The rivalry of the two media conglomerates is perhaps as old as the history of satellite television in India . ZEEL, as the first satellite television broadcaster in India , and Star India, which is part of News Corp, have been fighting for the top slot in the broadcast space for the last 12 years. But while the cable and satellite television market today boasts of around 104 million households as subscribers out of the total television-owning household base of 140 million, according to the FICCI-KPMG Media and Entertainment Report of 2011, both the broadcasters have been dependent on the local cable operator to help them reach subscribers and raise subscription fee. Currently the market is highly fragmented with over 50,000 local cable operators (LCOs) controlling over 74% of the market. This results in widespread leakages, under-declaration of subscriber base, poor service mix and low ARPU (average revenue per user).
Both Star and Zee have tried to get an upper hand by setting up their own distribution companies, but it has not been of much help. Zees parent company Essel Group and Turner International formed a 74:26 distribution company in 2002. It distributed all Zee channels other than its sports channels, and the channels owned by Turner including Cartoon Network, HBO and Pogo.
Initially Star distributed its channels directly to MSOs before setting up a 50:50 joint venture with DEN Networks, a cable services company in 2008. The joint venture (JV) company Star-DEN distributed all Star channels along with some non-Star channels such as NDTV 24x7, NDTV profit, NDTV India and NDTV Good Times. Star Sports was not part of this bouquet. Zee-Turner is estimated to have garnered revenues of Rs 800 crore in 2010-11 while Star-DEN generated around Rs 1000 crore in revenues. However, both Star- DEN and Zee Turner claim that they are getting only a mere 12-13% of the total subscription due to them, with local cable operators under-declaring their subscriber bases.
Under-declaration of the number of subscribers by the LCOs has all along been the bane of the industry, with experts putting the figure at 80-85%. And the failure on the part of the MSOs to collect the money from the LCOs only compounded the problem as they in turn imposed carriage and placement fees on the broadcasters. Media analysts estimate that subscription revenues total Rs 16,000-18,000 crore, of which the LCO keep 70%, the broadcaster gets 20% and the MSOs get 10%.
It is to get around this problem that the two rivals have now joined hands. Sameer Manchanda, chairman and managing director, DEN Networks, says, Broadcasters need to get their legitimate share. The payment that the customer makes does not reach the broadcaster. Hence this JV was essential to increase transparency in the value chain, to curb piracy and get rid of under-declaration.
Media analysts claim that Media Pro will be by far the largest distribution bouquet in the country with 68 channels to start with, which together command nearly 40% of the total viewership.
We have two objectives. One is to curb piracy and second, is to expedite digitisation addressability. If achieved, these will drive higher revenues, will cut costs on carriage and also increase efficiencies in the entire distribution business, says Punit Goenka, managing director and CEO, ZEEL.
In most developed markets, broadcasters have a healthy revenue mix with both advertising and subscription contributing nearly equal shares. However, in India every broadcaster is dependent on advertising revenues in a big way. Nearly 80-85% of a broadcasters revenues come from advertising money and the remaining 15-20% from subscription. Even popular international channels which are ad-free and earn revenues only through subscription had to adopt a new strategy when they entered India . For instance, movie channel HBO, which globally doesn't sell on-air advertising and earns revenues only through subscription, does otherwise in India . The two partners are hoping that the JV will address this anomaly.
Both partners are heavily dependent on advertising revenues whereas world over, there is a healthy balance between the two. And we need to attack this, says Goenka. By having a JV and through common goals and objectives from the top management to the bottom we felt this was the right way forward.
Besides Star-DEN and Zee-Turner, there are two more distribution companies Sun18 and MSM Discovery. Sun18, the most recent tie-up, between the Sun group and Network18 group, distributes 33 channels, inclusive of all channels of the TV18 group, Sun Network and Disney. MSM Discovery is a joint venture between Sony Entertainment Network and Discovery Communications. Also known as One Alliance, it distributes 18 channels, including all channels of Sony and Discovery, Hindi news channel Aaj Tak, Headlines Today, Tez, Neo Cricket and Neo Sports.
Already, there have been reports that One Alliance is in talks to join Media Pro Enterprise. However, according to a senior official in MSM, who did not want to be named, with Star-DEN and Zee-Turner refusing to take One Alliance as an equity partner, the latter has dropped such plans as of now.
Whether One Alliance joins Media Pro Enterprise or not, the JV does have the power to change the dynamics of the entire broadcast industry. As Rajesh Kaul, president, MSM Discovery says, It is too early to comment on how this JV might impact broadcast distribution companies. It will depend on how they take it forward. Smaller entities will 2-3 channels may consolidate.
Alliances like Media Pro will help distribution companies and channels get the best bargain, says Gaurav Gandhi, COO, Sun 18 and head international business, Viacom 18. Industry watchers also say that Media Pro is the only distribution company that has a very powerful platform play. On one hand Zee owns DTH firm Dish TV and an MSO called WWIL. On the other hand, Tata Sky is partly owned by Star India which also has stake in Hathway, one of the leading MSOs. Analyst firms such as B&K Securities say since Media Pro Enterprise has the strongest properties across genres it will be impossible for any MSO to ignore this JV and the bargaining power will now shift from the MSO to this JV.
ZEELs Goenka, however, believes that MSOs should look at it as a positive step. MSO should think that we are going to be the catalyst in change that would help collect revenues from the ground. DTH has nothing to fear because we anyway have very good deals with them compared to the deals with the cable operators, he says.
