In almost all countries including in India, media stocks perform in line with the general economic outlook. This is because economic environment has a direct bearing on advertisement revenues, which is the major source of revenue for both print media, and television broadcasting companies.
However, in the last 12 months, if we look at the performance of some of the best media stocks in India, they seem to have defied the subdued economic indicators and have given extremely handsome returns as is highlighted in the table below:
Was it because of the favorable government policies, such as mandatory digitization? Or was it innovation in technology? Or was it the sudden realization of the growth potential in the Indian Media & Entertainment Industry?
Of course it was a combination of all three.
According to the 2012 FICCI-KPMG Report, Indian media and entertainment industry revenues were Rs. 72,800 Cr. in 2011 compared to Rs. 65,200 Cr. in 2010, demonstrating a growth rate of 12%. Going forward, the Indian media and entertainment sector is projected to grow at a healthy compounded annual growth rate of 14.9% to reach Rs. 1, 45,700 Cr. by 2016.
This growth can be attributed to various factors with the most notable ones being (1) the enabling regulatory environment and (2) innovation in technology.
The television industry continues to have headroom for further growth as television penetration in India is still at approximately 60% of total households. The number of households with television is expected to grow to 188 million by 2016 at a CAGR of 17%.
On November 11 2011, the Information & Broadcasting Ministry (“IB Ministry“) had notified the phase-wise digitization of analog cable television networks in India. According to available data, the penetration numbers in the three metros (i.e. Mumbai, Delhi and Kolkata) where the first phase of digitization was carried out has been more than impressive with 91% digitization in Mumbai, 90% in Delhi and 76% in Kolkata. The success of the first phase of digitization has encouraged the IB Ministry, to cover 38 cities across 15 states in the second phase.
More and more set top boxes are making their way into people’s homes. As analog cable subscribers are digitized it will have a positive impact on subscription revenues for both broadcasting and distribution companies.
How Digitization of cable TV helps in driving up Subscription Revenue?
• Problem of under-reporting of subscriber base by Local Cable Operators (LCOs): Broadcasters, Multi Systems Operators (MSO’s) and LCO’s share subscription revenues either on a fixed-fee basis or on the basis of a negotiated subscriber base.
Since LCO’s are the last link between the broadcasters and the end consumer, they enjoy a strong bargaining power. As per industry estimates, LCOs declare only around 15 % of their paid connectivity to MSOs and broadcasters. This not only deprives the MSOs and broadcasters of their fair share of value, but also leads to lack of trust and transparency and frequent disputes between various stakeholders.
Since digitization would bring about full addressability1 , it would eliminate the possibility of under-reporting of subscriber base by LCOs.
• Carriage costs2 : The cost paid by broadcasters to distributors, currently remain high in view of the limited bandwidth of analog cable. This will decrease post digitization.
• Non-standard pricing: In a market survey conducted by reputed research firm MDRA, it was observed that the average monthly cable bill for a subscriber varied widely between cities. For example, for same channels and services being offered, the charge was Rs. 149 in Kochi and Rs. 322 in Shillong, highlighting the arbitrary nature of pricing. These shortcomings are the natural fallout of the local monopoly status enjoyed by most LCOs and small MSOs who are able to avert competition and thus prevent free market forces to keep prices under check.
• Increased Bandwidth: Analog cable systems offer limited bandwidth in comparison to digital system. Over the past few years, hundreds of new channels have started operations in India. Limited bandwidth resulted in high carriage cost being charged from the broadcasters due to increased competition. Channels with high viewership naturally attract more advertising revenue and were able to pay high carriage costs which resulted in education and science based channels such as Nat Geo and discovery finding it difficult to operate. Now with digitization, the carriage costs are likely to reduce which will help the operating margins and ultimately drive up media stock prices.
In high growth phases, businesses have higher budgets for advertising which inflates the earnings for media companies. Over the last few months however (ever since IB Ministry’s announcements on digitization of cable TV) media stocks, particularly television broadcasting and distribution companies have outperformed due to high expectation of growth in subscription revenue.
Many analysts believe that it is time to be cautious on media stocks since their current valuations are extremely high even assuming a robust growth in forward earnings. On the other hand, some of those who keep a close eye on the industry believe that in quick time, digitization will be implemented in most parts of the country. This, coupled with an improvement in the overall economic scenario will drive up the advertising and subscription revenues. Is most of this already factored in the prices of these stocks? We believe that over the next 1-2 years, media stocks in India could see further appreciation.
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Dated: 9 January 2013
1Addressability: Within the field of cable television, addressable System may enable and control the distribution of cable services, creating a conditional access system (CAS), and allow the cable system to control and administer which cable products a customer may purchase and/or view. This is done by installing a chip in the set top box.
2Carriage cost: the fees paid by a broadcaster to the MSO/Distributor of TV channels, for carriage of the channels of that broadcaster on the distribution platform owned or operated by the MSO/Distributor