Indian Entertainment Industry Focus 2010

Foreword
The Indian entertainment industry is on the threshold of emerging as a large

market globally. Future growth of the industry is expected to be led by rising
spends on entertainment by a growing Indian middle class, regulatory initiatives,
increased corporate investments and the industry's dynamic initiatives to make
strategic structural corrections to grow. In addition to the Indian middle class’
enhanced spends projected towards entertainment, the rising global interest in
Indian content is expected to fuel growth in this industry.
With this focus, Confederation of Indian Industry (CII) requested KPMG to initiate
this study on the key sectors: films, television, music and radio, highlighting its
potential and key trends to be expected with sharing insights on developments,
impact and opportunities.
The report, an initiative under CII's “India – The Big Picture” focus is an effort to
present a critical analysis of the sectoral constraints faced by the industry that are
impediments to its growth, the need for concerted action and hence achieve its
true potential. One of the key imperatives that can realise this potential, as
pointed out in this report, is the need for focus and effective collaboration
between the key stakeholders.
The analyses presented in the report have been arrived at through a combination
of KPMG's in-house knowledge base of the Indian Entertainment Industry and
extensive discussions with key members of the CII Entertainment Committee
and other industry experts. CII takes this opportunity to thank Rajesh Jain and his
team from KPMG, industry members and the CII Entertainment Committee
members, for making this endeavour possible and sharing the long-term vision for
the industry.
Subhash Ghai
Chairman
CII National Entertainment Committee
Message from the CII President
The Confederation of Indian Industry (CII) is taking a lead in the growth and
development of India's entertainment industry. CII under the guidance of
Mr Subhash Ghai, Chairman of the Entertainment Committee and Mr Bobby Bedi,
Co-Chairman, is driving several initiatives under the umbrella of “India – The Big
Picture” - a mother brand - created especially for organising events and seminars
to increase visibility of the Indian entertainment industry in the global
marketplace. Over the past few years, CII has organised major events,
EnterMedia 2002, CineMint 2003, India Pavilion at Cannes Film Festival 2003 and
2004, Film Bazaar at the International Film Festival of India 2002, 2003 and 2004,
in addition to various delegations to film markets and festivals, workshops, and
interaction with Central and State governments on policy.
The spend on entertainment in India is significantly lower than most advanced

countries, yet the growing middle class exhibits a greater propensity to spend on
entertainment, when we consider the entertainment spend as a percentage of
per capita spend. As the Indian economy grows, the rest of the population is
moving towards a higher standard of living. It is this growing consuming class
with the propensity to spend that will drive the growth of the Indian
entertainment industry.
The entertainment industry in India has the potential to be the next 'sunrise'
industry and is undergoing significant changes. Increasingly, the Indian
entertainment industry is being influenced by international trends and
developments. The industry is steadily moving towards corporatisation and
globalised markets.
With this background CII, in partnership with KPMG, has brought out a report:
“Indian entertainment industry - Focus 2010: Dreams to reality”, providing
In-depth analysis of its key constituent segments television, films, radio and
music. The report is aimed to assist industry to get an analytical understanding of
the entertainment sector.
CII is committed to facilitate the Indian entertainment industry to achieve new

levels of success.
Sunil Kant Munjal

President
Confederation of Indian Industry
An action plan for the Indian
entertainment industry
India ranks among the top five economies of the world in terms of purchasing
power parity, while its GDP ranks eleventh in absolute terms. Combined with the
fact that India has the second largest population in the world with over a billion
people, this makes India one of the most exciting marketplaces for any consumer
products or services industry.
Given the average Indian's cultural affinity for entertainment, the Indian
entertainment industry's growing contribution to the economy cannot be
understated.
KPMG and CII have come together to create this vision document on the sector
which aims to provide a critical evaluation of the Indian entertainment industry,
with in-depth analysis of its constituent segments - television, films, radio and
music.
The report evaluates whether the industry's potential can become a reality if the
various participants, including content providers, distributors, infrastructure and
technology providers, investors and the Indian government, work together with a
shared vision to address the issues and constraints faced. In this context, the
report articulates the KPMG-CII 10/10 Charter. The charter aims to form the
strategic blueprint for the industry and the government to undertake concerted
action that will result in strong growth based on stable fundamentals.
We trust that this report will be useful to all the stakeholders as well as to those
tracking the Indian entertainment industry.
Ian Gomes
Country Managing Director
KPMG, India
Contents
Executive summary 1
Industry overview 11
Television 23
Film 45
Music 81
Radio 93
Bridging the gap 107
The tax perspective 145

Executive summary
Let the fun begin

Over the last few years, there have been discussions on the Indian entertainment
industry being on the verge of take-off, powered by new delivery platforms and
technological breakthroughs, increasing content variety and favourable regulatory
initiatives. This is expected to transform the entertainment landscape, with more
players entering and traditional players being forced to adapt or perish. One can
already witness changes that have the potential to alter the industry structure.
New delivery platforms and technological breakthroughs: Increasing penetration

