Looking ahead, the future of M&E industry indeed revolves around digital. However, this brings with it challenges for every sub-segment of M&E industry, and whether the stakeholders are able to harness this potential dividend, will be the big answer to watch out for in the future.
The year 2016 was a mixed bag for the Indian media and entertainment (M&E) industry. While the digital ecosystem penetrated further into the citizens' day-to-day lives and opened up new avenues of consumption and revenue, it was time for introspection for many parts of the industry.
A slow economic recovery in the US and muted growth in China saw the global economy grow at a sluggish rate of 2.6 percent, with Brexit, the US election, and the rise of protectionist and free trade rhetoric adding to business uncertainty. The Indian economy, nevertheless, is expected to outperform major economies with a projected financial year (FY) 2017 gross domestic product (GDP) growth rate of 7.1 percent, despite the speed bump caused by demonetization. In 2016, the Indian M&E industry grew at 9.1 percent on the back of advertising growth of 11.2 percent. This was aided by strong fundamentals and a steady growth in consumption, although demonetization shaved off 150 to 250 basis points in terms of growth across all sub-segments at the end of the year.
Television – Bharat Beckons
The television industry in India stood at an estimated size of 588 billion in 2016, a growth of 8.5 percent over 2015, and is envisaged to register a CAGR of
14.7 percent to reach 1166 billion by 2021. The advertising revenue is expected to grow at a healthy CAGR of 14.4 percent, despite an early double-digit growth in 2016 and 2017; subscription revenues are expected to register at slightly higher CAGR of 14.8 percent, driven by the intended benefits of digitization flowing in post 2017.
Television had a steady run in 2016, with another year of double-digit growth despite headwinds on account of demonetization. The growth in subscription revenues was impacted due to the slow pace of digitization and average revenue per user (ARPU) realizations from the addressable C&S base Television advertising was steady at an 11 percent growth in 2016, aided by strong performance of sports properties.
The subscription revenue growth was tepid at 7 percent in 2016, on account of the impact of DD FreeDish subscriber additions and slow progress around digitization with Phase-III and IV deadlines revised to January and March 2017, respectively. Further, since distributors are focused on covering the entire Phase-III and IV, challenges around implementation of subscriber management systems, packaging for consumers, revenue distribution between LCOs and MSOs, and non-implementation of RIO deals persist.
The same has resulted in a flat ARPU growth for the distributors in 2016, with the percentage share of broadcasters in subscription revenue remaining flat.
The year also saw a flurry of M&A activity in the TV segment. The acquisition of Ten Sports by Sony Pictures Networks created a two-player market for sports broadcast genre in India. The strategic acquisition of Reliance Broadcast Network's GEC channels, Big Magic and Big Ganga, by Zee Entertainment Enterprises Limited, helped the company consolidate their presence in the GEC space.
On the distribution side, the merger of Dish TV and Videocon D2H created the largest DTH player in the country, setting the tone for further potential consolidation in the competitive TV distribution segment. The OTT segment saw broadcaster-owned platforms and independents consolidating their presence, while telecom operators like Airtel and Reliance Jio, and global players like Netflix and Amazon entered the market with varied video offerings.
The launch of high-speed data services by telecom operators and increasing propensity of users to consume content on-the-go bodes well for the growth of OTT in the near term. Currently, advertising video on demand (AVOD) is the dominant business model, but with consumption becoming widespread and original content coming into play, subscription video on demand (SVOD) models are set to gain traction
Consumer Analytics Has Become Indispensable
Analytics is being extensively used across M&E now, as organizations look to evolve their business models and address various challenges emerging in competitive markets. Analytics provides customized solutions to assess the business impact and provide feedback on areas of improvement. The BARC viewership data is providing new insights to broadcasters and advertisers resulting in changes in content, distribution and advertising strategies. Music and video streaming services are leveraging analytics and other digital technologies, such as machine learning and artificial intelligence (AI), in order to take better decisions pertaining to investments on user experience, customization services, and original programming. Further, analytics is being used in the film industry to gauge the effectiveness of marketing efforts and thus helping in strategizing accordingly to achieve maximum return on marketing investment (ROMI). With the evolution in technology, data availability would only increase and organizations need to invest significantly in gathering, analyzing, and interpreting data to optimize customer engagement.
Demonetization – A Bolt out of the Blue
The Government of India's de-legalization of high-denomination currency notes led to a decline in consumption across sectors, such as fast moving consumer goods (FMCG), auto, banking, financial services and insurance (BFSI), and real estate. This led to a pull back on discretionary spends on marketing and advertising, the repercussions of which were felt across M&E industry. Advertising revenues across television, print, and radio suffered while the attendance at cinema halls, particularly single screens, and live events, was also impacted. It is estimated that the annual advertising growth rates for television, print, and radio were adversely impacted by about 1.5 to 2.5 percent.
