A billion screens of opportunity

India is a huge market with very positive growth fundamentals across virtually every type of media. The market is strategically interesting to global players seeking to monetize content and capture growth upside, either as a participant via licensing or other commercial arrangements, or as an outright owner through an in-bound acquisition or organic investment approach.

The Indian media and entertainment (M&E) sector reached Rs 1.67 trillion (USD 23.9 billion), a growth of 13.4 percent over 2017. With its current trajectory, the M&E sector in India is expected to cross Rs 2.35 trillion by 2021 (USD 33.6 billion). While television will retain pole position as the largest segment, digital will overtake filmed entertainment in 2019 and print by 2021.

The key growth will come in digital only, tactical digital and bundled digital customer segments. Telco bundling will drive consumption for a majority of Indian OTT audiences.

The M&E sector continues to show great potential and one can expect to see stable, sustained growth over the next 3 years. India’s thirst for knowledge and escapism will ensure the M&E product remains a necessity. Digital consumption will grow, and monetization avenues will see great innovation to cater to the new Indian customer segments.

How big is the India M&E opportunity?

With more than 850 TV channels and over 17,000 newspapers, the country is one of the most diverse and vibrant media markets globally. Yet the headroom for future growth is significant. Advertising, the lifeline of India’s M&E industry, remains amongst the lowest in terms of spend as a percentage of GDP. The country is also at an inflection point in wireless broadband connectivity and infrastructure that combined with its GDP growth and young demographics offer new opportunities.

While there are positive growth trends across a number of M&E subsectors, these are some areas, which are seeing strong interest from global players.

Digital/OTT. India has the world’s second highest number of internet users after China, with around 570 million internet subscribers, growing at a rate of 13 percent annually. The impressive scale of the market and a liberal foreign investment environment will continue to be attractive to global streaming platforms looking to capitalize on the country’s fast growing digital consumption. There has been a strong focus by global streaming platforms in the last year to invest in local content and originals as they look to gain scale. This continues to provide an exciting opportunity for content creators, who are seeing both global and local streaming services invest in greater volumes of content with larger budgets.

Television. India is the second-largest pay-TV market in the world in terms of subscribers after China, with 197 million TV households growing at 7.5 percent YoY. While the size of the Indian pay-TV market in terms of revenue is smaller than its peers, the runway for continued growth provides exciting opportunities for global players.

Sports. The most recent set of cricket rights sold for approximately USD 9.3 million/game compared to USD 10.7 million/game for the English Premier League and USD 12.3 million/game for the NBA7. The rapid growth in cricket online viewership has led to significant interest from global internet companies in particular. This interest is likely to increase in the coming years as online viewership of cricket approaches that of linear television.

Film production and distribution. The growth in digital video consumption is providing new growth opportunities for major international film studios, many of which have already established domestic divisions or are collaborating with local studios. Non-theatrical releases are becoming more commonplace with Indian filmmakers increasingly open to making movies for exclusive digital release. At the same time, Hollywood movies are also seeing strong growth at the Indian box office – collections for the top 10 Hollywood films in India reached over Rs 7.5 billion in 2018 from Rs 4.8 billion in 2017.

M&E trends

Television grew 12 percent in 2018 to reach Rs 740 billion. Growth was led by a 14 percent increase in advertising revenues and an 11-percent increase in subscription revenues. Growth for the segment is expected to average 9 percent over the next 3 years, taking this segment to Rs 955 billion by 2021. Advertising comprised 41 percent of segment revenues in 2018 and this is expected to reach 42 percent by 2021. Number of channels increased to 885 in 2018, of which 43 percent were news channels.

Digitization-led DAS-III and IV, ARPU growth drove subscription.

