corporation’s joint execution as one might’ve hoped. However, distribution is venture with the Rajeev Chandrashekhar backed Jupiter likely to emerge as a major area of investment both in DTH Entertainment Ventures (which owns leading South Indian and cable, given future opportunistic growth. television channels)4. The distribution landscape in India is dominated by large This year also saw the exit of Reuters from their 26 percent conglomerates such as Tata, Zee, Reliance ADAG and the joint venture with Times Global Broadcasting and the sale of Hinduja Group which have the ability to invest for the long Peter Mukherjee backed INX Media’s sale of its English term as compared to the unorganized local cable operators. news channel to NaiDunia5. With limited financial strength and imminent digitization, Since broadcasters derive approximately 80 percent6 of their there consolidation is expected in the fragmented cable revenues from advertising, a slowdown in advertising market. growth in 2009, coupled with increasing placement costs is Deal activity in television distribution 2009 is likely to be likely to put severe pressure on the less established driven by requirements to raise capital to fund ambitious broadcasters. Broadcasters with strong channel bouquets roll-out/customer acquisition obligations and and those that can aggregate niche audiences are expected opportunistically acquire the local cable operators wherever to continue to see advertiser and investor interest in the possible. near term and also benefit from the imminent digitization of the distribution landscape.
2 Bloomberg, Research Reports, Mergermarket 6 Industry sources 3 Bloomberg, Research Reports, Mergermarket 7 Industry sources 4 Bloomberg, Research Reports, Mergermarket 5 Bloomberg, Research Reports, Mergermarket
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With just 38 percent8 of penetration in print, India is one of the few growing print markets in the world and is expected to sustain its growth rate and create value for the next 5-6 years, supported by strong underlying fundamentals such as growing literacy rate, emergence of local centric businesses, low PC penetration, absence of pan Indian players (except BCCL) and a huge vernacular market. DE Shaw’s second round of investment into Amar Ujala9 highlights the importance of extensive vernacular reach and regional advertising growth. Kotak Mahindra Bank’s increased stake in Business Standard10 supports the thesis that readers of English financial news dailies are considered to be in the higher income bracket thus luring advertisers to channel a larger portion of their advertising spends through English financial news dailies.
However, the print market faces two major challenges – growth of internet/television news and high newsprint costs. The rise of computer and internet penetration is likely to erode print market share in the long term and consequently the return on investment for advertisers. Second, rising newsprint costs seen in 2008 have eaten into the profit margins since newsprint accounts for approximately 50 percent11 of the total cost of a newspaper publisher.
As a result this industry is likely to go through a consolidation phase wherein the larger players may seek margin growth by acquiring smaller regional players. Second, print companies might also seek to leverage their news distribution model through different platforms such as the internet, television and mobile.
Radio
The presence of increasing number of players in this industry vying for a pie of USD 3 billion12 in 2010 – that too with zero differentiation has led to cannibalization of revenues in this sub sector. Hence, this sector has seen limited M&A activity in 2008. The incumbents have focused on strengthening their existing operations and the international players played a waiting game due to foreign investment constraints faced by this segment.
Regulatory changes such as relaxation of FDI limits, granting permission to own multiple frequencies in a city and the permission to air news and current affairs hold the key to the growth of this segment.
In the near future, relaxation of regulatory hurdles is likely to facilitate active interest from large international private equity players and global radio majors such as Fox, Walt Disney, Hearst, Rogers Communications, Virgin Group and CTV Globemedia.
8 Industry sources 12 IDFC SSKI Research Reports 9 Bloomberg, Mergermarket 10 Bloomberg, Mergermarket 11 Industry sources © 2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 164
Out of Home
The Out of Home segment witnessed a reasonable interest from private equity in 2008. Key deals consummated during the year were Goldman Sachs and Lehman Brothers’ investment of USD 50 mn in the out-of-home advertising subsidiary of ENIL and Warburg Pincus’ USD 75 mn investment in Laqshya Media13. A number of others were also reported to have been in discussions with private equity funds during the year to raise growth capital.
The growth prospects of this segment remain strong with key drivers being format expansion on the back of airport privatization, public infrastructure projects, upgradation of street furniture and technological advances. The fragmentation of other media and OOH’s proposition of providing a localized, low cost medium of advertising enhances the medium’s appeal to advertisers. However, near term challenges due to the rationalization of advertising expenditure due to the economic slowdown remains a concern.
Some of global OOH majors such as JCDecaux and Clear Channel have a limited presence in India and may look to scale up Indian operations through inorganic means. However, since most of the Indian companies are in growth phase and lack scale, M&A activity in 2009 may be limited to growth/expansion capital investments, joint ventures and alliances.
Gaming
In 2007, UTV Software Communications acquired Indiagames and the U.K.-based Ignition entertainment marking their foray into the mobile, online and console gaming market. In 2008, UTV continued to strengthen their position in this segment with the acquisition of True Games Interactive, a U.S.-based developer and distributor of online games.
Going forward, we believe that Indian gaming companies are likely to seek capital infusion to acquire technology, develop content and retain people. We also believe that incumbents such as Zapak and Indiagames are likely to seek to complement their existing portfolios and technologies through acquisitions in India and overseas. The Indian gaming industry is expected to grow at 106 percent annually to reach USD 250 mn14 by 2010 and is likely to witness strategic interest from international players such as Vivendi, Electronic Arts, etc.
Outbound Deals
In 2008, a number of Indian media companies extended their presence to other geographies. Key deals included Bennett Coleman’s acquisition of U.K. based Virgin Radio for USD 105 mn to gain a foothold in the U.K. radio market, UFO Moviez’s acquisition of Moviebeam, a leading U.S. based on-demand movie service and UTV’s acquisition of True Games Interactive, a U.S. based publisher of
13 Bloomberg, Mergermarket 14 Industry sources
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online games. Reliance Big Entertainment was by far the most active Indian media acquirer abroad with the acquisition of Willow TV (sports webcaster), DTS Digital Images (film restoration company) and the expected USD 550 mn joint venture with Steven Spielberg’s Dreamworks SKG15.
Indian media companies are likely to continue to scout for opportunities to establish a global footprint in 2009, especially at attractive valuations brought about by the global economic crisis.
“Internationally the mobile gaming segment in particular is ripe for another round of consolidation after seeing some significant M&A activity between 2004-2006. Some listed companies are trading well below cash and at fractional revenue to sales multiples. This is clearly a buyers’ market. However given the overall market sentiment, the natural instinct of most companies who have cash will be to conserve it and hence we may see some long gestation periods before deals actually get consummated.” Samir Bangara, COO, Indiagames
PE investment trends in Media and Entertainment
While there is a large amount of capital available for the right business venture, investors follow extremely rigorous assessment and evaluation processes before actually committing funds to a particular business. A typical private equity fund invests in only about 2-3 percent of the investment opportunities that are shown to it; approximately 85 percent of investment opportunities are rejected after initial screening or assessment.
Several reasons (including interest in the underlying industry or segment) can result in a potential investment being rejected by the investor. Main concerns that investors often have specifically in the case of media businesses are:
• Volatility of cash flows in the case of certain businesses or industry sectors
• Absence of operating infrastructure to support its growth projected in the business plan
• Significant involvement of the promoter/owner in decision-making
• Outdated and inconsistent accounting policies, not in line with current practices.
15 Industry sources, research reports, Mergermarket
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There are several actions that a media company can take in order to become more investor-friendly – in a sense to make itself “ready for investors”. These actions span different functional areas and some of them are described in more detail below.
Alignment of the business model to industry themes
Companies looking for investment need to examine their business models and assess how it is aligned to critical growth and competitive themes in their industries. This includes assessing the following:
• Who is the target audience?
• What is the value proposition being offered to this customer base?
• Is this an attractive customer segment?
• Is the value proposition superior to that of competition? For example, a newspaper that leads a particular language genre in a city may need to evaluate whether it provides advertisers an attractive audience that cannot otherwise be reached.
• To what extent they can exercise control over their position in the industry value chain and their revenue streams. For instance, a television channel that is not a part of a strong distribution bouquet may not have strong control over its ability to reach cable households in order to drive viewership and advertising revenues.
• How the company plans to mitigate risks particular to its industry segment or business model: for instance, a film production company, whose year-to-year revenue could vary widely depending on the performance of its films in the box office, might pre-sell some of its rights or enter into co-financing arrangements in order to reduce its dependence on performance of any specific film.
Development of a robust business plan
Investors today expect robust, professionally developed business plans from companies that they are considering an investment in. The plans need to cover following key elements:
• Detailed assumptions underlying such business plans, which are typically derived either from industry trends (e.g. size, growth) or the management’s strategy (i.e. target audience, pricing, market share etc.).
• Scenario analysis with regard to industry trends as well as success of the company’s strategy; identifying and analyzing key sensitivities in the
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assumptions is a good way to signal to a potential investor that the manager is aware of the risks associated with the business plan and is in the process of planning ahead for them. A television broadcaster, for instance, could analyze the break even for a new show by testing the impact of different levels of viewership and advertisement rates; a newspaper, on the other hand, could evaluate the impact of an increase in newsprint prices on its profitability.
Increasing visibility of cash flows in the projections
Reducing volatility of cash flows reduces the risk perception for investors, making the company more attractive to investors. Some possible ways to do this are:
• In an industry such as film production, where revenues can vary significantly from film to film, producers can increase visibility of future revenues by pre- selling some of the rights of upcoming films – this reduces the downside risk in case a film performs badly at the box office
• Similarly, television broadcasters and newspapers could increase visibility of future cash flows by signing long term sponsorship deals or newsprint purchase contracts
• Another common strategy employed by media companies to reduce earnings volatility is to adopt a portfolio approach. For instance, a record label can produce several albums each year; while the returns of individual albums may vary substantially, the returns of the portfolio could be expected to be steadier from year to year.
These strategies do not protect a company from poor performance in its core business, but it does reduce the volatility of earnings between one year and the next; lower volatility makes the same expected returns more attractive for potential investors. Companies wishing to attract investment need to understand which strategy is most relevant for reducing volatility in their business projections and how best to apply it to their business.
Development of the infrastructure supporting the growth plan
For most media companies, as the case for investment is based on business scalability, companies need to demonstrate the ability to execute their business plans. A critical aspect of this is the development of operating infrastructure, in the form of management teams, information and control systems, and decision- making processes, to support a larger scale of operations. Key areas to focus on are:
• Operational and creative dependence on few key individuals resulting from legacy of family/ individual driven business set up. Such dependence on few
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individuals coupled with absence of professional management raises concerns regarding scalability of the business as the existing management may not have the bandwidth to manage significant growth in the business. Media companies therefore need to develop a strong management team combined with a professional set of second tier management and also look to develop a well defined succession plan for key management individuals and reduce business discontinuity risk
• Lack of focus on supporting infrastructure leading to situations such as unsophisticated IT systems which are unable to handle complexities, absence of a formalized and strong MIS, ill defined processes, roles, responsibilities and management controls. Weak systems and processes place major constraints on the ability of an organization to increase scale and also reduce the reliability of the business plan from an investor’s perspective.
