India TV Industry. October 4, 2012

Transcription

1 India TV Industry At An Inflection Point October 4, 2012

2 II Table of Contents 1. Executive Summary 1 2. Market Overview 5 3. Analysis Of TV Conglomerates Appendix 18 List of exhibits Exhibit 1: Comparison of TV industry revenues, key emerging markets 1 Exhibit 2: Ranking of emerging-market TV companies by profit margin 3 Exhibit 3: Ranking of India s TV conglomerates 4 Exhibit 4: Declining share of advertising: India and Indonesia buck the trend 5 Exhibit 5: India television industry overview 6 Exhibit 6: How India s TV industry could look in Exhibit 7: An evolving regulatory framework 8 Exhibit 8: The new FDI framework 9 Exhibit 9: Increased M&A and fund-raising activity 9 Exhibit 10: Comparison of India versus emerging Asia, profit analysis of TV companies 11 Exhibit 11: Major media deals In Exhibit 12: Media values in emerging Asia, Indonesia on the rise 12 Exhibit 13: Comparison of flagship channels 13 Exhibit 14: Comparison of bouquet strength 14 Exhibit 15: Comparison of scalibility 14 Exhibit 16: Comparison of content sourcing, IPRs and syndication 15 Exhibit 17: Group companies aiding distribution strength 15 Exhibit 18: Comparison of financial strength and parentage 16 Exhibit 19: Comparison of future readiness 16 Exhibit 20: Comparison of TV conglomerates 17

3 1 EXECUTIVE SUMMARY A path to prosperity India s television industry is at an important inflection point with digitalization, investment and consolidation set to boost value creation across the ecosystem, benefiting all stakeholders. According to Media Partners Asia (MPA), TV industry revenues will grow at a CAGR of ~11% over the next five years, to reach US$15 bil. by 2017 versus US$9 bil. in This compares against growth rates of 9.8%, 5.0% and 3.1%, respectively, for China, the USA and UK, over the same period. Amongst emerging markets, India trails Indonesia, which will see its TV industry expanding at a CAGR of 16% over , as TV subscription revenues in particular grow rapidly from a low base. Industry profit margins will remain under pressure in the near term, and capital intensity over the next three years will be significant. But India s growth phase should, in the long term, also be anchored to higher profitability. Key drivers include: Exhibit 1: Comparison of TV industry revenues, key emerging markets Market Segment Unit % CAGR, Comment China Advertising (US$ bil.) % Future growth impacted by regulation and the growth of online Subscription (US$ bil.) % Driven by digitalization, upside limited by regulation Total (US$ bil.) % India Advertising (US$ bil.) % Macro resurgence, digitalization and regionalization will add more depth Subscription (US$ bil.) % Beneficiary of digitalization, tiering, FDI and a slow increase in ARPUs Total (US$ bil.) % Indonesia Advertising (US$ bil.) % Strong macro fundamentals, increasing depth in the ad market Subscription (US$ bil.) % Beneficiary of strong DTH growth and government-led digitalization Total (US$ bil.) % USA Advertising (US$ bil.) % Healthy growth for pay-tv program networks Subscription (US$ bil.) % Pay-TV universe increasingly saturated though IPTV and DTH still growing Total (US$ bil.) % UK Advertising (US$ bil.) % Eclipsed by online Subscription (US$ bil.) % Sky DTH retains robust growth potential Total (US$ bil.) % An improving regulatory framework. Recent policies by the Telecom Regulatory of India (TRAI) and the Ministry of Information & Broadcasting (MIB) have been broadly favorable for digitalization, especially with regards to: (1) Revenue-sharing between various cable distribution platforms; (2) Forbearance in retail price regulation; and (3) The increase of foreign direct investment (FDI) in cable and direct-to-home (DTH) satellite platforms, from 49% to 74%. These will provide the catalyst for digitalization, which is already progressing at a decent pace ahead of Phase I deployment on Nov. 1, 2012, and will further speed up capital investments over the medium term.

