• OUTLOOK ARENA
  • SECTOR FOCUS
  • JANUARY 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.

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA, Canada or the European Union countries, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited (Research Analyst)
103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407