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.

Chairman CII National Entertainment Committee

Subhash Ghai

–

Foreword

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.

PresidentConfederation of Indian Industry

Sunil Kant Munjal

–

Message from the CII President

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.

Country Managing DirectorKPMG, India

Ian Gomes

An action plan for the Indian entertainment industry

Executive summary 1

Industry overview 11

Television 23

Film 45

Music 81

Radio 93

Bridging the gap 107

The tax perspective 145

Contents

Let the fun begin

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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.

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.

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.

New delivery platforms and technological breakthroughs:

Increasing content variety:

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.

Executive summary

1A C I I - K P M G R e p o r t

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 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.

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.

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The past and the future

2Focus 2010 : D reams to rea l i t y

Growth of the entertainment industry

2003 2004 2005E 2006E 2007E 2008E 2009E 2010E

196 222 262

309 371

432 515

588

(INR billion)

Source: KPMG Research

The industry growth drivers

The forthcoming metamorphosis

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 non-

essentials, the entertainment industry has the potential to grow explosively in the

future.

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

The industry is ready to

enter a second stage of

growth, powered by

technology and an enabling

regulatory environmentDigital platforms will drive the next wave of growth

First wave of growth Second wave of growth

DTH

PDA

Wirelessbroadband

3G mobile

IP-TV

Interactivetelevision

Pay-per-viewConsoleCD, CD-ROM

FM radio

Broadbandinternet

Basic analogcable

MusiccassettesSingle

screentheatres

AM radio

Vinyl records

Terrestrialtelevision

Multiplexes

MultimediaPC

Spending power and awareness

Ava

ilabili

ty o

f new

pro

ducts

an

d s

erv

ices

Source: KPMG Research

A C I I - K P M G R e p o r t

A panoramic view 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.

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

Note: The summation of the figures may not match due to rounding off

Source: KPMG Research

Segment-wise break-down

(INR billion)

Others (live entertainment, interactive games, etc.)

Gross unadjusted revenues

2003

122

52

10

2

9

195195

7

8

196

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

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

Add: overseas' distributor's margin from sale of Indian films

Entertainment revenues at retail value

Radio

Music

Film

Television

2010E

371

143

13

8

60

595

18

588

11

Segment-wise composition of the entertainment industry

The coming of age of the

television sector has been

the primary driver of the

growth of the entertainment

industry

Focus 2010 : D reams to rea l i t y

Television

! Additional distribution platforms:

! More entrants in niche genres offering additional content variety to the

viewer:

! Conducive and liberalising regulatory intervention:

Films

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:

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.

Niche genres have significantly strengthened their value proposition

and more entrants are expected in spaces like animation, business and

lifestyle, among others.

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.

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

5A C I I - K P M G R e p o r t

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.

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.

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

Music

Radio

6

The future growth of music

industry will come from

non-phyical formats like

digital downloads, royalty

income and ringtones

Focus 2010 : D reams to rea l i t y

licence fee structure to a revenue sharing regime, and if foreign direct investment

is allowed.

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.

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:

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.

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.

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.

Emerging opportunities in the entertainment space

Animation:

Outsourced production facilities:

Organised home video:

7

Share of radio in the total advertising pie

Source: KPMG Research

Country Share of radio in advertising

India

Sri Lanka

USA

Spain

World 8

9

13

21

2

(In percentage)

A C I I - K P M G R e p o r t

Leisure entertainment like theme parks:

Live entertainment:

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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.

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.

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

Reaching for the heights - A need for action

8

A number of factors

continue to hold the

industry back and

significant efforts still

need to be undertaken

Focus 2010 : D reams to rea 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

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.

!

!The realisation of

opportunities would depend

on the aggressiveness of

the industry players and

sagacity of policy makers

and regulators

9A C I I - K P M G R e p o r t

Industry overview

The macro-economic environmentConsistent 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.

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.

Industry overview

9

8

7

6

5

4

3

2

1

092-93 93-94 94-95 95-96 96-97 97-98 98-99 99-00 00-01 01-02 02-03 03-04

GDP growth rate

Source: Reserve Bank of India

Regulation Consumerism

ri iP

c ng Content

Advertisingspend

Keydrivers

Technology

(In percentage)

A growing consuming class

with an increased

propensity to spend will

drive the growth of the

Indian entertainment

industry

11A C I I - K P M G R e p o r t

Consumerism and demographicsThe 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.

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

!

!

!

Rise of India’s earning and consuming classes

Source: NCAER

The Classes 1994-95 1999-00 2005-06E

R i ch(Above USD 4600)

Consuming(USD 970 - 4600)

Cl imbers(USD 470 - 970)

Aspirants(USD 340 - 470)

Destitutes(Less than USD 340)

1 millionhouseholds

3 millionhouseholds

6 millionhouseholds

29 millionhouseholds

48 millionhouseholds

48 millionhouseholds

32 millionhouseholds

24 millionhouseholds

32 millionhouseholds

17 millionhouseholds

33 millionhouseholds

75 millionhouseholds

78 millionhouseholds

66 millionhouseholds

66 millionhouseholds

As the average Indian’s

basic needs are met, his

propensity to spend on

discretionary items, such

as entertainment, increases

12Focus 2010 : D reams to rea l i t y

demand and an increased investment would result in an expansion of the

entertainment industry in the years to come.

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, e-

commerce 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 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.

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.

A non-homogenous market

!

!

!

!

!

Advertising spend

Companies and businesses

that have managed to

differentially cater to the

varying segments of the

population have benefitted

in the long run

13A C I I - K P M G R e p o r t

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.

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

Relative advertising spend for various countries

Source: KPMG Research

(USD billion)

GDP Total ad spend Ad spend to GDP

Australia

China

Hong Kong

India

Malaysia

Singapore

South Korea

USA

France

Germany

United Kingdom

412

904

164

485

88

86

477

10,384

132

1,984

1,560

4

6

4

2

1

1

4

134

1

16

14

1.0%

0.6%

2.1%

0.5%

1.0%

0.9%

0.8%

1.3%

0.8%

0.8%

0.9%

0.48

0.50

0.51

0.520.52

0.53

0.540.53

2003 2004 2005E 2006E 2007E 2008E 2009E 2010E

Total advertising spend and GDP (In percentage)

Source: KPMG Research

India continues to have one

of the lowest ad spend to

GDP ratios, underscoring its

untapped potential

14Focus 2010 : D reams to rea l i t y

increased, niche channels have emerged targeting specific demographic

segments and the cost of advertising on television has reduced.

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.

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)

Content

Number of brands advertised on television

Source: TAM Adex

1994 1995 1996 1997 1997 1999 2000 2001 2002 2003 2004

3906 39734496

4774

6830

7875 80417673

8994

10914

12759

15A C I I - K P M G R e p o r t

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.

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.

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.

Pricing

The number of films

produced annually has been

declining as producers are

increasingly valuing quality

over quantity

16Focus 2010 : D reams to rea l i t y

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.

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.

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).

Differential pricing

A price differentiation

strategy needs to be

adopted for media products

with a view to maximise

revenues

17A C I I - K P M G R e p o r t

United States

United Kingdom

Australia

Japan

India

60

63

65

65

83

40

37

35

35

17

Market Operator Broadcaster

Distribution of revenues

Source: Media Partners Asia

(In percentage)

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.

