In a freewheeling interview with Vanita Kohli-Khandekar, media specialist and contributing editor for Business Standard, and Salil Pitale, Executive Director - Investment Banking, Axis Capital, renowned investor Ramesh Damani, for his special CNBC-TV18 show RD360, discussed the scope of the Indian media business.
Both believe the ongoing digitization wave is going to be a game-changer for Indian media companies.
"The single biggest change that television is seeing in a couple of decades is at a head," said Khandekar.
Pitale said that average revenue per user (ARPU), which has been stuck at around Rs 150 for over two decades since the launch of cable TV is set to go up drastically. "It could go up to Rs 500 in five years."
This, he said, will increase profitability of all three players in the game: broadcasters, distributors and content owners.
Also read: Not giving up on India; media long-term pick: Akash Prakash
The duo also discussed opportunities in the online and the print media spaces.
Below is the transcript of the interview.
Q: Last year, you wrote a column [for Business Standard] titled 'Good news on TV'. What is the good news?
Khandekar: The good news is: the single biggest change that television is seeing in a couple of decades is at a head -- digitisation is moving on schedule.
If I go by the ministry of information and broadcasting's numbers -- and they are quite alright -- three metros are fully digital [in phase 1], while phase ii is almost complete with 38 towns, except for know-your-customer forms that have to be filled up.
This means three things. It increases bandwidth -- the pipe that takes a TV signal to your house, its capacity increases. Once that happens, cost goes down because your tariff fees get eliminated, a whole lot of the junk is eliminated. So that is a little more money into the broadcasters' kitty.
Second, your pay revenues go up. For the broadcaster and for the trade itself because transparency goes up. I think the only person who will protest is the last-mile cable operator but even he will also realize as time goes up and average revenue per user (ARPUs) go up, he will also earn more money.
Lastly and most importantly, variety goes up because now the game changes from being a distribution game to a game of getting people to pay with their money to watch and subscribe to a channel.
The moment that choice comes into a play, it is no longer just sell-in-bundles, and you have to create content for which people are willing to pay extra money.
Q: That happened in multiplex, isn't it?
Pitale: It happened in a big way. Seven-eight years back, the multiplex business was nascent, or really did not exist at all. Your subscription price points, the ticket prices in the entire exhibition chain was so abysmally low, they used to be at Rs 30-40, that was a price of a ticket to watch a movie.
I remember, we did the initial public offering (IPO) for a company called Fame in 2005. They were planning to price tickets at Rs 100 and we were all palpitating over why anybody will pay Rs 100. Today, in 2014, you realize that ticket prices have gone higher.
It is because of the fact that you got a quality entertainment destination, which is the analogy here: that a quality pipe in a digital format, which is available to consumer today, is able to fulfill the requirements and content across board.
Q: People will pay if there is a value proposition?
Pitale: Definitely. I think so.
Q: What is the ARPU now stuck at?
Pitale: The ARPU has been stuck at a number between Rs 150 and Rs 200 forever. When cable TV started in India in 1991, people were paying Rs 150. Today, the average ARPU is Rs 170.
We watched five channels then at that ARPU. Today we are watching 600 channels. We are spending two and a half hours in front of a television everyday and we are still at the same ARPU today.
So yes, in terms of the math, with 150 million homes, at that ARPU level, it is a Rs 30,000 crore business.
Q: And it will grow you think?
Pitale: Definitely, it will grow.
Q: Does the 10+2 ad cap (12 minutes of ads per hour allowed) kill the profitability of broadcasters?
Khandekar: I think most broadcasters are all right now with the 10+2 except certain segments of the broadcast industry.
I have always maintained in my writings that 10+2 is premature. We should have waited for full digitisation to rule out and then once pay revenues are on par with advertising revenues, then put in the 10+2.
10+2 is a normal in most countries. So there is nothing wrong with 10+2 but this is a wrong time to implement it.
Q: But ad rates will go up in 10+2, won't they?
Khandekar: In any case, the rates are high for the leaders and some of the top channels don't go beyond 14 or 16 minutes.
It is the genres like music or news where it has gone to 24-25 minutes. That is the place where inventory buying happens by the kilo. That is where you might see a lot of shutting down of channels, you might see a lot of consolidation happening there because of the 10+2.
Q: It is good thing, you don't want 500 channels.
Khandekar: But they have the right to compete in a fully-structured market. Let them shut down because consumers don't want them not because advertisers don't want them.
Q: In this brave new world we are talking about where ARPUs will be Rs 300 per day, who will make money? Is it going to be the broadcasters, the content owners or distributors? Is it going to be the local cable operator? How does this pie break down?
Pitale: The entire chain becomes wealthier. The Rs 30,000 crore size of the chain is going to grow in a multiple and not in percentage terms.
Q: Five years from now?
Pitale: I do not think we should be surprised that we are looking at Rs 500 ARPUs. I guess we will have the benefit of hindsight then.
Khandekar: If you think of the market as a pyramid there are clusters which are willing to, able to and wanting to pay Rs 500-1,000. You will be able to capture those clusters.
