Thursday, March 29, 2012

Ad Breaks to Go When Digitization and Subscription to Channel Grows?

By Anant Rangaswami, Firstpost, Mumbai, March 29, 2012 

Differentiated content, and not advertising revenue, should be the cornerstone of a TV channel's business plan. Addressability and digitisation, for the first time, will transfer the power to the subscriber, who will choose the channels that he wants to watch and will pay for them.

"How often do you get irritated with a commercial break interrupting the film you're watching just at the moment it got exciting? How irritated do you get when the frame of the programme you're watching shrinks as it gets 'surrounded' by a frame that sends out a commercial message? Hey, why is there another ad break? Didn't we just see one? Why are the commercials so LOUD that you jump for the remote control as the ad break begins, and raise the volume as the TV programme begins? Thanks to the ads, a two-hour movie becomes a three-hour viewer experience - is that fair?," Firstpost had written in an article that reported TRAI's move to restrict the advertising time on TV channels in India.

How do broadcasters react? "But broadcasters are not amused by the proposal to put limits on advertising, contained in the telecom and broadcasting watchdog's consultation paper on issues related to advertisements on television. They fear their main source of revenue will be badly hit," reported Hindu BusinessLine.

And, before the broadcasters decide to cry 'foul' and act like victims, let's take a look at the most recent major exercise conducted anywhere in the world on restricting advertising time - in the UK.

In a study titled 'Regulating the quantity of advertising on television', which was published as recently as December 15, 2011, the UK's watchdog, OFCOM, would have faced similar howls of protest - and it did.

"Any changes to advertising minutage regulation could have a significant impact on broadcasters, advertisers and viewers. There have been very different views expressed by different stakeholders on the need for, and nature of, any changes," says the OFCOM paper, highlighting the complexity of the task at hand.

The scenario is not much different in India. Broadcasters, advertisers and viewers will have different views on any proposed change and on the final outcome, whatever it is.

There is, however, one significant difference between the state of the industry in India and in the UK -- the historic business model.

Thanks to the example created by the legacy lead medium, print, media in India has been 'funded' largely by the advertiser. Newspapers, even today, recover a small fraction of their printing, paper and distribution costs from the cover price; forget about news-gathering and other attendant costs. Advertising revenue is the mainstay - and satellite television, when it came to India during the first Gulf war, followed the leader.

The entry of satellite television

When satellite television was launched in India, it was not 'largely' funded - it was funded 100 per cent by the advertiser - and revenues from subscription were non-existent. In the early '90s, we didn't even have the phrases 'Free to air' and 'Pay' to describe channels - which were free to subscribers.

The role of the cable operator and mutual love

The cable operator that all the TV channels love to hate so much today was the catalyst for the growth of satellite television in India. What use was a satellite channel to the consumer unless there was a way for him to receive it on his TV set? Enter the cable operator, who made the investments in dish antennae, cables, decoders, infrastructure, technicians, permissions and bribes, too.

In the first heady days of satellite television, the channels paid cable operators nothing - and the cable operator's only source of income was the subscription fee from the consumer. In turn, the cable operator paid the channels nothing - the channels' revenue was from advertising. Channels and cable operators loved each other.

The explosion of TV channels

By mid-1994, India had the established channels in Zee TV, Star Plus, Prime Sports, BBC and MTV/Channel [V]. Media houses were falling over each other in the race for India; Ashok Advani launched TVI, Raghav Bahl of Television18 brought ABNi to India, Jain TV had launched, Home TV was on the horizon, Sony was making noises to launch, the snubbed-by-STAR MTV was planning to come in on its own.

The cable operators' infrastructure was all analog, which limited the number of channels which could be carried with clarity - and we saw the beginnings of problems of 'carriage' (which I'll come to later).

Spoiling the cable operator

Zee and the channels of the STAR bouquet were all beamed from a single satellite - AsiaSat - which meant that all, together, needed just one satellite receiver/dish. The cable operator was reluctant to invest in a new dish which was receiving just a single channel - such as Jain TV or ABNi. The broadcasters needed the operators to carry their channels - and smothered them with love - in the form of free dishes and receivers.

The impact of STAR Movies

If this wasn't bad enough, a courageous STAR decided to launch the first of India's paid, encrypted digital channels - marking the beginning of the animosity between the cable operators and the broadcasters in a long phase that saw the dominance of the cable operator and the genesis of the leakage of revenue from subscribers.

STAR Movies also marked a milestone in how the business would be funded.

STAR Movies was the first pay channel in India. The signal was encrypted, and the cable operator required a decoder to unscramble the signal before it was transmitted to the subscriber. The cable operator would now have to pay a fixed sum per month per subscriber for the channel.

However, there was no infrastructure for the cable operator to re-scramble the signal forward - all of the subscribers of an operator who subscribed to STAR Movies would receive the channel. While the operator would ask the subscribers to pay 'extra' for STAR Movies (in addition to the fixed monthly sum he charged for the FTA channels), there was no mechanism for him to disconnect only STAR Movies.

