Where to invest: broadcaster or content provider? - Views on News from Equitymaster

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Where to invest: broadcaster or content provider?

Apr 18, 2000

The media sector is swarming with interest with nearly 10 issues entering the IPO market over the next few months. However, one must realise that all these are content providers. The barriers to entry for this business are lower and though initially some of them will do quite well (due to a surfeit of channels) the big money, in the long run, is made the broadcasters. This is because over a period of time the margins of content providers would get eroded since the entry barriers are quite low. However, there are tremendous entry barriers in the broadcasting sector which would ensure profitability for the successful ones. First, off course is the cost of the leasing the transponder, which works out to Rs 10 m pa. A single transponder can carry one channel and at best two channels and one satellite can carry around 14–15 transponders (Panamsat 4, which beams Sony, BBC and ESPN channels into India carries 14 transponders). Thus beaming a single channel requires an upfront recurring expenditure of almost Rs 10 m.

Second, is the cost of the setting up the uplinking facility, which allows the broadcaster connect to the satellite. With the government likely to allow the setting up of uplinking facility in India it is more than likely that private broadcasters would set a terrestrial network a la the state broadcaster Doordarshan (DD). However, it would require almost Rs 35 bn to set facilities that match DDs facilities and it is highly unlikely that any private broadcaster would even venture into setting up such extensive facilties.

The cost for a domestic uplinking facility works out to Rs 250 million and does not include the recurring cost of maintaining the facility. The benefit of setting up a domestic facility is that the advertiser on the broadcaster’s channels can pay in rupees (unlike now where in the absence of local uplinking, all advertisers have to pay the broadcaster in foreign exchange).

Third, since no broadcaster would depend entirely on the content providers almost all of them set up their own content providing facilities. While the main production facilities are outsourced, pre–production (scripting, casting, planning etc) and post–production facilities (dubbing, editing titling, effects) are set up in house.

Overall start up investments of anywhere around US $ 55–60 m (Rs 25 bn) are required over three years for setting up a broadcasting facility. And if one intends to be a distribution trolley the size of the investments could easily double An overdose of Entertainment?

In India the only private companies in this league are Zee, Star, Sun and Sony. While Zee rules at astronomical valuations, the other three companies, as and when they make their IPOs, could be worth looking into. And yes, be choosy about investing in content providers.

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