Splicing for a new era
When corruption in the country seems to go out of hand, people like Anna Hazare try to bring the nation together by going on fasts and putting pressure on the establishment to take a step towards curbing the evil. And even they know that it is a long process and the actual result may take a lot of effort from the entire system. Last week saw something like that happening in the broadcast distribution space, except the protagonists here are the big broadcast players who are bearing the brunt of the rampant cable piracy and under-declaration of subscribers. And they are trying to address the issue by consolidating their distribution strengths to put pressure of the rest of the value chain and take a step towards bringing in more addressability in the industry. And just like the analogy, they know that it will take a long time to actually see results come, but this is at least a step in that direction. The two largest broadcasting networks in the Indian media and entertainment space – Star and ZEE – entered into a JV to form a single syndication bouquet. Star-DEN (a 50:50 JV between Star Network and DEN Networks) entered into a 50:50 JV with Zee Turner (a 74:26 JV between ZEEL and Turner). Calling this a milestone initiative, Uday Shankar, CEO, Star India Private Limited said “Zee and STAR have been known for taking opposing stands on any industry matter but we are turning a new leaf today. This partnership will change the face of TV distribution in India. We firmly believe that this will also help in the process of digitisation of the distribution industry. We have seen many government initiatives in that direction too, and we believe that together we would be able to put together a consumer-friendly process that would help speed the process of digitisation.” The newly formed entity has been named Media Pro Enterprises India, and will be the largest broadcasting bouquet in the country with more than 68 channels. Industry observers say that it would corner nearly 40-45 per cent market share. These channels will be distributed in the markets of India, Nepal and Bhutan, across platforms including digital platforms such as DTH and IPTV. The JV does not include sporting properties of both the companies. Punit Goenka, Managing Director & CEO, Zee Entertainment Enterprises Limited said, “the long-term vision of this venture is to pool together the resources of both the partners so as to address various anomalies of the present analog market, curb piracy, introduce transparency by accelerating the pace of digitisation in India, which would result in benefit to all the stakeholders in the value chain”. Curbing under-declaration and piracy If we take a look at the entire broadcast industry which is of the size of Rs 297 billion in 2010 according to the FICCI-KPMG Report 2011, subscription revenues of the industry are to the tune of Rs 194 billion which is even more than the advertising revenues which are Rs 103 billion. Subscription revenues for the broadcast industry for the year 2010 is only Rs 41 billion. After considering the distribution commission of the industry, the broadcast industry is losing a major share because of under-reporting. During the announcement Punit Goenka also said “if you had to see all aspects of it, this rivalry has cost the industry 10 billion dollars. There are many areas where we need to collaborate and work together and this alliance will help us to address these issues and grow much faster.” Thus the main aim of this JV is to target this under-reported revenue which is paid by the customer for watching the content but it does not come through the entire value chain. Rajesh Jain, Head of Media and Entertainment, KPMG said, “the approach of this JV is largely going to be driven from the perspective that when the broadcasters bring the distribution platform together, they will be able to have a better bargaining power with the LCOs and stress towards improvement in declarations and therefore increase in subscription revenues. And they will be able to synergise a lot of people on the ground, location-wise subscriber base and connectivity and therefore use both data points and bargaining power to collect it.” India has over 141 mn television homes out of which 116 mn are cable & satellite homes. Less than 25 per cent of the cable & satellite homes are on DTH and the rest are on analog cable. “The subscription revenues from the cable segment to the broadcasters are as good as or marginally higher than the DTH segment. The under-declaration from the cable industry is to the tune of 80 to 85 per cent. There is a huge gap which needs to be filled .The cable industry is 20,000 Cr out of which less than 3,000 Cr is addressed. If the game is played fairly this number can be revamped and be grown multifold,” said Rahul Kundnani, Research Analyst, SBI caps. “This JV between Star & Zee will curb piracy