of new delivery platforms is one of the key drivers of the media and
entertainment industry today, that has the potential to change the way people
receive content. These platforms, resulting from fundamental technological
breakthroughs, are likely to see most of the action in next few years. For example,
the spread of inexpensive and stable storage media will also enable people to
store content and view it at their convenience. Some other examples are:
! Introduction of DTH and IP-TV
! Digital distribution of films
! Immersive content media like IMAX theatres
! Coming of age of Satellite Radio and FM Radio
! Emergence of new technologies like podcasting, etc
Together, these are expected to change the viewing habits of people.
Increasing content variety: New forms of content will emerge to cater to select
viewers, as the industry evolves. Content like community radio and local
television, that were unviable earlier, will also emerge stronger through new
delivery formats. Moreover, content innovation will be necessary to sustain the
interest of the increasingly jaded urban population. A few instances of rising
content diversity are:
! Newer programming categories like reality television,
! Crossover content in music and films,
! Niche programming on radio like sports and comedy,
! Newer genres like lifestyle television, religion channels, etc.
Regulatory initiatives: The regulatory framework for media is still evolving. Looking
at the policies announced by TRAI, it seems that a liberal framework is likely to be
developed in order to allow the industry to flourish. Alongside regulating
broadcasting and distribution, it will be important to create stronger protection
mechanisms for copyrights and royalties. If intellectual property is protected to a
fair extent, the industry could capture far greater value, giving its growth rate a
significant boost.
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A few examples of such regulatory actions are:
! An implementable regulatory framework for introducing addressability of
cable television
! Policy framework for DTH, satellite radio and community radio
! Migration to a revenue sharing regime in FM radio
! Superior copyright protection for films, music and home video, etc
The past and the future

The entertainment industry is thriving on the current economic upswing and is
currently estimated at INR 222 billion. Due to its sheer size, television has been
the main driver for the industry's growth, contributing 62 percent of the overall
industry's growth. Films contributed another 27 percent, while other segments
like music, radio, live entertainment and interactive gaming constitute the balance
11 percent.
Growth of the entertainment industry (INR billion)
588
515
432
371
309
262
196 222
2003 2004 2005E 2006E 2007E 2008E 2009E 2010E
Source: KPMG Research
Propelled by innovation across its value chain and a series of enabling regulatory
actions, the entertainment industry is expected to grow annually at almost 18
percent to reach around INR 588 billion by 2010. However, even with such growth,
it could be just scratching the surface of the Indian market's true potential.
Reaching this targeted growth rate will not be easy for the sector. Television
sector has witnessed a significant bit of transparency, process orientation and
discipline, except for the last-mile which is completely fragmented. The film
sector, on the other hand, still remains relatively opaque and persona-driven. Over
the past few years, the film industry has made some progress in getting
institutional and corporatised funding. However, the progress on this front has not
been as dramatic as had been expected when the institutional funding norms for
films were relaxed a few years ago. Even though different sources unanimously
agree that the entertainment industry is a sunrise sector, it has seen no major
fund-raising efforts, apart from television content and broadcasting where the
impact of professionalism and organised financing is evident.
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Fo c u s 2 010 : D r e a m s t o r e a l i t y
The industry growth drivers
Over the past decade, India has been the second fastest growing economy in the
world. In 2004, it grew by 8.2 percent, breaching the psychological 8 percent
barrier for the first time. In terms of purchasing power parity, it is already the
fourth largest economy in the world. Most major global companies are of the
opinion that it will become a key market in the years to come.
As the Indian economy continues growing, the Indian middle class will also
expand significantly. Compared to other nations, the 300 million strong Indian
middle class allocates a higher percentage of its monthly expenditure on
entertainment. The increasing consumerism of middle-class India is seen from the
sharp growth in the sales for various products like automobiles, colour television
sets and mobile phones and the burgeoning increase in credit cards and personal
loans. There is an increase in the direct consumer spends on entertainment and
advertising revenues have also been on the rise.
The industry is ready to
enter a second stage of With the average Indian getting younger, and hence more likely to spend on non-
growth, powered by essentials, the entertainment industry has the potential to grow explosively in the
future.
technology and an enabling
Digital platforms will drive the next wave of growth
regulatory environment
First wave of growth Second wave of growth
Availability of new products and services
DTH IP-TV
PDA
3G mobile Wireless Interactive
Basic analog broadband television
cable Console
CD, CD-ROM
Pay-per-view
Music Broadband
Single cassettes internet
screen
theatres FM radio
Terrestrial Multiplexes
television Multimedia
Vinyl records PC
AM radio
Spending power and awareness

The forthcoming metamorphosis

The entertainment industry is now at an inflection point. The earlier phase of
growth has run its course. Now the industry is ready to enter a second stage of
growth powered by the twin engines of technology (availability of quality
infrastructure and the accelerated penetration of digital connectivity) and an
enabling regulatory environment.
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A panoramic view
The coming of age of the The coming of age of the television sector has been the primary driver of the
growth that the entertainment industry has seen over the last decade. The
television sector has been private sector enterprise seen across the television value chain in the nineties
the primary driver of the drove the sector to newer heights. It is now the most important component of
growth of the entertainment the entertainment industry, contributing over 60 percent of its revenues. It is
expected to continue powering the industry in the digital era, through various
industry innovations like DTH, interactive television, etc.
Though in revenue terms, films contribute just 27 percent of the entertainment

industry, its visibility and impact is much more than this figure suggests. It is also
a major driver for other sectors like music, live entertainment and television. It
was accorded the status of an industry in 2000. Since then, some progress has
been made in developing transparency and professionalism in this sector.
Music, radio and other emerging segments like animation, interactive gaming and
live entertainment together account for remaining 12-13 percent of entertainment
revenue.
Segment-wise composition of the entertainment industry (INR billion)

