Foreword

The Indian entertainment industry is on the threshold of emerging as a large market globally. Future growth of the industry is expected to be led by rising spends on entertainment by a growing Indian middle class, regulatory initiatives, increased corporate investments and the industry's dynamic initiatives to make strategic structural corrections to grow. In addition to the Indian middle class’ enhanced spends projected towards entertainment, the rising global interest in Indian content is expected to fuel growth in this industry. With this focus, Confederation of Indian Industry (CII) requested KPMG to initiate this study on the key sectors: films, television, music and radio, highlighting its potential and key trends to be expected with sharing insights on developments, impact and opportunities. The report, an initiative under CII's “India – The Big Picture” focus is an effort to present a critical analysis of the sectoral constraints faced by the industry that are impediments to its growth, the need for concerted action and hence achieve its true potential. One of the key imperatives that can realise this potential, as pointed out in this report, is the need for focus and effective collaboration between the key stakeholders. The analyses presented in the report have been arrived at through a combination of KPMG's in-house knowledge base of the Indian Entertainment Industry and extensive discussions with key members of the CII Entertainment Committee and other industry experts. CII takes this opportunity to thank Rajesh Jain and his team from KPMG, industry members and the CII Entertainment Committee members, for making this endeavour possible and sharing the long-term vision for the industry.

Subhash Ghai Chairman CII National Entertainment Committee

Message from the CII President

The Confederation of Indian Industry (CII) is taking a lead in the growth and development of India's entertainment industry. CII under the guidance of Mr Subhash Ghai, Chairman of the Entertainment Committee and Mr Bobby Bedi, Co-Chairman, is driving several initiatives under the umbrella of “India – The Big Picture” - a mother brand - created especially for organising events and seminars to increase visibility of the Indian entertainment industry in the global marketplace. Over the past few years, CII has organised major events, EnterMedia 2002, CineMint 2003, India Pavilion at Cannes Film Festival 2003 and 2004, Film Bazaar at the International Film Festival of India 2002, 2003 and 2004, in addition to various delegations to film markets and festivals, workshops, and interaction with Central and State governments on policy. The spend on entertainment in India is significantly lower than most advanced countries, yet the growing middle class exhibits a greater propensity to spend on entertainment, when we consider the entertainment spend as a percentage of per capita spend. As the Indian economy grows, the rest of the population is moving towards a higher standard of living. It is this growing consuming class with the propensity to spend that will drive the growth of the Indian entertainment industry. The entertainment industry in India has the potential to be the next 'sunrise' industry and is undergoing significant changes. Increasingly, the Indian entertainment industry is being influenced by international trends and developments. The industry is steadily moving towards corporatisation and globalised markets. With this background CII, in partnership with KPMG, has brought out a report: “Indian entertainment industry - Focus 2010: Dreams to reality”, providing In-depth analysis of its key constituent segments television, films, radio and music. The report is aimed to assist industry to get an analytical understanding of the entertainment sector. CII is committed to facilitate the Indian entertainment industry to achieve new levels of success.

Sunil Kant Munjal President Confederation of Indian Industry

An action plan for the Indian entertainment industry
India ranks among the top five economies of the world in terms of purchasing power parity, while its GDP ranks eleventh in absolute terms. Combined with the fact that India has the second largest population in the world with over a billion people, this makes India one of the most exciting marketplaces for any consumer products or services industry. Given the average Indian's cultural affinity for entertainment, the Indian entertainment industry's growing contribution to the economy cannot be understated. KPMG and CII have come together to create this vision document on the sector which aims to provide a critical evaluation of the Indian entertainment industry, with in-depth analysis of its constituent segments - television, films, radio and music. The report evaluates whether the industry's potential can become a reality if the various participants, including content providers, distributors, infrastructure and technology providers, investors and the Indian government, work together with a shared vision to address the issues and constraints faced. In this context, the report articulates the KPMG-CII 10/10 Charter. The charter aims to form the strategic blueprint for the industry and the government to undertake concerted action that will result in strong growth based on stable fundamentals. We trust that this report will be useful to all the stakeholders as well as to those tracking the Indian entertainment industry.

Ian Gomes Country Managing Director KPMG, India

Contents

Executive summary Industry overview Television Film Music Radio Bridging the gap The tax perspective

1 11 23 45 81 93 107 145

Executive summary

Let the fun begin
Over the last few years, there have been discussions on the Indian entertainment industry being on the verge of take-off, powered by new delivery platforms and technological breakthroughs, increasing content variety and favourable regulatory initiatives. This is expected to transform the entertainment landscape, with more players entering and traditional players being forced to adapt or perish. One can already witness changes that have the potential to alter the industry structure. New delivery platforms and technological breakthroughs: Increasing penetration of new delivery platforms is one of the key drivers of the media and entertainment industry today, that has the potential to change the way people receive content. These platforms, resulting from fundamental technological breakthroughs, are likely to see most of the action in next few years. For example, the spread of inexpensive and stable storage media will also enable people to store content and view it at their convenience. Some other examples are: ! Introduction of DTH and IP-TV ! Digital distribution of films ! Immersive content media like IMAX theatres ! Coming of age of Satellite Radio and FM Radio ! Emergence of new technologies like podcasting, etc Together, these are expected to change the viewing habits of people. Increasing content variety: New forms of content will emerge to cater to select viewers, as the industry evolves. Content like community radio and local television, that were unviable earlier, will also emerge stronger through new delivery formats. Moreover, content innovation will be necessary to sustain the interest of the increasingly jaded urban population. A few instances of rising content diversity are: ! Newer programming categories like reality television, ! Crossover content in music and films, ! Niche programming on radio like sports and comedy, ! Newer genres like lifestyle television, religion channels, etc. Regulatory initiatives: The regulatory framework for media is still evolving. Looking at the policies announced by TRAI, it seems that a liberal framework is likely to be developed in order to allow the industry to flourish. Alongside regulating broadcasting and distribution, it will be important to create stronger protection mechanisms for copyrights and royalties. If intellectual property is protected to a fair extent, the industry could capture far greater value, giving its growth rate a significant boost.

1 A CII - KPMG Report

A few examples of such regulatory actions are: An implementable regulatory framework for introducing addressability of cable television ! Policy framework for DTH, satellite radio and community radio ! Migration to a revenue sharing regime in FM radio ! Superior copyright protection for films, music and home video, etc

!

The past and the future The entertainment industry is thriving on the current economic upswing and is currently estimated at INR 222 billion. Due to its sheer size, television has been the main driver for the industry's growth, contributing 62 percent of the overall industry's growth. Films contributed another 27 percent, while other segments like music, radio, live entertainment and interactive gaming constitute the balance 11 percent. Growth of the entertainment industry
(INR billion)

515 262 309 371 432

588

196

222

2003

2004

2005E

2006E

2007E

2008E

2009E

2010E

Source: KPMG Research

Propelled by innovation across its value chain and a series of enabling regulatory actions, the entertainment industry is expected to grow annually at almost 18 percent to reach around INR 588 billion by 2010. However, even with such growth, it could be just scratching the surface of the Indian market's true potential. Reaching this targeted growth rate will not be easy for the sector. Television sector has witnessed a significant bit of transparency, process orientation and discipline, except for the last-mile which is completely fragmented. The film sector, on the other hand, still remains relatively opaque and persona-driven. Over the past few years, the film industry has made some progress in getting institutional and corporatised funding. However, the progress on this front has not been as dramatic as had been expected when the institutional funding norms for films were relaxed a few years ago. Even though different sources unanimously agree that the entertainment industry is a sunrise sector, it has seen no major fund-raising efforts, apart from television content and broadcasting where the impact of professionalism and organised financing is evident.

2 Fo c u s 2 010 : D r e a m s t o r e a l i t y

The industry growth drivers Over the past decade, India has been the second fastest growing economy in the world. In 2004, it grew by 8.2 percent, breaching the psychological 8 percent barrier for the first time. In terms of purchasing power parity, it is already the fourth largest economy in the world. Most major global companies are of the opinion that it will become a key market in the years to come. As the Indian economy continues growing, the Indian middle class will also expand significantly. Compared to other nations, the 300 million strong Indian middle class allocates a higher percentage of its monthly expenditure on entertainment. The increasing consumerism of middle-class India is seen from the sharp growth in the sales for various products like automobiles, colour television sets and mobile phones and the burgeoning increase in credit cards and personal loans. There is an increase in the direct consumer spends on entertainment and advertising revenues have also been on the rise. With the average Indian getting younger, and hence more likely to spend on nonessentials, the entertainment industry has the potential to grow explosively in the future. Digital platforms will drive the next wave of growth
Availability of new products and services
First wave of growth Second wave of growth
DTH PDA 3G mobile Wireless broadband Basic analog cable Console CD, CD-ROM Single screen theatres Music cassettes FM radio Terrestrial television Vinyl records AM radio Multiplexes Multimedia PC Broadband internet Interactive television Pay-per-view IP-TV

The industry is ready to enter a second stage of growth, powered by technology and an enabling regulatory environment

Spending power and awareness Source: KPMG Research

The forthcoming metamorphosis The entertainment industry is now at an inflection point. The earlier phase of growth has run its course. Now the industry is ready to enter a second stage of growth powered by the twin engines of technology (availability of quality infrastructure and the accelerated penetration of digital connectivity) and an enabling regulatory environment.

3 A CII - KPMG Report

A panoramic view The coming of age of the television sector has been the primary driver of the growth of the entertainment industry
The coming of age of the television sector has been the primary driver of the growth that the entertainment industry has seen over the last decade. The private sector enterprise seen across the television value chain in the nineties drove the sector to newer heights. It is now the most important component of the entertainment industry, contributing over 60 percent of its revenues. It is expected to continue powering the industry in the digital era, through various innovations like DTH, interactive television, etc. Though in revenue terms, films contribute just 27 percent of the entertainment industry, its visibility and impact is much more than this figure suggests. It is also a major driver for other sectors like music, live entertainment and television. It was accorded the status of an industry in 2000. Since then, some progress has been made in developing transparency and professionalism in this sector. Music, radio and other emerging segments like animation, interactive gaming and live entertainment together account for remaining 12-13 percent of entertainment revenue. Segment-wise composition of the entertainment industry
Segment-wise break-down Television Film Music Radio Others (live entertainment, interactive games, etc.) Gross unadjusted revenues Add: overseas' distributor's margin from sale of Indian films Entertainment revenues at retail value
Note: The summation of the figures may not match due to rounding off Source: KPMG Research

(INR billion) 2004 139 59 10 2 11 222 6 8 222 2005E 164 69 10 3 16 261 7 8 262 2006E 189 83 11 4 23 309 8 7 309 2007E 228 99 11 5 30 373 11 8 371 2008E 266 114 11 6 39 436 13 9 432 2009E 325 129 12 7 48 521 16 10 515 2010E 371 143 13 8 60 595 18 11 588

2003 122 52 10 2 9 195 8 196

Less: overlap (sale of film broadcast and music rights) netted off 7

Piracy and revenue losses at the last-mile are the bane of the entertainment industry. They prevent the rightful owners of the content from realising its full value. All sectors of the industry, except radio, suffer from these twin predicaments in some way or the other. Currently, such losses are estimated at INR 4.3 billion, which amounts to over 40 percent of the industry's total revenues. While such losses are expected to continue for another two to three years, a reversal is expected eventually as a result of a combination of a technology push (with a wide repertoire of film and music becoming available through a variety of legitimate and convenient platforms and options) and a demand pull (with increased internet penetration and the advent of broadband).

4 Fo c u s 2 010 : D r e a m s t o r e a l i t y

Television With total revenues of INR 139 billion, television is the goliath of the entertainment industry. It is now ready to advance to the next stage of its evolution, grasping the opportunities presented by the digital age, which will completely change the home entertainment landscape. In the process, it is expected to continue its rapid growth and reach INR 371 billion by 2010. Some of the transformational changes are:

!

Additional distribution platforms: The last-mile of television distribution will see a lot of action in the near future due to entry of new Direct to Home (DTH) broadcasters, Internet Protocol based Television (IP-TV), broadcasting services using Digital Subscriber Line (DSL) technologies, etc. They will also give broadcasters direct access to consumers by enabling them with the ability to provide customised value-added services, such as video on demand. Presently the distribution of subscription revenues is heavily skewed towards the cable operator because of lack of transparency in the declaration of subscribers by the Local Cable Operator to the pay television broadcaster. The introduction of these new platforms and the consequent addressability will facilitate a more equitable distribution of revenues.

!

More entrants in niche genres offering additional content variety to the viewer: Niche genres have significantly strengthened their value proposition and more entrants are expected in spaces like animation, business and lifestyle, among others. Conducive and liberalising regulatory intervention: A beginning has already been made through an amendment of the Telecom Regulatory Authority of India Act. This is expected to deliver addressability in the currently fragmented distribution market, thereby increasing broadcaster's shares of revenue and encouraging greater participation.

!

Films Though films contribute just 27 percent to the entertainment revenues, they form the heart of this industry. Indian films, especially the mainstream Hindi film industry (Bollywood) dominate segments like music and live entertainment as well as television, where popular films and film-based programmes attract the highest viewership. Compared to television, this sector is rather unorganised and individualistic, with a low level of discipline and process orientation. This, along with the fact that it was not recognised as an industry as late as 2000, restricted its access to

5 A CII - KPMG Report

institutional funding and forced it to rely on other sources that charged usurious rates of interest. In the recent years, though there has been a distinct shift in the mindset and the willingness to tap institutional debt and equity funds. Some of India's largest corporate houses have entered this sector and large international studios are reportedly evaluating the Indian opportunity. However, the lack of transparency and discipline is preventing them from fully tapping this opportunity. The film industry is at a cusp in its evolutionary path. If conventional players are able to implement the changes needed to unlock its growth potential, the second phase of corporate and institutional growth could see the industry grow at around 16 percent annually to reach INR 143 billion in six years. Music The Indian music sector is quite unique compared to other global markets. Songs from new Hindi films comprise 40 percent of the total industry revenue and the box office popularity of the film typically drives sales. In India, growing piracy and free downloads have reduced music buying. Consequently, the industry has shrunk to around INR 10 billion from around INR 13.5 billion, three years ago. The silver lining is that though music buying from legitimate sources might have reduced, the delivery of music through new formats, like FM radio, internet and mobile phones has actually increased interest in music. The future growth is likely to come from non-physical formats like digital downloads, royalty income, ringtones, etc. The rollout of additional distribution platforms like DTH, digital cable and IP-TV with the growing popularity of large format retail stores will create many more channels selling music. Based on the current trends, the industry is expected to grow only moderately to INR 13 billion in 2010. With the right technology and regulatory push to curb piracy, it has the potential of achieving a double digit growth. Radio Though radio reaches out to 99 percent of India's population and is considered to be the most cost-effective mass medium, it was only recently that private participants were allowed to enter ths space with a view to unlocking the latent commercial potential. With private FM radio channels rolling out in several cities, the long stagnant advertisement revenues from radio have doubled in two years. Compared with other nations, radio currently has a very small share of the total advertising pie in India. This is indicative of the promise it holds if the current and proposed licensees are allowed to migrate from the current stifling and unviable

The future growth of music industry will come from non-phyical formats like digital downloads, royalty income and ringtones

6 Fo c u s 2 010 : D r e a m s t o r e a l i t y

licence fee structure to a revenue sharing regime, and if foreign direct investment is allowed. Share of radio in the total advertising pie Country India Sri Lanka USA Spain World
Source: KPMG Research (In percentage)

Share of radio in advertising 2 21 13 9 8

Going forward, enabling regulation that allows radio to develop in its fledgling years and technology-driven policy initiatives like introduction of satellite radio can help it grow exponentially. Additionally, with the introduction of new genres in programming with tailored content, the number of listeners are likely to increase; and radio could provide an efficient mechanism to reach out to niche consumer segments. Emerging opportunities in the entertainment space Apart from the second wave of growth that various sectors of Indian entertainment industry are set to witness, there are emerging opportunities spanning across genres and markets. Some of the more interesting areas to look out for are: Animation: India's large pool of software talent has made it an appropriate resource base to develop animation and graphics-heavy content. Many international organisations outsource their animation requirements to leading Indian software players. As the industry grows and establishes its quality credentials, India will emerge as a serious animation hub. Outsourced production facilities: With the relentless rise in Hollywood film budgets, the pressure on cost control is also increasing. India can tap this opportunity by offering Hollywood an overall low cost structure combined with high-quality technical talent and production facilities. However, significant investment in infrastructure and equipment are required to be made before this becomes a reality. Organised home video: The Indian market for home video entertainment - VHS tape, VCD or DVD, is largely unorganised with mainly local outlets. A demand for quality and convenience remains to be exploited by large organised retail players, who could leverage economies of scale in content procurement and distribution.

7 A CII - KPMG Report

Leisure entertainment like theme parks: Till date, outdoor entertainment in India has seen limited action with few significant investments. This is changing as leading international players are exploring the Indian opportunity. The challenge here will be providing a cost-effective and profitable value proposition to the Indian consumer. Live entertainment: The live entertainment industry in India is largely unorganised with few players having the requisite critical mass. The gradual reduction of entertainment tax across states will make the sector more attractive, drawing in large corporates and multinationals. This is likely to result in increased marketing investments and creation of world-class infrastructure like convention centres. Going forward, there could be collaboration with other constituents of the entertainment industry, like films, television and music.

Reaching for the heights - A need for action A number of factors continue to hold the industry back and significant efforts still need to be undertaken
The Indian entertainment industry has matured significantly in the past decade to evolve into a truly multimedia industry. Its fundamentals indicate strong growth in the future. However a number of factors continue to hold the industry back and significant efforts still need to be undertaken. Based on a thorough understanding of the industry, the interaction between its drivers and discussions with various stakeholders, this report articulates a 'Charter for Change' by all the stakeholders that can help the industry to move into overdrive. As the stakeholders are responsible for championing growth, the report classifies these initiatives for action by two main categories of stakeholders: ! The industry players and ! The Indian government The importance of this stakeholder classification is two-fold: ! It allocates the responsibility for championing the cause and implementing the change explicitly with a particular set of stakeholders, leaving no ambiguity for responsibility for change ! It makes it extremely clear that the industry itself will need to wake up to the realities of a changing and dynamic environment The industry initiatives can be grouped under two major heads: ! Improving operational effectiveness Raising organisational efficiency through tightly-run projects Improving consumer connect Developing transparency and process-orientation ! Maximising revenue earnings Building alternative revenue streams Developing new markets through aggressive promotions Leveraging technology

8 Fo c u s 2 010 : D r e a m s t o r e a l i t y

The evolutionary process followed by different segments of the industry defines the need, nature and rationale for such changes. Consequently, the nature and scale of the issues that they face presently differ, since the stage and pace of evolution and the willingness to evolve vary widely between segments. The nature of interventions required, therefore, range from correctional measures and market development in the case of certain segments to yield improvement and institutionalisation in the case of others. The government initiatives can also be classified into two categories: Assisting structural correction of the industry Evolving a framework to regulate cross media / value chain holdings Rationalising last-mile licensing Providing a level playing field for competing value chains. ! Developing a conducive environment for growth Liberalising programming code and censorship laws Constituting a national anti-piracy force Establishing a unified regulator

!

The realisation of opportunities would depend on the aggressiveness of the industry players and sagacity of policy makers and regulators

These regulatory initiatives will acquire different levels of meaning and importance for various sectors of the entertainment industry, once again based on its position in its life cycle and the prevailing market dynamics. The Indian entertainment industry has the opportunity to enter an exciting phase of growth driven by favourable socio-economic changes and smarter distribution technologies. The realisation of such opportunities would depend on the aggressiveness of the industry players and sagacity of policy makers and regulators. The suggested stakeholder charter is intended as a strategic blueprint for the industry to undertake concerted action that could result in a stronger sustainable growth.

9 A CII - KPMG Report

Industry overview

Industry overview

The macro-economic environment
Consistent commitment to economic reform over the last decade has spurred the steady growth of the Indian economy. The emphasis on creating an enabling environment for investment and the inherent potential of the Indian economy have together pushed India's annual Gross Domestic Product (GDP) growth rate beyond 8 percent. GDP growth rate
9 8 7 6 5 4 3 2 1 0 92-93 93-94 94-95 95-96 96-97 97-98 98-99 99-00 00-01 01-02 02-03 03-04

(In percentage)

Source: Reserve Bank of India

A growing consuming class with an increased propensity to spend will drive the growth of the Indian entertainment industry

While India's GDP ranks eleventh in the world in absolute terms, it ranks among the top five economies of the world when assessed in terms of purchasing power parity. It is the growing consuming class with the proclivity to spend that will drive the growth of the Indian entertainment industry. Adding to this positive outlook is the fact that the average Indian is getting younger and is showing a greater propensity to indulge and entertain himself. Moreover, there are over 20 million Indians living abroad who are increasingly opting for India-oriented entertainment, as the availability of such content increases. Globally, a clutch of international films with Indian content, themes and performers are receiving wide visibility and acclaim. This broad acceptance of Indian entertainment is likely to give a further fillip to the expansion of this industry. To be able to appreciate the contours of this industry, it would be useful to take a closer look at the key drivers of the entertainment sector.

Regulation

Consumerism

Technology

Key drivers

Advertising spend

Pr i

cin

g

Con

tent

11 A CII - KPMG Report

Consumerism and demographics
The emergence of the Indian middle class with greater earning power and a higher disposable income is one of the key factors that will drive the growth of the Indian entertainment sector. Demographic analysis clearly shows the evidence of this growth. The consumption chart below indicates the continued progression of people into higher income and consumption segments. Rise of India’s earning and consuming classes

As the average Indian’s basic needs are met, his propensity to spend on discretionary items, such as entertainment, increases

The Classes Rich (Above USD 4600)

1994-95 1 million households

1999-00 3 million households

2005-06E 6 million households

Consuming (USD 970 - 4600) 29 million households Climbers (USD 470 - 970) 48 million households Aspirants (USD 340 - 470) 48 million households Destitutes (Less than USD 340) 32 million households
Source: NCAER

66 million households

75 million households

66 million households

78 million households

32 million households

33 million households

24 million households

17 million households

A number of economic trends are testimony to this advancement: Automobile sales are rising across the country. In two wheeler sales, India now ranks second in the world, while car sales are over 1 million per annum, growing at about 25 percent annually. ! India is the sixth largest market for mobile handsets (16 million units per annum) and is growing at 50 percent a year. ! The country is the fifth largest market for colour televisions and is growing at 25 percent per annum.

!

As the average Indian gets richer and his more compelling needs are met, his propensity to spend on discretionary items such as entertainment increases. Further, as his consumption of various goods and services rises, companies would try to reach out to him through more marketing and advertising. Higher

12 Fo c u s 2 010 : D r e a m s t o r e a l i t y

demand and an increased investment would result in an expansion of the entertainment industry in the years to come. A non-homogenous market As the Indian entertainment market grows, it is essential to recognise the heterogenous nature of the market. All too often, the specific appetite of certain segments such as the rural population, women and children, is under-estimated and their financial value proposition continues to be under-recognised. Illustratively, here are some important facts about the rural sector: There are nearly 42,000 ‘haats’ (rural supermarkets) in India. In 2002-03, LIC sold 50 percent of its policies in rural India. Small towns and villages account for over one million cellular telephone users. ! Of the 25 million households that bought television sets over the last three years, 19 million, or 77 percent were rural households. ! Of the 20 million who have signed up for a popular horizontal portal, ecommerce and free mail service, 60 percent are from small towns. Of the 100,000 persons that have transacted on its shopping site, 50 percent are from small towns.

! ! !

Companies and businesses that have managed to differentially cater to the varying segments of the population have benefitted in the long run

Companies and businesses that have managed to differentially cater to the varying segments of Indian population have benefited. As a corollary, the entertainment sector too has begun to witness the advent of a broader set of offerings which are aimed for specific segments: e.g. television channels for children. On the other hand, the ‘children's films’ genre, for instance, has yet to grow and mature in India. There is a case for a proactive and sustained targeting of specific, niche segments of the market. In fact, given the size and potential of India's niche segments, niche may be a word which is likely to be replaced soon. Advertising spend As per industry estimates, the total advertising spend in India in 2004 was approximately INR 118 billion, a growth of 13.4 percent over the last year. However, India continues to have a low 'advertising spend to GDP' ratios compared to other economies, underscoring the untapped potential.

13 A CII - KPMG Report

Relative advertising spend for various countries GDP Australia China Hong Kong India Malaysia Singapore South Korea USA France Germany United Kingdom
Source: KPMG Research

(USD billion)

Total ad spend 4 6 4 2 1 1 4 134 1 16 14

Ad spend to GDP 1.0% 0.6% 2.1% 0.5% 1.0% 0.9% 0.8% 1.3% 0.8% 0.8% 0.9%

412 904 164 485 88 86 477 10,384 132 1,984 1,560

India continues to have one of the lowest ad spend to GDP ratios, underscoring its untapped potential

In 2004, the advertising spend for India stood at 0.50 percent of the GDP up from , 0.48 percent the previous year. This is expected to increase significantly due to rising consumerism and growing interest from global brands attracted by this huge and expanding market. Total advertising spend and GDP
0.53 (In percentage) 0.53 0.54

0.52 0.51 0.50 0.48

0.52

2003

2004

2005E

2006E

2007E

2008E

2009E

2010E

Source: KPMG Research

Given the increasing number of media channels that consumers are exposed to, brands will have to advertise more frequently and across more channels to generate brand recall. As television channels have multiplied and the content available has become more diverse in the last decade, their viewership has

14 Fo c u s 2 010 : D r e a m s t o r e a l i t y

increased, niche channels have emerged targeting specific demographic segments and the cost of advertising on television has reduced.

Number of brands advertised on television
10914

12759

8994 7875 6830 8041 7673

3906

3973

4496

4774

1994

1995

1996

1997

1997

1999

2000

2001

2002

2003

2004

Source: TAM Adex

While the broadcasters can dwell on this shared optimism, they must also recognise that advertising budgets are very sensitive to economic downturns. Advertising budgets are not only easily brought down, but the productivity of such expenses is also challenged. Companies are increasingly demanding their advertising agencies to link their fees to performance indicators such as sales increments. With increasing access to state-of-the-art technologies, addressability issues are being put to test, thereby exposing the limitations of current media research findings and measuring the true efficacy of media.

Content
Any new media market attracts an initial swell of content players. Such a scenario invariably leads to a stage where the smaller players find it unviable to continue and are eventually weeded out. After the initial shakeout, the industry consolidates and grows until it reaches a stage of maturity. Thereafter, in a stable environment, it is the quality of content, with an accentuation on innovation and creativity that drives the industry. In the television medium, the different genres are in different stages of their life cycle. Several channels have emerged recently in the space of children's entertainment and education. The news channels are in the next stage of evolution with an influx of players in the last two years, but market limitations and more transparent viewership patterns will lead to an inevitable shakeout. Up the maturity curve is the mass entertainment genre, which has established itself with 3-4 major players and the quality of programming (including innovative formats)

15 A CII - KPMG Report

determining their fortunes. With the introduction of newer distribution channels, such as DTH and IP-TV, the demand for premium/ alternate content will increase and this is expected to spur the growth of new genres such as education, teenage entertainment, mature content (subject to liberalisation of the programming code), etc.

The number of films produced annually has been declining as producers are increasingly valuing quality over quantity

With a legacy of over 50 years and 1000 films a year, the Indian film industry has reached a phase where the focus is on the quality of content. The increase in the number of films made has not seen a proportionate increase in their commercial success. In fact, there is now a decline in the number of films being produced annually and this trend is expected to continue as production houses now value quality over quantity. To combat the pressures of television programming, the Indian film industry, like its western counterpart, is being forced to attract the audiences through technological advancements like advanced visual effects, special effects, sound sync, animation and sheer star power. In the late 80s, the Indian music industry saw an end of the existing duopoly with several new players emerging. A spurt in content availability and new genres such as Indi-pop drove the rise in music consumption. However, technology has facilitated easy access to music through illegal downloads, pirated CDs and tapes, music television channels and radio FM channels. With little value realisation by music companies and minimal regulatory support, music companies are struggling for survival, as a result of which there has been very little experimentation in content. This situation could change with the increasing popularity of non-film music in India and globally, signs of which are being observed.

Pricing
India has the potential of becoming an attractive destination for international broadcasters and production houses, despite its low per capita income, as the larger population base makes a viable case for high volume consumption. However, while prices are significantly lower in India than in other parts of the world, access to volumes is restricted by fragmentation in the distribution chain. Subscriber declaration by cable distributors to broadcasters in India is extremely low resulting in very inequitable distribution of subscription revenues. According to an independent research, the operator-broadcaster split of subscriber revenue in India has possibly the worst skew in the world.

16 Fo c u s 2 010 : D r e a m s t o r e a l i t y

Distribution of revenues Market United States United Kingdom Australia Japan India
Source: Media Partners Asia

(In percentage)

Operator 60 63 65 65 83

Broadcaster 40 37 35 35 17

Such low levels of declarations have been attributed to the lack of transparency in the last mile distribution end of the business, which is controlled by the 30,000 odd local cable operators and independent cable operators across India.

A price differentiation strategy needs to be adopted for media products with a view to maximise revenues

Similarly, in films, there is low transparency of actual gate receipts, outside of multiplexes and few organised theatre halls. This is particularly true in smaller towns where receipts are not accounted for. According to industry experts, the total revenues lost to the film industry due to unaccounted receipts coupled with video piracy range between INR 15 - 20 billion annually. Film piracy through illegal DVD and VCD releases and the open screening of new releases by cable channels, is forcing film producers to pre-sell the television and video rights, before the release of the film even if it means an erosion of theatrical ticket sales. Piracy of music through illegal downloads, unauthorised CDs and remixed versions of popular music is taking its toll on music recording companies. The paltry royalty sums, if any, paid by music television channels and FM radio only adds to the difficulties faced by these companies. Differential pricing India has seen improved income levels across a large section of its populace, with a significant number of people willing to spend on entertainment. However, a substantial difference in the affordability levels between various sections of society continues to exist. As a result, a price differentiation strategy needs to be adopted for media products, with a view to maximise revenues. Establishment of zones and creating a zonal pricing structure for different cable subscription packages could be an effective pricing strategy. Through a differential pricing system, broadcasters will be able to earn more from higher income groups through compelling content packages, and the same can be used to subsidise subscription fees of lower income groups with minimal content packages. This will help increase the size of subscribers thereby resulting in increased revenues. In the film sector, price differentials already exist both at the point of distribution (territories for distribution) as well at the point of exhibition (theatre hall tickets).

17 A CII - KPMG Report

The differential pricing mechanism can be examined more closely and transparently to determine price levels that will draw larger audiences to films. In the music sector, pricing CDs at a premium end and cassettes at the low end may help music companies compete with the prices of pirated cassettes. A marginal drop in CD sales may be offset by increased cassette sales. At an overall level, difference pricing should be driven by the objective of revenue optimisation. In all these sectors, differential pricing would require a thorough understanding of the demand for media and price sensitivities of various segments, gained through research at the ground level.

Regulation Further growth is difficult without facilitative regulation
Regulations give form and direction to the free play of market forces, according to the social and economic objectives of the nation. Therefore, regulatory interventions are typically driven by a vision for the future, which can be shared by all stakeholders. The need to have such a vision is very important now in India, as the entertainment industry prepares for the introduction of several new technologies and business models that have the potential to revolutionise the dynamics of value creation in this space. The guiding principles of such a vision should include: ! Ensuring consumer choice and protection ! Achieving sustainable growth ! Ensuring a level playing field ! Providing equitable distribution of value ! Adoption of new technology In most media markets, the consultative process leading to formulating regulations, has served as defining steps for charting the growth path. In India, most segments of the industry have grown to their present structure and size in a largely unregulated environment. Such growth has resulted in the creation of lastmile monopolies in cable television, established through informal agreement among the unorganised last-mile operators. However, further growth will be extremely difficult without facilitative regulation to ensure structural and behaviourial changes amongst the industry players. Such changes are necessitated by the following ground realities: ! Lack of consumer choice in several segments of the industry value chain, most notably in the last-mile of cable distribution ! Piracy-related revenue and tax leakages across all segments of the entertainment industry ! The need to establish a level playing field for new distribution platforms like Direct To Home (DTH) broadcasting and digital film ! The need to protect sovereign interests like national security.

