India’s conducive regulatory environment and high volume of content consumption hold significant potential for foreign investments in the M&E sector.
The Indian media and entertainment (M&E) sector reached `150,000 crore in 2017, a growth of almost 13 percent over 2016. With its current trajectory, it is expected to cross `2 lakh crore by 2020, at a CAGR of 11.6 percent.
Growth was led by the digital segment, showing that advertising budgets were following the changing content consumption patterns of consumers. The film segment led on the growth front, mainly due to the international revenues generated by Indian films, and that has led to corresponding growth for the animation, VFX, and post production business. Television continued its strong run, on the back of digitization, tent pole properties, and nonfiction programming, particularly in regional languages. The local media of radio was impacted by demonetization and the introduction of GST, but showed a smart recovery toward the end of the year. Subscription growth outpaced ad growth in 2017, resulting in almost 15 percent growth in revenues in 2017. The Indian film industry witnessed a growth of 27 percent due to a combination of high growth in overseas theatrical releases (particularly in China), growth in satellite rights values, and domestic box office collections. Digital subscription made a strong impact in 2017, with a growth of 50 percent. There are around 2 million paid digital subscribers across application providers, and 1–1.5 million customers who have moved entirely to digital media consumption. By 2020, there will be 4 million digital only consumers who, along with millions of other tactical and mass customers will generate subscription revenues of `2000 crore. The animation, post production, and VFX segments are expected to grow at a CAGR of 20 percent till 2020, to reach `11,400 crore.
The proliferation of digital infrastructure will enable shifts in consumption patterns. It is expected that there are around 1–1.5 million digital only consumers in India today and this customer base is expected to grow to around 4 million by 2020. Tactical digital consumers would provide a high volume-lower value subscription base to content distributors. This segment could reach as high as 20 million households by 2020. Mass consumers would form the largest segment of the M&E sector in 2020. These consumers are expected to cross 500 million by 2020.
The TV industry grew from `59,400 crore to `66,000 crore in 2017, a growth of 11.2 percent. Advertising grew to `26,700 crore while distribution grew to `39,300 crore. Distribution was 60 percent of total revenues. At a broadcaster level, however, subscription revenues (including international subscription) made up approximately 28 percent of revenues. The number of licensed private satellite TV channels reached 877, of which 389 were news channels and 488 were non-news channels.
Distribution. The DTH companies and 10 largest MSOs dominated the market, serving around 65 percent of pay TV homes. Of the estimated 286 million households in India, TV penetration reached 64 percent in 2017. Digitization led to increased collections from end customers, across all DAS markets. In the analog regime, MSOs suffered from revenue leakages. However, with digitization, transparency has increased and MSOs have increased clarity on number of active consumers with each LCO. MSOs moved to a prepaid model with LCOs.
The number of active DTH subscribers in India grew by over 3 million during 2017, primarily driven by digitization in DAS-III and DAS-IV markets. However, ARPU has been flat at around `220 per month as compared to the previous year, despite muted increases in package prices. HD grew with digitization and has been estimated to cross 10 million.
By 2020, there would be around 4 million people who primarily depend on OTT platforms for their content. Broadcasters’ subscription revenue reached `9900 crore in 2017. International subscription revenues remained stable, and accounted for around `2000 crore in revenues in 2017. The TRAI had released the Telecommunication (Broadcasting and Cable) Services (Eighth) (Addressable systems) Tariff Order, 2017 (No. 1 of 2017) which is currently subjudice. According to this order, broadcasters are required to offer their pay channels on a standalone or a-la-carte basis. Free-to-air (FTA) and pay channels would have to be segregated in different bouquets with the MRP of a pay channel bouquet being not less than 85 percent of the standalone cost of all the pay channels forming it.
Content. The advent of more TV channels, as well as several OTT players has increased the overall demand for content. While Indian broadcasters produce over 100,000 hours of content annually across languages and formats, newer players are investing higher amounts per episode. The amount broadcasters paid for satellite rights increased by around 18 percent in 2017. Movie channels generated 23 percent of total viewership.
In 2017, digital media grew 29.4 percent on the back of a 28.8 percent growth in advertising and a 50 percent growth in subscription. Subscription is expected to grow to 9 percent by 2020. The rapid uptake of connected devices, especially smartphones and tablets, is instrumental in media consumption shifting beyond traditional media formats, such as broadcast and cable TV toward digital mediums. Internet users are expected to cross 500 million in 2018 and reach 829 million by 2021. 250 million people viewed videos online in 2017, a growth of 64 percent. Around 72 percent of total mobile traffic is expected to come from the consumption of video services by 2020. The video viewing audience in India is expected to grow at a CAGR of over 13 percent. Online video audience in the country is expected to reach ~500 million by 2020 from 250 million in 2017.
Digital subscription grew 50 percent in 2017 to `390 crore and this growth will continue unabated till 2020. The video subscription ecosystem has matured, and there are over 30 video OTT platforms in India. Unlike in the era of television, where must-provide regulations force a broadcaster to share content across all platforms who demanded it, no such laws exist in India for digital media. This has enabled OTT platforms to bid for and acquire content which is exclusive and not available on other platforms, or even television.
The Indian radio segment increased by around 6.5 percent in 2017. Phase-III saw the launch of 162 new FM radio stations. Licenses were acquired in 17 cities that had no operating FM licenses. New stations in existing cities and proliferation of private radio to smaller cities are likely to increase the listener base. Volume growth has put pressure on effective rates at an overall level and going forward, stations will need to curb inventory per hour to enable rate increases.