Improving corporate governance
Weak corporate governance processes are a key concern among investors with respect to the media industry primarily due to small/medium scale of a number of companies and traditional lack of corporatization in the space. These are typically evidenced by:
• Weak accounting policies resulting from absence of any accounting pronouncements on industry specific issues allowing companies the flexibility to develop accounting policies focusing on improving profitability and tax savings. For example, there is no set standard for accounting treatment of content costs due to which companies tend to have varied and inconsistent accounting treatments
• High risk of management override
• Weak board oversight
• Lack of transparency in operations stemming from absence of agreements for key arrangements and reliance on trust/relationships with regard to key operations. Agreements, if they exist, are not typically enforced or are difficult to enforce from a practical perspective. Increasingly, companies are entering into agreements with various stakeholders, evaluating means to enforce the agreements, looking for means to control and audit the supply and distribution chain etc.
Stronger corporate governance and processes are likely to increase the reliability of the business plan and the reported financial performance from an external investor’s perspective.
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© 2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 09 Changing landscape in accounting for Media and Entertainment industry
The convergence of accounting standards across the globe used set of accounting standards in the world, the is gaining increasing momentum. Most standard-setting accounting landscape as we know it, is significantly bodies have acknowledged that the ultimate goal of changing. convergence is to have a single globally accepted financial The aim of this publication is to provide a high-level reporting system. Accordingly, the International Financial summary of how financial statement results of the Media Reporting Standards (IFRS) issued by the International and Entertainment (M&E) industry may get impacted upon Accounting Standards Board (IASB) have emerged as an adoption of IFRS. IFRS is likely to affect most companies, ever greater focus of attention for reporting entities in not only those from the M&E industry, on various topics recent years. such as accounting for business combinations, financial While the IASB and the U.S. Financial Accounting Standards instruments and derivatives, share-based payments etc. In Board continue to work closely on their convergence project this publication, we have discussed how adoption of IFRS between IFRS and U.S. Generally Accepted Accounting may impact the area of “revenue recognition” for entities Principles (U.S. GAAP), the U.S. Securities and Exchange within the M&E industry especially transactions involving Commission (SEC) has made significant progress to barter transactions, multiple-element deliverables and right increase the acceptance of IFRS. The SEC's decision to of return provisions. Each of these concepts has been accept foreign private issuers' financial statements prepared explained by way of examples below. in accordance with IFRS as issued by the IASB without reconciliation to U.S. GAAP, has demonstrated the SEC's willingness to continue to support the move towards Barter transactions convergence. Additionally, the SEC recently proposed a "roadmap" for phasing in IFRS filings by U.S. public companies beginning for years ending on or after December Barter transactions involving advertising services are 15, 20141. Back home, the Institute of Chartered commonly entered into by entities within the M&E industry. Accountants of India has also released a ‘Concept Paper on IFRS could have a significant impact on the accounting and Convergence with IFRS in India’, which details the strategy reporting of such transactions in the financial statements. and roadmap for convergence of Indian Accounting A barter transaction involving advertising services occurs Standards with IFRS effective April 1, 20112. when two unrelated entities transact, under which one With these developments, the growing use of IFRS in the entity provides advertising services and in return receives world’s markets and its current position as the most widely advertising services from the other entity. These advertising
1 SEC Release No. 33-8982, Roadmap for the Potential Use of Financial Statements Prepared in Accordance with International Financial Reporting Standards by U.S. Issuers, available at www.sec.gov. 2 Concept paper on convergence with IFRSs in India, available at icai.org
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services may consist of publishing advertisements in the one in the barter transaction in question. newspapers or magazines, broadcasting commercials on The above can be explained by way of the following television or radio, displaying advertisements on websites or example: advertising through other media. In most cases, no payment is made between the two entities exchanging services. • Publisher X provides Television Broadcaster Y with advertising space in its magazine. In return, Y broadcasts Under IFRS, revenue from barter transactions is to be X’s television commercials on its channel. No payments recognized in the financial statements, provided the are made between the two counterparties. The fair value services exchanged are dissimilar and the amount of of the advertising service provided by X to Y is USD 3 revenue can be reliably measured . 100,000
IFRS does not provide a definition of similar or dissimilar • As the magazine and the television channel are two transactions. As an example, transactions involving different advertising media, the advertising services exchange of advertising services for supply of goods would exchanged are dissimilar. X therefore recognizes revenue be considered dissimilar. By contrast, transactions involving of USD 100,000 for the advertising service it has exchange of advertising services in similar media do not provided. This amount is the fair value of the advertising result in revenue recognition under IFRS. In this regard, service provided by X as part of the barter transaction, media may be considered to be similar, if they share some based on other similar advertising services provided by of the characteristics such as the target group, format or X. position and size of the advertisement, frequency and timing with which the advertisement is broadcast/placed. Certain related financial reporting issues may also arise if the barter transactions cross two accounting periods. For With respect to the second criteria, revenue from the example, if at the end of a reporting period one party to the exchange of advertising services may only be measured barter transaction has performed only part of its services reliably by the advertising service provider at the fair value and the other party has delivered all the services, then a of its own advertising service, and not at the fair value of necessary asset or liability need to be recorded in the the advertising service received. As a benchmark for financial statements. measuring fair value, the advertising service provider may only use other advertising transactions that are non-barter Therefore, before adoption of IFRS, entities that enter into transactions, involve advertising services similar to those in barter transactions need to analyze their contracts to the barter transaction, occur frequently, involve payment of evaluate financial reporting implications. consideration and do not involve the same counterparty as
3 International Accounting Standard (IAS) 18, Revenue, paragraph 12 and 20; Standing Interpretations Committee (SIC) 31
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Multiple-element transactions
A multiple-element arrangement is an arrangement with a customer under which different deliverables are required to be provided to and/or performed for that customer for a composite fee. In these cases, it may be necessary to separate this single arrangement into its various components, with different revenue allocations for each component to reflect the substance of the transaction.
IFRS does not contain detailed guidance on the breakdown of multiple-element arrangements. However, it is common practice to follow U.S. GAAP (EITF 00-21), which requires an arrangement to be accounted for as a multiple-element arrangement if:
• It has stand-alone value to the customer, which is the case if it is sold on a stand-alone basis by any vendor or the customer could resell it
• There is objective and reliable evidence of the fair value of the undelivered item and
• Delivery of undelivered elements is probable and substantially under the control of the vendor, i.e., if the customer has a general right to return the delivered elements.
In the media industry, publishers often sell comprehensive “information solutions” that combine print and online products. While the print product has a fixed edition status at the time of sale, the online product includes regular updates to the information contained in the print product, which are provided over the Internet for a certain period of time in the form of a time-limited subscription. In such cases, under IFRS when the customer buys a combined print and online product, the arrangement involving the two deliverables may need to be separated for revenue recognition and the total purchase price may need to be allocated among the individual elements4.
"Relative fair value method" is one of the methods that can be used to allocate the total purchase price among the individual elements. Under this method, the portion of the total consideration received or receivable to be allocated to the different components is determined by the ratio of the fair values of the components relative to each other.
The above can be explained by way of the following example:
A publisher sells books containing collections of accounting text. Customers can also purchase an online solution from the publisher, which provides regular online updates to the relevant accounting text. The products are sold at the following prices:
4 IAS 18, paragraph 13; example 11 of the Appendix to IAS 18
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• Bound print edition as a single purchase USD 100 • Three-year online subscription as a single purchase USD 50 • Bound print edition including three-year online subscription USD 120 Let us assume that customer X purchases the bound print edition including the 3- year online subscription and pays USD 120. Under the relative fair value method, two thirds of the total consideration of USD 120 is to be allocated to bound print edition amounting to USD 80 and one third to the 3-year online subscription amounting to USD 40.
Right of return provisions
Another area of revenue recognition that needs to be evaluated includes customer contracts having right of return provisions. Publishers generate publication revenue by selling their publications through wholesalers and retailers, which form the link in the commercial chain between the publisher and the end customer. Generally, wholesalers and retailers have the contractually agreed right to return unsold products to the publisher for a reimbursement of the selling price. This may affect music and print products.
In such situations, if the wholesaler or retailer has a right of return, and there is uncertainty as to the probability of return. Under IFRS, revenue is recognized when the period in which the wholesaler or retailer may exercise its right of return has passed or the publications have been sold to end customers5. However, revenue may be recognized at the time of delivery, if the volume of expected returns can be reliably estimated (e.g., from supportable historical data) and revenue is deferred for the risks based on the expected returns ratio. For new titles, it may be difficult to reliably estimate expected returns due to a lack of historical experience. In the absence of a reliable estimate, revenue is usually recognized for new titles only when the time period for exercising the right of return has elapsed or, if sooner, when the products have been sold to end customers.
Upon adoption of IFRS, publishers may have to analyze their contracts having right of return provisions and make necessary adjustments in the financial statements.
In conclusion, while we have only covered certain broad areas of ‘revenue recognition’ in this publication, there are various M&E industry-specific accounting issues that companies need to address upon of adoption of IFRS such as accounting for program assets, publishing and distributing rights, contract productions etc. Companies in the M&E industry should start thinking about adoption of IFRS - determining a strategy and project management plan, knowledge and resource requirements, changes to information technology systems and processes and communication to internal and external stakeholders.
5 IAS 18, paragraph 14; example 2b of the Appendix to IAS 18
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Building Robust And Scalable Internal Processes
The Media and Entertainment (M&E) companies in India To be specific, at each stage of their evolution, M&E players today are operating in a much more turbulent and volatile must ask themselves the following questions: environment as compared to their predecessors. The • Does the design of the business processes established exponential growth witnessed in certain media sub-sectors by my company support its strategic objectives? along with the need to constantly innovate the business model, to create a perceivable differentiator, has put • Are our processes robust enough to support scale up of significant pressure on the internal processes of these operations and improve our revenue realizations? companies. Considerable focus has been put on the top line • Has the management developed a comprehensive and valuations by Media companies in recent times with understanding of the business risks that could prevent little regard to profitability. But successful players realize that my company from achieving its strategic/business if they need to be profitable they need to make sure that process objectives? not only is their strategy well articulated but also that they have robust internal processes to efficiently execute that • Does the design of the internal processes established by strategy. In addition to these complexities, corporate my company adequately address the risks identified? governance requirements have increased manifold; investors • Has the management derived a set of critical success and rating agencies are now closely looking at an factors and key performance indicators that monitor organization’s risk management and governance practices. objectives and management of the risks? Organizational processes, systems, performance metrics as • Do we have a good oversight function to review whether well as procedures have to be aligned to the Company’s these established processes are working the way they strategic priorities. Then and only then is it likely that a should be? company could be able to successfully face the risks, challenges and opportunities being presented by the If players understand and prepare for these questions well external environment. Thus, having robust internal enough, then they are well placed to leverage their internal processes is now a pre-requisite for success. capabilities to take on the external and internal threats and opportunities. Further, they can also gain insights into those areas where their business design may not be optimized, and thus, are able to identify areas where their company may be able to improve their performance.
