India s Free TV. A game changing opportunity. July 2017

India s Free TV A game changing opportunity July 2017

The FTA revolution is upon us DD Free Dish, the state-run DTH provider, is the largest TV distribution company in the country with over 20m subscribers 1. This is considerably more than national pay TV companies, which average 8m to 16m each 2. With over 80 3 channels currently, DD Free Dish plans to add 104 additional channels by 2017 and eventually reach 256 channels by 2020. The subscriber base of DD Free Dish is projected to reach 40m users 2 in the next 2 3 years. The implementation of the Tariff Order of 2017 could further push the Free TV viewer base to 46m by 2020. DD Free Dish provides free-to-air (FTA) channels, which allow users to watch content without paying a subscription fee. This also provides a cost-effective option to advertisers who target the middle/lower income audiences for their products. Through this paper, we aim to evaluate the emerging trends in the FTA space and opportunities that Free TV provides to marketers. Farokh T. Balsara Sector Leader Media & Entertainment Farokh.balsara@in.ey.com Ashish Pherwani M&E Advisory Ashish.pherwani@in.ey.com 1 DD Direct DTH, 2016 2 EY Analysis 3 DD Free Dish channel list, 2017 2 India s Free TV - A game changing opportunity

Free TV is growing supported by the entire ecosystem The Free TV market in India is poised to grow primarily due to the rise of DD Free Dish, which has now become the largest DTH operator in the country. The availability of increased rural data now thanks to BARC, has provided greater visibility to broadcasters. Broadcasters have now opened up to the idea of providing many FTA offerings. This, in turn, has opened up avenues to advertisers who could not earlier afford the higher ad rates of mainstream GEC channels. The greater visibility on rural viewership has made the FTA option very attractive for Hindi news channels, almost all of which are now FTA. The new tariff order and digitization of DAS IV areas will provide further impetus to Free TV The Hourglass effect Base pack consumers move to base+ packs OR Base pack consumers move to Free TV We expect Free TV to reach 46 mn households by 2020 Growth in Free TV households 46 mn 30 mn mobile DTT opportunity 2016 2020 India s Free TV - A game changing opportunity 3

1 Emerging trends in the FTA market Growing TV households There has been a significant rise in the number of TV households in India (from 119m in 2011 to 183m in 2017 and an expected increase to 200m in 2020 4 ) thanks to the plethora of TV distribution options now available. The market in 2016 was split between Pay DTH (42m), organized cable (50m) and other pay cable (56m), apart from Free Dish and terrestrial television (together 30m). The rise of the DD Free Dish platform Among the DTH operators in the country, DD Free Dish has grown to become the largest with estimated 22m subscribers. This would make it the single largest distribution platform in India today. While there is no concrete data around it, because any customer can buy from a variety of hardware options and commence downlinking the Free Dish feed, DD Free Dish subscribers are expected to cross 40m in the next 2 3 years. This growth in subscriber base has caught the attention of both broadcasters and advertisers today. All large broadcasters, including Star, Zee, Sony and Viacom, have launched their Free Dish-based channels. The content on these channels is similar to that on the broadcasters general entertainment pay channels but is dated by up to a year or even less. Success of channels such as Zee Anmol (with ad revenue of ~INR80cr 5 ) and Sony Pal (with ad revenue of ~INR110cr) has led to even further channel launches by broadcasters, which have now launched FTA film channels on Free Dish as well. Hindi news television, a segment always skewed toward FTA channels, has taken to DD Free Dish in a big way in order to protect its ad revenues and save on the carriage fees charged by distribution companies. Almost all large Hindi news channels are now on the DD Free Dish platform. This, in turn, led to an increase in a channel s reserve price on Free Dish to INR8cr in the bidding round held in 2017. The availability of ABS-2 content ABS Ltd., a satellite operator headquartered in Bermuda, operates a fleet of satellites besides offering end-to-end solutions including DTH, cable TV distribution, cellular 4 Census 2011; Nielsen Micro Marketing & Economics 2015; BARC 2017; EY analysis 5 The Financial Express, 2016 4 India s Free TV - A game changing opportunity

