Entertainment & Media Industry in India - out-performing the economy

By Dr. Uday Lal Pai
Exclusively for InvestorIdeas.com
posted October 02, 2006

The Indian entertainment and media industry is witnessing a phenomenal growth and is slated to grow at 19 percent to US$ 18 billion by 2010 from its current size of US$ 7.9 billion

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The Indian Entertainment and Media (E&M) Industry has out-performed the Indian economy and is one of the fastest growing sectors in India.

The E&M industry in the country is expected to grow at 19 per cent compound annual growth rate to reach US$ 18.14 billion by 2010, according to a study by FICCI and PricewaterhouseCoopers (PWC).

The phenomenal growth in the E&M sector can be attributed to economic growth, rising income levels, consumerism combined with technological advancements and policy initiatives undertaken by the Indian government, the Ficci-PricewaterhouseCoopers study stated. An added boost to the industry is reduction of personal income tax over the last decade.

"Two factors that will contribute to the growth of the industry are low media penetration in lower socio-economic classes and low ad spends..... but efforts to increase it even slightly are likely to deliver much higher results," PricewaterhouseCoopers' says. The Indian E&M industry is undergoing remarkable change and is today one of the fastest growing sectors in the country. It is a perfect blend of creativity and commerce and provides vast investment opportunities.

Cinema

India has the world's largest movie (film) industry, which churns out around 1,000 movies a year. It stands at an estimated $1.5 billion and is expected to grow around 20 per cent annually. It is projected to reach $3.4 billion by 2010. (FICCI-PWC)

The Indian film industry has more than 3.1 billion admissions. With a strong appetite for movies and an upward migration of household incomes in India, this segment brings out several business opportunities in this segment.

The industry realizes about 85 per cent of its revenues from box office collections as compared with the US film industry where the box office sales account for only 27 per cent of the revenues. Though the number of admissions is the highest in the world, when one compares the number of screens available for India's population, the average is relatively low as compared with other countries. With around 12,000 theatres in the country that are mostly single-screen, the average screen density works out to be only 12 screens per a million population.

"Bollywood" is the term often used to refer to Indian cinema. It actually is the informal name given to Mumbai, which is the center of the Hindi language film industry. India has 16 official languages, but the influence of Bollywood cinema was instrumental in making Hindi the common language for the whole of India. The Tamil film industry (known as "Kollywood") based in Chennai (Madras) and the Bengali film industry based in Kolkata (Calcutta) are also booming. India is a movie superpower, producing the world's largest number of films, about 800 every year.

There has been an increased importance of regional cinema. According to industry estimates, Hindi language films command a 40 per cent share of the Indian film market today since a large portion of the films made in India are produced in the south and east regions of India in regional languages.

Ancillary revenues - earned by film producers by selling their digital rights to mobile companies, satellite rights to TV broadcasters and distributors (cable companies and DTH players) - are estimated to increase by 20 per cent a year.

Viewership of regional films is no longer confined to specific areas. This trend is being driven by mediums such as DVDs and the Internet. The home video households, which currently stand at three million, are projected to increase to about 13 million by 2010 - primarily because VCD and DVD prices are falling. However, what can upset the balance is the introduction of video-on-demand and pay-per-view services by TV distributors.

Mulitplexes - though only 250 compared with the estimated 12,000 single-screen theatres in the country - are helping the domestic box office revenues. India also offers a huge base for growth in the home video segment.

International films (primarily English, Hollywood) have a strong market share in most developed countries around the world. However in India, the share of foreign films as compared with the gross box office collections of all films is relatively small at around 5-10 percent. Hollywood films are now being dubbed in local Indian languages and screened in cinema theatres. The dubbing industry has grown at 25-30 per cent over the last five years. In fact, almost 75 percent of the total international industry revenues million is contributed by international content released in local languages

Cable and television

India is the third largest television market in the world today. From having one public service broadcaster to over 350 channels available today, the Indian television industry has come a long way and is poised for even higher growth. An urban cable home in the four metros currently receives approximately 90 TV channels in the analogue mode.

However, this has not discouraged the investor who still believes that there is room for more, keeping in consideration the potential to reach the large number of eyeballs, which no other medium can capture. As a result, around 50 new channels are being added each year. This has given rise to the serious demand for content for these 24-hour channels. Television broadcasting companies are continually scouting for content software companies and due to this imbalance, the programming costs are rising in an un-proportionate manner. This is a potential opportunity which still needs to be tapped to its fullest.

There are over 119 million television households, which comprise only about 60 per cent of the total households in the country. Of these 119 million television households, about 50 million receive cable television services, leading to a penetration of only about 42 per cent cable TV households to total TV households and 25 per cent cable TV households to total households in India. These low penetration percentages show that there exists a huge untapped potential for growth in this industry.

The potential of the industry just seems to get better even with the current statistics. Television homes are growing at a staggering rate of 4 percent per annum - it is no wonder that today in India, the number of television homes far exceed the number of telephone-connected homes.

