ADVERTISING REVENUES- RECOVERING FROM THE SLOWDOWN
Advertising revenue accounts for ~80% of broadcasters’ revenues in India and for a large number of channels (particularly newer ones), advertising constitutes the predominant source of revenue. Advertising spends on television grew at a CAGR of 17% from CY04- CY08 on the back of strong economic growth and resilient performance of sectors like telecom and financial services.
Whilst the high growth rates of the past years continued through the first half of CY08, the impact of the broader economic slowdown began to be felt during H2. Ad spend across sectors
like FMCG, financial services and real estate contracted and the advertising revenues of the broadcasters witnessed significant slowdown.
Visible green shoots of recovery….
While the advertising slowdown that started in the second half of FY09 continued in the first half of FY10, there are visible shoots of recovery in the second half of
this year. The main indicators of this are:
a) Significant pick up in FMCG advertising spends : The FMCG sector is the largest advertiser on television accounting for over 30% of the advertisement revenues. Moreover the sector also directs around 60-70% of its advertising spend on television.
b) Main Hindi GEC channels – inventories close to full utilisation, ad-rates hike likely : Our discussions with the management of leading broadcasting companies indicate that there has been a return of advertising spend in television and Hindi GECs have been the first and main beneficiary of this recovery. Our discussions also indicate that inventory is running close to full utilisation across the main Hindi GEC channels like Zee TV, Colors and Star Plus whereas the main regional channels like Sun TV have seen significant pick up in the nonprime inventory offtake. Furthermore, the Zee Entertainment management in their recent analyst meet indicated that 40% of the q-o-q growth was driven by ad rates. The company also hinted at plans to hike ad rates by as much as 15- 20%. This is a positive sign given that there is no significant movement in Zee TV’s viewership share in the last three quarters. Sun also announced an increase in its ad rates effective from 1st January 2010.
In addition, our discussions with media industry participants indicate that two trends have helped boost ad revenue realisations. First, the re-entry of smaller ticket advertisers who take up non-prime slots and pay higher rates than bulk advertisers like telecom and FMCG companies. Second, within the prime slots, the contribution of higher realisation advertisers has increased, pushing up the revenue from these slots.
….whilst long term prospects are strong
a) Indian relative ad-spend is abysmally low : Despite significant growth in the advertising spends in the last few years, India’s relative ad-spend (such as % of disposable income) is very low
compared to developed countries like USA & the UK as well as emerging economies like China. In addition, factors such as favourable demographic composition (~52% of population between 15-50 years old), higher economic growth prospects than most other countries indicate a latent potential demand for the advertisement market.
Television to continue as a dominant advertisement media
We believe television will continue to be the preferred media for advertising – considering that it is the most accessible entertainment media for the less literate and poorer section of the society. As the bottom of the Indian pyramid continues to develop, the trend of TV taking ad share away
from print is likely to continue. We expect relatively low impact of new media like the internet given the fact that internet penetration in India is a small fraction compared to countries where internet advertising has meaningful numbers .
SUBSCRIPTION REVENUES – DIGITISATION TO CURE ALL ILLS
Broadcasters face two challenges arising from the structure of the C&S distribution
market in India
a) Highly unorganised distribution market underpins subscription leakages : An unorganised television distribution market has for long been a bane for the television broadcasting segment. A large part of the distribution market in India is wired by cable operators – that include about 50,000 LCOs and 1,000 MSOs (of which only 10 are major players). The MSOs receive broadcasters’ signals and transmit those signals to local operators for a fee typically based
on the number of subscribers receiving the signals through each LCO. As LCOs provide the ‘last mile’ access to subscribers, they enjoy considerable monopoly over their areas of operations with around 1,000 to 2,000 subscribers. A lack of proper subscriber tracking system facilitates under reporting of the subscriber base by LCOs. Ironically this under-declaration of the subscribers enabled LCOs to price their services cheaply to penetrate further creating a viscous mass of under-reported subscribers.
Hence the subscription value chain is skewed in favour of LCOs. According to MPA, local cable operators get to keep 80 per cent of the revenues generated from cable TV distribution last year, while broadcasters and MSOs just received 14% and 6% of the revenues. This is in contras to the US and the UK, where broadcasters receive around 35% of the subscription revenues.
b) Carriage/placement fees
Most of the cable TV networks in India deliver TV channels in analog mode to the subscriber which limits the number of channels that can be carried given the bandwidth available. Even for a bandwidth as high as 860 MHz (a typical LCO uses between 550-750 MHz), the maximum number of channels that can be delivered is 106 . Also the viewing experience deteriorates
with different bands – prime band, colour band and “S” band with 11, 6 and 19 frequencies – with each subsequent band having poorer reception causing channels on that band to have lower visibility among viewers.
The steadily increasing number of channels and intense competition amongst the broadcasters to carry their channels on preferred bands such as prime bands to get better visibility has led to huge dole outs of carriage and placement fees by broadcasters to MSOs. Industry sources peg carriage & placement fees market to be anywhere between ~Rs15 to 20 bn.
Digitisation provides the much needed panacea
One of the prime benefits of digitisation is overcoming the bandwidth constraints of the analog networks. Digitisation also leads to a more organised and addressable distribution market. This is ultimately expected to increase the subscription revenues of broadcasters and potentially lower their carriage costs.