FICCI- Deloitte report - ‘Media & Entertainment in South India - the Digital March’
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FICCI- Deloitte report - ‘Media & Entertainment in South India - the Digital March’

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FICCI- Deloitte report - ‘Media & Entertainment in South India - the Digital March’ pegs Southern Media & Entertainment (M&E) industry growth at 16% CAGR to reach INR 43,600 crore by FY 2017 ...

FICCI- Deloitte report - ‘Media & Entertainment in South India - the Digital March’ pegs Southern Media & Entertainment (M&E) industry growth at 16% CAGR to reach INR 43,600 crore by FY 2017 against the current INR 23,900 crore in FY 2013. Southern India media and entertainment industry’s growth will be mainly driven by popularity of vernacular content, rapid digitization and the evolving ecosystem. More details at - http://bit.ly/1jwuuDC

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    FICCI- Deloitte report - ‘Media & Entertainment in South India - the Digital March’ FICCI- Deloitte report - ‘Media & Entertainment in South India - the Digital March’ Document Transcript

    • The Digital March Media & Entertainment in South India India Media & Entertainment Business Conclave – Bengaluru For private circulation only October 2013 www.deloitte.com/in
    • Disclaimer This Report and the information contained herein has been prepared by Deloitte Touché Tohmatsu India Pvt. Ltd (DTTIPL) solely for the purpose of general information. The reader shall not use this Report for any other purpose and in particular shall not use this Report in connection with the business decisions of any party and for advisement purposes. This Report contains analyses that are intended to provide high-level information on the subject and are not an exhaustive treatment of the subject. The analyses in the Report are limited by the study conducted, the time allocated, information made available to DTTIPL or collected by DTTIPL. DTTIPL accepts no responsibility or liability to any party in respect of this Report. This Report is not intended to be relied upon as a basis for any decision and the reader should take decisions only after seeking professional advice and after carrying out their own due diligence procedures, detailed analysis to ensure that they are making an informed decision. This Report is not and should not be construed in any way as giving any investment advice or any recommendations by DTTIPL to the reader or any other party. The reader shall be solely responsible for any and all decisions (including the implications thereof) made by them on the basis of this Report. This Report has been prepared on the basis of information made available, obtained and collected by DTTIPL in association with FICCI. The sources of any material information used in the Report have been mentioned or cited herein. The information obtained and collected from various primary and secondary sources has been used on an “as-is” basis without any independent verification by DTTIPL. DTTIPL shall not be responsible for any error or omissions, or for the results obtained from the use of this information and provides no assurance regarding the accuracy, timeliness, adequacy, comprehensiveness and/ or completeness of such information and provides no warranty of any kind, express or implied, including, but not limited to warranties of performance and fitness for a particular purpose. DTTIPL shall not be liable for any losses and damages arising as a result of any inaccuracy or inadequacy or incomprehensiveness or incompleteness of such information.
    • Contents Message from FICCI 4 Message from Deloitte Touche Tohmatsu India Pvt Ltd 5 Executive summary 6 Film 10 Television 19 Print 31 Radio 39 New Media 46 Analytics in Media companies 51 Accounting challenges 54 Overview of Domestic Tax 56 Indirect Tax implications 60 Transfer pricing issues 62 M&A in Media – Key opportunities and challenges 65 About Deloitte 68 About Deloitte’s Media Practice 69 Acknowledgements 70 Contacts 71 The Digital March Media & Entertainment in South India 3
    • Message from FICCI Mr. A. Didar Singh Secretary General FICCI Dr. Kamal Haasan Chairman FICCI Media & Entertainment Business Conclave - South As we present to you the 2013 edition of our South India Media and Entertainment (M&E) industry, FICCI would like to thank Deloitte Touche Tohmatsu India Private Limited, our knowledge partner, for their continued support through the years and their efforts towards developing this year’s report. to embrace technology across the value chain with increasing number of filmmakers as well as exhibitors going the digital way. The TV industry is also adopting high-definition technology while enabling multi-screen viewership of content so as to cater to its consumers. Print and Radio are not far behind in their quest to entertain consumers through the digital medium. The South India M&E industry continues to grow and innovate, owing to the demands of its consumers. All media platforms viz. films, TV, print and radio are pushing content on the digital medium so as to enhance reach. The Government’s digitization mandate for the TV industry and the upcoming Phase III of radio frequency auctions will aid further penetration of the media along with an enhanced consumer experience. The film industry in South India accounts for over 50% of total films certified in India. The industry continues 4 Going forward, quality of content placed on the digital medium as well as the players’ ability to monetize it can prove to be a major revenue earner for the industry. FICCI acknowledges the valuable inputs provided by all industry players and those who have graciously devoted time to share their views in helping Deloitte put this report together.
    • Message from Deloitte Touche Tohmatsu India Pvt Ltd (DTTIPL) The Indian Media & Entertainment industry is rapidly evolving to reflect the sheer diversity of India. South Indian media industry remains the “poster boy” of the thriving regional Media & Entertainment industry, with people in South India demonstrating a penchant for local content. Marketers are paying heed to the rising disposable incomes and purchasing power in South India. National brands have realized the need to localize campaigns, leverage regional stars as brand ambassadors and use local media to effectively reach target consumers in the South. Our objective through this report is to present a picture of the vibrant Media & Entertainment industry in South India encompassing Films, Television, Print, Radio and New Media segments. The Media & Entertainment industry in South India was estimated at INR 23,900 Crore in FY 2013. The industry is poised to grow at a CAGR of 16% till FY 2017, driven by demands of its ever-discerning consumers and endeavors by media vehicles to expand their presence. While enabling regional media players to reach their target audience, the industry continues to attract national players to explore this growing South market. The market is dominated by Television (~56%), followed by Print (~ 28%) and Films (~11%). Sectors such as New Media and Radio, though smaller than other mediums, are expected to grow at rates higher than the industry average, given their increasing power of engagement. Films rule the hearts and minds of the people in South India. The region churns out more films than Bollywood. South Indian films are also getting bigger by the day, both in terms of gross revenues and budgets. Film stars are idolized by the masses, with superstars like Rajnikant enjoying a cult fan-following not just in South India but in pockets all over the world. Players in South India continue to be pioneers of technology usage in film-making, surpassing even mainstream Bollywood films. The trend of remaking popular South Indian blockbusters continues as producers realize the entertainment value of these films, which transcend regional boundaries. Furthermore, an increasing number of Tamil and Telugu films are being dubbed for satellite broadcasting on national channels. The TV industry in South, as at the national level, is undergoing a metamorphosis with digitization underway in various cities. It is changing the way consumers view television, with broadcasters also seeing an opportunity in creating and showcasing digital content. South continues to be the stronghold of print industry especially due to the reach and engagement abilities of vernacular papers. The regional print industry, having recognized the importance of digital medium and its ability to connect with the youth along with rest of the population, continues to invest in offering customized news/videos through online portals and mobile applications. The Radio industry continues to focus on localized content and differentiated programming in South India. With Phase III of radio frequency auctions expected in FY 2014, players are gearing up to further their reach and strengthen engagement with the consumers. The success of New Media not only depends on accessibility and devices, but also on the development of a viable online eco-system. South Indian media industry holds great potential in leveraging the availability of quality vernacular content to create this eco-system. As the penetration of internet expands beyond key cities in the region, it will be interesting to see how the players in other media take advantage of the New Media platform. We would like to take this opportunity to thank all the industry players for actively participating in this endeavor. We would also like to thank FICCI for partnering with Deloitte to present this report at MEBC 2013 in Bengaluru. The Digital March Media & Entertainment in South India 5
    • Executive summary The South Indian Media and Entertainment (M&E) industry is growing in size, driven by the popularity of vernacular content among the region’s populace. While the popularity of film stars remains the most powerful trigger for films, digitization in the television sector is providing consumers access to a higher number of TV channels, a better viewing experience, and other value added services. Print, both in its English and vernacular forms, is widening its portfolio and markets to capitalize on the readership base in South India. As listeners become more selective, the radio industry in the South is tuning its programming towards local preferences, thus becoming a more integral part of life in South India. In fact, listeners in South India spend more time on radio as compared to those in other parts of the country. With a rich M&E industry driven by strong local demand, South India is poised to attain a greater position of strength in the coming years. Converting this potential into reality depends on the industry’s ability to continue to develop quality content as well as to deliver it through best-in-class platforms, both within India and abroad. Overview of the South Indian market In FY 2013, the overall South India M&E industry was pegged at INR 23,900 Crore. Owing to the evolving ecosystem and demand, the market is expected to grow at a CAGR of 16% to reach INR 43,600 Crore by FY 2017. Television constitutes the largest segment of the South Indian M&E industry and is currently estimated at INR 13,470 Crore accounting for the largest share of the overall market at 56%. The medium is expected to grow at a CAGR of 20% over the next four years due to benefits of digitization being realized. Print is the second largest segment accounting for 28% of the overall market in FY 2013 at INR 6,680 Crore. With players identifying innovative ways to reach out to their readers, Print industry is also expected to see steady growth going forward. Film, buoyed by an ardent fan following in the South, is the third largest segment at INR 2,680 Crore. Radio, with the upcoming Phase III auction and New Media, propelled by the consumer’s demand to access content ‘anytime, anywhere’, are expected to grow at a CAGR of 19% and 23% respectively, over the next four years. Figure 1.1: Overall South India Media and entertainment market 2013-17; E - Estimated (INR Crore) R– CAG 16% 43,600 23,900 2013* 2017E * 2013 is an estimate of the current size Source: Industry discussions and Deloitte analysis Table 1.1: South India Media and Entertainment market 2013-2017 – Media wise; E: Estimated (INR Crore) 2013* 2014E 2015E 2016E 2017E CAGR (2013–2017) Film 2,680 3,010 3,370 3,780 4,220 12% Television 13,470 16,540 20,180 24,090 27,960 20% Print 6,680 6,950 7,540 8,260 9,020 8% Radio 420 460 560 690 830 19% New Media 690 850 1,050 1,290 1,600 23% Total 23,900 27,800 32,700 38,100 43,600 16% * 2013 is an estimate of the current size Source: Industry discussions and Deloitte analysis. The market size numbers have been rounded off, which might lead to some rounding off error 6
    • Tamil Nadu and Andhra Pradesh constitute 70% of the South Indian M&E industry. The M&E industry in Tamil Nadu is expected to grow at a slightly higher rate than the other states of the region, with all four media platforms expected to grow faster in the state. Figure 1.2: South India Media and Entertainment market 2013 – Media wise split Figure 1.3: South India Media and Entertainment market 2013 – State wise split 2% 3% 14% 28% 36% 19% 56% 11% Television 31% Film Print Radio New Media Source: Industry discussions and Deloitte analysis Tamil Nadu Andhra Pradesh Karnataka Kerala Note: New Media has not been included in the state level market size calculations Source: Industry discussion and Deloitte analysis Table 1.2: South India Media and Entertainment market 2013-2017 – State wise split; E: Estimated (INR Crore) 2013* 2014E 2015E 2016E 2017E CAGR (2013–2017) Tamil Nadu 8,420 9,970 11,800 13,810 15,850 17% Andhra Pradesh 7,140 8,210 9,620 11,180 12,740 16% Karnataka 4,340 4,980 5,850 6,780 7,710 15% Kerala 3,350 3,800 4,380 5,050 5,730 14% Total 23,300 27,000 31,700 36,800 42,000 16% Note: New Media has not been included in the state level market size calculations * 2013 is an estimate of the current size Source: Industry discussion and Deloitte analysis The Digital March Media & Entertainment in South India 7
    • Key emerging trends Film The South Indian film industry with 831 films, accounted for over 50% of total films certified across India1. The number of films certified increased by 36% over 2011, primarily driven by a spike in Cable & Satellite (C&S) rights’ prices. However, the number of films released increased by only 8%2 during the same period as some producers chose not to release their films due to the high marketing costs associated, and as a result of a correction in the C&S rights’ prices in some of the markets. With over 90% of exhibitors using digital projection, filmmakers are more inclined to shoot their films digitally3. The industry continues to embrace technology in other parts of the ecosystem as well, be it experimenting with scouting talent through social media, adopting newer film making technologies in terms of sound and filming, distributing films digitally or embracing e-ticketing platforms. Furthermore, with the onset of digital prints, increase in C&S and remake rights’ revenue, the producers are getting opportunities to recoup their costs in a shorter duration. Television The Television industry in South India is on a transformation path, driven by the Government’s digitization mandate. It is one of the most flourishing regional media segment in terms of availability of content, reach and distribution. Over the years, it has seen increased action from regional as well as national advertisers. In fact, regional advertisers now contribute almost 40% of the TV industry’s advertisement revenues in states such as Tamil Nadu and Kerala4. The industry is also leveraging technology to enable multi-screen viewership of television content for viewers who are constantly on the move. Producers and broadcasters are looking to shoot as well as telecast content in high definition (HD) formats. Going forward, developing innovative programming content, identifying niche genres and expanding markets through new content delivery platforms, is expected to drive the South India TV industry. Print South India, driven by a high literacy rate and a sizable vernacular readership base (30% of total readership in India) is one of the strongholds of the Indian print industry. Amongst the four regional states, Tamil Nadu and Andhra Pradesh account for ~58% of the total revenue. Most of the markets in the region are dominated by English print in terms of revenue except Kerala, where vernacular prints accounts for nearly 90% of the revenue. However, the advertising revenue from vernacular print in the region is estimated to grow at twice the pace of that of English, largely driven by local advertisers and increasing focus of national advertiser’s beyond Tier 1 cities. Hence, some of the English players are now launching vernacular dailies to not only consolidate their presence in South India but also partake in vernacular growth. The industry is testing various business models to identify the right monetization opportunities in online space by developing mobile applications and mobile optimized websites. However, the future depends on how well the industry deals with the weak economic environment as well as the key issues of sustaining subscription revenues, monetizing online content and giving advertisers innovative ways to reach out to the readers. 1 2 3 4 8 Film Federation of India Industry discussions Industry discussions Industry discussions
    • Radio The radio industry enjoys greater acceptance in the South than in the rest of the country and thus stands out amongst its peers. This is indicated by relatively higher average radio listenership in cities like Bengaluru where people spend about 20 hours / week on radio while those in Delhi and Mumbai spend 13-14 hours / week5. The cultural diversity of cities in the South has fueled demand for localized content on radio. This has led to innovations in the type of content as well as the way in which content is being offered, so as to attract and retain audiences in a marketplace which is increasingly becoming crowded. Increasing presence of radio on the digital medium is also enabling it to reach listeners across the globe. With Phase III auction expected in FY 2014, the industry’s horizon will continue to expand. 229 of the 839 frequencies being auctioned are in 83 cities of the four Southern states. Phase III is expected to result in 294 frequencies (existing plus planned) in South India alone6. New Media The internet continues to have a profound effect on consumers’ viewing habits and the proliferation of devices is altering their media consumption behavior. With the increasing popularity of mobile broadband (3G) and the impending launch of 4G LTE services, mobile phones are expected to emerge as the preferred platform for consuming content. India already has over 65 Million smartphone users currently7. Utilization of existing bank of vernacular content, development of vernacular apps and improvement in connectivity infrastructure would define the growth trajectory of New media in South. The shift of users to web and mobile platforms for media consumption is expected to have a direct impact on growth of digital advertising as well. This is expected to grow at a CAGR of about 23% over the next four years. It would be exciting to see how players across M&E sectors experiment and innovate to effectively utilize and monetize new media platforms. 5 Industry discussions 6 Policy document on ‘Policy guidelines on expansion of FM radio broadcasting services through private agencies (Phase-III)’ 7 Report on internet trends, KPCB, May 2013 The Digital March Media & Entertainment in South India 9
    • Film South India’s large and active film industry caters not only to the masses but also to niche segments. While big budget films continue to account for a large chunk of revenues (~40%)8, smaller budget films with innovative subjects have been gaining popularity as well. The Hindi film industry has taken cognizance of the high entertainment value of South Indian films and has been remaking several successful Tamil and Telugu films. Further, increasing popularity of the digital medium has enabled producers to reach out to the overseas diaspora. Smaller budget films that are often unable to find theatres abroad are exploring web-enabled platforms to have a day-and-date release across the globe. However, the industry continues to face its share of challenges in digital piracy, rising marketing costs, shortage of quality theatres as well as skilled labor. Market size and overview Total revenues of the South Indian film industry were estimated at INR 2,680 Crore in FY 2013 (12% over FY 2012). The market is expected to grow at a CAGR of ~12% to reach INR 4,220 Crore by FY 2017, driven by a fervent fan base and growing revenue opportunities from satellite broadcasters and new media platforms. In 2013, Tamil and Telugu films together accounted for almost 90% of the revenue, with the rest being equally contributed by Kerala and Karnataka. While it is difficult to pick a genre of content that succeeds year-on-year at the box office, FY 2013 has seen reasonable success in comedy films, big star cast family entertainers and large budget action films. Just like Hindi films, South Indian films are witnessing a shorter theatrical window and rely on the initial weekend collections. While wholesome entertainers such as ‘Bulbul’ (Tamil) continue their dependable streak, smaller budget offbeat films such as ‘Attakathi’ (Tamil), ‘Pizza’ (Tamil) and 'Soodhu Kavvum' (Tamil) have also found a sizable audience. Figure 2.1: Film Market Revenues in South India; E – Estimated (INR Crore) CAGR (2013 – 2017) 4,220 3,370 260 200 3,010 2,680 190 150 220 170 300 350 18% 250 12% 1,750 3,780 12% 11% 1,870 12% 220 1,580 1,420 1,280 1,150 1,190 1,340 1,490 FY2013* FY2014E FY2015E * 2013 is an estimate of the current size Karnataka Tamil Nadu Andhra Pradesh Source: Industry discussions and Deloitte analysis 1,680 FY2016E FY2017E Kerala 8 Industry discussions and Deloitte analysis 10
    • Number of films certified The South Indian film industry with 831 films, accounted for over 50% of total films certified across India. The number of films certified increased by 36% over 2011, primarily driven by a spike in C&S rights prices. However, the number of films released increased by only 8% during the same period, as some producers chose not to release their films due to the high marketing costs associated, and as a result of a correction in the C&S rights’ prices in some of the markets. Increasing prominence of C&S rights Over FY 2013, Malayalam and Kannada markets have seen an increase in the value of C&S rights due to the demand from regional broadcasters. As per industry sources, with 4-5 regional GECs in each of these markets, smaller budget films increasingly rely on C&S revenues for breaking even. However, since the beginning of the current year, the broadcasters have reportedly become more selective in acquiring rights. Industry players believe that this could be due to the use of low-quality digital cameras by small budget films resulting in poor visual appeal on TV and rationalization of rights’ budget by broadcasters. Increase in production, marketing and exhibition costs As per industry sources, non-cast related production costs, comprising technician’s salaries, location rentals, travel expenses etc. have risen by almost 50% over the past year. Although post-production expenses have remained relatively stable, marketing costs and theatrical rentals have also seen a surge. New technology in filmmaking Taking a cue from global trends, South Indian filmmakers continue to adopt digital solutions to reduce costs, enhance quality, condense production time and streamline the overall production process. Film audiences in South India have traditionally been open to diverse genres, thereby encouraging filmmakers to explore themes that require advanced visual effects, such as action or adventure based films. Furthermore, the popularity of historical and mythological films in the past has aided South Indian filmmakers in becoming adept at using latest technologies. Table 2.1: Number of films certified in South India Category 2008 2009 2010 2011 2012 Tamil 175 190 202 185 262 Telugu 286 218 181 192 256 Kannada 162 177 143 138 128 Malayalam 88 94 105 95 185 South India 711 679 631 610 831 Source: Film Federation of India The South Indian film industry has certainly been at the forefront of cinema technology adoption having been first with digital cinema sound, non-linear editing and digital projection. The South has also wholeheartedly embraced digital cameras for film shoots in the last few years. Together, these innovations have truly democratized film making resulting in a significant growth in the number of small films, many of which have gone on to record runs! Consumers everywhere notice good product and technology helps achieve good quality at a lower price. Senthil Kumar Co-founder, Real Image Media Technologies The Digital March Media & Entertainment in South India 11
