Focus 2010 : Dreams to reality
Executive Summary
Let the fun begin
Over the last few years, there have been discussions on the Indian entertainment industry being on the verge of take-off, powered by new delivery platforms and technological breakthroughs, increasing content variety and favourable regulatory initiatives. This is expected to transform the entertainment landscape, with more players entering and traditional players being forced to adapt or perish. One can already witness changes that have the potential to alter the industry structure.
New delivery platforms and technological breakthroughs:
Increasing penetration of new delivery platforms is one of the key drivers of the media and entertainment industry today, that has the potential to change the way people receive content. These platforms, resulting from fundamental technological breakthroughs, are likely to see most of the action in next few years. For example, the spread of inexpensive and stable storage media will also enable people to store content and view it at their convenience. Some other examples are:
- • Introduction of DTH and IP-TV
- • Digital distribution of films
- • Immersive content media like IMAX theatres
- • Coming of age of Satellite Radio and FM Radio
- • Emergence of new technologies like podcasting, etc
Together, these are expected to change the viewing habits of people.
Increasing content variety:
New forms of content will emerge to cater to select viewers, as the industry evolves. Content like community radio and local television, that were unviable earlier, will also emerge stronger through new delivery formats. Moreover, content innovation will be necessary to sustain the interest of the increasingly jaded urban population. A few instances of rising content diversity are:
- • Newer programming categories like reality television,
- • Crossover content in music and films,
- • Niche programming on radio like sports and comedy,
- • Newer genres like lifestyle television, religion channels, etc.
Regulatory initiatives:
The regulatory framework for media is still evolving. Looking at the policies announced by TRAI, it seems that a liberal framework is likely to be developed in order to allow the industry to flourish. Alongside regulating broadcasting and distribution, it will be important to create stronger protection mechanisms for copyrights and royalties. If intellectual property is protected to a fair extent, the industry could capture far greater value, giving its growth rate a significant boost.
A few examples of such regulatory actions are:
- • An implementable regulatory framework for introducing addressability of cable television
- • Policy framework for DTH, satellite radio and community radio
- • Migration to a revenue sharing regime in FM radio
- • Superior copyright protection for films, music and home video, etc
The past and the future
The entertainment industry is thriving on the current economic upswing and is currently estimated at INR 222 billion. Due to its sheer size, television has been the main driver for the industry's growth, contributing 62 percent of the overall industry's growth. Films contributed another 27 percent, while other segments like music, radio, live entertainment and interactive gaming constitute the balance 11 percent.
Source: KPMG Research
Source: KPMG Research
Propelled by innovation across its value chain and a series of enabling regulatory actions, the entertainment industry is expected to grow annually at almost 18 percent to reach around INR 588 billion by 2010. However, even with such growth, it could be just scratching the surface of the Indian market's true potential. Reaching this targeted growth rate will not be easy for the sector. Television sector has witnessed a significant bit of transparency, process orientation and discipline, except for the last-mile which is completely fragmented. The film sector, on the other hand, still remains relatively opaque and persona-driven. Over the past few years, the film industry has made some progress in getting institutional and corporatised funding. However, the progress on this front has not been as dramatic as had been expected when the institutional funding norms for films were relaxed a few years ago. Even though different sources unanimously agree that the entertainment industry is a sunrise sector, it has seen no major fund-raising efforts, apart from television content and broadcasting where the impact of professionalism and organised financing is evident.
The industry growth drivers
Over the past decade, India has been the second fastest growing economy in the world. In 2004, it grew by 8.2 percent, breaching the psychological 8 percent barrier for the first time. In terms of purchasing power parity, it is already the fourth largest economy in the world. Most major global companies are of the opinion that it will become a key market in the years to come.
As the Indian economy continues growing, the Indian middle class will also expand significantly. Compared to other nations, the 300 million strong Indian middle class allocates a higher percentage of its monthly expenditure on entertainment. The increasing consumerism of middle-class India is seen from the sharp growth in the sales for various products like automobiles, colour television sets and mobile phones and the burgeoning increase in credit cards and personal loans. There is an increase in the direct consumer spends on entertainment and advertising revenues have also been on the rise.With the average Indian getting younger, and hence more likely to spend on non-essentials, the entertainment industry has the potential to grow explosively in the future.
Source: KPMG Research
The forthcoming metamorphosis
Over the past decade, India has been the second fastest growing economy in the world. In 2004, it grew by 8.2 percent, breaching the psychological 8 percent barrier for the first time. In terms of purchasing power parity, it is already the fourth largest economy in the world. Most major global companies are of the opinion that it will become a key market in the years to come. As the Indian economy continues growing, the Indian middle class will also expand significantly. Compared to other nations, the 300 million strong Indian middle class allocates a higher percentage of its monthly expenditure on entertainment. The increasing consumerism of middle-class India is seen from the sharp growth in the sales for various products like automobiles, colour television sets and mobile phones and the burgeoning increase in credit cards and personal loans. There is an increase in the direct consumer spends on entertainment and advertising revenues have also been on the rise.With the average Indian getting younger, and hence more likely to spend on non-essentials, the entertainment industry has the potential to grow explosively in the future. The entertainment industry is now at an inflection point. The earlier phase of growth has run its course. Now the industry is ready to enter a second stage of growth powered by the twin engines of technology (availability of quality infrastructure and the accelerated penetration of digital connectivity) and an enabling regulatory environment.
