Escolar Documentos
Profissional Documentos
Cultura Documentos
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 the 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 the 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.
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 the new year 2009, has heralded interesting yet challenging times for the Media and Entertainment (M&E) industry as a whole. The Indian M&E industryone of the fastest growing industries in the country over the past couple of yearsis 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 into 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 industrys 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 industrys 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.
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 2. Sector Snapshots 3. Narrowcasting 4. Regionalization 5. Digitization 6. Regulatory & Tax Environment 7. Internationalization 8. Deal Activity and Investment Trends 9. Changing Landscape in Audit for M&E 10. Internal Processes of M&E Companies 11. Way Forward: Sector wise key action steps 01 19 53 81 101 123 137 159 169 175 193
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.
01
Indian M&E Industry: The Growth Story
The Indian M&E industry was one of the fastest growing sectors in the country in recent times, riding on the back of a buoyant economy and extremely favorable demographics. A young Indians higher propensity for discretionary spending has propelled more money flow in the leisure and entertainment activities giving a steady impetus to the M&E industry. By embracing multiple platforms, expanding into new geographies, and exploiting the potential of under penetrated geographies, Indian promoters have built a scale, where they can now attract foreign media companies and investors. New content and delivery formats have emerged in the industry with new media gaining an increasingly important role in the distribution portfolio of the players.
Favorable demographic composition and strong long term fundamentals of the Indian economy. Unlike other countries, Indian economy is still growing, albeit at a lower rate than before. Further, 70 percent of Indian population is below 30 years of age1, presenting a good opportunity for marketers Advertising to GDP ratio in India is still at a low of 0.47 percent, vis a vis developed economies like the U.S., where it is as high as 0.9 percent2 Media penetration in the country remains low. For instance, there are still 359 million people in India who can read and understand any language but do not read any publication.3 This represents significant opportunity of expanding the market. At the same time, 2009-10 spells caution for industry players. The business imperatives in these times need to undergo change with increased focus on new mantras such as the 10 shortlisted below: User segmentation to provide increased options for targeted messaging through niche vehicles Innovation and flexibility, in content, formats, delivery mechanisms and marketing to reach out to new audiences and advertisers in multiple ways Focus on optimizing margins, through re-engineering processes, structures, and working capital management Leveraging IP to help ensure value maximization from existing libraries
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.
Select market expansion given the trends in regionalization, overseas markets and digital media
Greater accountability, through demonstration of effectiveness of media properties Establish standards for Corporate governance and move towards greater professionalization Differentiation of brand through creation of strong 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 2005 (INR billion) Television Print Film Radio Music Animation Gaming Internet Advertising Outdoor Total Size 163.3 117 .1 66.9 4.9 8.3 10.0 2.2 2.0 10.0 385
2006 182.5 138.6 81.7 6.0 7 .8 12.0 3.0 2.0 11.7 445
CAGR % (2006-08) 13.8% 13.8% 17 .7% 19.7% -4.4% 20.1% 44.6% 45.2% 17 .3% 15.0%
2010 P 295.6 197 .9 117 .5 10.3 8.0 23.3 13.3 11.0 19.8 697
2012 P 399.1 239.3 151.3 13.9 9.5 33.1 22.5 17 .1 25.5 911
2013 P 472.6 266.0 168.6 16.3 10.7 39.4 27 .4 21.4 29.3 1052
CAGR % (2009-13) 14.5% 9.0% 9.1% 14.2% 8.0% 17 .8% 33.3% 27 .9% 12.8% 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.
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.
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 percent. Going forward, the advertising industry is expected to exhibit a .1 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 (INR billion) Television Print Radio Internet Advertising Outdoor Total 2005 51.9 69.4 4.9 2.0 10.0 138.1 2006 60.5 84.9 6.0 2.0 11.7 165.0 2007 71.1 100.2 7 .4 3.9 14.0 196.6 2008E 82.5 108.4 8.4 6.2 16.1 221.6 CAGR % 2009 P 2010 P (2006-08) 16.7% 16.0% 19.7% 45.2% 17 .3% 17 .1% 88.2 114.8 9.2 8.4 17 .7 238.4 97 .1 123.8 10.3 11.0 19.8 262.0 2011 P 112.6 136.5 11.9 13.7 22.4 297 .1 2012 P 2013 P 131.7 153.6 13.9 17 .1 25.5 341.9 155.5 174.3 16.3 21.4 29.3 396.8 CAGR % (2009-13) 13.5% 10.0% 14.2% 27 .9% 12.8% 12.4%
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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However, the global economic recession has affected the Indian economy too, with the GDP growth rate expected to fall in near future. Percentage growth in Indias GDP
Even at these rates, Indias growth rate is still estimated to be higher as compared to other regions of the world. GDP Growth Forecast for Selected Countries
Country China India Japan U.S. Euro Area 2007 13.0% 9.3% 2.4% 2.0% 2.6% 2008 9.0% 7 .3% -0.3% 1.1% 1.0% 3.4% 2009P 6.7% 5.1% -2.6% -1.6% -2.0% 0.5% 2010P 8.0% 6.5% 0.6% 1.6% 0.2% 3.0%
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.
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, Indias 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. Indias Share of Wallet shifting towards Discretionary Items
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 countrys population is below 35 years of age.5 More than 50 percent of Indias population is likely to be under the age of 30 even in 2015. Population Distribution across various age groups
Source: Euromonitor
4 Indias GDP growth rate to go down by 2% Economic Times, November 2008 , 5 2001 Census, Euromonitor 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.
The emergence of Indias 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
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.
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.
The ad spend to GDP ratio for India, has also therefore shown a slow but distinct growth trend in the past few years. Ad spends as percentage of GDP
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.
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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 countriesNDTV 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 playersBoth 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 Britains Virgin Radio on June 20088 Reliance Big Entertainment forming a Joint Venture with Steven Spielbergs DreamWorks studio in September 2008.9 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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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. All rights reserved.
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13 KPMG Analysis
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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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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. All rights reserved.
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TV 18 enters Regional News Broadcasting with IBN - Lokmat New UTV Motion Pictures to produce Hollywood Movies Radio City launches in Ahmednagar Times Of India enters Chennai
Sun TV Forays into Film Production TV 18 forays into Print with the acquisition of Infomedia HT Media launches a job portal - shine.com Reliance Big Entertainment enters TV distribution Miditech to start its TV Broadcasting channel
Market
Dish TV offers free set up boxes to its consumers Mail Today introduces its First Supplement - Mail Today Property Andhra Jyoti becomes the first language newspaper in Andhra Pradesh to go all color NDTV expands into GEC segment with NDTV imagine TV 18 forays into GEC segment with the launch of Colors channel Dainik Bhaskar launches its Hindi Financial Newspaperer Existing New
Existing
Product
Source: Company Websites, Press Reports and Releases
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Sectorwise
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Snapshots
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Sectorwise Snapshot
Television
The TV industry is one of the largest chunk of the Indian M&E industry and has transformed completely in the last few years. The number of channels beamed on the TV screen of C&S viewers in India has exploded to over 450 now from about 120 in 2003 . There has been rapid growth in the number of channels in news and other niche segments such as lifestyle, kids and infotainment apart from GECs. In TV distribution, digital mediums have emerged in the form of DTH, Digital Cable and IPTV. Some of Indias biggest corporate houses have invested in the DTH sector. The subscriber base has seen rapid growth and we estimate the pay DTH market to have reached 10 million subscribers by end of 2008. The implementation of CAS in selected zones of Delhi, Mumbai and Kolkata from 2007 gave an important push towards digitization of cable. By September 2008, there were 717 ,722 set top boxes installed in the mandatory CAS regions of Delhi, Mumbai, Kolkata and Chennai2. Even in areas where CAS is not mandatory, the MSOs have already begun to digitize their cable networks. IPTV, another digital distribution medium, is part of the growth plans of most major Indian telecoms and with commercial IPTV services launched in Delhi and Mumbai in 2008, IPTV has made a small beginning.
In TV advertising, the growth up to now, was driven to a 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 sectors are cutting down on ad spends) Top 10 TV advertising sectors by volumes
Sector Food & Beverages Personal Care & Hygiene Services Telecom/ISPs Hair Care Banking and Finance Auto Personal Accessories Personal Healthcare Household Products
Source: TAM AdEx (Data for 2008)
% share 13 9 6 6 5 4 4 4 3 3
On the whole, the television sector is estimated to have grown at a CAGR of around 13.8 percent over 2006-08. Within this, advertising has grown with an estimated CAGR of 16.7 percent while subscription has grown at an estimated CAGR of 12.4 percent By the end of 2008, the industry is estimated to have reached a size of INR 241 billion, a growth of 13.8 percent over 2007 Out of this, subscription is estimated to . contribute around INR 158 billion to the industry size, while advertising revenues are estimated at around INR 82 billion.
