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Convergence: Will it remain a pipe dream? - Views on News from Equitymaster
 
 
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  • Jan 6, 2001

    Convergence: Will it remain a pipe dream?

    The melting of the ICE age led to relatively realistic valuations for the media sector towards the end of the year 2000. One primary reason for the high valuations was the view that Internet would change the way music, films, television programmes and books would be distributed in the future. Prime time would become a thing of the past as a subscriber would be able to download and access his/her favourite programmes whenever he/she wanted.

    Telephone companies, media companies and Internet companies eyed each other as mergers became a way out in the convergence era. AT&T, the American long distance company, bought out the cable giant TCI (now AT&T Broadband), gained control of Liberty Media (TV programming) and an interest in cable companies At Home (now Excite@Home) and Media One. These buyouts were apart from the 25 percent stake in Time Warner Entertainment and a 30 percent stake in Cablevision Systems. It however had to pay a heavy price for these acquisitions. The company, which was a zero debt company in 1998 ended up with a debt of US$ 62 billion with its stock crashing to an all time low. The management now proposes to split its operations into four entities, separating its media and telecom business, under surveillance of its creditors obviously.

    However, it may possibly be too early to write off the death of the convergence concept. The biggest test case for convergence viz. the AOLĖTime Warner is on course, with the Federal Trade Commission finally approving the merger. While AOL acquired valuable brands including Time, Fortune, HBO and Cartoon Network the primary reason for Time Warner to agree to the merger was the perception that advertising on the new media (the Internet) would grow (if at all) at the expense of the old media (print and television).

    The emerging distribution trolleys
    Doordarshan
    Network
    Zee
    Network
    Star
    Network
    Sony
    Network
    Sun
    Network
    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
    channels
    4 regional
    channels-Alpha
    Star News
    Asianet Star English

    In India, so far it is the dominant players in the press such as the Times of India, Midday and India Today which are looking at the Internet as a medium to distribute their products. The television media players have also seen an integration of sorts with the broadcasters venturing into cable television. While Zee owns Siticable, Star took a stake in the Rajan Raheja owned Hathway Cable. Similarly, Sun TVís promoters own Sumangali Cable, down South.

    These companies have already spent huge amounts in setting up cable headends and are spending more money for offering value-added services over their cable networks. Also, these are the very companies, which are offering a bouquet of channels comprising sports, general entertainment and regional language channels. So controlling the last mile access is critical for each of the players to provide access to their trolley of channels. The provision of value added services such as Internet over cable opens up another source of revenues for these players.

    Years
    (Rs. In bn)
    Total ad
    spend
    TV Ad
    spend
    Share of
    TV (%)
    FY95 22.2 5.3 24.0%
    FY96 35.0 8.8 25.0%
    FY97 42.3 10.8 25.5%
    FY98 39.6 11.1 28.0%
    FY00 63.5 19.1 30.0%

    Source: Nimbus Communictions Draft Prospectus

    What however remains critical is the continuing support of the advertisers to the media players. An apprehension of a slowdown in the USA has already prompted fears of a slowdown in advertising revenues. Infact valuations of media majors Disney, Time Warner and Viacom have come off over the last few months primarily because of slowdown in advertising expenses of the old economy majors. In India television has been the preferred medium of advertising. While the overall ad spend has increased by around 23 percent over the last five years the television medium has outstripped other mediums by growing at over 29 percent. It basically implies slower growth for the other mediums such as the press, radio and cinema.

    In the last quarter ended December 2000, HLL has reportedly cut advertisement spending by almost Rs 1.4 billion (US$ 30 million). One wonders what will happen next year given the fact that five of the biggest states In India are facing a drought situation. A rural slowdown could propel further cuts in advertisement spend next year as well. Finally, the distinction between the old and the new economy seems to be getting blurred. Thatís the real convergence to watch out for.

     

     

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