    • While talent for visual effects and digital colorization in South India matches global standards, skillsets in the special effects domain are still developing. Increased appetite for action films is inspiring producers to hire younger filmmakers with a formal education in postproduction. Exhibitors and filmmakers expect similar enhancements in audio, with AURO 3 and Dolby Atmos being more widely used over the next 2-3 years. The following table provides a snapshot of the impact that digitization has (or could have) on the various stages of the film making process in terms of time, cost and quality9. Figure 2.11: Impact of Digitisation on Film production, distribution and exhibition stages Pre Production Proportion of production costs 0.25 - 0.5% Production Production Post-Production 80-85% ~5-7% Marketing ~5-7% Distribution - Exhibition - Qualitative* degree of Digitisation Typical time Conventional Film process Digital Process Impact of Digitisation on Timelines Cost impact of digitization Quality/ Creativity considerations 1 - 6 months 3 - 8 months 2 - 3 months 1 - 3 months 1 - 2 months 1 - 3 months • Paper based scripting • Film based location selection, screen tests and costumes • Production using film based cameras • Recording content in film prints • The negative must be processed and scanned to digital for digital intermediate (DI) • Sound sync with picture during post production • Trailers are made in films and distributed • Physical distribution of films • Exhibition using conventional film based projectors • Scripting and storyboarding software • Digital capture, storage and transfer of screen tests and costumes • Capture is done using digital cameras • Recording and storage in digital memory • Footage can go directly into the DI pipeline • Sound in sync with picture during post production • Trailers are distributed in digital prints • Promotion on digital platforms (i.e. YouTube, Facebook etc) • Digital distribution over the satellite links or physical delivery of disks • Exhibition using digital 1K and 2K based projectors • Reduction in time for films with exhaustive location searches • Immediate access to final frame • Reduction in workflow in Sound and DI • Digital distribution of trailers over different medium • Large number of releases simultaneously reduces piracy • Allows producers a wider release possibility • Reduces cost of prints in screen tests • Reduction in raw stock, running expenses ,crew size leads to ~5 % savings • ~50% of consumables cost in postproduction comes down • Savings of about Rs.10-15 lakhs of trailer print for 500 prints • Digital print is only about 1/5th of the cost of film print • Single screen theatres must be viable to recover cost of projector • Increase in choice and improved creativity in costume designs • Accuracy in bringing concept to screen • Makes non-linear editing simpler and boosts creativity • The process is green • None • No major loss in quality from film print • Hollywood films are best viewed in d-cinema which is expensive than e-cinema *Maximum adoption of digitisation *Minimum adoption of digitisation 9 Industry discussions 12
    • Filming in digital formats and 3D: a leap to the next level As per industry sources, about 70-80% of South Indian films use digital cameras10. The larger budget Telugu and Tamil films are adopting advanced digital cameras, motion control systems and high quality sound and visual effects to match standards set forth by their Hollywood counterparts. Such attempts, although few in number, are raising industry standards. As per industry sources, the Kannada and Malayalam markets have limited number of trained cinematographers with knowledge of digital cameras11. Sound effects: Slow adoption of surround sound innovations With the onset of 3D visuals in films, some filmmakers are looking to adopt 3D sound technology as well. For instance, Kamal Hassan’s ‘Vishwaroopam' is the first Indian film and second film in the world to adopt the Auro 3D format12. However, filmmakers have been slow in adopting this technology due to the presence of only 1-2 studios across South India which offer mixing in Atmos 7.1 surround sound or AURO 3D13. Exhibitors are also less motivated to adopt these technologies due to high upgrading costs of about INR 25-40 lakhs14 associated with it. South India is dominated by three main digital distribution companies, namely Qube systems, UFO Moviez and Prasad PXD. As per industry sources, Qube holds about 65% of the screens in Tamil Nadu while UFO and PXD hold the remaining 25% and 10% respectively16. Way forward As the South Indian film industry continues to adopt digital cameras, advanced surround sound technology and digital prints, there seems to be a need for exhibitors to keep-up with the changing technology, in order to enable an enhanced viewing experience for consumers. However in the scenario where content plays a very important role in attracting audiences, it remains to be seen whether exhibitors would be motivated enough to invest in upgrades and recoup their costs through increased footfalls and/ or by raising ticket prices or will this need go unmet. Despite adopting the latest technology, many South Indian films do not match global sound quality standards. This is primarily due to the lack of skilled audiographers in the region. Digital prints and digital exhibition gains ground Single screens account for 90-95% of the theatres in South India of which almost 90% have upgraded to digital projection. However, some exhibitors in smaller towns of Kerala and Karnataka still use low quality digital projectors which lead to a poor viewing experience15. The increase in digital theatres has also encouraged filmmakers to shoot their films on digital cameras. While Tamil, Telugu and Malayalam have been quick to adopt digital filming technology, the Kannada industry lags behind primarily due to lack of skilled professionals with knowledge about filming in the digital format. However, the onset of digital prints has led to a narrower release window for smaller producers because the big-budget films book almost all the theatres during festive months and long weekends. 10 Industry discussions 11 Industry discussions 12 Kamal Haasan’s ‘Vishwaroopam’ is the first film to use Auro 3D in India, ibnlive.in.com, September 2012 13 Industry discussions 14 SPI Cinemas to install Dolby’s new Atmos tech across 37 screens, thehindubusinessline.com, June 2013 15 Industry discussions 16 Industry discussions The Digital March Media & Entertainment in South India 13
    • As film makers continue to enhance their presence on YouTube and Facebook to engage the youth audience, some of the players in South India have taken initiatives to monetize content through the ad supported as well as subscription based platforms. As connectivity in India improves, producers should see a larger portion of revenues from these digital platforms. The greatest advantage of new media is the ability to cater to the widespread South Indian diaspora across the globe. Suresh Babu Director, Suresh Productions Private Limited Use of digital media for funding, marketing and distribution Social media aiding crowd funding Social media platforms like Facebook, with over 82 Million monthly users in India17, allow producers to showcase snapshots of their films to a sizable populace. In addition, filmmakers are using the platform to drive engaged users to their blogs to seek investments. Crowd-funding has the potential to drive the production of more independent films; however it is unlikely to account for a significant share of the industry. Some directors who attempted, or are attempting crowd-funding in South India18 • Pavan Kumar, a Kannada film director created a Facebook page and ran a blog on crowdsourcing.org to fund his film titled 'Lucia'. The director was able to raise INR 51 lakhs in 10 days from over 100 investors. According to the director, his film’s unconventional script dissuaded him from approaching regular film financiers. • Karthik Ravi, a Tamil film director, also sourced INR 1.7 lakhs from about 20 people through a crowdfunding website Indigogo.com. 14 • V G Baburaj, a Malayalam film director is looking to raise INR 1.2 Crore through social media for his under-production film 'Chedam'. Academy Award winning sound designer, Resul Pookutty is also part of this project. Drivers for using crowd-funding in South Indian films: • Fragmented financers/producers: The regional film industry is fragmented thus making it difficult for new filmmakers to get funding. • Difficulty for non-star cast films: Popular South Indian film actors are often reluctant to experiment beyond conventional film themes making it more difficult for film-makers with niche subjects and a relatively less popular star cast, to approach financiers. • Ability to reach the global South Indian diaspora: Crowd-funding platforms, such as Kickstarter, can be accessed globally and hence allow film makers to approach the South Indian communities staying abroad. Film marketing on ad-supported platforms and social media The success of 'Kolaveri-di' on digital media has led South Indian film-makers to lay greater emphasis on digital advertising and social media promotion. Promotion on digital platforms particularly helps in reaching the next-generation audience. Digital film aggregators have created online channels on YouTube and Dailymotion which showcase their library of content. These channels have transformed into some of the most subscribed YouTube channels across the country, serving as prime areas to advertise upcoming films. • You Tube channels like ‘Telugu Film Nagar’ and ‘Telugu One’ are amongst the most subscribed channels across India19. These channels showcase full length films, songs, promos and trailers. In addition to digital advertising, social media promotion has gained enormous traction among filmmakers and celebrities. Today, celebrities have their own Facebook and Twitter accounts which are often managed by professional agencies. These platforms are used to keep fans engaged. Furthermore, the high engagement levels on these platforms make them effective tools for film promotion. • Blockbuster Telugu film,'Seethamma Vaakitlo Sirimalle Chettu' used contests on its Facebook page to keep audiences engaged20. 17 FB releases regional data of users: India has 82 Million users, radioandmusic.com, August 2013 18 Crowd-funding show gains pace with Kannada movie Lucia, over 100 people invest through Facebook & blog, Biswarup Gooptu, Sangeetha Kandavel, economictimes.indiatimes. com, April 2013 19 Youtube top 100 most subscribed India channels list, vidstatsx.com, 2013 20 SVSC uses social media for promotion, AW Phani, andhrawishesh.com, January 2013
    • • Tamil film, 'Vishwaroopam' posted updates about the film and the experiences of crew members on its Facebook page. The page also ran contests and gave fans an opportunity to win exclusive Vishwaroopam prizes21. While marketing on digital and traditional platforms is critical to engage younger audiences, industry sources state that word of mouth publicity will continue to be an important factor that makes a film succeed. New-media models for film distribution Film aggregators have seen the proportion of overseas views shift from 90% a couple of years ago, to around 60% today. With the existing 3G and impending 4G rollout, the portion of revenues driven by domestic viewers is expected to increase further22. In addition to web based platforms, film aggregators are also developing mobile applications to enhance content consumption. These mobile applications essentially provide a bouquet of YouTube channels and are often embedded in smartphones and tablets. According to aggregators, about 50% of the online consumption originates from mobile devices. An innovation in digital distribution The difficulty in releasing smaller budget films, led Kannada film director Pavan Kumar to develop his own web based, pay-per-view platform - hometalkies.com. The platform allows overseas consumers to view some of the latest Kannada films including his crowd-funded film 'Lucia'. The portal also serves as a marketing and distribution tool by providing viewers with a share of the revenue earned from links that they post. Viewers buying a film are given a link to the film, which they can share and earn a portion of the revenue generated by any purchase made through it. Mr. Kumar has been able to gather more than 800 distributors across the world through this innovation23. An initiative to curb online piracy Piracy is threatening both home video and digital revenues. To combat online piracy, the Anti-Video Piracy Cell (AVPC) of the Andhra Pradesh Film Chamber of Commerce (APFCC) has designed a free web application that helps users report cases of piracy to the AVPC instantly. The app is compatible with all smartphones and enables the APFCC to discover the source of piracy (either online or CD). The informants are rewarded for sharing valuable information about the pirates. However, it is too early to see the impact of this initiative24 25. e-Ticketing platforms In order to make purchasing of tickets more convenient, exhibitors in South India offer online ticketing. Some state governments are taking initiatives to expedite this trend: • On November 2012, the Kerala government decided to introduce e-ticketing in cinema houses across the state26. • The Andhra Pradesh Film Chamber of Commerce (APFCC) has partnered with theatre owners and producers to set up an online ticketing portal for about 1,500 single-screen theatres (representing ~50% of total screens27) across the state28. Online ticketing company BookMyShow has also extended its footprint in South India with its acquisition of Chennai-based Ticketgreen. The move has given BookMyShow access to partnerships with over 100 cinemas in southern states. BookMyShow is expected to further expand its footprint in South India29. "Digital distribution platforms and billions of connected digital devices are not only enabling film makers to reach global audience, but are also creating unique content monetization opportunities for the media industry beyond their traditional distribution platforms. Industry associations, film makers and service providers need to embrace digital distribution platforms to monetize on consumer’s evolving media consumption patterns.” Ravi Velhal Global Content Policy and Standards Strategist, Intel Corporation 21 Vishwaroopam creates buzz on social media, Prasant Naidu, lighthouseinsights.in, January 2013 22 Industry discussions 23 Lucia | By the people, Pavitra Jayaraman, livemint.com, August 2013 24 A new app to curb online piracy, Karthik Pasupulate, timesofindia.indiatimes.com, March 2012 25 Anti-piracy mobile app launched, timesofindia. indiatimes.com, April 2013 26 Kerala to introduce e-ticketing in movie halls, PTI, firstpost.com, November 2012 27 Film Federation of India, Industry Discussions, Deloitte Analysis 28 A portal to kill the black ticket, deccanchronicle.com, May 2012 29 Bigtree Entertainment acquires Ticketgreen.com, Peerzada Abrar, Radhika P Nair, economictimes. indiatimes.com, March 2013, Bookmyshow readies for Southern sortie, Bharani Vaitheeswaran, thehindubusinessline.com, September 2013 The Digital March Media & Entertainment in South India 15
    • Regional media on digital platforms Driven by an increase in mobile and internet penetration across India, OTT players, production houses and content aggregators are aggressively pursuing new digital distribution models. In addition to ensuring that their content can be viewed on mobile phones and PCs, these players realize the importance of regional content and thus have been forming alliances to license and acquire content. • Production Houses - Eros: Eros uses Ayangaran Studio’s Tamil film library on its internet subscription platform ‘Eros Now’32. • Content aggregators - Hungama: Hungama.com launched a digital store, Hungama Movies, in partnership with Intel Insider which offers viewers Hindi and regional content in various languages such as Bengali, Malayalam, Gujarati, Marathi, Telugu and Tamil33. Some examples include: • OTT players - BigFlix: BigFlix has partnered with Unisys Infosolutions, a VAS and enterprise messaging solutions provider, to offer over 200 full-length feature films in various regional languages including Tamil, Telugu, Kannada and Malayalam30. - Spuul: Film streaming service Spuul.com has strengthened its Tamil film library with the acquisition of over 50 Tamil classic titles from Rajshri Media31. Way forward The film ecosystem is showing an inclination towards new media platforms to not only market, distribute and monetize their content but also to source funding for it. However, it remains to be seen how these trends develop over time as the new media infrastructure becomes more widespread. 30 BigFlix partners Unisys Infosolutions for content, Saptarishi Dutta, medianama.com, March 2012 31 Spuul.com bolsters its Tamil film library with Rajshri deal, indiantelevision.com, February 2013 32 Eros Now launches Tamil movie section, indiantelevision.com, January 2013 33 Hungama launches movie offering in the Middle East, exchange4media.com, October 2012 16
    • Regional content on national media Introduction Over the past three years, the Hindi film industry has witnessed numerous successful remakes of South Indian films such as Ghajini, Pokiri and Singham, to name a few. Today, South Indian films match, and are often considered to be ahead of Hindi films in terms of production value, story-telling and the use of technology. These improvements in the overall quality of South Indian cinema have brought about an increase in interest to showcase dubbed versions of regional films on national broadcasting channels. Broadcasters: An attempt to reduce costs while maintaining ratings The escalating costs of acquiring C&S rights of Hindi films have led national broadcasters to look for alternative sources of content. South Indian films, especially those in Telugu and Tamil, have a high dose of action and drama coupled with good production values. This makes the content appealing to masses across the country. On an average, a Hindi film that has a production cost of about INR 10-15 Crore expects about INR 3-5 Crore for its C&S rights. In contrast, Hindi dubbed versions of South Indian films are available to the broadcasters for INR 1-2 Crore34. Appeal of the South Indian film content along with availability at relatively lower price, has led to an increase in interest among national broadcasters over the past 4-5 years. While the first six months of 2010 saw 25 telecasts of dubbed films on GECs, the number rose to 117 during the same period in 201235. This has also led to an increase in the cost of dubbing rights of about 15-20% over 201136. Remakes: The trend continues South Indian films have been a source of inspiration for mainstream cinema in Hindi for a long time. The entertainment value of the content is not limited to regional audiences. A successful film in South is likely to be a source for making successful content, for producers in other parts of India. Last few years have witnessed, leading Bollywood stars like Aamir Khan, Akshay Kumar, Salman Khan, Ajay Devgan enacting lead roles in Hindi remakes, which has further augmented the trend. This demand for remakes has opened another source of revenue for the producers in the South. Some of the popular remakes that have released in 2013 or are currently under production include37: Film Hindi Remake Stalin (Telugu) Mental Thuppakki (Tamil) Untitled film starring Akshay Kumar & Sonakshi Sinha Ramanna (Tamil) Untitled film starring Akshay Kumar Nuvvostanante Nenoddantana (Telugu) Ramaiya Vastavaiya Saamy (Tamil) Policegiri Thiruttu Payale (Tamil) Shortcut Romeo Kick (Telugu) Kick Pizza (Tamil) Bijoy Nambiar's untitled film Kandireega (Telugu) David Dhawan's untitled film Tamizh Padam (Tamil) Filmy Picture Films across South India have tremendous entertainment value which makes them particularly appealing to the audience not only in the South but across India. Therefore we are seeing an increase in demand from national broadcasters for dubbing rights and Hindi film producers for remake rights. K Vijayakumar Executive Producer, Ayngaran International Films (Pvt) Ltd. 34 Hindi channels dub to dip in the southern flavor, Meenakshi Verma Ambwani, thehindubusinessline.com, July 2013 35 Industry discussions 36 Top 10 upcoming South remakes in Bollywood: Salman Khan’s ‘Mental’, ‘Kick’, Prabhu Deva’s ‘Ramaiya Vastavaiya’ and More, Sangeetha Seshagiri, ibtimes.co.in, April 2013 37 Media reports and industry discussions The Digital March Media & Entertainment in South India 17
    • Human capital challenges in the Film industry Workforce priorities in the film industry Given the large number of films produced across South India, South Indian cities like Chennai, Hyderabad, Bengaluru and Thiruvananthapuram are hotbeds of skilled and unskilled workforce. However, the industry faces challenges in certain skills/roles; some of which are stated below38 39: • The quality of candidates and their technical skills, among those who are recruited from media schools, are often not up to the mark. Often they possess theoretical/ conceptual knowledge but lack practical training and an understanding of how to apply these concepts to their work. • Technicians are not trained well enough to use the latest equipment. Also, due to budget constraints, the quality of equipment being used by the industry is usually not as per international standards. This further reduces the quantum and quality of output per person. • Project Management: There is a need for thorough planning and efficient execution of the entire film-making process in order to eliminate wasteful expenditure and keep a tight control on costs and timelines. • Need for skilled talent in subtitling: South Indian films can be made palatable for non-Indian viewers by using cosmopolitan themes and English subtitles. • Need for talented workforce in Marketing: − Create an international distribution network for South Indian films which is well-organized and robust. − Create an awareness about the South Indian Film Industry on the international platform. − Identify and explore non-theatrical revenue streams. − Market films, especially for medium and small budget films. Potential solutions40 • Expansion of talent pool: The industry can consider setting up more film institutes or collaborating with existing ones, to expand the pool of acting and 18 technical talent. This would also reduce the overall talent cost for the industry, in the longer term. • Performance-based remuneration for key talent: According to sources, a significant portion of the remuneration for key talent, such as the screenwriters and directors, can be linked to the actual performance of the film at the box office. This would reduce the fixed cost burden on the film and incentivize good performance of these professionals. Producers currently implement such measures for major stars/actors. Conclusion The rich content and sheer entertainment value of films continues to draw audiences in theatres in South India. Filmmakers have been adopting technology across the value chain for various reasons including cost reduction, time saving and quality improvements. Going forward, the South film industry is expected to further leverage digital media for film marketing and distribution. The large consumer base and ever growing demand for regional films along with technology maturity is expected to attract more interest from national filmmakers and broadcasters. As the industry continues to grow, it may see the evolution of certain trends stated below. • Partnerships with national broadcasters, producers and aggregators to reach more South Indian film lovers across the globe. • An increase in the adoption of crowd funding and crowd distribution to allow niche films to flourish. • A push to use technology to enhance the audio and video quality of the films; not just by the producers but also by the exhibitors. • More multiplexes to bring in an untapped segment of consumers willing to pay premiums for a better viewing experience. 38 Single screen theatres hold their ground, Manish Raj, timesofindia.indiatimes.com, July 2012, Film industry in India: New horizons, Ernst & Young, 2012 39 South Indian film industry up against high costs, slack marketing, inability to maximize revenues, indiainteracts.in, November 2009 40 South Indian film industry up against high costs, slack marketing, inability to maximize revenues, indiainteracts.in, November 2009