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 last-

mile 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.

Regulation

!

!

!

!

!

!

!

!

!

Further growth is difficult

without facilitative

regulation

Focus 2010 : D reams to rea l i t y18

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

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 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

Technology

Source: KPMG Research

Split of industry revenues (INR billion)

Revenues to rightful IPR holders Leakages at last mile, piracy

2003 2004 2005E 2006E 2007E 2008E 2009E 2010E

6166

7783

95

101

120

126

135 156 185225

276330

395462Any regulatory intervention

should be supported by a

comprehensive framework

and effective Implementation

19A C I I - K P M G R e p o r t

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 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 (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.

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.

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

Digital distribution

The Personal Video Recorder

High Definition Television

Interactive services

20Focus 2010 : D reams to rea 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 are another way to bring interactive digital

services to consumers. The wireless debate currently centres on the use of point-

to-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-to-

multipoint, still an embryonic technology, operates like satellite distribution,

beaming data to as many reception antennae as the signal can reach.

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.

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 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.

Fixed broadband wireless systems

Internet radio stations

Downloadable digital audio

Satellite radio

21A C I I - K P M G R e p o r t

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 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.

The future of entertainment

will be governed by the

interplay of consumerism,

advertising spend, content,

pricing, technology and

regulation

22Focus 2010 : D reams to rea l i t y

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.

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.

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:

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;

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;

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.

The government needs to create a

conducive regulatory environment for rapid but stable growth by supporting

Today and tomorrow

! Introduction of addressability:

! Alternative distribution platforms:

! New players in niche genres offering more content choice to viewers:

! Meaningful regulatory intervention:

TelevisionBox Populi

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

23A C I I - K P M G R e p o r t

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.

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

!

!

!

!

Source: KPMG Research

Television revenues (INR billion)

37

35

5

60 65 7390

107136

163

63

68

35

30

58

24

39

12

4349

5414

17

20

Subscription Advertisement Others

213

73

39

250

78

43

24Focus 2010 : D reams to rea 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.

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.

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

!

!

!

Advertising

Medium 2002 2003 2004

Spend Share of total

spendSpend

Share of total spend

Spend Share of total

spend

Ad Industry Size 95.1 104.2 118.2

Television

Press

Radio

Cinema

Out-of-home

Internet

39.1

44.0

1.5

3.3

6.9

0.3

41.1%

46.3%

1.6%

3.5%

7.3%

0.3%

43.0

47.5

1.8

3.6

7.9

0.4

41.3%

45.6%

1.7%

3.4%

7.6%

0.4%

48.6

54.5

2.2

3.75

8.5

0.6

41.1%

46.1%

1.9%

3.2%

7.2%

0.5%

Source: TAM Adex

Shift in advertising over last three years (INR billion)

25A C I I - K P M G R e p o r t

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.

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.

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.

Who is advertising

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%US Japan Germany UK France

Others

Radio

Magazines

Television

Newspaper

Advertising pattern in developed countries

Source: World Association of Newspapers

For the next three years,

print and television will

command equal share of the

advertising market

26Focus 2010 : D reams to rea l i t y

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.

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.

Source: TAM Adex

Share of ad revenues among television genres

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

100%

80%

60%

40%

20%

0%

Mass

Films

Music

Regional

English Entertainment

Others

News

Sports

Source: TAM Adex

Top ten spenders on television in 2004

0

500

1000

1500

2000

2500

Shampoos

Toile

t soaps

Crp

orate

/ bra

nd imag

o

e

Wa

hg p

dr / l

iqu

sin

owe

ids

sr

i

Cell phone e

v ces

Tw- w

hel r

o

ee

s

ars Jee

s

C /

p

Toh

astes

otp

Cllu

l r pn

ea

hoes

of dr nk (a

raed)

St

is

et

(INR Million)

Mass entertainment

channels are slowly ceding

viewership to niche channels

27A C I I - K P M G R e p o r t

!

Is advertising volume reaching saturation point?

International norms on ad clutter

!

!

!

!

!

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.

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).

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.

Avera

ge S

ecs

/Ho

ur

DD FTA PAY All Channels

Type of Channel

102

219 208192

Pure advertising time for every hour of programming in India

Source: TAM Media Research

With addressability, the

effectiveness of ad spend

will become more

transparent

28Focus 2010 : D reams to rea 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.

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.

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

Subscription revenue

Source: TAM Survey over a sample Target Group

This is what the audience sees at a superficial level

Over-deliveries &over-exposure

Sub-optimaldeliveries

Under-deliveries& underexposure

Tele

visi

on v

iew

ing (hours

/w

eek)

60

Total TG

85

Heavy

50

Medium

20

Light

Television advertisements typically bombard certain audience with over exposure while completely skirting others

Effectiveness of advertising

29A C I I - K P M G R e p o r t

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.

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.

Source: www.worldscreen.com

90%

Cable television Penetration

80%

70%

60%

50%

40%

30%

20%

10%

0%

Australi

a

nSi gapore

China

Sh K

r

out o

eaIn

dia

Twan

aiapan

JSA

U

Philipines

pCan

daa

mGr

any

Source: Industry

Cable subscription rates have fallen in real terms

100

105

110

115

120

125

130

135

140

145

150

155

1997 1998 1999 2000 2001 2002 2003 2004

Consumer Price Index Cable Prices

The wide disparity in ARPUs

is not commensurate with

the quality or offering or

service

30Focus 2010 : D reams to rea l i t y

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 co-

axial 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.

!

!

Source: worldscreen.com

Global Cable ARPUs

USA U

K

Cana

ad

Aust al

ir

a

N

Ze

lnd

ew

aa Ja

apn

Korea

Philip

pine

s

Taiw

an

Maa

sia

l y

H

Kong

ong

Si

poe

nga

r

Thi aalnd

I

nesa

ndo

i

China

I

andi

31A C I I - K P M G R e p o r t

(USD/ month)

0

10

20

30

40

50

60

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.

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.

The CAS saga

Broadcaster

MSO

LCO

Consumers

Alternate platform providers

(DTH/ IP-TV)

Most pay broadcasters wanted to avoid/ delay addressability, as they feared a revenue fall in the short- medium 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.

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

Wanted addressability as it ensures a level playing field. But wanted to delay the implementation depending on the level of preparedness to launch services.

Supported addressability on the grounds of increasedtransparency and more equitable share of distribution revenues.

Supported addressability.

Conditional support for addressability, bargain for higher FTA charges.

Confused positions arising from the lack of information.

Highlighted implementation issues whilst supporting addressability.

Stakeholder What they thought What they said

32Focus 2010 : D reams to rea l i t y

Making sense out of the chaos

!

!

Putting the issues in perspective

!

!

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.

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

33A C I I - K P M G R e p o r t

!

!

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.

Split (for declared subscribers)

(LCO's gross revenues)

Split (for total revenues)

Number of subscribers 15001500

declared 1500375 25% 100%

undeclared 01125 75% 0%

Broadcasters 3575 50% 18%LCO 14553 35% 76%MSO 1022 15% 5%

Estimated tax loss 045000 45000

Subscription fee (INR/sub/month) 190150 40 27%

What the subscribers pay INR 285000225000 25%

Broadcaster revenues 5300028000 12% 16% 25000 89%

MSO revenues 150008000 4% 4% 7000 88%

LCO revenues 217000189000 84% 80% 28000 15%

Optimised Scenario Increase/monthCurrent Scenario

Source: Industry

Simulated revenue flow for a large LCO

34Focus 2010 : D reams to rea l i t y

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.