• TV subscription grew 11 percent to reach Rs 435 billion.
• TV viewing households increased to 197 million.
• TV penetration increased to 66 percent in 2018 from 64 percent in 2016; 88 percent of these television homes were digitized.
• ARPU increases were noted, primarily in DAS-III and IV markets.
• A 50-percent increase in LED/LCD/plasma television sets was observed and HD viewership increased by 57 percent.
• Multiple television homes crossed four million.
• The free+paid dual STB homes came into existence.
• Broadcaster share of subscription increased to Rs 110 billion.
• International distribution started to go direct to customer in January 2019.

Content went interactive and time spent increased.

• Total time spent increased to 3 hours 46 minutes per day.
• 77 percent of time spent on television was on escapism (GEC and film channels).
• Viewership growth was led by Oriya, Assamese, Marathi, Bhojpuri, and Urdu content.
• Sports viewership had a surprising new winner: Wrestling overtook cricket as the most viewed sport.
• Jio, Sony, Star, Zee, Viacom18, Televison18, and Netflix, amongst others, enabled interactivity with their viewers.

Future outlook

• 2019 promises further growth due to the General Elections and the ICC World Cup. Television segment can reach Rs 955 billion by 2021, with advertising growing at 10 percent and subscription at 8 percent.
• The impact of the TRAI tariff order can have implications on total viewership, free television uptake, channel MRP rates, and advertising revenues. While its implementation could take up to 6 months, one can expect a lot of changes. OTT platforms are sure to benefit due to increased parity between television and OTT content choice and costs. Since large broadcasters have removed their content from FreeDish, its attractiveness may be impacted
• Television broadcasters will focus on customer database creation and experiment more with combined selling of impact properties across TV+OTT platforms. The measure for the industry will become ad impressions, with the CPM rate being a function of the quality of the audience and closeness to purchase points
• Indian broadcasters will continue to expand their global footprint. International revenues could reach 15 percent of the topline by 2021.

Radio grew 7.5 percent in 2018 to reach Rs 31.3 billion, taking its share in total advertising to 4.2 percent. Growth was driven by a 3-percent ad volume growth, inventory growth from newly operationalized Phase-III stations, and non-FCT revenues from digital, content production, events, and the like.

Revenue growth was led by Phase-III inventory and non-FCT initiatives.

• Radio grew 7.5 percent in 2018 to reach Rs 31.3 billion, taking its share in total advertising to 4.2 percent.
• Radio segment’s growth in 2018 was fueled by a 3-percent volume growth of radio AdEX, inventory in Phase-III stations coming online, and non-FCT revenue growth from digital, content production, and events, among others.
• 53 percent of ad volumes came from the top seven cities, while Maharashtra and Gujarat led on volumes.
• Services, retail, food and beverage, auto, and BFSI were the top five sectors advertising on radio, with services comprising 30 percent of the total volumes. Reach increased, but a common measurement system was lacking.
• 47 new radio stations were operationalized in 2018 across 35 cities, taking the total of 386 radio stations in India key messages.
• Lack of measurement continues to be major drawback for the segment. Clients are exploring sharper segmentation via niche channels for niche products.
• New smartphone models do not all have FM receivers, which could impact radio listenership.

Future outlook

• There will be increased collaboration between radio players and streaming apps to increase fill rates on streaming audio platforms and sell segmented audiences to advertisers.
• Radio companies will focus on building communities to understand consumers better, and enable brands to connect directly with their audiences.
• Growth in 2019 will be fueled by ad spends in the upcoming elections, non-FCT revenues, and firming of ad rates in regional markets.

Overview of M&E deal activity in 2018

The M&E sector witnessed an interesting mix of deal activity in 2018, both on the traditional as well as the new media front.

Increasing content consumption, improved data bandwidth, and curated content creation are all rapidly enhancing the media value chain. The usage of content is increasingly moving towards a mobile-first medium, which has sprouted multiple digital platforms and content creators specifically for the digital platform. On the other hand, traditional sectors such as TV and radio are increasingly re-inventing their offerings and platforms to retain and grow audiences. The enhancement and expansion of the digital sector is providing an inherent thrust on the fund raising in this space, which in turn has led to the need for the traditional players to start consolidating their positions to compete effectively with digital players.