4 2 More policies are required to accelerate capital flow in the future. We highlight in particular: Cross-media regulations, which impede consolidation and value creation. These, especially limitations on vertical integration, would need to be relaxed to promote a stronger and healthier TV sector, and accelerate consolidation in distribution. Multiple sources of taxation on DTH companies in particular, which increase the cost of capital for existing and future investors in a fast-growing digital pay-tv segment. The licensing of cable operators will also need to be reviewed to encourage the entry of strategic investors into the cable and broadband marketplace. Digitalization. With less than a month to go, the government s revised Nov. 1 deadline to switch off analog signals is unlikely to be postponed. A recent MIB press release indicated 77% of Phase I markets are already digitalized. In our view, ~45% of the cable homes in these markets still need to be seeded with set top boxes (STBs), and the number of STBs required will exceed further because of subscriber churn. Nevertheless, the MIB data is indicative of steady growth in digital deployment. MPA s analysis indicates that close to 65% of India s TV households will be digitalized by 2017, equivalent to more than 115 mil. subscribers, compared to 34 mil. at the end of last year. TV subscription revenues will climb at 10.2% CAGR to top US$10 bil. by We highlight key benefits and issues: A new B2C ecosystem. In the current scenario, the TV distribution segment operates under a B2B model with larger broadcasters bargaining with MSOs to garner higher revenue share and vice versa. In the future, as the wider market undergoes digitalization, shareholders across the value chain will align their interests, keeping the consumer at the center. The packaging, tiering and segmentation of channels in cable will also give consumers choice, democratizing the TV ecosystem for the first time as broadcasters invest and compete to grow demand in a tiered digital universe. One reality is carriage & placement fees (C&P), which are likely to stabilize in the future, but nonetheless will remain in existence, with the onus more on placement within a particular package. Pricing & packaging. While digitalization will boost the addressable subscription pie, the industry still remains trapped in the Rs200-ARPU-per-month retail mindset. To be sure, as digitalization spreads across the country, affordability and low income will undoubtedly be factored into the mix. However, as distribution platforms evolve packaging and pricing, the onus should be on extracting value beyond the basic package. This means execution of a collaborative strategy to provide significant value in expanded and premium packs, niche packs and value-added services. Current DTH ARPUs are on average, in the Rs200 per month range, while the newly announced cable pricing for Phase I deployment implies ARPUs (post tax) of Rs per month with premium packs available at Rs275 per month. It is the pricing of premium packages that must change in the future as operators think practically of executing on a Rs per month consumer product roadmap. HDTV, broadband and VOD will provide a foundation for this proposition. In addition, the growth of quality linear channels, including local and regional channels, premium adfree channels, multiplexed channels and niche offerings, will provide a significant impetus. Critical to this proposition will be effective pricing and packaging of channels, which means both operators and broadcasters will need to be weaned away from short-term

5 3 deals and actively think about agreements that involve linear plus VOD content and multiplatform (i.e. tablets) rights to give consumers broader choice and value. Implications for stakeholders. Under digitalization, broadcasters will start investing more in content, and backwardintegrate into content production. In addition, digitalization should also fragment viewership across multiple platforms in the long term. This means broadcasters and aggregators will need to monetize content over cable, DTH, online and mobile platforms. The growth of audiences for a slew of new local channels and new niche offerings should also provide more depth to the ad market targeted appeal with new categories coming onboard. This, combined with the continued strength of TV and a resurgent economy after 2013, should help increase TV advertising at CAGR of 12% to US$5.1 bil. by 2017, with plenty of upside in the future. By 2017, China s TV ad pie will still be three times as large as India s, although its share of advertising will be drifting towards 30% (due to the growth of online and various regulatory dynamics) while the corresponding number for India will be close to 44%. Meanwhile, cable operators will start offering multiple services (digital video, HD, broadband, VOD and more) to differentiate and gain returns on infrastructural investment. For cable, ROI on a pure-play digital investment will take about three years, compared to two years or less when bundled with broadband. For channel providers, digitalization will provide an important lever for subscription growth, and as a result, the big majors (Star, Zee, Sony, Network18) are already investing and aligning products to ultimately grow margins. However, we envisage a lag of two to three years before operating leverage grows among the major TV networks. Profitability and value creation. While market bubbles have dissipated since and irrationality is not as pervasive as it once was, cost escalation continues across the TV value chain. Without revenue maximization, especially in the TV distribution segment, and lacking sustained strategic execution, profit margins among key TV companies in India trail those of their counterparts in emerging markets. Most notably, these include Indonesia, Latin America and Thailand where there is higher control of costs, talent and IP and consolidation is critical. We see significant scope for TV industry profit margins to grow, especially as (1) Digitalization legitimizes the TV distribution segment and puts the onus back on the market for execution; (2) Broadcasters invest more in content and back-end integration; and (3) Platforms benefit from FDI, greater scale and higher yields to gain sufficient operating leverage. Exhibit 2: Ranking of emerging-market TV companies by profit margin Sun BEC World Surya Citra Media TVB Televisa MNC Sky Vision Global Mediacom Astro MNC Group Emtek ABS-CBN Dish TV Star India Zee Entertainment Shanghai Media Group Sony 0% 20% 40% 60% 80% 100% Ebitda margin Note: Analysis based on the latest fiscal year Source: Company data, MPA analysis

