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The biggest risk for media stocks...- II

Oct 9, 2013

In our earlier article; we discussed how poor advertisement revenues have instigated some radical changes in media business. One such specific event was discontinuation of Television Audience Measurement (TAM) ratings by the media companies. Let us now discuss more such developments in the offing; which may even alter the revenue pie of media companies.

A major transformation has come recently in the form of Telecom Regulatory Authority of India (TRAI)'s notification to cap advertisement time at 12 minutes an hour from October 1, 2013. The cap has come in the wake of an attempt to improve quality of service to viewers. It was believed that some broadcasters were extending the advertising time to 20-30 minutes per hour; which was affecting the quality of service and attention span of the viewers.

How will advertisement cap mandate impact media stocks?

On an average, the current advertisement time is 18-20 minutes per hour. Therefore, the 12 minute advertisement cap, if implemented, is likely to reduce channels' advertising inventories significantly. This shall adversely impact channels' revenues. This spells more trouble as the media sector is already facing a slowdown in its advertisement revenues owing to poor economic growth. Also, production cost of content has gone northwards in recent years; making it even more difficult for the channels to bear the loss of revenues. As a result, some of the channels have even approached appellate tribunal Telecom Disputes Settlement and Appellate Tribunal (TDSAT) against the 12-minute cap on advertisements.

How can it be tackled?

One way to combat the impact of declining advertisement time on air could be to increase advertisement rates. In fact, many General Entertainment Channels (GECs) such as ZEE, Colors and Star have already announced a hike in advertisement rates to counter the effect of lesser advertising time. However; hike in ad rates may not fully compensate the expected ad inventory decline of about 30-40%. This is because raising the advertisement rates beyond a point may not be possible in this lean period for advertising, due to economic slowdown.

Another solution is Digitization process; which can come to the rescue of these channels. Digitization will encompass the country by end of 2014. It is likely to bring in few incentives to the industry. Primarily, problems of under reporting of subscribers by local operators will be done away with to a certain extent. Therefore, accurate reporting of subscribers will help increase subscription revenue of the channels. More subscribers will mean more advertising revenues. Moreover, digitization could ensure better organization which can spur investment in the TV media sector.

What is our view?

Media sector is set for some key structural changes. The success of these changes will depend upon if media companies can develop a more efficient rating system than TAM. Also, how effectively they tackle the ad cap mandate. However, one positive change the ad cap mandate can bring through is that it will make consumers stick with the channels as quality of service improves. Also, digitization shall bring in extra revenues for the broadcasters; thereby decreasing their dependence on advertisements to a certain extent. Although returns from digitization can take some time to fructify since the digitization process is not yet complete and subscription revenues are still not flowing fully to the channels. At the same time, the channels will have to tread a very cautious path as hike in ad rates may compel advertisers (particularly small advertisers) to look for alternative solutions e.g. print media etc. This may spell trouble for the long term growth of TV media sector. All said and done, an accurate impact on earnings of media companies can be measured only when ad cap mandate is fully implemented.

What should investors do?

TV media offers good long term prospects as TV penetration in India remains as low as 60-65%. Moreover, the above discussed developments can fine tune the way the industry works and bring more organization to the industry. However, slower growth in advertising revenue will continue to impact shareholder returns in near term. Also, TV media stocks are trading at expensive valuations; which do not make them an attractive proposition currently. Hence, investors can wait for some more clarity to emerge on implementation of these changes before increasing their exposure to the sector.

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