Segment-wise break-down 2003 2004 2005E 2006E 2007E 2008E 2009E 2010E
Television 122 139 164 189 228 266 325 371
Film 52 59 69 83 99 114 129 143
Music 10 10 10 11 11 11 12 13
Radio 2 2 3 4 5 6 7 8
Others (live entertainment, interactive games, etc.) 9 11 16 23 30 39 48 60
Gross unadjusted revenues 195 222 261 309 373 436 521 595
Less: overlap (sale of film broadcast and music rights) netted off
7 6 7 8 11 13 16 18
Add: overseas' distributor's margin from sale of Indian films 8 8 8 7 8 9 10 11
Entertainment revenues at retail value 196 222 262 309 371 432 515 588
Note: The summation of the figures may not match due to rounding off
Piracy and revenue losses at the last-mile are the bane of the entertainment
industry. They prevent the rightful owners of the content from realising its full
value. All sectors of the industry, except radio, suffer from these twin
predicaments in some way or the other. Currently, such losses are estimated at
INR 4.3 billion, which amounts to over 40 percent of the industry's total revenues.
While such losses are expected to continue for another two to three years, a
reversal is expected eventually as a result of a combination of a technology push
(with a wide repertoire of film and music becoming available through a variety of
legitimate and convenient platforms and options) and a demand pull (with
increased internet penetration and the advent of broadband).
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Television
With total revenues of INR 139 billion, television is the goliath of the
entertainment industry. It is now ready to advance to the next stage of its
evolution, grasping the opportunities presented by the digital age, which will
completely change the home entertainment landscape. In the process, it is
expected to continue its rapid growth and reach INR 371 billion by 2010. Some of
the transformational changes are:
! Additional distribution platforms: The last-mile of television distribution will

see a lot of action in the near future due to entry of new Direct to Home
(DTH) broadcasters, Internet Protocol based Television (IP-TV), broadcasting
services using Digital Subscriber Line (DSL) technologies, etc. They will also
give broadcasters direct access to consumers by enabling them with the
ability to provide customised value-added services, such as video on
demand.
Presently the distribution of subscription revenues is heavily skewed towards

the cable operator because of lack of transparency in the declaration of
subscribers by the Local Cable Operator to the pay television broadcaster.
The introduction of these new platforms and the consequent addressability
will facilitate a more equitable distribution of revenues.
! More entrants in niche genres offering additional content variety to the

viewer: Niche genres have significantly strengthened their value proposition
and more entrants are expected in spaces like animation, business and
lifestyle, among others.
! Conducive and liberalising regulatory intervention: A beginning has already

been made through an amendment of the Telecom Regulatory Authority of
India Act. This is expected to deliver addressability in the currently
fragmented distribution market, thereby increasing broadcaster's shares of
revenue and encouraging greater participation.
Films
Though films contribute just 27 percent to the entertainment revenues, they form
the heart of this industry. Indian films, especially the mainstream Hindi film
industry (Bollywood) dominate segments like music and live entertainment as
well as television, where popular films and film-based programmes attract the
highest viewership.
Compared to television, this sector is rather unorganised and individualistic, with

a low level of discipline and process orientation. This, along with the fact that it
was not recognised as an industry as late as 2000, restricted its access to
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institutional funding and forced it to rely on other sources that charged usurious
rates of interest.
In the recent years, though there has been a distinct shift in the mindset and the
willingness to tap institutional debt and equity funds. Some of India's largest
corporate houses have entered this sector and large international studios are
reportedly evaluating the Indian opportunity. However, the lack of transparency
and discipline is preventing them from fully tapping this opportunity.
The film industry is at a cusp in its evolutionary path. If conventional players are
able to implement the changes needed to unlock its growth potential, the second
phase of corporate and institutional growth could see the industry grow at around
16 percent annually to reach INR 143 billion in six years.
Music
The future growth of music The Indian music sector is quite unique compared to other global markets. Songs
from new Hindi films comprise 40 percent of the total industry revenue and the
industry will come from
box office popularity of the film typically drives sales.
non-phyical formats like
digital downloads, royalty In India, growing piracy and free downloads have reduced music buying.
Consequently, the industry has shrunk to around INR 10 billion from around INR
income and ringtones 13.5 billion, three years ago. The silver lining is that though music buying from
legitimate sources might have reduced, the delivery of music through new
formats, like FM radio, internet and mobile phones has actually increased interest
in music.
The future growth is likely to come from non-physical formats like digital
downloads, royalty income, ringtones, etc. The rollout of additional distribution
platforms like DTH, digital cable and IP-TV with the growing popularity of large
format retail stores will create many more channels selling music. Based on the
current trends, the industry is expected to grow only moderately to INR 13 billion
in 2010. With the right technology and regulatory push to curb piracy, it has the
potential of achieving a double digit growth.
Radio
Though radio reaches out to 99 percent of India's population and is considered to
be the most cost-effective mass medium, it was only recently that private
participants were allowed to enter ths space with a view to unlocking the latent
commercial potential. With private FM radio channels rolling out in several cities,
the long stagnant advertisement revenues from radio have doubled in two years.
Compared with other nations, radio currently has a very small share of the total
advertising pie in India. This is indicative of the promise it holds if the current and
proposed licensees are allowed to migrate from the current stifling and unviable
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licence fee structure to a revenue sharing regime, and if foreign direct investment
is allowed.
Share of radio in the total advertising pie (In percentage)
Country Share of radio in advertising
India 2
Sri Lanka 21
USA 13
Spain 9
World 8
Going forward, enabling regulation that allows radio to develop in its fledgling
years and technology-driven policy initiatives like introduction of satellite radio can
help it grow exponentially. Additionally, with the introduction of new genres in
programming with tailored content, the number of listeners are likely to increase;
and radio could provide an efficient mechanism to reach out to niche consumer
segments.
Emerging opportunities in the entertainment space