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An organization is governed by the interrelationships of also been rising in recent times. The main business many systems, functions and processes that contribute to objectives with respect to content acquisition and its success. For the M&E companies in particular, there are development should be to: certain key processes that are an imperative for their • Offer content that maximizes consumption (i.e. progress up the value chain. viewership, readership, listenership etc.) In this section, KPMG has attempted to analyze the impact • Maximize return on content production and/or acquisition of the external environment and recent trends on the costs following key internal processes of M&E companies as well as identify the critical success factors and key performance • Maximize the content library valuation by creating indicators for managing these processes: content with resale potential across time, mediums and geographies. 1. Content Acquisition and Development To achieve these objectives, players have to build in certain 2.Advertising Sales internal capabilities to face the risks and uncertainties 3.Distribution arising out of the business environment.
Content Acquisition and Development
Business Objectives
Content remains the king, especially with the wide variety of leisure and entertainment choices available to the consumer. Content has to be enriching enough to attract and engage the viewer and a rich content library can be a lucrative long term revenue source. Increasing number of players across M&E sub sectors, and the resultant competition has fuelled the demand for quality content. As a result, the cost of content acquisition and development has
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M&E Industry: Towards effective Content Acquisition and Development
Sector Environmental Context Critical Success Factors Key Performance Indicators
TV • Rapid growth in the number of GECs • Hedging against the risk of • Rating points (TRPs) for individual which typically obtain original increase in cost of content by programmes programming content from external signing long term contracts with content houses. Consequently, content houses • Viewership share of channel expected increase in content within its category acquisition costs for broadcasters • Comprehensive and continuous market research to keep a track of • Cost of programming per episode • Increasing demand for non-fiction consumer preferences for content programming such as reality, game • Percentage of projects meeting and talent shows • Modification of programming production budgets distribution to reflect these • Growing opportunities for established changes • Return on content players to syndicate content to development/acquisition costs smaller TV houses not competing in • Creating alliances to share content the same genre as well as created over time so as to • Hours of original content per day international players optimize returns, content relative to peers acquisition costs • Increase in equity barter deals in light • Value of programming library of the decrease in advertisement • Clear segregation of editorial spends due to cost reduction decision making from • Budget vs. actual variations in measures by corporates Advertisement-for equity barter program acquisition and deals to maintain independence of development costs editorial content • GRP trend analysis for programs
• Cost per GRP of content acquired/ developed
• Revenue growth from content syndication
• Number of customers for content syndication
Film • Increasing audience acceptance of • Ensuring a balanced portfolio of • Number of films in content library cross over content and small budget, big as well as small budget films multiplex movies to mitigate risks as well as • Value of content library maximize revenues • Emergence of studio model leading • Percentage of projects meeting to increase in content inventory for • Proper valuation as well as production budgets production houses monetization of content library • Return on content development • Increasing demand of Indian film • Production of content that is content for overseas market technically compatible as well as • Number of films released in the universal enough to cater to the year • Increase in number of multiplexes discerning overseas audience fuelling demand for content • Size of content pipeline relative to • Working on multiple films peers • Enhanced use of digital technology in simultaneously without cinema plus the race to lock in talent compromising on the quality of • Budget vs. actual variations in leading to an increase in production content production costs and timelines budgets • Efficient management and control of film production processes to prevent time and cost overruns
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Sector Environmental Context Critical Success Factors Key Performance Indicators
Print • Increasing significance of niche • Conducting continuous market • Average Issue Readership content with growth in the number research to keep a track of • Total number of copies sold of specialty magazines as well as consumer preferences (Circulation) newspaper supplements • Proper consumer segmentation • Average Realization per copy • Growing preference for locally and matching these segments to relevant content their content preferences • Market share within its category
• Change in business model aimed at • Ensuring a judicious mix of • Pagination vs. Compete de-risking Advertisement sales different languages and genres • Revenue growth from content revenue and creating newer while deciding upon product syndication platforms such as internet, radio etc. portfolio • Number of customers for content • Spiraling increase in newsprint costs • Increasing local supplements to syndication resulting in pressure on margins cater to specific local content needs • Increasing competition from news channels • Effectively leveraging existing content for newer business • Increase in equity barter deals in light ventures of decrease in Advertisement spends due to cost reduction measures by • Creating alliances to share corporates content created over time so as to optimize returns on content acquisition costs
• Clear segregation of editorial from Advertisement-for equity barter deals to maintain independence of content
Radio • Over 250 channels expected to be • Targeting specific consumer • Percentage share of Listenership operational by end of 20081 segments and differentiating • Return on music royalty fee paid content accordingly • Over 700 new licenses expected to • Return on number of RJs be issued under phase 32 • Differentiating through focus on employed particular music genres • Very little differentiation among the • Saturation of interest among radio stations with all of them • Differentiating through the consumers with the same music focused on mass music segment station’s RJs and non music genres across all stations programming • Excessive fragmentation of listenership specially in metros • Targeting geographies where resulting in lower Advertisement radio penetration is lower rather rates for each player than focusing on metros only
Music • High acquisition costs for film music • Conducting continuous market • Return on total music acquisition rights research to keep a track of costs consumer preferences • Not all movies are box office hits. As • Percentage of albums/movies for music sales of hit films generally • Bargaining for more rational prices which music rights are acquired earn a majority of the profits, for music rights among top 50 music albums sold therefore, high risks are involved for • Careful evaluation of future selling • Value of content library the music distributor prospects before buying rights • Size of content pipeline relative to • Film studios opening their own music peers distribution arms thereby limiting the content available for pure music players
1 ”FM Radio, music industry out of tune on royalty”, Rediffnews, December 2008 2 ”FM Phase III Policy in offing to add780 radio channels in another 275 cities, says secretary I&B”, ASSOCHAM, November 2008
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Sector Environmental Context Critical Success Factors Key Performance Indicators
Animation • Primary focus on the low value • Conducting continuous market • Size of content library production part of the animation value research to keep a track of • Value of content library chain which is outsourced to India consumer preferences • Percentage of projects meeting • Very few in house productions • Focus on complete in house production budgets indulge in genres other than productions mythology (which tends to have only • Return on content development • Focus on creating global properties local appeal) which are region, religion & culture • Number of films released in the • Lack of creative talent required for the neutral year high value conceptualization, pre- • Creating strategic alliances to • Size of content pipeline relative to production and post-production parts acquire the technical skills required peers of the value chain to produce quality animation • Budget vs. actual variations in content production costs and timelines
Managing Content Acquisition and Development risks - A summary
Most of the anticipated risks can be managed by embedding the following control processes in the operations:
• Conducting market research to ascertain consumer preferences at regular intervals
• Undertaking competitor research surveys and monitoring their product offerings
• Regularly tracking consumer acceptance (viewership, listenership, readership etc.) and taking corrective action as per the feedback
• Maintaining proper schedules and plans and monitoring deviations from the actual standards
• Implementing procedures to help ensure that intellectual properties are protected.
Therefore to conclude, anticipating future content preferences and proactive production of such properties, rather than reacting to market trends, may help players emerge as leaders in the market space. Developing standards, procedures and resource requirements for product design, testing and production and monitoring adherence to the development process and methodologies may also help in ensuring the desired production quality and efficiency.
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Advertising Sales
Business Objectives
The emergence of multiple media platforms and the consequent customer fragmentation, advertisers have become more demanding and players are being required to demonstrate value/results. As a result, the targets and goals pertaining to this function have become steeper than before. The main objectives of the business with respect to advertising sales are:
• Maximize price per spot and revenue per unit (viewership/listenership/readership)
• Optimize Advertisement-program/Advertisement-edit ratio
• Maximize Advertisement inventory utilization
• Enhance the advertiser’s perception of product value.
To achieve these objectives, players have to build in certain internal capabilities to face the risks and uncertainties arising out of the business environment.
M&E Industry: Towards an efficient and effective Advertisement Sales process
Sector Environmental Context Critical Success Factors Key Performance Indicators
TV • More number of channels leading to • Dynamic Pricing- Dynamically • Advertisement inventory increasing clutter and audience linking spot pricing to TRPs utilization fragmentation • Creating appropriate discounting • Advertisement revenues per • Increase in number of regional and policy for network sales rating point for individual niche channels that offer more cost programmes as well as for the effective and better targeting • Mapping advertisers to increase whole channel mediums to advertisers penetration • Ratio of advertisement units sold • Stagnant/declining Advertisement • Dynamic monitoring of sales and at original price to those sold at rates due to audience fragmentation available inventory spots discount
• Increasing competition from • Coordination as well as integration • Ratio of paid to free advertising emerging sectors like radio and of systems between slots internet Advertisement sales and scheduling teams • Average price per spot for prime • Increase in equity barter deals in light time and non-prime time relative of decrease in Advertisement spends • Key account management for to peers due to cost reduction measures by large advertisers corporates • Average Discounting rate • Identification and negotiation of equity barters to utilize unused • Percentage of old accounts Advertisement inventory retained
• Number of new advertisers
• Value and number of Advertisement for equity barter deals
• IRR on Advertisement for Equity barter deals
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Sector Environmental Context Critical Success Factors Key Performance Indicators
Print • Increase in competition leading to decline in • Optimizing pagination • Advertisement Edit Ratio cover prices, leading to enhanced dependence on advertising revenues • Optimizing the Advertisement-edit • Total Advertisement space ratio sold commercially • Declining readership figures leading to increase in bargaining power of advertisers • Increasing the proportion of color • Proportion of color inventory inventory sold sold • Rise in the number of specialty magazines and newspaper supplements, as well as • Appropriate advertising mix • Average price per insert regional press offer more cost effective and between display ads, classifieds, tenders and supplements • Advertisement inventory better targeting mediums to advertisers utilization • Offering optimized discount rates • Indiscriminate increase in pagination without • Paid to free inserts corresponding in Advertisement volumes. to advertisers for buying spots Now resulting in lower pagination to cut among the diverse portfolio • Percentage of old accounts spiraling newsprint costs offerings retained • Increasing competition from emerging • Mapping different categories of • Number of new advertisers sectors like radio and internet advertisers to the different portfolio offerings • Ratio of Advertisement units • Increase in equity barter deals in light of sold at original price to those decrease in Advertisement spends due to • Key account management for sold at discount cost reduction measures by corporates large advertisers • Average Discounting Rate • Identification and negotiation of equity barters to utilize unused • Value and number of Advertisement inventory Advertisement for equity barter deals • IRR on Advertisement for Equity barter deals
Radio • Radio Advertisement spends in India still • Dynamic Pricing- Dynamically • Advertisement inventory account for only 5 percent of the total linking spot pricing to listenership utilization Advertisement pie versus about 8 percent figures globally • Advertisement revenues per • Creating appropriate discounting unit listenership • Increase in number of radio stations has led policy for network sales to fragmentation of listenership and hence • Ratio of Advertisement units stagnation/decline of Advertisement rates for • Targeting local advertisers and sold at discount to those sold individual stations ensuring optimized mix of national at original price to local advertising • Local to National advertisement ratio is 25:75 • Percentage of old accounts in Indian radio versus 75:25 globally • Mapping advertisers to help retained ensure salience with programs • Lack of content differentiation due to • Number of new advertisers continued regulatory bottlenecks can lead to • Excellent coordination as well as stagnation in listenership and therefore systems integration between Advertisement revenues Advertisement sales and scheduling teams • Key account management for large advertisers
Outdoor • Increased PILs and consequent ban on • Optimize mix of advertising • Advertisement inventory hoardings in major cities putting advertisers inventory across various utilization under pressure since billboards is the largest segments- Billboards, Street segment in outdoor media Furniture, Transit as well residual • Percentage of old accounts media retained • Rising consumerism leading to increasing significance of ambient media and digital • Designing differentiating ads for • Number of new advertisers formats digital and ambient media
• Absence of a scientific metric for consumer • Developing in house capabilities response measurement limits the advertising for designing as well as execution pie in this medium of creatives
• Cinema advertising generating increasing interest with advertisers but is still in a nascent stage
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Managing Advertising Sales risks - A summary
Most of the anticipated risks can be managed by embedding the following control processes in the operations:
• Mapping advertisers across to increase the customer base
• Adopting timely and appropriate measures for tracking advertiser feedback and taking action on the same
• Maintaining up to date inventory status reports as well as monitoring sales and profitability across various channels and markets
• Establishing standard processes for Advertisement scheduling, billing and receivables.