1 Indiastat, KPMG Analysis 2 TRAI Indian Telecom Services Performance Indicators (July-Sep 2008)
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A major pain point for the broadcasters in recent times has been the rapidly growing carriage fee market which shot up from about INR 6 billion in 2007 to INR 12 billion in 2008 as channels increasingly competed for premium stabilize or drop from here on. Over the next five years the growth is likely to be driven by 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 million 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 placements3. However, the carriage fee market is expected to either
At the same time digitization of cable is likely to pick up pace, independent of whether CAS is implemented on a wider scale or not (although, making CAS mandatory in 55 big cities, as has been recommended by TRAI, could further quicken the process). We think it is possible that about 35 million cable households could be digital by 2013. Cable households in India
IPTV is expected to take some time to catch on as infrastructure is built to support it on a wider scale. It is estimated to add 4 million subscribers by 2013.
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IPTV Subscribers
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
At the same time, TV and C&S penetrations are 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 million and around 85 percent of these are estimated to be C&S subscribers.
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Distribution of TV Households
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 ad 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 billion by 2013.
I believe there is a tremendous apportunity 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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TV Industry (INR billion) Subscription Revenues Advertisement Revenues Total Industry Size
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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. Indias Film industry is one of the largest in the world with more than 1000 movie releases and over 3 billion 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
Besides competitive pricing, a key driver for unlocking the potential of home video business, and tackling piracy head on, will be the further compression of release windows
Harish Dayani, CEO Entertainment Division, Moser Baer
times, while small budget movies have been doing well in the market. With Moser Baer entering the market, DVDs and VCDs have become affordable and Home Video has come to stay. Hence the domestic theatrical lifecycle of movies has gone down, while due to ever expanding budgets and increasing market spends, the break even point of movies has increased.
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Film Industry (INR bn) Domestic Theatrical Overseas Theatrical Home Video Cable & Satellite Rights Ancillary Revenue Streams Total Industry Size
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 could 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
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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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 billion 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 multiplexing 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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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 ad 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 million, 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 million 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 million 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 percent in .6 2008 and reaching around INR 172.6 billion in size. The corresponding size was INR 160.4 billion 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 billion 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 percent over the year to reach INR 64.3 billion. .4 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 billion in size by 2013.
9 MRUC 10 Registrar of Newspapers of India 11 India Readership Survey 12 Group M 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.
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Advertising will increase its dominance as the primary revenue source of the industry and is expected to constitute around 66 percent of the 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 percent for the circulation revenues. While advertising revenue is .4 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 volumes Sector Education Services Banking/Finance/Investment Auto Retail Durables Personal Accessories Corporate/Brand Image Personal Healthcare Media
Source: Indiantelevision
literacy levels and improving affordability of the medium. The top 10 sectors contributed around 65 percent share of overall Print advertising in 2008. Newspaper publishing would continue to dominate Print Media and is expected to comprise around 92 percent of the total revenues of the sector in 2013. Newspaper publishing is expected to grow at the compounded annual rate of 9.1 percent over the next five years and is projected to reach INR 245.4 billion by 2013. 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 billion in size in 2013.
% share 15 12 10 7 5 4 3 3 3 2
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The ongoing economic slowdown poses a huge challenge for the sector owing to its heavy reliance on advertising. Second, with television fragmentation, print advertisings 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.
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.
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Radio
Radio ad 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 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 operationalized 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 billion 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 ad 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 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.
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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 ad industry as a percentage of the total ad 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 ad campaigns. However at the same time, like TV and Print, radio is also likely to feel the pinch of overall reduced ad spends in a slower growing economy. Already, in the quarter ending December 2008, ad 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 billion by 2013.
17 KPMG Analysis 18 KPMG Indian Entertainment Industry - Focus 2010 Report 19 Slowdown forces FM radios to cut ad rates by 10-15% Business Standard, February 2009 ,
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36
2005 4.9
2006 6.0
2007 7 .4
2008 8.4
2009p 9.2
2010p 10.3
2011p 11.9
2012p 13.9
2013p 16.3
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37
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 addressal 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 billion in .3 2008, down from INR 8.3 billion 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 nonphysical 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 billion in 2008. Digital music distribution is mainly restricted to Indias 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 million in 2008 to INR 921 million 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 million in 2008 is expected to more than double to reach INR 378 million by 2013. This growth is likely to be driven by improvement in live event infrastructure, increasing public awareness of copyright and intellectual property laws , corporatisation 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 billion 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. All rights reserved.
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Music Industry (INR billion) Physical Digital Television and Radio Public Performances Total Industry Size
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Outdoor
Outdoor Media, also referred to as out of home (OOH) media, refers to 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, Taxicabs, 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 ad 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 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.
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OOH media has grown at a CAGR of 17 percent over the past 3 years, and is .3 estimated to have reached INR 16 billion in size in 2008, a growth of 15 percent over 200725. The sectors performance was affected in the second half of the year owing to the overall economic slowdown. It is projected to grow at a compounded rate of 12.8 percent over the next 5 years and reach a size of around INR 29.3 billion by 2013. Projected Size of Indian Outdoor Industry
2005 10.0
2006 11.7
2007 14.0
2008 16.1
2009p 17 .7
2010p 19.8
2011p 22.4
2012p 25.5
2013p 29.3
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 may focus more on these towns in future. OOH advertising is likely to grow at a faster rate in these smaller cities and towns, owing to the cost effectiveness of 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 Tier 1 towns, with metros accounting for more than half of the total OOH market. Sectors spending the most on this medium include Telecom, Media & Entertainment and Financial Services companies26.
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With increase in consumer spends and intensified infrastructural development activities in Tier 2 and Tier 3 towns, penetration in these smaller cities is likely to drive the growth of OOH in the future. With retail development and consumer boom, Ambient Media is also expected to gain in 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.
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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 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.
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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2005 10.0
2006 12.0
2007 14.5
2008 17 .4
2009p 20.0
2010p 23.3
2011p 27 .8
2012p 33.1
2013p 39.4
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.
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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 industry. 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 and 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 Molinare for an undisclosed amount33.
32 KPMG Estimates 33 Animation express
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Growth Drivers
1. Building Brand India
India with its rich heritage, culture and a large talent pool, has the potential in creating content for Indian as well as global audiences in transferring 5000-yearold 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 US is USD 100-125 million as compared to USD 25-30 million from outsourcing to India.35
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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 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.
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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 billion 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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49
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 million 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 billion which is expected to go up to INR 9.4 billion 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 million telecom subscribers in India in 2013, mobile gaming is expected to be a significant competitor to the console gaming market in India.
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39 IAMAI
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51
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.
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Gaming Industry (INR billion) Mobile Console PC & Online Total Industry Size
41 IAMAI 42 IAMAI
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Narrowcasting
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03
Narrowcasting
Narrowcasting: Niche is in
Micro-segmentation of the Indian Market
One common trend seen across media sectors in India today is the growing importance of niche content. Besides targeting the masses, the M&E industry players have began to focus on the classes as well.
ability to broadcast a much larger number of channels, the 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 higher realizations and a premium for reaching out to their target audience. This has led to a self propelling effect. As the viewers are getting more choices in terms of content, TRPs of hitherto 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 earlier. The viewership of channels considered as niche categories such as news, kids and infotainment has also risen over the years. The trend is similar for Films. A few years ago, niche filmsoften referred to as parallel cinema- used to have limited takers in terms of distribution and viewing. It was important for a movie to have mass appeal to be even considered financially viable. The two main reasons for the same were low priced tickets and under declaration of cinema goers in the then prevalent single-screen theaters. Hence the distributors made money only if the number of people watching a movie was high. Therefore there was not much experimentation with the scripts, since most of the films were made keeping mass audiences in mind. Further, due to budget constraints, producers had to rein in the
1 Industry, Indiastat
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production, distribution and marketing costs of niche movies. As a consequence, in spite of garnering critical appreciation, these films did not see box office success. The emergence and increasing popularity of the multiplex format has given a new lease of life to the niche category of cinema in India. These multiplexes, which sometimes have screens with seating capacities starting from as low as 100, allow the exhibitors to experiment with the non-mainstream movies. Such movies usually do not have a large audience and by releasing such films in theaters with smaller capacity, the theater can manage reasonable capacity utilizations even with lesser number of people. This helps them maximize the potential of any film irrespective of its budget and star cast. Ticket prices in multiplexes are also much higher as compared to single screens, with no underdeclaration of revenues. This provides a platform for thematic exclusivity and creativity to the producers since they can now make movies keeping only a particular class of audience in mind. The print sector too is witnessing a lot of content variety in 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
across topics such as Travel, Lifestyle, Healthcare, Automobiles, Food, Heritage and Culture etc. The spurt of magazine titles in India is mostly a result of international magazine publishers aggressively investing in the Indian market, after the government opened up 100 percent foreign ownership rights in the non-news and special interest categories in print media. As a result of the opportunities available, several foreign magazine publishers set up shop in India. This also prompted established national players such as India Today and Outlook to expand their product offering. The spurt in niche magazines is also powered by the countrys changing economics and a new generation of highly brand conscious consumers. With global luxury players also gradually establishing their presence in India, there was a need for more targeted advertising. The niche model has got more advertisers interested as they are now able to focus their spending. Further, players with a range of publications can create baskets of advertising rates across various properties; this helps to attract and retain a diverse set of advertisers under one roof.
