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Media: Convergence diverges - Views on News from Equitymaster
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  • Jan 4, 2001

    Media: Convergence diverges

    The melting of the ICE age led to relatively realistic valuations for the media sector towards the end of the year 2000. This was not the way the year started though. A debt burdened Zee unveiled an ambitious Rs 37 bn plan to upgrade its Siticable network to a hybrid fiber coaxial (HFC) network that would give it the last mile access to millions of cable and satellite homes in 26 cities apart from setting up a horizontal portal Zeenext.com. This was after it had integrated into broadcasting by buying out Star TV in its joint venture Asia Today Ltd. From being a mere content provider to a broadcaster and then a cable company to being an internet play, Zee had it all. Whether Mr, Subhash Chandra had a real plan or was it an ad–libbing strategy for Dalal Street is difficult to say.

    What did happen however, is that Zee, which touched a high of Rs 1,630 in February 2000 is quoting near its 52 week low of Rs 254 after its convergence dream ended. The same is the case with Television 18, which managed a Rs 30 bn subscription to its Rs 545 m IPO, touched Rs 2,400 after listing and is currently quoting at Rs 240 – a reverse ten bagger!

    Be that as it may, the convergence dream of media companies ended. This was not the case only in India though. Even AT&T which enthusiastically took stakes in cable companies TCI and Media One, was forced to split into four divisions separating its telecom and media business. The company, which was a zero debt company in 1998 ended up with a debt of US$ 62 bn with its stock crashing to an all time low. So much for convergence! Of course the biggest test case for convergence viz. the AOL–Time Warner was on course, with the Federal Trade Commission finally approving the merger.

    The other significant happening of the year was the change in television content preference. Mythologicals were passe as fiction and gameshows such as ‘Kaun Banega Crorepati’ were lapped up by an enthusiastic population. More importantly, it gave Star Plus a new lease of life and enabled it to take on Zee TV in its own backyard viz. Hindi language programming. (Zee TV, which had 7 programmes among the top 10 programmes in the cable and satellite universe till the last quarter currently has only 3 programmes among the top 10.)

    The emerging distribution trolleys
    DD1 Zee TV Star Plus Sony Sun
    DDMetro Zee News Star Movies AXN Soorya
    DDNews Zee Cinema Star World SetMax Udaya
    DDSports Zee English Star Sports   Gemini
    15 regional
    4 regional
    Star News    
      Asianet Star English    

    The dogfight among the channels led to astronomical prices for content and higher programming costs for channels. Infact, the annual programming budgets of channels went through the roof during 2000. Star Plus, more than tripled its budget to nearly Rs 1.7 bn in the current year (partly led by KBC) almost equalling Zee’s programming costs last year. Sony, also ramped up its programming and has slated a game show to put up a real challenge to KBC. There have also been rumours of the channel buying up the satellite rights, music rights and overseas distribution rights (via its parent Columbia Tristar) of Karan Johar’s new movie for over Rs 4 bn! The era of big money and big stars has arrived on television as well.

    The year also marked the corporatisation of Bollywood with the IPO of Mukta Arts. The phrase “Content is king” came alive in the true sense of the word. Infact, Hindi film producers, never had it so good. Earlier, the producer would struggle for finances to complete his film and queue up in front of distributors who would pick and choose which film to promote.

    Now even before a single reel is canned, the music rights, satellite rights and overseas rights started to get gobbled up by music and television companies. Banks and financial institutions were open to funding movie production. And it is distributors who began to queue up in front of the producers! Of course all these developments did invite the attention of unwanted elements.

    After, Mr. Bachchan, music was the new hero for the film producers. After all, music distribution is one area where the underworld doesn’t have a core competency!!. An example was the sale of music rights of ‘Mohabbetein’ where the film cost Rs 110 m, but the music rights fetched the producer Rs 70 m alone!

    The surprise package of the industry however, was the level of activity at the state broadcaster Prasar Bharti (which comprises both DD and All India Radio). It outbid Zee, Sony and the Star Sports–ESPN combine in bagging the cricket rights for matches involving India for the next five years, launched a sports channel, extended the timing of most of its regional channels to 24 hours and allowed syndicated programmes on its Metro channels by letting out the prime time slot to Kerry Packer’s Channel 9. Last year the corporation had reported an all time high commercial and advertisement revenue of Rs 6.1 bn in FY 2000, a jump of 47% over last year’s revenue. This year can be expected to be even better. Doordarshan in Hindi means ‘watch from a distance’. Over the next few years competitors and investors need to do just the opposite.

    As far as legislation goes, the government finally approved Direct–to–Home (called DTH in popular parlance) services. The implications of this move in the long run could be far reaching. For one, it could change the balance of power between the cable operators and the broadcasting companies. So far, it has been the cable operator who holds the key to the revenues that the media companies earn in this country.

    This is because while a cable subscriber pays Rs 100 per month to the cable operator, the broadcasting company ends up getting hardly Rs 10 per subscriber. This, as Mr. Naganand, CEO, Convergence, Zee group, explained is due to the fact that the cable operators understate their subscribers.

    At present, assuming around 30 million cable and satellite homes in the country, the revenue for the industry works out to almost Rs 36 bn. Of this hardly 10% accrues to the broadcasters. DTH could change the scenario with installation of set top boxes which means that a cable operator stops being a gatekeeper and becomes only a distributor. Then the user addressability would allow the broadcasting company to determine how many customers are buying his product. The broadcaster would be doing the deal directly; the cable operator would become a mere distributor who gets a commission out of that.

    The industry reaction was however, surprisingly lukewarm to the proposal. The main reason for this of course was that the broadcasting companies have become cable operators themselves! While Zee owns Siticable, Star took a stake in the Rajan Raheja owned Hathway Cable. Similarly, Sun TV’s promoters own Sumangali Cable, down South. These companies had already spent huge amounts in setting up cable headends and were spending more money for offering value added services over their cable networks. Abroad, broadcasters are not allowed to control cable networks but in India the way the industry has developed, this has come to pass. Hence, though the broadcasters complained off and on, about the moolah being raked in by cable operators, they are now themselves a part of the same industry. Hence it doesn’t make sense for them to pour huge sums in setting up DTH infrastructure. They were far more than happy in trying to rope in local cable operators and getting control over the last mile rather then setting up a DTH infrastructure.

    The prospects for the sector in the coming year would depend on advertising spends of old economy companies! So far television has been the preferred medium of advertising in India. While the overall ad spend has increased by around 23% over the last five year’s, the television medium has outstripped other mediums by growing at over 29%. It basically implies slower growth for the other mediums such as the press, radio and cinema.

    In the last quarter HLL has reportedly cut ad spending by almost Rs 1.4 bn. One wonders what will happen next year with reports of drought occurring in five of the biggest states in India. Finally the distinction between the old and the new economy seems to be getting blurred. That’s the real convergence to watch out for.



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