Therefore, to conclude, adopting dynamic pricing, de-risking the business model by relying on advertising sales from more than one medium and mapping advertisers may help players emerge as leaders in the market space. Developing standards, procedures and resource requirements for Advertisement Scheduling, Billing and Collections can also help in ensuring the desired efficiency.
Distribution
Business Objectives
Building up an efficient content inventory and optimizing advertisement sales are of no use unless content is delivered in a timely manner to the end consumer. An efficient distribution process minimizes the time to market and helps ensure that this objective of the business is met. The primary business objectives for building a distribution function are mainly the following:
• Maximize total reach
• Increase ARPUs through ancillary revenue streams
• Maximize utilization of content inventory
• Facilitate content monetization across alternate platforms.
Creating efficient and effective distribution capabilities involves certain challenges and risks for the industry players as enumerated below.
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M&E Industry: Towards a more effective Distribution Process Sector Environmental Context Critical Success Factors Key Performance Indicators
TV For Broadcasters For Broadcasters For Broadcasters
• Increasing penetration of digital distribution • Efficient negotiation of distribution • Percentage of total C&S viewing platforms like CAS,DTH and IPTV as well as contracts and ensuring desired population reached cable digitization placements • Percentage of target consumer • Increasing number of channels leading to • Enhancing bargaining power with segments population reached high carriage and placement fees for distribution by adding more channels • Carriage costs negotiated with channels(even for digital platforms) and thus strengthening channel distributors relative to peers bouquet • Issues of revenue leakages still prevail due For Distributors to under reporting by cable operators • Monitoring of cable carriage contracts to help ensure compliance with agreed • Net Customer additions per • Opportunity to build in additional revenue terms quarter streams by providing value added services through digital distribution channels • Assessing benefit of paying excessive • Customer churn cable carriage with respect to For Distributors • Market share increased reach and resulting increase • Long term viability of businesses may be in Advertisement Sales • Average customer acquisition uncertain in the face of sustained losses due For Distributors cost to low price points • ARPU- Average Revenue per • Maintaining competitive price points – • Fickle consumer loyalties due to lack of user this is critical in strongly price content exclusivity amongst competing conscious market like India • ARPU through value added digital distribution platforms (and no other services point of differentiation as well) • Strong marketing and aggressive selling of add on services like video on • Average subsidy given per set • Inability to increase ARPUs through add on demand by digital distribution players up box services because of low uptake of such services among Indian consumers
Film • Digitization of cinema facilitating wider • Making investments in digital • Percentage of Total Population release of films technology and negotiation of reached agreements with digital screen • Growing revenues through C&S distribution • Rate of commission paid to exhibitors as well as multiplex owners due to increase in number of channels distributors in relation to peers • Negotiation of agreements with • Increasing penetration of home video market satellite channels; dynamic linking of due to lower price points in the sell through revenues with the number of segment screenings • Digital streaming and download of movies • Monetizing content library through through the internet alternate distribution platforms like • Despite growing popularity of Indian films home video and internet overseas, contribution of overseas • Aggressive marketing initiatives as well collections to the total revenues of film as tie up with agents to facilitate wider industry is below 10 percent release of films in overseas markets • Piracy issues continue to prevail • Proactive litigation against unauthorized use of content
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Sector Environmental Context Critical Success Factors Key Performance Indicators
Print • Increase in number of newspapers • Negotiation of agreements with • Percentage of total literate and magazines leading to increase in distributors and vendors population reached bargaining power of the distributors • Enhancing bargaining power by • Percentage of target consumer and vendors strengthening product portfolio segments population reached • Emergence of electronic and mobile • Monetization avenues for alternate • Rate of Commission negotiated versions of newspapers and distribution, especially in case of paid to distributors or vendors magazines classifieds and other display ads relative to peers • Inability to increase cover prices due • Agreements and policies regarding • Unsolds vs. Compete to competition coupled with unsold inventory increasing bargaining power of vendors putting pressure on margins of companies
Music • Continuous decline in sales of • Bargaining for better revenue • Total number of distribution physical units share in case of digital music, centers where physical units of especially in case of Mobile the company is being sold • Growing importance of alternate Music(currently operators take distribution platforms; more than half • Percentage share of online music about 70 percent of revenues the revenues of the sector is from downloads generated) licensing revenues – from FM, mobile • Percentage share of mobile music music sales, online music sales etc. • Ensuring content availability across downloads all major third party internet • Piracy is still rampant in the sector; platforms such as iTunes the sector loses more than 60 percent of its revenues through piracy • Proactively pursuing legislation against illegitimate online music • Film producers introducing their own distribution platforms music labels and retaining the music rights with themselves
Managing Distribution risks - A summary
Most of the anticipated risks can be managed by embedding the following control processes in the operations:
• Effective relationship management with distribution partners
• Monitoring and evaluating technological changes and new distribution opportunities
• Maintaining sufficient infrastructure back up and internal check points to plug last mile revenue leakages.
Therefore, to conclude, adopting managing relationships with distribution partners and anticipating technological changes may help players emerge as leaders in the market space. Developing standards, procedures and resource requirements for contracting, paying and monitoring distribution costs may also help in ensuring the desired efficiency.
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Internal Audit – A Catalyst for Change
Media & Entertainment companies are increasingly waking up to the potential of their Internal Audit functions to strengthen their internal processes as well as monitor compliance with the same. A ‘real’ Internal Audit function is well positioned to not just to share industry best practices with process owners but also link the strategic business risks with ‘on the ground’ internal controls. The following questions can help you assess if your Internal Audit function is geared to meet the today’s challenges:
• Does the Internal Audit function have a charter outlining its authority and responsibility that has been approved by the Audit Committee of the Board?
• Is your Internal Audit plan linked to the risks facing your business and has it been approved by the Audit Committee of the Board?
• Do your Internal Audit personnel possess adequate industry and audit experience?
• Is the Internal Audit work focused on improving business process and IT system controls instead of merely verifying transactions?
• Does your Internal Audit function have the independence to report its results to the Audit Committee of the Board and the Executive Management?
• Do you track whether the recommendations made by your Internal Audit team have been implemented?
Media companies have a long way to go to implement strong and scalable processes. However, strengthening their Internal Audit function could be start in the right direction. As the industry grows, serious players are likely to realize that focusing on processes is no longer a luxury but a necessity
“There are many challenges facing the fledgling radio sector. Its biggest challenge is to trim its cost structure and bring viability to the business. The biggest cost elements are music royalties. Radio companies must seriously consider moving away from music formats. Secondly, radio cos have to protect cash - by working together with each other on credit control in the market. Thirdly, radio players need to band together in promoting the medium - there are many advantages of radio that should help it increase its share of advertising but this will not happen until they band together. If radio companies do this, they will actually emerge a stronger bunch. It is a well known fact that in economic slow-downs, radio does well. Clients are bound to substitute costly media like TV and print with a more cost-effective medium like radio.” - Prashant Panday, CEO, Entertainment Network India Limted
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People Management in Media and Entertainment Industry
In a knowledge economy, it is people, not capital or market, who make all the difference. As talent occupies center stage in the Indian workplace, managing and retaining manpower is becoming crucial to an organization’s success. To achieve this, companies across sectors are focusing on some of the more critical HR practices.
Riding on the economic growth and rising income levels the Indian Media and Entertainment (M&E) industry too experienced a high growth phase. It was envisaged to emerge as one of the fastest growing industries and possibly, among the larger employment generators of the country. The role of HR within this sector has also undergone a major change. The siloed HR department, focusing predominantly on basic administrative, record-keeping and transactional duties, is a thing of the past. The industry has already opened doors to trained HR professionals from outside the industry. Changed scenario in the global economic front has also changed business priorities for the M&E sector. These changes taking place within the sector have given rise to some key imperatives for HR to act upon.
Increasing Cost Pressures
With the media industry too experiencing the effects of downturn, there is an increasing pressure on keeping the costs down while simultaneously retaining its key talent. Companies are acutely feeling the strain of training, managing and retaining good staff.
There may be a need to take some hard decisions, during which HR may have to work alongside the CEO to implement these measures without hurting the employee morale. These measures need to be implemented with utmost sensitivity and with elaborate planning. HR needs to constantly communicate to the employees in a forthright and transparent manner.
With the business priorities shifting to cost optimization and working capital management, HR has to examine its own cost structure and avenues for cutting costs without sacrificing effectiveness. It needs to identify the talent and roles which contribute and create the maximum organizational value and focus its limited funds towards them.
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Formalizing Organization Structure and Systems
The Indian film industry, with over 3 billion admissions per annum, is the largest in the world, in terms of number of films produced per year. The opening of the film industry to foreign investment coupled with the granting of industry status to this segment has had a favorable impact, leading to many global production units entering the country.
Today, every function and activity related to the Indian film business is becoming well defined and systematized, be it production, film retail infrastructure, financing, marketing or distribution. As film production, distribution and exhibition companies are being listed on stock markets; an increasing number of companies are seriously looking at creating corporate structures. HR needs to contribute to this business need of consolidation of operations by instituting a formal and efficient organization structure by aligning it to the changes in the business model and assigning responsibilities to the critical positions. Decentralizing decision making to bring speed and efficiency and implementing performance management systems to measure the value delivered are the needs of the hour.
Changed focus of training
Many companies in the M&E sector have in the past, focused on continuous learning and development initiatives to address issues of talent scarcity. Attrition was another important reason why companies looked at training their employees. As the economic slowdown continues, attrition and skill gap are no longer issues. Many companies have reacted with a halt on these initiatives and have replaced them with others like smaller increments and hiring freeze. For many organizations the hiring freeze is total, others have hiring for replacement vacancies or for certain positions based on business needs.
Training however is closely linked to the overall HR strategy of the company. With new employees taking over roles, even if they are limited in number, it becomes important to equip them with all the requisite knowledge and skills to make them productive at the earliest possible time.
Earlier, corporate training was undertaken by many medium to large-sized companies to hone their employees in various areas such as management skills, leadership, communication, change management, negotiation, customer service, conflict, time management, strategic planning, stress management, attitude and delegation. Now the focus of training needs to shift towards increasing productivity imparted through internal training.
The key issue that most M&E companies should continue to address is the need for more middle managers. Corporate training in such companies needs to aim at developing middle managers and creating a future leadership pipeline.