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5 27
TV
Film
Specialty Magazine Genres- Home and Lifestyle, Men, Travel etc. Supplements Very limited niche content right now because of regulatory issues. However, in future, niche stations based on talk shows, English music and Retro Hindi music is likely to emerge Mythology-based Films
Radio Animation
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58 2
At the same time, the viewership share of certain niche segments has increased. Viewership share of Niche Channels
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 mens 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 Lifestyle Business Sports Star Cricket Kids Chutti TV Bindass Movies Movies World Movies NDTV Lumiere Hindi news English News Education Entertainment News News 24 NewsX Topper E24 Star Sun UTV UTV NDTV BAG Films INX Media TV 18 BAG Films Channels NDTV Good Times UTVi Neo Sports Media Company NDTV UTV Nimbus Communications
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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 Star Plus Zee Sony Sahara + Star One + Sab NDTV Imagine 9x Colors Total 876 GRP (Nov 07) 356 254 102 164 GRP (Oct 08) 271 194 113 193 74 57 233 1135
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.
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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)
3 KPMG Analysis
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Apart from Ad 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 High
Mobi-tones, Mobi-Pixs, Mobi-Video, MobiFlat Fee per download Logo, Audio Samples, Audio tracks SMSs, Mobi-tones, Mobi-Pixs, MobiVideo, Mobi-Logo, Audio Samples, Audio Revenue sharing tracks, Alerts, Games, Chats, Clues, Event Entry, Voting Merchandising CDs, Books, Videos, DVDs, Tickets, Fan memorabilia Games, Video On Demand (VOD), Highlights clips
Source: Industry Sources, KPMG Research
High
Commission on Sales
Low
Low
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 billion, broadcasters get a share of about 25 percent. This translates into an INR 2.6 billion 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 billion)
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.
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Global Format Are you smarter than the fifth grader The Power of 10 Big Brother Fear Factor
The popularity of international format based game shows among Indian audiences can be judged from the fact that Viacom18s 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 Endemols 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-June 2008) Programming Content on Hindi News Channels (Jan-June 2008)
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.
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Year of Release 2006 2006 2007 2007 2008 2008 2008 2008 2008
Net Collections (INR Million) 130 70.9 180 79.3 54.9 30.2 265 105.7 104.4
Status Average Average Average Hit Hit Hit Hit Hit Above Average
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.
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Jurassic Park Wuthering Heights A Passage to India 2001: A Space Odyssey Harry Potter Series Lord of the Rings Series
This trend has recently picked up in Bollywood. October 2008 saw the Box Office release of Hello which was the celluloid adaptation of Chetans Bhagats 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 Zoya 3 Idiots The Japanese Wife
Source: KPMG Research
Book The Zoya Factor Five Point Someone The Japanese Wife
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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.
Producer/Animation Studio Silvertoons ECATS, Media Solutions Radiant Animation Shemaroo Entertainment Percept Picture Company Radiant Animation
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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Genre Auto Business and Finance Career and Education Fashion and Lifestyle General Interest Healthcare Men's Sports Travel Women's Total
Source: NRS, Exchange4Media
Sum of NRS 2006 485 2628 4707 11271 59389 1413 211 9144 802 30637 121618
Sum of NRS 2005 320 1926 2743 7033 50271 519 96 5650 505 25310 94963
% Increase 51.6 36.4 71.6 60.3 18.1 172.3 119.8 61.8 58.8 21 28.1
Industry players also seem to agree that the growth of the sector depends on niche genres. Accordingly, in continuation of the previous years 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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Title of the Magazine Traffic Life Grazia She GQ Auto Bild People Bangalore Happenings Rolling Stone; Blender Farm n Food Outlook Profit Windows World Heritage India BBC Good Homes
Delhi Press Outlook Group IDG Media Heritage India Communications World Wide Media Group-BBC
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 Caf 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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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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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 Ad revenues stood around INR 7 billion in FY2008 as against INR 5 billion in FY200518. Growth in Sports Advertising
As a result of the growth in Ad 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 million for the rights to Indias international matches and domestic cricket until 201019. ESPN Star broadcasts events staged by crickets global governing body, including World Cups; it paid more than USD 1 billion for the global rights between 2007 and 2014.20
Its no surprise therefore that the 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. All rights reserved.
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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 million 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 million. 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 million to INR 200 million compared to under INR 70 million for IPL25. This in turn, implies that the channel has to sell the Ad 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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Owner(s) Reliance Industries UB Group Deccan Chronicle Indian Cements and N Srinivasan GMR Holdings Preity Zinta, Ness Wadia, Karan Paul(Apeejay Surendra Group) and Mohit Burman(Dabur) Shahrukh Khan , Juhi Chawla and Jai Mehta(Red Chillies Entertainment) Emerging Media
Price (INR Billion) 4.48 4.46 4.28 3.64 3.36 3.04 3.03 2.68
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 leagues 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 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.
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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 tournaments 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 billion (over INR 42 billion). As part of the deal, the consortium is to pay the Board of Cricket Control in India (BCCI) USD 918 million for the television broadcast rights and USD 108 million 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.
29 Sony-WSG consortium bags IPL rights Business Standard, January, 2008 , 30 Businessworld,2008 31 Businessworld,2008 32 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.
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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 playerslike the suiting major S Kumars 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.
33 Industry Sources
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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, its expected to create a lot of interest in the sport among Indian audiences and further drive up viewership.
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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 Us estimated 333 million followers worldwide, 20 million live in urban India37.
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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.
All Media
Increasing programming (time) share of new genres such as Reality TV, Talent Hunts, Game Shows etc. Significant share of new genre shows in Top TVR lists TV Spurt in the number of niche channels for diverse TGs, such as Kids, Infotainment, Lifestyle etc. Increasing viewership share of niche category channels Emergence of Sports as a mainstream Entertainment Genre Small budget, multiplex movies have become viable due to audience acceptance Film Film Makers experimenting in new genres such as Kids, Horror, Sci-Fi etc. Celluloid Adaptations of Books are being experimented with Production houses need to mitigate their risk by striving to ensure that they have the appropriate portfolio mix of big, medium and small budget movies in their content pipeline Protection of IPR rights and valuation of library content has become all the more significant due to future revenue potential through remakes, sequels etc. Need to identify consumer preferences and gauge audience acceptance for different genres before going ahead with productions, in view of increasing costs of movie making Need for players to help ensure adequate monetization of supplements by effective targeting of advertisers Need for careful understanding of content preferences of target segment, and comprehensive evaluattion of their market potential before launching a new magazine to capture a niche audience Channels need to build up a diverse programming library, comprising a judicious blend of conventional and new genres. With the increased choices available to consumers, measures to help ensure customer loyalty are becoming increasingly important Increasing costs for broadcasting rights of sports events, - Broadcasters need to undertake a cost benefit analysis and determine an effective price before acquiring the rights for a particular event.
Rise in the number of supplements offered by both English and Regional Newspapers Increasing number of specialty magazines in English segment, by both existing players and new entrants
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Regionalization
04
Regionalization
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 result, it is estimated that by 2025 population of both Tier 2 and Tier 3 cities put together may be almost as big as that in the Tier 1 towns2. Hence, these cities are increasingly emerging as the focus area for marketers.
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The increasing purchasing power of Tier 2 and Tier 3 cities is 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 B C D E 106 97 100 99 100 105 96 95 98 107 104 101 97 100 101 98 98 100 103 100 94 94 94 105 104 96 97 95 98 105
Source: NCAER
Currently, the top 6 metros constitute only 30 percent of the total consumption of goods and services in India. However, 60 percent of media spends still go to the Top 6 cities3. This is an anomaly that is bound to change given the growth potential of Tier 2 and 3 towns due to an increase in the numbers as well as the increasing purchasing power of the population residing in these towns.
A higher number of middle and high income households has resulted in higher growth in per capita consumption in rural areas. Per capita consumption in rural areas went up by 12 percent in 2005-06 as compared to 9.8 percent in urban India.6
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 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. All rights reserved.
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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.
Further, overall Media7 Reach is much lower in rural areas as compared to urban areas. Media Reach
7 Note: Media=TV+Print+Radio+Cinema+Internet
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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 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 from 18 Jan, 2009 to 24 Jan, 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 for national broadcasters. Any broadcaster with a good content library can have it dubbed in other languages for broadcast. This has two advantages. One, the production cost is much lesser than building content from scratch. And two, the risk is minimized as the content has already proven to be successful in another language.