Q: At Rs 500 ARPU, who makes the money?
Pitale: What has happened is out of the three categories of players, the local cable operators (LCOs) were retaining a large chunk of the subscription revenue. The multiple-system operators (MSOs) were getting 15-20 percent share of the same, which had to be shared with the broadcaster and the broadcaster community is also paying carriage, so it was a very difficult situation.
The LCO as a community was making a lot of money, but it was fragmented, it was shared between some 60,000-80,000 cable operators. There were leakages because the entertainment tax, service tax impact of the same was not necessarily captured over there.
What will happen is that from a fragmented ownership of consumers, we move towards a more consolidated ownership of consumers. It has already happened in DTH: 40-45 million whatever is the number on DTH is really captured between six players.
On the cable side, post phase I and phase II, we are already seeing that the large MSOs at least have a clear presence in subscribers which run into 5 million, 6 million, 7 million and so on.
There is a challenge that they have not yet completed the last issue on KYC, but the moment that happens, we will have consolidated ownership of the cable business. We already have consolidated ownership of the DTH business.
The LCO as a segment is still important because it is required for fulfillment as last mile access in fulfillment. It does not disappear. It gets its share of the space.
Today from Rs 200 that the consumer pays, the MSO plus the broadcaster probably gets about Rs 70-80 out of it and the LCO community retains Rs 120.
From Rs 200 going to Rs 500, you could get into a situation that the LCO could still retain a 40-45 percent and that community also benefits and the balance certainly benefits as a chain -- both the broadcaster and the MSOs.
Khandekar: Maybe three-four-five years later, just the sheer 100 percent transparency will help.
Like with theatres, it is not as if the numbers of screens went up drastically, we have increased by about 2,000 screens or something in the country, but the 100 percent transparency in billing and collection resulted in a couple of billion dollars impact on revenue.
We are talking about Rs 8,000-10,000 crore coming in only because that Rs 200 is coming back into the system, because it was not coming back, it was leaking out.
Q: In this new food chain that you talk about, both the content guys win? Isn't that way you place your bets?
Khandekar: Absolutely. Across the board, if you look at TAM data on what is happening in digital homes, regional content is taking off in North India. Tamil and Telugu content in Delhi, for example, is shooting through the roof, English content is shooting through the roof in metros.
You have day-date release for shows like Castle, Sherlock etc. These shows would not have come to India for a year otherwise.
Q: In a very interesting column, you said billionaires love newspapers. It applies to the West, but explain yourself.
Khandekar: Billionaires have always subsidised newspapers. News is one of the toughest businesses to make money in. It is impossible to make money on news unless you are bundling it with entertainment, advertising. And the dis-aggregation that online has done, you are seeing the impact of that in the west.
Q: But there is a difference between what is happening in the west and what is happening in India. In India, print media is still growing.
Khandekar: It is growing hugely. There are three reasons. One, penetration is humongously low in India.
We are talking about 340-350 million people reading newspapers in a country with 70 percent literacy. So if you have a potential market of 700 million people, even if 500 million can actually read, others can just sign their name, you have an upside of 100-150 million.
Two, aspirationally, newspapers carry huge value in India which we keep forgetting. You go to Kanpur, Lucknow. These are not small towns. They are big towns, but newspaper is the written word, it holds for India. It is completely different to what it holds for completely literate for centuries in the western world.
Thirdly, I think language newspapers is the big story in India frankly as far as growth goes.
Q: Doesn't the smart phone and tablet put those great franchises that we have at risk?
Khandekar: Of course, it puts it at risk, but right now video is driving smartphone and tablet usage, not newspaper readership. If I look at Indian Readership Survey (IRS) and Audit Bureau of Circulation (ABC) numbers, you look at any trend, I would say they should start preparing for it.
English newspapers are already seeing it. Last IRS, we have not seen one 1 percent growth for English newspapers. So you are looking at trouble coming up very quickly and I have been saying this year after year, start putting your blueprints in play. Even Punit Goenka [of Zee, which partly owns DNA] said this recently: in online, you will do 10 things, one might work, not work, but just start the process.
Q: In direct-to-home (DTH) vs cable: who wins in that race?
Pitale: I do not think there is going to be an either-or winner in this. Both the DTH players and the large MSOs will grow. The challenge that the large MSOs face is that getting the KYCs right, getting the gross billings right, getting the billings done by themselves rather than LCOs.
Q: When will that happen? When will the billing start happening from cable operator?
Pitale: Right now, the billings are still being done. The bill is sent by an MSO to the LCO and the LCO supposedly distributes it. Clearly that is not the endgame. People are working towards it with varying degrees of success, but we are in midst of that change.
Q: Is it possible that internet cuts the legs of DTH and cable?
Khandekar: On the point about newspapers, this applies equally. I have been voraciously following online in the last few years, and it is going through the roof. 220-230 million people are online across devices in India right now, and it's a huge number.
But monetisation is pathetic so far because cost-per impressions (CPI) are terrible in India as well as the world over.