and bring about more transparency in the entire system. The deal will boost the subscription revenues of both the broadcasters. Also the deal comes at the right time ahead of digitisation plans to be announced by the government, probably in the monsoon session,” he added. There are two ways in which the subscription revenue of the industry can increase. One is through digitisation and the other is transparency across the entire distribution value chain. The penetration of digital cable and DTH is one part of bringing in more addressability in the industry. As per the KPMG analysis, total number of DTH subscribers to be added in 2011 is expected to be ~10-12 million as the industry is adding almost a million subscribers each month. Apart from that the government is attempting to gradually shift towards digital by making it mandatory to convert to digital addressable infrastructure. March 31, 2015 has been set as the revised deadline by TRAI for digitisation of the entire industry in a phased manner. Sameer Manchanda, Chairman & Managing Director, DEN Networks Limited, during the investor conference call said, “The ideology in which this JV has been formed is to tap the payment that the customer is paying but which is not coming through the full value chain. And that is happening on two accounts – under declaration and public piracy. So this JV is aimed as a value enhancer and structured at the value chain of this industry,” On the question of what steps will the company take on curbing the piracy issue, Manchanda dodged specifics and said that in the next six months we will see on-ground effects of this alliance. He however said that there will be a synergy between the teams in terms of data, research and industry knowledge and enforce addressability. “We will be going through the entire process of enforcement where we’ll be doing research and surveys of every colony and every LCO and track how many people are watching our channels. And then we will take the bottoms-up approach and involve everyone in the value chain including the LCOs and the MSOs.” Impact on carriage revenues According to media analysts a deal like this gives Star and Zee more bargaining power to negotiate with the distributors for higher content price and lower carriage fees. And it might have repercussions on the MSOs and LCOs in terms of further trimming down of carriage and placement fee paid by Star and Zee. The competing channels especially the newer channels could be under pressure to pay higher carriage or placement fees for better visibility after this JV. Mihir M Shah Research Analyst-Media & Entertainment, Alchemy Share & Stock Brokers Pvt. Ltd., said, “The bargaining power of the distribution players (cable: Hathway, Den) on carriage fees will relatively come down, as they will find it difficult to extract higher carriage fees from the combined entity. Carriage fees forms a large chunk of revenues for distribution players (for example, it contributes ~40% to Hathway’s consolidated revenues). This to an extent will be balanced by the new channels in pipeline. Recently, I&B ministry has approved 75 new channels, which provides some cushion to carriage revenues. Overall, impact is expected to be marginally negative for distribution players.” G Subramaniam, Chief Financial Officer, Hathway said, “Carriage fee contracts are negotiated annually and we do not anticipate any short term impact; in the long run this will be influenced by the digitization initiative.” However both Zee and Star have a relatively lower payout of carriage and strong content and hence the impact on carriage fees may not be too significant. “It is natural that when they come together they will save some carriage cost but they are already paying the lowest carriage cost and have a history of strong content. So it is not going to affect them materially or significantly. The main thing is that how do you change the structure and actually get paid for the content that viewer is watching,” said Sameer Manchanda of Den Networks. Nikhil Vora, Managing Director, IDFC Securities Ltd also said, “In terms of carriage revenues, we believe the formation of this JV would not have any material impact on the carriage revenues of the industry. Given the reach and scale of Star and Zee, we believe the two networks have a relatively lower payout of carriage.” When asked about the impact on carriage fees for channels of Turner in India, Anshuman Misra, MD Turner International India Pvt. Ltd said, “We hope that the alliance will help decrease carriage, IP rights theft and increase efficiencies, revenues and accelerate the pace of digitisation.” Impact on DTH industry DTH players have fixed price contract with broadcasters for long term basis and hence this deal may not impact them immediately, unless the arrangements are changed after the JV. Mr R C Venkateish, Chief Executive Officer, Dishtv India says