Apart from the second wave of growth that various sectors of Indian
entertainment industry are set to witness, there are emerging opportunities
spanning across genres and markets. Some of the more interesting areas to look
out for are:
Animation: India's large pool of software talent has made it an appropriate

resource base to develop animation and graphics-heavy content. Many
international organisations outsource their animation requirements to leading
Indian software players. As the industry grows and establishes its quality
credentials, India will emerge as a serious animation hub.
Outsourced production facilities: With the relentless rise in Hollywood film

budgets, the pressure on cost control is also increasing. India can tap this
opportunity by offering Hollywood an overall low cost structure combined with
high-quality technical talent and production facilities. However, significant
investment in infrastructure and equipment are required to be made before this
becomes a reality.
Organised home video: The Indian market for home video entertainment - VHS
tape, VCD or DVD, is largely unorganised with mainly local outlets. A demand for
quality and convenience remains to be exploited by large organised retail players,
who could leverage economies of scale in content procurement and distribution.
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Leisure entertainment like theme parks: Till date, outdoor entertainment in India
has seen limited action with few significant investments. This is changing as
leading international players are exploring the Indian opportunity. The challenge
here will be providing a cost-effective and profitable value proposition to the
Indian consumer.
Live entertainment: The live entertainment industry in India is largely unorganised

with few players having the requisite critical mass. The gradual reduction of
entertainment tax across states will make the sector more attractive, drawing in
large corporates and multinationals. This is likely to result in increased marketing
investments and creation of world-class infrastructure like convention centres.
Going forward, there could be collaboration with other constituents of the
entertainment industry, like films, television and music.
Reaching for the heights - A need for action

The Indian entertainment industry has matured significantly in the past decade to
A number of factors evolve into a truly multimedia industry. Its fundamentals indicate strong growth in
the future. However a number of factors continue to hold the industry back and
continue to hold the significant efforts still need to be undertaken. Based on a thorough understanding
industry back and of the industry, the interaction between its drivers and discussions with various
significant efforts still stakeholders, this report articulates a 'Charter for Change' by all the stakeholders
that can help the industry to move into overdrive.
need to be undertaken
As the stakeholders are responsible for championing growth, the report classifies
these initiatives for action by two main categories of stakeholders:
! The industry players and
! The Indian government
The importance of this stakeholder classification is two-fold:

! It allocates the responsibility for championing the cause and implementing
the change explicitly with a particular set of stakeholders, leaving no
ambiguity for responsibility for change
! It makes it extremely clear that the industry itself will need to wake up to the
realities of a changing and dynamic environment
The industry initiatives can be grouped under two major heads:

! Improving operational effectiveness
- Raising organisational efficiency through tightly-run projects
- Improving consumer connect
- Developing transparency and process-orientation
! Maximising revenue earnings
- Building alternative revenue streams
- Developing new markets through aggressive promotions
- Leveraging technology
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The evolutionary process followed by different segments of the industry defines
the need, nature and rationale for such changes. Consequently, the nature and
scale of the issues that they face presently differ, since the stage and pace of
evolution and the willingness to evolve vary widely between segments. The
nature of interventions required, therefore, range from correctional measures and
market development in the case of certain segments to yield improvement and
institutionalisation in the case of others.
The government initiatives can also be classified into two categories:

! Assisting structural correction of the industry
- Evolving a framework to regulate cross media / value chain holdings
- Rationalising last-mile licensing
- Providing a level playing field for competing value chains.
The realisation of ! Developing a conducive environment for growth
- Liberalising programming code and censorship laws
opportunities would depend - Constituting a national anti-piracy force
on the aggressiveness of - Establishing a unified regulator
the industry players and
These regulatory initiatives will acquire different levels of meaning and
sagacity of policy makers importance for various sectors of the entertainment industry, once again based
and regulators on its position in its life cycle and the prevailing market dynamics.
The Indian entertainment industry has the opportunity to enter an exciting phase
of growth driven by favourable socio-economic changes and smarter distribution
technologies. The realisation of such opportunities would depend on the
aggressiveness of the industry players and sagacity of policy makers and
regulators. The suggested stakeholder charter is intended as a strategic blueprint
for the industry to undertake concerted action that could result in a stronger
sustainable growth.
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Industry overview
Industry overview
The macro-economic environment

Consistent commitment to economic reform over the last decade has spurred the
steady growth of the Indian economy. The emphasis on creating an enabling
environment for investment and the inherent potential of the Indian economy
have together pushed India's annual Gross Domestic Product (GDP) growth rate
beyond 8 percent.
GDP growth rate (In percentage)

9
0
92-93 93-94 94-95 95-96 96-97 97-98 98-99 99-00 00-01 01-02 02-03 03-04
Source: Reserve Bank of India
While India's GDP ranks eleventh in the world in absolute terms, it ranks among
the top five economies of the world when assessed in terms of purchasing power
A growing consuming class parity. It is the growing consuming class with the proclivity to spend that will drive
the growth of the Indian entertainment industry. Adding to this positive outlook is
with an increased
the fact that the average Indian is getting younger and is showing a greater
propensity to spend will propensity to indulge and entertain himself. Moreover, there are over 20 million
drive the growth of the Indians living abroad who are increasingly opting for India-oriented entertainment,
as the availability of such content increases. Globally, a clutch of international
Indian entertainment
films with Indian content, themes and performers are receiving wide visibility and
industry acclaim. This broad acceptance of Indian entertainment is likely to give a further
fillip to the expansion of this industry.
To be able to appreciate the contours of this industry, it would be useful to take a

closer look at the key drivers of the entertainment sector.
Regulation Consumerism
Technology Key Advertising

drivers spend
Pr i
cin tent
g Con
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Consumerism and demographics
The emergence of the Indian middle class with greater earning power and a
higher disposable income is one of the key factors that will drive the growth of
the Indian entertainment sector. Demographic analysis clearly shows the
evidence of this growth. The consumption chart below indicates the continued
progression of people into higher income and consumption segments.
Rise of India’s earning and consuming classes