For a reader who reads the New York Times online, there is a 1:14 difference in what the advertiser pays. The physical advertiser will pay Rs 14 to reach you, but will pay Rs 1 to reach you if you are online.
A lot of people are moving online, but revenues are not moving online. That is the problem.
Q: Does internet poses the risk to the basic broadcasting model of watching television?
Khandekar: Not at all, you can straddle it. I think Indian broadcasters and foreign broadcasters in India have been very proactive -- far better than newspapers -- on quickly seeing the challenges and moving on.
Everybody is on YouTube. 59 million people in India were watching video in September last year. It is a huge number.
But what will it be a proportion of TV audience? It is less than 10 percent of proportion of people watching TV but the fact is it is a significant number. But you will never get the same revenues that just one show on Star Plus gets.
Pitale: The other point on that is bandwidth. For better and better quality content and more HD channels, you need fat pipes. Which means that you have to put in the investment. With 3G networks still being rolled out and 4G yet to happen, the cost of that, to set up an extensive network to carry such large fat pipes will be very different, and we will need a lot more telecom towers and high density.
So the whole cost economics will come into play and therefore it is not that the traditional DTH-cable is going to get impacted so quickly because it has got a big lead. I think things will change over a period of time, but the traditional DTH cable will have a very long way to go in this space.
Q: You are an investment banker. I know your clients ask you: where do I make money? So if you are going to tell them over the next three-five years one or two bright spots where you think a lot of money would be made, what names would you name?
Pitale: The whole distribution chain is just waiting to unleash big value creation. DTH players as a whole, cable and large players as a whole.
Even within cables, the guys who are implementing it beautifully are the guys who will really make the money.
Most of the names you can see around the place today. All the key MSOs, key DTH guys should do very well and they should really thrive in this particular space.
The DTH guys will keep getting the benefit of ARPU increases in a big way, the cable guys will get the benefit of customer ownership as well as the monetisation through broadband and so on. The ARPU is growing in any case.
Q: So the basic names: DEN, Hathway Cable, Siti Cable?
Pitale: Within all of this, one should look at individual managements and take bets around the same. But I would say that the segment really is waiting to happen.
Q: Who wins in the content race? Is it the general entertainment channels (GECs) or the niche channels?
Khandekar: 70 percent of India's TV audience is shared by five networks. They have got niche channels, GECs, they are in every genre possible and then you have smaller networks.
So you will have a Discovery or a Times Television, which are smaller networks, but you have Star, Zee , Sony, Sun and Network18 and between them, they have 70 percent of the audience.
Except for Zee and Network 18, nobody is listed. I think there is a lot of value left there waiting to be unlocked. I had also heard about Star and Sony long back that they want to raise money, but I do not think that happened.
These guys played the game right: they launched the news channels two years before digitisation took off.
Q: How about the pathetic news broadcasters?
Khandekar: They are not so pathetic. The problem with news broadcasting is that there may be like 10 serious channels and the rest is all junk.
Q: And advertising price is too small.
Khandekar: You have 135 news channels for a Rs 1,800-2,000 crore business. It is the largest number of news channels anywhere in the world. Today, I saw a poster of some real estate guy launching another news channel and I thought why are they doing this?
They have spoiled the market for the guys who want to make money.
Q: Do you think with the digitisation that might change, because no one pays for it, no one will watch it?
Khandekar: More than digitisation, you had asked me something about trends in 2000, I think media ownership is going to be a big issue, especially on news, not on entertainment.
Q: Corporates will own media houses?
Khandekar: Corporates already own media houses.
Q: It is an acceptable practice in the West. Would it come here too?
Khandekar: It is perfectly fine as long as everything is transparent. The only thing is news media ownership is the one where there are reasons for concern and every time I speak to Telecom Regulatory Authority of India (TRAI) I suggest norms which insist on transparency.
Who owns you? What is your shareholding? What is your revenue? What are your losses? Where is your money coming from? Where is it going? What happened to Tehelka was the owner was involved in something, but the financial inclusion would have happened one day or the other, because that company had lost Rs 40 crore in three years. Some investor has spent that money.
Look at all these news channels. 40-50 percent of news channels in this country are owned by politicians and real estate owners.
Pitale: Commoditised business as news, but as digitisation happens it is easy to get data points to say who is really doing better. The other benefit is carriage -- which has been a big cost element for news -- starts to come down.
Clearly, they get the benefit of the same and this digital data tells who is better than the other. It will ensure that at least the leaders will get their fair due.
Q: Will the ad rates go up sometime, because they are really at the bottom of the basement for the news channel?
Pitale: Yes, it should. The leaders will get the benefits. The three-four-five brands will get the benefit.
Khandekar: Definitely they should?
Q: Exciting space to be in media, because the stocks are under-owned, under-loved, under-appreciated?
Khandekar: Lot of them have not yet come into the market. I would say the best stocks have not yet come into the market.
Pitale: It is a good time for people to look at this space from all angles. As I said, the whole industry has been playing advertising
Today, you can play advertising-plus-subscription. And subscription is traditionally more than advertising.
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