Industry watchers say that while Media Pro is expected to steer the industry towards an era where broadcasters and everyone in the value chain earn their fair share, there are fears that it may also lead to a monopolistic situation. According to media reports, the Competition Commission of India is expected to examine the proposed alliance to see whether the deal conforms to anti-trust norms.
However, Uday Shankar, Star India CEO, dismisses any such apprehensions. We are not leaders in every market. In some markets Star is the leader and in some Zee is the leader. But we have very strong challenges even where we are leaders. There are markets where neither of us are leaders. Therefore, this whole notion of power has to be quantified.
Shankar goes on to say that the strong sectoral regulations in place do not allow for any cartels in the broadcast industry. I don't believe that negotiation power is now in the hands of the broadcasters because today any cable operator can send me a notice asking for my signal and within 21 days notice I have to give him the signal.
But Ravi Mansukhani, managing director of MSO InCablenet, thinks otherwise. He says, MSOs are going to be affected negatively. They (Media Pro Enterprise) will obviously take advantage of this strength to try and get more subscription and push MSOs to drop their carriage fees. The larger MSOs will take them on but it is the smaller MSOs who will be affected, as they cannot bargain well. They may be driven out of business or forced to consolidate with a MSO.
According to Mansukhani, the worst affected would be any new broadcaster as no MSO would want to take a channel that does not generate substantial television rating and also pay high subscription fees for it. In a situation like this, if a new broadcaster comes in it will be forced to join one of the existing distribution companies and shell out more money for both carriage and placement. Since 2003 there has been no increase in money from LCOs. When we enter into a contract with a broadcaster and agree to pay a certain amount as subscription money we pay that, irrespective of whether we recover it from the ground or not. But, when we enter into a contract with LCOs, most of the time we do no receive the money. What saved the MSO were the carriage and the placement fees, he says.
It is this carriage and placement fee that could be under threat now. While the older players pay less carriage fees, the newer channels pay more to ensure that they are carried in the prime band. An industry watcher, who did not want to be named, says, Older channels never had carriage fees as part of their business plan. But for newer channels it is. Colors had to spend nearly Rs 100 crore to get its distribution and placement in the right band.
While most broadcasters pay nearly 10% of their advertising revenue as carriage fees, industry sources reveal that Star and Zee pay the least because of the popularity of their channels and every MSO wants them in their bouquet. Therefore while it is not clear if the JV would help other broadcasters to pay less of carriage fees, it will certainly force MSOs to reduce their dependency on the same and try and extract their due from the LCOs.
Says Star Indias Shankar, Carriage fees are a cost to the business. And they exist in many other sectors. For instance, in the FMCG sector companies pay their distributors and retailers for a better display. Shankar also points out that carriage fees works in favour of incumbent broadcasters since in the absence of carriage fees anybody can launch a channel. So now there is a cost which people need to factor in. For me, increasing the bandwidth of cable to deliver more channels is more important an objective then reducing the carriage fees.
In terms of carriage revenues, we believe the formation of this JV would not have any material impact on the carriage revenues of the industry, says analyst firm IDFC. With respect to DTH (direct-to-home) operators, however, where declaration levels are 100%, the JV would shift the pricing power to the broadcasters (Star and Zee particularly). Thus, while DTH operators have been enjoying an upper hand, as broadcasters revenues from DTH exceed that of the cable, we believe the terms of the trade could change. As the newly formed entity exercises pricing power, content costs for DTH operators could trend upwards. Having said that, our sense is that the impact on Zee Group's Dish TV and Star owned Tata Sky would be limited.
DTH players Airtel DTH, Reliance Digital Television and Videocon d2h were unwilling to comment on the impact of the joint venture on their DTH business.
In a situation like this if an MSO is unable to collect the money from the ground and also faces heat in terms of carriage and placement fees, what would be the combat mechanism I don't know. Maybe their intentions are good. But it's a wait and watch game now, says Mansukhani.
Manchanda of Star-DEN estimates that it would take 3-6 months for the JV to get operati- onal. The new company will be conducting door-to-door research and invest in technology that can detect which signals are being stolen. Therefore, the JV will not have any immediate impact on the final consumer, though in the medium to long term, much will depend on the bargaining powers of the JV and the MSOs.
All eyes are now on the Parliament session set to start by the end of July. The Telecom Regulatory Authority of India, had set December 31, 2013 as the deadline for conversion of transmission of television signals from analog to digital, but with every stakeholder in the business saying that it will take at least a decade for the entire country to get digitised, they are banking on Parliament to come up with a more realistic roadmap for the rollout.
Sun 18s Gandhi says, There is a lot that has happened in the distribution space in the last 2-3 years. With the growth in number of DTH homes broadcasters now earn at least 40-45% of their subscription revenue from DTH. Till 2-3 years ago it was contributing only 15-20%. Therefore subscription revenues have been going up steadily. With digitisation around the corner we expect a total transparency in the system and in the next 5-7 years subscription revenue should go up by 40-50%. He, however, adds that once digitisation kicks in, the need for such alliances would go down since the system will be transparent. To my estimation none of these are 20-30-year alliances, he says.
Experts say it will be nearly 12 months before the dust settles down and industry gets to assess the impact of the launch of Media Pro. But the stakeholders in the JV are sure that Media Pro Enterprise will be a game-changer for the broadcast industry. As Anshuman Misra, managing director, Turner International India, says, With this new JV we are looking to enter a new chapter in the Indian media sector.