What’s changing in electronic media and entertainment

The Indian media and entertainment sector is now in the midst of much action. From multiplex operators to TV broadcasters and cable operators to radio players, all are facing an evolving marketscape. According to the FICCI-KPMG Indian Media and Entertainment Industry Report, the industry is expected to grow at an average of 14 per cent in 2015 and 2016 to reach ₹1,33,000 crore by the end of this period.

The stock market too seems to have taken note. Many electronic media and entertainment stocks have surged over the past year, gaining between 25 per cent and 110 per cent. The list includes Dish TV, Zee Entertainment, TV Today Network, Inox Leisure and PVR.

Here, we take stock of some of the key drivers and how they will impact each of the discrete segments within the industry. We begin with television, the single biggest segment that accounts for 46 per cent of the industry revenues.

Scripting a growth story The Indian television industry went through two phases (I and II) of cable digitisation during 2012 and 2013. The result: 26 million subscribers, spread across four metros and 38 cities, shifted from the traditional analog system to receiving TV cable signals in a digital format through set-top boxes. This was the time when many people faced TV screen blackouts, as they scrambled to meet the deadline for installation of set-top boxes.

 Launched with the hope that it would arrest under-reporting of TV subscribers by local cable operators and ensure a better experience for viewers, digitisation did not bring in all the intended benefits.

Yes, today we enjoy much better picture quality and have a wider range of channels, but broadcasters and distributors continue to face under-declaration of subscribers. Many subscribers remain unaccounted for and revenue leakages, though less severe than before, continue. Nonetheless, broadcasters and cable operators (multi-system operators) did experience a revenue boost thanks to digitisation. Subscription accounts for 67 per cent of the industry revenue and provides TV broadcasters with a buffer against the cyclically uncertain ad revenues. Aided by digitisation, Zee Entertainment saw a 26 per cent jump in its domestic subscription revenues in 2012-13, faster than in previous years. For TV Today Network, which runs the Hindi news channel Aaj Tak, subscription revenues are expected to get a fillip after the completion of the ongoing phases (III and IV) of digitisation, which will cover many Hindi speaking towns and cities.

 That apart, providing customers with channels all bundled in a basic pack instead of tailor-made packages with differentiated pricing, as is being done by the DTH (direct to home) operators, too meant limited gains from digitisation for cable operators and broadcasters. In 2013, while DTH operators saw their average revenue per user (ARPU) go up 12-15 per cent to ₹200 a month, digital cable ARPUs increased 5 per cent to ₹175 (FICCI-KPMG Report). Much higher prices for customers subscribing to HD channels too helped DTH players.

Reaping full benefit Broadcasters and distributors (cable industry comprises multi-system operators, local cable operators and DTH operators) are therefore awaiting digitisation of the remaining areas and realisation of the full potential of the areas already digitised.

 The ongoing phases of digitisation, which are to bring the entire country under its fold, are due for completion by December 2016, according to the target set by the government. Given the past experience, though, the target seems ambitious.

But when it does happen, 74 million more subscribers are expected to be added to the digital cable network. Also, ARPU is expected to improve as cable operators dish out packages with differential pricing to cater to different categories of subscribers. Estimates from the FICCI-KPMG report suggest that this could mean higher ARPUs of ₹246 a month for digital cable operators and ₹291 for DTH players, by 2017, with further increases in subsequent years.

 Together, the surge in the number of subscribers and the ARPU will boost subscription revenues for broadcasters, such as Zee Entertainment and TV Today Network, cable operators, such as DEN Networks and Hathway Cable & Datacom and DTH operators, such as Dish TV, all big players in respective markets. In case of cable TV, the subscription revenues are shared between the local cable operator, the multi-system operators and the broadcaster. In case of DTH, the subscription revenues are shared between the DTH operator and the broadcaster.

 A likely fallout of this wave of digitisation would be consolidation across thousands of multi-system operators, as they brace for implementation of digitisation that requires substantial infrastructural investment. Big players, such as Hathway Cable & Datacom and Den Networks, with very low debt-equity ratios of 0.8 times and 0.2 times, respectively, are well placed to make such investments.

The digitisation boom apart, TV broadcasters can also look forward to growth in advertising revenues, which account for 33 per cent of their aggregate revenues. As the economy gathers pace, higher spends from sectors, such as fast-moving consumer goods (FMCG), auto and consumer durables are expected to drive ad revenues. E-commerce companies too will continue to drive ad revenues.