18 Fo c u s 2 010 : D r e a m s t o r e a l i t y

Revenues losses due to leakages and piracy A substantial portion of the industry revenues is not captured at the last mile, through leakages and piracy. This does not even include unaccounted for revenues, the impact of which cannot be quantified, arising from: ! live entertainment events hosted by the unorganised sector ! black market sale of film tickets ! end-user revenues from pirated home video rentals ! unaccounted income from marketing of pirated home videos overseas Split of industry revenues
(INR billion) 126 120 101 95

Any regulatory intervention should be supported by a comprehensive framework and effective Implementation

83 61 135 2003 66 156 2004 77 185 225 276 330 395

462

2005E

2006E

Revenues to rightful IPR holders Source: KPMG Research

2007E 2008E 2009E Leakages at last mile, piracy

2010E

Going forward, it is expected that the ratio of illegitimate revenues to total revenues will go down to less than 25 percent from the current 30 percent, though in absolute terms, it will continue to increase. It is important to note that any regulatory intervention should be supported by a comprehensive framework for industry evolution, and followed up by efficacious implementation. Otherwise such interventions can only lead to chaos and uncertainty as demonstrated by the aborted attempt to introduce Conditional Access Systems (CAS) for television in 2003 - 04.

Technology
Technology has played a key role in influencing the entertainment industry, by redefining its products, cost structure and distribution. Empirical evidence suggests that technological innovations create discontinuities in the industry, with the initial dissonance evolving into eventual realignment to effectively create and realise value from it. Content creation has benefitted significantly from technological breakthroughs, especially in the areas of sound, visual effects and animation. This has benefitted audiences by providing them with a high-tech content viewing/ listening experience. The growing adoption of digital television around the world has forced leading global broadcasting companies to put development and use of new

19 A CII - KPMG Report

technologies at the centre of their core strategies. For a content distributor, future will come by specialised offerings, such as high-resolution pictures, high-speed Internet access, online games and information, pay-per-view electronic commerce services and voice telephony. New technologies, such as satellite radio, are characterised by their ability to reach out to larger audiences than ever before, reducing the cost per contact. While these technologies typically require high initial capital expenditure, the same may be set off by incremental volume gains through increased reach. It is this trade off that needs to be evaluated before an investment is made in any new technology. If one were to look at emerging trends in technology and their impact on entertainment consumption, the most significant trends are seen in the areas of media distribution, though some may be regarded as product innovations. Some such technology trends are: Digital distribution Digital distribution of content in television and film will help plug the leakage of last-mile revenues due to the under-declaration among cable operators and film theatre owners. The Personal Video Recorder The Personal Video Recorder (PVR) expands users' ability to decide when and how they will watch programmes. It allows the viewer to pause a television programme when required, and provides the luxury of skipping commercials entirely. The PVR allows viewers to create their own programming schedule to fit their time requirements. Technologies such as this will lead to more audience 'fragmentation'. In such a scenario, it is the programming content that will ultimately drive the industry. High Definition Television As digital video signals begin to appear, High-Definition Television (HDTV) sets are getting the most attention. Digitalisation allows HDTV broadcast and transmission with incredibly sharp and detailed pictures. However, at present, current-generation television sales have not demonstrated a downwards trend. In fact, consumers continue to pay more for large screen models with present-day technology. Even in the US, viewers are not expected to switch to HDTV soon, due to the very high price differential. Interactive services Digital broadcasters are working on ways to include interactive services into their over-the-air digital video transmissions, primarily as video signal enhancements. Cable and satellite television companies are also moving towards interactive

20 Fo c u s 2 010 : D r e a m s t o r e a l i t y

services that vary from simple video-on-demand to more complex internet access products. Such interactive technologies are expected to be platform-neutral, providing service providers with new products and services to offer. Fixed broadband wireless systems Fixed broadband wireless systems are another way to bring interactive digital services to consumers. The wireless debate currently centres on the use of pointto-point or point-to-multipoint technology. Point-to-point, a technology already entrenched in some regions of Asia, beams data over the air from a transmitter to one receiver. It is widely used for business-to-business communication. Point-tomultipoint, still an embryonic technology, operates like satellite distribution, beaming data to as many reception antennae as the signal can reach. Internet radio stations As internet connections have become faster and software for cyberspace has become more sophisticated, audio aficionados have benefitted significantly. Free, downloadable audio players for computers have made listening to audio via the computer commonplace. Traditional over-the-air radio stations have begun to take advantage of the new software, as well as the internet's ability to deliver graphics, data and video at the same time, to enhance their audiences' listening experience. The internet has also extended the reach of radio stations beyond their own markets, which was determined by the strength of their broadcast signals, to the entire world. Downloadable digital audio As technology has enabled internet users to download digital audio tracks, online music download sites have rapidly sprung up, presenting a challenge to existing radio stations. Marquee artists are opting more often to debut new albums or tracks online rather than through traditional radio stations or video music channels. Recording artists and record labels are also moving toward offering their music online. For both artists and producers, digital distribution is a way to bypass radio stations and, more recently, video music channels. Satellite radio Satellite radio is a digital radio broadcast system that uses direct-to-home satellite technology to offer listeners up to 100 channels of commercial-free audio music, news and entertainment. However, not all the new technologies listed above will succeed. In order to succeed and become a mass phenomenon, they will have to demonstrate that they are adding value for the consumers and the providers.

21 A CII - KPMG Report

The increasing penetration of technology is a major force shaping the entertainment landscape today. It will completely revolutionise content delivery as well as the viewership experience. Once these technological changes attain a critical mass, they can have a shattering effect on the existing industry equilibrium. Due to the imminent impact of these and other technologies, the successful media and entertainment companies will be the ones that are prepared for their disruptive effects on their business models and the industry structure.

The future of entertainment will be governed by the interplay of consumerism, advertising spend, content, pricing, technology and regulation

The future of the entertainment industry will be a function of the interplay of each of the above factors, namely consumerism, advertising spend, content, pricing, technology and regulation. Estimating the industry size over the next 5-10 years, would require a crystal ball, given the number of variables involved. However based on current trends, the industry is expected to breach the INR 500 billion barrier in five years. For the Indian entertainment industry, this is the moment of truth. Beyond the linear growth projections, there is a bigger story waiting to happen if a concerted and accelerated effort is made now. The industry is entering a second phase of growth, which will have technology as one of the key drivers. This growth phase will be the consequence of a combination of quality infrastructure and the gradual penetration of digital connectivity, which will redefine the way entertainment content is delivered and consumed. This phase of growth needs to be supported by an enabling tax and regulatory infrastructure, as the government begins to understand the long term potential of this sector, and starts according it the priority status it deserves.

For the purpose of this report, we have limited our detailed analysis to the four traditional sectors – television, film, music and radio, which together account for 96 percent of the entertainment industry revenues. The balance 4 percent is made up of revenues from live entertainment (currently a fragmented segment with few small players) and IT-enabled businesses like interactive game development and visual effects (engaged in outsourcing work primarily in areas of 2D animation, 3D graphics, post-production, etc.). These sectors are now taking off and could become significant drivers of growth in the future years.

22 Fo c u s 2 010 : D r e a m s t o r e a l i t y

Television
Box Populi

Television
Box Populi
The significant growth in the entertainment industry in the last decade of the twentieth century was largely triggered by the coming of age of television. For most of the last fifty years, it was a monopoly of the public sector broadcaster. However, the nineties inspired private sector enterprise across the television value chain. Since then, the rapid growth of the television industry has made it the most significant component, in value terms, of the entertainment sector. With increased hours of mass entertainment programming during prime time and better coverage of popular events, it has seen an explosive growth in consumer mindshare. Its status as the preferred mode of entertainment of the people is obvious from the fact that it now contributes more than 60 percent of the entertainment industry's revenues.

Today and tomorrow
Out of its total current revenues of INR 139 billion, subscription contributed 53 percent, i.e. INR 73 billion. That is one-and-a-half times the advertising revenues, which are at INR 49 billion. However, due to the large skew in the 'last mile', as discussed later, the broadcasters' share of pay revenues amount to only around 17 percent, or INR 12.5 billion. Other revenues, which include international distribution right, amount to INR 14 billion.

The growth of the Indian Television industry is decelerating and a number of new initiatives will be required to power a fresh round of expansion

As any industry matures, inevitably its growth starts slowing down. The Indian television industry too is following this dictum, seeing its growth decelerating from over 20 percent, till a few years ago, to less than 15 percent currently. However, it would be completely wrong to say that television has become a mature, sunset industry. While the current sets of growth drivers are gradually reaching saturation, there are a number of new initiatives which can power a fresh round of expansion. Some of these key factors are: ! Introduction of addressability: In spite of apprehensions, public debate and litigation, CAS was eventually launched in Chennai, providing valuable lessons for future attempts to bring in addressability across the country, though the impact of the same is yet limited; ! Alternative distribution platforms: DTH broadcasting has introduced the power of choice to the consumer. The last mile distribution segment is expected to see further action with the entry of new DTH players, IP-TV, broadcasting services on DSL technologies, etc; ! New players in niche genres offering more content choice to viewers: Niche genres have significantly enhanced their proposition over the last few years with the entry of several new channels. While, news and children's programming segments accounted for most of the new entrants, other niche genres like religion and health also experienced the launch of several new channels. ! Meaningful regulatory intervention: The government needs to create a conducive regulatory environment for rapid but stable growth by supporting

23 A CII - KPMG Report

initiatives like digitalisation of cable television, regulatory policy for DTH players, etc. These trends have the potential to redefine the landscape of the broadcasting industry in the country. The significance of such a redefinition should be understood in the context of the overall evolution of the broadcasting and distribution market in India. The high growth that took place in a relative regulatory vacuum in the last decade created a distortion in the distribution of value amongst industry players. This has fostered an opaque transactional environment, resulting in: ! Lack of consumer choice for last-mile access; ! Under declaration of subscriber numbers resulting in revenue loss for broadcasters and tax loss for the government; ! Absence of uniform pricing with prices varying across geographies and consumer segments; ! Lack of level playing field for alternative platforms like DTH, IP-TV, etc resulting from 'unreal' cost structures of incumbent access providers and non-uniform licensing conditions. A combination of purposeful regulatory interventions and technology adoptions can go a long way in correcting such structural imperfections. The initiatives being undertaken and being proposed to be undertaken, to correct these structural imperfections, will drive the second wave of growth of the industry. Television revenues
Subscription Advertisement Others
39 78 35 30 68 24 20 17 12 5 35 37 60 65 73 39 14 43 49 163 136 90 107 54 58 213 250 63 73

(INR billion)
43

Source: KPMG Research

In this new phase of growth, the sector is expected to grow at an annual rate of almost 18 percent to reach INR 371 billion by 2010; with subscription revenues forming the lion's share at INR 250 billion. It is also expected that the broadcasters will get a fairer share of the subscription pie. Advertising revenue is

24 Fo c u s 2 010 : D r e a m s t o r e a l i t y

expected to grow at a modest rate of 8 percent to reach INR 78 billion in six years. The true potential of television advertising however is much higher. It could touch INR 150 billion by 2010, depending on the following factors: ! Speed and effectiveness of the roll-out of the broadcasting sector reforms; ! The quantum of investments made by various players over the next few years on rolling out digital platforms; and ! The entry of telecom companies into the distribution sector.

The ensuing sections discuss the various drivers of growth that could take television to the next phase of evolution. Advertising As per industry estimates, the total advertisement spend in India last year was approximately INR 118 billion. However, at 0.50 percent, India continues to have one of the lowest 'Advertising spend to GDP' ratios amongst peer economies. This underscores the significant potential India has yet to achieve vis-à-vis advertising budgets. However, this is set to change. A growing middle-class will spur the increasing tide of consumerism and a growing lineup of global brands will continue to be attracted by this expanding market. Consequently it is expected that the 'ad spend to GDP' ratio will increase steadily over the next four years. Shift in advertising over last three years Medium Spend Television Press Radio Cinema Out-of-home Internet 39.1 44.0 1.5 3.3 6.9 0.3 2002 Share of total spend 41.1% 46.3% 1.6% 3.5% 7 .3% 0.3% Spend 43.0 47 .5 1.8 3.6 7 .9 0.4 104.2 2003 Share of total spend 41.3% 45.6% 1.7% 3.4% 7 .6% 0.4% Spend 48.6 54.5 2.2 3.75 8.5 0.6 118.2 2004 Share of total spend 41.1% 46.1% 1.9% 3.2% 7 .2% 0.5%
(INR billion)

Ad Industry Size
Source: TAM Adex

95.1

The above table indicates the allocation and growth of the advertising spends in India across various media. Print is still the largest recipient of advertising revenues, accounting for 46 percent of the advertising pie and, after a temporary

25 A CII - KPMG Report

slump, is currently growing at a rate faster than that of television. The share of television seems to have stabilised at around 41 percent, after increasing consistently for about 6-8 years. The overall media mix in India mirrors that in most advanced countries, where television and print jostle for dominance in the space of advertising expenditure. Advertising pattern in developed countries
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% US Japan Germany Source: World Association of Newspapers UK France Others Radio Magazines Television Newspaper

For the next three years, print and television will command equal share of the advertising market

In the Indian context, there is further potential for television to increase its ad share. It is expected that over the next three years, both print and television will each command around 43 percent of the market, with the balance 14 percent being split between radio, outdoors and others. Who is advertising Until recently, FMCG companies and consumer durable marketers were the main advertisers on TV channels. Today, the advertiser segment has expanded to include youth and teen products, financial products and services, educational products and services, corporate image building, telecommunications, computing, vehicles, and mobile telephony, to name a few. It is interesting to note that according to TAM Media Research, on-air promotions that are carried out by the channels themselves account for almost 40 percent of the total airtime, with a significant portion of them being shown on prime time. Going forward, with capacity utilisation of airtime improving, the opportunity cost of self-advertising will increase and it is expected to decline.

26 Fo c u s 2 010 : D r e a m s t o r e a l i t y

Top ten spenders on television in 2004
2500

(INR Million)

2000

1500

1000

500

0

S

m ha

os po

ile To

s s rs s es te ep d) ids ele as ice te on Je he rv ra iqu hp ph s/ se /l ot (ae -w ar ar l o er C To ne ks llu b Tw ho wd rin Ce e/ po ll p at td of or Ce ng S rp hi as Co W ps oa ts nd ra im e ag

Source: TAM Adex

Mass entertainment channels are slowly ceding viewership to niche channels

Where does the money go Mass entertainment continues to attract maximum ad-spends, but its share is being gradually ceded to niche channels. The major beneficiaries have been News, Regional and Sports channels. Share of ad revenues among television genres
100%

Others
80%

Music Sports

60%

English Entertainment Films News

40%

20%

Regional Mass

0%

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Source: TAM Adex

Some of the key aspects of television advertising in India are: ! Mass entertainment channels have the largest loyal advertising base. Around 17 -18 of the top 25 advertisers advertise only on mass entertainment channels. ! Consumer goods advertise mostly on mass entertainment, films and Hindi news. ! Luxury and lifestyle products are advertised across all major genres. ! Financial products like banking and insurance advertise primarily on English news and business channels.

27 A CII - KPMG Report

!

Organised retail, which is one of the larger advertising segments in developed economies like the US, has yet to impact the Indian advertising industry in a significant way. As the retail industry in India develops and begins to realise its potential in the near future, it is expected to follow its global counterparts and become a major advertiser on television.

Is advertising volume reaching saturation point? An analysis of television programming indicates that advertising in India, on an average, amounts to 192 seconds (3.2 minutes) per hour. It is still significantly lower than several other countries. Of course, in the case of prime time for mass entertainment channels, this number could go as high as 600 seconds (10 minutes). International norms on ad clutter The norms and standards for the amount of advertising that can be shown on television vary from country to country. TAM Media Research has compiled an illustrative list of standards, some of which are mentioned below: ! Australia Broadcasting Authority recommends 10 minutes of advertising per hour of children's programming and up to 15 minutes for non-prime programmes. ! Philippines stipulates a commercial load for television in Metro Manila to 18 minutes per hour, while for provincial television stations, commercial load permissible is a maximum of 20 minutes per programme hour. ! In China, a maximum of 9 minutes of ad time per hour of programming is allowed. ! Canada recommends 8 minutes of advertising per hour for children's programming and 12 minutes per hour for other programming. ! The average for other Asian countries is around 8 minutes of ad time and 2 minutes of programme promotion time, i.e. a total of 10 minutes of break duration per hour. Pure advertising time for every hour of programming in India
219 208

With addressability, the effectiveness of ad spend will become more transparent

Average Secs/Hour

192

102

DD
Source: TAM Media Research

FTA

PAY

All Channels

Type of Channel

28 Fo c u s 2 010 : D r e a m s t o r e a l i t y

With advances in the technology platforms available and the introduction of addressability the effectiveness of ad-spend will be more transparent. This will further redefine ad spend patterns among genres, channels and advertising segments. Addressability will give additional tools to media planners, leading to significant improvements in media planning. This, in turn, is likely to cause radical shifts in media buying on television, which presently is largely a function of TRPs. Channels that succeed in convincing buyers of a better value for money by clearly identifying the right target group will be able to charge a significant premium to the market. Effectiveness of advertising
Television viewing (hours /week) Television advertisements Over-deliveries & typically bombard certain over-exposure audience with over exposure while completely skirting others Sub-optimal deliveries
50

This is what the audience sees at a superficial level
85 60

20

Under-deliveries & under exposure

Total TG

Heavy

Medium

Light

Source: TAM Survey over a sample Target Group

There is a point of view that in a more transparent market, with the introduction of addressability, the duration of advertising will fall even as subscription revenues increase. However, this may not necessarily be the case. As has been seen in the past, the more popular channels have been able to garner almost the same quantity of advertisements (in volume terms) while simultaneously charging a subscription fee, compared to some of their free-to-air (FTA) counterparts. This situation is expected to continue and, barring short term dips, the average ad duration per channel is expected to sustain itself and, in fact, increase in the medium term as a result of an increase in non-prime time advertising. The fear that compulsory addressability could lead to a flight of advertisers to FTA channels may not be entirely justified; flagship channels, whether FTA or pay, will continue to garner premium advertisements. Subscription revenue Television reaches over 40 percent of the billion people in India, commands the highest mindshare among consumers and cuts across rural-urban and class divides. Currently, 91 million households own a television, out of which 48 million households are cable and satellite households, the state-owned terrestrial broadcaster, Prasar Bharti, accounting for the balance 43 million. Though the cable TV penetration in India continues to grow at a brisk pace, the untapped potential is still very significant. Over the next few years, cable and satellite, along with emerging delivery platforms like DTH and IP-TV are expected to close in on the

29 A CII - KPMG Report

gap further. It is expected that television connectivity in India can reach 134 million households by 2010, of which as many as 85 million, or 63.5 percent could be connected through cable and satellite, DTH, IP-TV or other non-terrestrial broadcast platforms. Cable television Penetration
90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

a e n es re or pa pin ap Ko Ja ilip th ing u S Ph So Source: www.worldscreen.com a ali str Au ina Ch

a di In

an iw Ta

A US

na Ca

da

m Gr

y an

The wide disparity in ARPUs is not commensurate with the quality or offering or service

Along with a growth in subscriber volumes, the cable subscription charges (ARPU per month) too is expected to grow at a pace faster than that of per capita GDP . At around INR 150, India has one of the lowest ARPUs in the world. In fact, the ARPU for cable television has actually fallen in real terms, growing at sub-inflation rates over the past seven years. An average urban Indian cable connected household receive as many as 100 or more channels for which it pays anywhere between INR 100 to 300 per month, while in certain rural and semi-urban areas, this number could be as low as INR 60 per month. The wide disparity in ARPUs between locations and, often, between various localities within the same city, is not proportionate to the quality of content or service offering by the distributor but has been guided mostly by the relative bargaining power of the cable operator with both the consumer and the broadcaster. Cable subscription rates have fallen in real terms
155 150 145 140 135 130 125 120 115 110 105 100
1997 1998 1999 2000 2001 2002 2003 2004

Consumer Price Index

Cable Prices

Source: Industry

30 Fo c u s 2 010 : D r e a m s t o r e a l i t y

Global Cable ARPUs
60 50 40 30 20 10 0
K Ph ore ilip a pi ne s Ta iw an M ala ys H ia on g Ko ng Si ng ap or e Th ai la nd In do ne sia Ja pa n U K Ca na da Au st ra N lia ew Ze al an d

(USD/ month)

Source: worldscreen.com

Apart from the low subscription fees, subscriber declaration by cable distributors to broadcasters in India is one of the lowest in the world, resulting in a grossly inequitable distribution of subscription revenues. According to an independent research, operator-broadcaster split in India of subscriber revenue has the worst skew in the world. It is estimated that the LCO corners 79 percent of the total subscription revenues of the industry and leaves just about 17 percent for the broadcaster. The residual 4 percent is retained by the MSO who downlinks the broadcasters' signals and transmits them through a combination of fibre and coaxial cable network to consumers' homes via the LCO, who, almost in all cases, owns the coveted 'last mile'. The low levels of declarations are attributed to the lack of transparency at the last mile distribution end of the business, owned by the 30,000 odd LCOs across India. This combination of low subscription fees (ARPUs) and chronic under-declaration of the subscriber base by the LCOs has significantly constrained the growth in the subscription revenues for the broadcasters. Attempts at increasing transparency have been made through a combination of technology and regulations. In 2003, an attempt was made to introduce CAS. As per CAS, the Indian home would receive two sets of channels: ! FTA channels - a basic bouquet of channels for which the customer would pay a flat amount, the pricing for which may be regulated by the Government as required; ! Pay channels - for which the customer would pay an amount fixed by the channel/bouquet owner. All pay channels would be routed through an addressable system.

Ch in a

In di a

U SA

31 A CII - KPMG Report

However, the implementation of CAS did not take-off due to lack of uniform acceptance by all segments of the television value chain i.e. Broadcasters, MSOs, LCOs, alternate platform providers and end consumers. The CAS saga Stakeholder What they thought Most pay broadcasters wanted to avoid/ delay addressability, as they feared a revenue fall in the shortmedium term. Genuinely wanted early implementation of CAS as such early mover advantage in seeding the Consumer Premises Equipment can reduce strategic vulnerability. Positions shifted between pro and anti addressability and finally settled for addressability as the threat perception of alternative platforms was enhanced. What they said Supported addressability on the grounds of increased transparency and more equitable share of distribution revenues.

Broadcaster

MSO

Supported addressability.

LCO

Conditional support for addressability, bargain for higher FTA charges.

Consumers

Consumer did not want addressability, as it was perceived to be a mechanism for charging more and delivering less.

Confused positions arising from the lack of information.

Alternate platform providers

Wanted addressability as it ensures Highlighted implementation a level playing field. But wanted to delay the implementation depending issues whilst supporting addressability. on the level of preparedness to (DTH/ IP-TV) launch services.

In the midst of the debate, CAS was finally implemented in Chennai and in some parts of Delhi. While there were few takers for CAS in Chennai, many cable operators in South Delhi did not even supply their subscribers with the required STBs. To resolve the potential deadlock, the Government of India has brought all broadcasting platforms under the regulatory ambit of the TRAI and CAS has been de-notified, pending a clearer regulatory direction from TRAI.

32 Fo c u s 2 010 : D r e a m s t o r e a l i t y

Making sense out of the chaos In a consumer economy, consumer interests should ideally drive the market structure and regulations. Today the consumer has little real choice regarding platforms or operators in the monopolistic last mile environment, created through informal agreements amongst cable operators. Unwillingness to proactively intervene to correct such market distortions amounts to protecting an informal monopoly, denying consumers their rightful operator and technology choices and constraining the growth and employment potential of the industry in the long term. Therefore, appropriate regulator intervention should focus on evolving an industry structure and a regulatory environment that facilitates the realisation of industry potential through correction of the following anomalies: ! Lack of consumer choice in the last mile. ! Under-declaration by last mile operators leading to: Subscription revenues falling out of tax net; Broadcasters being denied their share of the subscription revenues. Lack of level playing field for alternative platforms like DTH, IP-TV, etc; Lack of investments in distribution infrastructure upgrade and expansion; Lack of visibility of consumer viewing patterns resulting in inefficient media spends. Putting the issues in perspective It is unreasonable to expect the 30,000 strong LCO & ICO fraternity (which employs over 500,000 people) to either shut down or fall in line overnight. On an as-is basis, it is unlikely that the declaration percentage will improve significantly from the current level of 23-25 percent to more than 30-35 percent, unless such a move to increase declaration is accompanied by either a steep increase in subscription fee or a significant reduction in channel pay-outs, or a combination of both. This would necessitate all existing stakeholders, viz the LCOs, MSOs and broadcasters to act in unison and look at partnering solutions for the last mile. In the interim period when the market moves towards a correction in the imbalance, the incremental gains to the various stakeholders, including consumers will be disproportionate. However, if each stakeholder insists on maximising his own gain in the short term, it would only lead to a lose-lose situation in the long term. An effort in trying to correct the skew overnight may result in 'no correction' at all. Significant changes in the way broadcasting content is packaged and distributed currently can be initiated through the following measures: ! Introduction of voluntary addressability, enabling the distributors to select their business model. ! Tiering of channels: Distributors should offer multiple tiers of programming with the basic tier offering popular general entertainment and news channels like Star Plus, Zee, Sony, NDTV, CNN, BBC etc, along with FTA channels. The basic tier should be available to all consumers. Premium programming tiers containing sports, lifestyle and other niche segments can be made available in an addressable environment.

The existing players, viz LCOs, MSOs and broadcasters need to look at partnering solutions for the last mile

33 A CII - KPMG Report

! !

Government could cap the basic tier pricing till the market matures. The state of effective competition can be established by the extent of consumer choice available. While, within the price band, the pricing needs to be left to the broadcasters and market forces, the fundamental decision to include a channel in the FTA basic tier package could be mildly regulated, till the market matures. Viewership-based formula could be worked out and though such formulae are not foolproof, it could serve as a basic guideline to ensure that the average consumer is not deprived of popular content.

However, in the long run, there should be no ambiguity about the fact that better offering is linked to higher price; adequate consumer awareness campaigns may need to be undertaken by both the regulator and the broadcaster-distributors to ensure that pay revenues are eventually aligned with service. This situation, in a way, is akin to a toll road or an urban utility project, where privatisation of infrastructure eventually results in the user paying for a similar facility which he was hitherto enjoying for 'free'. To ensure smooth implementation, government could consider mandatory licensing for cable operators. All registered cable operators should be given a reasonable deadline to switch over to such a licensing regime without any licensing fee. The licensing authority could be given powers to conduct surprise audits to establish the declared subscriber numbers and to invoke penal provisions, in case of any material discrepancy. Simulated revenue flow for a large LCO Current Scenario
Number of subscribers declared undeclared Subscription fee (INR/sub/month) Split (for declared subscribers) Broadcasters LCO MSO 1500 375 1125 150 75 53 22 50% 35% 15%

Optimised Scenario
1500 1500 0 190 35 145 10 18% 76% 5%

Increase/month

25% 75%

100% 0% 40 27%

What the subscribers pay INR (LCO's gross revenues) Split (for total revenues) Broadcaster revenues MSO revenues LCO revenues Estimated tax loss
Source: Industry

225000

285000

25%

28000 8000 189000 45000

12% 4% 84%

53000 15000 217000 0

16% 4% 80%

25000 89% 7000 88% 28000 15% 45000

34 Fo c u s 2 010 : D r e a m s t o r e a l i t y

A 100%-declaration is possible, through only a moderate increase in rates, through partnering solutions

In the above simulation, it can be seen that 100 percent declaration can be brought about through a moderate increase in subscription rates, and an increase in inflows for all the players, resulting in a long term win-win: ! Consumers’ outgo goes up by 27 percent. This is not a very high price to pay, considering that the same consumer was: Paying almost the same amount, in real terms (after factoring in inflation) around 10 years ago for only 4-5 channels; Bracing himself for a much higher increase in rates, if mandatory CAS were to be implemented. ! Broadcasters' revenues will go up by almost 90 percent, significantly higher than what they can expect through organic growth in pay channel rates; ! LCO revenues will increase by 15 percent and therefore they have the incentive to declare their subscriber base fully and simultaneously secure their long term sustainability. One time Amnesty Schemes and deadlines for disclosure can be worked out as a further carrot and stick measure. ! MSOs revenues too will virtually double. 100 percent declaration will ensure that the consumer is now 'owned' by the MSO and this would throw open several possibilities of increasing ARPUs through value-added services and premium content, which can be pushed through more rapidly. As can be seen, the biggest beneficiary would be the government, since the taxes that are not paid due to a lack of subscriber declaration can be brought back into the system. The funds thus garnered could be used to form a corpus for development and reforms in the distribution sector. Content Broadcasters are beginning to recognise that audiences cannot be taken for granted. An increase in the number of channels, coupled with a surfeit of “me too” content on channels within the same niche has led to fragmentation in viewership patterns. Advertisers too, now, have the option of lower priced niche channels to reach a more focussed target group, and their advertising spend reflects this. An increasingly sophisticated Indian audience, now exposed to international fare, benchmarks television entertainment with the best when it comes to quality and treatment. Capturing the mood of the viewer, sports and Hindi film channels have gained viewership, but have had to spend heavily in order to acquire prime properties. News channels registered a 100 percent increase in viewership over the last three years, as have English entertainment stations and channels for children. The success of quality programming in certain segments indicates the potential for entertainment channels to move up the content value chain.

35 A CII - KPMG Report

Genrewise Viewership Share in 2004
8 5 2 4

(In percentage)

3

1 40

38 Mass Entertainment Hindi Film Channels Infotainment / Kids Regional Channels English Entertainment Music Channels News Channels Sports Channels

Source: TAM Media Research

The shifts in viewing patterns have put a high pressure on mainstream channels, necessitating them to revisit their content strategy to attract new audiences and to retain existing ones. Several big budget shows have been launched on Indian television in the recent past. The line-up included reality shows, professional dramas, game shows, interactive programmes, daily soaps and adult programming. These were highbudget, high star-value programmes on which channels spent millions on development and promotion, not all of which proved successful and were subsequently pulled off air or thematically re-oriented. Sports channels With an increase in cricket as well as non-cricket viewership, sports channel viewership has gone up manifold. The boom was primarily on account of World Cup Cricket 2003, followed by India's tours of Australia and Pakistan in 2003-04. The popularity of Indian cricket has been rising rapidly, as can be seen from the price at which the television rights have been sold in the recent past. For instance, as opposed to a mere USD 10 million which the broadcast rights for World Cup in Australia-New Zealand (1992) garnered, the rights for the 2003 World Cup in South Africa fetched around USD 85 million, an increase of 750 percent in ten years. Compared to this, the Olympic rights have moved from USD 350 million (Atlanta, 1984) to USD 1.5 billion (Athens, 2004), an increase of just over 300 percent in twenty years. In addition to cricket, viewership of Formula 1, tennis, soccer, hockey, basketball and baseball is also on the rise, helped to a great extent by the rise of Indian sportspersons like Narain Karthikeyan (Formula 1) and Sania Mirza (tennis) who have recently made it big in the international arena. Sports channels are

36 Fo c u s 2 010 : D r e a m s t o r e a l i t y

proactively trying to attract the audience with a mix of sports, entertainment and amusement. Indian viewers currently have a choice of five sports channels. It is expected that the share of viewership of sports channels will be cyclical depending on the occurrences of popular sports properties in that year, with a continued heavy dependence on cricket. News channels The news and business channel space grew from virtually nothing in 1995, to just over INR 2 billion in 2002 (comprising two dominant news channels, one major business channel and two international English news channels). Since then, this segment has grown further - currently, there are around 11 mainstream news channels and a slew of regional channels which together generate revenues of over INR 5 billion. Increased production values, introduction of tabloid news formats and entering into bouquets have helped this segment in attracting more eyeballs in the recent past. A few more news and current affairs channels are reportedly in the offing with large corporate houses planning forays into this segment. The business channel space, originally an offshoot of the news channel space, hitherto dominated by CNBC, is believed to be the next growth driver, within the news and business space. Currently valued at INR 1 billion, this space is expected to grow at 40-50 percent over the next 2-3 years. Children's channels Close on the heels of news channels, the children's channel space is emerging as one of the fastest growth drivers. Children's channels currently garner INR 1.4 billion in advertising revenues, while pay revenues too are expected to kick in, in a large way. Advertisers of general products are increasingly getting interested in this space - apart from a growing market for children's products, children are believed to exert a strong 'pester power', which influences buying decisions for a large range of consumer durable and non-durable products. Currently, there are around ten children's channels. International majors in children's broadcasting, Cartoon Network and Nickelodeon already have an established presence in India, while Disney has commenced operations recently. Established Indian broadcasters like Zee and content providers like UTV and Pentamedia have also entered this space over the last two years. The domestic players appear to be well-placed to exploit the current void in localised programming, which has empirically proven to be a strong driver in other mature television economies. The international channels too currently have a high degree of dubbed multi-lingual programming and are reportedly looking at including local programming in their offering as well. As a result of increased depth of

37 A CII - KPMG Report

programming, together with the expansion of the advertising space and the emergence of addressable distribution platforms facilitating pay television, the children's channel segment seems to have entered a period of sustained growth. Regional channels Regional channels have been jostling for viewership, in the face of increasing quality and variety of offering by mass channels, and the emerging popularity of niche channels. In West Bengal, Maharashtra and the four Southern states Andhra Pradesh, Karnataka, Kerala and Tamil Nadu, though, consumers have continued to establish a definite demand for regional content. However, this space is characterised by low ad rate realisations, low production budgets, “me too” programming and fierce competition between various channels.