6 4 TV conglomerate ranking. In its second year, the MPA TV.NXT scorecard for leading television networks in India offers some context to the current stage of the industry and a potential framework to gauge the future. In our assessment, based on seven criteria, the key networks to benefit in this year s ranking include: Star, potentially benefiting from: (1) A US$700 mil. bet on sports rights ahead of digitalization; (2) News Corp s US$300 mil. acquisition of the 50% stake it did not own in ESPN-Star Sports; and (3) Growth of local advertising among Star s regional channels, setting the stage for more feeds and investment in the future. The scale of Star s investment in sports and the TV ecosystem should not be underestimated; it will lead to margin erosion in the near term, but offers the prospect of significant returns further down the line. Zee, the true survivor of India s 20-year old TV industry, underlining its robust appeal to media buyers this year with strong advertising growth, investment in legacy content and channels, and gaining from the MediaPro JV. The challenge for Zee now is taking its international story to the next level (more content investment) and getting real momentum from the digital subscription story with new media upside. Sony, which paid US$271 mil. to buy out its minority shareholders and enter into its next phase of growth. Sony is making a reasonable chunk of money these days, due to the combination of popular franchises, people and strategy. Network18, beneficiary of a landmark transaction with Reliance Industries Ltd (RIL), which provides access to regional markets through ETV. The formation of IndiaCast also provides a strong anchor point for a subscription story in the years to come. Exhibit 3: Ranking of India s TV conglomerates Star Zee Network18 Sony Sun Discovery Disney Turner Reliance Source: Media Partners Asia Meanwhile, although Discovery continues to grow its franchises with the addition of Discovery Kids this year, Turner and Disney face a number of challenges. Turner closed Imagine TV earlier in the year, losing up to US$150 mil. on the business. Disney has done little to date to expand its TV business since the acquisition of UTV. In conclusion, successful implementation of mandatory digitalization will expand the market for the TV industry but the journey will be painful. In the medium term, TV networks will need to invest and execute on content, marketing, technology and manpower retention and recruitment. Operating margins will therefore remain under pressure. We expect big-ticket M&A over the next five years, consolidating the industry to three to five larger TV networks. (Full methodology and analysis of the TV conglomerate scorecard is provided in Section 3)

7 5 MARKET OVERVIEW TV industry outlook MPA analysis suggests that the TV industry will generate US$9 bil. in revenues during calendar year 2012, representing a growth of 11.4% year-on-year. Going forward, the total TV pie is expected to grow at a CAGR of ~11% as revenues top US$15 bil. by Key drivers include: Advertising. New genres, more brand categories, greater innovation and the continued growth of local/regional media will boost the advertising market. In the context of current macro headwinds, corporate ad spends have slowed with MPA revising its advertising forecast downwards to 8.3% for 2012 while the industry consensus is for 7-9% growth this year, though Q is expected to be strong. In spite of the slowdown, the TV industry continues to invest in content and innovation to improve advertising yields. For instance, Star India s Satyamev Jayate has expanded the weekend primetime slot while channels such as Star Gold, Zee News and Channel V have reduced ad inventory to improve viewership and obtain better rates. Broadcasters are also launching new niche channels in various genres such as action and comedy. This will help attract advertisers willing to target and segment their audience not just from demographic but also psychographic parameters. According to MPA, the TV advertising market will climb at a CAGR of 12.3% to top US$5 bil. by We believe that there should plenty of upside to these forecasts. In general, TV advertising rates remain relatively low although broadcasters such as Star and Sony are aggressively looking to increase yields. This should become the norm for the TV industry in the future in line with supply and demand economics and inflationary trends. TRAI s proposed TV advertising regulations remain controversial but broadly the 12 minutes per hour cap is seen as positive by advertisers and media buyers. TV, in conclusion, will remain a vital consumer proposition in India due to growing audiences and a stronger targeted addressable segment from digitalization. We do not see fiber broadband deployment or next-generation mobile broadband access significantly disrupting the TV ecosystem within the next five years. By 2017, MPA estimates that TV advertising will have a 43.5% share of the total ad market. Exhibit 4: Declining share of advertising: India and Indonesia buck the trend (% TV Ad Market Share) 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% India Indonesia China USA UK

8 6 Subscription. Digitalization will be the catalyst for a reordering of the TV distribution segment, driving subscription revenues across the ecosystem. MPA projections indicate that total TV subscription sales will top US$10 bil. by 2017, a 10% CAGR from 2012, with close to 65% of India s TV households subscribing to pay-tv through a digital STB a universe of 115 mil. homes by Various delays have limited digital pay-tv subscription growth in 2012, with digital subscriber additions fairly disappointing. The DTH market added 6 mil. gross net subs between January to August (active adds at 1.5 mil., we estimate) while new cable digital net adds have come in at 2 mil. Besides facing macro headwinds, DTH growth was slowed as operators raised prices, keeping in check the high level of rotational churn in the industry and boosting ARPUs. Furthermore, a four-month delay in DAS (Digital Addressable System) implementation has adversely impacted the seeding of boxes by cable operators. A successful rollout is essential to revive the growth of digital subscriber additions. The growth of digital cable in particular will be encouraging for the broadcasters, as 70-75% of subscription revenues from DTH are currently under fixed-fee deals, significantly limiting growth potential from the sector. However, the DTH industry is driving volumes of high-arpu HD subscribers. Total active HD customers have crossed the 1 mil. market with Tata Sky having a 60% market share. HD ARPUs are averaging Rs per month, double that of SD services. In the meantime, consolidation amongst channel aggregators with the formation of MediaPro and IndiaCast has enabled major networks like Star, Zee and Network18 to extract higher analog cable subscription revenues and expand distribution into new towns and cities. Major broadcasters have also made investments in technology to enhance the consumer experience and hedge future dispersion in viewership. This includes launching HD variants of their flagship channels, digitalizing archives and investing in new media platforms such as OTT, online and apps for handheld devices. In the future, new media and non-linear segments will form a significant percentage of a broadcaster s total revenues. Exhibit 5: India television industry overview % CAGR ( ) TV advertising revenues US$ mil. 2,425 2,652 2,848 3,176 3,601 4,074 4,574 5, Y/Y growth % 20.7% 9.4% 7.4% 11.5% 13.4% 13.1% 12.3% 11.2% Share of total ad market % 43.7% 43.3% 43.4% 43.4% 43.4% 43.5% 43.5% 43.5% Subscription revenues US$ mil. 4,846 5,527 6,136 6,931 7,718 8,495 9,238 9, Y/Y growth % 15.2% 14.0% 11.0% 13.0% 11.4% 10.1% 8.7% 8.0% Total revenues US$ mil. 7,271 8,179 8,984 10,107 11,319 12,569 13,812 15, Y/Y growth % 16.7% 12.6% 11.4% 13.3% 12.5% 11.6% 9.6% 8.7% Source: Media Partners Asia