Channels such as Zee, Star and Sahara already have syndication deals in place in Non-Resident Indian (NRI)-rich international markets such as the U.S. and U.K. However, its 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 South India 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 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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Zee entered into the Tamil GEC space in 2008 with Zee Tamizh - this is the one of the most competitive market in 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 is to 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, its important to identify which regional markets offer the greatest opportunity. This can be done by evaluating and rating the options on the basis of certain important parameters.
Gujarati
Marathi
Punjabi
Kannada
Tamil
Telugu
Malayalam
Bengali
Key: - least favourable - Slightly favourable - Moderately favourable - Highly favourable - Most 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 channel and a movie channel before getting into more niche categories. Sun, the 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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12 Indiantelevision
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13 Brand Reporter 14 KPMG Analysis 15 KPMG Interviews, Cental Board of Film Certification
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one with a budget of about INR 120-200 million, with around INR 30-40 million each paid as remuneration to the leading actors and director of the film. On the other hand, a budget film is typically done in about INR 40 million. Besides, there are also smaller films which are made in a total 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 for regional films are very small as compared to Bollywood, where 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 in Bollywood.17
Opportunities in Exhibition
In the exhibition space too, the uneven geographical distribution of the theaters in India gives the four southern 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. Players like Pyramid Saimira are also investing heavily 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.
16 Industry 17 Industry 18 Film Federation of India 19 Company Website, Press Releases 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.
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Kannada Film Industry by announcing two film projects there. Reliances music label-Big Music-also acquired the music rights of two Kannada Films20. These 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 from the 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 stars from the Hindi Film Industry 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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22 23 24 25 26
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Even in magazines, only 1 among the 10 most read Indian magazines belongs to the English language. Total Magazine Readership in India
Readership figures clearly show consumer preferences for regional press. Hindi is the most read language in the country. Tamil, Malayalam and Telugu come next.
27 28 29 30
HT Media announces launch of Hindi daily DNA, May 2008 , Company Website, Newswatch.in exchange4media exchange4media
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31 32 33 34 35
exchange4media exchange4media, Company Websites exchange4media exchange4media, Company Website exchange4media, Company Website
36 exchange4media 37 exchange4media
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38 TOIs launch all set to heat up Chennai Livemint, April 2008 , 39 exchange4media 40 exchange4media
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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.
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The growth in regional advertising today, is partly driven, quite significantly, by new advertising sectors such as education, hospitality, real estate and jewellery which often have local brands and therefore advertise through local Ad 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 Rapid growth in the number of regional channels Consistent rise in Ad revenue share of regional channels in the total TV advertisement pie National Broadcasters venturing into regional space by launching regional channels Regional players strenghtening their product portfolio by launching niche channels Launch of city centric channels by national players
Implications Demand for regional content is likely to continue to grow and even Hindi content houses may increase exposure to regional content development to exploit the growing demand As regional markets begin to saturate, there might be need for a careful evaluation of market potential of a particular region before launching a new channel Enhanced significance of library content because of the ability to dub good content and exploit it in different languages. Need for proper valuation of the library content. Need for the regional industry players to organize themselves and get themselves heard in appropraite industry forums Quality of regional cinema is likely to improve due to infusion of funds Players to enhance their production costs 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. Need for evaluating market potential before expanding into particular territories Advertising revenues to further grow in significance, even for Hindi and regional players, leading to need for more effective targeting of advertisers and efficient Ad inventory utilization Imperative for players to effectively monetize the supplements.
TV
Film
Improving collections of regional cinema due to expansion of multiplexes Trend of corporatization picking up, with Bollywood players venturing into Regional Cinema Cross Pollination of talent between Bollywood and Regional Cinema
Increased competition due to both national and regional players venturing into each others territories Established players expanding their product portfolio by adding new languages Competition leading to reduction in cover prices, and thus leading to price wars Rise in the number of supplements due to locally relevant content gaining in significance
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Digitization
05
Digitization
Introduction
Digitization of media is playing a major role in transforming the face of the Indian entertainment and media industry. In Television, advent and increasing penetration of digital delivery platforms implies a multi channel and multi distribution platform, alongside an addressable system for the broadcasters. Digital solutions in Filmed Entertainment have helped the producers to reach relevant audience and increase the number of prints without additional costs. The music industry is bullish on digital music platforms offsetting the decline in physical sales in outdoor media, the players are now gradually shifting from traditional hoardings to other forms of outdoor advertising such as digital signages like LEDs and LCD screens. Digitization is thus transforming the industry across sectors.
Digitization has also been a focus area for TRAI for the past two-three years and it is with this goal that it has brought in regulations to pave the way for Conditional Access System (CAS), DTH, HITS and IPTV.
Digitization in TV
The Indian TV distribution space is evolving fast and in a span of three-four years, we have seen the Conditional Access System being introduced which gave the necessary impetus to digital cable, the advent of 5 DTH players which together are expected to have garnered 10 million subscribers by the end of 2008, and the commercial launch of IPTV.
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 more than three times that of Urban India which stood at 1.8 million households as of August 20074. Number of Digital TV Households in India
Sky, Sun, Big TV and Airtel Digital TV. There is an aggressive marketing push by the new players, which is likely to expand the DTH market in a big way. Cable networks, facing the heat due to competition from DTH players with 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 midsized cable TV companies as part of its strategy to expand its footprint and limit the challenge of new MSOs entrants5. Another MSO, Digicable Network (India) acquired a 51 percent stake in Kolkata-based CableComm as part of its 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
Satellite Households in India. Share of subscription revenues coming from digital platforms is likely to be even higher at about 64 percent on account of higher ARPUs in digital distribution8.
Digital penetration shot up further in 2008, especially due to increased competition in the Pay DTH space. With the entry of Reliance Communications and Bharti, there are currently 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 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.
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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
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 , 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.
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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, its difficult for any player to keep prices significantly higher than others. At the same time, the players cant 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, and catch on in India as the consumer becomes better prepared to pay more for better quality of services. ARPU for DTH Services
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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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
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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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.
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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 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.
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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
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 dont 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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No of Channels 43 31
2. Digital homes spend more time on TV. Time Spent on TV per day
Target Group Digital Viewer Analog Viewer
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.
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The SolutionDigital 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 itselfunless 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.
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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.
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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.
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.
Durability of Films
Reduces Piracy
Improved Profitability
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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.
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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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35 TRAI, The Indian Telecom Services Performance Indicators July September 2008 36 UTV Investor Presentation, November 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.
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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.
Music
Alternate revenue streams available to music companies to compensate for declining physical unit sales Companies making their entire music libraries available on the internet for legal download Rapidly growing mobile music market in India with a large percentage of mobile music revenues coming 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 hoardings
Outdoor
Customers may expect more interactivity in the medium 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 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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Environment
06
Regulatory and Tax Environment
Introduction
Media plays an important role in dissemination of information, thereby stimulating development in any country. The significant function assumed by the media industry has been primarily responsible for regulatory intervention in this sector. Our countrys past experience manifests that effective regulations (which may be formed through a consultative approach) contribute to the growth and competition in any sector (e.g. telecom). The current regulatory structure in M&E sector demonstrates a drive in the same direction. Several factors have been responsible for regulatory intervention in the sector, which have contributed to furtherance of consumer interest, viz. Making available new alternative technology platforms for accessing the broadcasts (e.g. DTH, IPTV) Quality of services 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.
Government intervention by way of regulations also stems 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. Furthermore, the need for huge investments also calls for clear regulations- to generate investor confidence. Historically, media has been kept under check. The sector is still regulated and has not been opened for foreign participation as much as other sectors. This has been due to medias inherent power of influencing public opinion. This strength gives media immense responsibility too. Governments of several developed nations have provided for checks on media (helping ensure control of media firms in the hands of residents of their country, conservative approach on media acquisitions etc.) by way of regulations. In todays times, growth and objectives of the sector can only be achieved responsively if transparency, involvement of the stakeholders (in formulation of the regulations) and changing consumer behavior, tastes and technology are given due consideration.
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Implications The recommendation makes provisions for: a) Television channels without any subscription fee (to cable operator etc.) b) Enhanced coverage of local issues, events etc (against primarily the coverage of national issues by the satellite channels) c) Additional mode of accessing television channels being explored (in mobile TV)
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.) s 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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Legislation for Programme and content etc. Advertisement code included under the Cable Television Networks (Regulations) Act, 1995 and Cable Television Networks Rules, 1994 [the Cable Act] Regulator
No separate regulator TRAI appointed as a broadcasting and cable services regulator with effect from January 9, 2004
Appointment of a regulator facilitated addressing of isuues faced by the Industry. It has also brought more transparency in the policy making process - Choice to consumers to pay for the channels that they watch - Transparency for the broadcasters as the number of subscribers can be known - Better for the consumers as the discretion of the cable operators would not be functional - Regulations governing Interconnect agreements enable acquisition of content by distributors on competitive terms - Revenue leakage for private channels - Availability of important sporting events to the masses
- Conditional Access System (CAS) implemented in Chennai and some parts of Mumbai, Delhi and Kolkata - Pricing caps7 on a) Pay channel in CAS areas (INR 5.35 per channel per subscriber) b) Amount payable per month in Non-CAS areas is to range between INR 82 and INR 278; and c) Pay channels offered to DTH operators (at 50 percent of the rates at which channels are offered for non-CAS areas) - Provision of channels on a-la-carte basis made mandatory - Interconnect agreements between broadcasters and network operators (DTH, cable operators etc) governed8 by TRAI
Sharing of feed Based on commercial Mandatory5 sharing of live feeds in with public arrangements; not respect of sports programmes of broadcasters mandatory national importance
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 industrys 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 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.