Large regional variations in viewership necessitate a segmented approach in an addressable market

The large regional variations necessitate the need for a more targeted and segmented approach for content, in an addressable scenario. Viewership pattern across locations 2003
Total Market Hyderabad Bangalore Chennai Delhi Kolkata Mumbai 0% 20% English entertainment Mass Hindi Regional 40% Hindi films Music Sports 60% 80% 100%

Infotainment & kids Others News

1999
Total Market Hyderabad Bangalore Chennai Delhi Kolkata Mumbai 0% Mass Hindi Regional 20% English entertainment 40% Hindi films Music Sports 60% 80% Others News 100%

Infotainment & kids

Source: TAM Media Research

38 Fo c u s 2 010 : D r e a m s t o r e a l i t y

Viewership of other genres such as English entertainment has risen by around two thirds over the previous year. Currently, there are seven English entertainment and film channels that cater mostly to the urban households. English film channels enjoy the highest ads-to-viewership ratio, i.e. they command a relative premium on a proportionately lower viewership base, as opposed to mass channels. Regional channels, on the other hand, have the lowest ads-toviewership ratio. Content trends The television software sector, which supplies programming content to broadcasters, is currently estimated at INR 28 billion. The increasing number of programmes on prime time, a swell in the number of hour long weekly programmes and enhanced consumer interest in niche content are considered to be driving growth. Further, the increased use of content libraries for export to both Indian and non-Indian viewers abroad have also led to growth in this sector. While mainstream entertainment programming will continue to be the bulwark of Indian television, other genres such as news, sports, children and special interests (viz. religion, home, health, etc.) will form an increasingly important part of the software pie. It is important to note that despite the boom in the television sector and the spiralling demand for content, stand alone television production houses have not been able to grow their business, barring the market leader and a few others who have further consolidated their positions. Going forward, it is believed that both broadcasters and content producers will begin to work out backward and forward integration models respectively with broadcasters developing a higher proportion of content in-house and more production houses getting into the broadcasting business. Another growth area in the Indian television software industry will be adaptation of the existing content for digital and on other delivery platforms. Most of the Indian television software is generated on analog platforms, going digital only in the last phase of broadcasting. All content will first need to be converted to digital formats and then fine-tuned to suit the delivery needs of each individual format such as HDTV, IP-TV, etc. The road ahead The television industry is now ready to advance to the next stage of its evolution, grasp the opportunities presented by the digital age and completely change the home entertainment landscape. In the process, it is expected to continue its rapid growth and reach INR 371 billion by 2010.

39 A CII - KPMG Report

Over the next six years, television advertising spend is expected to grow at a little over 8 percent annually, to reach INR 78 billion in 2010. Such growth will be a function of an increase in number of advertisers and an increase in paid ad seconds. Going forward, digital distribution players like DTH, IP-TV are expected to emerge as new contenders for the total ad pie, as new revenue streams like (advertising on) Electronic Programming Guides (EPG) emerge. The total distribution revenues are expected to grow from the current INR 73 billion to around INR 250 billion by 2010, of which the share of declared revenues will improve significantly from INR 19 billion (26 percent) to INR 134 billion (54 percent). It will be driven more by the conversion of existing analog subscribers to addressable digital subscribers, rather than a plain vanilla increase in the declaration percentage, which will increase only from 25 percent to 30 percent in six years. Subscription revenues
declared & addressable revenues undeclared revenues
116 110 91 83 49 16 54 19 64 26 71 36 52 72 103 134

(INR billion)

2003

2004

2005E

2006E

2007E

2008E

2009E

2010E

Source: - KPMG Research

The increased addressability will significantly improve both the Pay television revenues to broadcasters and to organised distributors (MSOs, DTH operators, IP-TV operators etc.) which will emerge as a stronger, powerful community, as has been seen in evolved markets like the US.
(INR billion)

Distribution of Revenues Pay TV Revenues to broadcasters Distributors' retention Last mile operators Total Subscription Revenues
Source: - KPMG Research

2003 12 1 52 65

2004 13 3 58 73

2005E 2006E 2007E 2008E 2009E 2010E 16 5 69 90 19 11 77 107 29 16 90 136 42 23 99 163 62 32 120 213 82 41 126 250

Growth 37% 55% 14% 23%

40 Fo c u s 2 010 : D r e a m s t o r e a l i t y

Broadcasters' pay revenues will grow six-fold, from INR 13 billion to INR 82 billion, while organised distributors, currently at a fledgling INR 3 billion, will command a significant share of the television market with subscriber revenues of around INR 41 billion. The LCO community, though growing at a lower compounded rate, too will benefit from increasing ARPUs, seeing their revenues growing from INR 58 billion currently to INR 126 billion. Riding on a strong base and strong economic indicators, C&S connections are expected to grow at a CAGR of 10 percent over the next six years to reach 85 million households. Content will be the key driver and demand for premium content will increase. Though the market is expected to be price sensitive, operators are likely to be able to charge significantly higher fees for premium and value-added content.

Demand for premium content will increase

Anomalies like regional discrepancies in price will reduce and offerings will be uniformly priced across geographies and classes, which is not currently the case. The same consuming class currently pays the same price for consumer goods across geographies and it is anticipated that televised content would also eventually follow a similar trend. ARPU for analog and digital subscribers
600 500 400 300 200 100 2003 2004 2005E 2006E 2007E 2008E 2009E 2010E (INR per month)

ARPU - analog
Source: KPMG Research

ARPU - digital

ARPU - combined

ARPUs for analog cable are expected to grow moderately, and organic growth in this segment could eventually stagnate since the consumers in both urban and rural areas are likely to shift to digital offerings at a particular price barrier, once such offerings become available. The digital offerings are likely to be split into: Basic: These will be benchmarked at the analog cable prices of INR 125-150 and the offerings will include the current FTA channels and the most popular general entertainment channels and few genre-specific channels like news, children, etc to complete the bouquet.

!

41 A CII - KPMG Report

!

Premium: The mass entertainment, film, sports and other channels which have a significant consumer-pull in select consumer segments will be offered as the premium tier. Consumers are expected to pay around INR 500-700 (inclusive of the basic channels mentioned above). The channel's content combined with the operator's ability to bundle them attractively will determine the pace of conversion from analog to digital basic and from digital basic to digital premium subscribers.
2005E 213 98 53 46% 54% 25% 2006E 221 105 58 48% 55% 26% 2007E 229 112 63 49% 57% 28% 2008E 237 119 70 50% 59% 29% 2009E 246 126 77 51% 61% 31% 2010E 254 134 85 52% 63% 33% CAGR 3.6% 6.7% 9.9%

(In million)

Total Households (HH) TV HH Connected HH TV penetration Connected HH to TV HH Connected HH to total HH
Source: KPMG Research

2004 205 91 48 44% 53% 23%

Value-added services: These will include pay-per-view of new films, specific events like a major cricket match, interactive content like gaming, T-commerce etc. Channels may also strive to create a differentiated offering of the same content (e.g. ads-free telecast of cricket matches with a differentiated onground coverage) at a higher price for this segment, which is the most priceinelastic. The ARPUs for this segment could be around INR 900-1000.
Year 2010 penetration 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Top 20 cities Others Analog Cable DTH Total 90 80 70 60 50 40 30 20 10 0 Digital cable IP-TV and copper 2003 2004 2005E 2006E 2007E 2008E 2009E 2010E Break-down by tiered offerings (million subscribers) Analog cable Digital - premium package Digital - basic package Digital - value added services

Source: KPMG Research

42 Fo c u s 2 010 : D r e a m s t o r e a l i t y

The digital subscriber off-take is expected to be more rapid in metros, while the roll-out will be slower in other cities, towns and rural areas. The price wars with existing cable offerings will be more intense. While DTH and digital cable will see a moderate subscriber off-take in smaller towns and even rural areas (where the state-owned Prasar Bharti's low-priced DTH offerings are expected to have a higher market share compared to that of private operators), IP-TV and broadband over copper will be restricted to the major cities, given the high per-line investment required. In 2010, out of the estimated 85 million connected households (a household with C&S, DTH, IP-TV or any other form of connectivity other than terrestrial), digital platforms will have a market share of around 18 percent, or 13 million. There is a potential for this number to go up significantly, depending, inter alia, on the regulatory environment which will induce new players like established telecom operators to make the necessary investments. Break-down by access
80 70 60 50 40 30 20 10 0 2003 2004 2005E 2006E 2007E
Source: KPMG Research
Analog cable subs Digital cable DTH

(million subscribers)
IP-TV and copper

48 43

52

56

60

64.1

67 .9

71.9 8.6

5.7

3.5 2 1 1 2.2 1.0 2009E 2.8 1.3 2010E

1.6 0.7 2008E

In terms of offerings, it is expected that the majority of subscribers, irrespective of the platform they are on, will continue to opt for a basic package, which is selfcontained and fulfils the minimum infotainment requirement. 'Light viewers' (i.e. Less than 20 hours a week) form the bulk of television viewership and watch the maximum number of genres. The behaviour of this segment in the face of an onslaught of channels and competing platforms, and the ability of broadcasters and distributors to tap these eyeballs effectively through attractive packaging and pricing will have a direct bearing on the subscriber off-take. This, in turn, will determine how soon the basic subscriber, can move to the premium category.

43 A CII - KPMG Report

2005 could be the turning point for the industry’s life cycle

Conclusion 2004 was an eventful year for the industry. The industry saw a further strengthening of the C&S dominance and increasing reliance on subscription revenues. Persistent efforts by broadcasters enabled them to get higher disclosure rates. These superior disclosure rates coupled with higher subscription charges, post lifting of the price freeze that had been in force for around two years, increased the broadcaster revenues. It also helped the broadcast industry continue its progress from an advertisement dependant one to one with more balanced revenue streams. 2005 could be a turning point in the industry's life cycle. The launch of DTH, DSL and IP-TV is expected to reshape the landscape of the industry, by introducing competition in the last-mile for the first-time. The forces unleashed by them will determine the future of the industry.

44 Fo c u s 2 010 : D r e a m s t o r e a l i t y

Film
Back to the future

Film
Back to the future
India is the world's largest producer of films by volume - producing almost a thousand films annually. However, revenue-wise, it accounts for only 1 percent of global film industry revenues. Film and film-based entertainment together occupy a considerable part of the Indian consumer's mindshare. In terms of its sheer impact and visibility, film and film-based entertainment transcend well beyond what their 27 percent direct share of the Indian entertainment industry's revenues would indicate. Indian films, especially the mainstream Hindi film industry (or “Bollywood”) dominate segments like music and live entertainment as well as television, where popular films and film-based programmes attract the highest viewership along with cricket. Apart from the growing international success of Indian themed films like 'Monsoon Wedding', 'Bend it like Beckham' and 'Bride and Prejudice' (which debuted at the top spot at the UK box office), global curiosity about Bollywood is on the rise - Bollywood has been featured in recent issues of 'National Geographic' and 'Time'. All these point to the fact that the Indian film industry is now reaching the sophistication that is required to cater to global audiences. Gross worldwide revenues

Film

0%

20% USA

40% Japan UK

60% France India

80% Others

100%

Source: KPMG Research

Film and film-based entertainment jointly command a significant consumer mindshare

Although over ninety years old, the Indian film industry was accorded the status of an industry as recently as 2000. Consequently, it is only during the last five years that organised financing from banks, financial institutions, corporates and venture funds became possible. Earlier, it was almost solely reliant on private and largely individual financing at extremely high interest rates. Over the last few years, there has been some change in the operating style of the industry. Film financing from organised sources is on the rise: around 100 films availed of organised funding of INR 7 billion in 2004, compared to virtually nil a few years ago. This number could be higher in the future if ! on the demand side, the industry responds pragmatically, by creating an environment conducive to organised funding; and ! on the supply side, more financiers from the organised sector enter the fray spreading the risk for a single financier and deepening the market.

45 A CII - KPMG Report

India can establish itself as an important global film-making hub

The seeds of corporatisation have been sown and early forms of vertical integration between content producers, distributors, exhibitors, broadcasters and music companies can be observed in the industry. The stakeholders, especially the new generation of producers, directors and performers, are now much more receptive to international best practices to redefine the way of doing business. Better discipline has resulted in a slow turnaround in the industry, which recovered from an unsuccessful 2002 to record better profitability in the last two years. The film industry has entered a new phase of growth
First wave of growth Second wave of growth
Institutional financing Limited IPOs Golden era for studios Bonds, Low insurances corporate governance Integration of value chain Entry of MNCs

Evolution of the Indian film industry

J F Madan monopoly on exhibition

Prabhat Studios High cost private New Theatres Bombay Talkies financing Gradual rise of Dubious ‘banners’ channels of finance

Venture capital, private equity

Corporatisation

Early distribution networks Individual film makers

1910 1920

1930 1940 1950 1960

1990s

2001

2004

2005 onwards

Source: KPMG Research

Integration and rightsizing of all functions across the value chain is expected to lead to a consolidation among the fragmented players in the industry. This would result in increased market power, better economies of scale (through sharing of common resources across different areas of the value chain) and initiatives to mitigate risks as against transferring risks on to the next player. This will lead to a more efficient film-making process, where relevant content will be developed, distributed and exhibited in a more synergistic manner and on a larger canvas. Aided by investments in technology (like networking the last-mile through digital distribution) and the right measure of governmental intervention, India could establish itself as an important global film-making hub outside of Hollywood.

46 Fo c u s 2 010 : D r e a m s t o r e a l i t y

The changing paradigm The opening up of new markets overseas, with viewership of Indian films spreading beyond the Indian diaspora into Asian, and eventually non-Asian audiences. ! Nationwide distribution of well-made, big-budget regional films, some of which could cross over into countries like Japan and China. ! Rising penetration of home video and greater demand for pay-per-view content with the advent of alternate delivery platforms like DTH and IP-TV. ! Increased theatrical attendance consequent to right-sizing and upgradation of theatres and introduction of multiplexes to enhance the viewing experience ! Reduced leakages and piracy, with greater investments in digital distribution technology and network for: eliminating/ reducing the time lag between releases in mainstream and other centres more effective monitoring and recording of revenues

!

Components of the Indian film industry
The Indian film industry comprises of a cluster of regional film industries, like Hindi, Telugu, Tamil, Kannada, Malayalam, Bengali, etc. This makes it one of the most complex and fragmented national film industries in the world. These regional language films compete with each other in certain market segments and enjoy a virtual monopoly in certain others. The most popular among them is the Hindi film industry located in Mumbai, popularly referred to as “Bollywood” . Indian films certified by the censor board
120 0 Number of films 100 0 800 600 400 200 0 1999 2000 Hindi mainstream
Source: Central Board for Film Certification

2001 Other Hindi

20 02 Regional

2003

Bollywood Out of the 200 Hindi films made in India each year, around 150 are made in Bollywood. These Bollywood films are released throughout India on both big and small screen formats, with several of them being screened overseas as well. Though there have been sporadic instances of regional films, enjoying a national release or even an overseas release, virtually all films having a national audience,

47 A CII - KPMG Report

are made in Bollywood. It accounts for over 40 percent of the total revenues of the overall Indian film industry, which is currently estimated at INR 59 billion. It is estimated that only INR 50 billion finds its way to the industry coffers, with the balance INR 9 billion being cornered by pirates1. Regional films The major regional film industries are Tamil and Telugu, which together earn around INR 15 billion, followed by Malayalam, Bengali and Punjabi. The average cost of production of a regional film, in keeping with its limited market (compared to a Hindi film) and lower revenue potential, are only a fraction of that of a mainstream Bollywood film. With increased viewer exposure to a plethora of entertainment options on satellite television, the number of regional films produced annually has fallen from around 800, three years ago, to around 650 currently. However, in terms of discipline and cost control, the level of professionalism prevalent in certain regional film industries (like Tamil) is higher than that observed in Bollywood. For instance, the average time frame for completion of a relatively big-budget Tamil film is 4-9 months, as opposed to 15-18 months in Bollywood. Some key reasons for this are: ! Appropriate importance given to script development and pre-production, ! Leading actors working on limited number (usually one or two) of assignments at a time and ! Large scale of operations of studios giving them: flexibility to amortise and spread costs and risks over a larger portfolio greater degree of integration

In terms of discipline and cost control, certain regional film industries are more professional than Bollywood

Market Share by R even u es

Hind i Mainstre am 4 3%

Cross-o ve r Hindi 2% Fore ign 2%

O the rs 8%

Malayalam 10 %

Other Hind i 2% Be ngali 1% Telug u 15 %

Tam il 1 7%

Source: Industry

I n d u s t r y e s t i m a t e s t h e t o t a l r e v e n u e l o s s d u e t o p i r a c y a n d l e a k a g e s i n t h e a t r e c o l l e c t i o n s a t I N R 15 - 2 0 b i l l i o n . S i n c e t h e p r i c e p a i d b y t h e e n d c o n s u m e r f o r s u ch i l l e g i t i m a t e p r o d u c t s i s s i g n i f i c a n t l y l o w e r t h a n t h e n o r m a l p r i c e , w e h a v e c o n s i d e r e d t h e r e t a i l v a l u e o f s u ch i l l e g i t i m a t e i n c o m e a t I N R 9 b i l l i o n 48 Fo c u s 2 010 : D r e a m s t o r e a l i t y

1

English films Big budget Hollywood films are beginning to make a mark, with their dubbed versions making inroads into the semi-urban and rural markets. A recent case in point is 'Spiderman 2', which along with its dubbed version, grossed a whopping INR 342 million, higher than 'Murder' and 'Hum Tum' - two mainstream Bollywood hits of 2004. On a cumulative basis, box office collections of foreign films grew in both revenues and number of releases, from INR 1.5 billion from 60 films in 2003 to INR 1.8 billion for 72 films in 2004. Enthused by the international success of India-themed English films made in UK and US (like ‘Monsoon Wedding’, ‘Bend it like Beckham’, and ‘American Desi’), there is now a growing trend among younger film-makers to make English language films in India for the overseas viewers. Though the market share of such English language films made in India is still insignificant, both by volume as well as by revenues, there exists a niche audience for them, which is growing. Arthouse films, short films and documentaries Parallel film-makers like Satyajit Ray and Shyam Benegal have won plaudits internationally for adapting the neo-realistic style of film-making to an Indian milieu. Even in commercial Indian cinema, during the 50s and the 60s, filmmakers like Bimal Roy, Guru Dutt, V. Shantaram and Mehboob Khan made films with powerful social messages that were box office hits, successfully walking the tightrope between critical acclaim and commercial success.

Interaction between art and commercial film arenas is expected to raise the quality of cinematic content

Gradually, from the 60s, a distinction started developing between the so-called 'commercial' and 'art' films. The art film-makers could not compete at the box office due to the lack of commercial viability of the subjects they attempted. The mainstream films kept growing in terms of budgets and star cast. From the 70s onwards, there was a clear divide between commercial and art films. In the last few years, the tide seems to have turned again with barriers between art and commercial films beginning to wither away. Noted art house film-makers like Shyam Benegal, Govind Nihalani and Ketan Mehta are foraying into big budget, star-studded films while commercial actors are increasing performing in art films. Such interaction between art and commercial film arenas is expected to bring about an overall improvement in the quality of content. In addition, India also produces around 1300 short films, documentaries and nonfeature films, several of which have won critical acclaim and international awards. However, there has been no organised attempt at commercial exploitation of the non-feature genre.

49 A CII - KPMG Report

Emerging genres Till date, categories like tele-films and special-effects driven films, which drive film revenues internationally, were virtually absent in India. Efforts in producing telefilms have been few and far between. However, with the advent of additional distribution platforms like DTH and IP-TV, this could become a considerable revenue-earner for the industry in the future, with established film producers, directors and actors helping in realising its potential. The recent success of films like ‘Koi Mil Gaya’ and ‘Bhoot’ and the domestic success of Hollywood films like ‘Spiderman-2’ and the Harry Potter movies indicates a growing taste for special-effects driven films in India. Indian visual effects houses have acquired the sophistication and skill-sets to handle the special effects requirements of Indian mainstream films, though they may still have some distance to travel before they bag any large Hollywood contracts. Increased demand coupled with a supply push (post-production and visual effects houses investing in films) could increase revenues from this genre. Sequels of very successful commercial films, another genre hitherto non-existent in India, are being attempted for the first time. It remains to be seen how effectively the new generation of film makers leverage these genres to generate revenues.

Current revenue distribution
Distribution of film revenues
Leakages/ pir acy 14% I n ci nema ads 2% Music 2% Satel l i te/ DTH/ I P -TV 9% DVD/ VCD/ overseas cable 4% Overseas theatri cal 12 % Domesti c theatrical 57%

Source: Industry

The industry realises almost 70 percent of its total revenues (around 80 percent of legitimate revenues) of INR 59 billion from domestic and overseas theatre viewership, unlike in countries like the US which earn only 35 percent of revenues from theatre viewership while the remaining 65 percent is derived from other revenue sources such as DVD/ VHS/ cable, satellite, pay-per-view, etc.

50 Fo c u s 2 010 : D r e a m s t o r e a l i t y

For a brief period which ended in around 2001-02, sales of music rights accounted for 20-30 percent of the cost of production for a major film, selling for as much as INR120-150 million. Such prices were not sustainable and consequently, the sale of music rights ceased to be a major source of financing of productions. Lately, however, producers have been able to extract high prices from television channels by selling the satellite rights of major films in advance. Established producers have also been able to tap in-films advertisements as another source of revenue, their clients mostly being consumer goods companies.

Along with an overall reduction in costs, each of the revenue components can grow.

With the deepening of the home video market, sale of DVD/ VCD rights have now emerged as a considerable source of revenue, though at present, such rights are mostly bundled along with overseas theatrical rights and sold at lump sum prices. Overseas income from sale of theatrical and home video rights have been increasing from INR 2 billion in 1998 to INR 4 billion in 2000 to INR 9 billion now, accounting for 16 percent of total revenues.

Size and growth
With an overall reduction in costs, there is a potential for each of the revenue components to grow, albeit in varying degrees. Domestic theatrical revenues are estimated to grow at 17 percent, aided largely by multiplicity of ticket rates and higher occupancy due to rightsizing of screens from INR 34 billion to INR 86 billion in 2010. Satellite rights, including pay-per-view and broadband rights, could take off in 2007 when DTH, IP-TV and broadband , cable networks are expected to be rolled out on a large scale. Satellite revenues are expected to grow at 22 percent from INR 5 billion to INR 17 billion in 2010. Growth in other income from in-film promotions and merchandising is anticipated to flatten out after the initial spurt, while growth in revenues from the sale of music rights could be minimal. The combined forces of digital technology and more stringent regulations should be able to reduce the menace of piracy, though in absolute terms, it may still continue to account for around INR 6 billion in revenues in 2010. The current realisation on overseas theatrical and home video at retail value, i.e. the amount that the overseas end-consumer pays on Indian filmed entertainment is believed to be around USD 360 million a significant 90-100 percent over the USD 190 million (INR 9 billion) at which these rights are sold. The end-user consumer revenues of USD 360 million are projected to grow at 13 percent annually to reach USD 750 million in six years (some optimistic projections put it at over USD 1 billion), while the realisation for the Indian IPR owners will be better, narrowing down the margin from 100 percent to around 40 percent by 2010. Consequently, overseas theatrical and home video are expected to grow at 22 percent annually from INR 9 billion to INR 30.5 billion in 2010. This would still

51 A CII - KPMG Report

be well below the true export potential of Indian content and the appropriate marketing focus, synergistic alliances and co-productions could push this number up significantly. Growth of the Indian film industry
160 140 120 100 80 60 40 20 0 2002 2003 2004 2005E 2006E 2007E 2008E 2009E 2010E
Leakages / piracy In cinema ads Music Satellite/DTH/IPTV DVD/VCD/overseas cable Overseas - theatrical Domestic theatrical

(INR billion)

Source: KPMG Research

Overall, the industry is expected to grow annually at 16 percent to cross the INR 100 billion mark by 2007 and reach INR 143 billion in 2010. , If the combined efforts of the various stakeholders and the government create the desired impact in terms of charting a structured roadmap for the future, this growth rate could even exceed 30 percent in the next 4-5 years. The later part of this section focusses on the need for such collaboration.

Segment-wise growth of film revenues
140% 120% 100% 80% 60% 40% 20% 0% -20% -40% -60% 2003 2004 2005E 2006E 2007E 2008E 2009E Domestic theatrical DVD/VCD/overseas cable Music Leakages / piracy

(In percentage)
Overseas - theatrical Satellite/DTH/IPTV In cinema ads Total

2010E

Source: KPMG Research

Setting an industry agenda for accelerated growth
Though the growth prospects for the Indian film industry are quite strong, it is still performing below its underlying potential. It is a fact that India's per capita monthly spend on films is less than INR 4, which is extremely low for an entertainment-crazy country like ours.

52 Fo c u s 2 010 : D r e a m s t o r e a l i t y

Concerted efforts undertaken by the industry participants can launch the industry on an accelerated growth path, so that it can beat the forecasts. Some of the key drivers that can enable such accelerated growth could be:

! ! ! ! ! ! ! ! ! !

Corporatisation Developing economies of scale Organised film financing Value chain integration Last mile consolidation in distribution and exhibition Piracy and its control Expanding the international market Outsourcing to India Training and education and Government incentives.

Corporatisation In the 1990s, the Indian film industry was completely fragmented, with no individual entity - content producer, financier, distributor, exhibitor, music company and satellite broadcaster - commanding any considerable presence across the value chain. As a result, the revenue earning capacity of any given film became a function of the relative bargaining power of the concerned parties. Consequently, creative freedom and quality of content suffered. Risk mitigation, contracts and insurance were alien terms, while time and cost overruns were commonplace. A corporatised approach to production implies and includes the following mix of initiatives or actions: ! Intelligent selection of scripts which factors in an understanding of consumer preferences and market trends ! Project feasibility analysis for target audience preferences, box office results talent popularity and story viability in domestic and international markets ! Active participation and consent of each activity head at the green-lighting stage ! Investing in equipment, technology and management information systems to bring down costs and build in flexibility in shooting schedules ! Control over production timelines, budgets and quality with periodic monitoring ! Outsourcing non-critical functions to focus on the core aspects of filmmaking ! Introducing a profit sharing system thereby reducing initial risk on full upfront payment etc.

53 A CII - KPMG Report

In the last few years, the industry has taken a few steps towards corporatisation. However, it is currently in the first stage of corporatisation, without a clear delineation of creative and management functions. More often than not, the promoter/ CEO doubles up as the chief creative person, getting involved in every stage from script selection to casting, while creative people also function as operational managers. In the industry, there are six or seven large production houses which have built a formidable track record and capabilities over the years and possess rich experience in managing practically all the elements of the value chain. This experience enables them to operate with greater efficiency compared to the rest of the industry. In a way, they have also corporatised themselves. Corporatisation can greatly aid this industry in the following ways: Imposing transparency and discipline in the film-making process Higher emphasis on scripting, planning and documentation Very high focus on cost-control Developing an institutional memory of best practices

! ! ! ! There are only six or seven large production houses that have the experience of managing all elements of the value chain

In these ways, it could help make the film-production process much more efficient. The Indian film industry is far behind Hollywood in terms of its efficiency in the myriad aspects of film production, as illustrated below. Component Scripting and development Pre-production Above-the-line cost control Below-the-line cost control Risk reward sharing and mitigation Contracts and documentation Product marketing Merchandising
Source: KPMG Research

India

Hollywood

54 Fo c u s 2 010 : D r e a m s t o r e a l i t y

The film producers will have to change their mantra from ‘make the costliest film of the year’ to ‘make a portfolio of cost-effective films in a year’

While the Indian film industry has advanced to a significant extent in controlling direct costs, the below-the-line costs are rather poorly managed. This affects the film's budget adversely through time and cost over-runs. Scripting and development is another vital part of film production that is largely neglected in India. Contracts and documentation and merchandising are a few other elements of film-making where India lags far behind Hollywood. On a brighter note, India has made some basic progress in pre-production and product marketing, in recent times. Corporatisation, with its accompanying emphasis on transparency, accountability and consolidation in the various elements of film-making and distribution, can bring about an overall improvement in enhancing the profitability of the sector. Developing economies of scale The film producers will have to change their mantra from 'make the costliest film of the year' to 'make a portfolio of cost-effective films in a year'. They will have to blend films of different genres and budget segments aimed at different markets and different audiences to dissipate their risk profile. It is estimated that the producers can reduce their costs by 10-12 percent by: ! owning studio infrastructure and equipment ! signing long-term contracts with creative talent ! signing multiple contracts with distributors and exhibitors. They can also raise their revenues by signing long-term contracts with distributors and exhibitors. This will enable them to get a higher share of the domestic theatrical revenues and also help in plugging leakages. On a simple estimate, a 10 percent reduction in costs in the medium term, coupled with a 15 percent increase in revenues can more than double the industry profits. It is expected that the combination of key drivers at play could bring the industry closer to its optimal level of profit generation in the near future. Portfolio approach: a simulation
Reduced costs and expanded revenue streams go towards reducing return volatility and project risk substantially
Cost reductions Pre production Artists’ costs Post production costs Equipment Production expenses Distribution costs (print + publicity) Total Existing costs (%) 2 30 7 4 35 22 100 Possible cost increase (reduction) (%) 2 (3) (2) (1) (4) (3) (11) Revised costs (%) 4 27 5 3 31 19 89 Existing revenues (%) 65 11 14 6 4 Total 100 Revenue Increase/ (decrease) 9 5 14 Revised revenues (%) 74 11 14 6 4 5 114

Cost mitigation / planned strategies can typically bring down production costs by approximately 10-12 percent

Revenue enhancement strategies can boost income by around 10-15 percent

Revenue enhancements Domestic theatrical Overseas theatrical Satellite Music Others Leakages

Source: KPMG Research

Resulting in favourably altering the risk reward profile by 20-25%

55 A CII - KPMG Report

It is estimated that by developing a portfolio of films, it is possible to shave 10 percent off the artist's costs, reducing it from 30 percent to around 27 percent of the overall filming cost. The distribution costs (print and publicity) can be cut by approximately 14 percent, reducing it to 19 percent of the overall cost. The production expenses can also be similarly reduced to 30 percent of the overall filming costs, from 35 percent, while a higher budget could be allocated for preproduction. In all, it is estimated that corporatisation and economies of scale slash film production costs by over 10 percent. Side by side, it is also expected to increase revenues by 14 percent, by raising domestic theatrical revenues by 9 percent and plugging leakages of 5 percent. This can significantly improve the risk-reward ratio by almost 25 percent. Even at the current revenue numbers, cost reduction undertaken in this manner could lead to a complete turnaround in the risk perception of the industry, by improving the risk-reward ratio. By creating a portfolio of films in various genres and stages of production and the attendant cost-amortising and revenue-enhancing methods, the returns could go up to even 40 percent.

Organised film financing
Till 2000, films were mostly financed through private sources, since commercial lending agencies considered the industry to be a risky and low-priority sector. The two major sources for finance were: ! Distributors and music companies, who would pay advances to established film-makers and films with reputed star casts to acquire the theatrical/ music rights. ! High-net worth individuals Due to the unorganised nature of this funding and its perceived riskiness, the interest rates charged were usurious. Curiously, despite several downturns and the apparent riskiness, private financing continued unabated, even during lean periods. For instance, even in 2002, annus horribilis for the industry, fresh capital continued to enter. This indicates that the industry was able to generate sufficient returns, despite the high financing cost. This also implies that it is quite likely that in the absence of proper accounting and reliable data on costing, coupled with the continuous game of one-upmanship among large producers/distributors (prompting them to make exaggerated statements about their expenditure), the costs of production may have been grossly overstated in the past. In other words, it is possible that the bottom-line for the industry may actually have been much healthier over the last few years than what it was believed to be.