As the average Indian’s The Classes 1994-95 1999-00 2005-06E
basic needs are met, his Rich

(Above USD 4600) 1 million 3 million 6 million
propensity to spend on households households households
discretionary items, such

Consuming
66 million 75 million
as entertainment, increases (USD 970 - 4600)
households
29 million households
households
Climbers 66 million 78 million

(USD 470 - 970) households households
48 million
households
Aspirants
(USD 340 - 470)
48 million 32 million 33 million
households households households
Destitutes
(Less than USD 340)
32 million 24 million 17 million
households households households
Source: NCAER
A number of economic trends are testimony to this advancement:

! Automobile sales are rising across the country. In two wheeler sales, India
now ranks second in the world, while car sales are over 1 million per annum,
growing at about 25 percent annually.
! India is the sixth largest market for mobile handsets (16 million units per
annum) and is growing at 50 percent a year.
! The country is the fifth largest market for colour televisions and is growing at
25 percent per annum.
As the average Indian gets richer and his more compelling needs are met, his
propensity to spend on discretionary items such as entertainment increases.
Further, as his consumption of various goods and services rises, companies
would try to reach out to him through more marketing and advertising. Higher
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demand and an increased investment would result in an expansion of the
entertainment industry in the years to come.
A non-homogenous market
As the Indian entertainment market grows, it is essential to recognise the
heterogenous nature of the market. All too often, the specific appetite of certain
segments such as the rural population, women and children, is under-estimated
and their financial value proposition continues to be under-recognised.
Illustratively, here are some important facts about the rural sector:
! There are nearly 42,000 ‘haats’ (rural supermarkets) in India.
! In 2002-03, LIC sold 50 percent of its policies in rural India.
! Small towns and villages account for over one million cellular telephone
users.
! Of the 25 million households that bought television sets over the last three
years, 19 million, or 77 percent were rural households.
! Of the 20 million who have signed up for a popular horizontal portal, e-
commerce and free mail service, 60 percent are from small towns. Of the
100,000 persons that have transacted on its shopping site, 50 percent are
from small towns.
Companies and businesses Companies and businesses that have managed to differentially cater to the
varying segments of Indian population have benefited. As a corollary, the
that have managed to
entertainment sector too has begun to witness the advent of a broader set of
differentially cater to the offerings which are aimed for specific segments: e.g. television channels for
varying segments of the children. On the other hand, the ‘children's films’ genre, for instance, has yet to
grow and mature in India.
population have benefitted
in the long run There is a case for a proactive and sustained targeting of specific, niche segments
of the market. In fact, given the size and potential of India's niche segments,
niche may be a word which is likely to be replaced soon.
Advertising spend
As per industry estimates, the total advertising spend in India in 2004 was
approximately INR 118 billion, a growth of 13.4 percent over the last year.
However, India continues to have a low 'advertising spend to GDP' ratios
compared to other economies, underscoring the untapped potential.
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Relative advertising spend for various countries (USD billion)
GDP Total ad spend Ad spend to GDP
Australia 412 4 1.0%

China 904 6 0.6%
Hong Kong 164 4 2.1%
India 485 2 0.5%
Malaysia 88 1 1.0%
Singapore 86 1 0.9%
South Korea 477 4 0.8%
USA 10,384 134 1.3%
France 132 1 0.8%
Germany 1,984 16 0.8%
United Kingdom 1,560 14 0.9%
India continues to have one In 2004, the advertising spend for India stood at 0.50 percent of the GDP, up from
0.48 percent the previous year. This is expected to increase significantly due to
of the lowest ad spend to
rising consumerism and growing interest from global brands attracted by this
GDP ratios, underscoring its huge and expanding market.
untapped potential
Total advertising spend and GDP (In percentage)
0.54
0.53
0.53
0.52
0.52
0.51
0.50
0.48
2003 2004 2005E 2006E 2007E 2008E 2009E 2010E

Given the increasing number of media channels that consumers are exposed to,
brands will have to advertise more frequently and across more channels to
generate brand recall. As television channels have multiplied and the content
available has become more diverse in the last decade, their viewership has
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increased, niche channels have emerged targeting specific demographic
segments and the cost of advertising on television has reduced.
Number of brands advertised on television