9 7 A new ecosystem At present, the TV distribution segment operates under a B2B model with larger broadcasters bargaining with MSOs to garner a higher revenue share and vice versa. Over the next five years, as the wider market gets digitalized, we see stakeholders aligning their businesses and interests, keeping the consumer at the center. The ecosystem will gain in value while also consolidating with a more profitable business proposition. Exhibit 6: How India s TV industry could look in 2017 Broadcasters backward integrate into content production Content Creation Balaji Telefilms Endemol Big Synergy Sphere Origins Entertainment UTV Eros Yashraj Studios Studio18 Scalability from alternative revenue streams Broadcasters Star Zee Sony Network18/RIL Discovery Turner Higher subscription income boosts margins Responsible for monetizing content across multiple platforms Aggregators MediaPro IndiaCast One Alliance Major MSOs Hathway DEN InCable Digicable WWIL ICOs IPTV Bharti MTNL DTH Operators Dish TV Tata Sky Airtel Videocon D2H Big TV Sun Direct Shifts to a B2C model offering multiple services LCOs Massive consolidation Consumers: 115 mil. digital Pay-TV homes Consolidates to four players, generating FCF to fund growth.

10 8 Regulatory roadmap As Exhibit 5 underlines, the regulatory framework has evolved with some positive momentum over the past year or so. This is encouraging in particular for digitalization. We highlight: (1) No regulation of retail pricing under DAS; (2) Rational and equitable regulations on revenue sharing arrangements between cable MSOs and LCOs; and (3) Raising the cap on foreign direct investment (FDI) in pay-tv platforms from 49% to 74%. In addition, an improved management framework with a focus on execution by both the MIB and TRAI has made the Nov. 1, 2012 for Phase I of digitalization a more realistic deadline. Going forward, the focus has to shift to new policies on cross media ownership, which if executed well, should allow for vertical integration but prevent horizontal integration. This will help bring value and accelerate investment into the TV distribution segment in particular, similar to the path followed by markets such as the USA, Japan and Korea. A real policy to rid the fast-growing DTH sector of multiple taxation layers is also important. These taxes effectively stipulate 30% of subscription revenues comprising a 12% service tax, an 8-10% entertainment tax and a 10% license fee. Finally, the need to expand satellite capacity for additional channels and HD remains a key concern for DTH operators. While satellite operators are confident they can supply the required transponders and capacity needed by Indian DTH operators, most are concerned about the capacity constraints on the currently used FSS (Fixed Satellite Services) band. While DTH companies in India operate on the FSS band, most operators worldwide operate on the BSS (Broadcast Satellite Services) band. With limited spectrum capacity to expand further via FSS, some satellite operators have expressed their intent to expand capacity using the BSS band. Current government policy however fails to provide clarity on the usage of the BSS band by DTH operators. Exhibit 7: An evolving regulatory framework Amendment of Cable TV Act Release of Tariff Order and Interconnect Regulation Hike in FDI for broadcast services to 74% Aligning other regulations Phase-wise rollout of Forbearance in Helps bridge funding Cross-media Digital Addressable retail level price gap for cable and ownership System (DAS) Determined revenue DTH Rationalization of Approved by cabinet share between MSO Brings in international taxes and LCOs best practices and Endorsed by the President of India Carriage fees to be regulated strategic expertise Facilitates consolidation Ensuring enforcement and penalties for noncompliance