56 Fo c u s 2 010 : D r e a m s t o r e a l i t y

The availability of organised financing from commercial banks and lending institutions, primarily IDBI, triggered the entry of private equity funds and large corporate houses in this space. It is believed that the general experience of the organised sector has been satisfactory, which should lead to the entry of more players in the near future. Organised funding has significantly reduced the average financing cost in this sector. However, institutional lending rates are still high compared to other sectors, since film financing is perceived to be riskier. Limited or non-recourse financing, akin to project financing, is not common. It is believed that institutional financing could bring in stipulations like completion bonds, insurance, well-defined contracts, etc. The production houses' willingness to accept these conditions will determine the comfort level of the financiers. Once financiers earn reasonable returns for a sustained period, the risk-perception could change. Then one may even see sophisticated financial structures like securitisation, credit enhanced bonds, etc being introduced into the market. In the existing model of funding, financing is done on a project-wise basis. The bank finances upto 50 percent of the cost of a project and retains the negative rights as collateral. The producer brings in the rest of the money from his own sources. The bank also insists on a completion guarantee from the producer and insurance against delay.

Institutional lending rates are high compared to other sectors, since film financing is perceived to be riskier

Corporatised financing structures - First generation (existing) Full recourse
Bank
Guarantee / Collateral

Producer

Loan up to 50%

1. Negative rights 2. Completion guarantee 3. Insurance

Equity 50% +

Film Project
Source: KPMG Research

In the emerging financing structure, credit enhancers like evaluation by a rating agency and specialised guarantee funds are used to mitigate the risks to the financing agency. These enhancers help the bank take a larger share of the risk, say upto 70 percent of the project budget. The interest rates for such finance could be lower because the risk to the bank is reduced significantly.

57 A CII - KPMG Report

Corporatised financing structures - Second generation (evolving) Limited recourse financing (illustrative)

Interest
Loan guarantee (say 50% of the bank loan) Bank

Film production company

Specialized guarantee funds Understand risks, does detailed appraisal Takes a nonfund exposure

Equity 30% +

Film project

Loan upto 70%

Credit enhancers

Rating agency

Source: KPMG Research

In the futuristic scenario of funding films, the financing will not be project specific, rather a working capital loan could be given to the integrated entity which owns the entire value chain. It will be securitised using the exhibition receivables. Such a scenario will allow the bank to spread its risk across a portfolio of projects of the film production company. Corporatised financing structures - Third generation (futuristic) Receivables based financing (illustrative)
Film library
Home video

Television

Exhibition

Music

Digital distribution, last mile integration and higher transparencies could allow for direct securitisation of exhibition receivables

Receivables securitisation
Bank

Working capital
Film production company Film project

Complete cash entrapment
Source: KPMG Research

58 Fo c u s 2 010 : D r e a m s t o r e a l i t y

With cheaper sources of financing becoming available from legitimate sources and the industry becoming more disciplined, the quantum of unorganised financing is expected to shrink. In an increasingly professional environment, unviable products with weak scripts could find it difficult to garner funding. Consequently, the average number of films produced annually in India is expected to be reduce to around 600 over the next five years, while the average cost of production per film will increase. This will include an increased spend on script development, pre-production, visual effects and marketing. The changing pattern of film financing
1200 250

1000 200

800

Number of films

150

INR million

600 100 400

50 200

0

-

2002

2003

2004

2005E

2006E

2007E

2008E

2009E

2010E

Corporatised films

Other f ilms

Average cost of a mainstream film

Source: KPMG Research

The percentage of films produced through organised funding in the industry is expected to grow. Though corporate and institutional funding is currently limited largely to Bollywood films, it may not be long before regional films begin to qualify for such financing.

59 A CII - KPMG Report

Have mid-budget films eroded overall industry profitability?
Around 30 percent of the films generate 90 percent of the industry revenues. This is not surprising considering that out of around 150 mainstream films produced annually, 40-50 percent would not be considered financially viable in a corporatised environment. These laggards include ! Very low budget (Category D) films with weak scripts, completely unknown cast and inexperienced producers and directors ! Certain category AA (super budget) films that suffer due to cost overruns and a higher risk quotient and ! Several B Grade (mid-budget) films that suffer due to a serious mismatch between the products' cost and revenue potential. In an increasingly corporatised environment, films that are motivated more by passion than commerce are unlikely to get past the approval stage, unless there is a very strong justification for financing such products. In order to better understand the risk return profile of mainstream (Bollywood used as a proxy) films, we have classified films from 2003 and 2004 into the following four categories based on cost, production value, artists and technicians, and content.

In an increasingly corporatised environment, films that are motivated more by passion than commerce are unlikely to get past the approval stage

Categories AA A B C

Lowest Cost (INR) 150,000,000 80,000,000 30,000,000 10,000,000

Highest Cost (INR) 300,000,000 150,000,000 80,000,000 30,000,000

Gross collections include domestic and overseas theatrical receipts, domestic and overseas satellite and video rights, music rights and in-film advertising and merchandising revenues.

Category AA films are typically ‘big banner’ films. These films have a strong star cast, high level of technological sophistication and typically, socially acceptable themes. The key factor in an AA category film is that the producer and the director have a very strong track record and have the ability and the experience to complete the film on time. Category 'AA' costs are assumed to range from INR 150 to 300 million. Apart from domestic theatrical and other revenues, these films have an overseas potential as well, depending on the presence of certain lead actors. Category A films have costs that are assumed to range from INR 80-150 million. The costs cover variables like type of shoot, locations, number of shifts, the type of agreements with artists, post-production costs, capitalised interest, and so on. At the same time, they enjoy multiple cash flows on the sale of satellite rights, music rights, cable rights, internet rights and sponsorships. Generally, these films recover their costs in the first four weeks after release, unless they have been

60 Fo c u s 2 010 : D r e a m s t o r e a l i t y

made at a disproportionately high cost. Category B films are typically made by relatively financially weaker producers. In many cases, the completion of the film gets delayed due to the lack of last-mile finance. The producer also does not have his own sources of finance and usually taps the market for funds. Sometimes, the directors of these films have a mediocre track record with negligible past box office success to their credit. The star cast here may not be top grade and may include actors who have not been completely accepted by the mainstream audience. Often, these films are not completed due to lack of funds. Their costs are assumed to range from INR 30-80 million. Category C films comprise of a heterogeneous mix of low budget, high quality content films at one end with a high profit potential, to still-born projects characterised by a lack of quality, content, and good artists fashioned on run-ofthe-mill subjects, espousing mediocre music and virtually no market. Their costs are assumed to be between INR 10-30 million. Category D films, which comprise of virtual non-starters in terms of finance, content, and technical quality, have not been included in the sample examined due to their inability to get past the approval stage in a more corporatised environment. Ranking films by risk and return Categories Rank by returns 2 AA 2 A 3 B 1 C

Rank by risk 3 2 4 1

Combined rank 2 1 3 1

The overall sample consisted of over 150 films released in the years 2003 and 2004 It should be noted that the above analysis is indicative and not comprehensive. It is intended to serve just as an illustration. It is nevertheless observed that B and AA category films have proved to be relatively more risky investments for production houses, followed by A and C category which show lesser variation in their respective returns. B category films also perform poorly in their overall returns ranking, followed by AA and A category films that share the same return characteristics, with category C films finishing on top once again. The combined ranking for both the years shows that category A and C films are better investment prospects in terms of the balance between their risk-return

61 A CII - KPMG Report

characteristics, followed by category AA (super budget) films and, finally, category B (mid budget) films which appear to be the riskiest. Significantly, category B films represent an average of 40 percent of the Bollywood film industry's investments, compared to only 16.5 percent investments in category C and 26 percent in category A films. Thus, the performance of the overall film industry could be largely affected by overinvestment in unprofitable segments like category B and under investment in profitable segments like categories A and C. By strategically investing in a balanced portfolio, film companies and production houses can increase their overall returns considerably, while reducing their overall risk. This is not to imply that mid-budget films should not be produced or financed; however, it is imperative that the risks with respect to such films are well mitigated, costs and schedules adhered to and a proper assessment of the content and the creative team carried out at the developmental stage before any financing decisions are taken.

62 Fo c u s 2 010 : D r e a m s t o r e a l i t y

Value chain integration
The production phase A comparison of the stages of film production in the Indian film industry (using Bollywood as a proxy) with that of Hollywood reveals that the Indian film industry tends to ignore the most important stage of production - the development stage. During the development stage, typically, the story is developed from a concept or an idea into a complete script with a provisional screenplay. The commercial viability of a creative concept is evaluated carefully by way of market segmentation, market research and use of sophisticated revenue forecasting models. In Hollywood, on an average, this stage takes anywhere between 2-4 years and only 20 percent of the stories developed at this stage move on to the next stage of pre-production. The film production process
Conception of idea Development of idea Market research Obtaining rights Signing tentative cast, crew Raising capital Screenplay breakdown Shooting schedule Location scouting Budgeting Casting and unions Equipment rentals Permits, etc. Principal photography Blocking Lighting Final rehearsals Shooting Editing Sound effects Music production Special effects Mixing

Development

Pre-production

Production

Post-production

Source: Film Production Management, Baston Cleve

The general tendency is to transfer the risk to the next link in the value chain

In Hollywood, the studio is an integrated entity that oversees all aspects of the value chain (from production to distribution and at times, even exhibition) and hence has an incentive to make sure that the product is marketable right from the conceptual stage, since there are not many opportunities for risk transfer within the value chain. In the Indian context, due to the unorganised and fragmented nature of the film industry, the tendency is to transfer the risk to the next link in the value chain rather than to manage the overall risk effectively. The lack of allocation of time and budget towards script development and market research clearly manifests itself in the relative unprofitability of the industry in India, despite its increasing revenues every year.

63 A CII - KPMG Report

Time allocated to various stages of production
3 .5 3 2 .5 2 1.5 1 0 .5 0 Development Pre-production Hollywood Production Bollywood

(Years)

Post-production

Source: KPMG Research

Bollywood spends significantly more time in the production stage compared to Hollywood. Some possible reasons are: ! Cost overruns due to inadequate planning in the development stage itself and ! Lack of smooth funding during various stages of production (especially in the case of mid and low budget films) In the post-production stage, too, Bollywood tends to spend relatively lesser time compared to its US counterparts. Some probable causes are: ! Unavailability of funding (due to the film being over-budget at the production stage itself) ! Lack of importance given to post production ! Haste in releasing the film in order to recover the money.
Allocation of expenditure across film industries
Bollywood Hollywood
0% 20% 40%
Marketing

60%

80%

10 0 %

Development and Production

Source: KPMG Research

Another important difference between Bollywood and Hollywood is that the latter attaches considerable significant attention and funds to marketing of films. In India, however, it is the distributors who virtually carry the entire burden of marketing the film. This leads to the following problems: ! Distributors often go through a working capital crunch due to the failure of one film, leading to insufficient availability of funds for marketing the next. ! Each distributor uses his discretion in marketing a film. This can lead to the promotional effort conveying a message completely different from what the producer intended. This may be another area where the cost distribution and resource allocation structure of Indian films can be made more efficient.

64 Fo c u s 2 010 : D r e a m s t o r e a l i t y

Last-mile consolidation in distribution and exhibition
With around 12,900 active screens (down from 13,000 in 1990), out of which over 95 percent are standalone, single screens, India's screen density is very low. In contrast, China, which produces far less films than India, has 65,000 screens, while US has 36,000. With many more avenues of entertainment available to the youth (an important target population), it is imperative to create an enhanced theatre viewing experience. India is under-screened
(Screens per million population)
117

77 43 30 45 46 52 53 61

There is a need for at least 20,000 screens in India as against the current 12,900.

12
UK Germany Denmark Spain France Italy US Belgium Ireland India

Source: UNESCO

The multiplex revolution The conversion of standalone, poorly maintained single-screen theatres to sophisticated multi screen theatres, in addition to the new multiplexes within or around shopping malls and family entertainment centres, is an emerging trend in urban India today. Multiplexes, though a recent urban phenomenon, have shown the way forward in increasing domestic theatrical revenues. The reasons for their success are: ! They enjoy an average of 50-60 percent occupancy per screen as opposed to 30-35 percent of standalone theatres, ! The customer is willing to pay more for the enhanced viewing experience, ! The government has accorded various tax rebates for multiplexes, ! States like Maharashtra and Delhi have permitted dynamic ticket pricing, allowing them to change ticket prices according to demand and supply. ! They increase footfalls in shopping malls by 40-50 percent. As a result, several major malls have multiplexes in or near them. The present retail boom has led to a significant rise in the number of multiplexes.

65 A CII - KPMG Report

Increasingly innovative promos for Hollywood films and alliances that now involve a wide spectrum of players - multiplexes, television channels, internet portals, cellular operators, hotels, cafes and consumers goods - are expected to percolate to Indian film releases as well.

Multiplexes are ushering in a new era in exhibition of films

The advent of multiplex chains is expected to usher in a new era of film exhibition, apart from just an enhanced viewing experience. Some of the expected changes are: ! Dedicated marketing teams to leverage state-of-the-art technology to address the programming needs of exhibitors ! Marketing team to work out content-to-customer matches on the basis of consumer surveys and other metrics. ! Developing synergistic marketing strategies in conjunction with content producers, broadcasters, music companies, etc. ! Offering better terms to producers based on Presence across multiple locations Significantly higher transparency The strength of their balance sheet These activities of the multiplexes could to lead to a possible shakeout and consolidation among the standalone theatres. Changing distribution model Currently, theatrical rights for films are bid out to distributors on a per-territory basis, against minimum guarantees. Distributors in turn work out flat fee, lease rental and/or revenue sharing arrangements with exhibitors. However, this model

66 Fo c u s 2 010 : D r e a m s t o r e a l i t y

is highly unstable and is not expected to survive in the long term because of the following: ! Established producers command very high minimum guarantees, leading to disproportionate risk-reward sharing if the film is not successful. ! The distribution model of the future could become an infrastructure play, run by utility providers. ! There is lack of reliable information on theatre collection, due to the fragmented last-mile, which perpetrates under-reporting. ! Many screens/ theatres are expected to be wired up, with the entry of utility companies in the distribution sector. ! A spiralling demand for content, a considerable portion of which is expected to be film content, is expected to be sparked off by the digital home revolution (discussed in detail in the Television section of this report).

The industry could see alliances between producers and exhibitors on one hand and broadcasters and utility players on the other

In the future, the industry could see alliances between producers and exhibitors on the one hand, and broadcasters and utility players on the other. Traditional distributors could increasingly seek to re-invent their business model by gaining control over the last mile in select theatres and seeking to enhance the theatrical value proposition by investing in theatre upgrades and multiplexes. Aggregation of different parts of the value chain can eventually lead to greater revenue capture and enhanced bottomlines. Revenue aggregation for an integrated film producer
Revenue 75 Distributors and exhibitors Additional marketing costs 8

Revenue 8

Overseas rights Revenue 16 Additional marketing costs 2 Home video rights

Ticket sales Revenue 100

Producer

Revenue 4

Non ticket sales Revenue 6 Revenue 20 Television rights Revenue 13

Revenue 10

Revenue 3

Music rights Revenue 3 Revenue at retail value 138

Leakages Revenue 30

Revenue to producer 100 Incremental revenue 38 Incremental revenue 88

Untapped revenue 50

Source: Industry

67 A CII - KPMG Report

Piracy and its control Initiatives to reduce piracy in the years to come, either due to digital encoding mechanisms or better enforcement of the law, can also lead to an increase in domestic theatre viewership revenues. In the US, a typical theatrical window spans six months, where collection amounts to 25 percent of the total gross. In India typically 70 percent is collected over three months, after which piracy catches up and virtually nullifies any further theatre revenue potential. There are a large number of video rental shops across the country, many of which thrive on pirated videos. It is difficult to estimate the combined revenues of these rental shops but the impact it has on eroding theatrical revenues is significant. Issues relating to piracy have been discussed in detail later in this report.

Expanding the international market
While the initiatives mentioned above can expand the domestic market, a better exploitation of Indian products in other markets can provide another avenue of growth. These markets include: ! The Indian diaspora ! Neighbouring markets like Pakistan, Sri Lanka and Bangladesh which are now opening up, ! Non-traditional / new markets like Greece and the CIS countries, where Indian films were extremely popular 30-40 years ago, through sub-titled or dubbed content. The global progress of Indian films

New western countries

Asian countries with common languages: Pakistan, Bangladesh, Sri Lanka, Malaysia

Revisit CIS, Greece, other once popular markets

Indian Diaspora

1995

2000

2005

2007

2010

Source: KPMG Research

68 Fo c u s 2 010 : D r e a m s t o r e a l i t y

The Indian diaspora is estimated to be 20 million strong and growing. The combined wealth of the global Indian diaspora is an estimated USD 300 billion. Apart from being a community binder for Indians across the world, Indian films in the past few years have contributed in a significant way in promoting culture and tourism. The Indian diaspora
3.5 3.0 2.5 2.0 1.5 1.0 0.5
Myanmar Malaysia Saudi Arabia

(In million)

-

South Africa

Source: KPMG Research

Over the last ten years, overseas theatrical revenues have grown continuously and are now a major influence in determining the way mainstream films are made. More Indian films are now distributed and released in mainstream international theatres, owing to the growing demand from the Indian diaspora. Most of these revenues accrue from US, UK and Canada owing to their high concentration in these countries. However, the success of mainstream films overseas seems to be driven by the popularity of a few leading performers. To earn sustainable export revenues, it is imperative that this success extends beyond a few blockbusters to a wider portfolio. It is now a challenge for mainstream producers to create content that is universal enough to cater to the Indian abroad and to the man in rural India, while being technically comparable to a Hollywood film, in order to woo the discerning audience. Looking beyond the Diaspora Another key area of market expansion from an international perspective, is the export of Indian films to foreign audiences, both to culturally similar countries (e.g. Pakistan, Bangladesh, Sri Lanka, etc.), as well as to countries where cultural barriers are considerable. Currently, the non-Indian viewers of Indian films are largely restricted to Asian expatriates, as opposed to say Americans or Europeans.

Trinidad & Tobago

USA

UK

UAE

Canada

Mauritius

69 A CII - KPMG Report

Pakistan, for example, has a 155 million strong population that has a keen interest in Bollywood films. Similarly, countries like Bangladesh (136 million strong Bengali speaking population), Sri Lanka (3.5 million Tamils), Malaysia (1.5 million Tamil speakers), Singapore, UAE, and Fiji also have good potential for different regional Indian films, as has been proven by the popularity of Indian regional television channels in these countries.

It is important for Indian producers to tie-up with agents who have the right relationships and an understanding of different markets

Agents and marketing Most foreign distributors have a limited understanding of Bollywood's international potential. Therefore, it is difficult for them to commit considerable investments in marketing the same. Also, there are not many existing overseas distributors of Indian films. Going forward, it is important that Indian film producers get into distribution tie-ups with global majors to enable mainstream releases of their films, as opposed to releases only in India-centric theatres as was the practice previously. These alliances can also be facilitated by marketing agents. Internationally, most independent producers do not have relationships with distributors across countries. So, the representatives or agents form the critical bridge between the (independent) producer and distributor. It is important for Indian producers to tie-up with agents who have the right relationships with major distributors along with an understanding of different markets and theatrical revenue streams. Similar alliances and a more focussed approach to distribution and marketing of DVDs, VCDs, etc. Are required to tap the potential of the overseas home video segment. In general, a more comprehensive and concerted distribution effort is the key to maximising the revenue potential of Indian films from international audiences.

70 Fo c u s 2 010 : D r e a m s t o r e a l i t y

A Possible Segmentation of Markets Primary Market Secondary Market Hindi speaking Indian Diaspora 20 million strong. Tertiary Market Domestic regions within India where the films have to be dubbed or sub-titled.

The Bollywood (Hindi) Regional Film

60 percent of the population in India.

Pakistan 155 million 8 percent Urdu speaking.

Countries where the films have to be dubbed or sub-titled (Pakistan, Sri Lanka, Bangladesh, Singapore, Malaysia, Fiji, UAE, etc.) + Russian, Indian Diaspora in Pakistan. French, Spanish, Arabic, etc. Countries where the films have to be dubbed or sub-titled (Pakistan, Sri Lanka, Bangladesh, Singapore, Malaysia, Fiji, UAE, etc.) and Russian, French, Spanish, Arabic, etc.

The Bollywood Urban Film a la “Jhankar Beats” “Dil Chahta Hai” etc. , , The English Regional Film a la English August (can include Indian Diaspora and Joint Ventures made for the Indian market)

Urban City population Metro and Multiplex Phenomenon

Indian Diaspora and other countries like Pakistan, etc.

Cine-going urban English Speaking Indian population (around 1.50 percent)

Countries where the films have to be dubbed or sub-titled. (all English speaking countries of English Speaking Pakistan, the world huge tertiary audience) Bangladesh, Sri Lanka etc population and Indian Diaspora in these countries Tamil speaking Indian Diaspora Domestic regions within India where the films have to be dubbed or sub-titled Countries where the films have to be dubbed or sub-titled Eg, Japan for films starring the leading Tamil film actor Rajnikanth.

English speaking Indian Diaspora.

The Tamil Regional Film

11 percent of the population in India.

18 percent of Sri Lanka, Malaysia, Singapore, etc and the Indian Diaspora in these countries

The Bengali Regional Film

2.50 percent of the population in India.

Bangladesh and its diaspora

Domestic regions within India where the films have to be dubbed or sub-titled Countries where the films have to be dubbed or sub-titled Domestic regions within India where the films have to be dubbed or sub-titled Countries where the films have to be dubbed or sub-titled Domestic regions within India where the films have to be dubbed or sub-titled Countries where the films have to be dubbed or sub-titled

The Punjabi Regional Film

Punjabi Speaking Population in India

Pakistan - 48 percent of 155 million speak Punjabi. Punjabi (Indian and Pakistani) Diaspora.

The Telugu Regional Film

10.50 percent of the population in India.

Telugu speaking Indian Diaspora. India, Pakistan, etc.closer cultural match (films may have to be dubbed or sub-titled)

Indian Diaspora and Joint Ventures a la “Elizabeth” “Bend it , Like Beckham” , “Monsoon Wedding”

Global (where the language of the film is the first language of the country) Malayalam (3.90 percent), Kannada (4.40 percent), Marathi (1.80 percent), Gujarati (1.20), Oriya (1.0 percent)

Countries where the films have to be dubbed or sub-titled Domestic regions within India where the films have to be dubbed or sub-titled Countries where the films have to be dubbed or sub-titled

Other Regional Industries

Key points: ! These markets experience a strong overlap in the primary markets, relatively lower overlap in the secondary markets and practically no overlap in the tertiary market (where the market becomes more heterogeneous with different countries). ! Audiences would tend to see these films in the theatrical release “window” more in the primary market than in the secondary market (relative to the primary market) and least in the tertiary markets (consisting mainly of satellite, cable and DVD/ video viewing)

71 A CII - KPMG Report

Can the Indian film industry become a global powerhouse?
Wooing the international viewer India is one of the few markets globally where Hollywood has not been able to dominate. Hollywood only has a 4 percent market share in India, arguably the lowest amongst all other exporting countries. The Indian film industry boasts of a repertoire of 67 ,000 plus feature films and a few thousand documentaries made over the years in 30 different languages and dialects. This kind of body of content is only second to the US and the UK and therefore, can be a considerable source of export revenue due to its potential of distribution via multiple formats globally. In contrast, most countries that had vibrant film-making industries earlier have seen a decline in their domestic production due to the local dominance of Hollywood films coupled with lack of competent local language content. Even countries like France, UK and China have felt the need to institute state initiatives and control mechanisms like limiting the exhibition of foreign films to help their local film industries compete with Hollywood.

India is one the few markets globally where Hollywood has not been able to dominate

Since these countries are not producing significant content locally, they could be looked at as an attractive alternative market for all types of dubbed and sub-titled Indian films. This provides the Indian industry with a new opportunity to exploit in the international film landscape. CIS countries and the Middle East are the most appealing markets for India within this niche segment. Global box office revenues
0 .9 0 0 .7 1 0 .4 7 3 .0 6 4 .0 2 4 .0 9 0 .8 0 0 .5 2 3 .1 4 4 .9 5 5 .5 8 0 .6 0 3 .7 9 0 .8 0

(USD billion)
0 .6 9 3 .7 9

7.6 6

8 .4 1

9 .5 2

9 .4 9

2000 US A EMEA

2 0 01 A s ia-P ac ific

2002 L atin A m e ric a C anad a

2003

Source: MPAA

Penetrating these markets, however, will require significant upgradation in many aspects of production, like the quality of subtitles, dubbing, production values, universality of content, the ability to tell a story keeping an international audience in mind and, most importantly, the ability to handle a large canvas. It is not surprising, therefore, that internationally successful films based on Indian themes have been made by celebrated non-Indian directors, like James Ivory (several

72 Fo c u s 2 010 : D r e a m s t o r e a l i t y

Merchant-Ivory) films, Richard Attenborough (’Gandhi’), David Lean (’Passage to India’) and Roland Joffe (’City of Joy’), or by Indian expatriates like Shekhar Kapur and Mira Nair who are familiar with the pulse of the western audience. New generation Indian directors are becoming increasingly aware of the fact that a different kind of story telling style and skill is required for an international audience; this is an encouraging development. Cross pollination of talent and resources Some of Hollywood's greatest directors and producers have originally hailed from non-English speaking nations, for instance Fred Zinnemann, Milos Forman, Billy Wilder, Roman Polanski and Elia Kazan. This confirms the fact that individual talent and story-telling ability is not constrained by geographies - capable film-makers will always find their way through to appreciative audiences. With Indian films becoming more sophisticated and its talent gaining global recognition, new opportunities for collaboration between the two industries are constantly evolving. For example, Indian directors like Shekhar Kapur (’Elizabeth’), Gurinder Chadha (’Bride and Prejudice’) and Mira Nair (’Vanity Fair’) are reinforcing their credentials in English film-making.

Individual talent and story-telling ability is not constrained by geographies capable film-makers always find their way to appreciative audiences

Apart from these individual forays, Hollywood is increasingly importing talent and concepts generated by Indian film industry. Recent examples are A.R.Rahman's collaboration with Andrew Lloyd Webber in ‘Bombay Dreams’ and ‘Moulin Rouge’ which featured a popular Bollywood film song. International assignments being bagged by actors like Om Puri, Nasiruddin Shah, Aishwarya Rai, etc are on the rise. The globalisation of the Indian film industry has started - with many more actors, directors, producers, composers and technicians getting new opportunities creating a greater visibility and acceptability for Brand India. Co-productions and collaborations The next considerable step in the interaction between the Indian film industry and the world could be co-production, with established Indian film-makers collaborating with international majors to create global products. Elsewhere in the region, involvement by major studios in local film-making and distribution has brought about a completely new dimension to the end-product. Columbia produced the landmark crossover film ‘Crouching Tiger, Hidden Dragon’ (which reportedly grossed an estimated USD 140 million at the box office worldwide) and few other Hong Kong based films, while Warner Bros has started distributing films produced in the Philippines. The Miramax-produced Chinese film, ‘Hero’ opened to a USD 18 million collection in August 2004, surpassing any other Hollywood film that week and reportedly ended with well over USD 100

73 A CII - KPMG Report

million in box office receipts. Korea's ‘Taegukgi’ has done brisk business in US and Japan. Film exports from Korea were negligible till 1997 and have increased manifold to USD 37 million in the first half of 2004. It is important to note how a focussed approach and thrust on marketing helped Korea achieve such a significant growth in exports in the last 4-5 years. Indian history, mythology and literature too have their fair repertoire of compelling stories that can be adapted for a global audience. For instance, an epic like 'Mahabharata' can be recreated on the screen with the same grandeur as 'Troy', or the story of Hanuman, can be retold with the same technical finesse as 'Spiderman'. Increased collaborations can permit the scaling up of budgets and technical capabilities that are necessary to create such magnum opuses on a global scale.

Indian mythology, literature and history can be a vast source for compelling stories that can be adapted for global audiences.

English remakes of interesting Indian films can be another potential option for such collaboration. At least one such initiative is reported to be underway already (Mira Nair's proposed remake of the successful Bollywood film 'Munnabhai MBBS' in English).Remaking films in a different language and setting is quite a successful and well-established model globally. 'The Ring', a recent Hollywood remake of the Japanese horror film 'Ringu' grossed around USD 130 million in the box office.

Outsourcing to India
Apart from monetising the direct potential of Indian filmed content globally, there are several applications where India, due to its inherent cost advantage, can emerge as a major competitor to other countries as a preferred outsourced destination for films. Some of these are:Digital content creation The convergence of computer technology with film-making technology is revolutionising the way films are made. Digital content is an integral part in Hollywood films such as 'Matrix', 'Twister', and 'Jurassic Park'. Given the fact that India has a talent pool of world-class software professionals which is available at much lower cost compared to the West, India could have been at the forefront of film related software and graphics production. Already, a beginning has been made by organisations like the Hyderabad-based Ramoji Rao Studios which has provided equipment, crew, sets, and post-production facilities to at least seven Hollywood productions including the Oscar-winning 'Gladiator'. India is steadily growing into a major hub for cost-effective outsourcing for animation and special effects. According to industry experts the size of the Indian visual effects industry is currently estimated at around INR 30 billion and has

74 Fo c u s 2 010 : D r e a m s t o r e a l i t y

grown at around 30 percent over the last few years. According to NASSCOM, the size of the animation industry itself is INR 25 billion, while special effects and other services account for the remaining INR 5 billion. However, India still forms an insignificant part of the global visual effects value chain. Over the last couple of years, many new post-production studios have been set up in India, aided by the fact that the infrastructure requirements for a medium sized visual effects studio are not very high. Most of these establishments operate well below their true capabilities and at a relatively low end of the value chain. They are yet to take appropriate initiatives in terms of quality control and building the requisite skill sets to move up the value curve. Also, no Indian studio has yet been able to integrate all the segments to be able to offer large-scale end-to-end services for discerning clients. As a result, India has continued to remain a mere low end outsourcing destination for developed countries with very few notable instances of creative collaboration and origination.

India forms an insignificant part of the global visual effects value chain

With prospects of increasing domestic and overseas business in the future, it is imperative that the Indian post production and animation houses make the necessary investment in technical and human capital to be globally competitive in terms of quality and creativity and not merely on costs alone. Locations A large number of Hollywood films are presently shot outside the United States in countries like Australia, South Africa, Canada and even Spain. For example, ‘Matrix’ was shot in Australia, ‘Shanghai Knights’ was shot in the Czech Republic, ‘Anacondas’ in Indonesia, while large parts of ‘Kill Bill’ and ‘The Entrapment’ were shot in Beijing and Malaysia respectively. The Indian subcontinent extends right from the snow capped Himalayas in the north to the warm coastal regions in the south, with forests and deserts in between - a range of locales for film shoots covering nearly every conceivable climate and location. However, despite this, the trend of using Indian locations has not really caught on internationally. This may be attributed to the commonly held perception in Hollywood about political and regulatory impediments. Ironically, on the other hand, several countries like South Africa and New Zealand have been wooing Indian producers with sops and incentives.

No Indian studio has yet been able to integrate all the segments to offer end-to-end services for global clients

A facilitative regulatory environment and a focussed promotion drive by the government and industry associations could help create the right visibility and awareness for India as a shooting destination. Outsourcing: A word of caution India is now maturing as a outsourcing destination in terms of its ability to offer end-to-end services of the desired quality to discerning international customers.

75 A CII - KPMG Report

More than 50 percent of the Fortune 500 companies have some form of offshore outsourcing operations in India. With current revenues of USD 12.5 billion and a steady growth rate of 30 percent, the business process outsourcing industry in India is likely to continue to grow. Traditionally, the back-end post production work has shifted from one country to another to take advantage of the low-cost, high-quality output. The back-end hub for films shifted from US to UK and now resides in Australia. The cost differential for post-production activities between US and India could be as high as 1000 percent. India, with a 2.5 million strong experienced work force, could be a formidable outsourcing player if it were to invest in appropriate world class equipment for post production. However, India's cost advantage is not enough to create a large outsourcing industry. For Hollywood, quality is a more important factor compared to mere cost reduction, as has been made clear by its preference for other countries (like Singapore) vis-a-vis India. Training and education Training and education is an area within the Indian film milieu that needs urgent attention, especially from the perspective of the industry's bid to increase its market size by going global. Although an estimated 2.5 million people currently work in the film industry in India, there is a glaring dearth of institutions and learning centres that impart professional training in creative, technical, and functional areas of film-making. As a result, most of the current breed of artists and technicians that make up the Indian film industry are self-taught craftsmen who have mastered their craft by assisting veteran film-makers, who in turn have also learnt their art through years of experience rather than any sort of formal training. Apart from FTII Pune, there are hardly any other film-making school of repute in India. For the industry to reach global standards of film-making, there is an urgent need to develop and align film education to the requirements and opportunities of mainstream cinema. India needs to develop creative and technical courses which are focussed and simultaneously, responsive to the current market environment. For example, computer graphics, animation and special effects courses designed to match global industry standards are needed in order to take advantage of the outsourcing potential of the market. A professional approach will also go a long way in providing the right balance of classroom instruction, hands-on workshops (learning-by-doing), and academic interaction with like minded peers, further driving the more knowledge-oriented and systematic approach to film-making. Apart from being under-trained and under-educated in global production and

76 Fo c u s 2 010 : D r e a m s t o r e a l i t y

management processes, a lack of nationally recognised formal training institutes also gives the Indian film industry and its participants a certain lack of respectability as compared to conventional professions like engineering, law and medicine where one cannot enter without formal training. This acts as a disincentive to many prospective creative talents towards entering the industry. With a formal degree requirement as one of the qualifiers for entering the industry, the less talented would ideally be decanted by the system, and raise the bar for such specialised services. This would eventually lead to better alignment with global standards of film-making and an improvement in quality of the product due to superior quality and standards of its creators.