The year also marked a tepid response to batch-II of phase-III auctions of radio frequencies by the Government of India. Out of a total of 266 radio frequencies across 92 cities put up for auction, only 66 frequencies in 48 cities got sold to 11 companies. Overall, the players focused on consolidating their operations in the current locations as against aggressively bidding for new radio frequencies in typically radio-dark cities. In December 2017 the cabinet approved the e-auction of batch-III of private FM radio phase-III. Under this batch, the government is expected to auction 683 radio frequencies in 236 cities with a potential to generate revenue of Rs 1100 crore. The rollout of batch-III is expected to target majorly those cities that have no existing private FM radio channels.
Lack of a universally accepted radio measurement system continues to be a key area of concern both pre- and post-planning, and has acted as a deterrent to the growth of the radio industry. Due to the absence of the Indian readership survey (IRS) for 3 years, and RAM being restricted to only a handful of cities, there was no metric to enable return on investment. With the release of the IRS in 2018, it is expected that there will be more recent data made available. The industry is working toward implementing its own measurement across 21 cities, pilots of which are expected to begin in 2018.
Animation and VFX
The animation and VFX industry has grown significantly over the years, not only supporting the growing Indian M&E sector but also serving the world. In 2017, the industry grew by 23 percent to reach `6700 crore.
Animation. The growth of the Indian industry is expected to get a boost as Hollywood studios tap India’s large pool of low-cost, English speaking animators. The present trend of increased consumption in tier-II and tier-III cities is creating even more opportunities for the industry. The animation sector in India reached `1700 crore in 2017, registering a growth of 13 percent. It is expected to grow at a CAGR of 11 percent till 2020. India is now attracting work from geographies such as France, Germany, and the Middle East, other than just the Americas and the United Kingdom. Indian animation producers have also begun to create original IPs for a global TV and digital audience, commissioned by international studios and distributors. Cost arbitrage is still the key driver for animation of foreign movies in India.
VFX. Proliferation of platforms, growth in audience, and consumption spike due to falling data rates have contributed to high demand for content. 2017 witnessed a surge in content production for various platforms, and consequently the demand for post-production also increased. VFX was much in demand. Audience demand for better quality content on the back of exposure to dubbed international content and the Hollywood rub-off effect in terms of computer imagery has also led to the CGI component growing for special effects.
Creating a positive regulatory environment. An overall favorable regulatory environment for the M&E industry is likely to provide a boost to the animation sector as well. The GOI has increased the FDI limit from 74 percent to 100 percent in the sector through the automatic route, provided it is in compliance with the RBI guidelines. The government has granted industry status to the film industry for easy access to institutional finance, carved out a National Film Policy to tap the potential of the film sector mainly for the animation segment, and agreed to set up the National Center of Excellence for animation, gaming, visual effects, and comics industry in Mumbai. The Indian and Canadian governments have signed an audiovisual co-production deal.
Impact of GST
With the advent of GST, several taxes levied by the central government and by the state governments have been subsumed. While most erstwhile indirect taxes have been subsumed in GST, BCD continues to be levied on import of goods into India. The local bodies are still empowered to levy an entertainment tax. Subsuming the state levied and local body levied into GST has benefited the service industry in claiming the credit of taxes paid on procurement of consumables and capital goods. Television and radio broadcasters, cable TV operators, DTH operators, ad agencies, etc. have been availing the option of centralized registration. With the introduction of GST, all such suppliers are required to identify the relevant location (state) from where the supplies are made and shall have to pay taxes from such state GST registrations.
All major revenues generating activities of television broadcasters were covered under the service tax legislation. Thus, introduction of GST does not impact the taxability of revenues of television broadcasters. While the state level entertainment tax has been subsumed, the local bodies continue to have the power to levy entertainment tax. With the numerous local bodies in India, if such entertainment tax is introduced at the local body level, it will be detrimental to the television distribution supply chain. Television content procured on the licensing/acquisition basis was liable to VAT, generally at 6 percent. Further, other consumables and goods purchased by broadcasters were liable to excise duty and VAT.
Digital subscription was liable to service tax at 15 percent which has now been increased to 18 percent. However, this increase in rate is also coupled with availability of GST credit on most procurement by the digital organizations. As per the Constitution Amendment Bill, a local body can levy and collect entertainment tax in addition to GST levied by central and state governments. This could resultant into a cascading effect of tax which may defeat the concept of GST.
Operating Model 2020
Blockchain. Blockchain can eventually play a role in some of the areas of the M&E industry, such as piracy management, royalty payments, customers as distributors, monetization of content created by individuals, and micropayment-based payment models.
Artificial intelligence/machine learning. Top entertainment companies in the world are beginning to invest in AI and ML to improve revenues, reduce costs, enhance efficiencies, and create new digital products and services. From content processing and content recognition to speech recognition and ML, there are myriad ways in which AI and ML are impacting the M&E industry.
Security of IP and data. M&E companies are lucrative targets due to their high-valued IP content, end-customer information, and the wide scale public visibility that they tend to offer if affected. Most sub-sectors in M&E are dependent on several external stakeholders with access to IP content which create a long chain of access points that can be potentially exploited by hackers beyond the boundaries of the enterprise. A severe breach, in addition to severe consequences such as revenue loss, shareholder value erosion, and loss of jobs, could also create a public perception of a firm as an unsafe enterprise to deal with a negative branding.
Analytics. To effectively align their organizations for geographic and multimedia growth, M&E companies are placing significant emphasis on data analytics. M&E companies are largely focusing on four components – simplified single-version of rear-view reporting, developing predictive techniques, democratized access to data, and one view of the customer. The key to success in analytics for media companies is to link each persona/role in the organization to their business KPIs, which are in-turn linked to specific goals, and the goals define tactical sales and marketing campaigns.