11 9 Foreign investment Allowing more foreign investment comes as a big positive for the industry as the digitalization process gets underway. According to industry sources, the total capital requirement for upgrading India s 85 mil. analog cable homes could be as much Rs400 bil. Besides supplementing the funding requirement, partnerships with global strategic players will also help various cable operators tap strategic expertise, especially in broadband. This to some extent will help address concerns over execution risk for MSOs, which have traditionally thrived on carriage and placement income with limited expertise on the B2C cable model. Exhibit 8: The new FDI framework Business Activity Cap On Foreign Investments (%) Before Multi System Operators (MSOs) 49% 74% Other MSOs & LCOs 49% 49% DTH 49% 74% Head-end In The Sky (HITS) 74% 74% Teleport (Hub) 49% 74% Now Downlink Of TV Channels 100% 100% Uplink Of TV Non-News & Current Affairs Channels 100% 100% Uplink Of TV News & Current Affairs Channels 26% 26% Mobile TV No Policy 74% Under mandatory digitalization, last-mile LCOs who fail to digitalize face the risk of losing subscribers to DTH. Valuations for LCOs will therefore drop, making most of them viable M&A targets for larger MSOs keen on last-mile acquisitions. Deals won t happen right away however, especially as most strategic investors will take a wait-andsee approach as Phase I of digitalization gets underway. Exhibit 9: Increased M&A and fund-raising activity Stakeholders In TV Value Chain Broadcasters/Aggregators DTH Operators MSOs LCOs/ICOs Activity Entry of new players to launch niche/speciality channels, initially through partnerships for distribution Increase in network size/number of channels per aggregator Private equity infusion/ipos more likely as most operators have established themselves and are closer to attain operating breakeven Equity stake sell will occur at a premium We expect 3 out of 5 major MSOs to partner with foreign players (strategics/pe) over the medium to long term Limited scope for horizontal M&A in initial phases Combination of IPOs and debt to finance digitalization Merging with larger MSOs Possible rollout of the new HITS policy coupled with vendor financing might encourage larger operators to come together Source: MIB

12 10 Our analysis of the impact of FDI on key players in the TV distribution is as follows: Hathway. National MSO with established cable and broadband brands, will require funding particularly in Phase II of digitalization rollout. Post digitalization, potentially the best cable asset to adopt and execute international cable practices. DEN. National MSO with strong promoters and leadership, but requires overhauling in business operations to run a B2C model. Siti Cable (WWIL). The weaker of the two distribution assets under the Zee group, Siti s promoters are open to foreign partnerships. Siti has been active in digitalization in recent months, especially in Kolkata. InCable. Promoters have been keen to raise funds but failed due to a disagreement on valuations. The MSO has also been involved in constant disputes, and has appealed to the regulator (TRAI) to postpone the process of mandatory digitalization. You Broadband. Has limited market presence (Mumbai, Bangalore and Vizag) but has a proven cable and broadband product. Despite backing from CVC, the company has failed to scale business. It has also failed in its attempt to raise additional funds by way of IPO. Sun Direct. Promoter s involvement in the 2G Telecom scam will hinder any FDI funding. Current investor Astro has been looking to sell its stake. Dish TV. The DTH market leader is a more established distribution asset for the Zee group. The company is adequately placed to self-finance growth. Any FDI infusion will command premium valuations. Airtel Digital TV. Strong promoter group backing to fund growth. However, the company has seen a lot of organizational restructuring over the last 9-12 months. There have been talks to spin off the DTH unit as a separate entity, which might attract investors. Big TV. Distressed asset with limited value. Company has failed to raise funds from PE firms. Videocon d2h. Best-performing DTH asset in recent times in terms of subscriber growth and share of incremental adds. The company recently attained operational breakeven and is keen to raise capital. Ortel. The Orissa MSO is a regional player with a reach of 450,000 homes. The company is among a few in the industry to adopt a depth-over-width strategy to grow its business. Like You Telecom, Ortel has failed to raise funds through an IPO. The company is looking to raise Rs1 bil. through a mix of rights issue and debt. Tata Sky. News Corp currently holds a 30% stake in Tata Sky, whose operating leverage has improved. Although News Corp might be keen to raise its stake, current cross-media restrictions will be a barrier to majority control.

13 11 ANALYSIS OF TV CONGLOMERATES The path to value creation India s television industry has yet to benefit from significant operating leverage. The combination of digitalization and subscription revenue growth will help boost profitability in the coming years, but not without medium-term capital intensity, a strong approach to ground execution and a profitable rationale on content investment, pay-tv pricing, packaging, sales and marketing. Over the past fiscal, with the notable exception of Sun, a pseudo monopoly in the South, operating margins for most of India s TV majors have been modest. Star and Zee are in the 25% range; Sony is approaching 20%; Dish TV, the leading digital pay-tv distribution platform in the market, is at 26%. Network18 and NDTV were lossmaking over the past fiscal. Contrast this with operating margins for key free and pay-tv players in Indonesia (30-50% on average), Latin America (45-50%), Malaysia (35-40%) and broadcast jewels in Hong Kong and Thailand (45-55%). Significantly, cross-media ownership is fairly relaxed in both Indonesia and Malaysia, allowing vertical integration to flourish in particular and accelerating consolidation. In addition, the depth of the ad market has grown in Indonesia particularly in recent years, while all the key TV networks have backward-integrated into TV content production and generated significant levels of free cash flow. Exhibit 10: Comparison of India versus emerging Asia, profit analysis of TV companies (Ranked by profit margin) Company Market FYE Revenue (US$ mil.) EBITDA (US$ mil.) % Margin Sun India Mar % BEC World Thailand Dec % Surya Citra Media Indonesia Dec % TVB Greater China Dec % MNC Sky Vision Indonesia Dec % Global Mediacom Indonesia Dec % Astro Malaysia Dec-11 1, % MNC Group Indonesia Dec % Emtek Indonesia Dec % ABS CBN Philippines Dec % Dish TV India Mar % Star India India Jun % Zee Entertainment India Mar % Shanghai Media Group China Dec-11 2, % Hathway India Mar % Sony India Mar % TV Today India Mar % NDTV India Mar % Network18 India Mar %