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Additional guidelines - TRAI has issued include: recommendations for: - DTH Guidelines9 - Internet protocol Television (IPTV)10 a) the restructuring of cable TV services; b) Headend-in-the-sky (HITS)11
Principal Regulations
- Indian Copyright Act, 1957 (Copyright Act) - Cinematograph Act,1952 - Policy for Import of Cinematograph films etc.
Amendments in the The amendments proposed, inter Copyright Act proposed alia, include digital rights in the year 2006 management and aspects emanating from Indias membership of the World Trade Organization (WTO). It is likely to make the Copyright Act more stringent and in compliance with the international scenario. 100 percent FDI allowed in with no entry level conditions Treaties with China, Canada in process Removal of entry level conditions may allow more tie-ups/ foreign players to come into the country. Such treaties enable the development of film industries of both the countries and further economic and cultural exchanges. Treaties also accord status of a national film to the co-produced film. Editions of foreign newspapers could be made available to the Indian readers (which were earlier imported into the country). However, there is no facsimile edition in India till date. - Indian newspapers can procure material (photographs, cartoons etc.) from foreign publications The governments decision to allow Indian editions of foreign news etc magazines may result in reduction in prices of such magazines and also inclusion of Indian content/ advertisements in such publications.
Foreign Investment
Co-production Treaties with Italy UK, Further treaties with agreements France Germany, Brazil (treaty)
Print Media
Principal Regulation
- The Press and Additional guidelines/ Registration of Books regulations include: Act, 1867 - Guidelines for - The Registration of publication of Newspapers (Central) facsimile editions of Rules, 1956 foreign newspapers - Guidelines for Syndication Arrangements By Newspapers - Guidelines for publication of Indian editions of foreign technical/ scientific/ specialty magazines/ journals/ periodicals - Guidelines for Publication of Indian Editions of Foreign Magazines dealing with News and Current Affairs
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 100 crores 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.
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Multiple licenses
- Restriction on - At least 3 [excluding multiple licenses in a All India Radio (AIR)] city channels in any district to be allotted to - Cap on total different entities; channels held by a licensee in the country fixed at 15 percent of all channels - Cap (per licensee) of 50 percent of total channels in a district - No all-India cap
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 under Radio have been given by TRAI on 3rd phase of FM radio Broadcasting 15 These are MIBs views on TRAIs recommendations on 3rd phase of FM radio broadcasting
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Foreign Investment - Increase in options of mobilizing in stations funds broadcasting: - Foreign radio players may also - News and current participate in India through direct investment in the Indian company affairs- 26 percent - Other than News and with their expertise further 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 TRAIs proposals
Not permitted
Content sourced from AIR, Doordarshan (DD), authorized TV channels etc allowed, without any substantive change
The recommendations are expected to make the stations more viable and extend the dissemination of information to the masses. MIB is open to airing of news bulletins of AIR or DD only. It has also listed certain broadcast categories that shall be treated as non-news/ current affairs, viz. sports event commentaries, traffic and weather information, etc.
Networking Not permitted (simultaneous without prior broadcast of approval same content)
- Not permitted between two licensees - Allowed by a licensee for own stations in category C and D cities17 within a region only.
Networking allowed - Increasing the viability and quality of within a licensees content in smaller cities network only The recommendation is likely to further reduce the cost of content for the operators. MIB has accepted the TRAIs proposal. However, it has also suggested ensuring at least 20 percent broadcast to be in the local dialect of the city
Regulations
No formal regulatory code at the union level; states have their own policies - West Bengal Prevention of Defacement of Public Property Act
- Supreme Court (SC) had banned hoardings in Delhi in 1997on grounds of road safety - Municipal Corporation of Delhi (MCD) sets up an Urban Graphics Forum on April 30, 2003 for regulating outdoor advertising and evolving a new advertising policy for the city - 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)
- Central government has also asked state governments to impose a ban on hoardings
There is a need for appropriate policy/ regulations across the country which has been absent till now. It is imperative to bring uniform norms at national level.
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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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.
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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 arms 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 arms 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 arms 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.
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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.
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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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
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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.).
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Internationalization
07
Internationalization
No longer are the Indian M&E players confining themselves to domestic shores for their target consumers; they are increasingly reaching out to global audiences. Indian media companies, especially in the television and film segments continue to target the 25 million NRI various parts of the world. Estimated size of overseas Indian Community diaspora1 settled in
Finally, year 2008 witnessed one of the biggest landmarks in Indian M&E industry when two of the biggest Indian media players acquired media properties abroad. The move was significant since the acquisitions were not merely aimed at providing synergies to Indian operations or targeting the Indian population but establishing a distinct brand identity abroad. These acquisitions reiterated the increasing global 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 shoring hub of 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)
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 produce content not just for the NRIs but also for the mainstream global audience in other countries. At the same time, global demand for media services from India is also growing. Animation has been at the forefront in this with India emerging as a major outsourcing destination due to its cost advantage. Film post production has also shown potential in this regard.
1 Ministry of External Affairs
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Apart from Zee, some of the other Indian broadcasters beaming to different parts of the world are NDTV, UTV Global Broadcasting (UGBL), TV18, Aaj Tak and regional language players like Sun, Eenadu and Asianet. (Star and Sony too have global distribution networks but they are in any case part of multinational media companies). Besides the conventional cable networks, broadcasters also rely on new platforms like IPTV to distribute their content. For instance, UGBL recently entered into an agreement with IPTV service provider The New Media Group (TNMG), to launch 3 of its channels on TNMGs IPTV platform, World On-Demand in Japan, Australia and New Zealand from August 1, 2008. Viacom18 also joined hands with TNMG, to enable its newly launched GEC channels Colors to be seen via the IPTV service World On-Demand2.
there were cases of certain movies like Taal Yaadein , and Dil Se which were either flops or did average business at domestic bourses but were otherwise big hits overseas4, thus allowing the film makers to recover their money. In more recent times, Kabhi Alvida Na Kehna and Don performed relatively better overseas vis--vis the domestic market; they were top two Bollywood releases at the U.K. box-office in 20065.
Film
Dil Se Taal
Yaadein Don
U.K. and U.S. are the top two overseas markets respectively for Indian films in terms of both box office collections as well as the number of releases.
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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. grossing USD 5.48 million in the first 28 weeks of the 2008, emerged amongst the top 20 film distributors in North America (the only foreign language distributor in the top 20 list).6
Note: 1 Analysis done on Top 50 movies in terms of overseas collection over a period of 5 years 2 BO performance based on the size of collections 3 Size of the circle represents relative average net adjusted collection in the overseas market
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Country/City Chicago Average Bahrain, Dubai Bahrain, Dubai New York New York
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
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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 a 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 on 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--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
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The Happening
2008
In 2006, UTV Motion Pictures had also signed a USD 30 million deal, with Will Smiths production company Overbrook Entertainment and Sony Pictures Entertainment to produce two films12. According to the agreement, UTV and Overbrook are to co-produce the two films and Sony Pictures Entertainment is to distribute the movies worldwide, excluding India. Another company with ambitious global expansion plans is Reliances Big Entertainment. In May 2008, it announced that it plans to be 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 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.
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principles that the Indian film companies learn from their Hollywood experiences are applied to Indias film industry, it could certainly help make bigger movies, targeting a more global audience.
I believe that this is the best time for the Indian VFX industry. With booming growth rates of the domestic entertainment industry and untapped potential of Hollywood,the Indian visual effects/post production business is reaching closer to a point where it will be recognised as a powerhouse of talent offering international technology and quality standards
Namit Malhotra, Managing Director, Prime Focus
17 U.S. Newspapers may opt for outsourcing The Times of India, Spetember 2008 ,
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Source: Animation Industry set to Accelerate Crisil Research, May 2008, KPMG Research ,
Animation production consists of four main stages conceptualization, preproduction, production and post-production. In the outsourcing model, the preproduction 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 the cost of talent being much lower in the Asian nations places the outsourcer at an advantage.
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Apart from the cost advantage, splitting the production process and distributing it between studios also helps cut down the production times through parallel processing.
