The financial institution highlights four things to watch out for in Indian media, including strong revenue growth in FY2016, digitisation delays and fragmentation of channels & content costs
BestMediaInfo Bureau | Delhi | June 25, 2015
Bank of America Merrill Lynch has initiated coverage on the Indian media sector. According to the financial institution, the Indian media sector is expected to evolve as digitisation gradually picks up, fragmentation of channels increase and all companies (broadcasters, DTH and MSOs) evolve their business models in face of online content proliferation.
Bank of America Merrill Lynch has also reinstated coverage on Zee and Eros with a Buy rating and initiate on Dish TV with a Neutral rating.
According to the financial institution (FI), there are four key things to watch out for in the India media sector:
Digitisation: Going to be a slow process
The FI believes that digitisation will be a slow process. Though the Government has mandated full digitisation by December 2016, the on-ground checks show that it is nearly impossible for stakeholders to stick to the deadline. In the FI’s view, the entire rollout will be complete only by FY2010-21, with bulk of the benefits flowing in FY2018-19.
The larger MSOs do not have a local presence: In Phase I and II DAS-mandated areas, the large MSOs already had their infrastructure laid out and had knowhow of the local conditions. However, Phase III and IV are more remote areas where the MSOs do not have an established network, and hence will take time to roll out their network. These areas have been dominated by the local/ smaller MSOs, who may not have the wherewithal to invest capex and fund set top boxes for the consumer. If digitisation happens slowly, then the local MSOs will be able to capture this market (wherever analog cable is present), thus limiting the land grab of DTH operators.
Government has reasons to be ambivalent on digitisation: The Government benefits from digitisation by way of increased tax collections. At the same time, it will be wary of making voters pay a higher tariff for Pay TV bills. The ARPUs for Phase III and IV areas are lower; and a move to digital TV will entail a significant rise in their pay TV bills. Considering that TV is the main source of entertainment for Indians, the Government may look to ease the digitization roll-out slowly, rather than sticking to tight deadlines.
ARPUs are lower: The Phase III and IV DAS-mandated areas have a lower ARPUs compared to Phase I and II geographies, which would make it difficult for MSOs and DTH companies to push through a premium ARPU product. In the FI’s view, we might see more innovations like Dish TV’s low-ARPU Zing proposition (focusing on low-cost local content), lower price points and differential geographical pricing to drive adoption.
Ad revenue growth to be strong in FY2016
Advertisement revenues strong: Ad revenue growth is expected to be strong in FY16, on the back of:
1) A pick up in economy and the resultant rise in ad spends;
2) Increased ad spending by e-commerce companies; and
3) Television maintaining its share of the advertisement pie.
The ad spends have a strong correlation with nominal GDP. Considering that the economy is expected to pick up going forward, Bank of America Merrill Lynch forecasts a 13 per cent growth in ad revenues, which is in line with industry estimates. (Source: KPMG-FICCI Annual report 2015).
Implementation of BARC: The prevalent industry TV rating data (provided by TAM) has often been cited for inconsistencies by broadcasters and advertisers. Hence, the industry bodies representing the three key stakeholders – broadcasters, advertisers, and advertising and media agencies – have launched a new rating system – BARC. Since it has the support of the industry, It is believed that BARC will eventually replace TAM as the industry standard for determining TV ratings. Given that the new rating uses different methodology and sample set, the status quo TV ratings is at a risk of being upset. Though Zee has managed to hold on to third spot among Hindi GECs in the recently released data, as BARC moves towards a countrywide coverage, volatility in future ratings will remain a concern.
Smart devices will lead to increasing viewership and ad revenues: We believe that with increasing penetration of smart devices, overall video consumption will increase. Since Indians are quite willing to watch ad-supported free content, the ad revenues will increase with the rise in online viewership.
DTH: Factoring ARPU hike for 2-3 years
Impending move to RIO to increase ARPUs: The lead broadcaster, Star India, has made the first move by completely moving its channel bouquets to RIO pricing, without materially impacting its viewership. While other broadcasters are still debating on whether to move to RIO, in the FI’s view, Star’s successful move makes it only a matter of time before other broadcasters move to RIO pricing as well. Moving to RIO will increase the content cost for MSOs, necessitating an increase in tariffs to protect profitability. Bank of America Merrill Lynch is currently not factoring in RIO sign-ups in its base case. It sees upside to the subscription revenue estimates for both broadcasters and DTH operators in case market moves to RIO pricing.
Subscribers in low-ARPU areas may opt for ala carte subscription: Unlike in the West, regulation in India mandates broadcasters to make available their channels on a piece meal basis. Since the average Indian watched just 17 channels, the FI sees the risk of consumers in the low ARPU Phase III and IV DAS-mandated areas shifting to subscribe on a per-channel basis to reduce their monthly bills.
Reduction in carriage and placement fees: Digitisation of Pay TV will reduce the carriage and placement fees (C&P fees) that are paid to MSOs for beaming their content. Digitisation mandates complete removal of the placement fees. Additionally, digitisation of the channel signals has resulted in a 3-4x decrease in the bandwidth needed to broadcast individual channels, allowing MSOs to beam as many as 2,000 channels within the allotted bandwidth, and thus weakening the case for MSOs to charge for a non-existent constraint. While the broadcasters are still paying carriage charges, the charges on a per-channel basis have been reducing. This trend is expected to continue in the future.
HD channels to increase ARPUs: Subscription to HD channels have increased in recent months, due to:
1) HD content being made available;
2) Costs of HD set top boxes have fallen and the non-HD boxes point that distributors have stopped procuring non-HD boxes; and
3) Penetration of HD-enabled television sets have increased.
As per Bank of America Merrill Lynch’s estimates, HD subscribers on an average have ARPUs higher by about Rs 100. And with the HD take-up increasing up to 22 per cent for the DTH operators, HD is expected to positively drive up ARPUs.
Fragmentation of channels & content costs
Ad cap – and the fragmentation of channels: The Government has implemented the 12-minute ad cap (per hour) some time back. As a result, the sector has seen a slew of new channel launches and increase in ad rates to offset the impact. We will continue to see investment in new channel launches in the near term.
Content to become increasingly more important: Bank of America Merrill Lynch believes that in a digitised world, quality content is going to be increasingly more important. With the likely kicking in of RIO pricing, and possible move to a la carte packages, broadcasters will need the content “hook” to lure the subscriber to pay a higher price for the same content.
Content costs to rise: As more channels compete for the revenue pie, and channels move to RIO pricing, we see broadcasters have to increase their investments to produce quality content. In this context, we see the larger broadcasters to be in a better place to cope with the change with them having deeper pockets to invest in new content.