backhaul, VSAT and internet backbone services. ABS hosts two international pay DTH platforms: Nepal s HUMRO TV which delivers pay DTH channels exclusively for viewers in Nepal. REAL VU - Bangladesh offers 112 SD and HD channels delivering Pay DTH services for viewers in Bangladesh. In order to supplement the Real VU and Humro TV DTH platforms, they also provide a downlink of 95 other KU Band Free-To-Air channels, which are not necessarily part of these two DTH platforms. These include SD & HD channels. Any Indian household can currently receive 95 KU Band FTA Channels, free from the ABS-2 satellite. As of now, the ABS-2 platform offers more FTA channels than Free Dish and has emerged as a potential threat to Doordarshan s Free Dish. Since ABS claims not to be servicing viewers in India, it has not applied for a DTH license to the MiB in India. Disaggregation Regulatory changes which led to the dissolution of content aggregators have resulted in weaker channels not being able to piggyback on stronger channels and boquets. This led to many pay channels converting to FTA. Increased visibility: BARC India capturing data for the rural sector In the past, the lack of visibility on rural viewership data prompted both broadcasters and advertisers to focus on urban audiences. However, with ratings agency BARC India 5 now reporting rural viewership data, broadcasters have opened up to the idea of providing their content on FTA and pay channels, which cater to the rural segment. BARC India Reach 6 84 million TV households 99 million TV households 6 BARC India - Average for a period of 22 weeks from Mar-Jul 16 7 The Financial Express, 2016 8 BARC India - Average for a period of 22 weeks from Mar-Jul 16; EY analysis India s Free TV - A game changing opportunity 5

FTA channels viewership share by genre 9 81% 37% 26% 19% Hindi News Hindi GEC Hindi Movies Regional Movies 1% 2% 2% 4% 6% Sports English News Music Regional News Regional GEC 0% 0% 0% 0% English Movies Infotainment English GEC Kids FTA Pay Channels in these genres were launched with the aim of expanding the reach of channels in non-urban and rural areas, as the rural measurement proportion of BARC was increased significantly to 50% of its panel size. Zee Anmol was launched with this objective and it currently has approximately 29m viewers 6. The increase in the number of FTA channels has led to a significant rise in viewership for genres such as Hindi GEC, Hindi movies and, primarily, the Hindi news genre, in which FTA channels command 81% of the total viewership 8. Rural TV viewership contributes 52% 7 to overall viewership. However, it is estimated to contribute 74% of the total viewership of DD Free Dish. 6 BARC India - Average for a period of 22 weeks from Mar-Jul 16 7 The Financial Express, 2016 8 BARC India - Average for a period of 22 weeks from Mar-Jul 16; EY analysis 9 EY Analysis 6 India s Free TV - A game changing opportunity

Segmentation in pricing for advertisers FTA channels have also opened up avenues for advertisers with moderate budgets who could not afford high ad rates 9 for content aired on pay channels such as Zee TV and Star Plus. Broadcasters are adopting a model of segmentation in pricing for advertisers with the objective of being present in the pay market as well as the FTA market. Sun TV adopted a similar strategy for KTV in the South to target non-premium advertisers. Some broadcasters such as India TV are taking a different approach to increase their revenues by increasing their ad rates as advertisers shift focus to capture the under-penetrated non-urban and rural markets. Brands today are striving to drive growth from rural markets. In fact, for mainstream FMCG companies, 35% to 40% 10 of the sales are derived from rural areas. With BARC capturing rural data, the rural viewership is expected to grow and as a result advertising brands and agencies are expected to increase their focus on rural audiences. Hindi news channels shifting to FTA DD Free Dish has emerged as a popular home for Hindi news channels. With increased visibility on rural viewership due to BARC, news channels are finding the subscription-free model more attractive. The ~81% 10 contribution of FTA channels to the total viewership in the Hindi news genre has prompted channels such as NDTV India to move to an ad-only model. These channels have forgone their subscription revenues with the target to offset that loss with a gain in ad revenues. The unstable viewership of Zee News forced it to shift from a pay TV channel to an FTA model. This decision came with a goal to expand the channel s reach and has resulted in a 30% 10 hike in its ad rates. 10 The Financial Express, 2016 India s Free TV - A game changing opportunity 7