A lack of nationally recognised formal training institutes gives the industry a certain lack of respectability compared to conventional professions where one cannot enter without formal training

However, it is important to note that training and education in films is completely unlike training and education in more conventional fields like business and law, where employment is practically guaranteed after the completion of the course. Due to the intermittent and project-based nature of film-making and the fact that there are many more people interested in taking it up as a vocation than what the industry can support, there is expected to be severe competition on graduation. For example, in USA, out of the thousands of film school graduates produced annually at their 125+ film schools throughout the country, only a few students actually end up 'practicing' film-making while others take up other vocations as a means of sustenance. A good way to tackle this problem in India could be to have MFA programs in film instead of BFA, which would allow students to get their Bachelors degree in a vocation they can fall back on, apart from providing them with a well rounded education. Government incentives The role of the government as an enabler and a facilitator has been discussed at length later in this report. Specifically in the context of films, there are several areas where the government could act as a catalyst, through direct or indirect support. Certain countries like Canada, Iceland etc. offer tax incentives for shifting the production to a local site in that country from a country where the film is primarily intended to be exhibited (’runaway film production’). Tax incentives are also granted by certain countries on co-productions, involving two or more production companies from different countries jointly financing and producing a film. Coproduction can enable the production houses to avail the benefits that are available to national films in other countries with which co-production treaties have been entered into. These tax incentives are by way of special tax credits or deduction of eligible profits from income subject to tax. Entertainment tax levied by various states/ municipal bodies on the value of film

77 A CII - KPMG Report

tickets, live stage-shows etc. adversely affects the entertainment industry. This results in a large portion of theatre ticket receipts diverted towards tax, instead of being channelled into development of theatre exhibition facilities. At an average of 60 percent, the entertainment tax levy in India is one of the highest in Asia. A wishlist of concessions: Complete amortisation of production costs in the year of completion of the film ! Amortisation of costs of incomplete films, subject to furnishing adequate documentation ! Extending tax-incentives for multiplexes in metro cities ! Tax incentives for newly set-up film ventures, with a corporate set-up and sizeable amount of investment ! Providing facilities and indirect tax incentives on film production, studios, etc. ! Tax incentives for film-financing activities ! Rationalisation of entertainment tax ! Concessions on customs duty on import of studio and other equipments and software to promote use of superior technology in film-making.

!

Government could play a meaningful, facilitative role in the areas of education and foreign trade

In addition to fiscal incentives, the government could play a meaningful role in the areas of education and foreign trade, not necessarily through grants or investments but through facilitation (of say, land allotment and clearances), by complementing the private sector's initiatives in this regard. Areas of possible government involvement
Government incentives

u u

Piracy control Legal and regulatory Incentives

u u

Tax breaks Import and export Subsidies

u u

Training and education Film development

u

u

Investments in education infrastructure Setting up professional training Institutes for professionals

u u

u

Film funding assistance Strengthening ailing film assistance bodies Film appreciation courses for increasing audiences’ awareness of ainema

Source: KPMG Research

The initiatives and ideas suggested above have the potential to play the necessary assisting role in restructuring the industry and ensuring that it takes off on the path of sustained growth. What is needed now is a firm dedication to carry out deep-seated transformational modification including strategic and structural alterations, implementation of new technologies, superior understanding of the consumer pulse and better organisational effectiveness to ensure that the sector realises its true potential.

78 Fo c u s 2 010 : D r e a m s t o r e a l i t y

The industry is making its leap from a fragmented, unorganised framework to an organised, commercially focussed structure. It will need to adapt and imbibe the business processes that would aid this metamorphosis. Simultaneously, it needs to tap alternate revenue streams by utilising the right technologies and following the right processes to optimise resource utilisation. The key to success in such a dynamic scenario will be the ability of the players to adopt global practices with the necessary degree of customisation and localisation. When it succeeds in making this transformation, it will compare favourably with the world's most developed film industry, viz. Hollywood, in terms of functioning and earning potential.

Slowly but surely, the Indian film industry is moving Back to the Future

In conclusion, it may be pertinent to observe that most of the initiatives discussed above - like the integration of the value chain (akin to the studio model of the 30s and 40s), the emergence of new genres, the merging of barriers between mainstream and parallel films and the exploration of new markets like Eastern Europe and Greece, cross over films and co-production - have all been attempted by the industry during the 30s through to the 70s, with varying degrees of success. In a way, therefore, it can be said that slowly but surely, the Indian film industry is now moving ‘Back to the Future’.

79 A CII - KPMG Report

Music
The times they are a changin’

Music
The times they are a changin’
The Indian music industry is over a century old. However, the past few years have been dismal for the industry. It has shrunk to INR 10 billion from INR 13.5 billion in the last four years, as the onslaught of piracy, the high cost of acquisition of film music and the low priority accorded to the sectoral issues by the authorities have somewhat upset its business viability. The situation in India is not unique. Globally, the music industry has been in recession for about four years and is now making a slow recovery. A series of revenue enhancing and cost-cutting measures have been undertaken by global music majors, which are expected to bring about a turnaround soon. In India, the pattern of music consumption and distribution has shifted radically in recent times. Music buying has reduced and, despite the popularity of the new Hindi films, which make up for 40 percent of total music sales, the number of units being sold is falling. On the other hand, piracy has ensured that the average retail price of music cassettes remains stagnant over the years, while that of CDs fall. This has led to a spiralling decline in revenues, since such falling prices have not been compensated through rising volumes.

In recent times, the pattern of music consumption and distribution has shifted radically.

Over the last few years, the industry also witnessed the rapid rise of remixes, or cover versions and music videos of original soundtrack, which have attained mass popularity and received more airplay than the originals, on television and on FM radio, but did not significantly increase the sales of the original music companies. Future growth is likely to come from non-physical formats like digital downloads, royalty income and ringtones, among others. The Indian music industry needs to adapt to this swing in audience preferences by leveraging appropriate technology in a facilitating regulatory environment. Going forward, the industry will need to focus on controlling its distribution and manufacturing costs. This is likely to enhance the industry's bottomline and result in more capital being freed for investment in technology and infrastructure. The recovery process for the industry will be slow and a moderate growth is expected from hereon. There is an immediate need for the various stakeholders, viz. film producers, music companies and user-segments to come together and evolve solutions from within, and adopt a collaborative approach as discussed later. A unique industry structure The Indian music industry has a unique structure compared to most global markets. Till 1990, it was completely dominated by film and devotional music. With the advent of satellite television and increasing consumer exposure to nonfilm music channels, non-film albums and remixes have gained popularity recently. In the non-film category, devotional music produced by smaller and local

81 A CII - KPMG Report

companies is the most popular. A few late entrants to this category have decided to stay away from the vagaries of film music and have focussed on high end classical, devotional and other niche genres instead.

Genre-wise distribution of music sales in India
Others International 8% Devotional 10% 8% New film music 40%

Popular music 8% Regional film music 5% Old film music 21%

Source: Industry estimates

Genre-wise distribution of music sales in USA
Classical 3% Jazz 4% Religious 7% Others 12% Rock 27%

Country 11% R&B urban 11% Rap / hip hop 12%

Pop 13%

Source: IFPI

Piracy - A growing affliction Though the problem of piracy has been in existence for the last twenty odd years, it has emerged as an all-engulfing menace in the last five years or so. The volume of pirated units has been rising consistently despite the falling prices of legitimate music. Piracy, which is currently estimated at INR 4.3 billion, accounts for as much as 42 percent of the industry's total revenues. Unless stringent measures are taken now, this is expected to rise further. A look at the Indian audio-video market shows that the VCD/ DVD/ MP3 segment is growing at an explosive pace of almost 300 percent. However, this growth has

82 Fo c u s 2 010 : D r e a m s t o r e a l i t y

not been reflected in a corresponding growth in the legitimate sale of CDs, VCDs and DVDs. On the other hand, there has been an alarming rise in the production and sales of CDs and DVDs, far in excess of demand, in India and certain countries. Evidently, such growth has only resulted in increased piracy. While local CD-R burning is assuming a larger percentage of the piracy revenues (replacing VCDs and manufactured CDs), import of pirated CDs and DVDs from neighbouring countries continues unabated. Piracy trends
Estimated capacity
8 7 6 5 4 3 2 1

(All disc formats, billion units)

Total legitimate demand

Excess capacity
120% 100% 80% 60% 40% 20% 0%

In di a Si ng ap or e Th ai la nd Po la nd

Alarming rise in capacity despite falling demand indicates growing piracy Source: IFPI, industry estimates

Apart from physical piracy, another increasing problem is digital piracy. It is powered by the rising popularity of MP3 technology and rising PC penetration, making free downloads a convenient option for the consumer. While India has a large, indigenous copyright industry and a reasonably sound copyright law, there are several obstacles to reducing piracy. These are: ! Reluctance by law enforcers to accord due attention to the issue, ! Lack of resources and training (to track sophisticated MP3 piracy), ! Lack of an optical disc law and ! Lenient punishments. However, there is some light at the end of the tunnel. Indian Music Industry (IMI), an industry body comprising over 50 member companies, has stepped up its efforts to curb piracy through regulation as well as through technology. The members have decided to contribute 1 percent of their annual turnover, which works out to approximately INR 40 million, towards this cause, though this amount is considered rather inadequate. The recent strengthening of the Civil Procedure Code and the proposed Optical Disc Law are steps in the right direction. Strict vigil at the customs check-points and more stringent implementation of the law by the police will go a long way in reducing physical piracy in the near future.

si a In do Cz ne ec si a h Re pu bl ic

Ta iw an

Ko ng Ch in a M al ay si a

H on g

Ru s

83 A CII - KPMG Report

Side by side, it is expected that digital piracy too will be brought under control, eventually, through: ! Technology push: a wide repertoire of legitimate digital music becoming available through a variety of convenient platforms and options ! Demand pull: increased internet penetration and the advent of broadband ! Efforts by authorities to educate and deter the free downloader Global efforts to curb digital piracy Concerned by the growing trend of free downloads and peer-to-peer networks, and the inability to control mounting losses due to home piracy, music companies worldwide have decided to adopt a carrot-and-stick policy. Realising that there is a significant section of listeners with access to free and convenient downloads, they are adapting to the same channels of distribution to provide the convenience of digital downloads. They are also backing this up with a strong regulatory push, public announcements, litigation warnings and legal cases against users distributing large volumes of music files over the system. The results have been positive and for the first time since its origin, music downloads on peer-to-peer file sharing networks have started reducing. Also, new global developments have seen better acceptability of new service offerings. Apple Computer's iTunes Music Store, launched in April 2003, that sells individual song downloads for 99 cents, has reportedly sold more than 200 million songs till end 2004. The availability of a wide repertoire of more than one million songs from all four major labels and over 600 independent labels has contributed to its success. The new digital age is likely to see the rapid growth of service providers like iTunes, Napster, Rhapsody, MusicMatch etc. who have been able to enhance the music companies' revenues through innovative offerings like: ! Audio books ! Exclusive tracks, in-studio performances, customised playlists and ondemand video ! Portability - the freedom of accessing the account from any PC ! Flexible payment options, like pay-per-song, monthly subscription, one-off charge, pre-paid cards and music allowance accounts. ! Tie-ups with retail stores and PC manufacturers.

84 Fo c u s 2 010 : D r e a m s t o r e a l i t y

Composition of revenues Currently, the music industry derives annual revenues of INR 10.2 billion, of which music sales contributes around 92 percent and the non physical formats contribute the balance. Ring-tones now contribute around 5 percent, and royalty revenues 2.5 percent. It appears that the negative trend in revenues, seen in the earlier years, has been reversed. Sales in 2004 have increased at a very modest 1.2 percent vis-à-vis a 4 percent decline in 2003 and 14.5 percent drop in 2002), while the bottomlines have significantly improved. Music revenues
15 10 5 2000 2001 2002 2003 2004 2005E 2006E 2007E 2008E 2009E Pirated CDs and cassettes Royalty Revenues 2010E

(INR billion)

Original CDs and cassettes Ringtones Digital formats

Source: KPMG Research

Recovery and growth From a perspective of pure financial returns, and looking at other alternative and more attractive avenues available to the entertainment sector, the music industry will need to completely reinvent its business model in order to attract significant investments. In the future, it is hoped that the film and the music industries will work collaboratively, aided by digital infrastructure, effective distribution formats and a more conducive and effective regulatory regime, to combat piracy and get the listener back into the buying mode. Growth in sales
140% 120% 100% 80% 60% 40% 20% 0% 2001 -20% -40% 2002 2003 2004 2005E 2006E 2007E 2008E 2009E 2010E

Original CDs and cassettes Digital formats

Pirated CDs and cassettes Royalty Revenues

Ringtones Total industry

Source: KPMG Research

85 A CII - KPMG Report

In the future, the industry is likely to see changes in its distribution and consumption patterns, aided by technology and more stringent regulations to curb losses and leakages. The industry is expected to recover and post moderate growth to reach INR 13.2 billion by 2010, a CAGR of less than 5 percent. However, as non-physical formats gather momentum, the bottomlines of the music companies are expected to increase more than proportionately as a result of improved efficiency and lower delivery costs. With mobile phone penetration already over 50 million and expected to double in the next two years, revenues from ringtones are expected to become a significant contributor to the toplines of music companies. Also, as additional endusers like pubs and discotheques, hotels and restaurants are brought under the royalty payers' net, publishing (royalty) income is expected to grow significantly, from INR 254 million currently to INR 747 million in 2010. This number can increase significantly with investments in technology to track and record online usage and a more cooperative approach from the royalty payers.

A firm regulatory push, together with investment in Digital Rights Management, will eventually bring down losses of original IPR holders

A firm regulatory push, together with investment in Digital Rights Management, will eventually bring down losses currently suffered by the original IPR holders. Split of revenues
Original music sales Loss through cover versions
16 14 12 10 8 6 4 2 2003 2004 2005E 2006E 2007E 2008E 2009E 2010E 10% 0% 40% 30% 20%

(INR billion)
Pirated music sales Loss to original IPR owners
60% 50%

Source: KPMG Research

In the future, music will increasingly be sold through non-physical digital formats, as technology makes new products and services available and affordable. By end2005 digital sales are expected to account for around 6 percent of global music sales. It is expected that digital distribution of music will become popular in India by 2007 when large telecom, cable and DTH players roll out their network. In , keeping with the global phenomenon of the emergence of service providers, there will be a gradual proliferation of such providers in India too. These providers will sell bundled offerings of digital music, television broadcast and pay-per-view films and events to their consumers through different delivery platforms like digital cable, IP-TV and satellite.

86 Fo c u s 2 010 : D r e a m s t o r e a l i t y

The journey from here...
Though piracy remains a major global issue globally, the solution for the Indian music industry, because of its inherent nature, will need to be quite different and will have to come from within the entertainment industry. A few steps that could rejuvenate this industry are suggested below: Film industry as a partner The Indian music industry is quite unique compared to those in other countries, as it is virtually dependent on new Hindi films for the lion's share (40 percent) of its revenues. Regional and old Hindi films add another 25 percent to the industry revenues. The film industry needs to look at the music industry as partners rather than buyers - the current risk-reward distribution among them is lopsided and needs to be made more equitable. The film's performance at the box office and the music company's cost of rights acquisition determine the profitability of a music album. However, the music creates the curiosity factor for a film. It is the first phase of promotion that initiates the entire brand building for a film. Music companies do not have any say in the way the music is conceived or produced, yet they are expected to market it. Here, a collaborative approach with the producer of the film, and a revenue sharing based understanding, could result in improved content and better risk sharing. In the future, there could be collective efforts where the music companies are involved at the content-creation stage and also in the marketing of the film. Over the last three years, there has been a unified effort in the industry to correct the price paid for purchasing music rights. In the last few years, while the film industry went through a phase of rationalisation, the music industry made certain overvalued acquisitions. One fall-out of this market correction has been that the sale of music rights has dried up as a significant revenue stream for producers. Moreover, a new trend of producers setting up their own music companies has emerged. In the near future, there could be an increased number of alliances, and even acquisitions, with film production houses taking over music companies, to avail of their distribution network and operating expertise. The FM factor It is believed among certain sections of the music industry that the proliferation of FM radio stations across the country has led to a decline in the sale of audio cassettes and compact discs. Globally, FM stations help promote albums and labels by playing their songs. However, in India, FM is considered more of a threat than a promotional medium for the music industry the reason once again being the unique genre-preference of the Indian listener, which is heavily skewed towards new film music.

87 A CII - KPMG Report

However, since FM radio is limited to a handful of large cities, its impact in accelerating the downfall of the music industry may be overstated. In the future, though, there is a need for the music and radio industries to work together rather than at loggerheads, to work out a common growth path within the given environment. The possibilities and synergies of co-branding of music products and properties between radio stations and music companies can be explored. For example, Radio X could promote a collection of Y Music's songs or artists resulting in increasing the demand for these songs. On the other hand, Y could release a 'Radio X Top 10' album consisting of such songs and programmes promoted on air. Again, on several occasions, good quality, non-film albums produced by music companies do not get reasonable airtime. Such experimental or offbeat music can be effectively promoted on radio and the channel can be incentivised to take certain risks through intelligent revenue-sharing arrangements. Strategic thrust on marketing non-film music Music is not a necessary item on the consumer's shopping list. In the film-centric Indian music industry, there is virtually no loyalty for the label among the segment that buys only film music. However, the marketing models developed by FMCG companies to launch and sell lifestyle and aspirational products can be implemented by companies to boost the sale of non-film albums. This is possible by developing brands and charging premium prices once brand loyalty is built among the target audience. Once a strong brand recall is created through successful marketing of non-film albums, the same can be extended to film albums to create a differentiating factor over competing pirated products. Interestingly, the growing sale of video remixes of old classics has actually opened up a window of opportunities for the music companies that hold the original rights. The future could see these (original) music companies themselves getting into the remix act in a big way. This same move could see them getting into the cassette segment of non-film devotional songs recorded by unknown artists, hitherto a stronghold of the lesser music companies. Online marketing With increasing PC penetration, the internet is expected to become a significant influencer in the purchase of music. Online sales involve lower distribution costs and eliminate the retail margin of 15-20 percent. Part of these savings can be utilised for innovative net-marketing that offers consumers detailed information and reviews, and also the flexibility of customised and unbundled offerings.

88 Fo c u s 2 010 : D r e a m s t o r e a l i t y

Artist and repertoire One of the strategies adopted by the music industry for the growth of non-film music segment involves identifying new talent, nurturing it and creating strong brands around it. Such artist and repertoire (A&R) management will assume greater brand-building increases. One effective way to build brands with differentiated content is to create a talent pool of artists who are groomed, promoted and retained by the label. Notable experiments in recent years have been 'Band of Boys' and 'Viva', music groups promoted by Universal and Channel V respectively, which managed to generate significant awareness and popularity amongst their target segments. Sony Entertainment Television's 'Indian Idol' is another similar exercise in which people vote for their favourite contestant. Through this show, Sony aims to identify talent which is popular with the audience and simultaneously connect with the audience, which is an effective way of pre-selling what would have otherwise been albums by unknown artists. Similar experiments have proven to be fairly successful in other countries like Australia and USA. The most successful example of such a strategy is the ‘Spice Girls’ band that enjoyed global popularity. Music companies could benefit from the Indian experiences in this arena and further refine this strategy. The benefit of such a strategy is that apart from generating music sales, the creation of brands can be leveraged for multiple sources of revenue like brand merchandise and memorabilia among other things. At the same time, the cost of such talent acquisition is also relatively low, compared to the fees and royalties that are paid out to leading singers.

A&R in India can prosper in an environment that is more transparent and artist-friendly

Internationally, A&R forms a significant and steady revenue stream for music companies. Though in India, the film soundtrack is more important than the singer, there is no reason why A&R cannot prosper in a more transparent and artist-friendly environment. Currently, there is a certain lack of trust between the artists and the music companies. A fair and transparent business model could provide the platform for a healthy artist-recording company relationship. At the same time, a more serious effort needs to be put into the content that is churned out, to increase the shelf life of the artist and the music property, so as to create a sustainable long-term value proposition. This can be possible if the music companies consider allocating budgets and setting up dedicated divisions manned by experienced people. Royalty collections Currently, Phonographic Performance Ltd. (PPL) and Indian Performing Rights Society (IPRS) are the two administering bodies for royalty collection for all music that is publicly played over radio, restaurants, clubs, discotheques, etc. The scope and the awareness for such royalty collections has increased manifold over the last few years. It is expected that in the near future, the music companies will be able to collect substantial revenues through royalties from a vast cachement of

89 A CII - KPMG Report

users. The increasing user base can also enable PPL and IPRS to reduce the per user royalties collectible from other industry stakeholders like radio. However, PPL and IPRS do not the have the manpower, funds and the infrastructure to monitor and collect royalties on a nation-wide scale. One solution to increase collections and bring more users into the royalty net could be to introduce a point of sale tax - an indirect tax collected from all customers of pubs, discos, etc. It could be coupled with a share of the revenues from the sales of these establishments. This collection can be allocated among various music companies depending on certain mutually agreed criteria. A part of the money collected could be retained towards a development fund that will, among other things, invest in piracy control. Judicial leniency While existing laws have punishments for a term not less than six months and a fine not less than INR 50,000, offenders for copyright violation often get away with a single day imprisonment and fines between INR 500 and INR 1000. The fine too, goes to the government and not to the music company. Such lenient clauses do not serve any purpose as a deterrent to offenders. Again, due to lenient copyright laws related to music [like Section 52 (1)(j)], and the opaqueness of the system, the original rights holders stand to lose every time a remix of a popular song is made by a second recording company. Smaller recording companies and new entrants without significant archival content have successfully exploited this clause to the detriment of the original rights holders. Coupled with this, the lack of optical disc laws and ineffective implementation of controlling physical piracy, discussed earlier, have led to huge losses to the exchequer by way of non-payment of income tax, sales tax, excise duty and entertainment tax. A tighter regulatory regime and a more stringent enforcement of law is the need of the hour. Digital distribution With the rapid rollout of enabling digital technologies and rising PC penetration, music companies will need to embrace new technologies. The future will mean making more sales to more people in more ways but at a lower average price. Music companies need to re-engage innovatively with the consumer. The future demands a new consumer-inspired business model that incorporates everything that modern technology can offer, which is balanced with enhanced retail delivery. Also, there is a need to monetise access to music on the Internet, a difficult but not impossible challenge, as Apple’s iTunes experiment has proved. This requires significant investments in time and money, and a buy-in of all major music labels

90 Fo c u s 2 010 : D r e a m s t o r e a l i t y

to agree to come together and put up their repertoire on downloadable platforms. However, the music companies alone do not have the wherewithal to make the necessary upfront investment, and they may therefore need to work together with a digital access provider to home through cable, fibre or satellite on a revenue sharing basis. Collaborative efforts between access providers and music companies in this regard are reported to be underway. Convergent distribution Aided by enabling technology and a reasonable subscriber take-up, the music industry also has the potential of participating in convergent distribution, at least in the major metros when such services are rolled out. It means simultaneous availability of content to the public (via radio, television, internet, retail), real-time marketing, promotion and distribution. Convergent distribution will also enhance the value proposition of the access providers and improve subscriber take-up. Organised retail Globally, bundled offerings like books, music and coffee in stores located near hypermarkets, multiplexes and other entertainment destinations have significantly increased footfalls. Though hypermarkets alone account for 40 percent of sales in developed countries like France, Japan, etc., organised retail accounts for less than 2 percent of the total sale of music in India. With the growing acceptance and availability of large format retail stores, this ratio is expected to increase to around 5-6 percent in the next 4-5 years, which will still be rather low by international standards. Since the purchase of most media products is instinctive and preference based, their points of sale have to be spread across the various options available in the retail arena. Such outlets include supermarkets to service stations to specialised electronics shops to record shops. If this were to happen, it could help in curbing physical piracy too, since such pirated products are mostly sold through small neighbourhood music stores. Public awareness campaigns Such campaigns against piracy and free downloads have been quite effective in the US. The need for the Indian music industry to invest in public relation cannot be understated. The formation of a development fund, discussed earlier, could be thought of, for channelising investments in this area. New business models Emerging home entertainment technologies, the growth of high-end mobile handsets and music's growing role in games, advertising, films, television and corporations will result in music companies re-inventing their traditional business models significantly to be able to fully capture these emerging streams. Every

Convergent distribution will enhance the value proposition for access providers

91 A CII - KPMG Report

new technological innovation will also give rise to a new form of piracy, so continuous investments in digital security will need to be made. Conclusion The Indian music industry needs to undertake several strategic shifts going forward in order to retain its lost glory. It needs to revamp its operating model with support from key stakeholders and evolve new revenue streams for various delivery platforms. The last decade saw a spurt in the number of players who were attracted by the profits seen during the boom years. The next few years could see a consolidation and shake-out. The corporatisation in the film industry would have a beneficial effect on the music industry, as they jointly move towards a more equitable revenue and risk sharing model. Music is a creative industry, which needs support in trying times. How willingly and effectively the various stakeholders come together to adopt a partnering approach will determine the pace at which the industry re-invents itself to stay competitive.

92 Fo c u s 2 010 : D r e a m s t o r e a l i t y

Radio
Tuning in

Radio
Tuning in
Radio is a mass medium and therefore ideally suited for India - leveraging its twin advantages of wide coverage and cost effectiveness. It is dominated by the stateowned All India Radio (AIR), which covers 91 percent of India's area and reaches 99 percent of the population, through a wide network of broadcasting centres and transmitters. Apart from AIR, there are 21 privately-owned FM stations in 12 major cities, all of whom have been granted licences over the past 3-4 years. Advertising is the sole source of revenue for radio in India. Currently, the sector generates annual revenues of INR 2.2 billion and is growing at around 20 percent annually. This implies a marginal rise in radio's share in the advertising pie to around 1.9 percent. Given that commercialisation of radio is still in a nascent stage in India, this growth rate is far from flattering. As a result of unsustainably high licence fees, the sector has been reeling under heavy losses. A few FM stations have been forced to shut down, as they could not afford to pay the annual license fees, set at levels significantly above their earning capacity. If one considers the private sector FM market in Mumbai, four players cumulatively generate annual revenues around INR 250-300 million, against total operating costs of around INR 550-600 million. Given that a significant portion of the operating costs is the licence fee, which is set to increase at 15 percent per annum, revenues would need to grow at over 40 percent annually to break even in the next three years. The global scenario Globally, radio is enjoying a renaissance based on the support of the youth. They seem to prefer it since, unlike television, it is more compatible with their lifestyle. Research trends in Australia indicate that radio enjoys a higher level of popularity among the 15-29 age group. Today's busy teenagers love radio because it complements a faster-paced lifestyle - they can listen to music and get information on the move. Younger audiences, particularly those below the age of 25, also have access to new technology like mobile phones. They have taken very quickly to interacting with their favourite radio stations and RJs via email and SMS for song requests and competitions.

Globally radio is enjoying a renaissance based on the support of the youth.

93 A CII - KPMG Report

FM listeners across age groups
41% 35% 34% 28% 20% 40%

12-14

15-19

20-29

30-39

40-49

50+

Source: - MRUC and AC Nielsen ORG Marg's Indian Listenership Track 2004

The Indian potential India has an estimated 180 million radio sets, reaching over 99 percent of its one billion inhabitants - a clear indication of the vast commercial potential in India for this medium. Plainly, the radio sector cannot and should not be satisfied with a growth rate in the low 20s. In India too, it is the younger generation that is the key target audience vis-à-vis radio. While consumption in India is still largely at home, 'the radio on the move' trend is catching on in urban and semi-urban areas. The easy availability of FM radio sets at affordable price points (ranging from INR 40-INR 150) is fuelling its mass penetration. FM listening habits
100 80 60 40 20 0 8 7 7 1 5 8 2 4 1 5 72 72

Delhi
At home In Car Commuting

Mumbai
Neighbour/Friend’s place At office ( incl. Shops) Others

Source: - MRUC and AC Nielsen ORG Marg's Indian Listenership Track 2004

According to market research, in Mumbai and Delhi, FM penetration is the highest in the SEC A segment and least in SEC D. Further, 70 percent of radio listeners in these cities listen to FM radio all seven days of the week. However, this sector has not been able to monetise its hold on the listener’s eardrums. In spite of such attractive statistics, in terms of its advertising spend, radio remains a

94 Fo c u s 2 010 : D r e a m s t o r e a l i t y

laggard. It has less than 2 percent share of the total advertising pie in India, compared to a global average of 8 percent. In the US, radio has a 13 percent share, in Spain 9 percent and closer to home, in Sri Lanka, radio has a 21 percent share of the advertising spend. Global ad spend on radio
Share of total ad spend
25% 20% 15% 10% 5% 0%

Fr an ce

Sp ai n

Au st ra lia

Ja pa n

La nk a

Br az il

Source: - KPMG Research

Universally, media categories in the growth stage have a share of around 5 per cent and mature categories average around 10-12 percent of the total advertising expenditure across various media. We estimate that if its real potential is unlocked in India, commercial radio could account for approximately 8 percent of media spends in the short to medium term and up to 10-12 percent in the long term.

Radio revenues
25.0

G er

Sr i

m

(INR billion)

20.0
Current growth path Potential growth path

15.0

10.0
Includes only ad revenues Future subscription revenues (pay radio) included separately under ‘Digital Revenues’ of TV industry

5.0

0.0

2002

2003

2004 2005E 2006E 2007E 2008E 2009E 2010E

Source: - KPMG Research

In di a
95

U SA

Ita ly

A CII - KPMG Report

an y

U K

Bridging the gap
Due to the public-broadcaster nature of AIR and its socio-economic rather than a commercial focus, its ad revenues are expected to grow at a moderate pace. Since the private FM channels need to survive in a commercial and competitive environment, they have focussed on mass entertainment to gather listeners. Hence, it is expected that the private FM channels will drive the future growth of the sector.

FM radio needs to grow from the current 21 stations in 12 cities to atleast 300 stations in 100 cities

To exploit the true potential of this sector, FM radio needs to grow from the current 21 stations in 12 cities to at least 300 stations in 100 cities. At an investment of INR 40 million per radio station frequency, the total additional investment required will be INR 11 billion. In its current form and structure, the radio industry will not be able to attract the necessary funding. TRAI, the designated regulatory body for radio, has proposed a transition from the existing license fee regime to a revenue sharing one, to help the radio industry curb it losses. It is hoped that clarity on revenue-sharing emerges, soon. Apart from rationalising the licence fees, the government will need to promote and facilitate the growth of private FM radio by: ! Relaxing the entry barriers on foreign investment ! Providing a level playing field in programming for private players For example, opening up news and current affairs ! Enabling multi-city broadcasting of common programming content for radio companies ! Fostering the growth of niche channels by: Lifting restrictions on the same player owning multiple stations in the same city Relaxing licence fees for niche channels Incentivising existing players to set up additional channels with niche content The industry, on its part, needs to develop strategies to expand across the country and enhance business performance, thereby turning India's promise into reality. In other words, the challenge confronting radio is to bridge the gap between the current growth trend and potential growth expectations. It is expected that increasingly, FM radio stations will concentrate on: ! Focussing on local and smaller advertisers ! Exploiting future value of programming content ! Making niche and differentiated programming a viable option ! Managing costs of operation in line with its business model ! Managing brand association ! Selling radio as part of the multi-media strategy

96 Fo c u s 2 010 : D r e a m s t o r e a l i t y

Local mantra The sales and marketing efforts of the major FM radio stations have focussed on the large advertising clients. This may be partly attributed to the FMCG-marketing background of some of the managers and partly due to the sales strategy of the multi-media groups that own most radio stations. However, radio is a unique medium and the focus on large advertisers seems to be at the cost of its largest potential benefactor - the local retailer. The retail segment globally constitutes a large part of radio's clients and sales, but currently in India accounts for a small portion of the radio revenue pie. For example, in USA, 70 percent of all radio revenues come from local retailers, and only 30 percent comes from either national or international advertisers or from the network of advertisers. In contrast, in India, retail comprises only 8 percent of radio advertising.