14 12 All of this invariably helps grow valuations and bolster M&A activity. In Indonesia for instance, there has been a sustained rerating of media equities since 2009, which means that the publicly traded values of leading media companies have increased from US$ bil. in 2009 to US$3-4 bil. as of Sept In the meantime, M&A activity has increased as PE investors Ashmore, CVC, Saban and Creador have pumped more capital into broadcast and pay-tv industries. We expect a similar halo of value creation to occur in India over the coming years. M&A activity in the TV sector has been modest in 2012 to date, driven largely and encouragingly by: (1) Big-ticket media consolidation (NW18-RIL) and News Corp s acquisition of ESPN-Star Sports; (2) PE infusion with the Providence acquisition of Star s stake in Hathway Cable; and (3) A cleaner equity structure as Sony bought out various minorities. Going forward, as discussed in Section 2, we envisage more M&A activity in the distribution in particular, especially during with PE firms scaling up in DTH, and strategics potentially opting for cable. Exhibit 11: Major media deals in 2012 Acquirer Target Industry Stake Acquired Amount Paid (US$ mil.) RIL Network18 Broadcasting 0% 340* News Corp ESPN-Star Sports Broadcasting 50% 300 Aditya Birla Group Living Media Group Print Media/ Broadcasting 27.5% 100 Providence Hathway Cable 17.3% 72 Sahara Group DigiCable Cable 90% 52 Exhibit 12: Media values in emerging Asia, Indonesia on the rise Company Market EV* (US$ bil.) Media Nusantara Citra Indonesia 3.6 Zee Entertainment Enterprises India 3.5 BEC World Thailand 3.4 Global Mediacom Indonesia 3.3 Emtek Indonesia 3.2 Television Broadcasts Ltd Hong Kong 2.8 Sun TV Network Ltd India 2.6 Surya Citra Media Indonesia 2.2 Hunan TV & Broadcast Intermediary China 2.0 Dish TV India 1.9 MNC Sky Vision Indonesia 1.8 Phoenix Satellite TV Hong Kong 1.4 Indosiar Indonesia 1.3 Viva Indonesia 0.9 GMA Network Philippines 0.8 Hathway Cable & Datakom India 0.7 ABS-CBN Philippines 0.7 TV18 Broadcast India 0.3 * EV = enterprise value, calcualted from public market capitalization (Sept. 24, 2012) plus net debt or minus cash * Shareholder subscription to NW18 and TV18 will determine the final fund infusion by RIL. Minimum fund infusion by RIL will be Rs17 bil./us$ 340 mil.

15 13 Ranking India s TV conglomerates We scored India s leading television networks on seven critical parameters. Each of these parameters was assigned weight to the degree of its relevance over the next five years. Each network was assigned a score between one and nine (nine being the highest) for each parameter. There is a relationship and overlap between various parameters, thus a summation of weighted scores determined the final ranks of each TV network. The results reflect the relative positioning of India s major television networks as they set to grab the most of a US$15 bil. opportunity by Flagship channels (Weightage: 20). Outside of South India, Hindi GECs form the key driver channels for a TV network in terms of viewership and subscription revenues. A change in political landscape and the revival of the governmentowned cable distribution platform, Arasu, has had an adverse impact on Sun TV, Sun s major flagship channel. Nationalization of cable has allowed players with deep pockets to reinvest heavily into India s largest regional market Tamil Nadu. Yet in spite of this, Sun TV has been able to command >50% viewership over the last 12 months, thereby contributing significantly to the company s revenues and profits. Star continues to dominate the Hindi GEC space with Star Plus (>50% of group profits) and in spite of a mixed performance at Life OK, it will play an important role as a support channel. Since the end of 2012, Zee TV has enjoyed a sharp bounce back in ratings, vying closely for the number-two position with Sony. Importantly, while both Sony and Zee have varying viewership share, Sony has an additional advantage in having SAB as a strong flank channel. Exhibit 13: Comparison of flagship channels Reliance Discovery Disney Turner 200 Zee 150 Star Sun 0 Network18 Sony Bouquet strength (Weightage: 20). This has increasingly become a value-driven metric due to consolidation and M&A amongst aggregators. The acquisition of Eenadu (yet to be completed) will catapult Network18 into the fast-growing profitable regional space, which currently drives profits and margins for market leaders Star and Zee. IBN-Lokmat has been the only regional channel launched by Network18 to date. The addition of Eenadu s regional channels to the portfolio has given Network18 the required ammunition to form its own distribution bouquet, IndiaCast. IndiaCast will act as a catalyst to drive subscription income, while also potentially reducing carriage and placement costs for the network. Star s US$700 mil. bet on the media rights to BCCI cricket over the next few years along with News Corp s US$300 mil. buyout of the other half of of ESPN-Star Sports, are also big moves. The deals provide a valuable anchor ahead of digitalization. Consolidation of cricket rights between two major broadcasters Star and Zee (considering that Sony s IPL has arguably shown a level of fatigue among viewers) will help improve the economics of the sports business. Both networks can also draw synergies from bundled ad sales.