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.

!

!

!

!

Content

A 100%-declaration is

possible, through only a

moderate increase in rates,

through partnering solutions

35A C I I - K P M G R e p o r t

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 high-

budget, 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.

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

Sports channels

36Focus 2010 : D reams to rea l i t y

Genrewise Viewership Share in 2004

News Channels

Sports Channels

Mass Entertainment

Hindi Film Channels

Infotainment / Kids

Regional Channels

English Entertainment

Music Channels

38

40

13428

5

Source: TAM Media Research

(In percentage)

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.

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.

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

News channels

Children's channels

37A C I I - K P M G R e p o r t

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 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.

The large regional variations necessitate the need for a more targeted and

segmented approach for content, in an addressable scenario.

Regional channels

Total Market

Hyderabad

Bangalore

Chennai

Delhi

Kolkata

Mumbai

English entertainment

Mass Hindi

Regional

Hindi films

Music

Sports

Infotainment & kids

Others

News

0% 20% 40% 60% 80% 100%

Viewership pattern across locations

2003

Source: TAM Media Research

English entertainment

Mass Hindi

Regional

Hindi films

Music

Sports

Infotainment & kids

Others

News

0% 20% 40% 60% 80% 100%

Total Market

Hyderabad

Bangalore

Chennai

Delhi

Kolkata

Mumbai

1999

Large regional variations in

viewership necessitate a

segmented approach in an

addressable market

38Focus 2010 : D reams to rea 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-to-

viewership ratio.

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 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.

Content trends

The road ahead

39A C I I - K P M G R e p o r t

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.

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.

Source: - KPMG Research

Distribution of Revenues

Pay TV Revenues to broadcasters

Distributors' retention

Last mile operators

Total Subscription Revenues

2003

12

1

52

65

2004

13

3

58

73

2005E

16

5

69

90

2006E

19

11

77

107

2007E

29

16

90

136

2008E

42

23

99

163

2009E

62

32

120

213

2010E

82

41

126

250

Growth

37%

55%

14%

23%

Source: - KPMG Research

Subscription revenues

2003 2004 2005E 2006E

16 19 26 36

49 5464

71

2007E 2008E 2009E 2010E

5272

103134

declared & addressable revenues

undeclared revenues

83

91

110

116

(INR billion)

(INR billion)

40Focus 2010 : D reams to rea 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.

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.

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.

!

Source: KPMG Research

600ARPU for analog and digital subscribers

500

2003

ARPU - analog ARPU - digital ARPU - combined

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

400

300

200

100

-

(INR per month)

Demand for premium

content will increase

41A C I I - K P M G R e p o r t

! 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.

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 on-

ground coverage) at a higher price for this segment, which is the most price-

inelastic. The ARPUs for this segment could be around INR 900-1000.

Source: KPMG Research

Year 2010 penetration

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Top 20 cities Others Total

Digital cable

DTH IP-TV and copper

Analog Cable

Break-down by tiered offerings (million subscribers)

0

10

20

30

40

50

60

70

80

90

2003 2004 2005E 2006E 2007E 2008E 2009E 2010E

Analog cable

Digital - premium package

Digital - basic package

Digital - value added services

42Focus 2010 : D reams to rea l i t y

Source: KPMG Research

Total Households (HH)

TV HH

Connected HH

TV penetration

2004

205

91

48

44%

2005E

213

98

53

46%

2006E

221

105

58

48%

2007E

229

112

63

49%

2008E

237

119

70

50%

2009E

246

126

77

51%

2010E

254

134

85

52%

CAGR

3.6%

6.7%

9.9%

Connected HH to TV HH

Connected HH to total HH

53%

23%

54%

25%

55%

26%

57%

28%

59%

29%

61%

31%

63%

33%

(In million)

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.

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 self-

contained 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.

Source: KPMG Research

43A C I I - K P M G R e p o r t

0

2003

10

20

30

40

50

60

70

80

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

0.7

1.6

3.5

2.22.8

5.7

8.667.9

64.1

1.0 1.31 1

2

6056

5248

43

Break-down by access

Analog cable subs Digital cable DTH IP-TV and copper

71.9

(million subscribers)

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.

2005 could be the turning

point for the industry’s life

cycle

44Focus 2010 : D reams to rea l i t y

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.

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.

!

!

FilmBack to the future

Source: KPMG Research

0%

Film

Gross worldwide revenues

USA Japan UK France India Others

20% 40% 60% 80% 100%

Film and film-based

entertainment jointly

command a significant

consumer mindshare

45A C I I - K P M G R e p o r t

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.

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.

Evo

luti

on

of

the I

nd

ian

film

in

du

stry

The film industry has entered a new phase of growth

Golden era for studios

Institutionalfinancing

Limited IPOs

Lowcorporate

governance

High cost private

financing

Prabhat Studios

New TheatresBombay Talkies

J F Madanmonopoly

onexhibition

Earlydistributionnetworks

Gradual rise of ‘banners’

Dubiouschannels of

finance

Corporatisation

Integration of value chain

Venture capital, private equity

First wave of growth

Bonds,insurances

Entry of MNCs

Second wave of growth

Individual film

makers

1910 1920 1930 1940 1950 1960 1990s 2001 2004 2005 onwards

Source: KPMG Research

India can establish itself

as an important global

film-making hub

46Focus 2010 : D reams to rea 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

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”.

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,

!

!

!

!

!

Components of the Indian film industry

Bollywood

Indian films certified by the censor board

0

200

400

600

800

1000

1200

1999 2000 2001 2002 2003

Nu

mb

er

of

film

s

Hindi mainstream Other Hindi Regional

Source: Central Board for Film Certification

47A C I I - K P M G R e p o r t

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 1balance INR 9 billion being cornered by pirates .

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

Regional films

!

!

!

1I ndus t r y es t imates the to t a l revenue loss due to p i r acy and leakages in thea t re co l l ec t ions a t INR 15 -20 b i l l i on . S ince the p r i ce pa id by the end consumer

fo r such i l l eg i t imate p roduc ts i s s ign i f i can t l y l ower than the no rma l p r i ce , we have cons ide red the re t a i l va lue o f such i l l eg i t imate income a t INR 9 b i l l i on

Source: Industry

Market Share by Reven ues

Tamil

17%

Telugu

15%

Hindi Mainstream

43%

Others

8%

Other Hindi

2%

Bengali

1%

Cross-over Hindi

2%

Malayalam

10%

Foreign

2%

In terms of discipline and

cost control, certain regional

film industries are more

professional than Bollywood

48Focus 2010 : D reams to rea l i t y

English films

Arthouse films, short films and documentaries

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.

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, film-

makers 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.

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 non-

feature 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.

Interaction between art and

commercial film arenas is

expected to raise the quality

of cinematic content

49A C I I - K P M G R e p o r t

Emerging genres

Current revenue distribution

Till date, categories like tele-films and special-effects driven films, which drive film

revenues internationally, were virtually absent in India. Efforts in producing tele-

films 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.

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.