12759
10914
8994
7875 8041
7673
6830
4774
4496
3906 3973
1994 1995 1996 1997 1997 1999 2000 2001 2002 2003 2004
Source: TAM Adex
While the broadcasters can dwell on this shared optimism, they must also
recognise that advertising budgets are very sensitive to economic downturns.
Advertising budgets are not only easily brought down, but the productivity of such
expenses is also challenged. Companies are increasingly demanding their
advertising agencies to link their fees to performance indicators such as sales
increments. With increasing access to state-of-the-art technologies,
addressability issues are being put to test, thereby exposing the limitations of
current media research findings and measuring the true efficacy of media.
Content
Any new media market attracts an initial swell of content players. Such a scenario
invariably leads to a stage where the smaller players find it unviable to continue
and are eventually weeded out. After the initial shakeout, the industry
consolidates and grows until it reaches a stage of maturity. Thereafter, in a stable
environment, it is the quality of content, with an accentuation on innovation and
creativity that drives the industry.
In the television medium, the different genres are in different stages of their life
cycle. Several channels have emerged recently in the space of children's
entertainment and education. The news channels are in the next stage of
evolution with an influx of players in the last two years, but market limitations and
more transparent viewership patterns will lead to an inevitable shakeout. Up the
maturity curve is the mass entertainment genre, which has established itself with
3-4 major players and the quality of programming (including innovative formats)
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determining their fortunes. With the introduction of newer distribution channels,
such as DTH and IP-TV, the demand for premium/ alternate content will increase
and this is expected to spur the growth of new genres such as education,
teenage entertainment, mature content (subject to liberalisation of the
programming code), etc.
The number of films With a legacy of over 50 years and 1000 films a year, the Indian film industry has
reached a phase where the focus is on the quality of content. The increase in the
produced annually has been
number of films made has not seen a proportionate increase in their commercial
declining as producers are success. In fact, there is now a decline in the number of films being produced
increasingly valuing quality annually and this trend is expected to continue as production houses now value
quality over quantity. To combat the pressures of television programming, the
over quantity Indian film industry, like its western counterpart, is being forced to attract the
audiences through technological advancements like advanced visual effects,
special effects, sound sync, animation and sheer star power.
In the late 80s, the Indian music industry saw an end of the existing duopoly with
several new players emerging. A spurt in content availability and new genres such
as Indi-pop drove the rise in music consumption. However, technology has
facilitated easy access to music through illegal downloads, pirated CDs and tapes,
music television channels and radio FM channels. With little value realisation by
music companies and minimal regulatory support, music companies are
struggling for survival, as a result of which there has been very little
experimentation in content. This situation could change with the increasing
popularity of non-film music in India and globally, signs of which are being
observed.
Pricing
India has the potential of becoming an attractive destination for international
broadcasters and production houses, despite its low per capita income, as the
larger population base makes a viable case for high volume consumption.
However, while prices are significantly lower in India than in other parts of the
world, access to volumes is restricted by fragmentation in the distribution chain.
Subscriber declaration by cable distributors to broadcasters in India is extremely

low resulting in very inequitable distribution of subscription revenues. According
to an independent research, the operator-broadcaster split of subscriber revenue
in India has possibly the worst skew in the world.
16
Distribution of revenues (In percentage)
Market Operator Broadcaster

United States 60 40
United Kingdom 63 37
Australia 65 35
Japan 65 35
India 83 17
Source: Media Partners Asia
Such low levels of declarations have been attributed to the lack of transparency in
the last mile distribution end of the business, which is controlled by the 30,000
odd local cable operators and independent cable operators across India.
A price differentiation Similarly, in films, there is low transparency of actual gate receipts, outside of
multiplexes and few organised theatre halls. This is particularly true in smaller
strategy needs to be
towns where receipts are not accounted for. According to industry experts, the
adopted for media products total revenues lost to the film industry due to unaccounted receipts coupled with
with a view to maximise video piracy range between INR 15 - 20 billion annually. Film piracy through illegal
DVD and VCD releases and the open screening of new releases by cable
revenues
channels, is forcing film producers to pre-sell the television and video rights,
before the release of the film even if it means an erosion of theatrical ticket sales.
Piracy of music through illegal downloads, unauthorised CDs and remixed

versions of popular music is taking its toll on music recording companies. The
paltry royalty sums, if any, paid by music television channels and FM radio only
adds to the difficulties faced by these companies.
Differential pricing
India has seen improved income levels across a large section of its populace, with
a significant number of people willing to spend on entertainment. However, a
substantial difference in the affordability levels between various sections of
society continues to exist. As a result, a price differentiation strategy needs to be
adopted for media products, with a view to maximise revenues.
Establishment of zones and creating a zonal pricing structure for different cable
subscription packages could be an effective pricing strategy. Through a differential
pricing system, broadcasters will be able to earn more from higher income groups
through compelling content packages, and the same can be used to subsidise
subscription fees of lower income groups with minimal content packages. This
will help increase the size of subscribers thereby resulting in increased revenues.
In the film sector, price differentials already exist both at the point of distribution
(territories for distribution) as well at the point of exhibition (theatre hall tickets).
17
A CII - KPMG Report
The differential pricing mechanism can be examined more closely and
transparently to determine price levels that will draw larger audiences to films.
In the music sector, pricing CDs at a premium end and cassettes at the low end
may help music companies compete with the prices of pirated cassettes. A
marginal drop in CD sales may be offset by increased cassette sales. At an overall
level, difference pricing should be driven by the objective of revenue optimisation.
In all these sectors, differential pricing would require a thorough understanding of

the demand for media and price sensitivities of various segments, gained through
research at the ground level.
Regulation
Regulations give form and direction to the free play of market forces, according to
the social and economic objectives of the nation. Therefore, regulatory
Further growth is difficult interventions are typically driven by a vision for the future, which can be shared by
all stakeholders. The need to have such a vision is very important now in India, as
without facilitative the entertainment industry prepares for the introduction of several new
regulation technologies and business models that have the potential to revolutionise the
dynamics of value creation in this space. The guiding principles of such a vision
should include:
! Ensuring consumer choice and protection
! Achieving sustainable growth
! Ensuring a level playing field
! Providing equitable distribution of value
! Adoption of new technology
In most media markets, the consultative process leading to formulating