Profile of advertisers on Indian radio
Telecom 8% Others 26% Retail 8%

Finance 10% Durables 12% FMCG 14%

Media 22%

Source: Industry

Radio, by its very nature, is a localised medium, due to it’s ability to transmit a particular message over a small geographical area. The retailer, with city/ localityspecific target groups, can be a major beneficiary of radio advertising. Clearly, there is a need to unlock the advertising potential in the retail segment. Radio stations offer high frequency ‘opportunity to hear’ for the advertiser. International research indicates that radio has 60 percent of television’s effectiveness at increasing campaign awareness amongst an audience of 16-44 year old radio listeners. However, advertising on radio costs just 15 percent that of television. While the price relativity for other audiences will vary, the achievement of 60 percent of the result at 15 percent of the cost makes radio significantly more cost effective than television.

97 A CII - KPMG Report

Revenue composition
11%
11 percent of clients contribute 60 percent of revenue

60% 89%

40%

% Clients

% Revenue

Source: KPMG Research

The price differential between radio and television will vary depending on the area and the audience. In India, where the cost of television advertising is more than seven times that of radio advertising, the cost effectiveness of radio advertising will be even more acute, which can be a great proposition for local retailers. A high frequency combined with a moderate card rate (effective rates average between INR 500 to INR 900 per 10 seconds) provides an opportunity for retail players to promote their products and services cost effectively without fragmentation as in the case of national or even regional media. Presently, the advertiser base of FM radio is highly skewed, with around 11 percent of advertisers contributing 60 percent of their revenues. This should not be the case in a localised, mass-medium like radio. Ideally, the advertiser base should be broad-based with a large number of local advertisers promoting their products. While some radio stations are waking up to this reality, this potential is largely untapped. It is important for the radio stations to highlight the effectiveness of using radio for local level promotions and region-specific ad campaigns. Moreover, since many FM players are associated with larger, vertically integrated media corporations, cross media promotions could be an added incentive for the potential advertiser.

98 Fo c u s 2 010 : D r e a m s t o r e a l i t y

FM licensing - The story so far
In 1999, the government decided to allow fully owned Indian companies to set up private FM stations on a licence fee basis. Bids were called for allotting licences for 108 FM frequencies in 40 cities for a ten-year period. However, the government imposed a few conditions like: ! Broadcasts will be for education/entertainment only, with a ban on news and public affairs programming ! No foreign equity was allowed, although foreign institutional investors may have portfolio investments of up to 30 percent ! Licence fee will be determined by auction for each market. Subsequent annual license fee renewals will be based on bid price plus a fixed percentage. In May 2000, as part of Phase I of radio broadcast licensing, the auction was conducted and 37 licenses were issued, out of which 21 are operational in 14 cities. The results were not very encouraging, given that only 25 percent of the available licences were operational. Even the existing licensees claimed to be making heavy losses in their operations. The main reason for this was that the licence fees were based on highly optimistic projections. A committee was established under the chairmanship of Dr. Amit Mitra to make recommendations for Phase II of radio broadcast licensing. This committee found that the industry appeared unviable under the existing licensing regime and suggested a shift towards a one-time entry fee coupled with a revenue-sharing agreement. In February 2004, as the designated regulatory authority, TRAI was asked to give its recommendations for the Phase II licensing of FM radio. In April 2004, TRAI came up with a consultation paper that listed the following issues: ! Service area: Should it be city-wise or regional or national? ! Duration of licenses: Is there a need to change the present license period? ! Fund for rural roll out and niche programming: Should it be created? What should be its quantum? ! Licensing process: What approach should be adopted to award the FM radio licenses? ! Quantum of entry and license fees: How should entry and licence fees be set? Should it be a revenue-sharing model? ! Multiple licenses: Should multiple licences at the same centre be restricted? If yes, then to what extent? ! Networking: Should it be allowed between broadcasters in the same city? ! News and current affairs: Should the restriction on news and current affairs be maintained? ! FDI limit: Should FDI be permitted in this sector and what should be the limit of FDI?

99 A CII - KPMG Report

! !

Non commercial licenses: Should certain frequencies be reserved for niche channels? Migration related issues: Should migration of existing licensees to revenue share regime be permitted? If yes, under what terms and conditions?

In August 2004, TRAI presented its recommendations on the regulatory framework for private FM stations. The main recommendations are: ! Licences should continue to be allotted on a city-by-city basis. ! The licence period should be ten years, extendable for additional five years. ! A portion of the revenue received by the government to create a fund for public service broadcasting. ! Change the licensing process from open bid auction to tendering, without any reserve entry fee. ! Bids for the next phase of licensing should be based on entry fee plus revenue sharing model (4 percent of gross revenues). ! The winners should be selected in descending order of their entry fees. The entry fee for a player should be equal to the amount bid by him. ! Multiple licences to the same player in the same city should be permitted, subject to monopoly restrictions. ! Networking should be permitted across broadcast stations of the same entity in different cities. ! FM channels should be allowed to broadcast news and current affairs programs, subject to AIR code of conduct. ! 26 percent FDI should be permitted in FM broadcasting (news and entertainment) subject to some safeguards. ! Existing players should be allowed to migrate from a licence fee regime to the model adopted for new FM licence bidders. ! Co-location of transmission towers should be encouraged by suitable incentives. The Information and Broadcasting Ministry disagreed with some of TRAI recommendations. The objections and TRAI's rejoinders to them are listed below: ! The government's stand was that adopting a closed bid tender system without a reserve entry fee would leave the process vulnerable to cartelisation. According to TRAI, a reserve price has meaning only when there is a particular value to an asset, which won't be sold below reserve price. Here, it is just a mechanism of selection among the bidders. The government also thought that withdrawal penalties to deter non-serious bidders were not stringent enough. TRAI suggested a modified proposal to deter speculative bidders, while protecting smaller players. ! The government opposed TRAI's recommendation to move to a revenue sharing model because it would be difficult to monitor, cumbersome to implement and would cause revenue loss to the government. TRAI reiterated

100 Fo c u s 2 010 : D r e a m s t o r e a l i t y

!

!

the fact that the current fees were too high and would kill the industry prematurely. Instead, it suggested some accounting safeguards to ensure ease of monitoring. It also indicated that administrative convenience cannot be a major factor in deciding the licence fee model and that the government undertakes much more complex tasks like scrutinising over 30 million assesses annually for income tax. It also pointed out that the current revenues received by the central government were unsustainable. Shifting to a revenue sharing model would ensure that the industry is able to thrive and could even lead to higher government revenues in the future, as in the case of cellular telecom industry. The government opposed the TRAI suggestion on allotting multiple licences to the same player in the same city, saying that it would create a monopoly. It cited a Supreme Court (SC) case in defence of its stand. TRAI explained that the SC judgement sought to prevent the monopolies in the broadcasting arena under the garb of the right to free speech. TRAI is of the opinion that it has built in enough safeguards to prevent monopolisation. The government was of the viewpoint that the networking permitted by TRAI in its recommendations was unfettered and would lead to minimisation of local content and emergence of virtual national networks. TRAI mentioned that networking is permitted in a restricted manner. Competition and monopoly restrictions would also limit the extent of networking.

101 A CII - KPMG Report

Creation of value packs Most of the programming currently being aired, whether music or not, has little or no library value. Very little programming is developed to create any strategic intellectual property. Creating specific IP whether in the form of RJs, programme formats or around content areas could have the dual advantage of being re-usable in the future and being syndicated across other channels. Interactivity is a major content driver within the radio programming strategy. However, if the topics discussed are not affected by the 'recency' factor, there is enough potential to create a library of recordings that can be used beyond a single show. Such content, when re-broadcast, saves the cost of producing new content and generates newer revenues by offering brand association with such a property at reasonably low rates. Besides, such content can be exported for broadcast in other countries where the demand for Indian content is considerable. Creation of a good software library can become a source of competitive advantage for a radio player. Niche programming Internationally, content specialisation has been a distinct trend in the evolution of radio, especially FM radio. Radio stations have traditionally grown by attracting specialised audiences. These stations address specific audiences based on geographic, socio-economic or ethnic or combination of factors, like a radio station that caters to the African-American population of New York or a Malayalam channel with Indian content for expatriate Indians in the Middle-East. Being localised, these channels also meet the demands of local advertisers. Initially, most radio stations in India started off with a defined niche as well. Between them, they provided the listener with a choice of English, Hindi and mixed content. However, the pressure to sell airtime forced them to resort to the lowest common denominator - Hindi film music. Very few have held on to the English format or even non-film content. Channels that started out with English programming as a key differentiator have drastically reduced the total airtime dedicated to it. Since there is very little to differentiate between the various channels, the resultant effect is constant channel swapping by listeners. Radio stations have not been able to generate any significant channel loyalty. In fact, a closer look reveals that even programme loyalty does not exist, with listeners simply switching from song to song. This me-too approach towards content has a direct implication on the marketing of the radio channels as any message or campaign carried by it runs the risk of being lost in the clutter. Hence, there is an urgent need to evolve programming towards differentiated content. It may also require a shift from mass marketing of the radio channels to marketing programmes targeted at specific market

Radio stations need to start establishing their own identity through differentiated content

102 Fo c u s 2 010 : D r e a m s t o r e a l i t y

segments. Validation of niche audiences would enable differentiated client targeting with unique value propositions. With limited sponsored market research done in this area, radio stations find it difficult to market their USP However, these radio stations need not look beyond . their walls to get valuable listener data. The innumerable contests and interactive sessions on air bring in close to 30,000 callers every day for a single channel in a city like Mumbai - a valuable database that is currently under leveraged. Radio stations will need to start finding their own niche. Channels that address specialist listener groups need to emerge. Correction in the cost structures Most radio stations in the country are offshoots of larger, vertically integrated media organisations. The other media units of such organisations work on a much larger scale. Being a part of such large media houses, radio too seems to have expense items not necessarily justified by its scale of operations. Manpower The most conspicuous item on the expense list is 'salaries'. The salary structure in radio is comparable to that of other larger media units. This is driven by the fact that radio stations hire people from high wage industries like television, FMCG marketing or advertising. This has led to the creation of a people-cost structure that is incompatible with the current size and revenue earning capacity of the radio industry. While it is necessary to incur reasonable manpower costs in order to stay competitive and attract the best talent, innovative cost management solutions such as the right mix between live and recorded music could reduce production and salary costs. Branding Branding plays an important role in establishing a strong channel and programme association amongst listeners. The key word is 'association'. What the listener associates with is the quality of content. Brands that have spent more on marketing have a higher recall, but that does not necessarily translate into higher listenership, particularly in a market where lack of niche programming has resulted in constant surfing for songs of choice. Some private FM stations have incurred large costs on building merely 'Top of Mind Recall' for all listeners, irrespective of their preference or affinity to the station. But as the market matures and niche channels develop with defined target groups and unique value propositions, branding exercises will become more meaningful. Channel brands and programmes will be associated with niche content and specific listener profiles that can be sold to potential advertisers.

103 A CII - KPMG Report

There is no doubt about the effectiveness of radio when it comes to building brands for its clients. For example, brands like Binaca / Cibaca and Bournvita were built on radio. These programmes rode on extremely successful content formats. Branding is expensive and therefore, radio stations with limited budgets need to make a choice between channel branding and programme branding. What could work better for them would be a combination of two. Programmes that are aligned to channel positioning can ride on the channel branding, while other programmes should develop their individual brands, without diluting the channel positioning. The multi - media story Although most radio stations in India are part of larger media outfits, they do not necessarily leverage their strengths across multiple media. Business units within media groups tend to have their own sales teams working in isolation, not fully selling their integrated media story to prospective clients. While it is necessary to maintain and operate separate profit centres, going forward, radio stations could look at a greater degree of integration of sales efforts to fully exploit the multimedia strategies. This way, the media groups, rather than just being owners of media assets, will be able to offer an integrated value proposition to the advertiser. Conclusion India's radio industry has a strong growth potential if mechanisms and policies are put in place to provide it with appropriate support. India, with its diverse regional influences, is in a prime position to take advantage of the growth potential of this segment. With privatisation gathering momentum, the increased number of private radio channels across the country is likely to transform commercial radio from an urban phenomenon to a national one, as has been the case with satellite television.

104 Fo c u s 2 010 : D r e a m s t o r e a l i t y

Digital radio broadcasting
Two digital radio distribution technologies have emerged recently - Internet radio and digital radio broadcasting (DRB). Internet radio streams audio through the Internet. DRB involves the broadcast of digitally encoded audio and data to a receiver through either terrestrial radio frequencies or through satellite transmission. DRB offers a number of advantages over the existing analog system: Better quality reception compared to analog AM and FM broadcasts to fixed, portable and mobile receivers ! Ability to carry a range of additional data, usually programme associated data, including graphics and text, such as station name, song title, artist's name and record label, news, weather, time, traffic and promotional information ! Dynamic reconfiguration enabling services to easily change from, say, a high quality music programme in one time slot to two talk programmes of lesser technical quality in another

!

Internet radio and DRB have different modes of transmission, one via cables and the other terrestrial transmitters and satellite; however, they share some similar digital concerns. DRB technology comes at a cost - consumers need new reception equipment and broadcasters require new infrastructure. As with the conversion to digital television, the speed with which audiences adopt new technology will depend on the cost of the new equipment. Different technologies are being developed to deliver DRB services. Those expected to achieve some success in the next 5-10 years include: ! Eureka 147 ! Worldspace ! The USA's IBOC systems ! The USA's S-Band satellite services ! Japan's ISDB system ! Digital AM, both medium and shortwave ! Various cable and satellite technologies (to fixed receivers). A consortium of broadcasters in Europe developed the Eureka 147 system. The system converts an audio signal to a digital signal, which is then compressed. A multiplex can bring together several audio channels and encode them into a single data stream. Data and other services can then be added to form an ensemble. Digital receivers separate and decode the ensemble for the listener. Each multiplex is able to carry five 'compact disc quality' programmes: around six 'FM quality' services; around 12 'AM quality' services; almost 30 voice channels; or any combination of these. The signal can be dynamically reconfigured so that a

105 A CII - KPMG Report

high quality service can be readily switched to a number of lesser quality services or vice versa. To date, UK has the most advanced use of DRB technology. DRB has commenced there using Eureka 147 A legislative framework is in place, in which . broadcasters and multiplex managers are licensed separately. The government has allocated the spectrum to allow seven digital 'ensembles'. The BBC National Radio and Independent National Radio were each allocated an 'ensemble'. The remaining five 'ensembles' will carry BBC along with independent local and regional radio. The BBC launched its national service in 1995. The first commercial digital radio network was launched in November 1999. Over the past few years, Internet radio has been making inroads into the Indian broadcast scenario. It can easily incorporate text, images, even video clips into the broadcast, which makes it attractive for certain sectors like training, etc. However, while conventional radio is heavily regulated, there is no regulation at all for the Internet version. Like the cable television industry, this lack of regulation can prove to be a double edged sword. On one hand, it makes the process of starting a radio station easier, thus driving growth. On the other hand, it raises a number of issues such as content regulation and copyright violations, format rights, revenue models, etc. Currently, internet radio stations such as www.indiafm.com and AIR's own www.allindiaradio.com are available to Indian audiences at no cost.

106 Fo c u s 2 010 : D r e a m s t o r e a l i t y

Bridging the gap
What will it take?

Bridging the gap What will it take?
The Indian entertainment industry maintained very healthy growth rates through the nineties as it exploited a favourable economic environment and lack of regulatory controls. This, however,created a very skewed industry structure, characterised by opaqueness and rampant loss of revenues to rightful recipients. Today, in television, India is believed to have the worst skew in the distribution of subscription revenue between broadcasters and distributors. The film and music sectors suffer revenue losses of over INR 20 billion due to piracy. A closer analysis of the film industry shows that the extent of value destruction in mid-budget films (INR 20-100 million) could be as high as 80-90 percent; in many cases, due to a pronounced lack of process orientation and discipline. Such industry realities, resulting from structural anomalies and regressive practices, could hamper any intervention to make a positive change. Linear growth projections often ignore the underlying potential and carry the danger of being based on a limited understanding of the potential of the sector. Consider this: ! India's annual per capita adult spend on films is less than two rupees. At a projected Compounded Annual Growth Rate (CAGR) of 20 percent this could at best grow to three rupees in the next five years. This, however, does not represent the true potential of the film industry in this country of one billion people, for many of whom cinematic entertainment is the only or primary leisure activity. ! With 200 channels and 48 million cable homes, India is the third-largest cable economy in the world after US and China. But India also has the second lowest (after China's) per capita cable spend at INR150 per home per month. The hourly price realisation from a family of five with an average television viewing of one hour per day per person, is just one rupee. Read with the fact that cable is still not reaching even one fourth of India's 200 million households, it is clear that the CAGR of 20 percent grossly understates the real potential of television. What is required today is an urgent commitment to undertake fundamental transformational change including strategic and structural corrections, adoption of new technologies, improved consumer connect and organisational effectiveness in order to ensure realisation of the sector's true potential. The evolutionary process followed by different segments of the industry defines the need, nature and rationale for such changes. The older and relatively conservative segments of the industry, such as film production and distribution, have evolved slowly through reluctant experiments in corporatisation, while relatively new and dynamic sectors like television have experienced accelerated growth and investor confidence. Consequently, the type and scale of the issues faced differ within industry segments. The nature of interventions required range from corrective

Required today is an urgent commitment to undertake fundamental transformational change including strategic and structural corrections

107 A CII - KPMG Report

measures to facilitative regulation and institutionalisation. Such interventions differ from each other on the scale of the initiative, degree of difficulty, relative importance, complexity and level of risk. Following chart depicts the extent of maturity exhibited by various subsectors of Indian entertainment industry.

Sub-sector Maturity Factor
Television Film Music Radio

Industry history

Regulatory maturity

Adoption of technology

Extent of competition in content Extent of competition in distribution Maturity of internal processes

Ability to attract & retain talent

Ability to attract investments

Extent of piracy

Other revenue leakages

Demand growth projections

Note: The extent of shadow in the circle indicates the degree of maturity for each of the subsectors.

108 Fo c u s 2 010 : D r e a m s t o r e a l i t y

Based on a comprehensive understanding of the industry, the interplay between its drivers and our interactions with various stakeholders, the following initiatives are recommended to be undertaken by industry and the regulatory authorities. A stakeholder charter for concerted action will trigger thinking and meaningful interaction in this sector, which would lead to clarity of direction and urgency of action.

The KPMG-CII 10/10 Charter
Industry initiatives 1 Improve organisational effectiveness through focussed projects Improve yield Develop alternative revenue streams Improve consumer connect Develop new markets through aggressive market making Increase market activity in newer genres Improve governance standards Improve organisational ability to attract and retain talent Explore consolidation options Leverage technology strategically Regulatory initiatives Implement addressability for broadcasting distribution in a phased manner Review programming code and censorship laws Define service obligations and grievance redressal mechanisms Rationalise last mile licensing Evolve a framework for regulating cross media / value chain holdings Allow the freedom to choose the business model Constitute a national anti-piracy force Provide investment and operational incentives Constitute a unified regulator Develop national media and entertainment policy

2 3 4 5 6

7 8 9 10

109 A CII - KPMG Report

Getting the house in order – The industry charter
The Indian entertainment industry has the opportunity to enter an exciting phase of growth driven by favourable socio-economic changes and smarter distribution technologies. The realisation of such opportunities would depend on the aggressiveness of the industry players and the pragmatism of policy makers and regulators. To unlock value, the Indian entertainment industry would need to: ! develop marketable products keeping in mind the socio-economic realities of the Indian market ! improve operational effectiveness through global benchmarking, adoption of best practices, technology and strategic innovation ! leverage the capabilities thus developed in international markets This requires a fundamental mindset shift from complacency which breeds inefficiencies, to an insatiable quest for excellence. This section, focusses on the specific steps that the industry needs to undertake for such a transition to take place. Such initiatives need to address: ! structural issues that have contributed to destroying value and inhibiting growth; and ! strategy and operational issues across the value chain. Markets An analysis of industry structure and value chain reveals a need for corrective measures for ensuring profitable growth across market segments.Regulatory changes can enable and facilitate the introduction of new distribution platforms, thereby bringing in much-needed competition and consumer choice. However, to leverage an enhanced market opportunity, the industry needs to manage costs better, reduce revenue leakages, improve operational effectiveness and develop and leverage deeper consumer insights. In the past an environment of 'convenience alliances' created skewed market structures without effective competition which bred inefficiencies. This resulted in an inability to meet performance expectations and an industry that is characterised by: ! most segments being resource starved, consisting of smaller entities with limited potential to scale. Television is probably the only segment, which has adequately funded scalable players. ! Lack of management depth, especially in the film industry, has been the outcome of a lack of process rigour and measurement, the reluctance to invest in systems and procedures and in technology adoption. ! Inadequate organisational capabilities and lack of governance transparency impair the industry's ability to attract resources like investments and talent at reasonable costs. That, in many ways, also defines the fundamental premise of corporatisation in the entertainment industry.

Industry requires a fundamental mindset shift from complacency to an insatiable quest for excellence

110 Fo c u s 2 010 : D r e a m s t o r e a l i t y

In order to effectively manage the 'growing up' process, the industry needs to question and review its current structure and several aspects of the operating strategy. The schematic below segments the industry based on its level of maturity with respect to governance standards and process orientation.
Low High

High

DTH Operators

Alternative Platform Vendors

‘Maturing segments' consists of segments with reasonable process orientation and governance standards, comprising largely corporatised entities. Due to the comparatively recent evolution of sectors like broadcasting, digital distribution, FM radio, and the licensing and investment requirements, organised players had an opportunity to enter these spaces on equitable terms. This facilitated a certain level of organisational maturity in these sectors. However, an assessment of constituent players of these segments point to large spaces which are yet to evolve. As the extent and intensity of competition increases with more resourceful players entering the market, players in the maturing segments should move swiftly to plug such gaps and ensure profitable survival. 'Aspirants' comprise players who recognise the importance of effective corporatisation but, either due to lack of adequate expansion capital or an “if-itain't-broke,-we-won't-fix-it” attitude, have been able to achieve very little in that direction. Multi-system operators, organised content producers, music publishers, etc fall in this category.

nCorporate Governance
Theatre owners Unorganized Content producers nMature segments

MSOs Radio Stations Broadcasters

Movie Distributors

Corporatised Content producers

Low

Music retailers LCOs

Music distributors

nOperational effectiveness
nAspirants n nLaggards

111 A CII - KPMG Report

With the entry of organised, resourceful players the incumbents need to understand their strategic vulnerability and take immediate corrective measures

Most players in these sub-segments either started as offshoots of corporate entities or took steps to transform themselves to corporatised entities, when such positioning became 'fashionable' in the last few years. However, in most cases the initiative was confined to incorporating companies, constituting boards, creating formal structures and inducting professionals in a very limited manner. A power shift to professional, process driven organisations is yet to be seen. The third segment, 'Laggards', consists of players yet to wake up to the demands of the emerging business environment. These elements of the value chain made a significant contribution towards accelerating the growth of entertainment industry. For instance, the Local Cable Operators (LCOs) demonstrated an enterprising approach that contributed to the aggressive growth of cable television in India. Most other sub-segments of this cluster like theatre owners, music distributors, etc., also made similar contributions to the overall industry growth. For the overall sustainability of a profitable growth of the sector, the opaque practices, rampant piracy and inherent inefficiencies in these subsegments are issues that need to be addressed immediately. This should be seen in the context of the changing competitive environment. With the entry of organised, resourceful players with alternative technologies offering attractive value propositions, the constituent players need to understand their strategic vulnerability and take immediate corrective measures. While these clusters throw up some unique, sector specific issues depending on the nature and extent of evolution, most industry issues cut across such clusters. These issues fall under the following four categories: ! Structural issues, including issues relating to distribution of value amongst value chain participants, extent of competition and level playing field. ! Revenue related issues emanate from the industry's inability to achieve and sustain growth rates commensurate with the industry potential. ! Profitability related issues resulting from a combination of the first two issues along with an inability to manage costs. ! Resource related issues with regards to the industry's difficulties in attracting resources like investment, talent, etc. Any corrective action should therefore focus on correcting structural anomalies and improving sector performance. Even though structural corrections need to be addressed largely through regulatory interventions, there are several aspects which lend itself to an industry led correction. The analysis of such aspects highlighted seventeen key issues that demand urgent steps from Indian entertainment industry.

112 Fo c u s 2 010 : D r e a m s t o r e a l i t y

These initiatives have been prioritised in the table below to identify high-impact initiatives using a weighted average with the 'Ability to drive value' as the most influential factor.

Weightages
Ranking 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Possible industry initiatives Improve operational effectiveness Improve yield Develop alternative revenue streams Develop consumer connect Aggressive market making Enhanced activity in newer genres Improve governance standards Create an environment to attract and retain talent Industry consolidation Adoption of technology Support the evolution of a meaningful regulatory regime Improve process orientation Improve quality of content Financial innovation Remove value chain frictions Performance measurement Aggressive benchmarking

50%

30%

20%
Weighted score 4.3 4 3.9 3.5 3.3 3.3 3.25 3.25 3.15 3 3 2.8 2.8 2.7 2.4 2.3 2.2

Ability to Ease of Drive implement Extent of inaction value ation 5 5 5 4 4 4 2.5 2.5 3.5 3 3 3 3 3 2 1 1 4 3 2 3 3 3 4 4 2 3 3 3 3 2 2 4 3 3 3 4 3 2 2 4 4 4 3 3 2 2 3 4 3 4

From the above, the top ten initiatives were selected for closer scrutiny with a view to focus the spotlight on select high value opportunities the industry can pursue for each one of them. 1. Improve operational effectiveness Margin pressures will induce the entertainment sector to focus their attention on costs. To achieve sustainable efficiencies, the priority should be on enhancing organisational effectiveness in delivering strategy and addressing the following key aspects of effectiveness: ! Organisation structure and its alignment to operational strategy ! Streamlined processes, including measurement mechanisms ! Inculcating global entertainment industry best practices to enhance the process delivery quality ! Consistent global benchmarking to facilitate continuous improvement ! Strategic use of technology.

The entertainment businesses need to assimilate experiences of pathfinders in other sectors

113 A CII - KPMG Report

The entertainment businesses need to assimilate experiences of pathfinders in other sectors. A holistic approach towards operational effectiveness, along with the adoption of best practices and learning from other regions and industries will not only facilitate the desired performance turnaround but also ensure sustainability of benefits. Recommended steps (A) Develop organisational understanding on the need for effectiveness improvement (B) Conduct a diagnostic to identify improvement opportunities (C) Form dedicated teams for the identified projects (D) Measure the improvement 2. Improve yield The compulsions outlined in the earlier section will drive entertainment businesses to endeavour to maximise revenue yield from their products. Such an initiative could have the following dimensions: ! Maximising revenue from traditional revenue sources. For example the traditional revenue streams from television include airtime sales and subscription revenues ! Ensuring yield from the traditional revenue sources involves the following: Effective marketing to communicate the proposition of the product to generate awareness and trial Efficient distribution to ensure availability of the product to an interested consumer Ensuring utilisation at optimum price levels ! Developing and encashing alternative revenue streams like merchandising, events, supplementary content, export, etc While all the three are important to all genres of entertainment, some considerations are more important in the context of certain genres. For example the first two considerations are very important for the film industry which is trying to maximise the opening weekend yield. The last is particularly pertinent in the context of airtime sales in television, considering the perishable nature of airtime. Indian entertainment businesses must focus on developing systemic maturity and process orientation required to ensure yield maximisation. The absence of a facilitating environment that provides reliable data and other services required for yield management initiatives underlines the need to put in place the required internal processes and systems for enhanced data quality. The relevant internal processes cover the following functions: ! Market research and demographic profiling to understand consumer expectations and consumption patterns ! Marketing communication planning in terms of content, channels, etc and campaign execution

114 Fo c u s 2 010 : D r e a m s t o r e a l i t y

A disciplined process supported by adequate systems, and prior planning will help improve yield and minimise risks

! ! ! ! !

Distribution planning for cost effective coverage and yield maximisation Airtime inventory management and dynamic pricing Tiering and pricing of programmes Strategic product innovation Monitoring sales and taking corrective measures, etc

Often decisions on the revenue side across genres are taken on an intuitive understanding of the market and depend on the judgement of a few key individuals. A disciplined process supported by adequate systems, and prior planning will help improve yield and minimise risks. Global organisations follow mature processes in managing yield and use systems evolved in other industries with similarly perishable products like airline seats, hotel rooms, etc. The Indian entertainment business should inculcate global best practices, not just from the entertainment space but also from similar industries. For such initiatives to be impactful, industry-wide efforts to develop a mature infrastructure for reliable data gathering from the last mile points need to be coordinated. The Industry needs to put in place the following systems to be able to improve the quality of data: ! A data gathering and warehousing system to collate and analyse theatrical revenues of films. Such a system can be front ended by remote ticketing to enhance the reliability of data. ! Cable television subscriber information system centrally administered and funded by the industry. A subscriber card issued by the system should be made mandatory for all cable subscribers. A subscriber card should be produced for inspection by the licensing authority or by agencies authorised by industry bodies. A consensus on such a process for the subscriber validation can significantly reduce the extent of revenue leakage in the system. ! The current system of audience tracking, which largely determines media buying on television could be enhanced through broadbasing the existing sample size; enhanced automation of the tracking mechanism and the entry of more research agencies.

Recommended steps (A) Develop and implement revenue assurance processes and systems (B) Improved process orientation in other customer facing functions (C) Put in place shared systems to collect and analsze last mile consumption information

3. Develop alternative revenue streams Global experiences in developing and encashing alternative revenue streams in sectors like films, television, etc provide compelling evidence for the commercial attractiveness of such products.

115 A CII - KPMG Report

Some examples are: Taking the products to newer geographic territories; crossover of Tamil films to the Japanese market illustrates such territorial extensions ! Product innovation, such as un-film advertising and strategic use of brands inside mainstream content, resulting in improved revenue opportunities. ! Development of new products leveraging key assets of the core product category. Merchandise options or supplementary programming like the 'The making of Lagaan' are examples of developing new categories.

!

In order to develop alternative streams of revenues, the industry needs to have a vision for an enlarged revenue model. Alternative revenue opportunities should be identified at the product planning stage itself. Planning for alternative revenues should be undertaken with a view to establishing definitive targets and assigning clear organisational ownership for achieving revenue objectives. Alternative streams will become significant revenue contributors as the entertainment industry stabilises and entertainment consumption becomes more sophisticated.

Recommended steps (A) Identify possible alternative revenue streams for each product category (B) Target for 10-20 percent revenues from such sources (C) Create dedicated teams focused on alternative revenue stream 4. Develop consumer connect The entertainment industry value chain across genres needs to connect more closely to the voice of the consumer, employ the feedback to enhance consumer experience and thereby enhance value. For this, the content producers / content owners need to establish formal channels for consumer connect. While the need for creative space is well appreciated, creative professionals and content producers need to work together to also balance consumer needs and commercial realities when developing products. The high uncertainties and failure rates of individual entertainment products like films, television serials, etc highlights the viability issue of a majority of the ideas getting funded. The industry needs to take note of the gap in systemic research and feedback in the new product development process. Some initiatives that can be undertaken to increase the viability of products at the conception stage include: ! Market research to develop consumer insight for new product development, evaluate acceptability of product ideas and plan distribution ! Customer segmentation and profiling of target segments ! Developing points for brand experience and consumer dialogue ! Continuous consumer interaction and customer satisfaction surveys to gather feedback on consumption experience

The industry needs to take note of the gap in systemic research and feedback in the new product development process

116 Fo c u s 2 010 : D r e a m s t o r e a l i t y

! ! !

Formalised mechanisms to inculcate such feedback into organisational processes and future projects Employee training to develop consumer orientation, especially in last mile distribution Consumer support and complaint management processes in last mile distribution

The transition to a consumer focussed business has to be well thought through as it involves fundamental shifts in business models and operational strategy.