Distribution of film revenues

Leakages/piracy14%

Music2%

In cinema ads2%

Satel l i te/ DTH/IP -TV 9%

DVD/ VCD/ overseas cable

4%

Overseas -theatrical

12%

Domestictheatrical

57%

Source: Industry

50Focus 2010 : D reams to rea 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.

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.

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

Size and growth

Along with an overall

reduction in costs, each of

the revenue components

can grow.

51A C I I - K P M G R e p o r t

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.

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.

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.

Setting an industry agenda for accelerated growth

140

160

(INR billion)

2002 2003 2004 2005E 2006E 2007E 2008E 2009E 2010E

120

100

80

60

40

20

0Domestic theatrical

DVD/VCD/overseas cable

Music

Leakages / piracy

Overseas - theatrical

Satellite/DTH/IPTV

In cinema ads

Growth of the Indian film industry

Source: KPMG Research

Source: KPMG Research

Segment-wise growth of film revenues

140%

120%

100%

80%

60%

40%

20%

0%

-20%

-40%

-60%

Domestic theatrical

DVD/VCD/overseas cable

Music

Leakages / piracy

Overseas - theatrical

Satellite/DTH/IPTV

In cinema ads

Total

2003 2004 2005E 2006E 2007E 2008E 2009E 2010E

(In percentage)

52Focus 2010 : D reams to rea 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.

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 film-

making

Introducing a profit sharing system thereby reducing initial risk on full upfront

payment etc.

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!

!

!

!

Corporatisation

!

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!

!

!

!

53A C I I - K P M G R e p o r t

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

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.

!

!

!

!

Merchandising

Product marketing

Contracts and documentation

Risk reward sharing and mitigation

HollywoodIndiaComponent

Pre-production

Scripting and development

Above-the-line cost control

Below-the-line cost control

Source: KPMG Research

There are only six or seven

large production houses that

have the experience of

managing all elements of

the value chain

54Focus 2010 : D reams to rea l i t y

Reduced costs expanded revenue streams and go towards reducing return volatility and project risk substantially

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

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

Artists’ costs

Pre production

89(11)100Total

19(3)22Distribution costs (print + publicity)

31(4)35Production expenses

3(1)4Equipment

5(2)7Post production costs

27(3)30

422

Revised costs (%)

Possible cost increase (reduction)

(%)

Existing costs (%)

Cost reductions

Revenue enhancement strategies can boost

income by around 10-15 percent

11414100Total

55Leakages

4-

-

4Others

6-6Music

14-14Satellite

11-11Overseas theatrical

74965Domestic theatrical

Revised revenues

(%)

Revenue Increase/ (decrease)

Existing revenues

(%)Revenue enhancements

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.

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

Developing economies of scale

!

!

!

Source: KPMG Research

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’

55A C I I - K P M G R e p o r t

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 pre-

production.

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.

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.

Organised film financing

!

!

56Focus 2010 : D reams to rea 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.

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.

Bank ProducerGuarantee / Collateral

Corporatised financing structures - First generation (existing)Full recourse

Equity 50% +Loan upto 50%

1. Negative rights

2. Completion guarantee

3. Insurance

FilmProject

Source: KPMG Research

Institutional lending rates

are high compared to other

sectors, since film financing

is perceived to be riskier

57A C I I - K P M G R e p o r t

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

Interest

Loan guarantee(say 50% of the

bank loan)

Understandrisks,

does detailedappraisal

Takes a non-fund exposure

Filmproductioncompany

Filmproject

Ratingagency

Equity 30% +

Loan upto 70%

Specializedguarantee fundsBank

Credit enhancers

Corporatised financing structures - Third generation (futuristic)Receivables based financing (illustrative)

Film library

Homevideo Television

Receivables securitisation

Exhibition

Digital distribution, lastmile integration highertransparencies

andcould allow

for direct securitisation ofexhibition receivables

Music

Bank

Working capital

Film production company Film project

Complete cash entrapment

Source: KPMG Research

Source: KPMG Research

58Focus 2010 : D reams to rea 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 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.

0

200

400

600

800

1000

1200

2002 2003 2004 2005E 2006E 2007E 2008E 2009E 2010E

Nu

mb

er o

f fi

lms

-

50

100

150

200

250

INR

millio

n

Corporatised films Other f ilms Average cost of a mainstream film

Source: KPMG Research

The changing pattern of film financing

59A C I I - K P M G R e p o r t

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.

Gross collections include domestic and overseas theatrical receipts, domestic and

overseas satellite and video rights, music rights and in-film advertising and

merchandising revenues.

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.

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

!

!

!

Category AA

Category A

Have mid-budget films eroded overall industry profitability?

Lowest Cost (INR) Highest Cost (INR)

150,000,00080,000,00030,000,00010,000,000 30,000,000

80,000,000150,000,000300,000,000

Categories

AAABC

In an increasingly

corporatised environment,

films that are motivated

more by passion than

commerce are unlikely to

get past the approval stage

60Focus 2010 : D reams to rea l i t y

made at a disproportionately high cost.

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.

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-of-

the-mill subjects, espousing mediocre music and virtually no market. Their costs

are assumed to be between INR 10-30 million.

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.

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

Category B

Category C

Category D

Ranking films by risk and return

AAABC

Rank by returns Rank by risk

2231 1

423

Categories Combined rank

1312

61A C I I - K P M G R e p o r t

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.

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.

By strategically investing in a

balanced portfolio, film companies and production houses can increase their

overall returns considerably, while reducing their overall risk.

62Focus 2010 : D reams to rea 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.

Source: Film Production Management, Baston Cleve

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.

The film production process

Conception of idea Screenplaybreakdown

Shooting schedule

Location scouting

Budgeting

Casting and unions

Equipment rentals

Permits, etc.

Development of idea

Market research

Obtaining rights

Signing tentativecast, crew

Raising capital

Principal photography

Blocking

Lighting

Final rehearsals

Shooting

Editing

Sound effects

Music production

Special effects

Mixing

Development Pre-production Production Post-production

The general tendency is to

transfer the risk to the next

link in the value chain

63A C I I - K P M G R e p o r t

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.

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.

!

!

!

!

!

!

!

Time allocated to various stages of production

0

0 .5

1

1.5

2

2 .5

3

3 .5

Development Pre-production Production Post-production

Hollywood BollywoodSource: KPMG Research

(Years)

Source: KPMG Research

0% 20% 40% 60% 80% 10 0%

Marketing Development and Production

Allocation of expenditure across film industries

Bollywood

Hollywood

64Focus 2010 : D reams to rea l i t y

Last-mile consolidation in distribution and exhibition

The multiplex revolution

!

!

!

!

!

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.

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.

India is under-screened

30

43 45 4652 53

61

77

117

12

Ind

ia

US

Fra

nce

De

nm

ark

Irela

nd

Italy

Sp

ain

Ge

rma

ny

Belg

ium

UK

(Screens per million population)

There is a need for atleast 20,000 screens in

India as against the current 12,900.

Source: UNESCO

65A C I I - K P M G R e p o r t

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.

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

!

!

!

!

Changing distribution model

Increasingly innovative promos for Hollywood films and alliances that nowinvolve 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

66Focus 2010 : D reams to rea 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).