Demonetization was a late surprise for the TV industry in 2016. The broadcasters were negatively impacted due to the event. With cash drying up, consumption across the country saw a steep decline, resulting in major sectors cutting down on advertisement spends. The October–December quarter, which usually contributes to around 35–40 percent of the year's advertising revenues, saw de-growth in the last 45 days of 2016.
The broadcasters saw around an overall 200 bps decline.
The regional channels were worse off in terms of the impact, primarily due to a higher presence of local advertisers on these channels and a higher proportion of cut in spends by the FMCGs as compared to national Hindi channels.
BARC – Gaining Acceptance
2016 was the first full year in which BARC urban and rural data was available across the entire 52 weeks. In January 2016, BARC introduced the metric of
000 Impressions as a measurement tool for viewership, with the terminology decided keeping in mind the long-term strategy of BARC moving into digital measurement.
The coverage of rural viewership by BARC opened up whole new marketing opportunities for broadcasters and advertisers in 2016. The ratings pushed free-to-air (FTA) GEC channels of the top broadcasters, along with DD National in the top 10 category, and the same has consequently seen ad rates for these channels increase by about 50–70 percent during the year. The FTA channel launches were broad based, covering Hindi movies, news (Hindi and regional), music, and even kids at the end of the year.
Growth of FTA Genre
2016 saw major broadcasters launching FTA Hindi movie channels to complement their existing presence in the FTA Hindi GEC segment. The performance of the FTA Hindi GEC channels has rivaled that of respective pay-GECs, with major Hindi GEC FTA channels appearing consistently amongst the top 10 Hindi GEC channels. Some of the key factors that have led to the success of FTA channels are:
- With the BARC reaching 98.5 million rural households out of their universe estimate of 183 million TV households, the needs of the now measurable rural markets are amongst the top priorities for the broadcasters.
- The FTA genre provides a robust way for the broadcasters to achieve reach and viewership for the GEC in a relatively quick time, with the added incentive of cost effectiveness as compared to a pay-GEC.
- The continued resurgence of FreeDish has ensured that broadcasters having an FTA presence on this platform is a given. FreeDish is estimated to have garnered a million active customers at the end of 2016, providing a large potential viewership base to the broadcasters.
- The delay window of archived content aired on FTA channels shrunk considerably in 2016, having been reduced to around 1–3 months for some of the broadcasters, as compared to more than 1 year when the channels were initially launched.
The growing interest in a slot on FreeDish was evidenced by the 31st auction in October 2016, with DD garnering
1.3 billion from renewals and addition of three new channels on empty slots. February 2017 auctions saw a further increase in slot rates, with the highest bid at 73 million as against a reserve price of 48 million. With renewal of 10 slots and sale of three new slots, DD was able to garner
0.66 billion. The platform also ramped up its channel catalog to 104 from 80, along with an intention to start encrypting its signals from April 2017.
Consolidation emerged as one of the biggest themes in the television and broadcasting space in 2016 with deal activity witnessed across broadcasting and distribution.
In September 2016, Zee Entertainment Enterprises Limited sold their sports business under the Ten Sports umbrella to Sony Pictures Networks India for 25.84 billion. This put Sony's sports profile at par with Star India's. It ensured round the year cricket offering by Sony. Zee Entertainment Enterprises Ltd. (ZEEL) consolidated their presence in the GEC segment through the acquisition of television and radio businesses of Reliance Broadcast Network for 18.72 billion.
The television industry is moving toward further consolidation with players across the value chain eyeing inorganic expansion opportunities. With the rapid growth of OTT platforms and the TRAI tariff orders leaving viewing choices entirely in the hands of consumers, niche channels could look at consolidation opportunities in the near future.
The DTH sector too saw consolidation with Essel Group's Dish TV acquiring a controlling stake in Videocon Industries Limited's Videocon D2H. Essel Group will hold 55.4 percent, while Videocon will hold the balance 44.6 percent in the merged entity. The merged entity will constitute 27.6 million net subscribers, making it the largest DTH player in the country.
Vertical Integration of Media and Telecom Operators
OTT video has emerged as an important media consumption platform in the last year and stakeholders across the TV value chain have looked to establish their presence on this growing medium. However, the proliferation of OTT platforms brings with it challenges around fragmentation. A successful OTT play needs to have two key elements – strong content creation capabilities and an ability to reach the end consumer through a wide distribution platform. In India, both broadcast network-based platforms and telecom providers have strong and upcoming OTT platforms; however, they lack an element of end-to-end capability as outlined above. The global markets point toward a unique trend of potential consolidation between content creators and telecom service providers in creating an integrated media play. With Reliance's investments in media assets of Network 18 and an integrated telecom play in the form of Reliance Jio, vertical integrations of such nature could play out in the years to come.
TRAI Tariff and Interconnect Regulations – A Game Changer?