A panoramic view
The coming of age of the television sector has been the primary driver of the growth that the entertainment industry has seen over the last decade. The private sector enterprise seen across the television value chain in the nineties drove the sector to newer heights. It is now the most important component of the entertainment industry, contributing over 60 percent of its revenues. It is expected to continue powering the industry in the digital era, through various innovations like DTH, interactive television, etc.
Though in revenue terms, films contribute just 27 percent of the entertainment industry, its visibility and impact is much more than this figure suggests. It is also a major driver for other sectors like music, live entertainment and television. It was accorded the status of an industry in 2000. Since then, some progress has been made in developing transparency and professionalism in this sector.
Music, radio and other emerging segments like animation, interactive gaming and live entertainment together account for remaining 12-13 percent of entertainment revenue.
Source: KPMG Research
Piracy and revenue losses at the last-mile are the bane of the entertainment industry. They prevent the rightful owners of the content from realising its full value. All sectors of the industry, except radio, suffer from these twin predicaments in some way or the other. Currently, such losses are estimated at INR 4.3 billion, which amounts to over 40 percent of the industry's total revenues. While such losses are expected to continue for another two to three years, a reversal is expected eventually as a result of a combination of a technology push (with a wide repertoire of film and music becoming available through a variety of legitimate and convenient platforms and options) and a demand pull (with increased internet penetration and the advent of broadband).
Television
With total revenues of INR 139 billion, television is the goliath of the entertainment industry. It is now ready to advance to the next stage of its evolution, grasping the opportunities presented by the digital age, which will completely change the home entertainment landscape. In the process, it is expected to continue its rapid growth and reach INR 371 billion by 2010. Some of the transformational changes are:
- • Additional distribution platforms: The last-mile of television distribution will see a lot of action in the near future due to entry of new Direct to Home (DTH) broadcasters, Internet Protocol based Television (IP-TV), broadcasting services using Digital Subscriber Line (DSL) technologies, etc. They will also give broadcasters direct access to consumers by enabling them with the ability to provide customised value-added services, such as video on demand.
Presently the distribution of subscription revenues is heavily skewed towards the cable operator because of lack of transparency in the declaration of subscribers by the Local Cable Operator to the pay television broadcaster. The introduction of these new platforms and the consequent addressability will facilitate a more equitable distribution of revenues. - • More entrants in niche genres offering additional content variety to the viewer: Niche genres have significantly strengthened their value proposition and more entrants are expected in spaces like animation, business and lifestyle, among others.
- • Conducive and liberalising regulatory intervention: A beginning has already been made through an amendment of the Telecom Regulatory Authority of India Act. This is expected to deliver addressability in the currently fragmented distribution market, thereby increasing broadcaster's shares of revenue and encouraging greater participation.
Though films contribute just 27 percent to the entertainment revenues, they form the heart of this industry. Indian films, especially the mainstream Hindi film industry (Bollywood) dominate segments like music and live entertainment as well as television, where popular films and film-based programmes attract the highest viewership.
Compared to television, this sector is rather unorganised and individualistic, with a low level of discipline and process orientation. This, along with the fact that it was not recognised as an industry as late as 2000, restricted its access to institutional funding and forced it to rely on other sources that charged usurious rates of interest.
In the recent years, though there has been a distinct shift in the mindset and the willingness to tap institutional debt and equity funds. Some of India's largest corporate houses have entered this sector and large international studios are reportedly evaluating the Indian opportunity. However, the lack of transparency and discipline is preventing them from fully tapping this opportunity.
The film industry is at a cusp in its evolutionary path. If conventional players are able to implement the changes needed to unlock its growth potential, the second phase of corporate and institutional growth could see the industry grow at around 16 percent annually to reach INR 143 billion in six years.
Music
The Indian music sector is quite unique compared to other global markets. Songs from new Hindi films comprise 40 percent of the total industry revenue and the box office popularity of the film typically drives sales.
In India, growing piracy and free downloads have reduced music buying. Consequently, the industry has shrunk to around INR 10 billion from around INR 13.5 billion, three years ago. The silver lining is that though music buying from legitimate sources might have reduced, the delivery of music through new formats, like FM radio, internet and mobile phones has actually increased interest in music.
The future growth is likely to come from non-physical formats like digital downloads, royalty income, ringtones, etc. The rollout of additional distribution platforms like DTH, digital cable and IP-TV with the growing popularity of large format retail stores will create many more channels selling music. Based on the current trends, the industry is expected to grow only moderately to INR 13 billion in 2010. With the right technology and regulatory push to curb piracy, it has the potential of achieving a double digit growth.