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 to producer

Incremental revenue 38

Incremental revenue 88

100Untapped revenueRevenue at retail value

138 50

Televisionrights

Music rights

Additional marketing costs 2Revenue 16

Revenue 6

Revenue 13

Revenue 3

rightsHome video

Overseasrights

Revenue 75

Revenue 8

Revenue 4

Revenue 10

Revenue 3

Additional marketing costs 8

Revenue 100

Distributors and exhibitors

Ticket sales

Revenue 30

Non ticket sales

Revenue 20

Leakages

Producer

Revenue aggregation for an integrated film producer

Source: Industry

The industry could see

alliances between

producers and exhibitors on

one hand and broadcasters

and utility players on the

other

67A C I I - K P M G R e p o r t

Piracy and its control

Expanding the international market

!

!

!

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.

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.

1995 2007 20102000 2005

The global progress of Indian films

Ind ai n D ai ps ro a

As ai n c no ou t mn oe mir ithw s cal n gu ,sa heg de : las P g Bi ak na tan,s Sri L anka M , ala ias y

Rev si ti C SI G r , ece, oe thr e

once p op lu ra st m ra ke

New w e ts re s n unt io rc e

Source: KPMG Research

68Focus 2010 : D reams to rea 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.

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.

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.

Looking beyond the Diaspora

The Indian diaspora

3.5

3.0

2.5

2.0

1.5

1.0

0.5

-

Myan

ma

r

US

A

Mala

ysi

a

Sau

di

Ara

bia

UK

So

uth

Afr

ica

UA

E

Ca

nad

a

Trin

idad

&To

bag

o

Mau

riti

us

Source: KPMG Research

(In million)

69A C I I - K P M G R e p o r t

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.

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.

Agents and marketingIt is important for Indian

producers to tie-up with

agents who have the right

relationships and an

understanding of different

markets

70Focus 2010 : D reams to rea l i t y

A Possible Segmentation of Markets

The Bollywood (Hindi) Regional Film

The Bollywood Urban Film a la “Jhankar Beats”, “Dil Chahta Hai”, etc.

The English Regional Filma la English August

(can include Indian Diaspora and Joint Ventures made for the Indian market)

The Tamil Regional Film

The Bengali Regional Film

The Punjabi Regional Film

The Telugu Regional Film

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

Other Regional Industries

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 (Pakistan, Sri Lanka, Bangladesh, Singapore, Malaysia, Fiji, UAE, etc.) + Russian, 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.

Countries where the films have to be dubbed or sub-titled. (all English speaking countries of the world huge tertiary audience)

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.

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

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

Countries where the films have to be dubbed or sub-titled

Primary Market Secondary Market Tertiary Market

60 percent of the population in India.

Urban City population

Metro and Multiplex Phenomenon

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

11 percent of the population in India.

2.50 percent of the population in India.

Punjabi Speaking Population in India

10.50 percent of the population in India.

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)

Hindi speaking Indian Diaspora 20 million strong.

Pakistan 155 million 8 percent Urdu speaking.

Indian Diaspora in Pakistan.

Indian Diaspora and other countries like Pakistan, etc.

English speaking Indian Diaspora.

English Speaking Pakistan, Bangladesh, Sri Lanka etc population and Indian Diaspora in these countries

Tamil speaking Indian Diaspora

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

Bangladesh and its diaspora

Pakistan - 48 percent of 155 million speak Punjabi.

Punjabi (Indian and Pakistani) Diaspora.

Telugu speaking Indian Diaspora.

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

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)

71A C I I - K P M G R e p o r t

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.

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.

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

Global box office revenues

4 .024 .0 9

4 .95 5 .5 83 .06

3 .1 4

3 .79 3 .7 9

7.6 6 8 .4 1 9 .5 2 9 .4 9

0.7 10 .8 0

0 .8 00 .9 00 .6 90 .6 0

0 .5 20 .4 7

20 01 20 0 2 20 0 32 0 0 0

US A E ME A A s ia-Pacif ic L atin A m e rica C anad a

( U S D b i l l i o n )

Source: MPAA

India is one the few

markets globally where

Hollywood has not been

able to dominate

72Focus 2010 : D reams to rea 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.

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.

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.

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

Cross pollination of talent and resources

Co-productions and collaborations

Individual talent and

story-telling ability is not

constrained by geographies -

capable film-makers always

find their way to

appreciative audiences

73A C I I - K P M G R e p o r t

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.

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.

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:-

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

Outsourcing to India

Digital content creation

Indian mythology, literature

and history can be a vast

source for compelling

stories that can be adapted

for global audiences.

74Focus 2010 : D reams to rea 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.

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.

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.

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.

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.

Locations

Outsourcing: A word of caution

India forms an insignificant

part of the global visual

effects value chain

No Indian studio has yet

been able to integrate all

the segments to offer

end-to-end services for

global clients

75A C I I - K P M G R e p o r t

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 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

Training and education

76Focus 2010 : D reams to rea 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.

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.

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. Co-

production 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

Government incentives

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

77A C I I - K P M G R e p o r t

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.

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.

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.

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Government incentives

u Piracy control

u Legal and regulatory Incentives

u Tax breaks

u Import and export Subsidies

u Training and education

u Film development

u Investments in education infrastructure

u Setting up professional training Institutes for professionals

u Film funding assistance

u Strengthening ailing film assistance bodies

u Film appreciation courses for increasing audiences’ awareness of ainema

Areas of possible government involvement

Source: KPMG Research

Government could play a

meaningful, facilitative role

in the areas of education

and foreign trade

78Focus 2010 : D reams to rea 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.

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’.

Slowly but surely, the Indian

film industry is moving

Back to the Future

79A C I I - K P M G R e p o r t

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.

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.

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 non-

film music channels, non-film albums and remixes have gained popularity

recently. In the non-film category, devotional music produced by smaller and local

A unique industry structure

Music The times they are a changin’

In recent times, the pattern

of music consumption

and distribution has

shifted radically.

81A C I I - K P M G R e p o r t

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.

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

Piracy - A growing affliction

Source: Industry estimates

Genre-wise distribution of music sales in India

Old film music

21%

Others

8% New film music

40%40%

Devotional

10%

Regional film music

5%

Popular music

8%

International

8%

Genre-wise distribution of music sales in USA

Rock

27%

Pop

13%

Rap / hip hop

12%

R&B urban

11%

Country

11%

Religious

7%

Jazz

4%

Others

12%Classical

3%

Source: IFPI

82Focus 2010 : D reams to rea 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.

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.

!

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Piracy trends

Estimated capacity Total legitimate demand

(All disc formats, billion units)

Excess capacity

87654321

0%

20%

40%

60%

80%

100%

120%

T

an

aiw

Hon

og

Kng

Cina

h

Malay

sia

India

S

apor

ing

e

T

d

haila

n

Poland

Russia

Ind

esia

on

Czeh

eu

lic

cR

pb

Source: IFPI, industry estimates

Alarming rise in capacity despite falling demand indicates growing piracy

83A C I I - K P M G R e p o r t

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

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 on-

demand 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.

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Global efforts to curb digital piracy

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84Focus 2010 : D reams to rea l i t y

Composition of revenues

Recovery and growth

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.

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.