Television

• Television was the second largest sub-segment in terms of deal size, led by the twin deals of the acquisition of Hathway and Den Networks by Reliance Jio. These deals will provide Reliance Jio last-mile connectivity to offer its triple-play services  voice, data, and video seamlessly. This sector saw most of the strategic transactions.
• There were two major deals in the TV distribution space in 2018. In October 2018, Reliance Jio announced the acquisition of a 51-percent stake in Hathway for a deal value of USD 420 million through a preferential issue of shares. With this acquisition, Reliance Jio will get access to consumers directly and through its network; and Reliance Jio also announced the acquisition of a 66-percent stake in Den Networks through a mix of preferential issue and secondary purchase of shares totaling a deal value of USD 327 million.
• The Supreme Court judgement enforcing the implementation of the tariff order and interconnect regulations by TRAI is a watershed judgement in the Indian television broadcast segment; as per the new tariff order, broadcasters will now have to declare the maximum retail price and nature of all the channels. Distribution platform operators will have to declare network capacity fees and distribution retail prices. The broadcasting segment will, therefore, travel towards unchartered territory. This will set the pace for consolidation in the broadcasting space where standalone/lesser-viewed channels will face a challenge in surviving and hence look for larger broadcasters to be housed with.

Radio

• The radio segment is riding the consolidation wave as the segment is maturing and some of the major players are coming together to achieve greater market share and economies of scale.
• There were two deals in the segment. In April 2018, Music Broadcast Limited (MBL) acquired 100 percent stake in Ananda Offset Limited, which runs Friends 91.9 FM in Kolkata; and HT Media acquired 51 percent in Next Mediaworks to expand their offering in English, and also offer a better proposition to advertisers in terms of specific consumer segments

Going forward

The M&E sector is ripe for consolidation and is going to continue to see the digital media, multiplex, radio, and TV distribution segments acquiring strong business verticals to expand and complement their existing businesses. This is a trend likely to continue going forward as large media companies look to further strengthen their positions in this fast-growing sector.

Tapping the immense opportunities in Tier-II and Tier-III markets has just begun, and increasing amounts of regional and vernacular content will only further fuel the growth in this space. India’s demographic dividend and increased data and smartphone penetration will make the space attractive and rewarding for investors in the M&E sector. The Indian M&E sector is also seeing huge interest from global strategists who want to monetize the India growth story.

Tax environment, key developments in India

Increase in cost of digital marketing for Indian start-ups and SMEs

India has introduced an EQL of 6 percent to tax payments made to non-residents by Indian residents/Indian permanent establishment (PE) of non-residents in relation to online advertising and other notified services. While currently EQL is only applicable on online advertising-related services, in the future, the scope of services covered by EQL is expected to be expanded. EQL has generated over Rs 5.5 billion in tax revenues. Many startups and businesses that do not have a significant market share rely on digital advertising platforms to reach potential consumers. In most cases, the EQL burden may be passed on to the ultimate customer, which raises the cost of advertising for these companies. There is also an additional compliance burden on these companies. This also coincides with a ruling by an Indian tribunal in the case of a search engine platform, which held that payments made by an Indian taxpayer to its overseas group company for marketing and distribution of advertising software programs of the overseas entity was in the nature of royalty under the Income Tax Act as well as the provisions of the applicable Double Taxation Avoidance Agreement (DTAA). This is contrary to earlier rulings, which have regarded consideration for distribution agreements to not be in the nature of royalties. The tribunal held that the distribution arrangement involved the use of patented technology, trademarks, secrets, and other confidential information of the foreign company. The ruling raises concerns over the tax impact on distribution arrangements for digital services, till the matter is settled by the court.