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Ensuring talent pipeline for the future beyond the slowdown
With the advent of new sectors like internet, gaming and animation; and the established sectors like film, television and radio growing at a fast pace talent requirement is likely to grow manifold in a short period. For instance, the animation industry is expected to double its revenues to nearly USD 1.5 billion by 2010. The manpower demand in the sector has grown multifold in the last two years, though has ebbed recently. Not withstanding the current slowdown, which perhaps has blunted the focus on talent acquisition, the industry may certainly need many more trained hands.
The challenge for the industry is to build a pipeline of talent. Specifically, it is the middle and senior level talent, which is difficult to locate. This has led to a trend of recruiting people from outside the industry. It is increasingly seen in the marketing, sales and administration roles in media companies. Poaching from competition is an easy path for recruitment, however with limited choice. In the digital business, as systems grow bigger and more complex, the need for “highly skilled super specialized techies, product developers and designers” is going to grow with further growth of the industry.
From a larger perspective, there is also a need for creating world class universities and institutions which can cater to the demand created in the industry. These institutions can help in creating compact module courses with a good combination of academic learning and practical orientation/exposure.
The M&E industry needs to take cue from other industries like IT & ITES in laying structured procedures for management of its talent. The HR function also needs to expand much more with specialists in place to design, implement and manage scientific HR systems in the organization. HR also needs to put HR policies in place on the lines of other evolved industries and that meet the global standards of working. Deployment of HR policies and structured procedures in media companies are likely to help ensure transparency and fairness in the work culture, which go a long way in attracting and retaining talent.
As digital media experiences further growth, new business models and ideas get rolled out; people with potential join the fray as entrepreneurs thus creating niches and skill-sets that are more specialized.
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However, it is to be recognized that the opportunities earlier regarded as mere hobbies are becoming full time career options. Right from radio jockeys, actors, musicians, dancers, journalists, video technology creators and managers to accounts planning, cameramen, editors, soundmen and public relations managers, this sector offers career opportunities for all, challenge being to maintain and nurture these skill-sets; therefore, to build and grow a talent pool, we need greater coordination with academic institutions. Further, Media and Entertainment sector offers various high profile careers that are in constant public glare and can help to earn handsome incomes.
The need is to create a mindset amongst the parents to encourage their children to look beyond the traditional disciplines like medicine, engineering and management, and foray into this sector that can cater to the youngsters’ skill sets and competencies. The prospective employees have to deduce just what can open the doors of opportunity for them. Some of the jobs related to M & E industry involve information technology, communication engineering, event management, production management, ideation, celebrity management, financial management, brand management, business development and consulting. Care, however, should be taken in right skilling, or matching jobs with a particular level of training rather than hiring over skilled workers.
Continue with the long-term strategies of “Building an employer brand”
Creating an employer brand is one of the many long-term strategies that organizations across industries employ. When most employment strategies are short term and reactive to requirements, building an employer brand addresses the problem on a longer-term basis as it is designed to provide a steady flow of applicants to the company.
An employment brand creates an image that makes people want to work for the company because it is a well managed organization where employees are continually learning and growing. The image of an organization as a ‘great place to work’ in the minds of people creates loyal customers and employees.
Most importantly, it helps organizations to rebound quickly and get on tract as the effects of the slowdown wear off.
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An important aspect of creating a successful employer brand is supporting the entire brand building campaign with a work environment and culture conducive to professionals, where the employees get opportunities to grow professionally as well as personally.
Companies that offer variable pay options, flexible work hours, part-time options, and multiple-shifts, give employees the option to planning their work so that they can find the right balance between work and home. It also provides the immense benefit of being able to manage its employee costs effectively during the time of economic downturn.
Wealth creation in today’s era is transiting from a financial resource base to a knowledge capital base especially in those sectors which are growing at a breathtaking pace like the M & E industry. The market is increasingly dependent on intellect which lies in knowledge lies within individuals and the cultural context of the enterprise. HR needs to concentrate on converting this abstract knowledge into a corporate property without sacrificing the larger perspective of organizational effectiveness.
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Way Forward: Sector wise key action steps
Based on a detailed understanding of the industry and our IPTV, and since ARPUs are already fairly low, players need to interactions with various players, the following initiatives are differentiate through their add-on services and quality of recommended to be undertaken by those companies customer service to attract new customers. operating in various sub sectors of the M&E industry. The To summarize, the main challenges for the sector are likely industry is looking to capitalize on new opportunities driven to be: by favorable socio-economic changes and smarter distribution technologies. This section focuses on key action • Fragmentation of viewership: As the number of steps that players need to keep in mind in order to unlock channels increase differentiation of content is likely to greater potential and to help themselves: become increasingly important
• Increase their Market Share • Under declaration of subscribers by Cable operators: In an analog cable dominated distribution market like • Maximize their revenues India, rampant under declaration of subscribers at the • Improve profitability levels LCO and MSO levels, results in large subscription revenue losses for the broadcasters. This will continue to be a challenge until addressable digitized platforms Television garner a higher share in the distribution markett
• High production costs: With rising costs of acting and technical talent, managing production costs is likely to be With the explosion in the number of TV channels, and critical for television content producers increase in the choice available to the viewer, TV viewership has been seeing continuous fragmentation. Maintaining high • Low ARPUs for DTH players: Competition is likely to quality standards in content and differentiating oneself from help ensure that the ARPUs are kept low in the short competition is thus becoming more important than ever term, directly affecting the bottom lines of DTH before. Both broadcasters and content houses need to be companies. constantly aware of the changing consumer preferences for content and their products accordingly. Monetization of content libraries through internet and new media platforms such as Mobile TV is also likely to be important to augment revenues. In the distribution end of the segment the competition is likely to be intense between cable, DTH and
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To manage these challenges, while capitalizing on opportunities, stakeholders across the value chain need to take further action to unleash the true growth potential in the sector.
At an industry level, some important initiatives that could help in unlocking growth are:
• Pushing for government regulations for mandatory digitization of all TV distribution
• Development of alternate audience/viewership measurement systems
• Rationalization of content production costs through discussions with stakeholders at all levels – actors/technical staff, production houses and broadcasters
At a player level, broadcasting companies need to focus on content differentiation to attract viewers in an increasingly fragmented environment. They also need to create content for audiences in the Tier 2 and 3 towns from where the next wave of growth is likely to come.
Digital distribution players may need to improve and monetize their add-on offerings to augment their top lines. Since differentiating on cost is likely to be difficult, they need to differentiate on the quality of customer service levels.
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Television Sector: Key Action Steps
Broadcasters
Going forward, a basket approach will be important for success in the broadcasting Building channel bouquets industry. Creation of channel bouquets will increase the bargaining power of broadcasters with distributors. Innovative bouquet offerings will also help in attracting advertisers
With the over crowding of television channels, the TV viewer is likely to be spoilt for choice and those channels that are able to differentiate in terms of their content to cater Focus on differentiation of content to specific audiences are likely to do well. Channels with differentiated content and specific target audiences may also be more attractive to advertisers
Players need to focus on building a strong content library to help ensure steady source of Building a strong content library to capitalize future revenues. Some of the avenues for future revenues are dubbing of content in on various revenue streams regional languages, internet distribution, and distribution across Mobile TV etc. Proper valuation of library content also assumes added significance in such a scenario
Broadcasters must intelligently exploit mobile interactive services i.e. Peer-to-Application Realizing the revenue potential of mobile (P2A) and SMS – for reality shows and talent hunts –to augment the revenues earned interactive services from such shows. With India’s large and growing mobile subscriber base, this can be a significant revenue stream
Growth in TV and C&S penetration is expected to be driven primarily by small town and Focus on content relevance for Tier 2/Tier 3 rural India over the next five years and hence it is very important for the broadcasters to towns and Rural India develop content that is relevant to these audiences
With the increasing competition in the GEC broadcasting space, the content costs to broadcasters are likely to go up. A good long term strategy for GEC broadcasters could Backward integration therefore be to get into content production themselves, and thus hedge the risks associated with the cost of content acquisition
With a large number of distributors across segments – cable, DTH and IPTV – negotiating deals with distribution players is likely to become more complex and may need to be Maximizing reach of channels managed intelligently so that the channel reach can be maximized while making sure that carriage costs to the broadcaster remains reasonable
Distributors
With the pressure to keep monthly subscription price points low and subsidize setup boxes, it is likely to become increasingly important for DTH, IPTV and digital cable players Increasing revenue from add-on services to augment their revenues through add-on services such as video on demand. User (digital distribution players) adoption for these services may have to be driven through keeping the price points low, offering free trial periods and aggressively marketing these services among customers.
As competing on price becomes increasingly difficult, distribution players can effectively differentiate themselves is by building a reputation for quick and efficient servicing of Providing quick and efficient customer service customer complaints (which is another important consideration that people have when deciding which service to go for)
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Regulatory Wishlist
With regard to support from the government, some of the important regulations that the industry is looking at are:
Foreign Investment
• Enhancement in FDI limits in case of cable network and DTH to 74 percent in order to bring them at par with competing technologies in IPTV (in view of the convergence of broadcasting and communication technologies)
Double Whammy
• DTH players are subjected to both service tax and entertainment tax. There is a demand for removal of such double taxation
Income-tax provisions
• Rectification of the anomaly/disconnect between the down linking policy and the tax provisions regarding conclusion of contracts or holding of marketing/ distribution rights by the Indian Company and its consequential taxability.
• Clarifications regarding categorization of satellite payments (whether royalty or not) to prevent litigation.
Filmed Entertainment
The year 2008 was a learning year for the industry with the sector reeling under the twin impact of lower success ratio as compared to last year as well as facing tough competition from sporting events such as IPL. The ongoing liquidity crunch has also affected the movie making business and has slowed down the funding to producers and corporates. Consequently the number of film releases is expected to reduce in the near future. Even though in recent times, small budget movies have displayed an upside potential, yet the overall profitability of films has been adversely impacted.
To summarize and reiterate the challenges for the sector:
• Piracy – This is truly the bane of the Indian film industry. It is estimated that as much as INR 20001 crores is lost due to piracy annually. Films are sometimes released in the pirated market no sooner than 12 hours after the official release for as little as INR 20. If the industry can combat piracy then the potential revenue upside for the sector could be significant
1 Industry Inputs
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• High Remuneration Costs – Actors’ fees have been growing steeply of late which renders some projects economically unviable as they are not able to recover their costs
• Content – Film making is a creative business and the primary driver for a good film is its content. The industry needs to come up with good quality and original content which appeals to the audience
• Liquidity Crunch – In the last few years we have witnessed corporate houses jump onto the film making bandwagon; however due to the recent economic downturn they are facing a liquidity crunch and funding that was easily available in the film industry has now dried up. As a result of this we are likely to see movies that have been produced not being released. Sporting events like the IPL may also impact the releases of the films. Producers opt to time their films release after the sporting events such as IPL which could then result in a glut of films being released at the same time leading to plenty of vying for similar resources such as distributors, exhibitors etc. Low to medium budget films may be impacted the most due to this as they do not have the necessary clout
• Infrastructure – The industry is grappling with inadequate facilities in terms of number of shooting floors available, dubbing studios, equipment, exhibition centers, this is compounded by the fact that the burgeoning Television industry is also competing for the same finite resources. The need of the hour is to establish additional state of the art studio facilities which can serve as a one stop shop for all the pre and post production activities.