This phenomenon gave rise to new TV jargon - 'declaration'. Operators and distribution executives would agree on a number of subscribers, and this 'declaration' would be the basis for the revenue to STAR Movies (and, later, to all pay channels). Operators routinely under-declared - and the revenue leakage began in earnest.

The first commitment to limiting advertising time on pay channels

STAR Movies launched in India as a pay channel - with a single, 60-second 'interval' for advertising. Let me re-run this: just a SINGLE break in the entire duration of the movie and just 60 seconds in that break.

The reasoning was lofty: this was a pay channel and viewers deserved not to be disturbed by ads.

Today's protestors seem to have forgotten those lofty thoughts and ideals...

Don't antagonise the cable operator

Because the broadcasters did not invest in distribution infrastructure (in the larger sense; they did in the case of Hathway), they had little control over the cable operator. As the cable infrastructure collapsed with the launches of new channels, there were only so many frequencies available to carry clear audio and video - and the demand/supply equation tilted squarely in favour of the operator. If a channel wanted to be carried on the 'clear' frequencies (I will refrain from using jargon), the cable operator agreed to do so only if he was paid a 'premium' for the position. Competition forced newcomers and incumbents to outbid each other in the fight for premium position.

As more channels launched, things got worse - channels had to pay a CARRIAGE fee to operators - pay and you will be carried; don't and you won't.

In such an environment, pay channels such as STAR Movies struggled to get operators to increase the number of declared subscribers --- and the leak became a flood. The compunction was to appease the cable operators at all costs, as that's where the power lay - with the cable operator, not with the broadcaster or the viewer.

Advertising is everything

By now, STAR Movies had abandoned all thoughts of near ad-free broadcast, as competition in the movie space had caused the cost of acquisition to sky-rocket. New costs such as carriage fees and premium for frequencies had emerged.

The only hope was to increase revenue from advertising.

And competition, growing each month, meant that the yields were decreasing, which meant that the only way to increase revenue was to increase the number of minutes of advertising time, which is what the TRAI is concerned about.

And so it went, till Dish TV and Tata Sky were launched

In 2004, the first signs of a shift in the power equation were seen with the launch of the first direct-to-home (DTH) service in India, Dish TV, closely followed by the launch of Tata Sky.

It marked the beginning of the end of the cable operator as the consumer could now bypass the operator, his whims and fancies, and poor quality signals, at a similar cost. More importantly, DTH brought with it addressability and measurement, which resulted in channels getting paid for every single consumer who had subscribed to it.

The impact of digitisation on revenues

Let's take a look at what the revenue pie for a particular broadcaster looks like: "Zee has a number of things going in its favour. Subscriptions for both DTH and cable are robust. The company is looking at better deals with cable operators in unison with STAR TV and expects better realisations when DTH comes up for renewal. Subscriptions account for 44 per cent of Zee's total revenue. Zee's subscription revenue originates from three nearly equally-split sources: DTH (36 per cent of subscription revenue); domestic cable (32 per cent); and international subscriptions (32 per cent)," says Value Research Online, October 2011.

Domestic DTH, alone, then contributes approximately 16 per cent of the entire revenues of the channel. While it must be mentioned that, among all the broadcasters, Zee's distribution story is the best, the general positive growth trend is common.

Let's take a look at what the growth looks like:

Source: FICCI KPMG Report 2011

It is digital which is measurable, which is spurring the growth of the entire category, which, by direct implication, means that the TV channels have more and more predictable revenue from this head, reducing the pressure on revenue from advertising sales.

Does digitisation reduce the pressure on ad sales? The viewer is king!

That's the rub: it does and it doesn't.

Addressability and digitisation transfer the power to another entity - for the first time, it is the subscriber who is king. The subscriber will choose the channels that he wants to watch and will pay for them - while he will not pay a farthing for the channels he does not want to watch.

In essence, the channels which prove popular will see significant revenues in a digital pay environment, and the channels with less than compelling content will actually see their subscription revenues dip.

And that's the crux of the current protest by broadcasters

There can be no case, if one looks at practices and regulations elsewhere in the world, of unlimited advertising time. You can get a sense of what prevails generally in Europe and specifically in the UK here.


Digitisation means more predictable revenue for broadcasters.

Digital homes will outnumber analog homes in India by 2013.

As a consequence, income from subscriber revenue is growing dramatically - and the dependence on revenue from advertising is decreasing - but only for the channels that consumers find favour with.

What increasing minuteage will do is to allow channels that perform poorly to continue to survive - and cause the yields for all channels to stay under pressure. It is only the poor performers who need endless inventory to sell - not the better channels.

What increased secondage will do is to allow television in India to go the same way that newspapers have gone - create a business plan which is unviable in the long run, which constantly puts pressure on advertising yields.

Astonishingly, the reason for a TV channel to survive should be differentiated content, and differentiated content should be the cornerstone of the business plan.

By keeping the cover prices low, newspapers demonstrate little or no confidence in what should be their raison d'être - superior content. And, TV wants to do the same.

The TRAI proposal is a rescue - not a punishment...

The writer is consultant, Firstpost.

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