Recommended steps (A) Redesign the customer facing processes to enhance the quality of experience (B) Ensure consumer feedback flow through to product design, marketing and distribution (C) Establish consumer satisfaction measurement and linkages of such measures with remuneration

Increasing intensity of market activity in the last mile distribution will spur demand for quality content, triggering action across the value chain

5. Aggressive market making The entertainment industry will see increased market activity across genres and across the entire value chain. A combination of new technologies, regulatory changes and a growing awareness of a professional business and market oriented approach can make the difference. Consider the following developments: ! Three Direct To Home (DTH) players are expected to be fully operational by end-2005, providing the much needed consumer choice in broadcasting last mile ! Telecommunication majors are introducing broadcast distributions services. An IP-TV based service is currently undergoing advanced trials and is expected to enter the market in the near future ! Several MSOs may consider investing in CAS enabling equipment and digitising the last mile, even without a regulatory directive, to effectively compete with DTH/ IP-TV players ! Digital distribution of films is finally off the ground in 2004. Though the initial experiments lack scale, the emergence of multiple scale players in digital film distribution is expected in the next couple of years. DTH players and IP-TV players may also extend their services to cover digital cinema ! Large corporate houses are demonstrating serious interest in the entertainment industry either by setting up own experimental outfits or through investments ! Indian Music Industry (IMI) is exploring options to partner to digitise and electronically distribute music across India

117 A CII - KPMG Report

Increasing intensity of market activity in the last mile distribution will spur demand for quality content, triggering action across the value chain. However, this assumption is premised on middle class India's enormous appetite for entertainment. We believe that such demand is a function of the following: ! Quality and diversity of content ! Compelling value proposition in terms of quality of service, pricing, etc ! Low initial investments While the market developments mentioned above are capable of bringing about a quality shift in entertainment delivery, businesses need to develop models with: ! Focus on content quality ! Attractive price propositions, often based on subsidising the consumer acquisition costs or consumer premises equipment costs ! Imaginative re-engineering of the cost structure through redistribution of risks and rewards ! Aggressive marketing, branding and distribution to ensure market visibility and coverage As these initiatives require significant investments and increase the risk profile, entertainment businesses that are adopting an approach to enlarge the market, need to assess the viability of such a plan through a careful examination of market potential, competition, costs, potential risks and mitigants. Such an assessment should also take into consideration the learning from other developed markets, as they offer key signposts on the road ahead.

Companies need to constantly define new/ changing genres based on the demographic profile of the market

Recommended steps (A) Rethink growth targets in the light of emerging distribution scenario (B) Develop 'low entry barrier, low cost' business models (C) Establish the viability of such models through quantitative business cases

6. Enhanced activity in newer genres Media and entertainment content, like any other product, needs constant evolution to meet changing consumer needs. Media companies need to blend artist creativity with consumer tastes and preferences. In this pursuit they need to constantly define new/ changing genres based on the demographic profile of the market and a surveyed understanding of consumer likes. Creativity needs to be channelised in the right direction so that its commercial attractiveness can be exploited. To its credit, the Indian music industry has constantly looked at new genres to keep it afloat. Indi-pop, Sufi, fusion, re-mix, folk, etc. are all successful genre

118 Fo c u s 2 010 : D r e a m s t o r e a l i t y

creations in the popular Indian music space over the last ten years. The music industry's foray into devotional music partly revolutionised its fortunes. In a similar manner, television saw an era being dominated by Mahabharat and Ramayan, where the protagonists achieved 'a demi-God 'status in India. Religious programming continues to have its share of success in the television space, through independent channels on Christianity, Hindu mythology and devotional music - 'bhajjans'. This genre is relatively unexploited in films. The “tried and tested formula” in Indian film making is being challenged. The industry has witnessed how new genre creations have set new trends and reaped rich rewards. However, any new genre success 'formula' is quickly replicated and often the weak treatment of the 'me-too' results in failures. In the television space, potentially lucrative genres such as lifestyle, education and health are still under-leveraged. An assessment of the Indian demographic profile, as well as increased programming on these genres on mass entertainment, and even news channels, indicates a potential to exploit each of these genres separately, and targeted marketing to advertisers could result in unlocking this potential to some extent. Themes need to be consumer centric and contemporary. Entry into new genres may include rekindling genres of the past, if that is what the consumer demands. Success hinges on a good understanding of consumer behaviour, likes and dislikes, sampling of content, creative programming, effective marketing and distribution.

Recommended steps (A) Explore and innovate - develop new genres (B) Consumer research to be undertaken continuously to be in sync with changing consumer preferences (C) Redirect creative resources towards genres in line with consumer interests

The investor community tends to display limited conviction towards the entertainment industry, citing issues of corporate governance

7. Improve governance standards The investor community tends to display limited conviction towards the entertainment industry, citing issues such as: family run enterprises, lack of transparency, lack of professional management, inadequate financial discipline and reporting. As large industrial houses, financial institutions and private savings evince interest in this sector, the industry players need to institutionalise processes that will lay the foundation for good corporate governance.

119 A CII - KPMG Report

Typically, an effective corporate governance framework is based on the following principles [drawn from the OECD (Organisation for Economic Co-operation and Development) Principles of Corporate Governance]: ! It should promote a transparent and efficient market and be consistent with the law. It should protect and facilitate the exercise of shareholders' rights and ensure the equitable treatment of all shareholders, including minority shareholders. ! It should recognise the rights of stakeholders established by law or through mutual agreements and encourage active co-operation between corporations and stakeholders in creation of wealth and the sustainability of financially sound enterprises. ! It should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company. ! It should ensure the availability of appropriate strategic guidance to the management of the company; effective monitoring of the management by the board and the board's accountability to the company and its shareholders. While the responsibility to actualise corporate governance rests with individual organisations, industry associations can play a crucial role in developing corporate governance standards that should reflect both the maturity of the industry as well as the practical constraints faced by participants.

Recommended steps (A) Industry association to create a corporate governance cell (B) Cell to set up processes in line with corporate governance principles (C) Cell to define reporting requirements (D) Cell to set up an audit committee to audit governance procedures among members

8. Create an environment to attract and retain talent The attractiveness of the entertainment industry as a professional option needs to be re-established in a challenging talent market (both on the creative and the business management side) against stiff competition from sunrise sectors such as BPO, software, aviation, etc.

If the industry seeks to continue attracting talent against stiff competition, it would need to undertake a number of measures

With the intensity of market activity and the extent of competition rising, the need for attracting and retaining top talent assumes greater significance. If the industry seeks to continue attracting talent, it would need to undertake a number of measures that are infrastructure building in nature and also lead to a change in mind-set.

120 Fo c u s 2 010 : D r e a m s t o r e a l i t y

Some of these include: Developing an educational infrastructure catering to the sector by creating world-class institutes in India, on the lines of the IITs and IIMs for attracting young talent, providing training in both the creative and business aspects of the entertainment business private-public partnership models should be encouraged to develop the required infrastructure ! Improving the attractiveness of the sector by benchmarking itself with competing sunrise sectors in terms of remuneration and career growth to make the sector attractive for prospective employees establishing an exciting and professional working environment by instituting appropriate systems, process and organisational practices establishing a quantitative performance management system which sets measurable performance targets, measures and rewards performance in a fair manner establishing meritocracies founded on sound principles of organisation building ! Establishing a brand in the talent market by articulating its value proposition to professionals in terms of growth potential, development, compensation and lifestyle adopting consistent communication of its value proposition at the talent market this would need to be actioned through media campaigns and presence at college campuses as well as career fairs

!

Recommended steps (A) Benchmark compensation, employee policies and working environment and take measures to plug the gaps (B) Implement quantitative performance management systems (C) Aggressive branding in the talent market

9. Industry consolidation The Indian entertainment industry is fragmented. There is a vast disparity between a few large players and multiple small players, all of whom are competing for a finite market with a finite set of resources. Certain elements like the last mile distribution, content production, etc are far more fragmented than other parts of the value chain. For example, there are a large number of small independent film producers, who typically operate in the mid-budget range of INR 20-100 million. An analysis of the profitability of such projects reveals that this segment of the industry has been the least attractive. While the contribution of this segment to the industry in

121 A CII - KPMG Report

The inability of fragmented players to be more efficient is a consequence of the greater cost of resources that they bear due to their inefficient scale of operations

terms of investments and the platform it provides for talent development are not to be underestimated, there does exist a case for a more efficient utilisation of resources that will not only add greater value to the industry but will also raise the profitability of these small players. The large production houses can realise efficiencies at three different levels: Financial - Having larger budgets and established names, the level of risk that financial investors perceive is far lesser, resulting in lower interest costs ! Risk management - With multiple projects, the production house can spread its risk across projects of varied themes and financial sizes. This enables the management of risk at a portfolio level ! Utilisation of resources - Apart from financial resources, these production houses have shared resources in terms of infrastructure that can be more effectively utilised across various productions to bring down the project costs. Additionally, the availability of multiple projects makes possible the setting up of a repository of talent to be recruited and effectively employed within the production house

!

Inefficiencies across genres and across the value chain result in the following detrimental effects: ! Lower profitability of small players Independent players with inefficient mechanisms and low resources suffer from an inability to realise profits. ! Reduced attractiveness of the industry Lower profitability and losses reduce the attractiveness of the industry, because of the increased level of risk and lower return on investment The repercussions of this are felt when players need to attract investment, evident from the unwillingness of investors or high rates of interest demanded for the perceived level of risk ! Quality of services Lack of resources (a key issue faced by small players) means that the quality of services to the end consumer could be affected The inability of small local / independent cable operators to upgrade their service offering by investing in better infrastructure illustrates the point The inability of fragmented players to be more efficient is a consequence of the greater cost of resources that they bear due to their inefficient scale of operations. Therefore industry participants need to explore consolidation options to build up scale efficiencies. Recommended steps (A) Review the long term growth strategy to evaluate the desirability and practicality of inorganic growth (B) Explore inorganic growth opportunities.

122 Fo c u s 2 010 : D r e a m s t o r e a l i t y

Lack of sophistication is not just a limiting constraint to organisational effectiveness, but also a significant risk from a business continuity perspective

10. Strategic adoption of technology Technology can play the dual role of a demand driver and process enabler. Technology adoption in last mile distribution has the potential to revolutionise the entertainment sector in the country. The initial adoption is expected to see the launch of DTH/ IP-TV/ DSL services, digital cinema, digital radio, etc. This will set the stage for an exciting phase of technology led growth. The ability of operators to leverage exciting new technologies like Interactive Television, broadcasting to mobile devices, etc will drive growth as the digital entertainment matures into digital commerce. In addition, such strategic technology adoption will also emanate from the need to improve process efficiencies dramatically. The entertainment sector remains relatively lesser technology-enabled with respect to process delivery. It is interesting to note that sophisticated operators with technologically well developed core processes in production, broadcasting, etc continue to have business functions using legacy spreadsheets and primitive applications. The entertainment industry should learn from the large strides made by traditional sectors like manufacturing in technology adoption in the last decade and the consequent gains in productivity and competitiveness. Such lack of sophistication is not just a limiting constraint to organisational effectiveness, but also a significant risk from a business continuity perspective. Entertainment businesses should take immediate steps to address both these dimensions, vis-à-vis the strategic use of technology as a competitive tool and as a process enabler and aim to evolve a medium-to-long term strategy to leverage technology.

Recommended steps (A) Identify opportunities for strategic use of technology (B) Develop a long term blue print for technology adoption with quantitative business justifications (C) Increase the technology spend

123 A CII - KPMG Report

Stakeholder charter It is hoped that the industry should undertake the following initiatives to participate in the industry's next phase of growth and set a progressive long-term direction.

Degree of impact on # Action points Industry Consumer

Resistance to change

Complexity of implementation

1

Improve organisational effectiveness through focused projects Improve yield Develop alternative revenue streams Improve consumer connect Develop new markets through aggressive market making Increase market activity in newer genres Improve governance standards Improve organisational ability to attract and retain talent Explore consolidation options Leverage technology strategically

High

Medium

Medium

Medium

2

High High

Medium Medium

Low Low

High Medium

3

4

High

High

High

High

5

High

High

Medium

Medium

6

High

High

Low

Medium

7

High

Medium

High

High

8

High

Medium

High

High

9

High

High

High

High

10

High

High

Medium

Medium

124 Fo c u s 2 010 : D r e a m s t o r e a l i t y

Getting the house in order – The regulatory charter
The objective of regulation Most modern economies use selective multi-dimensional regulatory / policy interventions to ensure growth and consumer choice. While the nature and extent of such interventions typically depend on the industry context involving specific issues to be addressed, there are several common objectives which define such initiatives. Each of these objectives acquires a different level of importance depending on where the industry lies on its evolutionary curve and the prevalent market dynamics. Some of the primary objectives that regulatory interventions seek to achieve include: ! Protecting stakeholder interests with consumer interests being the priority ! Ensuring adequacy of competition ! Ensuring sustainable industry growth ! Facilitating the adoption of new technologies ! Protecting investments ! Ensuring business viability ! Protecting intellectual property rights ! Regulatory oversight A large part of the growth of Indian entertainment industry has taken place in a regulatory vacuum. This has given rise to distorted structures to develop and protect monopolistic positions and opaque distribution chains facilitating revenue leakages. At the same time, as mentioned earlier the industry is at the threshold of a potentially steep growth curve if the stakeholder groups meet expectations. Given this context, the government and industry regulators must lay out a clear agenda and set off initiatives to bring about the desired transformation. The desired initiatives are analysed below from the perspective of the three key objectives of government / regulatory intervention, viz: ! Protecting stakeholder interests ! Ensuring adequacy of competition ! Fostering growth Protecting stakeholder interests The stakeholder universe of the entertainment industry includes the following groups: ! Industry players Content producers / owners Distributors Last mile access providers ! Consumers ! Government

The government and regulators must lay out a clear agenda and set of initiatives to bring about the desired transformation

125 A CII - KPMG Report

Industry players Regulatory direction to ensure stakeholder interests should originate from an analysis of the extent and adequacy of competition in the entertainment value chain. A high level scan of the value chain reveals three clusters with varying levels of competition and opaqueness. This necessitates the need for differentiated treatment at the regulatory level. These three clusters of industry participants are: ! Mature segment ! Laggards ! Growth engines
Alternative Platform Vendors

Radio Stations DTH Operators

Broadcasters

Radio Carriers

The sections below discuss the constituents of each cluster and their regulatory needs. Mature segments This segment consists of players operating in a highly competitive market with a reasonable level of transparency. Television broadcasters and corporatised content producers can be considered mature as compared to other segments. As in the case of broadcasters, most genres offer the choice of more than three players. Popular genres like general entertainment, sports, news, etc offer much more choice today. This cluster, with higher overall levels of corporate ownership, operates under a relatively more transparent environment. The free play of market forces that has fostered competition and value creation in this cluster, should not be tampered with.

nExtent of transparency nExtent of transparency
LCOs nMature segments

Corporatised Content producers

Movie Distributors MSOs

Music distributors

Theatre owners Music retailers

Unorganized Content producers

nIntensity of competition
nLaggards nGrowth engines

126 Fo c u s 2 010 : D r e a m s t o r e a l i t y

Illustrative list
General Entertainment News English Entertainment Sports Music Infotainment Kids Films Star Plus, Sony, SET MAX, Zee, Sahara One, SAB, DD CNN, BBC, NDTV India, NDTV 24X7 NDTV Profit, CNBC, Zee News, Star News, , Headlines Today, Aaj Tak, Sahara Samay, DD News etc Star World, Zee English, AXN, Adventure, FTV, Trendz etc. ESPN, Star Sports, Ten Sports, DD Sports etc. V, MTV, B4U, etc National Geographic Channel, Discovery, The History Channel, Animal Planet etc. Hungama TV, Cartoon Network, Pogo, Nickelodeon, Animax etc. Star Movies, HBO, Hallmark, Zee Cinema, Zee MGM, Star Gold, CVO, etc.

Any intervention that ignores the evolutionary context and forces driving it is likely to fail and can also be counter-productive

Laggards These are characterised by relatively lower levels of competition and transparency. Significant sections of the conventional last mile of the entertainment sector fall under this category, along with the unorganised sector in content production. They account for over 50 percent of the value created by the industry. They need to be seen in the context of a peculiar industry dynamic, which is simultaneously the cause and the effect of a unique set of evolutionary processes. Therefore, any intervention that ignores the evolutionary context and forces driving it is likely to fail and can also be counter-productive. The following factors need to be considered before formulating regulatory position vis-à-vis laggards. ! Socio-economic distribution of Indian consumers and affordability of entertainment products: A large majority of Indian consumers are in the low income brackets. As many as 75 percent of Indian cable homes have incomes lower than INR 8,000 per month. When an industry services large low-income segments of the society, it will be forced to adopt 'innovative' methods to re-engineer the cost structure, which may not be always legitimate, equitable and fair. ! Revenue leakages through piracy and under declaration: Such re-engineering (as mentioned above) typically takes the familiar route of piracy and under declaration. Leakages stretch from the under-declaration of the number of cable subscribers and theatrical revenues to the unauthorised reproduction and distribution of copy-righted content. ! Unviable tax structures: Most state governments view the entertainment sector as an easy revenue target and hence, tax it heavily. ! Existence of last mile monopolies: While adequate competition exists in several parts of the entertainment last mile, some significant segments demonstrate monopolistic behaviour. The problem is acute in the last mile of cable services where operators have managed to develop a monopolistic environment through informal arrangements on the ground. Such arrangements impact the consumers the right to select their operators.

127 A CII - KPMG Report

!

Lack of transparency: The distribution chain of the entertainment industry is characterised by a lack of transparency across genres. The resulting lack of visibility of the consumer and his consumption pattern causes inequitable distribution of value, influences investor perceptions negatively and protects vested interests.

Innovative, practical solutions as well as efficient implementation to resolve these issues are imperative today. Impractical solutions are unlikely to work, as they often do not address the complex equilibrium of cause-effect relationships effectively, triggering overall discontent. Our experience with conditional access implementation or investment subsidies for films have proved that isolated efforts will not have the appropriate impact. Growth engines These comprise emerging media like FM radio and alternative distribution platforms like DTH, IP-TV, digital movie distributors and exhibitors, etc. This cluster represents the future of Indian entertainment industry not only because of the increasing share of these media and platforms in the overall entertainment activity, but also because of their ability to be a positive change agent for the entire sector. However, the operating environment is skewed against them because of the disparities in license conditions and cost structures. Governments and regulators need to recognise the relevance and significance of alternative platforms and facilitate a conducive environment. Having discussed the regulatory need of industry participants, let us look at the regulatory needs of the most important participant in the industry value chain – the consumer. Consumers Protection of consumer interests should be high on the agenda of the government and regulators. Consumer interests can be defined along the following lines: ! Consumer choice: Consumer's right to choose a content-quality-price combination ! Access to customer service: Right to receive prompt and effective service and avoidance of any discrepancy between original product promise and functionality delivered In most segments of the entertainment industry freedom of choice is either nonexistent as in the last-mile of television cable services or limited as in the case of sectors like film/ music distribution etc. The scenario with respect to customer service and grievance redressal mechanisms is not very different. Governments, regulators and industry players should devise specific measurable actions aimed at improving consumer choice and service levels.

Impractical solutions are unlikely to work, as they often do not address the complex equilibrium of cause-effect relationships

128 Fo c u s 2 010 : D r e a m s t o r e a l i t y

governments, regulators and industry players should devise specific measurable actions aimed at improving consumer choice and service levels. Government The government's engagement with the sector should be guided by its interest in expanding the economic activity in the entertainment sector in a sustainable manner with a view to: ! expand the direct and indirect tax base of the sector ! increase the employment potential of the sector ! increase the foreign exchange earnings of the sector The government should play a role in promoting art and culture in our society and should own the tools/ channels for disseminating information, providing recreational content to communities not accessible in a commercially viable manner and making social interventions to facilitate positive change, like in the case of literacy or family planning. Government should also safeguard national interests like security or national assets like spectrum. Ensuring adequacy of competition The best way to safeguard stakeholder interests is to ensure the free play of market forces in a market environment where adequate competition exists. Such conditions minimise the need for corrective regulatory interventions. As analysed in earlier sections of the report, adequate level of competition does not exist in several clusters in the entertainment value chain. As a result, the corrective interventions are often far less effective and decisive than required. For instance, in the case of the broadcasting last mile segment where near monopolistic conditions exist in most parts of the country, government and regulatory bodies agree that the entry of alternative platform operators like DTH , IP-TV or xDSL operators will be able to increase the extent of competition significantly. However there are certain aspects that need to be kept in consideration: ! In the absence of effective regulatory provisions and enforcement measures to ensure transparency, cable operators enjoy an unreal cost structure built on the premise of cost avoidance and under-declaration. Alternative platforms operating in an open, addressable manner will not be able to compete effectively ! Further, alternative platforms do not enjoy a level playing field vis-à-vis cable services in the current regulatory environment: ! For example, DTH operators need to pay an INR 100 million license fee and a 10 percent revenue share on adjusted gross revenues. Cable operators only need a registration from the local post office. It is also pertinent in this context to note that cable services are an established business and the infrastructure is already amortised, while for DTH, which is a new business, the 10 percent gross revenue share will push back the break even point by a

Best way to safeguard stakeholder interests is to ensure the free play of market forces in a market environment where adequate competition exists

129 A CII - KPMG Report

! !

few years. In the initial years this share will effectively have to be paid out of capital, there being no positive cash flow or profits, and this will have a long term cascading effect on project costs and cash flows. The extent of Foreign Direct Investment (FDI), which could be a significant source of funding, is limited to 20 percent for DTH, while in cable services FDI can be up to 49 percent; DTH set-top boxes currently need to be interoperable across various DTH platforms, while no such restrictions are imposed on cable operators, where there exists a virtual monopoly at the last mile.

Last mile corporatised entities across the sector face similar disadvantages in cost structures because of rampant piracy. To ensure adequate competition to protect stakeholder interests, the government and regulators need to take forceful policy/ regulatory positions and follow it up with effective implementation. Fostering growth It is clear that most sub-sectors in the entertainment industry are performing suboptimally and unable to tap the opportunity and potential available. The eventual realisation of such potential is a function of focussed and coordinated stakeholder action. The government and regulators have to make considerable contributions to make such coordinated action happen. An analysis of sub-sector performance clearly shows that television is the prime mover for the industry so far. Through the nineties, the television sector has emerged as both the largest and the fastest growing cluster in the entertainment industry. Moreover, several positive steps like the introduction of alternative platforms (DTH and IP-TV) have been taken to accelerate the rate of growth. Given such a context, government should consider proactive interventions for other sub-sectors like films, music, radio, etc with a view to: ! facilitate an investment friendly environment ! provide policy/ regulatory clarity and ! ensure a level playing field for competition In summary, as the industry goes through an evolutionary process to realise its actual potential, the government and regulatory bodies should play the role of a change agent. With a view to protecting stakeholder interests, ensuring adequate competition and sustainable growth, a charter for governmental/ regulatory intervention, needs to be identified.

The government and regulatory bodies should play the role of a change agent

130 Fo c u s 2 010 : D r e a m s t o r e a l i t y

Key issue Protecting stakeholder interests Consumer
n

Television

Films

Radio

Music

Choice of content Platform - operator quality-price combination Customer service and grievance redressal Addressability Transparency Free play of market forces Non access

n

Choice in pricequality combinations Diversity of content

n n

Diversity of content Alternative access points

n

Choice of price quality combinations Alternative access points

n

n

n

Industry players

n n n

n n

Transparency Free play of market forces Investment and operational incentives Stringent anti-piracy regime

n

Rationalisation of licensing regime Freedom in choosing the technical architecture for Broadcasting Credible measure for listenership of stations Investment and operational incentives

n

Stringent anti-piracy regime Investments and operational incentives

n

n

n

n

n n

Investment and operational incentives

n

n

Governments

n

Policy/ regulatory clarity Transparency Enhanced tax compliance

n n n

Policy clarity Transparency Enhanced tax compliance

n

Policy/ regulatory clarity Enhanced licensing fees Continued control of select genres Adequate competition exists

n n

Transparency Enhanced tax compliance

n n

n

n

Ensuring adequate competition

n

Ensure level playing field Stringent anti regime Policy / regulatory clarity Investments and operational incentives

n

Stringent anti-piracy regime

n

n

Stringent anti-piracy regime

n

Ensuring growth

n

n

Policy / regulatory clarity Investments and operational incentives

n

Policy/ regulatory clarity

n

Stringent anti-piracy regime

n

n

n

Establish a credible n Investments and measure of listenership operational incentives of stations

A high level analysis of the key issues highlights the following priorities across sub-sectors: ! Ensure consumer choice ! Improve customer service and redressal mechanisms ! Improve last mile transparency ! Ensure non-discriminated access to content and platforms ! Rationalise licensing conditions ! Allow operators the freedom to select the business model ! Develop stringent anti-piracy regime ! Provide investment and operational incentives ! Provide policy / regulatory consistency and clarity Clearly, to address these priorities, governmental/ regulatory interventions with varying degree of complexity, and close coordination between stakeholder groups is essential. We have attempted to prepare a short list of high impact interventions from a larger set of possible interventions identified against the above listed compulsions, through extensive industry interaction.

131 A CII - KPMG Report

The following criteria were developed after extensive industry interactions and were applied to prepare the shortlist: ! The nature of impact the intervention can make on fostering growth and competition and protecting stakeholder interests ! Complexity of implementation including possible stakeholder resistance Below, we profile our top ten governmental/ regulatory interventions with a view to initiate an industry dialogue to evolve a consensus on sector priorities 1. Implement addressability for broadcasting distribution in a phased manner Most industry analysts agree that mandatory addressability is the best possible solution for the issues plaguing the broadcasting and cable services industry. The government has initiated steps in line with this thought process to implement conditional access systems (CAS). However, several factors specific to CAS implementation in the Indian context need to be given sufficient consideration before devising a strategy for implementing addressability. As mentioned earlier in this section, more than 75 percent of Indian cable homes earn less than INR 8,000 in a month. Currently, an average cable home pays around INR 150 per month for around 100 channels.

!

!

!

Impact on broadcaster revenues Mandatory implementation of addressability may increase the cable prices significantly as pay channel revenue models will be impacted significantly by a falling subscriber base and resultant negative impact on advertising revenues Infrastructural investments required by the cable operators get factored into the price. At 30 percent penetration, the cost of conditional access implementation in four metros with secure digital STBs, will work out to be about INR 11 billion. (Source: Media Partners Asia). MSOs will have no option but to carry forward this cost to consumers Increased consumer cost In order to maintain the current set of channels, a consumer needs to spend around INR 350 without providing for the STBs (FTA with taxes at around INR 100 and five prominent bouquets at current prices at INR 250). With a provision for STBs, the monthly bill can easily cross INR 400, putting most popular entertainment channels beyond the reach of a majority of consumers, triggering a spiral of reduced advertising revenues and rising channel prices. For the consumer, this would be a case of 'paying more and watching less'.

132 Fo c u s 2 010 : D r e a m s t o r e a l i t y

!

!

Market-driven conditional access No other country mandates the use of conditional access systems for accessing pay content. The decision to distribute the signals in an encrypted fashion and therefore force the use of conditional access devices is purely a business model decision of the cable operator. In that sense, a consumer transitioning to a conditional access system takes a conscious decision based on the attractiveness of the services on offer. Keeping in mind the digital transition Most countries consider migration to an addressable environment as part of a larger transition to a fully digital environment. Industry players and regulators in several advanced countries like USA, UK, Australia, etc are committed to effect such a transition as soon as a majority of the cable homes are in a position to migrate and realistic timelines are set.

An example of planned migration: China's digital upgrade timeline

2002 2002 2003 2003 2005 2008 2008 2015

Finish testing the technical standards for terrestrial transmission Publicise national standards for digital cable television transmission Adoption of national digital television standards Publicise national digital television standards Launch digital television broadcasts in selected cities Transmit Beijing Olympic Games on HDTV Launch digital television commercial broadcasts in major cities Switch-off analogue system nationwide

Source: www.china.org.cn

In summary, whatever be the mode of implementation, addressability, if not implemented keeping in mind practical compulsions, it may deny a majority of consumers access to quality entertainment and slow down the growth of the industry considerably. The government also needs to develop a phased, long-term plan to migrate to a fully digital environment and set a realistic date for analogue transmission. Whatever be the mechanism of implementing addressability, the government needs to evolve a framework for the classification of channels, which will then enable the industry (through consumer choice) to determine what is valued and what is not. International experience suggests the following three tiers of programming:

133 A CII - KPMG Report

Government needs to develop a phased, long-term plan to migrate to a fully digital environment

A.

Free to air channels: Most elementary tier of programming consists of free to air channels only. Every cable operator should dedicate a 'stipulated share' of capacity to carry the FTA tier. Such an FTA tier should consist of: a. Stipulated number of public broadcasting channels b. Most viewed channels in the relevant community to ensure mandatory carriage of popular free to air channels in a specific region. c. Other FTA channels that the cable operator chooses to include in the FTA tier Scores from the existing viewership rating system should be used to pick channels for the class (b) slots. The government/ regulator may need to consider regulating the prices of the FTA tier till effective competition and consumer choice come about in the natural course.

B.

Basic pay programming: Cable operators should put together a basic tier of pay programming comprising the following: a. Genre leading pay channels in general entertainment, sports, news, music, etc. Such leadership needs to be established through viewership monitoring mechanisms like TRPs. In such a system a stipulated number of leading channels in each genre should be necessarily included in the basic pay tier. b. Pay or FTA channels that the cable operator chooses to carry. Such a layer should involve niche channels, channels catering to niche ethnic/linguistic/religious communities and other pay channels not included as part of class (a) mandatory carriage. The choice of channels in these slots should be left to the discretion of the operator. In addition, the cable operator should reserve a specified number of slots for piloting new channels. The pricing for the basic tier of pay programming could be left to market forces, with government supervision of predatory or monopolistic pricing policies. Consumers should be able to watch the FTA tier and the Basic Pay tier without investing in a Conditional Access Device.

C.

Premium tier of programming: Cable operators should be allowed to offer premium content in a digital addressable environment. Consumers will need Conditional Access Devices for accessing these premium programming channels or pay per view content. Such programming can include premium movie channels, high end sports programming, niche thematic channels, etc. Content providers operating in this tier and cable operators should be allowed to enter exclusive distribution arrangements. Such exclusivity of content is an integral part of digital addressable broadcasting in the transition to a fully digital last mile environment.

134 Fo c u s 2 010 : D r e a m s t o r e a l i t y

The government should evolve a framework with clearly defined guidelines for the classification and tiering of channels. Such a framework should also stipulate the nature of price regulation in FTA tier and monitoring mechanisms to protect consumer interests. Such tiering of programming along with a few other initiatives like licensing of cable operators (discussed below), would enhance consumer choice and transparency in the last mile environment.

Recommended actions (A) Prepare a long term plan for digitial transition (B) Encourage voluntary implementation of addressability (C) Allow addressable operators exclusive access to premium content (D) Stipulate a system for classifying channels (E) Evolve an acceptable mechanism for FTA price determination (F) Evolve a fair system for sampling new channels 2. Review programming codes and censorship laws Mature content has proven to have large demand globally. This is true of India too. Such content is commonly available over television, film, internet and print, without any checks and balances across the country. Effective legislation of such content will help enforce discipline and responsibility to transmit or show such content with adequate precautions and warnings. However, the current legislation and mechanisms are ineffective and not completely practical in dealing with this subject.

! !

For example, the current films' rating system is relatively narrow; there is a case for multi-tiering the rating system and revisiting the approval process. Similarly, there is a lack of clear, practical norms for mature content on television. Given the medium it is not practicable to enforce a mechanism on a day-to-day basis and therefore it is essential to find a solution that is acceptable to all stakeholders and involves an element of self-regulation.

Any moves could however invite strong reactions from various sections of society. As there exist strong, but divergent points of view on this subject, the government should initiate a process to gather and analyse all such opinions along with an understanding of the ground realities before reviewing/developing legislation. 3. Define service obligations and grievance redressal mechanisms The last mile of the service delivery in the entertainment sector in India is largely dominated by the unorganised sector which lives by its own set of rules resulting in a plethora of rights abuses. This results in a peculiar situation with the consumer rights being completely ignored.

135 A CII - KPMG Report

For example, disputes between cable operators and broadcasters often result in denial of consumer access to popular sporting events without notice leaving the consumer without any choice. In a monopolistic situation, access has become an instrument of blackmail, without any regard for consumer rights. Most consumers are scared to take the fight to consumer courts fearing retaliation from the 'unorganised' sector. The government should examine such abuses of monopoly power and bring out implementable mechanisms to ensure appropriate service delivery and customer service. Such mechanisms should include clear definitions for quality of service, customer service standards and guidelines for record keeping. Government should also specify grievance redressal mechanisms. The initiatives taken by the telecom regulatory authority to improve customer service in the telecommunications space offer a benchmark to emulate. 4. Rationalise last mile licensing The discontinuities and unplanned evolution of licensing in the entertainment last mile has resulted in inconsistencies for similar products/ services. In the broadcasting distribution space no licensing is required for cable operators while unified licensing exists for DTH and IP-TV. The unified licensing regime is a movement towards such a system. Film or music distribution, exhibition and retailing do not require licenses. However, radio, being a broadcast medium, carries unviable license conditions including a hefty license fee. Licensing has a very positive role to play in an industry that hopes to streamline its unorganised players. Most part of the entertainment value chain needs external facilitation to attain the level of discipline and openness required to operate in an efficient and equitable structure. Any attempt to review and rationalise disparate licensing regimes in the sector should take into account the following important factors: ! License fee should not jeopardise the commercial viability of the sector. 10 percent gross revenue share in DTH broadcasting and flat license fees in radio affects the viability of these genres. ! Within a sub-sector, license conditions should ensure a level playing field. As explained earlier, such level playing fields do not exist in several parts of the entertainment last mile, most notably in the case of broadcasting distribution. The government should consider the following to initiate corrective measures: Migrate to a commercially viable revenue sharing model for radio Review DTH license conditions to ascertain whether INR 100 million one time license fee plus 10 percent of gross revenue share make commercial sense ! Consider licensing unorganised distribution and last mile entities including cable operators, film distributors, movie hall owners, music distributors and retail outlets. The objective of such licensing should be limited to enhancing

The discontinuities and unplanned evolution of licensing in the entertainment last mile has resulted in inconsistencies

! !