“Going forward, differentiation of brands will be key for a broadcaster; there will be emergence of channels catering to specific demographics - across different age groups, cities” Kunal Dasgupta, CEO, Multiscreen Media (Sony Entertainment)
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• Competition- There is increasing competition for the audience wallet and mind share from sources like IPL, online gaming, formula 1 etc. It is becoming increasing harder for films to break through the clutter and emerge as the winner in this battle.
These challenges also underscore that going forward the industry is likely to be driven by original content, technological advances and agility in responding to changing customer preferences. Stakeholders across the value chain may need to take further action to unleash the true growth potential in the sector.
At an industry level, the following initiatives are likely to help in unlocking value for the sector:
• Improve consumer connect by investing in new formats and content
• More wide spread distribution of Home Video, e.g. at grocery stores etc., to facilitate easy access
• Take coordinated and proactive action to tackle piracy
• Promote and experiment with new talents
• Improve organizational ability to attract and retain talent
At an individual level, players need to focus on developing new capabilities and reinforce their strong areas. Companies need to focus on maximizing their revenue from alternate revenue streams. With the Video on Demand services on both DTH and IPTV expected to pick up in future, players need to build up a strong and diverse content library to capitalize on content demand as well as mitigate their risks.
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Filmed Entertainment Sector: Key Action Steps for Industry Players
Film makers may have to focus on innovative content and original screenplays to help ensure higher occupancy rates in the theaters. Visual enhancements and presence of big stars can never be substitutes for good content. To help ensure higher occupancy rates in Focus on developing innovative storylines and theaters, production houses may need to keep enriching the content for viewers. content Segregating content development and aligning it with the different sections, i.e. urban/rural audiences, age-wise bifurcation, etc. are likely to be essential. Companies may also need to invest in significant advancements in audience measurement technology in order to capture and analyze consumer preferences and develop content accordingly.
Consumers today need better stories, super acting performances and wish to watch an overall entertaining movie irrespective of the subject matter. Moreover, with the rapid expansion of multiplexes in the country, there is a continuing need for good movies to fulfill the variety appetite of the viewers. In the absence of any sure shot formula for box Create a diverse library to balance returns office hits, players need to focus on creating a diverse content library, comprising different subjects and consisting a judicious blend of big, medium and small budget movies. Besides helping ensure a steady supply of content, this could also help in getting balanced returns and derisk the business model. Library content valuation is also likely to gain in significance for helping ensure steady future cash flows from diverse revenue streams.
It may be important for Indian producers to tie-up with agents who have the right relationships with major distributors along with an understanding of different markets and theatrical revenue streams. Similar alliances and a more focused approach to distribution Focus on enhancing collections from and marketing of DVDs, VCDs, etc. may also be required to tap the potential of the Overseas Markets overseas home video segment. A more comprehensive and concerted distribution effort is expected to be the key to increasing the revenue potential of Indian films from international audiences.
With the spurt in the number of Television channels, there is an increase in demand for movie content. Players can take advantage of this situation and enter into innovative arrangements with the channels. Instead of sale of satellite rights for a specific period, Maximize Returns from the Satellite Market companies can enter into revenue arrangements based on number of screenings with satellite channels. This way the players need not get tied up for a specific number of years and also can sell these rights to multiple number of channels.
Players need to improve their operational effectiveness to help ensure strict adherence to time and cost commitments. Production houses may have to deploy tighter controls and Ensure Effective Time and Cost Controls insist on time bound scripts and provide adequate provisions for contingencies to enable timely release of movies and prevent cost escalation.
Today with the theatrical windows being greatly compressed it is imperative to package ones product innovatively that could get the audience into the theaters in the opening Focus on Innovative marketing and packaging week itself and sustain it self post that with word of mouth and second rung of of content promotional activity. In today’s age of clutter, it is as important to package and present your product cleverly as much as focusing on the right content.
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Regulatory Wishlist
The sector is likely to receive a strong impetus if the following steps are taken by the government to correct the existing anomalies:
• Greater uniformity in entertainment tax and VAT regimes across States
• Relax constraints on pricing, number of shows etc. in South India
• Set up a separate body/association/ regulator for IPR related jurisdiction that is empowered to tackle copyright infringements and IPR violation cases
• Review of the Indian Cinematograph Act, 1952
• Stringent enforcement of anti piracy laws.
Print Media
Print Media is witnessing increasing proliferation of the niche and specialty genres, as well as aggressive market expansion in the regional space. As a result of the competition, the cover prices, and consequently the circulation revenues are coming down. At the same time, rising cost of newsprint is increasing the cost of operations for print companies. In such a scenario, advertising revenues are further gaining in significance for the print companies.
Owing to the dynamic and competitive environment, the sector is facing certain challenges:
• Effect of economic slowdown - Print largely being an advertising driven medium, the economic slowdown and the consequent reduction in advertisement budgets of marketers has affected this medium. Newspapers receive a large portion of their advertising revenues from verticals such as Retail, Real Estate, Jobs and Classifieds. A prolonged slowdown in these sectors is likely to have its rub off on print media.
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• Competition from internet - The increasing popularity of online services and increasing investments in the internet distribution platform poses a long term challenge to print media. The development of niche portals makes online an effective and cheaper way to reach the target audience as compared to newspapers. Globally, the sector has witnessed migration of advertising revenues from print onto online services; Indian players need to prepare themselves to avoid such a situation at home
• Rising cost of Newsprint - Newsprint accounts for approximately 50 percent of the total cost of a newspaper publisher.2 In 2008, global newsprint costs shot up due to the demand supply mismatch leading to strained margins for Indian print companies. Sharp decline in newsprint demand in the U.S. led to the closure of many newsprint factories in U.S. and Canada. However in 2009, we believe that newsprint costs may remain stable as the demand from emerging markets remains relatively stable while the supply continues to reduce. The reduction in supply due to capacity reduction of Canadian companies and the depreciating rupee could be complemented by reducing energy costs and capacity addition in China. This is expected to provide relief to print media companies
These are challenging times for Print Media. To tackle these challenges as well as provide growth impetus, industry as well as the government needs to take certain action steps.
Industry can take the following concerted steps to unlock the growth potential of the sector:
• Invest in quality improvements, especially in regional media to attract advertisers
• Collective negotiations and bulk purchase of newsprint
• Constitute forums to encourage and promote regular reading habits among youth
• Adopting innovative practices like trading media space in publication platforms in return for equity
• Improve organizational ability to attract and retain talent
At the player level, there is a need to consolidate ones respective position in their respective markets, as well as increase their niche and specialty offerings. Strong investments need to be made in quality improvements to attract more advertisers, as well build consumer loyalty. Companies also need to monetize their news content over alternate media platforms to scale up their presence.
2 “Indian Print Media Industry”, Systematix Institutional Research, May 2008
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Print Media Sector: Key Action Steps for Industry Players
There are limited numbers of print vendors in each city, enjoying monopolies over a particular area. With competition heating up and growth in the number of newspapers and Strengthen Distribution Avenues magazines available, there is a need to retain and manage these vendors effectively. Hence companies may need to focus on building vendor loyalties in order to reach the end consumers effectively.
With the smaller towns growing in terms of per capita income and consumer spends, and advertisers opening their eyes to the cost advantage that regional dailies offer vis-à-vis their Enhance Presence in Regional Markets English counterparts’, players have to focus on enhancing their presence in the regional markets to maintain their growth momentum. Inorganic growth is likely to be more cost effective vis-à-vis organic growth.
Players may have to focus on effective consumer segmentation and define their target groups so that they are able to customize their offerings according to their target segments. Indian consumers have become quite discerning in their choices, and the axiom Focus on niche and specialty product offerings “One Size Fits All” is no longer valid for the Indian Media market. Players have to offer different products to capture different target segments, and niche and specialty products could further grow in significance.
Similar to their global counterparts, Indian Print Media Players are facing a big threat from TV and Internet in the long run; these two media are eating into the share of news distribution for the print players. Hence, players may need to realign themselves across Exploit alternate distribution platforms to news distribution media- TV, Internet and Radio- rather than being standalone publishers. monetize content and de-risk the business Most of the larger players have already taken the lead in this aspect. Further, players also model need to try to monetize their online versions by providing differentiated content and focusing on classified sections such as properties, jobs and matrimonies. Development of internet verticals can also help insulate players from the growing challenge of the internet.
To attract advertisers, players have to focus on improving their product quality. This could be done by enhancing by having more colored pages, increasing the proportion of colored Invest in quality improvements advertisements and innovative format layout. Per unit revenues from color inserts are more than those of black and white. Hence these quality improvements could automatically lead to improved bottomlines.
At present, e-versions of newspapers and magazines are primarily a cost center for print media companies, with very few monetizing them. Players have to provide distinct and up Monetize Electronic Versions to date content for their online versions and then find avenues for monetizing the same, especially the display ads section like job portals, matrimonials, classifieds etc.
Globally newsprint costs are escalating at a rapid pace, and Indian print media players source around 55 percent of their demands from imports3. Therefore Indian players are Manage Newsprint Costs also getting affected by the rising prices. Players have to focus on managing these costs effectively, by inventory stockpiling and entering into long term contracts.
3 “Indian Print Media Industry”, Systematix Institutional Research, May 2008
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Regulatory Wishlist
The government can also facilitate the growth of Print Media in these challenging times by taking the following action steps:
• Reducing the custom duties for newsprint which can help the players in controlling their costs
• Ensure uniform tax rates for Indian and foreign players which can provide a level playing field in the industry.
Radio
After the Phase 2 reforms and the rationalization of the license fee, the Private FM sector in India has been on a rapid growth mode with the number of Private FM station increasing from just 21 at the end of 2005 to 205 by March, 2008. As there is very little differentiation in content between the stations, this has led to continuous fragmentation of listeners especially in the metros. With the grant of Phase 3 licenses expected soon, the competition may increase further and it may become necessary for the players to differentiate themselves to build a brand identity and get loyal listeners. At the same time, it may also be important for the sector to aggressively target local advertisers, which currently make up only about a fourth of the radio advertising pie.
To summarize, the main challenges for the sector are likely to be:
• Fragmentation of listenership: As there is very little differentiation in content between the stations, this has led to continuous fragmentation of listeners especially in the metros. With the grant of Phase 3 licenses expected soon, the competition and fragmentation is likely to increase further
• Increasing share of Radio in the total advertisement pie: This is currently around 4 percent versus an average of 8 percent globally. Increasing this share may require making greater efforts in convincing advertisers of the effectiveness of radio as an advertising medium.
• Attracting regional advertisers: Local advertisements make up only a fourth of the radio advertising pie currently (as against 75 percent in U.S.4), and therefore tapping this segment adequately may continue to be a big challenge.
To manage these challenges, while capitalizing on opportunities, stakeholders across the value chain may need to take further action to unleash the true growth potential in the sector.
4 KPMG Interviews
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At an industry level, some important initiatives that can help in unlocking growth are:
• National implementation and acceptance of the listenership measurement mechanism – there is a need for greater consensus on nature and system of measurement
• Initiatives for ongoing messaging to the advertising community on the effectiveness of the medium by radio industry forums
• Developing consensus on a mutually acceptable method of determining radio music royalties along with music companies
At a player level, companies may need to focus on differentiating the content on their radio stations. They also need to target local advertisers and increase awareness of the effectiveness of radio as a local advertisement medium.