Source: KPMG Research

Growth in sales

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

2001 2002 2003 2004 2005E 2006E 2007E 2008E 2009E 2010E

Original CDs and cassettes Pirated CDs and cassettes Ringtones

Digital formats Royalty Revenues Total industry

-

5

10

15

2000 2001 2002 2003 2004 2005E 2006E 2007E 2008E 2009E 2010E

Music revenues

Original CDs and cassettes Pirated CDs and cassettes

Ringtones Royalty Revenues

Digital formats

(INR billion)

Source: KPMG Research

85A C I I - K P M G R e p o r t

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 end-

users 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 currently suffered by the original IPR holders.

In the future, music will increasingly be sold through non-physical digital formats,

as technology makes new products and services available and affordable. By end-

2005 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.

-

2

4

6

8

10

12

14

16

2003 2004 2005E 2006E 2007E 2008E 2009E 2010E

0%

10%

20%

30%

40%

50%

Original music sales Pirated music sales

Loss through cover versions Loss to original IPR owners

(INR billion)

60%

A firm regulatory push,

together with investment in

Digital Rights Management,

will eventually bring down

losses of original IPR

holders

Split of revenues

Source: KPMG Research

86Focus 2010 : D reams to rea 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:

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.

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.

Film industry as a partner

The FM factor

87A C I I - K P M G R e p o r t

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.

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.

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.

Strategic thrust on marketing non-film music

Online marketing

88Focus 2010 : D reams to rea l i t y

Artist and repertoire

Royalty collections

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.

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.

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

A&R in India can prosper

in an environment

that is more transparent

and artist-friendly

89A C I I - K P M G R e p o r t

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.

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.

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

Judicial leniency

Digital distribution

90Focus 2010 : D reams to rea 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.

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.

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.

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.

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

Organised retail

Public awareness campaigns

New business models

Convergent distribution

will enhance the

value proposition for

access providers

91A C I I - K P M G R e p o r t

new technological innovation will also give rise to a new form of piracy, so

continuous investments in digital security will need to be made.

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.

Conclusion

92Focus 2010 : D reams to rea l i t y

RadioTuning 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 state-

owned 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.

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.

The global scenario

RadioTuning in

Globally radio is enjoying a

renaissance based on the

support of the youth.

93A C I I - K P M G R e p o r t

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.

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

FM listeners across age groups

35%

41% 40%

34%

28%

20%

12-14 15-19 20-29 30-39 40-49 50+

FM listening habits

100 72 72

8 87 27 41 15 5

At home

Delhi Mumbai

Neighbour/Friend’s place

In Car At office ( incl. Shops)

Commuting Others

80

60

40

20

0

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

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

94Focus 2010 : D reams to rea 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.

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.

Source: - KPMG Research

Global ad spend on radio

25%

20%

15%

10%

5%

0%

Sri La

nka

USA

Spain

Austra

lia

Fran

ce

Japa

nIta

lyUK

Brazil

Ger

man

yIn

dia

Share

of

tota

l ad s

pend

Source: - KPMG Research

Radio revenues

Current growth path

Potential growth path

0.0

5.0

10.0

15.0

20.0

25.0

2002 2003 2004 2005E 2006E 2007E 2008E 2009E 2010E

Includes only ad revenues

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

95A C I I - K P M G R e p o r t

(INR billion)

Bridging the gap

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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.

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

FM radio needs to grow

from the current 21 stations

in 12 cities to atleast 300

stations in 100 cities

96Focus 2010 : D reams to rea 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.

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/ locality-

specific 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.

Source: Industry

Telecom8%

Retail8%

Finance10%

Durables12%

FMCG14%

Media22%

Others26%

Profile of advertisers on Indian radio

97A C I I - K P M G R e p o r t

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.

Source: KPMG Research

11%

60%

% Clients % Revenue

89%

40%

Revenue composition

11 percent of clients contribute 60 percent of revenue

98Focus 2010 : D reams to rea l i t y

FM licensing - The story so farIn 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?

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99A C I I - K P M G R e p o r t

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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

100Focus 2010 : D reams to rea 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.

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101A C I I - K P M G R e p o r t

Creation of value packs

Niche programming

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.

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

102Focus 2010 : D reams to rea 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.

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.

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 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.

Correction in the cost structures

Manpower

Branding

103A C I I - K P M G R e p o r t

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.

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 multi-

media 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.

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.

The multi - media story

Conclusion

104Focus 2010 : D reams to rea l i t y

Digital radio broadcastingTwo 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

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105A C I I - K P M G R e p o r t

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.

106Focus 2010 : D reams to rea l i t y

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

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Bridging the gapWhat will it take?

Required today is an urgent

commitment to undertake

fundamental

transformational

change including strategic

and structural corrections

107A C I I - K P M G R e p o r t

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.

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

of the subsectors.

108Focus 2010 : D reams to rea l i t y

Other revenue leakages

Extent of piracy

Ability to attract investments

Ability to attract & retain talent

Extent of competition in distribution

Maturity of internal processes

Regulatory maturity

Industry history

Demand growth projections

Extent of competition in content

Adoption of technology

Maturity FactorRadioMusicFilmTelevision

Sub-sector

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 Regulatory initiatives

Improve organisationaleffectiveness through focussedprojects

Implement addressability forbroadcasting distribution in aphased manner

Improve yieldReview programming code andcensorship laws

Develop alternative revenuestreams

Define service obligations andgrievance redressal mechanisms

Improve consumer connect Rationalise last mile licensing

Develop new markets throughaggressive market making

Evolve a framework for regulatingcross media / value chain holdings

Increase market activity in newergenres

Allow the freedom to choose thebusiness model

Improve governance standardsConstitute a national anti-piracyforce

Improve organisational ability toattract and retain talent

Provide investment andoperational incentives

Explore consolidation options Constitute a unified regulator

Leverage technology strategically Develop national media andentertainment policy

1

2

3

4

5

6

7

8

9

10

109A C I I - K P M G R e p o r t

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.

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.

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Markets

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Industry requires a

fundamental mindset

shift from complacency

to an insatiable quest for

excellence

110Focus 2010 : D reams to rea 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.

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.

comprise players who recognise the importance of effective

corporatisation but, either due to lack of adequate expansion capital or an “if-it-

ain'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.

‘Maturing segments'

'Aspirants'

Hig

h

nOperational effectiveness

nC

orp

ora

teG

ove

rna

nc

e

Corporatised Content

producers

BroadcastersRadio Stations

Music distributors

Music retailers

Movie Distributors

Theatre owners

LCOs

MSOs

Alternative Platform Vendors

DTH Operators

nMature segments nAspirants nLaggards

Unorganized Content

producers

Lo

wH

igh

nOperational effectiveness

nC

orp

ora

teG

ove

rna

nc

e

Corporatised Content

producers

BroadcastersRadio Stations

Music distributors

Music retailers

Movie Distributors

Theatre owners

LCOs

MSOs

Alternative Platform Vendors

DTH Operators

nMature segments nAspirants n

Unorganized Content

producers

Lo

w

nOperational effectiveness

nC

orp

ora

teG

ove

rna

nc

e

Corporatised Content

producers

BroadcastersRadio Stations

Music distributors

Music retailers

Movie Distributors

Theatre owners

LCOs

MSOs

Alternative Platform Vendors

DTH Operators

nMature segments nAspirants n

Unorganized Content

producers

nOperational effectiveness

nC

orp

ora

teG

ove

rna

nc

e

Corporatised Content

producers

BroadcastersRadio Stations

Music distributors

Music retailers

Movie Distributors

Theatre owners

LCOs

MSOs

Alternative Platform Vendors

DTH Operators

nMature segments nAspirants n

Unorganized Content

producers

Lo

w

HighLow

111A C I I - K P M G R e p o r t

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, , 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 sub-

segments 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.

