Sunday, April 18, 2010

Television Broadcasting

The tenets of an article on the future of television broadcasting co-authored by me 14 months ago still holds true today!

Whilst 2008 on the whole showed growth for the industry the last quarter of 2008 was impacted by the economic slowdown and liquidity crunch and this will continue into the current year.

The fortunes of the major players in the Indian media and entertainment industry is closely linked to advertising growth, given the fact that a significant portion of the industry revenues are attributable to advertising income. The combined effect of advertiser weakness at the regional and national level, a broad weakness across major advertising categories(particularly real estate, auto, financial services, etc.) and increasing inventory levels all point to one direction – media advertising growth will tread on cautious territory in 2009; albeit there will be growth.

Political spending on the back of the elections and the Indian Premier League may cover up the market weakness to some extent in 2009, but there seems to be consensus that the general economic scenario and confidence levels will slow the growth rates.

Advertising spend is a function of GDP. In 2008, India’s ad spends to GDP ratio was at a dismal 0.47% when the country was growing at 9%. Advanced economies such as the US report ad spend to GDP ratio of 0.9%.

On a 5 year horizon the outlook for the industry remains good and the industry is expected to grow at over 15% p.a. However, for 2009, the agenda for media companies is likely to be as follows:
1. Build core strengths;
2. Stay lean including managing working capital and cash flows
3. Focus on cost optimization – content, people, distribution, etc
4. Devise innovative marketing strategies viz for e.g. localization & regionalization of media, digitalization, etc
5. Provide effective measurability platforms to advertisers
6. Explore strategic options

In 2009, media companies will focus on building core strengths. New initiatives such as diversification into newer segments, increasing capital investment, entering newer markets or geographies etc. will be muted this year. Media companies will, instead, channel the capital expenditure required for new capital intensive initiatives’ into their core business operations. They are also likely to reduce investments on “risky” assets which have a lower hit to miss ratio.

In order to stay lean, media companies are increasingly likely to seek rationalization of content and distribution costs. They are also unlikely to diversify into markets and businesses they don’t fully understand. Moreover, media companies are less likely to see the level of employee churn that existed in 2006 to 2007, which was largely driven by the plethora of opportunities and demand for talent leading to exorbitant pay packages. Companies may also look at rationalizing their workforce and salary costs, which was ramped up in preparation for robust industry growth opportunities.

2009 will see fewer media launches and even lesser marketing blitz campaigns. Marketing blitz and hype prior to a launch will create awareness but interest levels will wane if the content is not appealing. It is understood that quality content will create the stickiness for a specific property but content acquisition should be preceded by a thorough cost benefit exercise. Media companies need to monetize library content through all available means such as white label productions, syndication and repackaging. Carriage fee contracts will be renegotiated with the purpose of sustaining margin levels.

As advertisers scale down their marketing budgets, media companies will increasingly resort to barter deals in order to release unsold inventory. There may also be an increase in business to business deals in this sector for e.g. a broadcaster advertises on a broadsheet daily and vice versa. Companies will strive to increase the advertising pie by approaching companies that have shied away from advertising, more so, in segments where demand is relatively inelastic. We believe that companies will expand from a largely national concentration to a local, regional penetration.

Secondly, media buyers will monitor Return on Investment (“ROI”) for shorter periods leading to shorter advertising contract durations for media companies. Hence, media measurability will gain increased prominence this year. Companies will make every effort to increase reach by tapping non media users to first time users and retaining existing consumers through subsidized subscription strategies, increasing supplements, providing premium content and rethinking programming strategy in order to provide an attractive ROI to advertisers.

Media companies typically outperform the market in a bull economy and underperform in a bear economy, since media spends are largely discretionary and demand is therefore elastic. This is reflected in the valuations of media properties in India. Attractive valuations may drive cash rich companies (both Indian and international) to opportunistically acquire businesses at far lower valuations than they might have a year ago.

Among the main trends in the sector that will drive consolidation activity is the creation of specialized media and multimedia holding companies that include print and publishing companies, internet resources, radio, TV and a number of other media assets. As the pressure mounts, industry players may find it easier to stay afloat by seeking business and operational synergies with their counterparts. Moreover, deal activity could also be driven by the divestment of early stage properties that are burning cash.

The emergence of the all new media property like the Indian Premier league will reap rich dividends in 2009. The format though initially was received with certain skepticism, received an extremely favorable response from India and overseas. The IPL, in 2008, set an international benchmark and a successful advertising medium for the country by aggregating audiences at a national level and providing advertisers more bang for their buck. Going forward, companies will require disruptive thinking to create media properties such as the IPL or risk getting marginalized.

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