Film
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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
Animation Film Shrek 2 Finding Nemo Shrek The Third The Lion King Kung Fu Panda
Source: IMDB
Worldwide Box Office Earnings (USD Billion) 881 865 791 783 633
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 films 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, Indias competitive edge comes from peoples 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 postproduction 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 Elxis 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 bigbudget 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 threedimensional 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
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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. 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.
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project, and thus helping in securing more work. Once the studio/producer sees physical infrastructure in a place abroad, and is assured of the quality a VFX studio can offer him, he can clearly understand the value proposition of doing work in half the time and 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 Primefocuss London and Indian Studios; Rhythm & Hues regularly outsources work to its center in India.
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 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.
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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 RadioOn June 2008, the Times Group, through its wholly owned subsidiaryTimes 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 53.2 million pounds (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 in a 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 15 million pounds 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 Britains 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.
September 2008 witnessed another important milestone by Indian M&E companies, when Reliance Big Entertainment and Steven Spielbergs 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 Bollywood company-and thus marked the biggest union between the two industries till date.25
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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. Viacoms 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 Hollywoods 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 Spielbergs 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 Entertainments 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. There are some important points which Indian media companies need to consider before acquiring a foreign media property.
Ascertaining market size and growth potential of the overall M&E industry of the target
Awareness, Salience and Recall of the brand among its target audience
Organizations capabilities required to support the growth plans of the target brand and whether the acquirer possesses these capabilities Whether expected returns commensurate with investment levels required
What are possible avenues for the target to leverage its existing capabilities /brand image?
What are the areas where the company can use its current capabilities to differentiate in the market?
Targets performance vis- -vis the intensity of competition faced in the market
Evaluating existing distribution capabilities of the brand and future inventory pipeline
Acquirers abilities and change readiness to handle the risk and challenges arising out of integration of two different cultures
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Effects of Internationalization
Steadily increasing penetration of Indian channels abroad (meant for NRI audiences) across multiple distribution platforms Launch of channels by Indian broadcasters that cater to local audiences in other countries
Implications
Steadily increasing international revenue stream for broadcasters After a sufficient scale has been built in India, big broadcasters in India can start launching channels catering to mainstream audiences in other countries and create international television brands such as the ones that Star and Sony have created Need to understand the content preferences and tastes of target audience, be it NRI or global mainstream, and have a programming mix tailor made for them Need to understand the type of content that works for the NRI audience, and develop content accordingly Imperative for players to tie up with marketing/distribution agents abroad to secure release in mainstream theaters and unlock the potential of the overseas home video market Technical and creative quality of the film should be able to match international standards; accordingly time and cost allocation at the script development and post production stage needs to go up Players need to aggressively market themselves in international markets as well as international film festival forums; marketing spends abroad to increase
Film
Increasing popularity of Indian Films among the NRI diaspora Bollywood Films have started making inroads amongst the mainstream global audience Established players in Bollywood venturing into co-production and production of Hollywood films Indian Post Production Studios can develop as a potential off shoring destination for foreign studios
Players have launched overseas editions of newspapers and magazines Online editions of Print Media targeted primarily for the NRI audience
Need for evaluating the target market potential and consumer preferences before getting into particular territories Players need to effectively tap advertisers abroad to capitalize on their reach among the Indian diaspora Need for players to effectively monitize their online versions
Animation
India has a share of about 8 percent in the global animation outsourcing market About 80 percent of the revenues of the Indian animation industry comes from outsourcing work As a result, India has a thriving and fast growing aniamtion industry inspite of low local demand
Because of the excessive dependence on the outsourcing model right now, there is a risk that the Indian industry may lose a large portion of its revenues if outourcing dips. This could happen if other alternative outsourcing hubs emerge or if India begins to lose its cost advantage due to higher talent costs because of talent demand outstripping supply The Indian Industry uses world class software and technology as it handles outsourced animation production of some of the biggest international studios Because of the already existing high quality infrastructure, their remains a big untapped 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
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
08
Deal Activity and Investment Trends
to the increasing subscriber growth potential of this medium. In 2008, radio witnessed 1 cross border deal valued at USD 105 million. Some of the model profitable media companies worldwide are conglomerates with presence across the media value chain such as News Corporation, Disney, Time Warner, Viacom and NBC Universal. These conglomerates have been able to create value by the exploitation of their content libraries across media platforms thereby aggregating their customer base and addressing diverse media consumption patterns. Among the main trends in the sector that is driving M&A activity is the creation of specialized media and multimedia holding companies that include print and publishing companies, internet resources, radio, TV and a number of other media assets. In India too, several companies such as UTV; Network18; Reliance Big Entertainment; Bennett, Coleman & Co. and NDTV have expanded their presence across the media value chain. These domestic conglomerates have seen increased interest from their global counterparts as evidenced by Viacoms joint venture with Network 18, Time Warners investment in Miditech, Disneys investment in UTV Software Communications and NBC Universals investment in NDTV Networks plc.
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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
Historically, television has been the largest value creator in the Indian media and entertainment sector on the back of robust advertising growth, and it is no surprise that this segment has seen a flurry of deal activity from private equity and global media conglomerates alike. Key transactions in 2008 include Disneys acquisition of a 15 percent stake in UTV Global Broadcasting2, NBC Universals acquisition of a 26 percent stake in NDTV Networks plc for USD 150 mn3, Merrill Lynchs investment of USD 30 mn in Zoom Entertainment Network and News Corporations joint venture with the Rajeev Chandrashekhar backed Jupiter Entertainment Ventures (which owns leading South Indian television channels)4. This year also saw the exit of Reuters from their 26 percent joint venture with Times Global Broadcasting and the sale of Peter Mukherjea backed INX Medias sale of its English news channel to NaiDunia5. Since broadcasters derive approximately 80 percent6 of their revenues from advertising, a slowdown in advertising growth in 2009, coupled with increasing placement costs is likely to put severe pressure on the less established broadcasters. Broadcasters with strong channel bouquets and those that can aggregate niche audiences are expected to continue to see advertiser and investor interest in the near term and also benefit from the imminent digitization of the distribution landscape.
2 Bloomberg, Research Reports, Mergermarket 3 Bloomberg, Research Reports, Mergermarket 4 Bloomberg, Research Reports, Mergermarket 5 Bloomberg, Research Reports, Mergermarket
Television Distribution
The television distribution segment has not witnessed too much deal activity in 2008 with Morgan Stanley and India Infrastructure Holdings Funds USD 60 mn investment in Hathway Cable and Datacom being the only significant reported investment this year7. This segment is plagued by a number of inefficiencies which are impediments to value creation. In addition, some of the measures taken by the government such as implementation of CAS have not seen the level of enforcement and execution as one mightve hoped. However, distribution is likely to emerge as a major area of investment both in DTH and cable, given further opportunistic growth The distribution landscape in India is dominated by large conglomerates such as Tata, Zee, Reliance ADAG and the Hinduja Group which have the ability to invest for the long term as compared to the unorganized local cable operators. With limited financial strength and imminent digitization, there consolidation is expected in the fragmented cable market. Deal activity in television distribution 2009 is likely to be driven by requirements to raise capital to fund ambitious roll-out/customer acquisition obligations and opportunistically acquire the local cable operators wherever possible.
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Print
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 Shaws second round of investment into Amar Ujala9 highlights the importance of extensive vernacular reach and regional advertising growth. Kotak Mahindra Banks 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.
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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 OOHs proposition of providing a localized, low cost medium of advertising enhances the mediums 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 million14 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 Colemans acquisition of U.K.-based Virgin Radio for USD 105 mn to gain a foothold in the U.K. radio market for , UFO Moviezs acquisition of Moviebeam, a leading U.S.-based on-demand movie service and UTVs 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 Spielbergs 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
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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.
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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 ad rates; a newspaper, on the other hand, could evaluate the impact of an increase in newsprint prices on its profitability.
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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 investors perspective.
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.
Changing Landscape in
09
Changing landscape in accounting for Media and Entertainment industry
The convergence of accounting standards across the globe is gaining increasing momentum. Most standard-setting bodies have acknowledged that the ultimate goal of convergence is to have a single globally accepted financial reporting system. Accordingly, the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) have emerged as an ever greater focus of attention for reporting entities in recent years. While the IASB and the U.S. Financial Accounting Standards Board continue to work closely on their convergence project between IFRS and U.S. Generally Accepted Accounting Principles (U.S. GAAP), the U.S. Securities and Exchange Commission (SEC) has made significant progress to increase the acceptance of IFRS. The SEC's decision to accept foreign private issuers' financial statements prepared 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 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 15, 20141. Back home, the Institute of Chartered Accountants of India has also released a Concept Paper on Convergence with IFRS in India, which details the strategy and roadmap for convergence of Indian Accounting Standards with IFRS effective April 1, 20112. With these developments, the growing use of IFRS in the worlds markets and its current position as the most widely
used set of accounting standards in the world, the accounting landscape as we know it, is significantly changing. The aim of this publication is to provide a high-level summary of how financial statement results of the Media and Entertainment (M&E) industry may get impacted upon adoption of IFRS. IFRS is likely to affect most companies, not only those from the M&E industry, on various topics such as accounting for business combinations, financial instruments and derivatives, share-based payments etc. In this publication, we have discussed how adoption of IFRS may impact the area of revenue recognition for entities within the M&E industry especially transactions involving barter transactions, multiple-element deliverables and right of return provisions. Each of these concepts has been explained by way of examples below.