16 14 In conclusion, the acquisition of Eenadu and India cricket rights were the two key properties to have a major impact on the positioning/strength of TV networks. Significantly, Sony, backed by its parent, was a frontrunner to acquire both these key assets, only to have missed out by a narrow margin. The closure of Imagine TV marked Turner s exit from the Hindi GEC space. The network now has its presence limited to the kids genre (which has a mere ~USD 60 mil. market size). Star also exited the news business, having sold it minority stake to ABP group. Exhibit 14: Comparison of bouquet strength The international subscription pie for Indian content has saturated however, and there is huge potential to grab ad dollars in many of the developing countries through new content initiatives in free and pay segments. Having tasted success in international markets like the Middle East (with the recently launched Zee Alwan), Russia and Africa, Zee now has made a conscious effort to invest in content tailored to international audiences outside of the Indian community. It foresees a huge market opportunity as it sets itself to attain a global base of 1 bil. viewers over the next five years (it currently reaches 650 mil. viewers globally). Exhibit 15: Comparison of scalibility Reliance Discovery Disney Turner 200 Zee 150 Star Sun 0 Network18 Sony Scalability (Weightage: 20). In the domestic market, the roll out of DAS will provide scale to broadcast business models. A stabilization in carriage fees will encourage broadcasters to launch new channels that target specific audiences. This will expand the overall advertising and subscription market opportunity. Profits earned can be ploughed back towards improved programming, marketing and technologically advanced content in HD format. On a relative basis, structural changes in the distribution landscape will benefit some of the newer networks such as NW18. Incumbents such as Zee are playing a more long-term game, tapping international audiences outside of the Indian diaspora. Reliance Discovery Disney Turner Zee 150 Star 0 Network18 Sun Sony Content sourcing, IPRs and syndication (Weightage: 10). As digitalization gets underway, we foresee growing demand for value-added services in the form of catch-up TV, movieson-demand, SVOD and domestic/international syndication. Backward integration into content production will help networks limit content cost inflation, while better control over IPRs will help monetize these alternative revenue streams. However, none of the incumbent networks Star, Zee and Sony have made any significant investments into content production.

17 15 Disney s UTV is the only network which has implemented backward-integration into both television and movie content production. For Sun, South India is a high-consumption market for movies. As a result, its entry into movie production through Sun Pictures was critical, though the business has yet to gain scale. Network18 s motion picture division has scaled to a studio model to produce movies per year. The group has also leveraged international alliances and partnerships to enhance its product offering, notably through partnerships with Viacom, CNBC and History. Turner and Discovery have access to successful and proven shows with universal appeal (Kids and Infotainment), the rights to which are held by their global parent companies. This allows them to largely remain focused on distribution and marketing, with some degree of content localization. In the case of channel aggregators, partnerships often work better over alliances. Distribution alliances are fickle and are more linked to the rating performance of key channels. Since its launch, Colors has moved from the One Alliance to Sun18 and formed its own distribution bouquet, IndiaCast, which subsumes Sun18. One would again question Sun s arrangement with Network18, as TV18 acquires Eenadu, Sun s competitor in key south markets. Distribution partnerships on the other hand are more long-term, as illustrated by MSM-Discovery (a JV between Discovery and Sony), which has now completed 10 years. Ownership in channel bouquets provides more control and thus steadiness to network distribution. Exhibit 17: Group companies aiding distribution strength Exhibit 16: Comparison of content sourcing, IPRs and syndication 100 Zee Disney Star 50 Reliance Sun 0 Reliance Discovery Disney 60 Zee Star Sun 0 Sony Discovery Sony Turner Turner Network18 Group companies driving distribution strength (Weightage: 5). Cross-media regulations do not allow networks to capitalize on synergies from vertical and horizontal integration. We therefore assign a lower weightage of 5% to this category. However, due to poor enforcement of the law, networks such as Sun have enjoyed a monopoly in South India. Networks with group companies having a presence in distribution platforms are at an advantage, particularly in launching new niche channels, which require limited reach. Examples include Zee Khana Khazana and Ten Golf. Financial strength and parentage (Weightage: 20). Some of the transactions in 2012 are indicative of the advantage a network has from having a strong parentage. News Corp backed Star s US$700 mil. bet on sports and the acquisition of the 50% of ESPN-Star Sports it did not own. Sony s parent backed its acquisition of minorities because of increasing confidence in the growth trajectory of the business. In 2012 however, the big transaction that stands out is the RIL-Network18-Eenadu combination. In spite of having some strong challenger brands in key genres, the expansion plans