    • Television Overview The South Indian television (TV) industry is continuously evolving and innovating in response to its environment, be it the Government’s digitization drive, the impending ad-cap regulation or the demands of its viewers. It is attracting national advertisers, while helping local players to reach their target audience. Broadcasters are creating in-house non-fiction formats to counter the increasing production costs across the industry. They are also investing in niche content to cater to specific needs of the viewers. Players are investing in high definition (HD) technology as well as digital content viewing platforms, in order to meet the demands of today’s discerning consumers. While industry participants agree that on-demand ‘anytime anywhere’ content is a key growth area, and even as the ecosystem to deliver such content is rapidly developing, effective monetization of such content remains a challenge. HD may present a more immediate revenue enhancement opportunity. In the last few years, South regional channels have taken a major leap in quality and nature of programming. From offering international format shows to creating innovative fiction stories, all efforts are being made to pull in new audiences to sample the regional space. Content that is more vibrant, contemporary and fresh is being offered to lure the youth. Anup Chandrasekharan Business Head, Asianet and Suvarna The South Indian TV industry was valued at INR 13,470 Crore in FY 2013. Against the backdrop of sluggish economic growth, the industry grew at a lower-thanexpected rate of 11% during FY 2013 (14% in FY 2012). The South Indian TV industry is estimated to grow at a CAGR of about 20% over the next 4 years, driven by subscription revenue growth; as consumers shift from analog to digital TV, and ARPU levels rise correspondingly. Figure 3.1: Overall market size of TV industry in South India; E: Estimated (INR Crore) CAGR (2013 – 2017) 880 20% 14% 6,780 14% 20,310 23% 27,970 24,090 770 20,180 680 13,470 520 16,540 590 5,990 5,250 4,600 4,000 17,320 8,950 FY2013* 11,330 FY2014E 14,240 FY2015E FY2016E FY2017E * 2013 is an estimate of the current size Content Subscription Advertisement Source: Industry discussions and Deloitte analysis The Digital March Media & Entertainment in South India 19
    • Figure 3.2: Share of various constituents of South TV industry in FY 2013* and FY 2017E South TV Industry – FY 2013* South TV Industry – FY 2017E 4% 3% 24% 30% 66% Subscription Advertisement 73% Content Subscription Advertisement Content * 2013 is an estimate of the current size, E: Estimated Source: Industry data and estimates, industry discussions, Deloitte analysis Subscription revenues currently represent 66% of the total industry, and advertisement revenues represent about 30%. With digitization of cable and the resulting shift from analog to digital ARPU levels, the share of subscription revenues in overall industry revenue is expected to rise to 73% in FY 2017. Subscription Market size TV subscription market in the South was valued at INR 8,960 Crore in FY 2013, and is expected to grow at a CAGR of about 23% to reach INR 20,310 Crore in 2017. Subscription revenues grew at a rate of 11% during FY 2013 driven by a rise in the subscriber base, as well as an increase in ARPU levels, partly owing to digitization. Digitization is also expected to bring about a shift in the way subscription revenues are shared across the value chain, bringing in transparency and increasing the revenue share of MSOs and broadcasters. Thus, the dependence of broadcasters on advertising revenues is expected to reduce. This would be particularly useful with the 12-minute ad cap per clock hour regulation that may get implemented in the coming months. Tamil Nadu and Andhra Pradesh represent around 70% of the total South TV subscription market. Although Andhra Pradesh is the most populous state in South India, Tamil Nadu contributes the largest portion of subscription revenues owing to the high C&S penetration of about 90% in the state. This is much higher than Andhra Pradesh’s C&S penetration of about 70%. Figure 3.3: TV subscription market in South India; E: Estimated (INR Crore) CAGR (2013 –2017) 20,310 1,790 14,250 1,480 11,340 1,190 8,960 960 1,830 22% 4,010 22% 6,510 17,320 23% 2,100 22% 3,430 2,840 5,580 2,280 4,610 3,700 2,970 25% 3,200 4,170 FY 2013* Tamil Nadu Karnataka Kerala 6,520 7,690 FY 2015E FY 2014E Andhra Pradesh * 2013 is an estimate of the current size Source: Industry discussions and Deloitte analysis 20 5,320 FY 2016E FY 2017E
    • Table 3.1: % share of states in South India’s population vs subscription revenues State % Share of South Indian population % Share South Indian subscription revenues Tamil Nadu 29% 36% Andhra Pradesh 34% 33% Karnataka 24% 20% Kerala 13% 11% South India 100% 100% Source: Industry discussions and Deloitte analysis The Digital March Media & Entertainment in South India 21
    • Digitization India’s large analog cable market is in the process of getting digitized in four Phases, driven by a government mandate. While Phase 1 (four metro cities) have largely been digitized (except for Chennai), Phase 2 cities (38 cities with >1 Million population) are in focus currently. Cable TV digitization level has reportedly touched 90% across 38 cities41. 5 out of these 38 cities are in South India. Months after the Union Government’s deadline for Phase II (March 31st 2013) has passed, cities of Bengaluru and Hyderabad in South India are said to have achieved 100%42 digitization, while others are in various stages of completion. The city of Mysore had achieved 80%43 digitization by the end of May 2013, while Coimbatore and Vishakhapatnam appear to be lagging, with only 30%44 digitization achieved by the end of March and April 2013 respectively. Even as DTH operators and MSOs continue to convert subscribers, as well as gradually increase ARPU levels, the industry faces challenges in achieving the deadlines set for digitization. A key issue being faced by players is the shortage of Set Top Boxes (STBs). Most cable operators were not well prepared and did not seem to have created the required inventory of STBs for Phase II. As many cable operators are importing STBs, depreciation of the Indian Rupee has resulted in an increase in prices, almost by INR ~15045 per STB. The price increase has reportedly been passed on to consumers. However, passing on such price increases may be more challenging in Phase 3 and Phase 4 towns. The challenge of “digitized, but not addressable” also persists. Addressability and the ability to deploy packages will become possible as MSOs obtain filled in Customer Acquisition Forms (CAFs) and are able to capture end-consumer information in their systems. Obtaining CAFs has been a longer drawn process than seeding STBs, thereby causing delays in addressability. Addressability and package deployment is key to raising ARPU levels. Impact of digitization Consumers Digitization has led to an enhanced TV viewing experience for consumers. They can watch a greater variety of channels in digital quality and have the option 22 of choosing and paying only for their favorite channels. It has also led to niche channels being launched by broadcasters in order to woo their consumers. Distributors Due to strong regulatory push for digitization, distributors are experiencing increasing traction with viewers for conversion to digital TV. MSOs are seeing assured monetary benefits with the help of revenue sharing agreements being entered into with LCOs. For example, Siti Cable Network Limited has signed a DAS interconnect agreement with 55% of its LCOs, working on a revenue-sharing basis of the carriage fee46. The cable TV distribution space in India is getting increasingly structured with monitoring mechanisms like KYC, CAF being put in place, as well as with consolidation into fewer and more efficient players. With increased transparency due to digitization, the revenue share is shifting from smaller cable operators to MSOs and broadcasters. Small cable operators appear to be selling their consumer connections to the big networks as a result of decreasing profits47. Broadcasters Broadcasters stand to gain an increased share of subscription revenues with all subscribers being accounted for. Digitization has also led to a reduction in the carriage fee to be paid by broadcasters to distributors. Regional as well as national broadcasters have seen a decline of about 30-40% in carriage fee post digitization (in digitized areas). Way forward The third Phase of digitization, including all urban areas not covered in Phase 1 or 2 is to be implemented by 30th September 2014, while the last Phase covering rest of India is to be implemented by 31st December 2014. Digitization of cable will bring in several benefits to the ecosystem, as described earlier, and successful execution of digitization is key for the industry. At the same time, addressability needs to go hand-in-hand with digitization (i.e. seeding of STBs). MSOs are currently focusing on Phases 1 and 2 of digitization. As digitization moves into Phase 3 and 4, where subscriber density is typically low (weakening the business case for the setup of a head-end and other 41 I&B Minister Manish Tewari’s Update on Phase II Digitization data, cablequest.org, April 2013 42 Bangalore’s cable TV network is fully digitized, claims Government, thehindu.com, May 2013, Baffling 194 percent cable digitization in city!, Rahul V Pisharody, newindianexpress.com, May 2013 43 Bangalore’s cable TV network is fully digitized, claims Government, thehindu.com, May 2013 44 TV Digitisation: Consumers can utilize transition period of 10 to 15, PTI, ibnlive.in.com, April 2013, Baffling 194 percent cable digitization in city!, Rahul V Pisharody, newindianexpress.com, May 2013 45 TV Distribution: Green Signals!, IDFC Securities, June 2013 46 SitiCable inks rev-share agreements with cable operators for digitization, Vikas SN, medianama.com, October 2012 47 The Big Digital Dividend, Gurbir Singh, Business World, August 2013
    • infrastructure for an MSO), other models for delivering cable may emerge, such as Head-end In The Sky (HITS). A HITS model would allow local cable operators to directly downlink content from a satellite, rather than source content through fibre, thus bypassing the need for a head-end on the ground. Various models of digitization are thus available, and the ingredients seem to be in place to convert India into a fully digital C&S country. With the country on the path to digitization, the time is right for deployment of HITS. HITS will help India in going digital, by providing a medium for local cable operators to digitize, while continuing to own the end-subscriber, grow their business and monetize the same. Advertisement Market size TV advertising market in South India was valued at INR 4,000 Crore during FY 2013, a growth of about 11% over FY 2012. Over 60% of TV ad revenues were garnered from the States of Tamil Nadu and Andhra Pradesh, with the rest being equally contributed by Karnataka and Kerala. Even though the South market is said to have grown at a rate higher than the national average in FY 2013, it is lesser than the growth rate attained during FY 2012 (15%). Reasons for this muted growth vary by State. For example, there were power cuts in Tamil Nadu which is estimated to have decreased TV consumption in the State. Going forward, TV ad revenues are estimated to grow at a CAGR of 14% to reach INR 6,780 Crore in 2017. Growth is expected to be driven by both volume (new channel launches) and inflation in ad rates, against the backdrop of the 12 minute ad cap per clock hour being implemented. Tony D’ Silva President, Hinduja Ventures Ltd. Figure 3.4: TV advertisement market in South India; E: Estimated (INR Crore) CAGR (2013 – 2017) 6,780 5,990 5,250 4,600 4,000 730 710 1,030 840 950 1,330 1,200 14% 1,160 13% 1,700 13% 15% 1,040 920 810 1,170 1,070 14% 1,510 1,780 2,050 2,370 2,720 1,530 FY 2013* FY 2014E FY 2015E FY 2016E FY 2017E Tamil an estimate of the Pradeshsize Karnataka Andhra current Kerala * 2013 isNadu Source: Industry discussions and Deloitte analysis Note: 1. Estimates above are estimates for the channels in the home state language. For e.g. Tamil for Tamil Nadu 2. Karnataka is to a large extent, a multi-lingual state, with a strong presence of Hindi, Konkani / Marathi and Tamil speaking population. Hence the share of viewership of Kannada channels in Karnataka is lower than the share of, say, Malayalam channels in Kerala, depressing the ad market size vis-à-vis size of the home state The Digital March Media & Entertainment in South India 23
    • In South India, in fact, players have already started hiking ad rates. Sun TV network successfully raised ad rates for weekday prime time slots on its flagship channel Sun TV by an average of 19%, while Star Vijay, owned by Star TV and Fox International Channels, also hiked ad rates by almost 25-30%48. These developments suggest that leading broadcasters in South India have some degree of pricing power. Changing advertiser mix Advertisers and genres Traditionally, FMCG players preferred advertising on fiction shows due to their reach and sustenance. However, firms are now adopting a multi-pronged strategy rather than a uni-directional approach. Firms have now started advertising with fiction as well as non-fiction (reality) shows; fiction for sustenance and non-fiction for say, a brand launch. Players across other industries are also casting a wider net as opposed to focusing on a particular genre of content while advertising. National vs local advertising Although national advertisers have always had a larger share of advertising, there is an increasing trend of local players advertising on Southern regional channels. Industry participants believe that local advertisers are becoming aware about the reach of television and it being a relatively cheaper medium of advertising. Local retail comprises 30-40% of advertising on channels in Tamil Nadu (primarily textile) and Kerala (primarily jewelry). Retail advertisers are not as dominant in Karnataka, and represent about 5% of the overall advertising on Kannada channels49. Impact of ad-cap regulation The regulation Recently, there has been increased spotlight around a TRAI regulation for TV channels. As per the regulation, a channel is allowed 10 minutes of commercials along with an additional 2 minutes for in-house ads per clock hour50. The regulation requires time gap between an ad break and programming to be at least 15 minutes, except in the case of a live sports event. This time gap needs to be a minimum of 30 minutes while telecasting films. Popups, part screen, or drop-down advertisements are not allowed. The regulation also requires broadcasters to ensure that advertisement audio levels do not exceed the regular audio levels of the channel. 24 Response of broadcasters The upcoming regulation, while being beneficial for viewers, will cause broadcasters and advertisers alike to re-think their strategies. Currently, news channels sometimes have 30 minutes of advertising per clock hour, and Hindi film channels have around 20-22 minutes. Hindi GECs have about 14-16 minutes of ad breaks per clock hour50. As the supply of ad inventory reduces, broadcasters expect ad rates to rise, though it may not fully compensate for the loss of revenue. Broadcasters may also launch new channels to compensate for the lost inventory – which entails some cost, and brings in some element of risk in terms of garnering viewership. The Government however recognizes that implementation of the ad-cap regulation must be in sync with the digitization process taking place, so that potential loss of ad revenue may be compensated for by an increase in subscription revenue and / or decrease in carriage. The MIB has indicated that news channels may get an extension on implementation of the 12 minute ad-cap, at least till the final Phase of digitization is complete51. TDSAT has also stayed the implementation of the ad-cap regulation till the next date of hearing on October 21, 2013 and/ or November 11, 201352. This is expected to give broadcasters time to decrease ad inventory / increase ad rates in a gradual manner. The reduction in the excessively long advertising breaks will increase programme ratings and subsequently the TRPs. Social media will stand to reap the benefits of the TRAI rule with the internet becoming a mode of delivery since no limits have been set so far. It will mean more business for those who integrate TV and the web. Ashok Vidyasagar Business Director -South, Big Synergy Media Limited 48 Channels hike ad rates to offset time limit, Vidhi Choudhary, S. Bridget Leena, livemint.com, August 2013 49 Industry discussions 50 Movie channels ready script to buck ad cap, afaqs.com, August 2013 51 NBA welcomes Manish Tewari statement on 12-min ad cap, mxmindia.com, September 2013 52 A fractured ad cap mandate dawns, Seema Singh, Meghna Sharma, indiantelevision.com, September 2013
    • Content Market size Content revenues in the South Indian TV industry were valued at INR 510 Crore during FY 2013, a growth of 11% over the last fiscal. Content revenues are estimated to grow at a CAGR of 14% to reach INR 879 Crore in 2017. Even though content composition in the Tamil Nadu market is gradually changing with more reality/non-fiction shows coming up, it still continues to be a fiction dominated market. This is due to the fact that the state's TV audience primarily comprises 25+ female population who prefer fiction and films. Changing genre mix Although the South Indian TV industry continues to be a fiction dominated market, the share of non-fiction shows has been increasing over the last few years. Each State has its own mix of fiction, non-fiction and film content. The share of non-fiction content varies from 20% to 50% across the four States53. N. S. Easwaran Business Head, Zee Tamizh Industry participants believe that even though non-fiction shows are meant to increase the equity of a channel and are a favorite format among advertisers who want top-of-the-mind recall, it cannot help sustain a channel’s growth. The costs for non-fiction shows (excluding in-house formats and shows like Neengalum Vellalam Oru Kodi i.e. the Tamil version of Kaun Banega Crorepati) could be 5-10 times that for fiction shows54. Regional broadcasters are also investing in in-house non-fiction formats which cost much lesser than the large budget formats. Figure 3.5: TV content market revenues in South India; E: Estimated (INR Crore) CAGR (2013 – 2017) 870 780 680 600 510 120 110 90 180 160 140 150 14% 150 14% 140 120 110 90 140 14% 200 230 13% 220 260 300 340 190 FY 2013* FY 2014E FY 2015E FY 2016E FY 2017E 16% Tamil Nadu Andhra Pradesh Karnataka Kerala Figure 3.5: TV content market revenues in South India; E: Estimated (INR Crore) 53 Industry discussions 54 Industry discussions The Digital March Media & Entertainment in South India 25
    • The era of niche channels With digitization providing a platform for a large number of channels, and consumers being able to exercise their choice about what kind of content they want to watch, broadcasters are investing in niche content. Higher channel carrying capacity, and the (expected) resulting lower carriage would make it cheaper for broadcasters to launch new channels in a digitized world. but “upgraded” to HD either during the postproduction process or even at the broadcast stage. Post August 2012, various new channels have been launched in the South TV market. These launches primarily targeted specific audiences through niche channels, and a majority of these were targeted at the Malayalam speaking population. Various other launches, across categories, such as Captain Music, Pudhu Yugam (GEC) are also planned during the forthcoming year. Following is a list of notable launches post August 2012. Current scenario Even though consumers in India have had access to HDTVs for a few years now, there has been little motivation for the industry to provide content in HD. This is due to high capital investment required across the production, post-production, broadcasting, and distribution stages. However, with increasing consumer awareness and their willingness to pay for a better TV viewing experience, and with HD even acting as a differentiator, the industry has begun to showcase HD channels. About 35 HD channels are available for viewing in India and many more are in the process of being rolled out55. Table 3.2: TV channels launched post August 2012 Name Genre Language 10TV News Telugu Captain News News Tamil Mathrubhumi News News Malayalam Raj News News Kannada Media One Infotainment Malayalam Kappa TV Music Malayalam, Tamil, Hindi, English Surya Music Music Malayalam Suvarna Plus GEC Kannada Source: Media articles Technology The high definition era HD – What is it? HD or High Definition is a video content format with a resolution typically of 1920 X 1080 and an aspect ratio of 16:9, versus the conventional 720 X 480 or 720 X 576 4:3 TV format. HD pictures are much sharper and clearer, with 1080 rows of pixels available as compared to SD pictures which display only 480 rows of pixels. For optimal picture quality, content needs to be shot and edited in HD and then broadcast to HDTVs via HD-enabled STBs. This may also be termed as ‘true HD content’ as opposed to ‘HD content’ that is broadcast in HD but is shot in SD. In this case, content is shot in SD 26 Interestingly, the next generation of HD is already rolling out to consumers. Described as 4K UHD or 'Ultra High Definition', the video format offers a minimum resolution of 3840 pixels × 2160 lines; nearly twice the horizontal and vertical resolution of the 1080p HDTV format, with four times as many pixels overall. Interestingly, SUN Direct was the first DTH services provider to showcase HD channels. SUN network also provides HD channels such as Sun TV HD, Gemini TV HD, Sun Music HD, KTV HD as part of its offering bouquet56. Channels in other South Indian languages have also been made available in HD. However, only a few shows are available in True HD. As per industry sources, broadcasters like SUN network are trying to convert all shows being currently shot in SD and telecast in HD format to ‘true HD’ format57. Impact of HD In addition to providing consumers with a superior TV viewing experience, deployment of HD will also be beneficial for others in the value chain. Higher rates for HD channel packages will help increase ARPU levels, in turn boosting subscription revenues for distributors and broadcasters alike. Although ad rates on HD channels are currently lower than those on SD channels, broadcasters may start charging higher ad rates for HD channels with increased penetration. Lower number of ads on HD channels is one of the key value propositions of HD in India. Broadcasters, however, will need to maintain a balance, to derive benefit from increasing ad rates, while keeping ad volume below a certain threshold to retain their premium HD subscribers. 55 Growing IT opportunities in the Media sector, Amit Singh, crn.in, July 2013, Industry discussions 56 Research report on SUN network, Emkay, August, 2013 57 Industry discussions