regulations, has served as defining steps for charting the growth path. In India,
most segments of the industry have grown to their present structure and size in a
largely unregulated environment. Such growth has resulted in the creation of last-
mile monopolies in cable television, established through informal agreement
among the unorganised last-mile operators. However, further growth will be
extremely difficult without facilitative regulation to ensure structural and
behaviourial changes amongst the industry players. Such changes are
necessitated by the following ground realities:
! Lack of consumer choice in several segments of the industry value chain,
most notably in the last-mile of cable distribution
! Piracy-related revenue and tax leakages across all segments of the
entertainment industry
! The need to establish a level playing field for new distribution platforms like
Direct To Home (DTH) broadcasting and digital film
! The need to protect sovereign interests like national security.
18
Revenues losses due to leakages and piracy
A substantial portion of the industry revenues is not captured at the last mile,
through leakages and piracy. This does not even include unaccounted for
revenues, the impact of which cannot be quantified, arising from:
! live entertainment events hosted by the unorganised sector
! black market sale of film tickets
! end-user revenues from pirated home video rentals
! unaccounted income from marketing of pirated home videos overseas
Split of industry revenues (INR billion)
126
120
101
95
83
Any regulatory intervention 77
395
462
66
61 330
should be supported by a 225
276
156 185
135
comprehensive framework
and effective Implementation 2003 2004 2005E 2006E 2007E 2008E 2009E 2010E
Revenues to rightful IPR holders Leakages at last mile, piracy
Going forward, it is expected that the ratio of illegitimate revenues to total

revenues will go down to less than 25 percent from the current 30 percent,
though in absolute terms, it will continue to increase.
It is important to note that any regulatory intervention should be supported by a

comprehensive framework for industry evolution, and followed up by efficacious
implementation. Otherwise such interventions can only lead to chaos and
uncertainty as demonstrated by the aborted attempt to introduce Conditional
Access Systems (CAS) for television in 2003 - 04.
Technology
Technology has played a key role in influencing the entertainment industry, by
redefining its products, cost structure and distribution. Empirical evidence
suggests that technological innovations create discontinuities in the industry, with
the initial dissonance evolving into eventual realignment to effectively create and
realise value from it.
Content creation has benefitted significantly from technological breakthroughs,

especially in the areas of sound, visual effects and animation. This has benefitted
audiences by providing them with a high-tech content viewing/ listening
experience. The growing adoption of digital television around the world has forced
leading global broadcasting companies to put development and use of new
19
A CII - KPMG Report
technologies at the centre of their core strategies. For a content distributor, future
will come by specialised offerings, such as high-resolution pictures, high-speed
Internet access, online games and information, pay-per-view electronic commerce
services and voice telephony. New technologies, such as satellite radio, are
characterised by their ability to reach out to larger audiences than ever before,
reducing the cost per contact. While these technologies typically require high initial
capital expenditure, the same may be set off by incremental volume gains through
increased reach. It is this trade off that needs to be evaluated before an investment
is made in any new technology.
If one were to look at emerging trends in technology and their impact on

entertainment consumption, the most significant trends are seen in the areas of
media distribution, though some may be regarded as product innovations. Some
such technology trends are:
Digital distribution
Digital distribution of content in television and film will help plug the leakage of
last-mile revenues due to the under-declaration among cable operators and film
theatre owners.
The Personal Video Recorder

The Personal Video Recorder (PVR) expands users' ability to decide when and
how they will watch programmes. It allows the viewer to pause a television
programme when required, and provides the luxury of skipping commercials
entirely. The PVR allows viewers to create their own programming schedule to fit
their time requirements. Technologies such as this will lead to more audience
'fragmentation'. In such a scenario, it is the programming content that will
ultimately drive the industry.
High Definition Television

As digital video signals begin to appear, High-Definition Television (HDTV) sets are
getting the most attention. Digitalisation allows HDTV broadcast and transmission
with incredibly sharp and detailed pictures.
However, at present, current-generation television sales have not demonstrated a

downwards trend. In fact, consumers continue to pay more for large screen
models with present-day technology. Even in the US, viewers are not expected to
switch to HDTV soon, due to the very high price differential.
Interactive services
Digital broadcasters are working on ways to include interactive services into their
over-the-air digital video transmissions, primarily as video signal enhancements.
Cable and satellite television companies are also moving towards interactive
20
services that vary from simple video-on-demand to more complex internet access
products. Such interactive technologies are expected to be platform-neutral,
providing service providers with new products and services to offer.
Fixed broadband wireless systems

Fixed broadband wireless systems are another way to bring interactive digital
services to consumers. The wireless debate currently centres on the use of point-
to-point or point-to-multipoint technology. Point-to-point, a technology already
entrenched in some regions of Asia, beams data over the air from a transmitter to
one receiver. It is widely used for business-to-business communication. Point-to-
multipoint, still an embryonic technology, operates like satellite distribution,
beaming data to as many reception antennae as the signal can reach.
Internet radio stations

As internet connections have become faster and software for cyberspace has
become more sophisticated, audio aficionados have benefitted significantly. Free,
downloadable audio players for computers have made listening to audio via the
computer commonplace. Traditional over-the-air radio stations have begun to take
advantage of the new software, as well as the internet's ability to deliver
graphics, data and video at the same time, to enhance their audiences' listening
experience. The internet has also extended the reach of radio stations beyond
their own markets, which was determined by the strength of their broadcast
signals, to the entire world.
Downloadable digital audio