Key Action Steps for Industry Players
With the crowding of FM channels especially in metros, retaining loyal listeners is likely to become increasing difficult for the radio stations if all of them are offering the same genre Differentiation in music content of music – new Bollywood hits. Focusing instead on other genres like retro Bollywood or English music could help ensure differentiation
Apart from music content, the other option for radio stations to differentiate themselves could be through other programming such as chat shows, comedy shows etc. In such Differentiation in non-music content programming, how good or bad the RJ is can make a lot of difference; therefore retaining and attracting the best RJ talent may be of great importance in a competitive environment. With local advertisement accounting for only 25 percent share of the radio advertisement pie, against as high as 75 percent in U.S., regional advertising still remains a large Target local advertisers untapped potential in India. The whole industry needs to take steps to sell the medium to local advertisers and educate them about the cost-effectiveness of radio for local advertisement campaigns. Brand building to ensure greater listener stickiness is all the more critical in the current Brand building scenario with limited content differentiation
Assessing potential of alternate revenue streams such as activations and internet radio Exploring alternate revenue streams may also be important to augment the standard advertising revenues.
“Radio, however, is severely underserved and in fact requires more release of supply of radio frequencies rather than consolidation. Similarly, Internet will become big in the next 2/3 years on the back of 3G/Wimax and Broadband initiatives and enterpreneurial innovations.” Rajesh Sawhney, President, Reliance Entertainment Pvt. Ltd.
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Regulatory Wishlist
The industry is looking at the government for regulatory support in some important areas:
• Foreign Investment: Raising FDI limit above the current level of 20 percent to bring in more foreign investment
• Royalties paid to Music Companies: Rationalization of music royalties with a variable fee system
• Permission to broadcast News and current affairs programmes
• Networking between players: Allowing of networking between licensees for sharing content, resources etc.
• Government Advertising: Mandatory share in government advertising to the sector
• Removal of cap on number of channels across the country: Relaxation of cap on total number of channels that can be held by a player in the country
• Allowing of multiple licenses within a city: This could allow radio companies to experiment with different genre for radio stations apart from hit film music
• Raising loans: Considering loans extended to the Radio sector as “priority lending”
Music
With rampant piracy eating away half of the revenues and resulting in dismally low growth rate, the Indian Music Industry has been going through hard times like the rest of the world. However the increasing revenue from the mobile and online sales as well as radio royalties is now showing potential to offset the declining physical unit sales and push the industry towards higher growth rates. Mobile music may be the most important category here with high cell phone penetration levels in India. Piracy is expected to continue to be the biggest menace to the industry and players could get together to tackle it more aggressively.
To summarize and reiterate, the main challenges for the sector are likely to be:
• High rights acquisition cost: Acquisition cost of music rights had been consistently rising. This combined with higher marketing spends had severely constrained the profitability of the music companies. Though the companies have reduced their acquisition costs by entering into revenue-sharing agreements with producers, bringing them further down is likely to be a
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challenge.
• Rampant piracy: The risk related to piracy of both digital and physical music is very high. Consumers can easily share songs amongst themselves through peer-to-peer file sharing. On a global level the industry has managed to clamp down on and successfully shut down some file sharing websites like Napster, Kaaza and Limewire, and established legitimate digital distribution platforms. However, a lot remains to be done before piracy can be brought under control. The lengthy legal and arbitration process coupled with lack of empowered officers for enforcement of anti-piracy laws continue to undermine the crackdown on piracy.
• Adaptation to digital business models: To stand up against the new realities of music business, companies need to adopt new strategies for content monetization such as entering into mobile music revenue sharing agreements with music companies and content aggregators. To monetize digital music, they need to invest in digitalizing their entire music libraries.
To manage these challenges, while capitalizing on opportunities, stakeholders across the value chain need to take further action to unleash the true growth potential in the sector.
At an industry level, some important initiatives that can help in unlocking growth are:
• Forming joint raid and intelligence teams with the local policy to bring piracy under control
• Providing assistance to the Internet Service Providers in identifying the websites allowing download of illegal music content and blocking access
• Negotiating better revenue sharing terms for mobile music with mobile service providers
At a player level, companies need to focus on monetization of their libraries on new media platforms – mobile and internet. For mobile music, they could consider getting in “bundling” deals with handset manufactures. Aggressively pursuing legislation against copyright infringement may also be critical to reduce losses occurring due to piracy.
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Music Sector: Key Action Steps for Industry Players
With the continuing decline of cassette and audio CD sales, the revenue from new distribution media – i.e. mobile and internet is likely to become increasing important for music companies. In mobile music, it is important for the music companies to negotiate Maximizing monetization of music libraries for better revenue sharing terms with mobile service providers. For monetizing music on across new media the internet, music companies need to provide complete ‘entertainment packages’ to attract consumers and roll out their own video and music-streaming services , along with other value added services like artist interviews, live performances and ‘behind-the- scenes’ footage directly to consumers.
With the popularity of music phones in the country, players need to tie up with handset makers to provide music subscription services for a limited period and tap this consumer segment. The cost of providing such services can be bundled with the handset prices. This Exploring avenues for ‘bundling’ of music idea can be extended beyond handsets. “Free” music can also be bundled with mobile- subscriptions with other devices phone contracts, broadband service, music-players, PCs or even cars. Firms that provide these things may be prepared to chip in towards the cost of the music service in return for customer loyalty. Proactive legislation like the recent instances of T-Series suing Yahoo and Youtube for copyright violations can also go a long way in curbing online piracy. If such legislative Taking proactive measures against piracy actions are systematically pursued by the industry players, it could act as a strong deterrent to online piracy.
Regulatory Wishlist
Support from the government and law enforcement agencies is likely to be critical for the music industry in the coming years as it continues to grapple with piracy. The current state of law enforcement against individuals indulging in music piracy remains poor. Joint teams of music industry forums and the police to conduct raids can prove to be an effective way to control piracy but these teams need to be deployed on a much larger scale, have adequate manpower and be spread throughout the country to have measurable impact.
The music industry is in a state of paradigm shift, reinventing its business model, entering into more partnering in response to dramatic transformation in the way the music is being consumed and distributed. Music companies may not be building an economic future based not just on selling music but on “monetizing” consumer access to it. “Music for free” is the myth that the industry needs to drive a campaign against with the cooperation of the government and internet service providers.
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Outdoor
Over the past two years, the sector has benefited from the increase in consumption power of Indian customers. As consumption increases, new products are being made available to new markets and it becomes essential for marketers to build brand awareness. Other demographic changes like women entering the workforce have also led to creation of new products and services such as ready to eat products, online payment services etc. These new products and services need awareness building. Building awareness has been a traditional strength of the OOH medium.
However, like its counterparts from other M&E sectors, OOH medium faces certain inherent challenges. Some of the most notable challenges are:
• Effect of economic slowdown - OOH being completely an advertising driven medium, the economic slowdown and the consequent reduction in advertisement budgets of marketers has affected this medium. The sector witnessed decreased ad-spends, especially towards the last quarter of 2008 when financial categories like international banks and mutual funds reduced their exposure towards the sector. Further the slowdown in construction sector as well as postponement of retail supply plans is expected to impact the sector adversely.
• Lack of a scientific measurement system - The lack of a scientific metric to measure the efficacy of OOH medium continues to be a deterrent to advertisers. Research that gives accountability for the rupee spent has long been the need of the hour. The panel set up by MRUC and Hansa Research to measure the efficiencies of outdoor advertising is expected to play a crucial role in the growth factor for the industry. The research is in an advanced stage and results are awaited shortly.
• Ban on billboards/hoardings in some cities - Authorities across the country initiated "city beautification" drives and introduced new byelaws for OOH. The impact was felt through reduced clutter levels in cities and standardization of sizes. Some cities witnessed a complete large format media ban, viz. Chennai. Traditionally, Billboards has been one of the largest segment within the sector with over 60 percent share of the outdoor pie5; but now there is an imperative upon players to reduce dependencies on this medium.
• Need to provide end to end services as well as customized content - Integration of services provided including content design and development and media integration is a trend that could further consolidate. An increasing need to create and provide customized content for this medium is being felt in the industry. Companies need to address this demand to unleash the growth
5 KPMG Interviews, KPMG Analysis
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potential of OOH.
These challenges also represent a potential for consolidation in the industry. As players change their business models, and go for integration across their value chain to provide end to end services, the sector could witness more acquisitions and exit of smaller players. Bigger players may expand from City to State and hence become stronger, thus leading to a more organized sector in the medium to long run.
To capitalize on favorable trends and opportunities, stakeholders across the value chain need to take further action to unleash the true growth potential in the sector.
At an industry wide level, the following steps need to be jointly taken:
• Improve governance standards and move towards greater professionalization
• Improve consumer connect by providing end to end integrated services
• Invest in creative innovations for this medium, both in terms of technological formats as well as communication mediums
• Explore consolidation options by expanding across the value chain
• Promote the development of a uniform scientific measurement system for this medium
• Improve organizational ability to attract and retain talent
In particular, players need to invest in developing certain capabilities that could provide growth impetus at an individual level. It is becoming an imperative for players to optimize their advertising inventory across various formats as well as expand their presence in smaller towns. Investments in building digital capabilities
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Key Action Steps for Industry Players
The traditional billboards segment is under pressure in urban centers with Chennai already banning them and speculations about Bangalore and Delhi placing further curbs. Further this segment is highly fragmented with a large number of unorganized players operating in Optimize mix of advertising inventory across these segments. On the other hand, street furniture & transit segments are growing various segments rapidly on account of the growth in transport, retail, malls and real estate. Therefore, players need to focus on maintaining a judicious blend of inventory across these segments.
With smaller towns emerging as important growth sectors and increased spends on infrastructural developments in these towns, expansion to these through focused Expand Presence in smaller towns investments have to be the thrust area for players. Players should lay emphasis on providing localized services.
Rapid onset of organized retail and the consequent expansion in malls and multiplexes imply the need to engage customers through interactive mediums. To capitalize on the same, players need to focus on asset deployment of screens using digital technology. Invest in building digital capabilities Further, this type of interactive media calls for content that is distinct from the traditional outdoor media. Hence companies have to concentrate on building capabilities to of creating separate ads and designing different creatives for the digital and ambient media.
With companies increasingly looking for one stop destination for receiving end to end services, players have to invest in providing integrated services, including content design Expand presence across the value chain to and development and media integration. Smaller outdoor companies too need to enter provide end to end services into tie-ups with creative designing agencies and other players to enhance their value chain and offer a complete their portfolio of services
With rapid technological advancements and onset of public transport system like Metro Develop new capabilities to capitalize on Rail, Mass Rail Transport system etc., there is a need to enhance the creative capabilities infrastructure development in public transport and kind of outdoor media to take advantage of this huge opportunity. Players need to system invest in capability building to take advantage of the same.