    • However, distribution platforms see HD providing a strong push for acquiring subscribers. Videocon d2h for instance reports that nearly 15% of new subscribers in Q1 & Q2 of CY’2013 have opted for HD58 services on the back of a sustained marketing effort. With the recent digitization of cable networks, large MultiSystem Operators like Hathway are also pushing the HD experience to subscribers59. Even so, the off take of HD STBs is currently only around 2-3mn60, well below 5% of the total digital universe in India. Challenges in adoption The large file size and complexity of HD content requires complex and expensive equipment to be used in the entire chain, from HD cameras and HD editing equipment to broadcasting in HD. HD content also requires over twice the transponder space on the satellite as compared to SD formats61. Benefits from HD investments may be “slow burn”, and take time to reap returns. Even if content is shot in HD, it may need to be converted to SD in order to cater to the large population with SD set top boxes. A deterrent towards successful implementation of HD content, specifically in the South Indian TV industry may be the unpreparedness of the entire value chain. Suresh Narayanan Chief Operating Officer, Insight Media City (India) Private Limited Way forward As the penetration of HD-enabled TV sets increases, and as income levels increase, the ecosystem is expected to move gradually towards greater HD penetration. Industry discussions suggest that broadcasters and distributors view HD as a key driver to raise subscription revenue, and most industry participants appear to have plans to expand their portfolio of HD channels. Like the US, which saw HDTV penetration increase dramatically post digitization around 2006, India too will experience a transition. But the current production-to-delivery costs associated with “True HD” means it will be a slow process and restricted initially to the larger and betterfunded broadcasters. The benefit of HD though is currently being optimized by distribution platforms. With ARPUs for HD subscribers pegged at nearly twice those of SD subscribers; DTH & digital terrestrial platforms like cable are pushing the ‘HD experience’ to new and existing subscribers - offering HD channels as a product differentiator. Vynsley Fernandes Director, Castle Media Pvt Ltd 58 Indiantelevision.com report, September 2013 59 Hathway selects STMicroelectronics to power its high-definition set top boxes, Thomson Reuters, finance.yahoo.com, September 2013 60 Indiantelevision.com report, September 2013 61 Industry discussions The Digital March Media & Entertainment in South India 27
    • Current Scenario With more and more users wanting to consume content ‘on the move’, broadcasters are creating a digital universe parallel to the traditional TV watching experience. As per industry sources, national broadcasters like Zee, Colors, Sony are expanding across various digital platforms i.e. online and mobile portals/ applications. Regional broadcasters are not too far behind in this race to innovate and grab digital eyeballs. Regional content has been made available on platforms like Apalya, Ditto TV, NexGTV etc. These platforms showcase content either by partnering with broadcasters directly or indirectly (via content aggregators like IndiaCast, MediaPro etc.). Regional broadcasters are also making inroads in the in-house digital platform space. PeppersTV, a Tamil entertainment channel launched its offerings on mobile platforms last year, making it the first regional channel in India to do so62. Content monetization on digital media The technology to deliver the enterprise with digital at its core is here now. The main challenges are around leading and marshaling the talent and innovative culture needed to make it a reality. Whilst we might be at the end of the digital beginning we are a long way from the beginning of the end of digital. Sanjay Reddy Managing Director, Dream Boat Entertainment Pvt Ltd Regional broadcasters are also exploring other digital platforms like WAP pages, voice services. WAP video content is usually placed on WAP pages of telecom operators while voice services provide the audience with an option to listen to 3-4 minute summaries of their favorite TV shows. For example, the voice service of Asianet TV was launched last year. WAP pages and voice services of more Star network channels are scheduled to be launched this year63. Content monetization Revenues for regional broadcasters from monetizing TV content are still low, as a majority share is retained by the telecom operator or the OTT platform. However, these revenues have risen over the last one year and are expected to continue to follow an upward trend in future. Tamil content seems to be most popular among the four South Indian languages and sees a lot of traction with the international audiences. Revenues from Kannada content are lower vis-a-vis Tamil and Malayalam content. 62 PEPPERS becomes India’s first regional TV channel on mobile, afaqs.com, March 2012 63 Industry discussions 28
    • shows among households. However, there are several challenges faced by the industry today, some of which are outlined below64 65. We are seeing good traction in the content consumption of our regional channels. Regional is our third largest content segment after Hindi GECs and films. We have been seeing a 15-20% growth in the consumption of regional content on Ditto TV every month. Manoj Padmanabhan Business Head, Ditto TV Challenges Even with existing technology and the innovations being made by players to reach consumers via the digital medium, actual usage may still be low. This may be due to infrastructural issues like low internet speed in India. Further, effective monetization on new media continues to be a challenge. Way forward The end-user ecosystem appears strong, with the availability of large-screen smartphones, and low-end tablets. The rising disposable income of the population may result in a greater willingness to pay. Deployment of 4G and stronger uptake of 3G may represent accelerated solutions to the infrastructure problem. Industry participants all agree that new media is a key area of growth, and this will continue to be a focus area for them, resulting in a greater number of innovations around offerings as well as monetization models. Human capital challenges in the TV industry Workforce priorities in the television Industry There has been a vast change in terms of content offered by the television industry; be it fiction to non-fiction shows or introducing a new genre of entertainment focused on target age groups such as kids, elderly (spiritual) etc. This offers a wide variety of roles for people in the television industry, thus accommodating talent of many kinds. These factors have contributed to the popularity of television It is a challenge to identify the areas of improvement in terms of skill gaps in the industry as there are no available databases that accurately document employment in this sector. Also, there are no comprehensive listings of all employers/ companies operating in the sector. Following are some of the areas of concern typically seen for talent in the industry. • Most of the institutes do not have media degrees/ specializations for media and the quality of candidates and their technical skills are often not up to the mark. • Keeping people commensurate with the changing technologies is a challenge, as often they possess theoretical/ conceptual knowledge but lack practical training and an understanding of how to apply these concepts to their work. • The Television industry employs a large number of freelancers, such as journalists. To determine the quality of work done by such individuals may prove to be a challenge. • Wages and employment for stage-hands are governed by trade unions that do not have any minimum certification or criteria required for enrollment. • The roles and processes are not standardized across the industry e.g. a Director at a small TV channel would work on a very different scale and perform a very different role as compared to a Director for a big budget event. There is a need for project management for thorough planning and efficient execution66. • Many of the channels are managed by promoters and succession planning becomes a key issue. Potential solutions • Professional set-up: Attracting professional talent from outside the promoter group to manage the business, with a profit share and pay for performance. • Expansion of talent pool: Industry-academia tie-ups or collaborating with existing educational institutions to participate in curricula development and adopting campuses to create a sustainable talent pool for technical talent67. 64 Broadcasting industry in ‘cost-rationalization’ Phase, retrenchment fears loom, Prashant Jha, thehindu.com, July 2013 65 TV offers opportunities to every talent: Javed Jaffrey, IANS, timesofindia. indiatimes.com, August 2013 66 Production Manager – TV, creativeskillset.org 67 South Indian film industry up against high costs, slack marketing, inability to maximize revenues, indiainteracts.in, November 2009 The Digital March Media & Entertainment in South India 29
    • Conclusion The South Indian TV industry is expected to continue on its growth trajectory, with technology aiding the process. With digitization of cable as well as new subscriber additions, subscription revenues are expected to more than double over the next 4-5 years. With greater transparency, broadcasters’ share of subscription revenues are expected to rise significantly, reducing the industry’s dependence on advertisement revenues. 30 Although GECs are expected to remain the mainstay of the industry, several new and niche channel launches are expected, as the cost of carriage decreases with digitization. These channel launches may also help compensate the industry for decrease in inventory due to a cap on ad minutes. The TV industry has begun its journey towards a more robust ecosystem, and successful execution of digitization of cable is key to taking it there.
    • Print South India is one of the strongholds of the Indian print industry with four states representing about 30% of the Indian market in terms of readership. From providing the latest news and insights to exploring digital media through modern channels, South Indian publishers are trying various means to attract and engage the highly literate readers in the region. The opportunity lies in tapping the growth potential of the market through expansion and deeper penetration while simultaneously building additional capabilities to explore alternate sources of revenues. As in other parts of the country, the South Indian print industry is facing issues of maintaining circulation revenues and monetizing online content. Market size The overall print industry in South India was estimated to be INR 6,680 Crore in FY 2013 (~7% growth over FY 2012). The industry is expected to grow at a CAGR of approximately 8% to reach INR 9,020 Crore by FY 2017, driven by an increase in subscription prices and readership. Low levels of print penetration coupled with growing literacy levels point to clear headroom for growth in the print sector in India. To tap this growth, we have put in a dual strategy of using English brands to tap all urban readers and language brands to address non-metro markets. Critical to implementing this strategy successfully is a relentless focus on innovation across product formats, in our consumer offers and the advertising solutions we offer. Shrijeet Mishra Chief Operating Officer, Bennett Coleman & Co. Ltd. Figure 4.1: Print Industry Revenues in South India; E: Estimated (INR Crore) CAGR (2013 – 2017) 9,020 8,260 7,540 6,680 6,950 1,330 1,430 1,470 1,770 1,970 1,810 2,150 1,600 2,280 FY 2013* Tamil Nadu 9% 1,740 1,890 7% 2,180 2,390 8% 8% 2,460 FY 2014E Andhra Pradesh 1,840 1,670 1,510 1,390 9% Karnataka 2,670 2,900 FY 2015E FY 2016E FY 2017E Kerala * 2013 is an estimate of the current size Source: Industry discussions and Deloitte analysis The Digital March Media & Entertainment in South India 31
    • Figure 4.2: Print readership split across languages in India and South India – FY 2013 English* 10% Vernacular non-South 26% Hindi 35% South Vernacular 29% Kerala 30% Karnataka 17% Tamil Nadu 28% Andhra Pradesh 25% Source: Industry discussions and Deloitte analysis *This includes English language papers in South India Figure 4.3: Vernacular Print Industry Revenues in South India; E: Estimated (INR Crore) CAGR (2013 –2017) 4,870 11% 1,650 9% 720 11% 1,240 11% 12% 4,320 3,800 3,240 1,170 3,420 1,490 1,340 1,220 470 810 840 790 550 490 870 FY 2013* FY 2014E Tamil Nadu Andhra Pradesh Karnataka * 2013 is an estimate of the current size Source: Industry discussions and Deloitte analysis 940 1,090 970 1,110 1,260 FY 2015E FY 2016E FY 2017E Kerala Vernacular market The vernacular print industry in South India was estimated to be INR 3,240 Crore in FY 2013. Kerala contributed 36% to the overall market in terms of 32 630 revenue, while Andhra Pradesh and Tamil Nadu contributed about 25% each. The industry is expected to grow at a CAGR of 11% to reach INR 4,870 Crore by FY 2017.
    • Figure 4.4: English Print Industry Revenues in South India; E: Estimated (INR Crore) CAGR (2013 –2017) 3,440 3,740 3,530 160 3,940 170 180 170 1,110 1,050 4,150 5% 190 4% 1,170 5% 1,150 5% 5% 960 980 960 970 1,360 1,410 1,490 1,560 1,640 FY2013* FY2014E FY2015E FY2016E FY2017E Tamil Nadu Andhra Pradesh Karnataka 1,090 1,030 Kerala * 2013 is an estimate of the current size Source: Industry discussions and Deloitte analysis English market South India has a large English speaking population and this is reflected in the fact that the English print market in South India accounts for over 50% of the total South Indian print market in terms of revenue, while the corresponding figure for all India is approximately 40%. The English print industry in South India was estimated to be INR 3,440 Crore in FY 2013. Tamil Nadu contributed 39% of the total market share while Andhra Pradesh and Karnataka contributed about 28% each. Kerala forms a very minor share of the English print industry in South India. The English market is expected to grow at a CAGR of approximately 5% to reach INR 4,150 Crore by FY 2017. Mirroring the all-India trend, the English print industry in South India is expected to grow at a lower rate than the vernacular industry, as a majority of newly literate readers enter the vernacular readership pool. While the English speaking population is expected to increase, the language demographic is such that it may experience the maximum adoption of new media. The Digital March Media & Entertainment in South India 33
    • Figure 4.5: Split of subscription and advertising revenues for each market in FY 2013 (INR Crore) Tamil Nadu Andhra Pradesh 1,460 1,190 520 36% 45% 530 690 580 270 39% 940 280 64% 48% 660 61% 420 300 Advertising Subscription 52% Subscription Karnataka Advertising Kerala 880 970 310 32% 450 460 160 35% 660 68% 770 Advertising Vernacular Source: Industry discussions and Deloitte analysis 34 11% 88% 110 12% 89% 65% Subscription English 400 50 300 55% Subscription Advertising
    • Advertising revenues contributed between 65% - 70% of total revenues of South Indian Print industry in FY 2013. Local advertisers remain the key category to drive print advertising revenues68. Overall, as per industry sources, advertising from health, retail and real estate sectors has shown robust growth. Education sector advertising has remained stagnant while growth in the auto sector advertising has been marginal. Further, the industry is expecting increase in Government ad spends (Department of advertising and visual publicity) especially in vernacular papers in the run-up to the 2014 general elections. Overview Introduction While vernacular and Hindi dailies dominate the readership figures across India, advertising revenues are tilted towards English dailies. This trend is also exhibited in South India, primarily due to the urban, higher socio-economic clusters that typically form the target market for English newspapers. In order to lure national advertisers, South Indian publications have established offices in key metros and have been aggressively pitching to media agencies. These national advertisers form a sizable portion of the total advertising revenue. In order to increase penetration, these print houses are not only expanding into other languages but also venturing into other cities. However, economic and business pressures are forcing publishers to increase their subscription rates. Exploring new horizons to broaden reach Print houses are exploring opportunities in the vernacular as well as English market. Some examples include: • The Hindu’s Tamil newspaper: The Hindu is planning to launch a Tamil newspaper in major cities including Chennai, Coimbatore, Madurai and Tiruchy69. In order to expand the publication’s reach, the Group is expected to distribute its Tamil offering as a separate publication and not bundled with its English daily70. • The Times of India’s expected regional entry: The Times of India is contemplating entry into regional languages including Tamil71. • Indian Express enters the South market: The Indian Express group has entered the English print market in South India with the launch of ‘National Standard’ in Bangalore, to target the youth72. It plans to subsequently expand into Chennai and Hyderabad as well73. The long term growth story for regional print remains strong despite the recent slowdown in the macro-economic scenario. Local and national advertisers continue to prefer vernacular papers to reach consumers in the Tier II and Tier III cities. To enhance our offering in the vernacular landscape, we have launched a Tamil language daily with editions across Tamil Nadu as well as a Tamil language news-website. Bharath Ganapathi General Manager - Corporate, The Hindu Upgrading printing technology • Publishers have been upgrading their machinery periodically to enhance the printing quality and increase the capacity of their units. For instance, The Hindu has upgraded to the new Mitsubishi Diamond Spirit printing machine which will enable the company to produce 24-page colour (from the previous 16-page colour)74 in broadsheet, at the rate of 75,000 copies an hour. This new press also has a closed loop ink density control which helps maintain consistency of print across the run, reduces dependence on skilled labor and minimizes startup waste75. 68 Industry discussions 69 Publisher of The Hindu to launch Tamil daily before season time, T E Narasimhan, businessstandard.com, July 2013 70 SKBKS Media &Entertainment report 2013 71 After Kolkata, Chennai to be next newspaper battleground, S. Bridget Leena, livemint.com, July 2013 72 Indian Express launches as National Standard in Bangalore, exchange4media.com, August 2013 73 Indian Express Group to launch National Standard in the South, T E Narasimhan, business-standard.com, July 2013 74 The Hindu in 24-page colour soon, The Hindu, February 15, 2013 75 Automatic closed-loop inking using Diamond Eye, Rushikesh Aravkar, prinweek.in, December 2012 The Digital March Media & Entertainment in South India 35
    • Concerns in the print industry The print industry in South India has been able to maintain its vigor through tough times, driven by strong growth in semi-urban and rural areas. However the industry continues to face macro-economic pressures. • Weakening Indian rupee: Indian publishers import over 50% of their newsprint76 as local newsprint does not often meet the quality requirements. The Indian rupee has lost about 17% of its value in 2012 - 2013 vis-à-vis the US dollar77, thus increasing the cost of imported newsprint. This is severely impacting publishers’ margins as newsprint constitutes roughly 40% of operating costs78. • Economic slowdown impacting advertising revenues: English newspapers rely on advertising for over 70% of their revenues79. The weakening domestic economic scenario, indicated by the GDP growth rate of 4.4% (lowest in the last 4 years80), has led to softening of advertising revenues in Q2, 2013 for English language papers. However, as per industry sources, vernacular dailies have not experienced any significant dip in advertising revenues due to their reach beyond metros and Tier I cities. Print industry embracing digital media Unlike the West, it might be another 10 years before a majority of readers prefer accessing content on digital devices. However, we have invested in building a presence on web and mobile platforms to brace ourselves for the next wave in news consumption. Malaya Manorama has refined its mobile applications for iOS, Android and Windows platforms and customized its web portal for desktop and mobile viewing. Jayant Mammen Mathew Deputy Editor and Director, Malayala Manorama 36 Industry outlook Both English and vernacular players have established their presence on web and mobile platforms. Although internet based advertising revenues are still miniscule in comparison to revenues from the traditional print medium, newspaper companies want to be ready with their applications, web platforms and mobile customized WAP pages, specifically targeted at the youth. To promote their online offerings amongst the younger generation, these news companies have established their presence on social media platforms such as Facebook and Twitter and have made arrangements with leading web portals to drive more traffic to their webpages. However, players need to chalk out a clear path to monetization from these new platforms. Cross platform integration with content management systems With publishers increasingly making their newspapers, magazines and video content available on multiple digital platforms, content management and sharing has become increasingly important. These systems provide flexibility to editors to quickly re-purpose content not just on multiple platforms but also on multiple portals. For instance, a publisher can make a video available on its TV news channel, web platform and mobile platform simultaneously. Similarly, news articles can be instantly tweeted and listed on a web-portal. Some examples of Content Management Systems (CMS) currently being used: • Mathrubhumi has gone live on the Atex Editorial CMS. This collaboration is expected to help Matrubhumi’s multi-channel newsrooms in creating, managing and delivering content to any print or digital platform81. • Malaya Manorama has acquired Adobe’s CMS to streamline content dissemination on different platforms82. Publishers have launched various mobile applications with multiple functions incorporated, in order to better engage with readers. • Mathrubhumi’s mobile application contains the latest national and regional news, cartoons, videos and photos being streamed live 24/7. • Dinakaran’s mobile application provides users with the latest news, in-depth analysis and speed news 76 Indian print industry hit by depreciating INR & increasing newsprint cost, Maneka Tanwani, exchange4media.com, July 2013 77 Rupee hits life low below 66, posts biggest fall in 18 years, Swati Bhat, Manoj Kumar, in.reuters.com, August 2013 78 Capitaline corporate database – Media, Printing and Stationary 79 Capitaline corporate database – Media, Printing and Stationary 80 GDP growth at 4.4% in Q1, slowest in four years, Asit Ranjan Mishra, livemint. com, August 2013