Radio
Though radio reaches out to 99 percent of India's population and is considered to be the most cost-effective mass medium, it was only recently that private participants were allowed to enter ths space with a view to unlocking the latent commercial potential. With private FM radio channels rolling out in several cities, the long stagnant advertisement revenues from radio have doubled in two years.
Compared with other nations, radio currently has a very small share of the total advertising pie in India. This is indicative of the promise it holds if the current and proposed licensees are allowed to migrate from the current stifling and unviable licence fee structure to a revenue sharing regime, and if foreign direct investment is allowed.
Source: KPMG Research
Going forward, enabling regulation that allows radio to develop in its fledgling years and technology-driven policy initiatives like introduction of satellite radio can help it grow exponentially. Additionally, with the introduction of new genres in programming with tailored content, the number of listeners are likely to increase; and radio could provide an efficient mechanism to reach out to niche consumer segments.
Emerging opportunities in the entertainment space
Apart from the second wave of growth that various sectors of Indian entertainment industry are set to witness, there are emerging opportunities spanning across genres and markets. Some of the more interesting areas to look out for are:
Animation:
India's large pool of software talent has made it an appropriate resource base to develop animation and graphics-heavy content. Many international organisations outsource their animation requirements to leading Indian software players. As the industry grows and establishes its quality credentials, India will emerge as a serious animation hub.
Outsourced production facilities:
With the relentless rise in Hollywood film budgets, the pressure on cost control is also increasing. India can tap this opportunity by offering Hollywood an overall low cost structure combined with high-quality technical talent and production facilities. However, significant investment in infrastructure and equipment are required to be made before this becomes a reality.
Organised home video:
The Indian market for home video entertainment - VHS tape, VCD or DVD, is largely unorganised with mainly local outlets. A demand for quality and convenience remains to be exploited by large organised retail players, who could leverage economies of scale in content procurement and distribution.
Leisure entertainment like theme parks:
Till date, outdoor entertainment in India has seen limited action with few significant investments. This is changing as leading international players are exploring the Indian opportunity. The challenge here will be providing a cost-effective and profitable value proposition to the Indian consumer.
Live entertainment:
The live entertainment industry in India is largely unorganised with few players having the requisite critical mass. The gradual reduction of entertainment tax across states will make the sector more attractive, drawing in large corporates and multinationals. This is likely to result in increased marketing investments and creation of world-class infrastructure like convention centres.
Going forward, there could be collaboration with other constituents of the entertainment industry, like films, television and music.
Reaching for the heights - A need for action
The Indian entertainment industry has matured significantly in the past decade to evolve into a truly multimedia industry. Its fundamentals indicate strong growth in the future. However a number of factors continue to hold the industry back and significant efforts still need to be undertaken. Based on a thorough understanding of the industry, the interaction between its drivers and discussions with various stakeholders, this report articulates a 'Charter for Change' by all the stakeholders that can help the industry to move into overdrive.
As the stakeholders are responsible for championing growth, the report classifies these initiatives for action by two main categories of stakeholders:
- • The industry players and
- • The Indian government
The importance of this stakeholder classification is two-fold:
- • It allocates the responsibility for championing the cause and implementing the change explicitly with a particular set of stakeholders, leaving no ambiguity for responsibility for change
- • It makes it extremely clear that the industry itself will need to wake up to the realities of a changing and dynamic environment
The industry initiatives can be grouped under two major heads:
- • Improving operational effectiveness
- Raising organisational efficiency through tightly-run projects
- Improving consumer connect
- Developing transparency and process-orientation - • Maximising revenue earnings
- Building alternative revenue streams
- Developing new markets through aggressive promotions
- Leveraging technology
The evolutionary process followed by different segments of the industry defines the need, nature and rationale for such changes. Consequently, the nature and scale of the issues that they face presently differ, since the stage and pace of evolution and the willingness to evolve vary widely between segments. The nature of interventions required, therefore, range from correctional measures and market development in the case of certain segments to yield improvement and institutionalisation in the case of others.
The government initiatives can also be classified into two categories:
- • Assisting structural correction of the industry
- Evolving a framework to regulate cross media / value chain holdings
- Rationalising last-mile licensing
- Providing a level playing field for competing value chains. - • Developing a conducive environment for growth
- Liberalising programming code and censorship laws
- Constituting a national anti-piracy force
- Establishing a unified regulator
These regulatory initiatives will acquire different levels of meaning and importance for various sectors of the entertainment industry, once again based on its position in its life cycle and the prevailing market dynamics.
The Indian entertainment industry has the opportunity to enter an exciting phase of growth driven by favourable socio-economic changes and smarter distribution technologies. The realisation of such opportunities would depend on the aggressiveness of the industry players and sagacity of policy makers and regulators. The suggested stakeholder charter is intended as a strategic blueprint for the industry to undertake concerted action that could result in a stronger sustainable growth.
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