136 Fo c u s 2 010 : D r e a m s t o r e a l i t y

! !

transparency and order in the last mile entities. As part of such licensing, the government should clearly specify the following: Qualifications for becoming a last mile operator. Such qualifying conditions should not exclude existing operators, as it would result in on ground and logistical issues. Record keeping and reporting requirements; Quality of service and customer service requirements Harmonise licensing conditions across platforms in a given genre so as to allow a level playing field as is indicated in the recommendations for unified licensing brought out by TRAI Introduce strict penal provisions including fines, revocation of licenses for non-compliance, wrongful declarations, consumer rights abuses, etc

The success of such a licensing system will critically depend on the monitoring and enforcement mechanisms put in place. The government/ regulators need to define the monitoring mechanisms including provisions for surprise audits by the licensing authority or agencies authorised by the licensor. Strict penalties should be enforced for non-compliance. Recommended actions (A) Consider licensing last mile entities currently not under licensing (B) Harmonise license conditions in a given genre (C) Introduce strong penal provisions for violation of license conditions. 5. Evolve a framework for regulating cross-media/ value chain holdings Media integration is used as an important strategic tool by the media industry. Such integration provides significant competitive advantage in the market. The strategic reasons for such integration typically include: ! Horizontal integration (cross-media integration) with a view to leverage content and client relationships. ! A television broadcaster owning a radio station is an example of such integration. In such a case the competitive advantage comes from crossmedia usage of content as well as the ability to offer an integrated marketing solution targeting multiple consumer segments. ! Vertical integration (value chain integration) which significantly enhances the competitive positioning because of the potential to gain preferential/ exclusive access to distribution or content. It is reasonably common to see such strategies in action in most large media markets in the world. For examples in the United States, an analysis of the business interests of top ten media companies shows that all of them are integrated media players with interests in either multiple media or multiple segments of the value chain.

137 A CII - KPMG Report

Company

Major Business Interests
Disney's interests span theme parks, hotels, and consumer goods, such as toys, and broadcasting, in addition to movies. The businesses are organised in the following segments: media networks, studio entertainment, theme parks and resorts and consumer products. Viacom is a leading global media company, with interests in creation, promotion and distribution of entertainment, news, sports, music and comedy. Viacom's well-known brands include CBS, MTV, Nickelodeon, VH1, BET, Paramount Pictures, Viacom Outdoor, Infinity, UPN, Spike TV, TV Land,CMT: Country Music Television, Comedy Central, Showtime, Blockbuster, and Simon & Schuster, etc. Comcast has interests spanning creation and distribution of content and is one of the leading players in cable. Leading Comcast businesses include Comcast cable, CN8.TV, E! Online, Comcast spectacor, Comcast sports, Philadelphia Fliers, 76ers, Golf Channel, Outdoor Life Network, etc. Newscorp is an integrated media company with interest in publishing, film and television production, broadcasting and distribution, network stations and radio Diversified media business spanning television, radio, outdoor, leisure, etc The oldest network in the US owned by GE. This group owns assets including NBC, CNBC, MSNBC, Bravo Cable Network and Telemundo. NBC has also invested in History Channel, Value Vision, Praxis Communication Corporation, etc. Integrated media and communication company had interests in creation and distribution of content. The group businesses include AOL, Time Warner Cable, Time, HBO, CNN, etc. Cox is an integrated distribution play offering voice, data, broadcasting and pay per use services Integrated satellite based distribution player. Owns Dish TV

Walt Disney

Viacom

Comcast

Newscorp

Clear Channel

NBC

AOL Time Warner Cox Comm. Echostar Comm.

Source: Company annual reports

However, vertical integration could lead to anti-competitive behaviour/ unfair discrimination. Several countries are currently formulating/ reviewing regulations regarding cross media holdings and mandatory access obligations. In India also Telecom Regulatory Authority of India (TRAI) has opened up the matter for consultation. The following critical factors need to be considered before finalising regulatory positions on the issue: ! Integration restrictions will constrain investments and growth. ! Industry needs significant investments to transition to digital last mile, seed STBs, enhance the programming quality, etc. Such investments are most likely to come from large integrated media players. Any restrictive regulation will be detrimental to the long term growth of the sector. ! Safeguards to manage abuse by integrated operations It is possible to evolve safeguards against abuse of advantages arising out of such integration.

138 Fo c u s 2 010 : D r e a m s t o r e a l i t y

-

Mandatory access obligations like 'Must Provide' and 'Must Carry' provisions should be judiciously used to restrict such abuse. However, the nature of content / access to be covered under such 'Must Provide' / 'Must Carry' regulation needs to be carefully considered as it critically impacts the ability of the broadcaster/ platform owner to function in a commercially viable manner.

The government/ regulator should consider integrated ownership with clearly defined safeguards to prevent anti-competitive behaviour. Thus, the regulator can undertake a supervisory role with the powers to intervene and take decisive action when required.

Recommended actions (A) Bring out policy on cross media integration and value chain integration in media and entertainment (B) Define mandatory access obligations of broadcasting and distribution players 6. Allow the freedom to choose the business model Indian entertainment industry across genres operates under regulatory/ policy restrictions imposed over the years. These restrictions have resulted in locking up value in the sector. Some of the existing or proposed restrictions that are hindering growth include: ! Architectural restrictions [uploading restrictions for television, transmission restrictions for radio, etc.] (Existing); ! Structural restrictions like FDI limits (Existing); ! Service provisioning restrictions on television/ distribution/ radio, etc (Existing) ! Price regulation (Proposed for television broadcasting) ! Cross holding restrictions and mandatory access obligations (Proposed) ! Limiting the extent of advertising on television broadcasting (Proposed) Such restrictions seriously impair an operator's ability to define the business model in a commercially sustainable manner according to the emerging market conditions. For instance, FM radio players operating in multiple cities are forced to set up transmission stations in each city. As a result they are unable to leverage the benefits of scale and a pan Indian presence, escalating costs significantly in the process. Most above-mentioned restrictions result in such cost escalations or revenue losses. Restrictive regulation should be put in place with the objective of safeguarding national security or protect consumer interests in markets where sufficient competition does not exist.

139 A CII - KPMG Report

Recommended actions (A) Review restrictive regulation across media and entertainment to remove value locking restrictions (B) Clearly articulate circumstances / qualifying conditions for imposing such restrictions

Piracy is the single largest value destroyer in the media and entertainment business

7. Constitute a national anti-piracy force Piracy is the single largest value destroyer in the media and entertainment business as it prevents the rightful owner of content from realising the true value of their content. It raises the costs of officially available content putting content providers and content users in a vicious cycle, creating a parallel unorganised market. Leakages account for over INR 20 billion revenue losses annually. The various forms of leakages include: ! Losses to the exchequer through under declaration by last mile cable operators, MSOs and theatre operators ! Illegal reproduction of content including illegal film/ music DVDs, illegal music CDs/cassettes, etc ! Use of copyrighted intellectual property without compensating the legal owner of such property. Examples of such violations include illegal remixes, illegal use of copyrighted content in advertising, etc. A multi-pronged approach is required to deal with such leakages and analyse the nature of its real economic impact, which not only addresses the genuine demand for a product with a lower cost but also thereby expands the market. Therefore the response to piracy, copyright infringements and last-mile leakages should be premised on the following: ! Stringent legislation and enforcement and ! Introduction of appropriately priced products or low cost variants An analysis of piracy and copyright related laws, enforcement mechanisms and cost structures reveals several areas for possible improvement. Such laws require tightening up in terms of content and enforceability. It is quite difficult for individual businesses to coordinate with state level law enforcement machinery and the legal system to fight piracy and infringements. Thus, there is a need to coordinate proactive action, powered by stringent legal provisions. At the same time, government should support the industry in developing attractive price propositions to address lower income segments. Given such a context, the following steps can be initiated: ! Creation of a national force with the specific mandate to crack down on piracy and infringements of all forms The government should consider constituting a national body with law enforcement powers to fight piracy. The constitution of such a body can

140 Fo c u s 2 010 : D r e a m s t o r e a l i t y

be part-funded through industry contributions. The enforcing entity should conduct its own surveys, maintain subscription/ retail off-take related data and should have the powers to conduct surprise audits, search and seize operations and initiate criminal proceedings.

!

Plug the loopholes in piracy and copyright related laws The government should review current legislation to identify and plug commonly abused loopholes like the one relating to music reproductions and introduce stringent penal provisions. Review taxation policy in the sector Indirect taxation through entertainment tax, sales tax and service tax is a significant part of the total 'cost to the consumer' of all products and services in this sector. For the fight against piracy and last-mile leakages to be effective, governments should take a more imaginative approach to taxation in this sector and enhanced revenues through lower taxes and improved compliance, thereby bringing the price levels to affordable levels.

!

Recommended actions (A) Constitute national anti-piracy force (B) Review current piracy related legislation and plug the loopholes (C) Include stringent penal provisions to disincentivise piracy (D) Rationalise taxes

8. Provide investment and operational incentives For several segments of the industry, investment and operational incentives are the only mechanism to ensure survival in the face of an exorbitant cost structure. Direct to Home broadcasting is a classic case where a DTH operator is expected to pay the following kind of tax/regulatory pay outs: ! Sales tax as high as 25 percent in several states ! Service tax at 10 percent ! Entertainment tax which assumes significant proportions in certain states. With such a tax structure, DTH can never be competitive with local cable operators who also do not declare most of their subscriber base. In contrast, tax exemptions for multiplexes have resulted in a virtual multiplex boom. The story goes beyond tax incentives. This sector requires massive investments to upgrade the last mile infrastructure. Unless the sector's attractiveness is significantly enhanced, such investments are unlikely to happen. The following steps are recommended to improve the sector's attractiveness to investors:

Entertainment sector requires massive investments to upgrade the last mile infrastructure

141 A CII - KPMG Report

! ! ! ! !

Rationalise the tax regime - transition to a low tax, high compliance model; Introduce tax slabs with cable FTA subscriptions, Low cost film tickets/ CDs/ cassettes, etc can either be exempted from tax or be subjected to very low taxes; Consider deferred tax schemes for new entrants, especially with regard to those involved in infrastructure creation; Review and rationalise FDI restrictions; Introduce transparent processes for the approval and disbursement of investment subsidies.

Recommended actions (A) Review taxation policies (B) Develop schemes to incentivise investments 9. Constitute a unified regulator In 2004, the government amended the definition of telecommunication services in the Telecom Regulatory Authority of India (TRAI) Act to include broadcasting and cable services, bringing the broadcasting and cable services industry under the regulatory oversight of TRAI. The move triggered hurried stakeholder consultation to evolve regulatory positions on issues including the implementation of conditional access systems, possible cross-holding restrictions, price regulation, mandatory access obligations, possible advertising restrictions and customer service. While this is a laudable initiative to make a meaningful regulatory intervention in the broadcasting and cable services space, it is still a case of 'too little, too late' and is more of a reaction than a reflection of long-term vision for the sector. As the media and entertainment sector prepares itself to enter another explosive growth phase, it requires a progressive regulatory environment that can facilitate growth while protecting consumer rights and minimising any negative socioeconomic fall-out. However, such regulatory action can only evolve from a clarity of vision for the sector taking into account the following key factors: ! Digital distribution platforms (such as DTH, IP-TV, digital distribution of films, etc) will revolutionise the last mile of the entertainment sector across subsegments. ! Such platforms will deliver a rich menu having multi-media offerings and interactive services along with other voice and data services like telephony, Internet, video conferencing, etc. For example, an IP-TV operator will deliver a convergent menu, offering a myriad of information and entertainment services. ! Evolution of access equipments, which are capable of receiving convergent offerings. Such access equipments would include smart digital televisions, mobile devices, intelligent home entertainment systems, etc.

142 Fo c u s 2 010 : D r e a m s t o r e a l i t y

Government, in consultation with the industry, consumer interest groups, investors and other stakeholder groups should define the roadmap to realise the actual potential of the sector

For the market to mature to a level of reasonable stability, it has to endure a long transition period with the following kind of players co-existing:

! ! !

Full-service convergence players Niche convergence operators offering select services Traditional platform owners like pure play cable operators and movie theatres

Clearly, there is an urgent need for a comprehensive regulator who shares an exciting vision of the emerging telecommunications, media, broadcasting and entertainment sectors, has the depth of regulatory capabilities and understands the regulatory process well enough to perform such a role in a transient economy. TRAI, having effectively anchored the regulatory process in the telecommunications space and conducted the initial round of consultation in the broadcasting and cable services industry, is probably best placed to take over the role of a convergence regulator. The government could consider upgrading TRAI as a National Convergence Regulator. In this role, it should have the regulatory oversight over all businesses dealing with carriage of voice or data including information, news, entertainment related content over cable, fibre, copper, wireless, radio, etc. Such a move will ensure consistency and continuity of forward looking regulation driven by a shared vision.

Recommended action (A) Appoint TRAI as the National Convergence Regulator with oversight over all businesses dealing with carriage of voice or data including information, news, entertainment related content over cable, fibre, copper, wireless, radio, etc. 10. Develop a national media and entertainment policy The effectiveness of a regulatory intervention will critically depend on the clarity of vision articulated through a comprehensive policy. The success of telecom regulation was built on the policy direction set by the NTP 1999 which articulated a vision for the telecommunication space. Such clarity is the need of the hour in the media and entertainment industry. The government, in consultation with the industry, consumer interest groups, investors and other stakeholder groups should define the roadmap to realise the actual potential of the sector. The following corner stones could define the nature of the national media and entertainment policy: ! Sustainable growth orientation ! Increasing choice for consumers ! Eliminating piracy ! Accelerated adoption of newer technologies

143 A CII - KPMG Report

Such a policy making exercise should combine several legislative initiatives of the past including amended cable television bill, convergence bill, etc. The process adopted to evolve the policy must involve composite stakeholder discussion as it is critical to establish the credibility and therefore the acceptability of the outcome. The time is ripe to initiate the process to develop a comprehensive national media and entertainment policy. Recommended actions (A) Conduct stakeholder discussions to develop a shared vision for the sector (B) Develop a national media and entertainment policy before the end of year 2005

Regulatory charter The following table summarises ten initiatives that the government/ regulators should take to give direction and impetus to the long-term growth of the entertainment sector:
Degree of impact on Industry High High High High High Consumer High Medium Medium High High

#

Action points Improve organisational effectiveness through focused projects Improve yield Develop alternative revenue streams Improve consumer connect Develop new markets through aggressive market making Increase market activity in newer genres Improve governance standards Improve organisational ability to attract and retain talent Explore consolidation options Leverage technology strategically

Resistance to change

Complexity of implementation

1 2 3 4 5

High Low Low High Medium

High High Medium High Medium

6 7

High High

High Medium

Low High

Medium High

8

High

Medium

High

High

9 10

High High

High High

High Medium

High Medium

Conclusion The twenty initiatives (ten governmental initiatives and ten industry initiatives) presented above have the potential to play the necessary facilitating role required to iron out structural distortions and take off on a phase of sustainable growth. While this KPMG-CII 10/10 CHARTER is not intended as a prescriptive intervention, it is a starting point for an intense corrective dialogue within the industry and outside. We hope that such a dialogue will set the stage for ushering in a new and exciting entertainment economy.

144 Fo c u s 2 010 : D r e a m s t o r e a l i t y

The tax perspective
In the fine print

The tax perspective In the fine print
Exchange control regulations
In the course of liberalisation of exchange control regulations, the Government of India has allowed 100 per cent FDI in the film sector under the Automatic Route without entry level conditions, with only certain post filing requirements to be complied with. The film sector for FDI purposes broadly covers film production, exhibition and distribution related services and products. However, the Automatic Route is not available for broadcasting sector. The permissible limits for this sector are:
Segment TV Software Production Setting up hardware facilities Cable network DTH Up linking of news and current affairs TV channel FM Broadcasting Limit 100 percent FDI allowed subject to certain conditions 49 percent FDI allowed 49 percent FDI allowed subject to certain conditions 20 percent FDI allowed within the overall limit of 49 percent of foreign equity 26 percent foreign equity allowed 20 percent portfolio investment allowed; direct investment by foreign entities is not permitted

There may be merit in permitting greater foreign equity in DTH, which is extremely capital intensive and is, in a sense, akin to a telecom infrastructure project. Currently the cable industry is unorganised, fragmented and resorts to large scale under-reporting of revenues which results in revenue leakage for the central and state government on account of direct (income) and indirect (service, entertainment, etc.) taxes. Therefore an alternative medium such as DTH may be encouraged fiscally by providing a income-tax holiday benefit (as available to broadband network) and indirect tax benefits (such as excise duty and sales tax exemptions for set-top boxes) since this access mechanism indirectly benefits the government by partly protecting it from revenue leakage. The current scenario on the liberalisation of FM broadcasting is not very encouraging in India. Private radio stations generally face a long/ uncertain payback period. Nonetheless, the foreign investment policy for FM broadcasting is in variance with the FDI policy in other media segments as no direct investment by foreign entities, NRIs and OCBs is permitted in this segment.

145 A CII - KPMG Report

Income tax and allied laws
Film production and distribution cost As per the prescribed rules1, a film producer who sells the entire exhibition rights of the film is entitled to a deduction of the entire cost of production incurred by him in the same year in which the Censor Board certifies the film for release in India. A similar deduction is also available to a film distributor for outright sale of the film distribution rights acquired. In case of a partial sale and/ or partial exhibition of film rights by the film producers/ distributors, it is necessary that the film should be released at least 90 days before the end of the tax-year (the tax year is 1 April to 31 March) to claim a full deduction of specified production costs/ specified costs of acquiring distribution rights. Where the film is not released at least 90 days before the end of such tax year, then the cost of production, limited to the amount earned from the film, shall be allowed as a deduction in the tax year and the remaining cost of production shall be allowed in the following year. Where the feature film is not exhibited by the producer himself or not sold, leased or transferred on a minimum guarantee basis, no deduction in respect of the cost of production shall be allowed in the tax year. The entire cost of production shall be allowed in the succeeding tax year(s) in which the film is exhibited or the rights are sold. Sale of rights of exhibition also includes the lease of such rights or their transfer on a minimum guarantee basis. Multiplexes The government has introduced partial tax holidays for income of multiplex theatres. A deduction of 50 percent from profits is allowed for a period of five years from the year of commencement of operations in respect of the business of building, owning and operating a multiplex theatre of prescribed norms. Some of the norms prescribed under the rules are: ! The multiplex theatre should be constructed during the period from 1 April 2002 to 31 March 2005. ! The multiplex theatre should comprise of at least three cinema theatres and at least three commercial shops. ! The total seating capacity of all the cinema theatres comprised in the multiplex should be at least 900 seats and no cinema theatre should consist of less than 100 seats. ! The multiplex theatre cinema should be centrally air-conditioned. ! The ticketing system employed by the cinema theatres should be fully computerised.
1

R u l e 9 A a n d 9 B o f t h e I n c o m e - t a x R u l e s , 19 6 2 ( t h e R u l e s )

146 Fo c u s 2 010 : D r e a m s t o r e a l i t y

!

The multiplex in order to be eligible for tax holiday should be located in a place other than New Delhi, Chennai, Kolkata and Mumbai.

There are no specific/ separate provisions in respect of the taxation of film artists, technicians, etc. They are entitled to a deduction of the income derived from foreign sources, subject to the satisfaction of certain prescribed conditions. In the case of overseas performance, taxation in the host country needs to be examined in the context of the applicable Double Tax Avoidance Agreement (DTAA) and availability of foreign tax credits against Indian tax on such income. Live shows and stage performances being held in India are taxed as per the general principles of personal taxation, applicable DTAA provisions and the special circular1 issued by the Central Board of Direct Taxes (CBDT)2. As per these provisions, income arising from such live shows is generally taxable in India. However, certain exclusions have been provided in case of:

! ! !

Gratuitous performance without any consideration; Performance in India for promoting sale of records, without any consideration; and Acquisition of copyrights of performance in India for subsequent sale abroad.

In other cases, the amounts are taxable in India, depending upon the facts of each case and the applicable provisions of the DTAA. Foreign television channels/ telecasting companies (FTCs) The two primary sources of revenue for FTCs, amongst others, is income from sale of advertising airtime on the TV channel and subscription revenues. Under the domestic tax law, income of the FTCs would be taxed in India in case they constitute a business connection in India. In case an FTC operates from a country with which India has a tax treaty, it would be taxable in India only if it constitutes a Permanent Establishment (PE) in India. The provisions of the DTAA would apply to the FTC to the extent they are more beneficial as compared to the provisions of the domestic law. The term “business connection” is widely interpreted and based on case law. The definition of PE is generally narrower as compared to the term business connection. In case the FTC has a business connection/ PE in India, the profits attributable to such presence in India would need to be computed. In case the FTCs do not maintain country wise accounts, then this could pose considerable difficulty in computing the profits which would be taxed in India.

1 2

C i r c u l a r N o 7 8 7 d a t e d 10 Fe b r u a r y 2 0 0 0 The Apex Income-t ax administering authorit y in India

147 A CII - KPMG Report

Subscription revenues are collected by Indian distributors and subsequently paid to the FTCs. The Indian tax authorities are contending that the payments of subscription fees repatriated to the FTCs are liable to tax withholding considering the same to be royalties. Some other issues which the FTCs need to consider is withholding taxes on the payments made to foreign satellite owner for transponder lease and up-linking charges. The tax authorities contend that the charges are in the nature of royalties/ fees for technical services which are deemed to accrue or arise in India. There have been conflicting tax rulings on this matter and the matters are currently pending before the appellate authorities.

General tax provisions
Withholding tax Certain payments to non-residents (e.g. interest, royalties, fees for technical services) would not be tax deductible if withholding tax provisions are not complied with. Effective 1 April 2003, even certain payments to residents (on account of interest, commission or brokerage, fees for technical services or fees for professional services etc) are non tax deductible if withholding tax provisions are not complied with. Set off of accumulated loss and unabsorbed depreciation In case of a business combination (e.g. merger/ amalgamation) the ability of the merged entity to carry forward the business losses/ unabsorbed losses of the merging/ amalgamating entity is extremely important. However, the tax laws only permit such a benefit to entities which have industrial undertakings. The entertainment industry, primarily a service industry, would not be eligible for these benefits and accordingly, it acts as a hindrance to the growth and consolidation of the industry. In case of demergers (i.e. carve-outs) the accumulated losses/ unabsorbed depreciation of the demerged (carved out) undertaking would be available to be carried forward by the resulting entity. Scheme of taxation Film producing and distributing companies typically go through cycles of profit and losses, which cannot be predicted. Specific methods of accounting and provisions for taxation for the film industry could be evolved to take into account such fluctuations.

148 Fo c u s 2 010 : D r e a m s t o r e a l i t y

Potential service area India is a globally preferred destination for setting up call centres and business process outsourcing centres. One of the reasons for this is the English speaking skills of the Indians. Even Indian teachers are in demand overseas for teaching in English language. These language skills could be used for making India a global centre for dubbing in English language. Transfer pricing India has transfer pricing regulations in place. Transactions between a resident and non-resident being associated enterprises are considered as international transactions. The Indian Income-tax Act specifically provides that “any income arising from an international transaction must be transacted at an arm's length price. Accordingly, determination of taxable income of foreign companies in ” entertainment industry having a “permanent establishment” in India may have to be done in accordance with such transfer pricing regulations. The transfer pricing regulations also contain provisions for maintenance of documents to evidence that the transactions have been effected at an arms length price.

Global scenario
The film industry is a highly mobile, globally competitive industry, and all developed countries use incentives to attract and retain film production. For instance, a foreign investor in an East European country is entitled to exercise three tax incentives viz. tax incentive on production/ co-production, development tax allowance and accelerated depreciation. A certain Asia Pacific country has introduced a “refundable tax offset” to encourage production of large budget films. The incentive represents a cash subsidy of 9 - 12.5 percent of the total budget of a production, on satisfying certain prescribed conditions. The treaty co-production system has existed for decades and has been used extensively to encourage a pooling of creative, artistic, technical and financial resources among producers of treaty countries. Films produced under the terms of a co-production treaty qualify as national content in the country of each participating co-producer and thus make the production eligible for applicable cash assistance/ rebates from the Government and tax benefits from each coproduction territory. Currently, countries such as Australia, UK, France, Germany, Italy, New Zealand etc have entered into such co production treaties. India currently does not have any co-production treaties. Indian film/ content production/ post production entities would benefit with such co-production treaties.

149 A CII - KPMG Report

Indirect tax laws
There are other levies (central and state) also which are applicable to the film industry. Excise duty, customs duty, sales tax, service tax, entertainment tax are some levies, which directly affect the film industry. Excise duty is payable on manufacture. The central excise tariff covers various cinematographic goods. Presently, the excise duty rate for exposed and developed cinematographic films is nil. Accordingly, production of films does not attract any excise duty. However, excise duty is payable on manufacturing, processing and development of films. This is also subject to certain exemptions. Further, manufacture of equipments such as camera, projectors and other equipment are also liable to excise duty. A state High Court has held that production and sale of a film resulted in creation of a work of art and not sale of goods. However, some other state sales tax laws have included films as 'goods' liable to sales tax. Further, certain states levy sales tax on intangibles like copyright and also on grant of film rights to use/ hire. There is need for greater consistency and uniformity in taxation for such an important industry. Entertainment tax is levied on various modes of entertainment such as on film tickets, cable television, live entertainment etc. The rates of entertainment tax payable by theatre owners vary form 0 percent in Andhra Pradesh to 130 percent in Assam. India has one of the highest rates of entertainment tax across the globe. Recently, some states have granted exemption from entertainment tax to multiplexes. In addition to the above taxes, service tax is now becoming a major source of indirect tax revenue for the government. Currently, service tax at the rate of 10.2 percent is levied on the following services relating to the entertainment industry: ! ! ! ! ! ! Advertising agency services Broadcasting services Cable services Event management services Sound recording services Video production agency services

150 Fo c u s 2 010 : D r e a m s t o r e a l i t y

Glossary

AIR ARPU BFA BPO BSNL C&S CAGR CAS CIS DRB DSL/ xDSL DTH EPG FDI FMCG FTA FTII GDP HDTV IDBI IIM IIT IMI INR IP IP-TV IPO IPRS IT LCO LIC MFA MSO NASSCOM NRS NTP OECD PPL PVR RJ SEC SMS STB TG TRAI TRP UAE USD

All India Radio Average Revenue Per User Bachelor of Fine Arts Business Process Outsourcing Bharat Sanchar Nigam Limited, A leading Indian telecommunications company Cable and Satellite Compounded Annual Growth Rate Conditional Access System Commonwealth of Independent States Digital Radio Broadcasting Digital Subscriber Line (variants) Direct To Home Electronic Programming Guide Foreign Direct Investment Fast Moving Consumer Goods Free To Air Film and Television Institute of India Gross Domestic Product High Definition Television Industrial Development Bank of India Indian Institute of Management Indian Institute of Technology Indian Music Industry Indian Rupees Intellectual Property Internet Protocol Television Initial Public Offering Indian Performing Rights Society Information Technology Local Cable Operator Life Insurance Corporation of India Master of Fine Arts Multi System Operator National Association of Software and Service Companies National Readership Survey New Telecommunications Policy Organisation for Economic Cooperation and Development Phonographic Performance Ltd. Personal Video Recorder Radio Jockey Socio Economic Category Short Messenger Service Set Top Box Target Group Telecom Regulatory Authority of India Television Rating Points United Arab Emirates United States Dollar

About CII
The Confederation of Indian Industry (CII) works to create and sustain an environment conducive to the growth of industry in India, partnering industry and government alike through advisory and consultative processes. CII is a non-government, not-for-profit, industry led and industry managed organisation, playing a proactive role in India's development process. Founded over 108 years ago, it is India's premier business association, with a direct membership of over 4,800 companies from the private as well as public sectors, including SMEs and MNCs and indirect membership of over 50,000 companies from 283 national and regional sectoral associations. A facilitator, CII catalyses change by working closely with government on policy issues, enhancing efficiency, competitiveness and expanding business opportunities for industry through a range of specialised services and global linkages. It also provides a platform for sectoral consensus building and networking. Major emphasis is laid on projecting a positive image of business, assisting industry identify and execute corporate citizenship programmes. With 45 offices in India, 13 overseas in Australia, Austria, China, France, Israel, Japan, Malaysia, Russia, Singapore, South Africa, Switzerland, UK, USA and institutional partnerships with 239 counterpart organisations in 101 countries, CII serves as a reference point for Indian industry and the international business community.

About KPMG
KPMG is the global network of professional services firms of KPMG International. KPMG member firms provide audit, tax and advisory services through industry focussed, talented professionals who deliver value for the benefit of their clients and communities. With nearly 100,000 people worldwide, KPMG member firms span 715 cities in 148 countries. The member firms of KPMG International in India were established in September 1993. As members of the cohesive business unit that serves the Middle East and South Asia (KPMG's MESA business unit), they respond to a client service environment by leveraging the resources of a globally aligned organisation and providing detailed knowledge of local laws, regulations, markets and competition. KPMG has offices in India in Mumbai, Delhi, Bangalore, Chennai, Hyderabad and Kolkata and services over 2,000 international and national clients. The firms in India have access to more than 900 Indian and expatriate professionals, many of whom are internationally trained. KPMG strives to provide rapid, performance-based, industry focussed and technology enabled services, which reflect a shared knowledge of global and local industries and our experience of the Indian business environment.

www.in.kpmg.com
For further information contact:

www.ciionline.org
Confederation of Indian Industry
Jayant Bhuyan Deputy Director General E-mail: j.bhuyan@ciionline.org Gayatri Gulati Executive Officer E-mail: gayatri.gulati@ciionline.org Mumbai 105, Kakad Chambers, 1st Floor 132, Dr Annie Besant Road, Worli Mumbai 400 018 Telephone: +91 22 24931790/0565/0287 Fax: +91 22 24939463/24945831 Head Office CII Mantosh Sondhi Centre 23, Institutional Area, Lodhi Road New Delhi 110 003 Telephone: +91 11 24629994 Fax: +91 11 24621649/24633168

KPMG
Rajesh Jain National Industry Director Information, Communication and Entertainment E-mail: rcjain@kpmg.com Anindya Roychowdhury Associate Director E-mail: anindyaroychowdhury@kpmg.com Anuj Poddar Manager E-mail: apoddar@kpmg.com

Mumbai KPMG House, Kamala Mills Compound 448, Senapati Bapat Marg, Lower Parel Mumbai 400 013 Telephone: +91 22 24913131 Fax: +91 22 24913132 Delhi 4B, DLF Corporate Park DLF City, Phase III Gurgaon 122 002 Telephone:+91 124 2549191 Fax: +91 124 2549101 Bangalore KPMG House, 20/2, Vittal Mallya Road Bangalore 560 001 Telephone: +91 80 22276000 Fax: +91 80 22273000 Chennai Wescare Towers 16 Cenotaph Road,Teynampet Chennai 600 018 Telephone: +91 44 24332533 Fax:+91 44 24348856 Hyderabad II Floor, Merchant Towers Road No. 4, Banjara Hills Hyderabad 500 034 Telephone: +91 40 23350060 Fax:+91 40 23350070 Kolkata Park Plaza, Block F, Floor 6 71 Park Street Kolkata 700 016 Telephone: +91 33 22172858 Fax: +91 33 22172868

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. The content provided here treats the subjects covered here in condensed form. It is intended to provide a general guide to the subject matter and should not be relied on as a basis for business decisions. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. Specialist advice should be sought with respect to any individual circumstances. KPMG International is a Swiss cooperative consisting of separate KPMG member firms in countries throughout the world.

'2005 KPMG, the Indian member firm of KPMG International, a Swiss cooperative. All rights reserved. Printed in India.

Sign up to vote on this title
UsefulNot useful