    • scroll with minute-by-minute updates. It also enables sharing of articles, photos and videos via email, Facebook and/ or Twitter. Web-presence and customization for mobile phones Most publishers have dedicated websites that are constantly updated to provide consumers with the most recent news updates, pictures and videos. These websites also have links to the electronic version of the printed paper (e-paper), enabling users to catch up with the morning news. However, only a few of these publishers have optimized their webpages for mobile viewing. This entails resizing of the webpage for mobile screens and including navigation aids. Malayala Manorama has been among the pioneers in releasing its mobile website m.manoramaonline.com. • Malayalam News Live: Aggregates news from One India, Mathrubhumi, Mangalam, India Vision TV, Web Dunia and a few other publishers. Way forward As publishers continue to strengthen their presence on digital platforms, the quality, functionality and overall user experience of the applications would be critical to ensure consumer stickiness. The onset of news aggregators brings in new challenges for the publishers by further fragmenting the digital advertising pie. Thus, publishers need to look at other ways to increase penetration of their online applications and possible methods of extracting subscription revenues. 81 Mathrubhumi goes live on Atex editorial content management system, atex. com, August 2013 82 Industry discussions, Malayala manorama partners with Adobe for its digital transformation, indiadigitalreview.com, May 2013 83 Industry discussions Geographic targeting for advertisers News publishers provide marketers with online geographic targeting options which give an advertiser freedom to reach out to readers in a specific geographic area. This is particularly helpful in South Indian markets where a majority of the advertisers are often local retailers. Furthermore, the publishers are able to approach overseas advertisers to reach the South Indian diaspora abroad, many of whom form an affluent consumer base. While the cost per impression from India could be anywhere between INR 90 - 150 per impression, overseas rates often range between INR 200 - 300 per impression83. Third party news applications As per industry sources, while leading publishers such as Malayala Manorama, Eenadu etc have been constantly upgrading their news applications (apps), third party developers have launched news aggregation apps. These apps have been gaining popularity as they provide consumers with news from multiple sources and allow them to browse vernacular as well as English papers. These third party apps currently do not share revenues with publishers. Some third party news aggregator mobile apps include: • Telugu Newspapers: Aggregates news from Eenadu, Sakshi, Andhra Jyoti and many more Telugu publications in addition to business news from Money Control and Economic Times. The Digital March Media & Entertainment in South India 37
    • Human capital challenges in the print industry While many players in the print industry are looking at expanding distribution beyond Tier I cities (some players are collaborating with others in the value chain to penetrate rural markets), talent is becoming scarce. The need of the hour is good editors84. It is said, “An editor takes care of the stories, while a sub-editor looks after the words." Though sub-editing (or copy editing) is a crucial function in the newspaper industry, it has been looked upon as a role making limited impact. Thus looking at the little appreciation received for this vital and potentially creative aspect of journalism, few media students today aspire for such jobs85. Since campus recruitment has become a common practice in the print media field, there is obviously a sizeable collaboration between the print industry and institutes of print education. However a point to be noted, although in-house, is that on-the-job training is vital. Few new recruits today have the benefit of organized orientation or mentoring programs in the print houses they join. Thus, what they learn at journalism school is generally what they have to fall back on. As there is a lot of development happening in the industry, the need for a strong engineering team is as high as the need for a good development team. However, the print industry faces stiff competition from other industries such as IT in attracting engineers. The other challenge is to produce good managers. It is easy to come across many grey areas when it comes to managing people. Training is a huge responsibility. While machines do their job, the people who ultimately matter are those who can make a real difference. Conclusion The strong dollar is putting pressure on operating costs of the print media industry and slowing GDP is weakening advertiser’s sentiment, which in turn is affecting print media revenues. 38 At the same time, print media in the South is witnessing several emerging trends such as improving product offerings with the use of technology, increasing circulation in Tier-II and Tier-III cities and continued investment in engaging consumers with online offerings. While English newspapers are largely focused on metros and Tier 1 cities, vernacular papers have established a strong presence in Tier 2 and Tier 3 towns. As the advertisers look to engage with consumers beyond metros, vernacular print would continue to witness strong growth. High literacy coupled with strong distribution has led to a vibrant and robust print industry in South India. As in the rest of the country, while the English print has established a strong presence in Metros and Tier 1 cities, vernacular print has been able to penetrate deeper into the hinterland. Going forward, vernacular print is expected to witness healthy growth rates buoyed by national advertisers looking to engage the market in smaller towns and the local advertisers. Realizing this opportunity, BCCL will continue to expand its language portfolio to cover these audiences. Arunabh Das Sharma President, Bennett, Coleman & Co. Ltd. 84 Guest Article: Upbeat South print industry, K Balaji, exchange4media.com, February 2012 85 Subeditors: another attempt to explain why they are becoming redundant, Roy Greenslade, theguardian. com, February 2009
    • Radio or regional, value the medium as an important part of their media mix and planning. It is a fitting compliment to Radio that the medium of Television, with its massive reach of 578 Million86 is also vying to tie up with it in order to better connect with its audience. Radio helps advertisers and other media such as TV and film connect with a universe of 160 Million87 listeners. Digital platforms have helped Radio enhance interaction with its current audience as well as connect with new audiences. The upcoming Phase III of frequency auctions is expected to help Radio expand its reach further, by opening 839 frequencies in 294 cities. Advertisers are re-evaluating their media mix and finding radio to be a more effective medium than TV and print, in order to connect with their target audience. Prashant Panday Executive Director & CEO, ENIL (Radio Mirchi) Market size Private FM Radio industry revenue in South India was estimated at INR 420 Crore in FY 2013, a 17% growth over FY 2012. Growth in revenues of radio companies has been driven by increasing advertisement volumes as well as an increase in advertisement rates. With the Finance Minister’s proposal to roll out Phase III in the ongoing fiscal, the industry is expected to see growth going forward and is estimated to reach INR 830 Crore by FY 2017. Introduction The South is an important part of the all-India radio landscape with strong listenership throughout the region. Listeners in Southern cities spend more time on radio and are believed to be more interactive than in other parts of the country. Advertisers, be it national Figure 5.1: Private FM Market Revenues in South India; E: Estimated (INR Crore) CAGR (2013 –2017) 830 19% 90 16% 250 18% 160 19% 330 20% 690 80 560 50 50 130 110 90 80 220 180 160 Tamil Nadu 210 170 140 130 FY2013* 60 460 420 FY2014E Andhra Pradesh Karnataka FY2015E 270 FY2016E FY2017E Kerala *2013 is an estimate of the current size Source: Industry discussions and Deloitte analysis 86 IRS Q4 2012 87 IRS Q4 2012 The Digital March Media & Entertainment in South India 39
    • Factors driving South radio industry Radio is increasingly becoming an integral part of the media mix for players across industries. With ad inventory restrictions expected to be adhered to on television, advertisers may want to explore other mediums. Further as the advertisers shift from brandbuilding exercises to promotional activities, radio has seen growing preference88. Regional advertisers National as well as local advertisers are increasingly realizing the importance of radio. While helping national advertisers expand their reach, radio has proved to be a cost-effective way for local players to reach their target audience. At an all-India level, share of national advertisers in radio is more than that of regional advertisers. However, this trend of radio advertising is reversed in South India. For example, about 65% of ads in Tamil Nadu are by regional advertisers89. Listener engagement Listeners in South India are more involved with radio as a medium than listeners in other parts of the country. Not only do they spend more time on radio, listeners in South India are believed to be more interactive. This may be exhibited through more number of callers per show or interactions with radio stations for differentiated content such as talk shows, RJ hunts etc. As per industry estimates, the average radio listenership in Bengaluru is approximately 20 hours/ week, compared to Delhi and Mumbai at 13-14 hours/ week90. Radio and other media Radio has become an integral part of the entertainment industry in South India with media like Film and TV also using radio as a promotion vehicle. Film industry in Tamil Nadu has tied up with radio stations to organize music premiers and other promotional activities. Broadcasters are also using the medium for promotion of new shows as well as channels. The second season of Neengalum Vellalam Oru Kodi (Tamil version of Kaun Banega Crorepati) was marketed through radio among other media91. Tie ups with five radio channels in Andhra Pradesh were leveraged to promote Telugu news channel 10TV prior to its launch earlier this year92. 40 Innovation in programming and beyond Programming content on radio is the driving force to attract and retain listeners. Further, programming needs to be up-to-date to reflect contemporary preferences of the listeners. Radio channels in the South have recognized this and have made it the most successful regional radio industry in terms of user acceptance93. Until recently, the customization was limited to only music with most programming centered on music. However, stations are now diversifying into different kinds of content and activities in order to differentiate and suit the listener’s palate. This has further strengthened their engagement with audiences by creating a strong connect based on local customization. Potential drivers for innovation Targeting new segments Differentiated content helps cater to a wider target audience. Non-film content such as international music also differentiates a radio station and provides interested advertisers with a niche consumer segment rather than a mass-audience. For example, a radio station with a talk show on social events caters to select listeners in addition to playing popular music, which is more appealing to the masses. Phase III to open more possibilities Availability of multiple frequencies will drive content innovation amongst players. Such additional channels, especially in metros can lead to emergence of niche and non-commercial content. Commitment to social causes Realizing the power of the medium to reach a wide mass, radio channels in the South are spearheading campaigns such as BIG FM’s 'Green Ganesha' to make people aware of the common issues plaguing the society and create a positive impact on the environment, society and people. Such campaigns involve highintensity on-air and on-ground activities, which result in a higher audience engagement. Big FM which continued the 'Green Ganesha' campaign into its sixth successful year94, also associated itself with 'Pinkathon' – a 10km run for women in Bengaluru to spread 88 Industry discussions 89 Industry discussions 90 Industry discussions 91 Vijay TV brings KBC Tamil season 2 with Prakash Raj, Raushni Bhagia, afaqs.com, February 2013 92 Upcoming Telugu news channel 10TV to extend reach to Orissa, Karnataka, afaqs.com, December 2012 93 Radio ads to get a boost as RAM expands footprint, indiantelevision.com, October 2011 94 Big Green Ganesha, Lakshmi Ramakrishna, channel6.in, September 2013
    • awareness about breast cancer. A 40-day engagement campaign involving women’s associations, IT parks, college campuses, malls, etc. was launched to promote Pinkathon. The event was remarkably successful with 3,500 people taking part in the marathon95. In an effort to make citizens participate actively in the electoral process, Radio one organized an 'Elections Special' where eminent personalities spoke about candidate reports, importance of voting, the need to choose right candidates etc. on shows during the day96. Programming beyond music Despite majority of programs being anchored around music, radio channels have started looking beyond music to provide differentiated content that will hold on to the listeners’ attention span. Radio city Chennai has tried its hands at various programming formats, apart from music. ‘Ragasiya Police Badava Group 911’ is one such talk show that solves listeners’ personal issues in a comic way97. Big FM launched ‘BIG Junior RJ Hunt 2013’ to identify children between 5-10 years of age for hosting two of the station’s Sunday shows98. Chennai Live is known for innovation in programming beyond music. The radio station is into its second season of 'Vodafone Voice of Chennai', where RJs discuss day to day events. The station has partnered with TED (Technology, Entertainment and Design), a global organization, to air the popular US talk series ‘TED Radio Hour’. They are also planning to launch shows like ‘Home Sweet Home’ and ‘Golden Wedlock Soon’ based on real estate and local jewelers & engaged couples respectively99. The fact that Chennai Live was able to hike its ad rates by 30% this year100, is indicative of the advertiser’s preference for differentiated content. Although such radio stations cannot be termed as mass radio channels, they claim to have a better consumer connect as they target a specific listener segment. And, certain brands may be looking to target just those listener segments. Thus, even as film music will continue to be the favorite program format, newer and fresher program formats are expected to find their own space as players try to differentiate and achieve “consumer stickiness”. Expansion of radio on digital platforms Fast paced growth of digital media owing to increasing internet and smartphone penetration, has prompted radio industry players to utilize various digital platforms to enhance consumer engagement. Digital and media sharing platforms Radio channels in South are also exploring contemporary avenues like podcasts and platforms such as YouTube and SoundCloud to expand their reach. They are trying to reach their audience through DTH as well as mobile value added services (mVAS). Podcasts Podcasts help in expanding the reach of a radio station to an audience which otherwise does not constitute their regular listeners. Radio Mirchi garners over 2.5 – 3 lakh downloads for their podcasts every month101. In fact, Radio Mirchi is the number one podcast from India. It podcasts from the iTunes platform and is the only radio station to be featured on the cover flow of iTunes store102. Although the use of Podcasts in India is not as frequent as in the west, the trend seems to be catching up. YouTube Radio stations are also using other online media platforms for ensuring a wider presence. Private FM radio companies such as Radio Mirchi have established their own YouTube channels to offer customized content for Tamil, Telugu and other South Indian audiences103. Other players such as Big FM are also present on this platform104. 95 Milind Soman, Ramya flag off Big FM’s run ‘Pinkathon’, radioandmusic.com, April 2013 96 Radio One gets Bangalore to vote, radioandmusic. com, April 2013 97 Gopi.. badava gopi.. ragasiya police badava gopi 911.., planetradiocity.com, March 2012 98 92.7 Big FM Bangalore announces ‘Big Junior RJ Hunt 2013’, Anish, indiantvinfo.com, May 2013 99 Chennai Live is on the path to prosperity, Jescilia Karayamparambil, radioandmusic.com, June 2013 100 Chennai Live is on the path to prosperity, Jescilia Karayamparambil, radioandmusic.com, June 2013 101 Industry discussions 102 Private FM players enthusiastic about podcasting, radioandmusic.com, June 2013 103 YouTube channels for Radio Mirchi 104 Industry discussions The Digital March Media & Entertainment in South India 41
    • SoundCloud and Whatsapp Big FM continues to use online media sharing platforms like SoundCloud to expand their user base to overseas listeners craving for vernacular content105. The radio station has also recently started using the Whatsapp application to engage with users. Although technology has been around for a while, the way it is being used by players is evolving considerably. 92.7 BIG FM Bangalore has created a WhatsApp group that enables it to communicate with its fans on the latest on the stations, allows the RJ to connect with their listeners and get traffic and other updates. Ashwin Padmanabhan National Business Head, Big FM Internet radio Internet radio is a service quite similar to the terrestrial radio except that in place of an FM radio device, an internet enabled device is needed. Unlike terrestrial FM radio, internet radio has no geographical limitations and thus can be used to reach audiences across the world. Most internet radio stations play specific genre(s) of songs and thus cater to niche segments of listeners. They also help create content differentiation which is not possible on terrestrial FM stations in the current limited scenario of frequencies. Some online radio stations have dedicated shows featuring independent artists while others solely cater to listeners who look for music beyond the mainstream. Examples include Mirchi Edge and Freedom Radio which have been started by Radio Mirchi and Radio City. Online radio stations like Radio Whiskey provide a platform for independent artists to showcase their talent and gain listenership. 42 Currently, various players in India’s radio industry have online stations for music streaming. Radio Mirchi has 6 stations viz. Meethi Mirchi, Purani Jeans, Club Mirchi, Mirchi Edge, Cassettes Classics and Radio Romance. Radio City also has 6 online stations namely Fun Ka Antenna, Freedom, Indipop, Hindi, Smaran and Tamil. Each of these stations plays a different genre of content. While most stations are music streaming platforms, some shows on these stations are also led by radio jockeys. Internet radio and regional content Players are now realizing that niche offerings such as Carnatic music, devotional music etc. in regional languages or even mainstream music in regional languages can gain significant traction with local as well as global audiences. In order to take Tamil music to listeners across the globe, PlanetRadiocity.com launched its first regional stream i.e. Radio City Tamil in July 2013. Radio City Tamil hosts non-stop hit Tamil music, along with anecdotes from Radio City’s hit feature, Ragasiya Police Badava Gopi 911106. Apart from Radio City, Radio Josh has also launched an online Telugu radio station in the current year107. These radio stations can be tuned in through mobile applications on iOS, Android, Nokia and Blackberry platforms, thus providing access ‘anytime, anywhere’. Advantages and challenges of internet radio One of the advantages of internet radio is that a local radio station is accessible to listeners across the world. Players are trying to increase their reach by launching mobile apps on popular platforms like iOS or Android but low penetration of mobile internet and low speeds are seen as impediments to growth of internet radio. Today, radio broadcasters are using digital media innovatively, thereby making radio a more interactive medium and enabling it to reach to a wider consumer base. Industry players believe that monetization of internet radio would continue to be challenging. Internet radio players face a threat from services like Gaana, Dhingana etc. which provide users the freedom to choose not only 105 Industry discussions 106 PlanetRadiocity launches ‘Radio City Tamil’, planetradiocity.com, July 2013 107 Radio Josh’ global online Telugu radio launched by actress Tapsee, newswala. com, March 2013
    • the music but also create a playlist of his/her liking; but when it comes to an interactive offering, wherein the listener can interact with radio jockeys, internet radio stays a clear winner. Phase III update Regulation Private FM players have been eagerly waiting for the Phase III of expansion of FM radio broadcasting services that was approved by the Union Cabinet in July 2011. In his speech for the Union Budget 2013, the Finance Minister proposed rollout of Phase III in FY 2014, thus bringing much cheer among the broadcaster community. About 839 channels in 294 cities would be made available for bidding by private companies108. Impact for South India 229 of the 839 frequencies being auctioned are in 83 cities of the four Southern states. Phase III is expected to result in 294 frequencies (existing plus planned) in South India alone109. About 90% of the cities for which frequencies will be auctioned belong to Tier 2 or Tier 3 categories. This would help radio expand its reach to the masses. Industry players believe that, increased penetration of radio post Phase III might make it a medium with one of the largest reach. The rollout of Phase III will also give a chance to advertisers looking to engage with audiences in Tier 2 or Tier 3 cities. Figure 5.2: Number of frequencies in South states pre and post Phase III implementation 118 743% 252% 14 Andhra Pradesh Exsiting channels Phase III of radio frequency auctions is expected to bring in further thrust into the medium. With increased penetration, Phase III has the potential to make Radio larger than TV in terms of reach in TN. Rajeev Nambiar CEO, Hello FM Malar Publications Ltd 74 72 454% 21 13 Tamil Nadu Karnataka 76% 30 17 Kerala Number of channels post Phase III Source: Policy document on ‘Policy guidelines on expansion of FM radio broadcasting services through private agencies (Phase-III)’ 108 Policy document on ‘Policy guidelines on expansion of FM radio broadcasting services through private agencies (Phase-III)’ 109 Policy document on ‘Policy guidelines on expansion of FM radio broadcasting services through private agencies (Phase-III)’ The Digital March Media & Entertainment in South India 43