18 16 for the NW18 group came to a halt as the group was saddled with a gross debt of US$300 mil. and loss-making new ventures. However, the deal announced in Q will help address the group s challenges as the Rs40 bil. fund infusion will help the network deleverage while also diversifying its channel portfolio with Eenadu. The structured transaction has been a key driver of the NW18 group s ranking. Incumbent networks, particularly Star and Zee, continue to command higher rankings. In addition to strong parentage, both have healthy balance sheets, and their current operations generate healthy cash flows to fund future growth. Zee for instance is generating cash profits of around US$30 mil. per quarter in addition to its existing cash pile of US$240 mil. Exhibit 18: Comparison of financial strength and parentage Reliance Discovery Disney Turner 200 Zee 150 Star Sun 0 Sony Network18 Future readiness (Weightage: 5). Digitalization will result in rapid changes in the way content is consumed and packaged, but importantly it will bring in addressability to monetize content from multiple revenue streams. Incumbent networks Star, Zee and Sony have realized this potential and have made investments to digitalize their existing content library. In February this year, Zee launched India s first OTT platform Ditto TV. Management expects that there will be minimal overlap Exhibit 19: Comparison of future readiness Reliance between traditional platforms and newer platforms such as OTT, which will target a new set of audiences. NW18 is another network to have an equally strong presence in broadcast and new media businesses, particularly online. Disney s UTV has scaled its content business by foraying into various delivery platforms such as broadcasting, web, mobile and gaming. In 2011, the gaming and interactive vertical alone formed a healthy 19% of the company s total revenues. Final assessment. M&A activity, strong execution and sound strategies have helped drive rankings for Star, Zee, Sony and Network18 (NW18). The lack of progress at Disney and Turner in particular is a sign of deals gone bad (i.e. Turner s closure of Imagine TV) or lack of execution (the TV side of UTV s business post Disney s acquisition). Going forward, the successful implementation of mandatory digitalization will expand the market for the TV industry, but the journey will be painful due to the scale of capital intensity for distribution platforms and a new level of investment required among broadcast networks. We expect bigticket M&A over the next five years, consolidating the industry to three to five larger TV networks. We also expect the composition of the MPA TV.NXT scorecard to change in the coming years as large digital distribution platforms (DTH and potentially cable) transform into powerful gatekeepers and value creators. Discovery Disney Turner Zee Star 0 Sun Sony Network18

19 17 Exhibit 20: Comparison of TV conglomerates Weightage Zee Star Sun Sony Network18 Turner Discovery Reliance Disney Flagship channel Bouquet strength Scalabilty /room for growth Content sourcing, IPRs and syndication Group companies aiding distribution strength Financial strength and parentage Future readiness Weighted scores Zee Star Sun Sony Network18 Turner Discovery Reliance Disney Flagship channel Bouquet strength Scalabilty /room for growth Content sourcing, IPRs and syndication Group companies aiding distribution strength Financial strength and parentage Future readiness Total Final Ranking

20 18 Appendix About Media Parnters Asia Media Partners Asia Ltd. (MPA) is a leading independent provider of analysis on media and telecoms industries. Established in 2001, MPA is known for its expertise in advertising, broadcasting, pay television, broadband and digital media industries. We offer various audiences and clients a number of services, including research, consulting, publishing, online and conferences. Our publications and research reports receive widespread coverage in global media and are used by numerous industry-related groups. In Print, the fortnightly afaqs! Reporter magazine has a controlled circulation model, and reaches over 7,000 of the top decision makers in India s advertising, media and marketing firms. Besides this, it has a wide base of subscribers across the country, plus in B schools and other communication institutes, thanks to its tremendous credibility for its reportage. afaqs! also hosts more than half a dozen industry events besides a large number of other industry interactions during the calendar year. To learn more about MPA, visit To gain more insight into the industries MPA covers, visit and About afaqs! The leader in the Indian advertising, media and marketing community, afaqs! uses news, features, visuals and user-generated content to create a community of advertising, media and marketing professionals on the internet, in print and offline. Online, is the world s second-largest website in this space, with about 270,000 unique visitors and over 250 advertisers. The dominant Indian site also has a strong jobs section. afaqs! offers the best and most effective platform for media firms to communicate to media buyers and clients. That places it in a great position to grow strongly on the back of the strong growth in Indian media. The site is also uniquely placed to leverage on the strong Indian diaspora and expand its footprint to cover key markets in South Asia.