Change is the only constant in the media industry. Convergence today is taking centre stage in this change. Economic liberalization and the subsequent advent of cable television has spurred the entertainment revolution in India and it’s just the beginning.

India with rising disposable incomes and improving infrastructure (like Internet connectivity in urban area) is likely to throw huge opportunities for the entertainment sector and would outperform global industry growth rates. The Indian entertainment sector estimated to be around Rs 96 bn, is growing at 25% annually. While television and music account for a major pie of entertainment revenues, new segments like event management and radio entertainment are fast emerging.

However, what is hindering growth is lack of proper regulatory environment, disorganized nature of the industry, unclear policies from the government and heavy entertainment tax.

Take for example number of theaters, which are on the brink of expansion even with population of 250 m who can afford going for a movie atleast once in every three months. This is due to the fact that high entertainments taxes, till recently have adversely affected the economics of running a movie theatre and hence a major disincentive for expansion of theatre capacity in the country. The entertainment taxes in India range anywhere between 50%-120% varying across different states.

Following various state government decisions to exempt multiplexes from entertainment tax in initial years, there has been a spurt in fresh investments. It is expected that Maharastra alone would attract investment in the range of Rs 5 bn in multiplexes in the next two years.

The government recently imposed 5% service tax on entertainment. This would mean multiplicity of taxes, as output of the media sector goes through several stages and service tax will be levied at every level.

The growth of entertainment sector is also to a large extent directly proportional to growth in ad-spend of corporates. Advertisement is a key source of revenues for the broadcasters. However, India’s per capita ad spend is one of the lowest in the world. The ad-spend to GDP ratio in our country stands at just 0.4% as against 1.4% in the US and 0.7% in Indonesia.

The Rs 35 bn advertisement industry, which grew at a rate of an estimated 25% in the past two years, is expected to witness growth in the range of 12%-15% for the next two years. This is primarily because of the dismal growth of FMCG company sales and a resultant cut in ad-spend by them. FMCG sector accounts for about 16% of the advertisement industry. As a result any impact on the sector’s revenue growth is likely to affect the growth of the ad industry. Nevertheless, new categories of advertisers like telecom; insurance, healthcare, retail and financial services are expected to drive future growth. But lowering of advertisement budgets of corporates remains a major concern in the near term.

Dwindling ad revenues are forcing broadcasters to look for other revenue streams particularly subscription revenues from pay channels. Given the 30 m cable TV homes in India, with a penetration of just 40%, the opportunity for broadcasters to improve their revenue base is immense. However, this model also faces challenges, as the level of disclosure by cable operators for the number of subscribers is as low as 25%. The Convergence Bill, which is expected to increase, bargaining power of broadcasters, is still awaiting approval of the parliament.

While the Convergence Bill is still on hold, announcement of the detailed guidelines on DTH (direct–to-home) broadcasting services has not yet attracted much attention from broadcasters. Various restrictions imposed by the government have limited the market potential of DTH broadcasting. With high capital investment (cost of set top box) and hefty monthly subscription charges, chances for success of DTH in India still look a distant dream. Given the high initial investment required, the restrictions are restraining the growth of DTH in India

Again, on the regulatory front the country requires stricter anti-piracy laws. It is estimated that with a strict enforcement of anti-piracy laws, revenues for the movie industry could double. Just to give an example, last year the music industry added little more than Rs 1 bn, by putting a check on anti-piracy. The anti-piracy rate in the music industry is still close to 40% (down from 80% couple of years back).

Further, lack of organised finance has always been a gray area for the industry. Though the RBI has introduced film-financing norms to promote flow of organised funds in the industry the actual flow of money in the industry would depend on the willingness of institutions in taking exposure to this industry.

Also, it is difficult to attract the foreign investment in the sector. Consider this. Total FII investment in the DTH sector is restricted to 49%, with a cap of 20% on foreign direct investment (FDI). Although, the RBI has recently increased the FII limit on broadcasting to 49% from the earlier 24%, it is yet to increase the FDI limit for the DTH sector to attract foreign investment. Nevertheless, increase in FII limit has also come as a boon to broadcasters, as now they will be able to infuse funds into the company through strategic sale of a stake. This is likely to help those broadcasters who are setting uplinking facilities for which they require funds (being capital intensive in the initial stages).

To summarise, the media industry has huge untapped potential but lack of clear policies and un-organised nature of the industry are taking the sheen away from a dazzling industry. If things are put together the industry definitely has a potential to log super normal growth rates.