    • Challenges Industry players feel that with high reserve prices and the open ascending e-auction procedure, Phase III licenses may become unviable for many players. This may dissuade players from investing in innovations in programming for better consumer connect and drive them to solely focus on maximizing revenues and breaking even. Going forward Different players are expected to strategize differently for the upcoming auction for Phase III frequencies. Some national players plan to fill current gaps in their network while others plan to expand aggressively in South India. Local players would most likely look to consolidate in their current regions110. Phase III is expected to give a thrust to niche programming on terrestrial FM radio stations. However, quality of programming on new frequencies would be dependent on three factors, viz cost of acquiring the frequency, a player’s intent to enter a new market or expand in an existing one, as well as risk appetite of the player. Human capital challenges in the Radio industry Workforce priorities in the Radio industry The industry believes that the skill gaps are largely owing to a scarcity of educational institutes offering programs for radio. This in turn limits the sources for recruitment. This leaves the industry with either hiring graduates and training them in-house or relying on alternative sources of hiring e.g. walk-in-interviews, theatre etc. The issue is only expected to escalate once Phase III licenses are auctioned across India. Phase III auction of licenses of radio frequencies, is expected to generate substantial employment across the country. Thus with the launch of new stations in 283 cities across the country, experts in the industry foresee demand for people proficient in regional languages for which regional dialect and diction training may also be required. According to industry sources, retention is never a challenge for key management / leadership team. It’s the support staff that is a challenge111. Currently, the industry relies on on-the-job training to compensate for the lack of training courses. 44 External trainers from abroad are also commissioned to train people on creative thinking skills and show conceptualization. Trainers are often hired to train sound engineers and technicians. Resources are also trained in-house on handling radio transmission equipment and software. Some of the skills/ roles that require attention in the industry include • Demand for people proficient in regional languages. • Pipeline of supporting staff. • Strong programming team to meet both the creative and commercial needs of the radio stations. • Radio presenters are the voice of a station or program, whether they work in speech-based or music radio. They are responsible for creating the tone and style of Radio output and establishing a relationship with listeners. They may also be required to carry out a range of other production tasks and delivering the content. • Considering the growing acceptance of radio as a medium and an increase in the number of advertisers there is a need for strong commercial producers. • Commercials producers work with a radio station's commercial clients, interpreting client briefs to create effective radio advertising. They may be expected to manage client briefings; generate and pitch ideas; write scripts or work with writers; cast actors and voiceovers; select music; organize and run recording sessions; and edit and produce finished commercials and other advertising material. Commercials Producers may also be required to produce trailers to promote client-sponsored events or competitions, or to build the station brand and promote the station itself. They are expected to work closely with colleagues involved in sales and marketing, sponsorship and promotion, as well as programming, to ensure that audience and client expectations are met, and that revenue is maximized for the station. Potential solutions • Expansion of talent pool: The industry can consider setting up more institutes or collaborating with existing ones, to expand the pool of talent. This would, in the longer term, also reduce the overall talent cost for the industry. • Variable pay policy: Innovative policy for employees across the board linked to their quarterly performance. 110 Industry discussions 111 Radio still needs to be evangelized: Harrish Bhatia, mxmindia.com, September 2013
    • Conclusion The radio industry has enjoyed greater acceptance in the South than in the rest of the country. Increasing listener engagement and growing interest of national as well as regional advertisers in the medium have made it an integral part of the entertainment industry in South India. Radio stations are increasingly seeking to differentiate through programming beyond music and placing their offerings on digital platforms. With the release of new frequencies in Phase III, the Southern Radio industry will definitely get a boost, especially in the Tier 2 or Tier 3 cities. It remains to be seen how the advent of Phase III will impact players and their strategies going forward; be it expansion, nature of programming on new frequencies, identifying innovative ways to monetize digital content or any other revenue opportunities. The Digital March Media & Entertainment in South India 45
    • New Media Introduction New media can broadly be defined as a format that involves the delivery of digital content through platforms other than the traditional broadcast and exhibition platforms, i.e. PCs, feature phones, smart phones, tablets, etc. Data connectivity infrastructure with adequate capacity to enable widespread video consumption is critical for the success of new media. Also, development of an ecosystem where digital content is available in local languages and supported by vernacular applications would be the key to mass adoption of this medium. Increased consumption through this platform would open monetization avenues through advertising or/and user-paid business models. While the user-paid market in the country is in its infancy, evidence suggests that digital advertising is proving to be a popular way to monetize content on the platform, currently. Reach of screens India has an estimated 161 Million112 television households and 728 Million active mobile subscribers113. Although, television is the primary platform to deliver content, mobile phones have evolved from a simple voice and text communication device, to a device capable of delivering media content. sales expected to grow at over 100% in this fiscal year. Although the current tablet penetration stands at 0.5%, it is expected to grow steadily and reach a penetration level of 1.4% by 2016115. Connectivity: Mobile broadband to be the savior India had a user base of 165 Million internet users as on March 2013. While approximately 143 Million of these are mobile internet users, the remaining 21.6 Million have fixed internet connections116.Given the low fixed internet penetration, 3G and 4G LTE services are expected to be key enablers in the near future for improving internet penetration. The number of 3G users is expected to cross 200 Million by 2015, which would significantly improve the overall broadband penetration in India117. South India has ~42 Million internet subscribers comprising 8.3 Million fixed line subscribers and ~34 Million mobile internet subscribers. While the region accounts for 25% of the total internet subscriber base in India, with 6 Million subscribers, it constitutes 40% of the total fixed broadband subscriber base in the country. Figure 6.2: Fixed and mobile internet penetration in South India (2013) 18% 17% Figure 6.1: Estimated growth of smartphone users in India (Million) 235 50% 11.5% 8% 4% 3% 2% Andhra Pradesh Mobile internet penetration 102 44 12% Tamil Nadu 155 Karnataka CY2014E CY2015E CY2016E Tamil Nadu, 12.4% Source: Report on internet trends, KPCB, May 2013, Deloitte analysis The current penetration of smartphones stands at ~5%114. This penetration is expected to increase significantly in the future, driven by users upgrading from feature phones, declining device and mobile data costs, along with a wide range of applications and features on offer. Besides smartphones, tablets have gained traction in the Indian device market, with 46 2% Kerala Source: Performance indicator reports, TRAI, August 2013, Deloitte Analysis 67 CY2013E 5% Fixed internet penetration Figure 6.3: Fixed Broadband connections share by states - South India (2013) CY2012 112 Initiating coverage- Sun TV network Ltd, Ventura Securities Ltd., December 2012 113 Telecom subscription data, Telecom regulatory authority of India, May 2013 114 Report on internet trends, KPCB, May 2013, Deloitte Analysis 115 Manufacturer’s association for Information Technology, 2012, Deloitte analysis 116 Performance indicator reports, TRAI, August 2013 117 Wireless intelligence database, 2012, Deloitte analysis Rest of India, 60% South 40% Andhra Pradesh, 10.4% Karnataka, 9.7% Kerala, 7.5% Source: Performance indicator reports, TRAI, August 2013, Deloitte Analysis India
    • Video to lead the way With improvements in average internet speeds, more users may consume video; with video content expected to cross 50%118 of India’s consumer internet traffic by the end of 2013. As per analyst reports, between 2010 and 2012, the average time spent by an Indian internet user on entertainment has increased by 50%, from 2 hours per month to 3 hours per month119. Entertainment is expected to be a key catalyst in driving the consumption of online video. YouTube is the most popular video streaming platform in India with approximately 31.5 Million viewers in 2012120 . Going ahead, mobile devices enabled with 3G and 4G data services are expected to emerge as the preferred platform for consuming video. Introduction of efficient streaming technologies such as Adaptive bit rate (ABR) is also expected to push uptake of video consumption. Auto detection of the data connections of users and providing an appropriate bit rate for the video would reduce buffering time, helping push video content to all mobile data users irrespective of connection speed. Together, these factors are expected to aid the increase in video content streamed or downloaded every second from ~8,250 minutes of video per second to ~25,000 minutes of video per second between 2012 and 2017121. Figure 6.4: Share of Video in Consumer internet traffic - India 36% Digital consumption in South is growing rapidly driven by both consumer demand and constant supply of diverse regional content in all four languages by media stakeholders in the South. Ali Hussein Head of entertainment partnerships, South Asia Google Regional content is immensely popular on digital platforms and the future seems bright as consumers are becoming increasingly comfortable viewing videos on both web and mobile platforms. Ram Veerapaneni CEO, Mango Mass Media 59% 64% 41% 2012 Video 2017P Non video Source: Cisco Visual Networking Index forecast, February 2013; Deloitte analysis 118 Cisco Visual Networking Index forecast, February 2013 119 Online and upcoming: The internet’s impact on India, Mckinsey & Company, December 2012 120 State of internet in India, Comscore, February, 2012 121 Cisco Visual Networking Index forecast, February 2013 The Digital March Media & Entertainment in South India 47
    • Case study on Regional video consumption on digital platforms (Telugufilmnagar) Viewership trend on Telugufilmnagar (Million) Viewership share across countries 16% 64% 10% 63% 11% 76% 36% 24% 2011 Mobile 2012 PC/Laptop India USA Middle east Others One of the prominent regional channels on YouTube is Telugufilmnagar. The channel is ranked 15th by number of views122 (September 2013) and 3rd by number of subscribers (1.17 Million subscribers as on September 2013123)amongst Indian YouTube channels. The channel primarily comprises Telugu film content i.e. clips, songs and trailers, along with coverage of film promotional events such as audio launches, etc. The channel has over 12,000 videos uploaded with aggregate view count standing at 247 Million124. The views through mobile devices are increasing at almost 50% YoY125. Almost 40% of the traffic is from countries such as USA, Canada, UAE, etc., driven by the Telugu diaspora. Youth population (< 20 years of age) constitutes >50% of the overall viewership126. Key Takeaways: Strong consumption of Telugu content via digital platforms: Of the top 15 YouTube channels in India, Telugufilmnagar and Teluguone are the only non-English and non-Hindi content channels.The high growth in number of views on Telugufilmnagar (120% between 2011 and 2012), suggests a growing demand for Telugu content on digital platforms. Increasing share of mobile views: The number of views from mobile devices have increased by 50% during last year, suggesting an increasing preference for mobile as viewing platform. Digital advertising in South India In 2012, digital advertising accounted for about 5% of the overall Indian advertising industry127. However, with the impending growth in fixed and mobile internet in India, digital advertising is bound to gain more traction and its significance amongst advertisers and marketers is likely to increase. Digital advertising in South India was estimated at ~INR 690 Crore (FY 2013) and is estimated to grow at a CAGR of 20 - 25% over the next four years. Web advertising constitutes ~90% of the digital advertising pie, while mobile advertising accounts for only 10% of the market. 48 Figure 6.5: Market size of digital advertising in South India (INR Crore) 1,296 1,080 625 69 FY2013* Mobile 750 101 FY2014E 900 146 FY2015E 212 FY2016E PC/Laptop * 2013 is an estimate of the current size Source: Industry discussions, and Deloitte analysis 307 FY2017E 122 Top 100 youtube channels- India, vidstatx. com, September 2013 123 Telugufilmnagar, vidstatx. com, September 2013 124 Telugufilmnagar, vidstatx. com, September 2013 125 Industry discussions and Deloitte analysis 126 Industry discussions and Deloitte analysis 127 Indian advertising market, Group M, 2013
    • Web advertising Currently, as digital advertising is in a nascent stage, most marketers tend to go for pan India campaigns rather than region focused campaigns. Prime cities in the South such as Bengaluru, Hyderabad and Chennai, with the highest concentration of internet users in South, are the most likely markets to conduct digital advertising campaigns128. These campaigns can be delivered through either search, display or social media advertising. Mobile advertising Although mobile advertising is a relatively new concept in India129, it is expected to grow at a higher rate over the next five years, driven by increased penetration of smartphones and tablets. The mobile advertising market in South India is estimated at ~INR 70 Crore and is expected to grow at a CAGR of 45% to reach ~INR 310 Crore by 2017130. The need for development of vernacular content Although India has the third largest internet user base, no Indian language features amongst the top 10 languages on the internet. There remains a gap between availability of local content on web and the popularly spoken local languages in India. As per IAMAI, in 2012, 64% of rural internet users accessed internet in their local language whereas 25% of urban users accessed internet in their local language. Leading OEMs have taken initiatives sensing the vernacular opportunity in the mobile space. Apple’s operating system (iOS) supports Indian scripts to be read on their flagship products, iPad and iPhone. In August 2013, Samsung announced that it would launch apps in nine local languages for its Galaxy Grand, Galaxy S4 smartphones as well as for its latest Tab 3 tablet131. Samsung will initially offer the apps in Hindi, Punjabi, Bengali, Tamil, Telugu, Kannada, Malayalam, Marathi and Gujarati on its high end smartphones, post which it aims to offer these apps on its other sub-$100 handsets as well. On Google’s popular mobile operating platform Android, a few apps such as ‘Sparsh Indian keyboard’ provide text input functionality in local Indian languages including Tamil, Telugu, Kannada and Malayalam132. Digital advertising is bound to grow at an exponential pace in India. South is an important territory for digital marketers as Bangalore, Hyderabad and Chennai are key markets with a large tech savvy user base. Ravi Ganesh National Business Director, Insights, Group M motivator Figure 6.6: Web advertising market in India- Key segments (2013) 15% Search Display Social 50% 35% Source: Industry discussions; Deloitte analysis 128 Industry discussions 129 Industry discussions and Deloitte analysis 130 Industry discussions and Deloitte analysis 131 Samsung launches apps in local Indian languages, online.wsj.com, August 2013 132 Google Play website, September 2013 The Digital March Media & Entertainment in South India 49
    • Besides independent app developers, a few media players are taking the initiative to develop vernacular apps. A recent example is the launch of mobile app for Malayalam film Kalimannu133 for Android, Apple and Blackberry platforms. This is the first time an app has been developed for a Malayalam film with fans being able to download songs for free. Content aggregators in other states are also exploring mobile apps as an avenue to distribute and monetize content. A leading broadcaster in the South, Sun TV network recently launched a YouTube channel for its television content. Language is a critical barrier in increasing internet usage in a country such as India, where a large part of the population is still not conversant with English. Although English and Hindi attract most attention in digital media, a large majority of people prefer to consume media in their native language. This presents opportunities for application developers to create apps that are accessible in local languages. Going ahead, as broadband penetration increases, the demand for localized websites, apps and regional content is bound to grow. 50 Conclusion The new media platform in India is evolving in terms of expanding user base due to proliferation of enabling devices and increasing acceptance of the platform for advertising. Video is emerging as one of the key drivers for digital media consumption in the country. The popularity of South Indian vernacular video content is demonstrated by the presence of Telugu channels as the only non-Hindi and non-English channels amongst the top 15 YouTube channels in India. This is further aided on the supply side by content owners in South India, who are active in using new media platforms to distribute content. Although video consumption is increasing rapidly, there exists little evidence to suggest that users pay for content. As users migrate to digital mediums for media consumption, advertisers and marketers will follow suit, thus leading to growth of digital advertising in South India. It would be interesting to see how the new media ecosystem evolves in South India. 133 Mobile app for Kalimannu, english.manoramaonline. com, September 2013
    • Analytics in Media companies Introduction Analytics refers to the skills, technologies, applications, and practices for continuous iterative exploration and investigation of past business performance to gain insight and drive business strategy. It makes extensive use of data, statistical and quantitative analysis, explanatory and predictive modeling, and fact-based management to drive integrated decision-making. store the data. There is an increased pressure for faster and better decision making which can be met by analytics. A variety of internal industry drivers such as proliferation of data, sophistication of users, maturation of ERP systems and external industry drivers such as competitive pressure, regulatory compliance, and technology advancement are pushing the businesses to embrace analytics. In today’s market place, both structured and unstructured data is growing exponentially. Businesses which can make use of these huge data volumes and come out with valuable insights are gaining an advantage over the businesses which just gather and Trends in Media and Entertainment industry (M&E) Certain trends contributing to the transformation of the M&E industry have generated a unique opportunity for Business Analytics. Industry trends Business analytics value • Proliferation of Internet access, increasingly one of the most popular consumer entertainment medium, is changing consumer media behavior • New media, social networks, and usergenerated content Consumer Analytics can drive growth by leveraging consumer insights. • Drive intelligent marketing offers and real-time consumer communication • Provide insight into new product development, brands, e-commerce offers, product bundles, and pricing • Consumer insight feeds marketing objectives • Enhance and enable a personalized consumer experience • Improve resource allocation from market response drivers and ROI • Need for revenue from new emerging business models • Shift of advertising revenue from traditional to digital channels • Continued pressure to reduce costs Financial Analytics can enable to expand its role, enable better decision making, and directly affect organization priorities. • Drive business profitability management • Enable budget versus actual analysis and tax rate analysis • Enable price improvement and consumer profitability • Facilitate consensus demand forecasting • Enable external driver-based forecasting • Introduction of transformative digital devices and applications • Shift from physical to digital distribution models Supply Chain Analytics can help organizations gain visibility and detailed insight into their supply chain operations to stay ahead of the curve. • Drive improved logistics cost • Enable organization to operate at improved inventory levels • Reduce cycle times in content and product delivery The Digital March Media & Entertainment in South India 51
    • Success stories Successful innovations have spanned new spectrum of opportunities for quite a few companies in the business market place. • A leading internet subscription service for films and TV programs used programmes that rely on consumer data and statistics to come up with the best recommended choices for the consumers. • A digital video recorder company processes consumer viewing patterns to recommend shows to its consumers and provides data to others for advertising and market entry strategies. • A sports broadcaster expanded into cross-platforms based on the insights it garnered from understanding the consumer behavior. Case study The following example is one successful case study of Consumer Analytics. The company is a leading provider of advanced television to the cable industry in North America. With wide-spread internet use and access to user generated content through its devices, the company has come up with new alliances with leading online service providers, thus increasing its revenue base. The company has developed Digital Video Recorder (DVR)s which help them gather consumer data. They leveraged its data mining abilities to understand consumer behavior and form key partnerships to increase service offerings. Organization and technology • Consumer premise hardware consists of a set-up box which records TV shows on a hard disk in the form of MPEG streams. • Server collects anonymous viewing information uploaded from DVRs. • Server-side computation - The server computes pair-wise correlations to compute series 'of interest' to user, and this package (series) is downloaded to certain DVRs. • Consumer -side computation: The collaborativefiltering algorithm on each DVR iterates through its program guide, using the download package (series) to make predictions for unrated shows. 52 Data sources The company has collected data from various sources such as viewer profiles, real-time viewership data and consumer care. The data company has collected included age, gender; TV shows the consumer watches, ratings given by the consumer, frequency of watching and fast forwarding, complaints lodged and consumer satisfaction rating. Analysis The company uses a collaborative filtering (CF) system (data mining technique) to make television show recommendations • Uses Data Mining to create the profile of a viewer based on viewing history and ratings • For a show that is unrated by the active viewer, the system will find how that show is rated by those similar viewers and combine their ratings to produce a predicted rating for this unrated show Strategic actions Equipped with this analysis, the company could: • Enhance consumer experience by recommending shows to viewers based on similar viewership profile. • Collaborate with a North-American based market analytics firm to provide marketing solutions to advertisers on two new services. • Partner with a satellite television provider to analyze consumer DVR data that would align advertisers with viewers. Benefits Leveraging its data mining infrastructure, the company has been able to forge alliances with large retailers: • In 2008, announced an alliance with a leading online book store which enabled its millions of subscribers to buy books, CDs, and DVDs directly from onscreen menus on their TVs. • In an arrangement with leading video sharing website, the company’s high-end Series 3 and HD subscribers would be allowed direct access to the website’s video content on their TVs. • In 2009, signed a deal with leading search engine that will allow the later to draw on viewing data from company’s subscribers to help sell TV ads sold through the search engine’s advertising platform.