2 EY point of view: The road ahead for free television The hourglass effect We believe that customers will get segmented according to their paying capability and product preferences. We have tried to estimate the differences between the customer base today and within 3 years, assuming that the new tariff order and DAS IV will be implemented as per their scheduled timelines. Category Customer Segment 2016 2020 % Mn % Mn A+ OTT customers* 1% 2 2% 4 A Premium + tactical OTT 8% 14 10% 20 B Base + 2 (40+ a-la-carte) 22% 40 22% 44 C Base + 1 (15-40 a-la-carte) 22% 44 47% 85 D Base and up to 15 a-la-carte 18% 36 E Base pack only 5% 9 3% 6 F Free DTH + terrestrial 17% 30 23% 46 100% 180 100% 200 * This is combination of households and individuals, mainly the latter What we see is the hourglass effect wherein base pack customers will either move upward to base + packs, or move down to free television. Several factors are working together in the current environment in 2017, which we believe will lead to a significant growth in free TV viewership over the coming years. These factors include: 1. Digitization of cable TV distribution DAS IV Given the regulatory push toward digitization, the Government of India has mandated the total shutdown of analog cable transmissions from April 2017. In effect, this will require consumers, particularly those in DAS III and IV markets, to make a choice opt for more expensive cable TV options, DTH or free TV options such as terrestrial TV or Free Dish. Given that they would have to invest in hardware (a STB and perhaps also a dish), the more price-conscious customers may opt for free television services in the immediate term. 8 India s Free TV - A game changing opportunity

2. The proposed new tariff order With the base price set by the new tariff order at a maximum of INR130 plus tax for carriage of 100 channels, customers paying INR150 per month or below will now end up losing access to all pay channels they were receiving. In such an event, they would have the option to either pay more to receive pay channels of their choice or decide that free television would be a better option, given the quantum of quality content on it. Broadcasters FTA channel strategy may impact their subscription revenues in the event the move toward free television becomes significant. 3. The fast growth of DD Free Dish Free Dish currently provides over 80 channels and is moving toward 250 channels, many of whom have the same or similar content than pay channels. In addition, recent regulations classifying even more sports events as those of national importance (hence requiring them to be shared with DD) make the Free Dish bouquet formidable competition to pay bouquets. 4. DTT on mobile infrastructure One interesting development relating to mobile television is the advent of digital terrestrial distribution. Since this is a broadcast technology, the key implication will be that consumers whose mobile handsets have the required antenna would not be required to pay any bandwidth charges. Consequently, once the mobile handset ecosystem matures, DTT could also provide a strong addition to free television services. We believe that the factors mentioned above can significantly increase the uptake of free television. We estimate that from the current approximately 30m free television (i.e., Free Dish + terrestrial) households, the free television industry could grow to as large as 46m households by 2020, in addition to consumption on mobile DTT handsets. This change in customer behavior will have a significant impact on FTA and pay television channel uptake, and corresponding spends on subscription income. India s Free TV - A game changing opportunity 9