Offshore digital players may have a business presence in India on account of Indian users or revenues sourced from India

India introduced the concept of SEP in the source rule. The law now provides that SEP in India will also constitute a business connection, i.e., a taxable presence in India. The SEP will be triggered on transactions of goods, services, or property entered into by a nonresident in India, through digital means, exceeding a monetary threshold or systematic and continuous soliciting of business or interaction with a specified number of users (to be prescribed). While non-residents with tax treaty protection will not be affected by the proposed changes as the expanded definition is yet not incorporated in the bilateral tax treaties, India is proposing to use this introduction to re-negotiate its existing bilateral tax treaties. With this change, apps/websites operating from outside India may create a taxable presence in India, based on the number of Indian users or India-sourced revenue, irrespective of such company having any sort of physical presence/local entity in India.

Maintenance of servers in India

Recently, the Reserve Bank of India (RBI) has introduced a requirement to store/localize India-related customer data from the perspective of data privacy. E-commerce and social media companies have been asked to set up local entity/servers in India. Further, the RBI has mandated that all data related to payment systems be locally stored in India from the perspective of surveillance, monitoring, and exclusive control of data.

New e-commerce rules

The Department for Promotion of Industry and Internal Trade (DPIIT), in December 2018, had introduced rules for India’s e-commerce industry on how foreign online retailers should structure their business operations in India. The new regulations propose a relation on conditions for eligible borrowers, eligible lenders, and end-use restrictions. Further, in light of the revised e-commerce guidelines, companies operating through marketplace model need to assess their existing business model and in case of any gaps, it needs to align its operation to comply with these new provisions. In addition, the DPIIT has issued a draft National E-Commerce Policy, which seeks to address certain key issues of the e-commerce ecosystem – data, infrastructure development, marketplace model, and regulatory issues, for stimulating the domestic digital economy and export promotion through e-commerce. The draft also recommends setting up of a registered business entity in India by the e-commerce sites or apps, which are available for download in India.

GST

A far-reaching tax reform like the GST is a big challenge, and requires streamlining of procedural aspects, which were earlier envisaged by the law but needed to be reviewed due to sector representations. Further, rate rationalization has also been an equally important priority. Over the past few months, the efforts of the government to peg rates at 18 percent or lower for almost 99 percent of goods are brave and laudable. This initiative has also led to the much-needed rationalization of GST rates on cinema tickets. On the procedural front, the government has implemented a partial compliance regime, keeping in abeyance compliances related to filing and furnishing details related to credits. The administration is also continuously and proactively removing bottlenecks for granting refunds, and procedural issues are being dealt with through consultation, driven by a focused attention toward achieving ease in doing business.

Regulatory update

Introduction of the draft E-Commerce Policy

The DPIIT has released the Draft National E-Commerce Policy (E-Commerce Policy) on February 23, 2019, for stakeholder comments. Some of the key features of the policy are that it: classifies small firms and start-ups attempting to enter the digital sector as an infant industry and envisages providing data access to these infant industries; suggests that the policy of not imposing taxes on electronic transmissions should be reviewed; suggests that measures to check the violation of intellectual property should be established; and suggests that reviews and ratings of products and services should be authentic and reliable. Most importantly, the policy notes that data generated in the country is a national asset and seeks to impose restrictions on cross-border data flow. It proposes a restriction on the transfer outside India of certain types of data including data collected by IoT devices installed in public spaces, and data generated by users in India on e-commerce platforms, social media websites, and search engines.

5G technology in India

5G would be a game changer for the media and entertainment sector, particularly OTT platforms, as it would enable high-resolution and very-high-speed download of video content using 5G network. The 5G technology is also expected to be a game changer for the fourth industrial revolution technologies, such as artificial intelligence modeling language, augmented reality/virtual reality, and, therefore, it will also revolutionize online gaming in India, and put the Indian M&E sector at par with the rest of the world.