    • Implications for Indian M&E industry Coming to the Indian Television industry, the main players in the TV value chain constitute content creators, broadcasters and distributors, while consumers are the end users. Content creators produce the TV programming which is aggregated by broadcasters and aired to the end user through the distributors or pipe providers i.e., cable, DTH. With digital TV moving towards wider adoption on the back of government mandate, the onus to provide the consumers, the programs of their choice lies heavily with the broadcasters, distributors and content creators as well. With the government’s mandate to digitize the distribution of TV signals, in the entire country by Dec, 2014, the number of DTH connections and Set Top Boxes will rise tremendously. With this, the user base that would be ready to pay a premium for value added services like recommended TV shows, films will also increase. With appropriate consumer analysis, such new age consumer demand may be addressed leading to improved consumer satisfaction and retention. Also, the distributors could make strategic alliances with online shopping sites, retailers and may be, even, grocery shopping websites, so that orders can be made through the interactive selection facility on TV screen. This can not only provide a happy consumer base, but also, a source of revenue to the broadcasters whose primary source of revenue, as of now, happens to be advertising. With more user generated content available, the content creators may be able to understand the consumers’ preferences and accordingly create content targeting a particular group of the viewers. The media companies which realize this potential of consumer analytics and effectively make use of it may be able to attract a loyal consumer base and also a larger portion of the revenues. The Digital March Media & Entertainment in South India 53
    • Accounting challenges The entertainment and media industry includes various subsectors, such as advertising, films, television, music, broadcasting, radio and internet. Each subsector has unique product and service offerings which gives rise to certain complex and challenging accounting issues. Given below are the some of the more challenging accounting aspects in the subsectors. Advertising industry Presentation of gross V/s net Revenue contracts do not always describe the relationship between the parties, i.e. who is the principal and who is the agent? Advertising industry has many intermediaries who work for commission and hence identifying the relationship is of prime importance for correct accounting. The revenue earned is calculated separately for each sale or service and for each link in the commercial chain (publisher – advertising agency - subagents). While the agent recognizes only its “commission” as revenue, the principal is allocated the gross inflow. The agent’s commissions represent sales costs for the principal. Cable industry Revenue recognition in multiple-element arrangements A multiple-element arrangement is an arrangement with a consumer under which different deliverables are required to be provided to and/or performed for that consumer. In the cable industry, this may involve: • The sale of a cable subscription agreement combined with the provision of the necessary decoder at a discounted price. • Activation and setup fees associated with a channel subscription. • Triple-play agreements (arrangements where the deliverables are television, IP telephony, and internet). The focus of the assessment is on whether, based on the contractual provisions, both a primary service (provision of the cable channel) and incidental services (provi¬sion of a decoder) are required to be performed. Another view is to divide the arrangement into two transactions (provision of the cable channel and sale of a decoder). Accounting for set top boxes The cable industry debates over the treatment for set-top boxes. One view is that when the set-top box is installed at the consumer’s place, it should be treated as a sale. The other view is that when the set-top boxes 54 are purchased/ installed it should be accounted as a capital item. The more prevalent practice in the industry is to capitalize the cost of set-top boxes. The life of set-top boxes is an area of debate with respect to the depreciation charge to be taken on yearly basis. If the set-top boxes are considered as a capital item, subsequent issue arises for impairment charge to be taken in the following cases: • The set-top boxes which are not sold (nonmoving stock). • Set top-boxes which are returned by the consumers after discontinuing the services of the cable operator. • Number of days to be taken into consideration as churn period or the dark period (i.e. waiting period after the set-top boxes are returned till the time it is re-installed at a new location) before taking a charge for impairment. • On account of constant technology changes taking place. Broadcasting industry Advertising revenue dependent on audience ratings Television broadcasters sometimes guarantee their advertising consumers certain minimum audience ratings in their target group. If the audience ratings are not achieved, the television broadcaster will often grant the advertising consumer reductions on future advertising prices or free advertising time and more often than not, the television broadcaster would have a constructive obligation to compensate the advertising consumer. The revenue is therefore deferred and only recognized when the compensation is provided. Contract production revenue When series, shows, or single-part/multipart dramas are produced for television broadcasters under a contract production arrangement, the question arises as to what specific issues the production company needs to consider in recognizing the revenue from those services. For e.g. if several episodes are produced simultaneously, for example to avoid changing filming location, revenue is also recognized ratably (Percentage of Completion) for those further episodes because revenue and related contract costs are recognized by reference to the stage of completion. Volume discounts / rebates Volume discounts / rebates are generally given by the broadcasters as incentives to the agencies for getting
    • bulk business/advertising deals. Accounting of volume discounts and timing of recording such discounts is a topic of discussion. The general trend in the industry is that broadcasters show sales net of the discounts and agencies consider the discounts received from the broadcaster as other operating income. Barter transactions When goods are sold or services are rendered in exchange for dissimilar goods or services, the exchange is regarded as a transaction which generates revenue. The revenue is measured at the fair value of the goods or services received, adjusted by the amount of any cash or cash equivalents transferred. When the fair value of the goods or services received cannot be measured reliably, the revenue is measured at the fair value of the goods or services given up, adjusted by the amount of any cash or cash equivalents transferred. For example, broadcasters enter into barter deals for the sale of airtime against charges payable to agencies in return for the services rendered by them. Thus fair valuation of such transactions results in a complex exercise. Film industry The classification of unamortized production costs in the books of account as inventory, intangible assets, or other asset type is a complex evaluation. The classification will likely depend on the nature of the costs and the period over which a company expects to benefit from them. In addition to presentation on the balance sheet, classification of the programming assets will impact their measurement basis, the model used for assessing impairment, and potentially the classification in the income statement as the assets are amortised/ expensed. approximates its fair value. On or near its release date, a discounted cash flow model is usually used to estimate the fair value of a film, since this is typically the point at which reliable cash flow projections can be made. Under a discounted cash flow model, cash inflows should include all cash flows an entity expects to generate from a film, which may differ from the actual revenues the entity uses to determine the amortization of capitalized film costs under the individual-film-forecast-computation method. Cash outflows should incorporate all outflows necessary to generate the film’s cash inflows, including, but not limited to, exploitation costs (such as marketing and promotional expenses) and distribution costs; however, the amount of distribution costs to include in an impairment model may vary depending on the facts and circumstances. Impairment should be recorded if the fair value of a film is below the unamortized film costs, even if a specific impairment trigger cannot be identified. Many media companies license intellectual property to third parties. Such licenses might include the right to exploit a motion picture in various markets and territories, or the right to exploit a character to be used in a video game or other consumer product. The assignment of rights for a nonrefundable amount under a non-cancellable contract permits the licensee to use those rights freely. The transaction is in substance a sale when the licensor has no remaining obligations to perform. A fixed license term is an indicator that the revenue should be recognized over the period because the fixed term suggests that the license’s risks and rewards have not been transferred to the consumer. Industry gives due consideration to what represents the performance obligation and when control is transferred for each obligation. The uncertainties associated with a film’s success can result in various challenges related to the testing of unamortized film costs for impairment because of the judgments, estimates, and assumptions that are applied. During a film’s production, its capitalized cost generally The Digital March Media & Entertainment in South India 55
    • Overview of Domestic Tax Media and Entertainment industry (M&E) is one of the fastest growing industry driven by increased digitization, growth of regional media, robust film industry and emergence of new media for content delivery. It is a blend of conventional media such as radio, television, print, etc. and latest innovations in the form of animations and visual effects. Although M&E industry is marching towards new horizons of growth, there appears to be no clarity surrounding various tax issues in the Industry. Film industry Specific provision/ rules have been prescribed under the Income-tax Act, 1961 (ITA) in relation to a person engaged in the production and distribution of the cinematograph film as under: Furnishing of statement A person carrying on the production of a cinematograph film (during the whole or any part of the year) is required to furnish a statement in a prescribed form134 to the assessing officer under the ITA135. The statement to be submitted requires the details of the person from whom or to whom aggregate payment exceeding INR 50,000 is made/due during the year. The details are to be furnished per film within 30 days of the end of the relevant tax year or completion of the production of the film, whichever is earlier. Non-compliance of the above provision could attract penalty under the ITA136. Deduction of cost of production/ cost of acquisition of distribution rights of feature films Specific rules137 have been prescribed in relation to the deduction of expenditure permissible on production of feature films/ cost of acquisition of distribution rights of feature films. Cost of production The rules link the deduction allowable in respect of expenditure incurred on production of feature films with the release of the feature film as under: Particulars Release of films 90 days before end of the Previous year Quantum of cost of production deductible Where the right of exhibition of film is sold in the previous year Not Applicable Allowable Where the film producer exhibits the film on commercial basis and/or sell all the rights of exhibition of the film during the previous year Completed Allowable Not Completed Deduction allowed to the extent of amount realized from the release of film and balance amount of deduction of the expenditure allowed in the subsequent year Where the film producer does not exhibit the film on commercial basis and/or does not sell the rights of exhibition of the film during the previous year Not Completed No deduction would be allowed. The entire cost will be carried forward and allowed as deduction in the subsequent year on the release of the film. 134 Form 52A of the Income-tax Rules, 1962 (‘Rules’) 135 Section 285B of the ITA 136 Section 272A of the ITA 137 Rule 9A and 9B of the Rules 56
    • The cost of production means the expenditure incurred on the production of the film except for the following: • Expenditure incurred on preparation of the positive prints of the film; and • Expenditure incurred in connection with the advertisement of the film after the same is certified for release by the Board of Film Censors. Sale of rights of exhibition also includes the lease of such rights or their transfer on a minimum guarantee basis. Cost of acquisition of distribution rights of feature films The rules links the deduction allowable in respect of expenditure incurred on acquisition of distribution rights of feature films with the release of the feature film as under: Particulars Release of film 90 days before end of the previous year Deduction of cost of acquisition of distribution rights Where all the rights of exhibition of film is sold in the previous year Not Applicable Allowable Where the film distributor exhibits the film on a commercial basis and and/or sells the rights of exhibition of the film during the previous year Completed Allowable Not Completed Deduction allowed to the extent of amount realized on the exhibition/ sale of distribution rights of the film. The balance amount would be allowed as deduction in the subsequent year Where the film distributor does not exhibit the film on a commercial basis and/or does not sell the rights of exhibition of the film during the previous year Not Completed No deduction would be allowed. The entire cost will be carried forward and allowed as deduction in the subsequent year on the release of the film The Digital March Media & Entertainment in South India 57
    • The cost of acquisition of distribution rights in relation to a feature film means the following: • amount paid by the film distributor to the film producer or to another distributor for acquiring the rights of exhibition; and • where the rights of exhibition have been acquired on a minimum guarantee basis, the minimum amount guaranteed, except the amount of expenditure incurred by the film distributor for the preparation of the positive prints of the film and the expenditure incurred in connection with the advertisement of the film. Tax issues Exhibition of film on Commercial basis The rules refer to the exhibition of film on commercial basis. However, the mode of exhibition is not prescribed. The question arises whether the exhibition of feature films refers to exhibition of film only in cinemas or would cover exhibition of film other than in cinemas. The Mumbai Income-tax Appellate Tribunal in the case of Vishesh Films Pvt. Ltd138 has held that as the mode of exhibition of film is not specified, the exhibition of film on television would also be covered. Deductibility of expenditure not covered in ‘Cost of Production’ Rule 9A of the Income Tax Rules defines the cost of production. An issue as to whether an expenditure which is not specified in the rule would be allowed as business deduction under section 37(1) of the ITA. The ITAT (Hyd.) in the case of ACIT v. Akkineni Nagarjuna Rao140 held that all the expenses directly relatable to production of film will be capitalized and allowed as deduction in the year of release of the film and not when the film was under production. Industry wish list The limit of reporting prescribed under the ITA for the producer of cinematograph film may be increased. Specified rule requires 90 days to be completed from the release of the film before the end of the previous year for allowing deduction of the entire cost of production and cost of distribution of films. In today’s arena, where the life of the film is very short, there seems to be a need for the above requirement of 90 days be either reduced or removed. Advance tax payment in the case of release of a film The release of feature films and their profitability are subject to a high degree of uncertainty. The estimation of profits for production companies for the purpose of discharge of their advance tax liability is a challenge. Failure to pay advance tax on such unforeseen profits can result in levy of interest under sections 234B and 234C of the Act. It would help the M & E Industry if the above practical difficulty is addressed and a relief is provided in the provision relating to the levy of interest under sections 234B and 234C of the ITA. The Madras High Court in the case of Prasad Productions Pvt. Ltd.139 held that the specified rule does not have overriding effect on the provisions of the ITA. Expenditures that cannot be deducted under the specified rule could qualify for deduction subject to the expenditure being laid out or expended wholly and exclusively for the purpose of the business under section 37(1) of the ITA. Television industry Depreciation on the Integrated Recorder Device (IRDs) IRDs are used by the production house. The functions of an IRD is similar to that of a computer system. The question therefore arises as to whether the depreciation rate prescribed under the ITA for the computer could be applied to IRDs. Allowability of interest on loan taken for production of film The rule provides that deduction of interest on loans borrowed for production of film where all expenses directly relate to production of film will be capitalized and allowed as deduction. The question arises whether the same will be allowed in the year of release of the film or when the film was under production. The ITAT (Jaipur Bench) in the case of Deputy Commissioner of Income-tax (DCIT) v. Rajasthan Patrika (P.) Ltd.141 held that printer and scanner are eligible for the depreciation rate prescribed for the computers. The same analogy could be useful for IRDs. 58 138 26 SOT 64 139 179 ITR 147 140 52 SOT 23 141 41 ITD 349
    • Music industry Deductibility of cost of acquisition of license/ copyright in music. The deductibility of cost of acquisition of license/ copyright in music has been a peculiar issue. The issue is whether such cost would be capital expenditure entitled to depreciation or is it in the nature of revenue expenditure. The judicial authorities142 have taken a view that payment for acquiring music right is in the nature of raw material and hence revenue in nature. Radio industry Deductibility of license fees by Radio broadcasters Radio broadcasters are required to pay license fees, viz. one-time entry fee and recurring annual fees, to the government as per the terms of license. The issue that arises is whether such fees are in the nature of revenue expenditure to be claimed as deduction in the year in which it is incurred or is in the nature of capital expenditure entitled to depreciation at specified rates. Conclusion The M&E Industry has been contributing substantially to the exchequer. There seems to be a need for the Government to come up with clarity on various debatable issues affecting the industry and provide income tax sops to keep the camera rolling. 142 82 ITD 641, 2010 TIOL 671 , 48 ITD 145 , ITA No. 719 & 720/Hyd/2011 34 taxmann.com 12, 22 ITR(T) 707, 143 ITD 288 (Chennai Trib.) The Digital March Media & Entertainment in South India 59
    • Indirect Tax implications Introduction The media and entertainment industry is one of the fastest growing industries in the world. Nonetheless in the recent years, its ability to grow at the desired pace in India has been marred by innumerable taxes in various forms and multifarious statutory compliances. The introduction of the Negative list of Services under the Service tax regime vide the Finance Act 2012 was appreciated across various industrial and commercial segments in the country. However, this change has also brought in its share of complexities to the Media and Entertainment industry. Some of these changes were addressed in tranches and some were clarified in the Finance Act 2013. The Indirect tax implication with respect to the Media and Entertainment industry have been outlined in the following paragraphs. Films and Television As on date, the revenues earned from distribution of theatrical and non-theatrical rights are liable to service tax. Separately, various State Governments classify copyrights as goods thereby levying Value Added Tax on transfer/ licensing of copyright on non-theatrical streams. The Finance Act 2012 sought to exempt the industry from service tax on copyright on cinematographic films. With this move the exhibitors were saved from the levy of service tax on payments made by them to distributors for exploitation of cinematographic rights. The introduction of a negative list of services applicable to the Service tax regime sought to widen the tax net which had already engulfed the film industry. The producers of programs or feature films avail input services which inter-alia include performance by artists, hiring of space, payments made to directors, story writers, dialogue writers, musicians, cameramen etc. However the above exemption lead to a significant rise in irrecoverable tax costs paid on input services consumed by the production houses. In order to grant relief to the film industry, the Finance Act 2013 brought about an amendment by way of limiting the above mentioned exemption to cinematographic films for exhibitions in cinema halls or theatres. By this amendment, the producer of cinematographic films would be able to avail credit of the taxes/ duties paid on capital goods and proportionate duties paid on input 60 services used for rendering taxable services- i.e. transfer of copyrights of such films which are not for exhibition in cinema halls and theatres. However, since the ultimate customer paying the price for the tickets for watching the movies is still not taxable under service tax, the service tax on input services has contributed to a huge cost in the hands of the theatre owners. As per the industry, the issue could be resolved if the final leg of the transaction is also subject to service tax levied by the Central Government rather than entertainment tax levied by the State Government. Industry believes that this position can be corrected by introduction of GST that subsumes entertainment tax as well. Print The conventional newspaper has made tremendous progress since its inception, but with the advent of internet, it is facing immense pressure from new media like cyber journalism. The Service tax legislation continues to exempt sale of space for advertising in print media from the levy of Service tax. The Service tax legislation as of now is silent on the taxability aspect of cyber journalism where online access to newspapers and magazines is provided to the end user for payment of a subscription fee. The question that still requires clarity is whether e-access of newspapers and periodicals would be subjected to service tax under the negative list regime governing service tax levy or not. Further, exemption from service tax has been allowed for transportation of newspapers or magazines registered with the Registrar of Newspapers, by rail or a vessel from one place in India to another. However such exemption has not been extended for transportation of newspapers and magazines by trucks, buses etc. Also those news agencies which are not registered under the Registrar of Newspapers lose out on this exemption. Radio Sale of time slots for advertisements on a radio channel continue to be subjected to service tax as is the case with sale of time slots by a broadcasting organization. But the issue with regard to treatment of sale of time slots as goods for VAT purposes does not seem to be addressed which further continues the debate of dual taxation on the same transaction.