The next wave: Genres moving to FTA model There is a now a strong case for channels to consider becoming FTA. The vertical axis in the below graph 11 represents FTA channels viewership share by genre. The horizontal axis represents the ad-to-subscription revenue split. The dots marked green represent genres with >50% of revenues from ads and a high FTA penetration. Due to increasing opportunities in the FTA space, networks in these genres are likely to expand their bouquet of FTA channels. The dots marked in blue represent genres with >50% of revenues coming from ads and a low FTA penetration. Due to lower subscription revenues, the networks in these genres, such as regional GEC, regional news and music, are likely to forego their subscription revenue in order to increase their reach, which can lead to an increase in ad revenues. The dots marked in yellow represent genres with <50% of revenues coming from ads and a negligible FTA penetration. Broadcasters in these genres, such as kids and infotainment, may not move to an FTA model due to high dependence on subscription revenues but may launch alternate FTA offerings to capitalize on this new market. 90% 80% Hindi news FTA channels' viewership share by genre 70% 60% 50% 40% 30% 20% 10% 0% Hindi GEC Hindi movies Regional movies Infotainment Regional GEC Regional news English entertainment Kids Sports Music English news 0% 20% 40% 60% 80% 100% Ad to subscription ratio Next wave of FTA channels: Channels with low subscription share may be willing to forgo subscription revenue to increase reach and ad revenue. 11 Industry discussions; EY analysis 10 India s Free TV - A game changing opportunity

Implications of growth in free television Key considerations for broadcasters and distribution companies in the near future will include: Broadcasters Pricing of channels, particularly those that are not leaders in their genres, and determination of whether channels should move to FTA Number of channels to include in base and base+ packs of distributors Carriage fee considerations Creation of free television products, and differentiation of free and paid television products Competition from Free Dish offerings to broadcasters pay channels Increasing audience reach from a DTT perspective Distributors Creating packages for various customer segments, while at the same time convincing customers to pay more for fewer channels Ensuring channels from all broadcasters are present in each popular package Placement of channels in and within appropriate packages Prevention of subscriber migration to free television India s Free TV - A game changing opportunity 11

3 Some ideas for Free TV to consider Listed below are some opportunities we believe Free TV could consider to monetize its customer base. Own channels Free TV has the audience, and it is growing. It could be a good opportunity for Free TV to monetize this audience with negligible content cost by launching more channels. They could use the best content from the existing bouquet or take the large volumes of content created for digital-only platforms such as YouTube, and provide a platform for such content. This will generate additional advertising inventory, which can be sold to advertisers. Music While music is consumed mostly on mobile phones, consumption in homes is limited. By providing music stations through the service, Free Dish can earn either license fees from other radio companies or ad revenues if it decides to run the stations by itself. Ads on the launch page As with other cable and DTH companies, the landing page now generates advertising revenues. This is an income source that Free TV can look at monetizing quickly. 12 India s Free TV - A game changing opportunity

Our M&E practice Our M&E team EY India has a dedicated M&E practice of more than 300 professionals across 15 key segments of the industry. We provide services to many of the country s leading M&E companies as well as to global media giants operating in the country. We have developed a wide range of services, such as entry strategy, private equity placement, due diligence, IT security review, organization structure, performance improvement and tax structuring. This has enabled us to establish a strong presence in each segment of the industry. As your advisors, we can help respond quickly and effectively to the challenges the entertainment industry faces today. Farokh T. Balsara Sector Leader Media & Entertainment Farokh.balsara@in.ey.com Ajay Shah Transaction Advisory Ajay.shah@in.ey.com Rakesh Jariwala Tax Advisory Rakesh.jariwala@in.ey.com Ashish Pherwani Advisory Ashish.pherwani@in.ey.com Govind Ahuja Assurance Govind.ahuja@in.ey.com Mukul Shrivastava Forensics Mukul.shrivastava@in.ey.com Author: Nripendra Singh Design: Biprajeet Chakrabarty Editorial: Tanmay Mathur Jay Sampat Business Development Jay1.sampat@in.ey.com Radhika Pradhan Markets Radhika.pradhan@in.ey.com Our thanks to Partho Dasgupta - BARC and Ashok Venkatramani for their valuable insights.

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