he does not see any material impact of the JV on their company. “We don’t see this turn of events having an impact on DTH industry. We do not see any push ups in content costs as the deals with broadcasters have been done in advance on a long term basis.” However Manchanda of Den Networks gave an indication during the investor conference call that the team will come together and work out a strategy for the DTH players in three to six months time. Analysts feel if the JV has an impact on the DTH industry, players like Zee Group’s Dish TV and Star owned Tata Sky will have a limited impact. “With respect to DTH operators, however, where declaration levels are 100%, the JV would shift the pricing power to the broadcasters (Star and Zee particularly). Thus, while DTH operators have been enjoying an upper hand, as broadcasters’ revenues from DTH exceed that from cable, we believe the terms of the trade could change. As the newly formed entity exercises pricing power, content costs for DTH operators could trend upwards. Having said that, our sense is that the impact on Zee Group’s Dish TV and Star owned Tata Sky would be limited,” said Nikhil Vora, Managing Director, IDFC Securities Ltd . Mihir Shah of Alchemy said, “In the case of Dish TV, the content contract with ESPN-Star will come up for renewal in FY13E. With the formation of the new entity, Dish is expected to derive a better rate in the same way that Tata Sky is expected to derive from the bouquet of Zee channels. A symbiotic relationship will not only benefit the broadcaster arms (Zee and Star) but also the distribution arms (Dish TV and Tata Sky) which provide them the competitive edge over peers.” In essence, the coming together of the two largest broadcasters of the country is a critical development for the industry as a whole. In a highly fragmented and unorganised industry with over 70,000 LCOs, consolidation led by digitisation is the only way forward. Joint ventures like this will not only spur subscription revenues, digitisation and launch of new niche channels but also show a way for rest of the stakeholders in the value chain for consolidation. In the next few years we may see consolidation within other MSOs, acquisition of LCOs and also DTH players. CHANNELS INCLUDED IN THE BOUQUET STAR-DEN STAR PLUS, STAR ONE, STAR GOLD, STAR MOVIES, STAR WORLD, VIJAY TV, STAR UTSAV, STAR NEWS,STAR ANANDA, STAR MAJHA, STAR PRAVAH, STAR JALSA, CHANNEL [V], NATIONAL GEOGRAPHIC CHANNEL, FOX HISTORY & ENTERTAINMENT, FOX CRIME, FX, NAT GEO WILD, NAT GEO ADVENTURE, NAT GEO MUSIC, NAT GEO – HD, BABY TV, THE MGM CHANNEL, ASIANET, ASIANET PLUS, SITARA, SUVARNA, STAR CJ ALIVE, NDTV 24X7, NDTV PROFIT, NDTV INDIA AND NDTV GOOD TIMES. ZEE-TURNER ZEE TV, ZEE CINEMA, CARTOON NETWORK, POGO, WB, HBO, CNN, ZEE NEWS, 24 GHANTA, ZEE NEWS U.P., 24 TAAS, ZEE CAFE, ZEE STUDIO, ZEE TRENDZ, ZEE BUSINESS, ZEE ACTION, ZEE PREMIER, ZEE CLASSIC, ZEE MARATHI, ZEE BANGLA, 24 GANTALU, ZEE TALKIES, ZEE KANNADA, ZEE TELEGU, ZEE TAMIL, ZEE PUNJABI, ETC PUNJABI, ETC, ZEE MUSIC, ZEE SMILE, ZEE JAGRAN, ZEE SALAAM, REAL, ZEE KHANA KHAZANA MAJOR BROADCASTING BOUQUETS IN THE COUNTRY Star-DEN: Star-DEN is a 50:50 JV between Star Group and DEN Networks. The Star- DEN bouquet includes all channels of the Star Network (except the sports properties) and properties of other broadcasters like NDTV. Star DEN garnered revenues of ~Rs10bn in FY11. Zee-Turner: Zee Turner is a 74:26 JV between Zee Enterprises and Turner. The bouquet includes all channels of the Zee Group (except the sports properties) and channels from Turner (Cartoon Network, HBO and Pogo). Zee-Turner is estimated to have garnered revenues of ~Rs8bn in FY11. Sun18: Sun18, the most recently formed alliance, is a 50:50 JV between Sun Group and Network18 Group. Sun18 distributes 33 channels, including properties of the TV18 Group, Sun Network and Disney. MSM Discovery: Also known as the One Alliance, MSM Discovery is a JV between Sony Entertainment and Discovery Communications. The entity distributes 18 channels, including properties of Sony and Discovery. Source: Idfc Securities Research INDIAN TELEVISION INDUSTRY’S DISTRIBUTION VALUE CHAIN India is the 3rd largest cable TV market in the world, with 104 mn C&S households out of a total television-owning household base of 140 mn Currently, the market is highly fragmented with over 50,000 Local Cable Operator (LCOs) controlling over 74 percent of the market. This results in widespread leakages (under declaration), poor service mix and low ARPU However, the scenario is changing, driven by rising digitization in the form of CAS, DTH, HITS and IPTV, which is expected to reduce under-reporting Multi System Operator (MSOs) and Operating Companies are expected to be key beneficiaries of the estimated CAGR of 29 percent in subscription revenues SOURCE: FICCI KPMG REPORT 2011
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