With the advent of sporting leagues like IPL, sports and events in general are likely to have a large outdoor component and there is likely to be convergence between event Build scale and take advantage of management and outdoor. Given such a scenario, large scale outdoor companies may convergence between event management venture into event management and vice-versa. Further, there is a possibility of and outdoor acquisitions and consolidation in the industry, and players need to be well prepared for the same.
could also give good returns in the long run. Regulatory Wishlist
Support from the government is critical for this rapidly evolving sector in the coming years. In particular, government can propel the growth of the sector by taking the following action steps:
• Clarity in regulatory framework given the thrust for infrastructure development
• Dialogue with industry players before framing guidelines on the sector, as against unilateral decisions like ban on hoardings across cities
• Provide investment and operational incentives
• Appointing a unified regulator for the sector
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Animation and VFX Industry
Driven by growth in the global market for animation content and the compelling business case for outsourcing, the Indian animation sector has been on a rapid growth mode over the last few years. With the success of recent Indian animated films and the increase in the number of children’s channels, animation content demand in the domestic market is growing too. We expect the industry to grow at a CAGR of approximately 18 percent, over the next five years, to reach INR 39 billion by 2013, as most of the underlying growth drivers remain strong.
In order to make Indian Animation and VFX industry globally competitive and churning out products for domestic as well as global audience, the industry will need to manage the following key challenges
• Absence of co production treaties: Countries like Korea, China, Singapore, France etc have enjoyed Government support for ingeniously promoting this sector. The Government assists the industry for the development of robust domestic industry and to explore exports avenues through co production treaties. For example, France has a fund created out of entertainment tax, which supports co-production to the extent of 25 – 40 percent, with a condition that 40 percent of the production to be done in France.6 India has no such exemptions from the government or any co production treaties with countries such as France, Korea, Japan etc.
• No restriction on networks for airing content: Presently most of the animated content downlinked on networks is sourced from the overseas market and generally from an existing library at a discounted price. This is one of the serious impediments on the growth of Indian Animation Industry. Many countries like Canada, China, Korea, France, UK etc have made varying levels of mandatory localization of content. According to CASBA Korea has mandatory local content programming quota for movie channels 30 percent and for animation channels it is 35 percent.7
• Lack of awareness: Countries like Japan, Korea, China etc provide assistance to the local Animation & VFX Industry for overseas business promotion. Indian companies suffer because there is a lack of international awareness about the potential of the Indian animation and VFX industry as a library of rich original content and a hub for co productions.
To manage these challenges, while capitalizing on opportunities, stakeholders across the value chain will need to take further action to unleash the true growth potential in the sector.
6 FICCI 7 FICCI
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At an industry level, some important initiatives can help in unlocking growth would be:
• Indian companies creating international presence through acquisitions / joint ventures / strategic tie ups will provide access to the front end and transferring back end production to India.
• While capital is an important element for companies increased focus on creativity through implementation of processes, systems and technology management will hold the key to development of this industry.
• With an increasing focus to cut back on production costs, Hollywood companies such as Pixar, Disney etc would be attracted to the Indian animation and VFX market. For example, a typical production budget of approximately USD 150 million in the US could be reduced in low cost countries such as India to approximately USD 30 million.8
• Education initiatives such as the growth of animation and VFX education institutes will supply this industry with the required talent pool to create IP of international repute.
On a player level, companies will need to invest in increasing the scale and scope of their activities and aim at creating global animation properties.
Key Action Steps for Industry Players
A world class animation film can have a production and marketing budget of over USD 100 million,9 and the revenues necessary to recover this cost can only be earned through a mix of domestic and international markets. Therefore, to become truly global, the industry will need to build not only the creative capabilities to develop animation properties and story concepts Produce animation properties with a which have a universal appeal, but also the marketing skills and relationships to pre-sell their universal, global appeal films in international markets and the financial muscle to take a project from pilot to completion. Aggressively targeting co-production deals with international studios could be one way to build valuable IP; focusing on low-cost films with local storylines and characters could be another. Further, international acquisitions could help Indian players rapidly enhance their skills.
It will be important that the animation studios in India increase the scale and scope of activities that they can handle. Some progress has been made in this regard in the past few years, and several Indian players are recognized internationally for world class infrastructure and high Increase scale and profitability quality talent. In order to support this move up the value chain, Indian animation studios would need to extend their capabilities from television to film content, and to strengthen their presence in pre-production activities such as storyboarding and character modeling, and post- production activities such as visual effects and compositing.
In the short term, outsourced work continues to be the primary revenue stream of the industry. Key neighbouring countries and competing outsourcing hubs such as Singapore, Philippines and China benefit from high quality infrastructure and strong government support, Continue to attract outsourced work and thus players must work hard to maintain their cost advantage without compromising on quality. Animation and VFX studios need to develop their own tools and processes to increase the efficiency of accomplishing repetitive tasks while maintaining quality.
To build a strong talent pool requires developing educational infrastructure keeping in mind the Invest to build a strong talent pool projected demand for animators. Thus, to ensure a good talent pool in both quantity and quality, the industry players will have to invest in improving the education infrastructure.
8 KPMG Estimates 9 KPMG Estimates
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Regulatory Wishlist
The industry is looking at the government for regulatory support in some important areas:
• Tax holiday: Animation industry is covered under the Software Technology Parks of India (STPI) society, set up by Ministry of Communication & Information. STPI holds goods for an ‘outsourcing’ business and most animation studios that are getting benefited from STPI have to ensure an export commitment of more than 85 percent. As a result many Indian animation studios wanting to produce original content-based IP and use art and talent from India to produce animation stories for India, do not get any such benefits. The classification is unviable since Indian govt. through this STPI route is actually subsidizing the production cost of the foreign shows instead of content creation for Indian companies. This is leading to more & more studios working on foreign content and is leading to a severe lack of animated Indian stories in domestic television schedules.
• Service Tax relaxation: Original content studios developing local content should be subject to a much lower level of the 12.36 percent levy of service tax to enable growth during the intial phase.
• Entertainment tax: The entertainment tax in India varies from 21 percent to a high of 125 percent across various States of India with the average rate of tax being 60 percent.10 High incidence of taxation adds to the cost of operations for young animation companies. Hence, the Indian animation industry should not be classified in the same league as the live action film category that has already achieved industry status.
• Government Advertising: Mandatory share in government advertising to the sector
• Implementation of a cap on airing content on networks across the country: Implementation of a cap on number of hours of licensed content that can be aired by a network as against fresh programming in the country
• Raising loans: Considering loans extended to the Animation and VFX sector as ‘priority lending’
10 FICCI
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Gaming
Video games have been a popular pastime since the 1970s. There was a time when the global gaming market was dominated by the ubiquitous PC games. But with the advent of newer options such as mobile, console, and online games, the gaming market and its dynamics have undergone a major change the world over. PC gaming is no more the leader in the worldwide gaming segment. Mobile gaming, with revenues of USD 4.5 billion11 in 2008, has become the fastest- growing segment because of its rising popularity amongst gamers and the advent of devices such as the 2nd generation iPod Touch and the iPhone, which greatly improve on the mobile gaming experience.
To summarize, going forward, the main challenges for the sector would be:
• Skewed revenue sharing agreements with Mobile operators: Because of the direct billing relationship with the end user, operators in India typically get 60-70 percent of the revenues for VAS while content creators get only 15-20 percent. This puts mobile game developers at a disadvantage
• High customs duties and indirect taxes: These make legitimate console hardware and software about 40 percent more expensive than grey market imports and therefore encourage piracy.
• Internet piracy: Piracy is and will continue to remain a big challenge for PC game developers, because of easy availability of illegal free downloads of games on the internet through P2P sharing services.
To manage these challenges, while capitalizing on opportunities, stakeholders across the value chain will need to take further action to unleash the true growth potential in the sector.
At an industry level, some important initiatives can help in unlocking growth would be:
• Developing a consensus on and implementing a nation wide anti piracy campaign jointly with law enforcement agencies (for conducting raids) and Internet service providers (for blocking access to illegal online game downloads)
• Pushing the government towards lowering of duties – such as custom duties, and indirect taxes such as VAT that eat into games companies margins.
• Publishing dedicated gaming publications, organizing gaming events, contests etc. can go a long way help in creating more awareness and attracting new consumers to the gaming world.
11 FICCI
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At a player level, companies will need to focus on differentiating the content on their radio stations. They will also need to target local advertisers and increase awareness of the effectiveness of radio as a local advertisement medium.
Key Action Steps for Industry Players
Communities do exist in India but they have not assumed scale similar to the western world. In India, communities are extensions of a group of friends or family members. The online Developing networks around games community format where gamers with similar interests from different geographies come together is still at a nascent stage in India. Actively developing such communities, will help the gaming companies retain loyal gamers.
Brand building through sustained advertising will be important to ensure greater gamer Brand building stickiness
Exploiting the potential of alternate revenue streams such as in-game advertising and Exploring alternate revenue streams advergames will also be important to augment revenues
Regulatory Wishlist
The industry is looking at the government for regulatory support in some important areas:
• Recognition of industry status for the gaming industry
• Relaxation of customs duties and indirect tax regime
• Government assistance to clamp down on rampant piracy in this industry
• Considering loans extended to the gaming sector as ‘priority lending’
© 2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. © 2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. We would like to thank all those who have contributed and shared their valuable domain insights in helping us put this report together.
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KPMG in India KPMG Contacts FICCI Contacts
Mumbai Pradip Kanakia Amita Sarkar KPMG House, Kamala Mills Compound Executive Director FICCI 448, Senapati Bapat Marg, Head - Markets Federation House Lower Parel, e-Mail: [email protected] 1 Tansen Marg , Mumbai 400 013 Tel: +91 80 3980 6100 New Delhi - 110001 Tel: +91 22 3989 6000 e-Mail: [email protected] Fax: +91 22 3983 6000 Rajesh Jain Tel: +91 11 2335 4285 Executive Director Delhi Head - Information, Communications & Leena Jaisani DLF Building No. 10, Entertainment FICCI 8th Floor, Tower B, e-Mail: [email protected] Federation House DLF Cyber City, Phase 2, Gurgaon 122 002 Tel: +91 22 3983 5300 1 Tansen Marg , Tel: +91 124 307 4000 New Delhi - 110001 Fax: +91 124 254 9101 Jehil Thakker e-Mail: [email protected] Executive Director Tel: +91 11 2376 6967 Bangalore Head - Media & Entertainment Solitaire e-Mail: [email protected] Manish Ahuja 139/26, 3rd Floor, Tel: +91 22 3983 6232 FICCI Inner Ring Road, Koramangala, Federation House Bangalore 560 071 Nandita da Cunha 1 Tansen Marg , Tel: +91 80 3980 6000 Associate Director New Delhi - 110001 Fax: +91 80 3980 6999 Business Advisory e-Mail: [email protected] e-Mail: [email protected] Tel: +91 11 2331 6527 Chennai Tel: +91 22 3983 6294 No.10 Mahatma Gandhi Road Nungambakkam Samik Ray Chennai 600 034 Associate Director Tel: +91 44 3914 5000 Corporate Finance Fax: +91 44 3914 5999 e-Mail: [email protected] Tel: +91 22 3983 5347 Hyderabad 8-2-618/2 Nisha Bains Reliance Humsafar, 4th Floor Associate Director Road No.11, Banjara Hills Media & Entertainment Hyderabad - 500 034 e-Mail: [email protected] Tel: +91 40 6630 5000 Tel: +91 22 3983 6224 Fax: +91 40 6630 5299
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