Barter transactions
Barter transactions involving advertising services are commonly entered into by entities within the M&E industry. IFRS could have a significant impact on the accounting and reporting of such transactions in the financial statements. A barter transaction involving advertising services occurs when two unrelated entities transact, under which one entity provides advertising services and in return receives 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 newspapers or magazines, broadcasting commercials on television or radio, displaying advertisements on websites or advertising through other media. In most cases, no payment is made between the two entities exchanging services. Under IFRS, revenue from barter transactions is to be recognized in the financial statements, provided the services exchanged are dissimilar and the amount of revenue can be reliably measured3. IFRS does not provide a definition of similar or dissimilar transactions. As an example, transactions involving exchange of advertising services for supply of goods would be considered dissimilar. By contrast, transactions involving exchange of advertising services in similar media do not result in revenue recognition under IFRS. In this regard, media may be considered to be similar, if they share some of the characteristics such as the target group, format or position and size of the advertisement, frequency and timing with which the advertisement is broadcast/placed. With respect to the second criteria, revenue from the exchange of advertising services may only be measured reliably by the advertising service provider at the fair value of its own advertising service, and not at the fair value of the advertising service received. As a benchmark for measuring fair value, the advertising service provider may only use other advertising transactions that are non-barter transactions, involve advertising services similar to those in the barter transaction, occur frequently, involve payment of consideration and do not involve the same counterparty as
the one in the barter transaction in question. The above can be explained by way of the following example: Publisher X provides Television Broadcaster Y with advertising space in its magazine. In return, Y broadcasts Xs television commercials on its channel. No payments are made between the two counterparties. The fair value of the advertising service provided by X to Y is USD 100,000 As the magazine and the television channel are two different advertising media, the advertising services exchanged are dissimilar. X therefore recognizes revenue of USD 100,000 for the advertising service it has provided. This amount is the fair value of the advertising service provided by X as part of the barter transaction, based on other similar advertising services provided by X. Certain related financial reporting issues may also arise if the barter transactions cross two accounting periods. For example, if at the end of a reporting period one party to the barter transaction has performed only part of its services and the other party has delivered all the services, then a necessary asset or liability need to be recorded in the financial statements. Therefore, before adoption of IFRS, entities that enter into barter transactions need to analyze their contracts to evaluate financial reporting implications.
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:
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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 3year 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.
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.
10
Building Robust And Scalable Internal Processes
The Media and Entertainment (M&E) companies in India today are operating in a much more turbulent and volatile environment as compared to their predecessors. The exponential growth witnessed in certain media sub-sectors along with the need to constantly innovate the business model, to create a perceivable differentiator, has put significant pressure on the internal processes of these companies. Considerable focus has been put on the top line and valuations by Media companies in recent times with little regard to profitability. But successful players realize that if they need to be profitable they need to make sure that not only is their strategy well articulated but also that they have robust internal processes to efficiently execute that strategy. In addition to these complexities, corporate governance requirements have increased manifold; investors and rating agencies are now closely looking at an organizations risk management and governance practices. Organizational processes, systems, performance metrics as well as procedures have to be aligned to the Companys strategic priorities. Then and only then is it likely that a company could be able to successfully face the risks, challenges and opportunities being presented by the external environment. Thus, having robust internal processes is now a pre-requisite for success.
To be specific, at each stage of their evolution, M&E players must ask themselves the following questions: Does the design of the business processes established by my company support its strategic objectives? Are our processes robust enough to support scale up of operations and improve our revenue realizations? Has the management developed a comprehensive understanding of the business risks that could prevent my company from achieving its strategic/business process objectives? Does the design of the internal processes established by my company adequately address the risks identified? Has the management derived a set of critical success factors and key performance indicators that monitor objectives and management of the risks? Do we have a good oversight function to review whether these established processes are working the way they should be? If players understand and prepare for these questions well enough, then they are well placed to leverage their internal 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 many systems, functions and processes that contribute to its success. For the M&E companies in particular, there are certain key processes that are an imperative for their progress up the value chain. In this section, KPMG has attempted to analyze the impact of the external environment and recent trends on the following key internal processes of M&E companies as well as identify the Critical Success Factors and Key Performance Indicators for managing these processes: 1. Content Acquisition and Development 2. Advertising Sales 3. Distribution.
also been rising in recent times. The main business objectives with respect to content acquisition and development should be to: Offer content that maximizes consumption (i.e. viewership, readership, listenership etc.) Maximize return on content production and/or acquisition costs Maximize the content library valuation by creating content with resale potential across time, mediums and geographies. To achieve these objectives, players have to build in certain internal capabilities to face the risks and uncertainties arising out of the business environment.
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Number of films in content library Value of content library Percentage of projects meeting production budgets Return on content development Number of films released in the year Size of content pipeline relative to peers Budget vs. actual variations in production costs and timelines
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Sector
Environmental Context
Increasing significance of niche content with growth in the number of specialty magazines as well as newspaper supplements Growing preference for locally relevant content Change in business model aimed at de-risking Ad sales revenue and creating newer platforms such as internet, radio etc. Spiraling increase in newsprint costs resulting in pressure on margins Increasing competition from news channels Increase in equity barter deals in light of decrease in Ad spends due to cost reduction measures by corporates
Conducting continuous market research to keep a track of consumer preferences Proper consumer segmentation and matching these segments to their content preferences Ensuring a judicious mix of different languages and genres while deciding upon product portfolio Increasing local supplements to cater to specific local content needs Effectively leveraging existing content for newer business ventures Creating alliances to share content created over time so as to optimize returns content acquisition costs Clear segregation of editorial from Ad-for equity barter deals to maintain independence of content
Average Issue Readership Total number of copies sold (Circulation) Average Realization per copy Market share within its category Pagination vs. Compete Revenue growth from content syndication Number of customers for content syndication
Radio
Over 250 channels expected to be operational by end of 20081 Over 700 new licenses expected to be issued under phase 32 Very little differentiation among the radio stations with all of them focused on mass music segment Excessive fragmentation of listenership specially in metros resulting in lower Ad rates for each player
Targeting specific consumer segments and differentiating content accordingly Differentiating through focus on particular music genres Differentiating through the stations RJs and non music programming Targeting geographies where radio penetration is lower rather than focusing on metros only Conducting continuous market research to keep a track of consumer preferences Bargaining for more rational prices for music rights Careful evaluation of future selling prospects before buying rights
Percentage share of Listenership Return on music royalty fee paid Return on number of RJs employed Saturation of interest among consumers with the same music genres across all stations
Music
High acquisition costs for film music rights Not all movies are box office hits. As music sales of hit films generally earn a majority of the profits, therefore, high risks are involved for the music distributor Film studios opening their own music distribution arms thereby limiting the content available for pure music players
Return on total music acquisition costs Percentage of albums/movies for which music rights are acquired among top 50 music albums sold Value of content library Size of content pipeline relative to peers
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 , 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.
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Sector Animation
Environmental Context Primary focus on the low value production part of the animation value chain which is outsourced to India Very few in house productions in genres other than mythology (which tends to have only local appeal) Lack of creative talent required for the high value conceptualization, preproduction and post-production parts of the value chain
Critical Success Factors Conducting continuous market research to keep a track of consumer preferences Focus on complete in house productions Focus on creating global properties which are region, religion & culture neutral Creating strategic alliances to acquire the technical skills required to produce quality animation content
Key Performance Indicators Size of content library Value of content library Percentage of projects meeting production budgets Return on content development Number of films released in the year Size of content pipeline relative to peers Budget vs. actual variations in production costs and timelines
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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 Ad-program/Ad-edit ratio Maximize Ad inventory utilization Enhance the advertisers 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.