The Telecom Regulatory Authority of India (TRAI) ushered in the cable TV digitization process in 2012, which was aimed at tackling issues around a non-addressable base leading to a lack of transparency across the value chain, non-uniform pricing, sub-par quality to consumers, and continued litigations between stakeholders. Even post sizable digitization, the following challenges persist:
- Discrimination and non-transparency in distribution, with most deals between broadcasters and distributors being signed on a fixed-fee basis, and enforcement of RIO-only deals is non-existent in the market; deep discounting of packages over a-la-carte pricing, leading to some non-performing channels piggybacking on the top channels.
- Carriage fee still remains a significant payout for broadcasters, creating entry barriers for new entrants.
- lInstallation of subscriber management systems, implementation of channel packaging, and choice to the consumer at MSO end remains patchy.
- The sharing of revenue between MSOs and LCOs remains non-transparent, leading to non-realization of intended revenue benefits of digitization.
The consultation on draft tariff and interconnect regulations, initiated by TRAI in October 2016 and subsequent tariff orders released in March 2017, aim to address the above concerns and provide the consumer with complete choice in terms of selection and payment of only the content they would wish to view.
The above tariff orders and interconnect regulations could be a game changer for the industry and unit economics of each player. The regulations intend to usher in everything that addressability intended to, but with significant changes to business models and internal systems that these guidelines could bring about for all stakeholders, implementation is foreseen to be a long-drawn challenge. Television remains amongst the most important entertainment mediums in the country.
The process of digitizing this medium began with Phase-I in 2012 and has progressed slowly, with persistent challenges. At the end of 2016, the digitization of C&S households was around 70 percent, up from 60 percent in 2015, with parts of Phase-III and a substantial base in Phase-IV, still non-digitized. The Ministry of Information and Broadcasting (MIB) extended the deadline for Phase-III and IV of DAS to January 31, 2017 and March 31, 2017 respectively. With around 47 million estimated C&S households yet to be digitized, the resurgence of FreeDish observed in 2016 is likely to gather further momentum in 2017. The active subscribers for pay-DTH and digital cable grew by 24 percent in 2016, reaching a base of 54 and 45 million respectively. The subscriber growth for FreeDish was impressive at 47 percent YoY, touching an active base of 22 million subscribers at the end of 2016.
Nonetheless, we envisage some form of these regulations, taking into account the concerns of all stakeholders, to emerge within the coming couple of years. The same are expected to result in better ARPU realizations and along with HD adoption and upselling to consumers, the subscription revenues are expected to grow at a CAGR of 14.8 percent from 2016 to 2021 to reach a size of 771 billion.
Challenges Plaguing Realization of Digitization Benefits
Digitization was intended to bring in significant long-term benefits for the entire TV value chain in terms of addressability at the LCO level, choice to the consumer, plugging the leakage of revenues which would result in an ARPU increase across the value chain, and higher taxes for the government, minimization of carriage fees, and increased transparency across industry stakeholders.
More than 3 years into Phase-II digitization completion, but many of these issues still remain. The up-streaming of revenues from LCOs to MSOs and eventually the broadcasters, has not materialized as envisaged. The billing in Phase-I and II based on channel packages is not ubiquitous, resulting in MSOs continuing to collect a fixed amount from the LCOs. The above factors have resulted in ARPUs remaining stagnant across phases. The net ARPUs for MSOs stand at 95–105 for Phase-I and 80–90 for Phase-II, and 35–40 for Phase-III and IV, implying a marginal growth from 2015. Stakeholders have also pointed out that in spite of STB deployment in Phase-III and IV, the realizations per subscriber are still based on old analog rates, as on-ground digital collections have not yet materialized. Further, implementation of subscriber management systems at the MSO end is not widespread, leading to challenges around broadcasters ascertaining their share of the subscriber revenues.
Further, despite foreseeable challenges around litigations on the tariff and interconnect regulations, their eventual implementation by the regulator, in a form and manner acceptable to the stakeholders, is essential to realize the monetization benefits from the entire digitization process. Post 2017, an uptick in the ARPUs is estimated, with a 2016–2021 CAGR of 9 percent and 11 percent respectively for pay-DTH and MSOs, subscribers from Phase-III and IV coming in at lower price points. To encounter the FreeDish threat, major DTH operators launched entry-level packs at 99, consisting of FTA channels with a mandatory regional/add-on pack.
The GST Impact on Television
The Goods and Services Tax (GST) is envisaged to be implemented by the central government in FY2018 and is expected to simplify the multiple incidence of taxes currently being levied by central and state governments. The GST impact on TV distributors (DTH and MSOs) is expected to be largely positive, with the tax incidence likely to come down with the single GST rate as compared to the current levy of service tax at 15 percent and entertainment tax (depending upon the state).
The MSOs, however, might have a higher tax outgo for broadband services, which currently attract a service tax of
15 percent. TV broadcasters would likely see a rise in taxation from the current service tax to the final GST rate. The broadcasters though, have been pitching with the government for parity with print for being considered as an item of mass consumption. The availability of input tax credit for production companies could help bring down their tax outgo(to be continued in the next edition).
Based on a white paper by KPMG India-FICCI released at FICCI Frames 2017