New tariff regime for broadcast and distribution

TRAI released the Telecommunication (Broadcasting and Cable) Services Interconnection (Addressable Systems) Regulations in 2017 (Interconnection Regulations) and the Telecommunications (Broadcasting and Cable) Services (Eighth) (Addressable Systems) Tariff Order in 2017 (Tariff Order), (collectively, New Regulatory Framework).

The interconnection regulations and the tariff order regulate the framework for tariffs to be charged by broadcasters and distributors as well as govern the arrangements between various service providers engaged in broadcasting services.

Inter alia, the new regulatory framework requires the broadcasters to declare a monthly maximum retail price for a-la-carte channels; and provides for a levy of a network capacity fee, as well as a ceiling on the amounts chargeable by distributors as network capacity fees; manner in which broadcasters and distributors may charge for bouquets of channels; and manner in which broadcasters and distributors may apply discounts and carriage fees.

Based on FICCI-EY Report, A Billion Screens of Opportunity. For the complete report, please visit, http://broadcastandcablesat.co.in/A Billion Screens Of Opportunity

Uday Shankar
Vice President, FICCI and Chair,
FICCI Media and Entertainment Division

“The M&E sector is poised to kickstart a new era of growth. Technological disruptions are creating new opportunities for the sector. Indian M&E is headed toward becoming a world-class media-tech sector, on the back of access to global audiences through online platforms, its large talent pool, storytelling capabilities, post-production and VFX expertise, and policy and regulatory certainty. It is time to create global media giants from India”

Ashish Pherwani
M&E Sector Leader,
Ernst & Young LLP

“The growth of digital infrastructure is enabling Indians to fulfil their need for personal content consumption, and the M&E sector has responded. India produced and licensed around 750,000 hours of content in 2018, a majority of which was made in India. We expect the amount of content being produced to keep increasing.The sector has to serve a billion screens in India and globally.”

NP Singh
CEO,
Sony Pictures Networks India

“With the proliferation of smartphones, enhanced connectivity, and low-cost data charges, the use of second screen is thriving. However, since India is a country driven largely by family viewing in single-TV households, both TV and OTT enjoy a symbiotic coexistence”.

Sudhanshu Vats
Group CEO,
Viacom18 Media

“2018 has been marked by the power of the 3 C’s – consolidation, convergence, and consumer. On the broadcast side, the new TRAI tariff order will compel the industry to develop its offerings in line with consumers’ choice. While on the digital side, we are witnessing the unlocking of what can be a Rs 10,000-crore digital subscription market in a 5-year horizon.”

Gaurav Gandhi
Director and Head of Business,
Amazon Prime Video India

“In the next 4 to 5 years, there will be more individuals having access to streaming video than television. Localization and regionalization will help video streaming go much deeper and wider. And as more streaming services focus on creating high-quality, differentiated, and disruptive content, customers will get even more discerning about their preferences and gravitate further toward streaming originals”.

Amit Goenka
CEO,
International Broadcast Business, ZEEL

“The OTT space getting so crowded recently has a lot to do with the blurring of lines between media houses, technology companies, telcos, and ISPs. Everyone has jumped into the fray realizing that ownership of consumer and content are the real keys to the kingdom. In a newly converged world, my sense is that winning will still rest on the core fundamentals of great story telling and fabulous consumer ease. In this intensely competitive space, there will be only one real winner and that’s the consumer, and that is as it should be.”

Prashant Panday
Managing Director and CEO,
Entertainment Network (India) Ltd.

“I am confident FM radio will be the fastest-growing traditional media in the years to come. Radio brands will also diversify and become multimedia content producers, reaching audiences through radio, video, SM all.”

Rajesh Kaul
Head – Sports Business,
Sony Pictures Networks India

“One key trend that is shaping sports consumption on TV in India is broadcasters providing local language feeds for sports. From an interactive engagement tools perspective, second screen engagement is moving to the forefront and we will continue with this trend as it gives viewers deeper insights and a more immersive experience”.