TV
More number of channels leading to increasing clutter and audience fragmentation Increase in number of regional and niche channels that offer more cost effective and better targeting mediums to advertisers Stagnant/declining Ad rates due to audience fragmentation Increasing competition from emerging sectors like radio and internet Increase in equity barter deals in light of decrease in Ad spends due to cost reduction measures by corporates
Dynamic Pricing- Dynamically linking spot pricing to TRPs Creating appropriate discounting policy for network sales Mapping advertisers to increase penetration Dynamic monitoring of sales and available inventory spots Coordination as well as integration of systems between Ad sales and scheduling teams Key account management for large advertisers Identification and negotiation of equity barters to utilize unused Ad inventory
Ad inventory utilization Ad revenues per rating point for individual programmes as well as for the whole channel Ratio of ad units sold at original price to those sold at discount Ratio of paid to free advertising slots Average price per spot for prime time and non-prime time relative to peers Average Discounting rate Percentage of old accounts retained Number of new advertisers Value and number of Ad for equity barter deals IRR on Ad for Equity barter deals
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Sector Print
Environmental Context Increase in competition leading to decline in cover prices, leading to enhanced dependence on advertising revenues Declining readership figures leading to increase in bargaining power of advertisers Rise in the number of specialty magazines and newspaper supplements, as well as regional press offer more cost effective and better targeting mediums to advertisers Indiscriminate increase in pagination without corresponding in Ad volumes. Now resulting in lower pagination to cut spiraling newsprint costs Increasing competition from emerging sectors like radio and internet Increase in equity barter deals in light of decrease in Ad spends due to cost reduction measures by corporates
Critical Success Factors Optimizing pagination Optimizing the Ad-edit ratio Increasing the proportion of color inventory sold Appropriate advertising mix between display ads, classifieds, tenders and supplements Offering optimized discount rates to advertisers for buying spots among the diverse portfolio offerings Mapping different categories of advertisers to the different portfolio offerings Key account management for large advertisers Identification and negotiation of equity barters to utilize unused Ad inventory
Key Performance Indicators Ad Edit Ratio Total Ad space sold commercially Proportion of color inventory sold Average price per insert Ad inventory utilization Paid to free inserts Percentage of old accounts retained Number of new advertisers Ratio of Ad units sold at original price to those sold at discount Average Discounting Rate Value and number of Ad for equity barter deals IRR on Ad for Equity barter deals
Radio
Radio Ad spends in India still account for only 5 percent of the total Ad pie versus about 8 percent globally Increase in number of radio stations has led to fragmentation of listenership and hence stagnation/decline of Ad rates for individual stations Local to National advertisement ratio is 25:75 in Indian radio versus 75:25 globally Lack of content differentiation due to continued regulatory bottlenecks can lead to stagnation in listenership and therefore Ad revenues
Dynamic Pricing- Dynamically linking spot pricing to listenership figures Creating appropriate discounting policy for network sales Targeting local advertisers and ensuring optimized mix of national to local advertising Mapping advertisers to help ensure salience with programs Excellent coordination as well as systems integration between Ad sales and scheduling teams Key account management for large advertisers
Ad inventory utilization Ad revenues per unit listenership Ratio of Ad units sold at discount to those sold at original price Percentage of old accounts retained Number of new advertisers
Outdoor
Increased PILs and consequent ban on hoardings in major cities putting advertisers under pressure since billboards is the largest segment in outdoor media Rising consumerism leading to increasing significance of ambient media and digital formats Absence of a scientific metric for consumer response measurement limits the advertising pie in this medium Cinema advertising generating increasing interest with advertisers but is still in a nascent stage
Optimize mix of advertising inventory across various segments- Billboards, Street Furniture, Transit as well residual media Designing differentiating ads for digital and ambient media Developing in house capabilities for designing as well as execution of creatives
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Distribution
Business Objectives
Building up an efficient content inventory and optimizing ad 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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Film
Digitization of cinema facilitating wider release of films Growing revenues through C&S distribution due to increase in number of channels Increasing penetration of home video market due to lower price points in the sell through segment Digital streaming and download of movies through the internet Despite growing popularity of Indian films overseas, contribution of overseas collections to the total revenues of film industry is below 10 percent Piracy issues continue to prevail
Making investments in digital technology and negotiation of agreements with digital screen exhibitors as well as multiplex owners Negotiation of agreements with satellite channels; dynamic linking of revenues with the number of screenings Monetizing content library through alternate distribution platforms like home video and internet Aggressive marketing initiatives as well as tie up with agents to facilitate wider release of films in overseas markets Proactive litigation against unauthorized use of content
Percentage of Total Population reached Rate of commission paid to distributors in relation to peers
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Sector Print
Environmental Context
Increase in number of newspapers and magazines leading to increase in bargaining power of the distributors and vendors Emergence of electronic and mobile versions of newspapers and magazines Inability to increase cover prices due to competition coupled with increasing bargaining power of vendors putting pressure on margins of companies
Negotiation of agreements with distributors and vendors Enhancing bargaining power by strengthening product portfolio Monetization avenues for alternate distribution, especially in case of classifieds and other display ads Agreements and policies regarding unsold inventory
Percentage of total literate population reached Percentage of target consumer segments population reached Rate of Commission negotiated paid to distributors or vendors relative to peers Unsolds vs. Compete
Music
Continuous decline in sales of physical units Growing importance of alternate distribution platforms; more than half the revenues of the sector is from licensing revenues from FM, mobile music sales, online music sales etc. Piracy is still rampant in the sector; the sector loses more than 60 percent of its revenues through piracy Film producers introducing their own music labels and retaining the music rights with themselves
Bargaining for better revenue share in case of digital music, especially in case of Mobile Music(currently operators take about 70 percent of revenues generated) Ensuring content availability across all major third party internet platforms such as iTunes Proactively pursuing legislation against illegitimate online music distribution platforms
Total number of distribution centers where physical units of the company is being sold Percentage share of online music downloads Percentage share of mobile music downloads
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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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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.
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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 todays 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.
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.
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Way Forward: Sector wise key action steps
Based on a detailed understanding of the industry and our interactions with various players, the following initiatives are recommended to be undertaken by the players operating in various sub sectors of the M&E industry. The industry is looking to capitalize on new opportunities driven by favorable socio-economic changes and smarter distribution technologies. This section focuses on key action steps that players need to unlock greater potential and to help: Increase their Market Share Maximize their revenues Improve profitability levels
differentiate through their add-on services and quality of customer service to attract new customers. To summarize, the main challenges for the sector are likely to be: Fragmentation of viewership: As the number of channels keeps increasing differentiation of content is likely to become increasingly important Under declaration of subscribers by Cable operators: In an analog cable dominated distribution market like India, rampant under declaration of subscribers at the LCO and MSO levels, results in large subscription revenue losses for the broadcasters. This will continue to be a challenge until addressable digitized platforms garner a higher share in the distribution markett High production costs: With rising costs of acting and
Television
With the explosion in the number of TV channels, and increase in the choice available to the viewer, TV viewership has been seeing continuous fragmentation. Maintaining high quality standards in content and differentiating oneself from the competition is thus becoming more important than ever before. Both broadcasters and content houses need to be 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 IPTV, and since ARPUs are already fairly low, players need to
technical talent, managing production costs is likely to be critical for television content producers Low ARPUs for DTH players: Competition is likely to help ensure that the ARPUs are kept low in the short term, directly affecting the bottom lines of DTH companies.
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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 unlock 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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Focus on content relevance for Tier 2/Tier 3 towns and Rural India
Backwards integration
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 to augment their revenues through add-on services such as video on demand. User 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 are lost due to piracy annually. Films are sometimes released in the pirated market as soon as 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 appeal 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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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 ad 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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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 news distribution media- TV, Internet and Radio- rather than being standalone publishers. Most of the larger players have already taken the lead in this aspect. Further, players also 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 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 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 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.
Exploit alternate distribution platforms to monetize content and de-risk the business model
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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 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 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 ad pie, against as high as 75 percent in U.S., regional advertising still remains a large 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 ad campaigns. Brand building to ensure greater listener stickiness is all the more critical in the current scenario with limited content differentiation Assessing potential of alternate revenue streams such as activations and internet radio may also be important to augment the standard advertising revenues.
Brand building
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.
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.
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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. iracy 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 challenge.
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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.
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.
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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.
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.
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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 ad budgets of marketers has affected this medium. The sector witnessed decreased adspends, 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 potential of OOH.
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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 could also give good returns in the long run.
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Expand presence across the value chain to provide end to end services
Build scale and take advantage of convergence between event management and outdoor
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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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 which have a universal appeal, but also the marketing skills and relationships to pre-sell their 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 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 postproduction 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, 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 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.
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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 fastestgrowing 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.
Brand building
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.
Images courtesy : NDTV, Star India Pvt. Ltd, Zee TV, Zee News, Dish TV, DNA, Rajshri Media Pvt Ltd, Laqshya OOH, Colors, Red Chilies Entertainment, Tips, Shemaroo Entertainment Pvt. Ltd, Next Gen Publishing, Sony BMG, Zoom
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.
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FICCI Contacts
Amita Sarkar FICCI Federation House 1 Tansen Marg , New Delhi - 110001 e-Mail: amita@ficci.com Tel: +91 11 2335 4285 Leena Jaisani FICCI Federation House 1 Tansen Marg , New Delhi - 110001 e-Mail: leena@ficci.com Tel: +91 11 2376 6967 Manish Ahuja FICCI Federation House 1 Tansen Marg , New Delhi - 110001 e-Mail: manish@ficci.com Tel: +91 11 2331 6527
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