'Laggards'

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With the entry of organised,

resourceful players the

incumbents need to

understand their strategic

vulnerability and take

immediate corrective

measures

112Focus 2010 : D reams to rea l i t y

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.

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.

1. Improve operational effectiveness

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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

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

Ranking

1

2

3

4

5

6

7

8

50%

Ability toDrivevalue

5

5

5

4

4

4

2.5

2.5

30%

Ease of implement

ation

4

3

2

3

3

3

4

4

20%

Extent ofinaction

3

3

4

3

2

2

4

4

Weighted score

4.3

4

3.9

3.5

3.3

3.3

3.25

3.25

Industry consolidation

Adoption of technology

Support the evolution of a meaningful regulatoryregime

Improve process orientation

Improve quality of content

Financial innovation

Remove value chain frictions

Performance measurement

Aggressive benchmarking

9

10

11

12

13

14

15

16

17

3.5

3

3

3

3

3

2

1

1

2

3

3

3

3

2

2

4

3

4

3

3

2

2

3

4

3

4

3.15

3

3

2.8

2.8

2.7

2.4

2.3

2.2

The entertainment businesses need to assimilate experiences ofpathfinders in other sectors

113A C I I - K P M G R e p o r t

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.

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

2. Improve yield

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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

114Focus 2010 : D reams to rea l i t y

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3. Develop alternative revenue streams

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.

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.

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

A disciplined process

supported by adequate

systems, and prior planning

will help improve yield and

minimise risks

115A C I I - K P M G R e p o r t

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.

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

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4. Develop consumer connect

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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

The industry needs to take

note of the gap in systemic

research and feedback in

the new product

development process

116Focus 2010 : D reams to rea l i t y

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5. Aggressive market making

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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.

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

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

117A C I I - K P M G R e p o r t

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.

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

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6. Enhanced activity in newer genres

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

Companies need to

constantly define new/

changing genres based

on the demographic profile

of the market

118Focus 2010 : D reams to rea 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.

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.

7. Improve governance standards

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

119A C I I - K P M G R e p o r t

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.

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.

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.

!

!

!

!

8. Create an environment to attract and retain talent

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

If the industry seeks to continue attracting talent against stiff competition, itwould need to undertake anumber of measures

120Focus 2010 : D reams to rea 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

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

!

!

!

9. Industry consolidation

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

121A C I I - K P M G R e p o r t

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:

- Having larger budgets and established names, the level of risk that

financial investors perceive is far lesser, resulting in lower interest costs

- 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

- 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.

! Financial

! Risk management

! Utilisation of resources

!

!

!

Recommended steps

(A) Review the long term growth strategy to evaluate the desirability and

practicality of inorganic growth

(B) Explore inorganic growth opportunities.

The inability of fragmentedplayers to be more efficientis a consequence of the greater cost of resources that they bear due to theirinefficient scale of operations

122Focus 2010 : D reams to rea l i t y

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

Lack of sophistication is notjust a limiting constraint toorganisational effectiveness,but also a significant risk from a business continuity perspective

123A C I I - K P M G R e p o r t

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

Degree of impact on

Consumer

Resistance to change

Complexity ofimplementation

High

High High

High

High High High High

High High

High High

High High High

High High High

High High HighHigh

High High

Medium

Medium Medium

Medium

Medium Medium Medium

Medium Medium

Medium

Medium Medium

Medium

Low

Low

Low

Action points#

Industry

1

2

3

4

5

6

7

8

9

10

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.

124Focus 2010 : D reams to rea l i t y

Getting the house in order – The regulatory charter

The objective of regulation

!

!

!

!

!

!

!

!

!

!

!

Protecting stakeholder interests

!

!

!

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

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

125A C I I - K P M G R e p o r t

Industry players

!

!

!

Mature segments

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

The sections below discuss the constituents of each cluster and their regulatory

needs.

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.

nIntensity of competition

nE

xte

nt

of

tran

sp

are

nc

y

Corporatised Content

producers

Broadcasters

Radio Carriers

Radio Stations

Music distributors

Music retailers

Movie Distributors

Theatre owners

LCOs

MSOs

Alternative Platform Vendors

DTH Operators

nMature segments nLaggards nGrowth engines

Unorganized Content

producers

nIntensity of competition

nE

xte

nt

of

tran

sp

are

nc

y

Corporatised Content

producers

Broadcasters

Radio Carriers

Radio Stations

Music distributors

Music retailers

Movie Distributors

Theatre owners

LCOs

MSOs

Alternative Platform Vendors

DTH Operators

nMature segments nLaggards nGrowth engines

Unorganized Content

producers

126Focus 2010 : D reams to rea l i t y

Laggards

! Socio-economic distribution of Indian consumers and affordability of

entertainment products:

! Revenue leakages through piracy and under declaration:

! Unviable tax structures:

! Existence of last mile monopolies:

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.

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.

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.

Most state governments view the entertainment

sector as an easy revenue target and hence, tax it heavily.

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.

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.

General Entertainment

News

English Entertainment

Sports

Music

Infotainment

Kids

Films

Illustrative list

Any intervention that ignores

the evolutionary context and

forces driving it is likely to

fail and can also be

counter-productive

127A C I I - K P M G R e p o r t

! Lack of transparency:

Growth engines

Consumers

! Consumer choice:

! Access to customer service:

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.

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.

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's right to choose a content-quality-price

combination

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 non-

existent 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

128Focus 2010 : D reams to rea l i t y

governments, regulators and industry players should devise specific measurable

actions aimed at improving consumer choice and service levels.

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.

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

Government

!

!

!

Ensuring adequacy of competition

!

!

!

Best way to safeguard

stakeholder interests is to

ensure the free play of

market forces in a market

environment where

adequate competition exists

129A C I I - K P M G R e p o r t

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.

It is clear that most sub-sectors in the entertainment industry are performing sub-

optimally 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.

!

!

Fostering growth

!

!

!

The government and

regulatory bodies should

play the role of a change

agent

130Focus 2010 : D reams to rea l i t y

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.

!

!

!

!

!

!

!

!

!

n Policy / regulatory clarity

n Investments andoperational incentives

n Stringent anti-piracyregime

n Policy clarity

n Transparency

n Enhanced tax compliance

n Transparency

n Free play of market forces

n Investment andoperational incentives

n Stringent anti-piracyregime

n Choice in price- quality combinations

n Diversity of content

n Stringent anti-piracyregime

n Investments and operational incentives

n Policy/ regulatory clarity

n Establish a credible measure of listenership of stations

n

n Transparency

n Enhanced tax compliance

n Policy/ regulatory clarity

n Enhanced licensing fees

n Continued control of select genres

n Rationalisation of licensing regime

n Freedom in choosing the technical architecture for Broadcasting

n Credible measure for listenership of stations

n Investment and operational incentives

n Choice of price -quality combinations

n Alternative access points

n Diversity of content

n

n

n Ensure level playing field

n Stringent antiregime

n Policy/ regulatory clarity

n Transparency

n Enhanced tax compliance

n Addressability

n Transparency

n Free play of market forces

n Non access

n Investment andoperational incentives

n Choice of contentPlatform - operatorquality-price combination

n Customer service and grievance redressal

Ensuring growth

Adequate competition exists

Ensuring adequate competition

Governments

Industry players

Alternative accesspoints

Consumer

Protecting stakeholder interests

n Stringent anti-piracyregime

n Stringent anti-piracyregime

n Investments andoperational incentives

n Policy / regulatory clarity

n Investments and operational incentives

Films MusicRadioTelevisionKey issue

131A C I I - K P M G R e p o r t

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

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'.