India is set to become Asia's leading cable market by 2010, the largest satellite market by 2008, and the most lucrative pay television market by 2015, according to estimates by Hong Kong's Media Partners Asia (MPA). Turnover for multichannel video--including cable, satellite and Internet protocol television (IPTV)--will jump to $7.2 billion from $3.6 billion by the end of the decade, a study by MPA showed.

Direct-to-Home (DTH) satellite television service, hitherto the domain of Zee Group's Dish TV and Doordarshan through its free-to-air (FTA) channels, is seeing increased interest on the part of large business houses and has emerged as a major challenge to the established cable TV. DTH has seen the Tatas, along with Star, launch Tata Sky last month and even the Reliance-ADAG Group and Sun TV have announced their intention to enter this segment.

From the current market size of around 3.5 million connections, I estimate that by 2015, DTH will reach 30-35 million. The increasing popularity of DTH services will stir up not only growth within the segment, but also in the cable TV system. Cable operators, especially multi-system operators (MSOs), are gearing up with their offering of digital cable to compete against the DTH services.

Music

Indian Music sector, dogged by problems of piracy, could see a revival of sorts with the growth of 'mobile music' and licensed digital distribution services. The sector with a size of $155 million would grow to $165 million by 2010 with a CAGR of merely 1 per cent. According to another section of the market analysts, the music sector is estimated to be about US$ 149 million in legitimate sales of music cassettes and CDs and is pegged to grow at 3 per cent over the next five years. Exact figures are not available on account of the piracy.

However, the industry has a unique structure unlike most other global markets. Earlier, the music market was completely dominated by film music, as music is an integral part of Indian films and music rights contributed as much as 15 percent of an individual film's earnings. However, in the past few years, the success of music videos and non-film albums is driving growth in the Indian music market.

Radio

Till a couple of years back Radio was in the privy domain of the State Broadcaster. It has now been opened up to private investment. Indian radio today reaches out to 99 percent of the population and is currently the most cost-effective mass communication medium in the country, according to the report by PWC.

Near-obituaries have been written, but radio (liberalized in 2005) is alive and has been resurrected - in fact, it is kicking. The segment is estimated to be a $67 million industry. It is estimated to garner a share of about two per cent of the total ad spending in India. This sector has become the hottest sector for investments amongst the entertainment and media industry. As many as 338 FM Radio licenses are now available for bidding for the private players. These cover about 91 cities, most of which till now were being serviced only by the State Broadcaster.

The PwC report states that there will be a boom in the radio industry with 22 per cent growth and rationalization of the license framework will treble its size to about US$ 145.9 million by 2009.

India's private FM radio sector is expected to get foreign investments of US$ 111 million in the next 12 to 18 months.

Worldspace, the only player in the satellite radio sector, has about 47,000 subscribers in India (globally, it has around 115,000 subscribers). In India, its target was 100,000 by March 2006.

Print Media

The market highly fragmented with approximately 1900 news publications for a circulation figure of just 200 million. As per the latest readership survey NRS 2005, the reach of the print media (dailies and magazines combined), as a proportion of the reading population (i.e. 15 years and above) is only 27 per cent. The global average readership is estimated to be over 50 per cent. This highlights the significant potential of the print media market in India.

Due to low levels of literacy and India's marked regional diversity, the print media segment is characterized by a large number of players dominating specific geographies. Vernacular news dailies thus dominate the market with a 49 per cent share.

The print media with current size of $1.5 billion is gradually opening up to foreign investment due to a booming Indian economy, growing need for content and government initiatives. The sector with a CAGR of 12 per cent is estimated to grow to $4.3 billion by 2010.

Animation

India's software success story is graduating to the creative space. It is now blending its IT skills with its legendary prowess in story telling to cook up an immensely entertaining broth. Cashing in on its English-educated manpower, which is conversant with English humor, and cost effectiveness, India is now on the fast lane to becoming a key player in the animation world.

National Association of Software and Services Companies (NASSCOM)'s Study on Animation and Gaming Industry in India, released in December 2005, estimates the global opportunity in this sector at $55 billion today, with the Indian market taking $285 million in 2005. It sees the opportunity rise to $950 million by 2009.

Experts say that unlike animators in China, South Korea or the Philippines, Indian animators have not been exposed to animation films. There is lack of awareness about the industry and absence of substantial venture capital inflow. Experts say there is also a need to set up more training institutes that focus on animation. And when all that happens India can be called an animation hub.

The total cost for making a full-length animated film in America is estimated to be $100 million to $175 million. In India, it can be made for $15 million to $25 million.

Advertising

Indian Advertising spending, as a percentage of GDP is only 0.34 percent, which is way below the percentages for both developed and developing countries. This provides an immense potential for growth since advertising revenues are key to every segment in the Indian entertainment and media industry. Even if India were to reach the global average, the advertising revenues generated would almost be equal to the current advertising revenues, which are estimated at about US$ 2.5 billion for 2005 fiscal.