    • Music The negative list regime of service tax sought to exempt services provided by temporary transfers or permitting the use or enjoyment of a copyright covered under certain specific clauses of the Indian Copyright Act 1957, relating to original literary, dramatic, musical, artistic works or cinematographic films. The Central Board of Excise and Customs in its Draft Guidance Note issued at the time of Budget 2012 has clarified that a music company would be required to pay service tax as the copyright relating to sound recording has not been exempted from service tax. In other words, only copyright relating to original work of composing song are exempt from service tax. This has resulted in a situation whereby only certain transactions are liable to service tax. The levy is exempt only on the payments made to the music directors etc., for creation of the original music while the revenue streams are subject to service tax This has resulted in a favorable tax treatment, as this would result in passing on the service tax credits effectively which mitigates the earlier existing tax cascading effect. However, as per the industry, levy of VAT on the same revenue as a transfer of right to use the copyright in some cases could result in dual taxation and continue to be litigated. Future of Media and Entertainment Industry with the advent of GST Under the proposed GST regime which would be applicable to India, both the Central and the State government shall be empowered to collect tax at the point of supply. Accordingly, under a desired GST scenario, all taxes proposed to be subsumed in GST under this regime can become a pure ‘pass through’ and tax would be on final consumption only. The industry is currently facing the issue of dual taxation in many cases (i.e. service tax and state value added tax) and believes that implementation of such a tax regime would bring relief to it. However it is too early to examine and comment on the GST impact on the M&E industry. There is no certainty in the rate of tax under the proposed regime, nor is there clarity on the goods and services that shall be subject to CGST and SGST. Nevertheless, the industry hopes for a tax regime which is transparent, simple to understand and friendly both to the industry as well as the ultimate customer. Digital media The Finance Minister in his Budget 2012 speech, announced that “selling of space or time slots for advertisements other than advertisements broadcast by radio or television” will be included in the negative list and thus will be exempt from the levy of service tax. As a consequence the sale of space for advertisement by mobile operators, websites, blogs etc. on the internet will be exempt and would not attract any service tax. However, services provided by advertising agencies and relating to making or preparation of advertisements would not be covered in this negative list and are still taxable under the service tax regime. The advent of ecommerce and the supply of digital content have also contributed to the share of issues on service tax with the introduction of service tax on such supplies only by Indian service providers (as granting online access) and exempting the foreign service providers from service tax. As per the industry, there does not seem to be a level playing field as the transactions of ecommerce by local players have an additional tax element attached to the same. The Digital March Media & Entertainment in South India 61
    • Transfer pricing issues Introduction The transfer pricing regulations were introduced in India over 11 years ago and since then there has been a steep increase in total adjustments by the revenue authorities in eight rounds of transfer pricing audits. During this period, transfer pricing officers have gained experience which can be seen from various judgments resulting into new interpretation of transfer pricing provisions. This has not only given rise to number of adjustments but also the enquiries into different issues and types of transactions. This increasing trend of cross-border transactions has resulted into in-depth scrutiny by the revenue authorities through transfer pricing audits. Further in light of the fact that the tax laws in different countries vary significantly, the tax administrations have recognized the possibility that MNCs may be “shifting” profits to low tax jurisdictions. In such arrangements, appropriate pricing needs to be established called as ‘transfer price’ for such intra-group, cross-border transfers of goods, intangibles and services. Transfer pricing is thus the term used for pricing of cross-border, intra-firm transactions between related parties. Not only transfer pricing has evolved in the long run but also the complexity in the cross-border transactions. The Indian media and entertainment (M&E) industry is one of the diversified industries with various complex transactions. The M&E industry not only includes traditional media companies like radio and television broadcasters, film entertainment, direct marketing and book magazines but also digital media content creation, content aggregation and various phone applications. Some of the typical transactions in M&E industry are listed below: • Payment of royalty; • Sale of contents and programmes; • Receipt of sales commission; • Provision of services; • Publications; • Video streaming; and • Provision of printing services. Each of the above transactions is unique as well as interlinked, which may involve more than two parties. One of the preferred ways to benchmark such transaction would be to bifurcate the functions performed by each party and to remunerate them with an arm’s length return. It may make sense to outline a systematic supply chain model for a media / entertainment company to identify the role and functions performed by each of the parties involved in the transactions. One of the challenges would be to prove the transactions to be at arm’s length. This can be achieved with the help of available information related to intercompany transactions and detail understanding of business. There are possibilities that the transactions may come under the heightened scrutiny by the transfer pricing officer if appropriate documents are not maintained to justify the arm’s length nature of said transactions. With the increase in the complexity of business model various transfer pricing issues are faced by M&E industry. Some of them are listed below Transactions covered in M&E Industry Primarily the types of transactions observed in Media industry are related to transfer of content rights globally coupled with distribution and other services. Further the industry also observes transactions related to sharing of technology platforms and related services. Age no longer a value driver in current scenario Advertising and subscription revenue had a positive correlation with channel’s age factor. New and innovative concepts by new players are giving tough time to existing players. Thereby channel’s age in market is no longer a key value driver. This is also peculiar to print media, where challenge is posed in the process of digital transformation due to discovery of digital reader content channels such as amazon.com. In India, being a cricket loving country, the frequent transactions we see are around acquisition of telecasting and distribution rights of cricket tournaments and events. These acquisitions of distribution rights give rise to international transactions in the nature of payment of licence fees, provision of services and content development activities. Constant enlargement of the value chain The concept of production and thereafter distribution by the same entity is no longer in existence. This chain is now segmented between several players such as content creators, content providers, channel companies, distribution companies, cable operators, DTH providers, etc. 62
    • This has opened up transfer pricing issue of determining the revenue allocation key for each of this player which has posed the biggest transfer pricing challenge as on today. The development of advanced media and media aggregators produces a plethora of unexplored transfer pricing issues. Transaction such as distribution of content is a common transaction in M&E industry, however it may entail issues such as presence of valuable intangible. Market penetration strategies adopted by media conglomerates There is an emergence of “media conglomerates” including foreign content creators and distributors penetrating the Indian market. M&E Industry is witnessing transformation in the pricing models where the simple model of production and distribution has now brought in market penetration strategies. Foreign MNCs with deep pockets are ready to bear heavy losses in order to capture market share. Bifurcation of such losses between the parties involved using an appropriate allocation key will be one of the issues which will arise in transfer pricing arena. Mandatory content-sharing concept is impacting the pricing models One of the aspects of content-sharing concept is that no distribution platform has the right to display exclusive content on its platform. The broadcasters are impacted due to mandatory sharing of content. The mandatory inter-connect order also debars a broadcaster from offering its content exclusively to a single distribution platform. In such scenario, determination of loss in revenue due to content sharing has become a difficult adjustment for a transfer pricing specialist. Pricing issues due to movement from analogue technology to digital technology In case of digital technology, there are no existence of physical cables and physical connectors. The entire reliance on digital technology is based on the terms of the agreements entered between the parties. Unfortunately, under transfer pricing norms, these agreements will not hold good if the parties to the agreement are related. This poses a big challenge for establishing the basis for pricing mechanism and documenting for providing an evidence to be produced before the tax authorities. Although from viewer’s perspective digital technology has several advantages, it poses several challenges in transfer pricing scenario especially of documenting the transaction and demonstrating adherence to the arm’slength principle. Further changing risk profiles needs to be documented in order to justify the appropriate pricing model. Such difficulty is also faced in case of transfer of theatrical rights. Recent transfer pricing audit issues in M&E Industry The Indian M&E industry being one of the diversified industries has various complex transactions. The transaction which is most commonly picked up and adjusted by transfer pricing officers relates to payment of royalty / licensing fees for use of content rights. Further, in order to hold the regulatory permission to downlink a channel in India, many foreign broadcasting companies have created marketing entities in India. The marketing and promotion activities undertaken by these marketing entities in relation to the contents owned by foreign broadcasting companies are constantly being challenged. Recently similar issue was observed in the case of a large news broadcaster, Income Tax Appelate Tribunal (ITAT), Delhi, wherein it was further held that there is no obligation on marketing agent to undertake marketing and promotion activity for the channel. The cross border movement of funds in the aspiring M&E industry has been low hanging fruit for the Indian revenue authorities. In the recently concluded audits, intercompany loans and guarantees were one of the favorite transactions picked up for audit and were adjusted furiously. Tax authorities’ failure to appreciate the intrinsic complexities of this industry has created enormous litigation when it comes to transfer pricing audit. Recent developments in transfer pricing In the Finance Act 2012, there was an introduction of specified domestic transactions (SDT) within the scope of transfer pricing provisions. With the introduction of SDT regime, not only large multinational corporate houses The Digital March Media & Entertainment in South India 63
    • but also many midsized groups would also be covered under the transfer pricing ambit, which has entered into specified domestic transactions exceeding the threshold limit of INR 5 crore. This means the pricing of domestic transactions also needs to comply with the arm’s length principle. Accordingly, any domestic transactions entered into by M&E industry within its domestic related parties will now fall within the ambit of transfer pricing scrutiny. Further, since the industry is into consolidation phase, various joint ventures are being formed. One has to analyze the transactions with the joint venture partners to check the applicability of transfer pricing provisions. Further with retrospective effect from 1 April 2002, definition of international transaction is clarified to specifically include transactions like guarantees, capital financing, receivables, transfer of intangible, business reorganizations, etc. This will further enlarge the scope of scrutiny for these transactions and we can expect new adjustments on such issues soon. Advanced pricing agreement (APA) introduced by Finance Act 2012 is a welcome sign as it could provide certainty to tax payer, for its tax positions for 5 consecutive years and help avoid the possibility of transfer pricing audits along with reduction of litigation costs. One view is that APA could be explored by M&E industry where transactions are complex and taxpayers have a past litigated and in-depth scrutiny history. 64 Recently, the much awaited safe harbor rules were finalized which upfront provides the arm’s length margin for certain types of international transactions. Financial transaction (i.e. outbound loans and corporate guarantees) is one of the covered transactions for which a safe harbor option can be availed by the companies. Since loan and guarantee transaction are often found in a M&E industry, media companies may opt for safe harbor option which will help avoid the future transfer pricing audits. Way forward Evolving dynamics of the M&E Industry and the uniqueness of the transactions entered, have posed a challenge to defend the case. By understanding the group’s business model and the transactions within the group entities, effective transfer pricing policy should be formulated. The industry gives due consideration to the inter-company arrangements / agreements in existence by conducting the benefit test analysis. By analyzing the functions performed and risks undertaken between the participants of the global supply chain, appropriate transfer pricing policy should be developed. Key to effective transfer pricing compliance in the M&E industry is thereby robust documentation and maintenance of requisite supporting documents which will help get away from the prolonged transfer pricing audits.
    • M&A in Media – Key opportunities and challenges Overview Mergers and acquisition (M&A) in the Media industry has been quite buoyant with help of some large transactions in recent times despite muted overall M&A activity. M&A activity in media industry has been mainly driven by opportunities in the television distribution space, regional media (broadcasting and print) and film exhibition. Implementation of digitization of Cable and Satellite (C&S) homes has resulted in large capital requirements for the operators to procure backend equipment’s and Set Top Boxes (STBs). This has been facilitated by increased FDI limits in distribution segment which were changed to 74% last year. Consequently, we have seen higher private equity interest levels in this segment. This was evidenced by Goldman Sach’s 15% acquisition in DEN Networks, Providence Equity Partner’s acquisition of 17.3% in Hathway Cable and Datacom and Sahara Groups acquisition of 90% in Digicable143. Television distribution would be a growth space in near term. Some of the DTH players have already filed prospectus for IPOs and some others are planning to go public in coming future in India or abroad. Having said that the success of these would be subject to markets rebounding and being conducive for public offering. Expansion and potential of regional media (television and print) has been a big factor for many of the large M&A transactions in recent times. National players are looking to increase their regional footprints as growth experienced by vernacular press or regional media has been higher than those of national players. This was evidenced by acquisition of Eenadu TV by Network 18 group and Nai Dunia Media Private Limited by Dainik Jagran144. Tremendous growth in Film exhibition space mainly driven by box office successes of films (Regional and Bollywood) has made the segment attractive for investors. L Capital’s and Multiples investment of 31.6% in PVR Cinemas and PVR Cinemas acquisition of Cinemax for USD 119 million in turn was a proof of ongoing interest of the financial investor community for further consolidation and fund raises to scale up145. Despite opportunities presented by certain segments of the industry there is an overall uncertainty in view of the current macro environment. This could result in investors being very selective about their investments. Sluggishness in the economy and valuations still being relatively high, investors are safeguarding themselves by undertaking all-encompassing robust due diligence processes. Indian corporate sector has been recently hit by frauds of large magnitude and hence investors are not leaving anything to trust. In addition to the traditional due diligence around financial, tax and legal matters, which by themselves have become more intense, other due diligence areas are also being looked at, in specific, Anti-Corruption and compliance, Human Resources, Information Technology and Regulatory. These are making the duration taken to close a transaction much longer. In addition to heightened professional skeptism there are certain issues that have plagued this sector and make the investors weary of fresh investments. We have summarized some of these. Business practices and structures are yet to become completely transparent and organized Media industry in India opened up in late nineties and has been growing and evolving since then. Media sector is still represented by numerous mid-size and small players which are operated as family businesses. Though there has been a momentum towards having a corporate structure, there are still very few players who are organized. Consequently, industry follows business practices which are not very transparent and structured. On account of this investors are skeptical to provide investment. They tend to seek several guarantees and impose usage restrictions on proceeds invested in the company. Since the companies reported balance sheets are lighter as compared to their operations providing collaterals and security for funding received also becomes a challenge. Disparate accounting policies followed by various players which makes comparing peer performance a challenge Many matters pertaining to the Media sector are peculiar in nature and Indian accounting standards are not prescriptive about how to cater to these situations. This leads to potentially more than one interpretation of the accounting rules. As a result of individual interpretations disparate accounting policies are followed by different players 143 Mergermarket and Venture Intelligence databases 144 Mergermarket and Venture Intelligence databases 145 Mergermarket and Venture Intelligence databases The Digital March Media & Entertainment in South India 65
    • in the same industry. Typical areas where there are differences are revenue recognition, capitalization of production costs, amortization of costs and valuation of inventory. Quality of earnings is dependent on the policy being followed by the company with regards to key revenue and expense streams. Performance among peers can only be compared if the policies being followed are uniform. Policies adopted tend to be aggressive and may not be in line with the earnings process or pattern of deriving benefits from cost incurred. High incidence of cash expenses and expenses not backed by contractual agreements Given that the media industry is largely still an unorganized sector, there are high amount of expenses recorded in the financial statements which are incurred in cash. There could be also certain cash payments made towards various artist expenses, payments made to obtain shooting permissions in certain cases, cash payments made to local cable operators etc. which may not be backed with appropriate documentation. The stereotypical image of an accountant with his cash box is still largely prevalent in the industry. Be it daily shooting budgets, travel accounts or lunch allowance, the percentage of cash expenses is very high. In this scenario, there is potential for cash leakage. Large amount of expenses are driven by creative teams and their understanding of the financial process might be limited. Consequently, expenses are incurred at their discretion without adequate trail of pricing decision or selection of vendors. Television distribution involves dealing with large number of small local cable operators (LCOs) who prefer cash transactions. Consequently, they prefer not to have any legal contractual agreements for carriage fees which they get from broadcasters. High degree of political affiliation Perhaps owing to the fact that the popular political movements sprung from film personalities in India, the level of political influence in the media industry specially in the south is still high. In the South, most major television stations are affiliated to the ruling or opposition parties in the respective states. This trend 66 has continued to the film space as well where political influence is a dominating factor in the performance of films and film production companies. There have been instances where film releases have been stalled and ad rates on television channels have been capped due to political compulsions. Inconsistencies in policies and regulations Adding to the policy confusion is the inconsistency in regulations in different states. For example, entertainment tax varies from state to state and even within states from film to film. Likewise, Chennai was part of the mandatory CAS cities while the other major cities in the south are not. Even for Chennai, the imposition of CAS has been delayed and is the only metropolitan city in India where CAS is yet to be introduced. Lack of scale and huge dependence on certain individuals Media outfits are largely one or two man (or woman) firms where the creative writ of a few individuals runs large. The business model is hence inherently non-conducive for a potential M&A as the dependence on a few individuals is large. What could companies do to be more M&A friendly? Some of the issues identified above are macro issues where an individual company may have little wherewithal to effect any major changes. However, based on our interaction with the investor community, we understand that following steps if taken by media companies can facilitate M&A process and spur investments: Implement strong financial systems with a professional set up Perhaps the single biggest fillip for an M&A would be the appointment of a professional CFO and Financial controller. While financial discipline is usually an issue in any promoter-driven company, this is much more pressing in the media space. In a sector driven primarily by creative impulses, the lack of financial controls is usually a major deal breaker. This could be avoided by having in place a competent finance person and empowering him with the right to question creative decisions that have a huge financial implication.
    • Institutionalize processes It may sound counter-intuitive but there is a scope for a lot of science in what is essentially an art-driven industry. There needs to be strong processes in place to greenlight a film project. Extensive analytics needs to be undertaken on past collections in different geographies at different theatre classes and price points. As the industry evolves, there is a great need to treat this as a consumer product subject to the same rigors of process and analysis as the consumer goods industries. It is no surprise that most of the organized media companies in Mumbai are headed by professionals from the FMCG sector. Create strong IP’s Ultimately, content sells. Media companies must recognize that as a service provider, the optimal levels of service excellence and track record will still get them only to a certain extent. The key value driver would be the IP that a company holds. For example, in the western markets, TV production houses do not tend to make a profit on the initial show of their programs. It is only through multiple syndication (made possible by their ownership of IP) that they generate returns on their programs and several go on to become cash cows for the creators. The Digital March Media & Entertainment in South India 67
    • About Deloitte Deloitte is one of the world’s largest and most diversified professional services organization, providing assurance and advisory, tax, management consulting, and enterprise risk management services with revenue to the tune of $32.4 billion (FY 2013). In overall terms, Deloitte member firms serve over 80% of Fortune Global 500 companies. Deloitte’s headcount is in the region of 200,000 globally and a presence in 153 countries. Our organization includes the world’s largest private consultancy, and a unique portfolio of competencies integrated in one industry-leading organization. We bring a unique combination of business, functional, and technical knowledge that allow our clients to better align their business objectives and strategies with the need of today’s competitive market. We serve Indian business houses, multinational corporations and the public sector and provide assistance to global clients seeking to develop local businesses and expand into emerging markets such as India. Our edge lies in our ability to draw upon a well-equipped global network and teaming this with customized services of a local office. Deloitte is the multidimensional professional services organization with integrated global capabilities across Consulting, Tax, Enterprise Risk Services and Financial Advisory “Deloitte is the largest Management & Advisory Consultancy in the world (includes S&O, HR, IT, Risk, FA, Audit, and Tax advisory capabilities).” “Deloitte is a leader in management consulting, having extensive capabilities and depth in strategy, OM and HR, as well as BAS and IT consulting.” Source: Kennedy Consulting Research & Advisory; Global Consulting Marketplace 2010-2013; © BNA Subsidiaries, LLC. Reproduced under license Europe 297 offices in 47 countries Key Offices: London, Frankfurt, Paris, Rome, Dusseldorf, Madrid, Moscow, Prague Asia Pacific 113 offices in 26 countries Key Offices: Pakistan, Singapore, Thailand, Vietnam, Indonesia North America 131 offices 2 countries Key Offices: New York, San Francisco, Los Angeles, Denver, Toronto, Montreal South America 69 offices in 28 countries Key Offices: Sao Paulo, Mexico City, Buenos Aires, Santiago, Caracas Africa & Middle East 46 offices in 35 countries Key Offices: Johannesburg, Cape Town, Kenya, Tel Aviv 68 India 13 offices Key Offices: Mumbai, Delhi, Hyderabad, Bangalore
    • About Deloitte’s Media Practice Deloitte has one of the largest Media Consulting practices globally. Coupled with Audit, Tax, and Corporate Finance / Financial Advisory services, it makes us a leader in serving companies across key segments of the industry We have more than 500 media and entertainment clients, including the vast majority of market category leaders across all sector segments, and thousands of sector specialists world-wide. With many of our practitioners coming from the sector directly, we’ve got an insider’s view that adds to our unique position to help clients wrestle with critical business issues. Selected Technology, Media & Telecommunications thought leadership in India Technology, Media & Telecommunications Predictions, 2013 This publication is released in conjunction with Deloitte’s global Predictions report for the TMT sector and presents our view of key developments over the next 12-18 months that are likely to have significant medium-to long-term impacts for companies in TMT and other industries in India. Media & Entertainment in South India A White Paper, written by Deloitte India that was released at FICCIs Business Conclave, Chennai October, 2012. It studies the current state and market potential of the different segments of Media & Entertainment in South India. Media & Entertainment in East India - Bengal A White Paper, written by Deloitte India that was released at FICCIs Business Conclave East (Kolkata) December, 2012. It studies the current state and market potential of the different segments of Media & Entertainment in East India. The state of media democracy This is the second edition of The State of the Media Democracy Survey – India (the Survey). The survey was carried out late 2011/early 2012 and provides a generational ‘reality check’ on consumer preferences, interaction with technology, purchasing trends, response to advertising and a peek into future preferences. Single window clearance: Making India easier for filmmakers This is a whitepaper released by Deloitte in June 2013. Given the strength of India’s media and entertainment industry, its rich heritage and diverse landscape, India is well poised to attract foreign productions into the country. This paper attempts to further our understanding of the role played by Film Commissions globally and their benefits by highlighting global best practices. The Digital March Media & Entertainment in South India 69
    • Acknowledgements During the course of writing the paper, we spoke to various people related to the industry. Deloitte and FICCI would like to acknowledge them for their insights which form an integral part of the analysis presented in the paper. We are extremely grateful for their contribution and would like to thank them. 70
    • Contacts Acknowledgements for subject matter experts Hemant Joshi Technology, Media and Telecommunications Ashesh Jani Media C. A. Gupta Direct Tax M. S. Mani Indirect Tax Rajiv Sundar Financial Advisory Services Rajarshi Sengupta Analytics, Technology Integration Deloitte Neeraj Jain Senior Director, Deloitte Touche Tohmatsu India Pvt. Ltd. (Leader, Consulting – Technology, Media and Telecommunications) Strategy & Operations Consulting Phone no: +91 95602 24446 Email: neerajjain@deloitte.com FICCI Leena Jaisani Senior Director & Head, Media & Entertainment FICCI Entertainment Division 4th Floor, Federation House, 1 Tansen Marg New Delhi - 110001 Email: leena@ficci.com and frames@ficci.com P. Thiruvengadam Human Capital Advisory Services Anis Chakravarty Transfer Pricing We also acknowledge the efforts of Abhijit Sen, Abhiram Bajpai, Aditya Samanta, Arunesh Kumar, Arvind Raghavan, Ashok Nayak, Bhumika Smart, Bhupendra Kothari, Gunjan Gupta, Kausik Saha, Lakshmanan Balaji, Mital Patel, Nishant Jalan, Ravikumar M Yanamandra, Regidha Delphin, Shikha Sashi, Shivram S., Shubhra Batra, Tulip Estibeiro, Vijay Mani, Villy Dhabhar, Vivek Ramakrishnan, Vinod Parameswaran towards this report. The Digital March Media & Entertainment in South India 71
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