Ad revenues to pick up Companies in the FMCG and consumer durable goods sector are expanding in the high-growth potential Tier-2 and 3 cities. A pan-India broadcaster, such as Zee Entertainment, which has a strong presence both in Hindi and regional markets, is well placed to garner a share of these growing ad revenues.

 There is however, one risk — the new TV audience measurement system introduced by the Broadcast Audience Research Council of India (BARC), this year. With wider coverage — newer areas and a larger number of households — captured under the BARC ratings, channel rankings are expected to get shuffled. Given the dependence of advertisers on these ratings, a shift in channel rankings could impact the allocation of ad revenues across different television broadcasters.

 The multiplex juggernaut The superlatives on Baahubali: The Beginning just keep coming; the highest grossing South Indian movie, ₹550 crore at last count, the fastest movie to reach ₹100 crore in two days…. the list goes on.

These would not have come about without the ability to rapidly reach vast audiences across the country — something made possible through the digitisation of screens.

Up to 60-80 per cent of average movie revenues now accrue within the first week of release. In Chennai, as in all of the leading metros, multiplexes are the reigning kings of movie exhibition, and are uniquely positioned to capitalise on this trend. The big three of the industry today are PVR Cinemas with 474 screens, Inox Leisure with 377 screens and Carnival Cinemas with 341 screens, the last an unlisted player.

A lacklustre show at the box office combined with cost pressures last year resulted in a less-than-satisfactory performance by Inox Leisure. Revenue rose 17 per cent (lower than in earlier years) and operating profit remained almost unchanged. Hurt by higher fixed costs, net profit fell 46 per cent to ₹20 crore.

But driven by successful movie releases, the company put up an impressive show in the June 2015 quarter. The same was true for PVR.

The large players are set to see better days ahead. With many acquisitions in the sector, such as that of Satyam Cineplexes by Inox Leisure, the bigwigs are getting even bigger. This, in turn, should strengthen their bargaining power versus movie distributors, with whom they share a chunk of their box office collections.

High growth potential The other industry-wide trend is the expanding presence of multiplexes in the Tier 2 and 3 cities, which have relatively lower screen penetration. Lower real estate prices are enabling multiplex players to bring down their cost per screen at such locations, making them as lucrative as the multiplexes in prime locations.

Last year, leading cinema chains added close to 100 new screens in Tier 2 cities across the country.

This year too, smaller cities will continue to remain on the radar of multiplexes. Most of Inox Leisure’s planned screen additions in 2015-16 will take place across smaller cities and towns.

 Expanding presence apart, with a series of big movies such as  Phantom, Prem Ratan Dhan Payo, Dilwale  and Mission:Impossible-Rogue Nation  lined up for release this year, box office collections are expected to zoom.

One will, however, have to wait and watch whether the movies live up to the hype generated.

On high frequency  While television and films are among the biggest segments, radio is much smaller, bigger in size than only music. The radio industry, which generated ₹1,700 crore in revenue in 2014, is forecast to grow 14 per cent in 2015, according to the FICCI-KPMG report.

With the government kick-starting the auction of 839 radio channels (Phase III) across 294 cities, radio players now have an opportunity to expand; both within existing locations and into new cities. This is likely to improve the attractiveness of the sector to advertisers, who are looking for ever wider pan-India coverage.

Also, two new policy changes introduced in the Phase III auctions should work in favour of radio players. One, radio operators have been permitted to broadcast All India Radio news bulletins. Two, the licence period has been extended to 15 years. 

Sound benefits  So, who would be the likely beneficiaries here? While one will have to wait for the final auction results, the benefit of the expanded reach for each player, achieved through acquisition of new stations will have to be weighed against the price paid.

This is particularly true given that for many auction participants, such as HT Media, which has Fever 104 FM and DB Corp, which operates My FM, radio is only one of their many business segments. Moreover, contribution from this segment to company revenues is quite small in many cases. For both companies, radio contributes only 5 per cent to their total revenue. For HT Media, profit (before interest and tax) from the radio business is less than a fourth of its newspaper business. For DB Corp too, the share of radio in profit is only 6 per cent.

It is, however, not so for market leader Entertainment Network, which operates Radio Mirchi. It grew its revenue 14 per cent to ₹438 crore and net profit 26 per cent to ₹106 crore in 2014-15, compared with the year-ago period.

 But, buying new stations is not the only route to growth that companies have been adopting. Consolidation too is very much visible here.

Take, for instance, the takeover of Radio City by Jagran Prakashan. More deals could be in the offing, as radio players take to acquisition as a cost-effective mode of expansion.

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