The television advertising market in India today is estimated at about US$ 1,067 million. Advertising revenue for cable television was $1.02 billion in 2005, and is forecasted to grow to $1.8 billion by 2010.

The size of the radio market in India is currently estimated at US$ 53 million and is expected to have the highest growth at a CAGR of 22 per cent in the coming years.

With an estimated 28 million Indians already hooked on to the internet, internet advertising in India is presently worth $22 million. With the broadband slowly becoming popular, the segment would show a compound annual growth rate (CAGR) of 50 per cent.

Government Initiatives

• The Government allows 20 per cent foreign direct investment in FM radio and recommended shifting to revenue sharing regime from the current license fee structure.
• The government changed its media policy in 2002 and relaxed foreign ownership restrictions in the newspaper category. Today, 26 per cent foreign equity holding in news-related print media is allowed, though editorial management must remain Indian.
• While approving the uplinking guidelines, the Union Cabinet has relaxed the 26 per cent FDI cap in news channels and brought it on par with FDI norms in the print media by allowing investments by (foreign institutional investors (FIIs), non-resident Indians (NRIs) and overseas corporate bodies (OCBs) within the 26 per cent FDI ceiling.

Foreign Investments

India has one of the most open liberal investment regimes among the emerging economies with a conducive foreign direct investment (FDI) environment. The entertainment and media industry has significantly benefited from this liberal regime and most segments of the entertainment and media industry today allow foreign investment. Recently FDI was permitted in the two important sectors of Print Media and Radio. Films, Television and other segments are already open to foreign investment.

Faced with slowing sales and dipping profits, foreign media houses are increasingly eyeing India, one of the most attractive markets globally, thanks to a robust economy and easing of stiff investment rules.

India's thriving media industry, which was shut for foreign firms until not long ago, today counts Britain's Pearson, publisher of the Financial Times, Independent News and Media, Turner International and BBC Worldwide as its recent investors.

The information and broadcasting ministry, since the beginning of this year, has cleared 13 proposals for FDI in media and is examining another 22 proposals.

There have been eight proposals for FDI in the news and current affairs media including Mid-Day Multimedia Ltd, Business India Publications Ltd, Deccan Chronicle Holdings Ltd, Dhara Prakashan Pvt Ltd, Writers & Publishers Ltd and DT Media & Entertainment Pvt Ltd.

Currently, the government guidelines have capped FDI inflow into the news and current affairs segment at 26 per cent FDI, with several riders like insistence on an Indian editor and single largest shareholder to have 51 per cent stake, among others.

In the print media segment, 100 per cent FDI is now allowed for non-news publications and 26 per cent FDI is allowed for news publications. Printing of facsimile editions of foreign journals are now also allowed in India. This policy is helping the foreign journals save significant costs on distributing them to service the Indian market audiences more effectively. The FM radio sector too was opened for foreign investment recently with 20 per cent FDI being allowed. As many as 101 companies have expressed their interest in the segment, most of which are currently not in the business of running and operating a radio station. This has brought about a need not just for financial investments but also technical and operating experience. As most of the existing players are themselves bidding for additional licenses, there is a demand from the new players, who are proposing to enter this space, for technical and financial expertise to run a radio business and thus are looking out to international market for the same.

Future

With over 700 million people below the age of 30 and a middle-class of over 300 million, no marketeer wants to give this a miss. Similar is the case with the entertainers. Salivating at this huge potential audience has brought all major M&E companies to India. So you have SONY, Paramount, Disney, Fox and Time-Warner all establishing their operations here.

With high ROI, 100 percent FDI on automatic basis, co-production treaties, vast opportunities for investing in theatre/ multiplex infrastructure, increasing number of cable & satellite homes and opening up of foreign investments even in the print media, this segment is all set to script its own blockbuster in the days ahead. These are being driven by the spectacular growth of the television industry, the new formats for film production and distribution, the privatization and growth of radio in the country, the gradually liberalizing attitude of government towards the sector, easier access to and for international companies.

With a host of factors contributing to the double-digit growth of the industry and an added easing of the foreign investment norms, the E&M Industry in India thus is a sunrise opportunity that presents significant avenues for investment.

Companies to watch

HT Media Ltd.
Cyber Media (India) Ltd
Zee Telefilms Ltd.
Sri Adhikari Brothers.
G V Films Ltd.
Crest Communication Ltd.
Radio Mirchi
Cinevistaas Ltd.
Dainik Jagran
Sun TV Ltd.
Jain Studios Ltd.
Shringar Cinemas Ltd.
Prime Focus Ltd.
PVR Cinemas

Disclaimer
Dr. Uday Lal Pai is an independent columnist for this web site. Dr. Uday Lal Pai  may hold long or short positions in any of the stocks mentioned in this article and those positions can change at any moment. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp, InvestorIdeas is not affiliated or compensated by the companies mentioned in this article. Dr. Uday Lal Pai  is a freelance writer. Nothing in the articles should be construed as an offer or solicitation or recommendation to buy or sell any specific products or securities. Past performance does not guarantee future results.

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