!

!

1. Implement addressability for broadcasting distribution in a phased

manner

!

!

!

132Focus 2010 : D reams to rea 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

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:

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

2002

2002

2003

2003

2005

2008

2008

2015

133A C I I - K P M G R e p o r t

Source: www.china.org.cn

A.

a.

b.

c.

B.

a.

b.

C.

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:

Stipulated number of public broadcasting channels

Most viewed channels in the relevant community to ensure mandatory

carriage of popular free to air channels in a specific region.

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.

Basic pay programming: Cable operators should put together a basic tier of

pay programming comprising the following:

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.

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.

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.

Government needs to

develop a phased, long-term

plan to migrate to a fully

digital environment

134Focus 2010 : D reams to rea 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.

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.

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.

2. Review programming codes and censorship laws

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3. Define service obligations and grievance redressal mechanisms

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

135A C I I - K P M G R e p o r t

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.

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

4. Rationalise last mile licensing

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The discontinuities and

unplanned evolution of

licensing in the

entertainment last mile has

resulted in inconsistencies

136Focus 2010 : D reams to rea 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.

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 cross-

media 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.

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5. Evolve a framework for regulating cross-media/ value chain holdings

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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.

137A C I I - K P M G R e p o r t

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.

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Company

Walt Disney

Viacom

Comcast

Newscorp

Clear Channel

NBC

AOLTime Warner

Cox Comm.

Echostar Comm.

Major Business Interests

Disney's interests span theme parks, hotels, and consumer goods, such as toys, andbroadcasting, 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 theleading players in cable. Leading Comcast businesses include Comcast cable, CN8.TV,E! Online, Comcast spectacor, Comcast sports, Philadelphia Fliers, 76ers, GolfChannel, 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 anddistribution 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

138Focus 2010 : D reams to rea 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.

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.

6. Allow the freedom to choose the business model

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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

139A C I I - K P M G R e p o r t

7. Constitute a national anti-piracy force

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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

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

140Focus 2010 : D reams to rea 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.

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:

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8. Provide investment and operational incentives

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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

Entertainment sectorrequires massive investments to upgrade thelast mile infrastructure

141A C I I - K P M G R e p o r t

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9. Constitute a unified regulator

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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.

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 socio-

economic 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 sub-

segments.

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.

Recommended actions

(A) Review taxation policies

(B) Develop schemes to incentivise investments

142Focus 2010 : D reams to rea l i t y

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.

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

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10. Develop a national media and entertainment policy

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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.

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

143A C I I - K P M G R e p o r t

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.

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:

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.

Regulatory charter

Conclusion

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

Action points#

1

2

3

4

5

6

7

8

9

10

Degree of impact on

Consumer

Resistance to change

Complexity ofimplementation

High

High High

High

High High High High

High High

High High

High High High

High High High

High High HighHigh

High High

Medium

Medium Medium

Medium

High High High

Medium Medium

Medium

Medium Medium

Medium

Low

Low

Low

Industry

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

144Focus 2010 : D reams to rea l i t y

The tax perspectiveIn the fine print

Exchange control regulationsIn 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:

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.

The tax perspectiveIn the fine print

145A C I I - K P M G R e p o r t

Segment Limit

TV Software Production

Setting up hardware facilities

Cable network

DTH

Up linking of news and current affairs TV channel

FM Broadcasting

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

Income tax and allied laws

Film production and distribution cost

Multiplexes

1As per the prescribed rules , 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.

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.

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1 Ru le 9A and 9B o f the Income- t ax Ru les , 1962 ( the Ru les )

146Focus 2010 : D reams to rea l i t y

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Foreign television channels/ telecasting companies (FTCs)

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 1 2circular issued by the Central Board of Direct Taxes (CBDT) . 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.

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 C i r cu la r No 787 da ted 10 Februa r y 20 0 0

2 The Apex Income- t ax admin is te r ing au thor i t y i n Ind ia

147A C I I - K P M G R e p o r t

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.

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.

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.

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.

General tax provisions

Withholding tax

Set off of accumulated loss and unabsorbed depreciation

Scheme of taxation

148Focus 2010 : D reams to rea l i t y

Potential service area

Transfer pricing

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.

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.

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 co-

production 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.

Global scenario

149A C I I - K P M G R e p o r t

Indirect tax lawsThere 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

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150Focus 2010 : D reams to rea l i t y

AIR All India Radio

ARPU Average Revenue Per User

BFA Bachelor of Fine Arts

BPO Business Process Outsourcing

BSNL Bharat Sanchar Nigam Limited,

A leading Indian telecommunications company

C&S Cable and Satellite

CAGR Compounded Annual Growth Rate

CAS Conditional Access System

CIS Commonwealth of Independent States

DRB Digital Radio Broadcasting

DSL/ xDSL Digital Subscriber Line (variants)

DTH Direct To Home

EPG Electronic Programming Guide

FDI Foreign Direct Investment

FMCG Fast Moving Consumer Goods

FTA Free To Air

FTII Film and Television Institute of India

GDP Gross Domestic Product

HDTV High Definition Television

IDBI Industrial Development Bank of India

IIM Indian Institute of Management

IIT Indian Institute of Technology

IMI Indian Music Industry

INR Indian Rupees

IP Intellectual Property

IP-TV Internet Protocol Television

IPO Initial Public Offering

IPRS Indian Performing Rights Society

IT Information Technology

LCO Local Cable Operator

LIC Life Insurance Corporation of India

MFA Master of Fine Arts

MSO Multi System Operator

NASSCOM National Association of Software and Service Companies

NRS National Readership Survey

NTP New Telecommunications Policy

OECD Organisation for Economic Cooperation and Development

PPL Phonographic Performance Ltd.

PVR Personal Video Recorder

RJ Radio Jockey

SEC Socio Economic Category

SMS Short Messenger Service

STB Set Top Box

TG Target Group

TRAI Telecom Regulatory Authority of India

TRP Television Rating Points

UAE United Arab Emirates

USD United States Dollar

Glossary

About CIIThe 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

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A facilitator, CII catalyses change by working closely with government on policy issues,

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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

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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.

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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.

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KPMG strives to provide rapid, performance-based, industry focussed and technology

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About KPMG

www.in.kpmg.com

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Although we endeavour to provide accurate and timely information, there can be no guarantee thatsuch information is accurate as of the date it is received or that it will continue to be accurate in thefuture. No one should act upon such information without appropriate professional advice after athorough examination of the particular situation. Specialist advice should be sought with respect toany individual circumstances.

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For further information contact:

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