As technology has enabled internet users to download digital audio tracks, online
music download sites have rapidly sprung up, presenting a challenge to existing
radio stations. Marquee artists are opting more often to debut new albums or
tracks online rather than through traditional radio stations or video music
channels. Recording artists and record labels are also moving toward offering their
music online. For both artists and producers, digital distribution is a way to bypass
radio stations and, more recently, video music channels.
Satellite radio
Satellite radio is a digital radio broadcast system that uses direct-to-home satellite
technology to offer listeners up to 100 channels of commercial-free audio music,
news and entertainment.
However, not all the new technologies listed above will succeed. In order to
succeed and become a mass phenomenon, they will have to demonstrate that
they are adding value for the consumers and the providers.
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A CII - KPMG Report
The increasing penetration of technology is a major force shaping the
entertainment landscape today. It will completely revolutionise content delivery as
well as the viewership experience. Once these technological changes attain a
critical mass, they can have a shattering effect on the existing industry
equilibrium. Due to the imminent impact of these and other technologies, the
successful media and entertainment companies will be the ones that are
prepared for their disruptive effects on their business models and the industry
structure.
The future of entertainment The future of the entertainment industry will be a function of the interplay of each
of the above factors, namely consumerism, advertising spend, content, pricing,
will be governed by the
technology and regulation. Estimating the industry size over the next 5-10 years,
interplay of consumerism, would require a crystal ball, given the number of variables involved. However
advertising spend, content, based on current trends, the industry is expected to breach the INR 500 billion
barrier in five years.
pricing, technology and
regulation For the Indian entertainment industry, this is the moment of truth. Beyond the
linear growth projections, there is a bigger story waiting to happen if a concerted
and accelerated effort is made now. The industry is entering a second phase of
growth, which will have technology as one of the key drivers. This growth phase
will be the consequence of a combination of quality infrastructure and the gradual
penetration of digital connectivity, which will redefine the way entertainment
content is delivered and consumed. This phase of growth needs to be supported
by an enabling tax and regulatory infrastructure, as the government begins to
understand the long term potential of this sector, and starts according it the
priority status it deserves.
For the purpose of this report, we have limited our detailed analysis to the
four traditional sectors – television, film, music and radio, which together
account for 96 percent of the entertainment industry revenues. The balance
4 percent is made up of revenues from live entertainment (currently a
fragmented segment with few small players) and IT-enabled businesses like
interactive game development and visual effects (engaged in outsourcing
work primarily in areas of 2D animation, 3D graphics, post-production, etc.).
These sectors are now taking off and could become significant drivers of
growth in the future years.
22
Television
Box Populi
Television
Box Populi
The significant growth in the entertainment industry in the last decade of the
twentieth century was largely triggered by the coming of age of television. For
most of the last fifty years, it was a monopoly of the public sector broadcaster.
However, the nineties inspired private sector enterprise across the television
value chain. Since then, the rapid growth of the television industry has made it
the most significant component, in value terms, of the entertainment sector. With
increased hours of mass entertainment programming during prime time and
better coverage of popular events, it has seen an explosive growth in consumer
mindshare. Its status as the preferred mode of entertainment of the people is
obvious from the fact that it now contributes more than 60 percent of the
entertainment industry's revenues.
Today and tomorrow

Out of its total current revenues of INR 139 billion, subscription contributed 53
percent, i.e. INR 73 billion. That is one-and-a-half times the advertising revenues,
which are at INR 49 billion. However, due to the large skew in the 'last mile', as
discussed later, the broadcasters' share of pay revenues amount to only around
17 percent, or INR 12.5 billion. Other revenues, which include international
distribution right, amount to INR 14 billion.
The growth of the Indian As any industry matures, inevitably its growth starts slowing down. The Indian
television industry too is following this dictum, seeing its growth decelerating
Television industry is from over 20 percent, till a few years ago, to less than 15 percent currently.
decelerating and a number However, it would be completely wrong to say that television has become a
of new initiatives will be mature, sunset industry. While the current sets of growth drivers are gradually
reaching saturation, there are a number of new initiatives which can power a fresh
required to power a round of expansion. Some of these key factors are:
fresh round of expansion ! Introduction of addressability: In spite of apprehensions, public debate and
litigation, CAS was eventually launched in Chennai, providing valuable lessons
for future attempts to bring in addressability across the country, though the
impact of the same is yet limited;
! Alternative distribution platforms: DTH broadcasting has introduced the
power of choice to the consumer. The last mile distribution segment is
expected to see further action with the entry of new DTH players, IP-TV,
broadcasting services on DSL technologies, etc;
! New players in niche genres offering more content choice to viewers: Niche
genres have significantly enhanced their proposition over the last few years
with the entry of several new channels. While, news and children's
programming segments accounted for most of the new entrants, other niche
genres like religion and health also experienced the launch of several new
channels.
! Meaningful regulatory intervention: The government needs to create a
conducive regulatory environment for rapid but stable growth by supporting
23
A CII - KPMG Report
initiatives like digitalisation of cable television, regulatory policy for DTH
players, etc.
These trends have the potential to redefine the landscape of the broadcasting
industry in the country. The significance of such a redefinition should be
understood in the context of the overall evolution of the broadcasting and
distribution market in India. The high growth that took place in a relative regulatory
vacuum in the last decade created a distortion in the distribution of value amongst
industry players. This has fostered an opaque transactional environment, resulting
in:
! Lack of consumer choice for last-mile access;
! Under declaration of subscriber numbers resulting in revenue loss for
broadcasters and tax loss for the government;
! Absence of uniform pricing with prices varying across geographies and
consumer segments;
! Lack of level playing field for alternative platforms like DTH, IP-TV, etc
resulting from 'unreal' cost structures of incumbent access providers and
non-uniform licensing conditions.
A combination of purposeful regulatory interventions and technology adoptions

can go a long way in correcting such structural imperfections. The initiatives being
undertaken and being proposed to be undertaken, to correct these structural
imperfections, will drive the second wave of growth of the industry.
Television revenues (INR billion)
43
Subscription Advertisement Others
39
78
35 73
30
68
24
63
20
17 58
250
14 54
12 213
49
5 43 163
39
136
35 107
90
65 73
60
37
In this new phase of growth, the sector is expected to grow at an annual rate of
almost 18 percent to reach INR 371 billion by 2010; with subscription revenues
forming the lion's share at INR 250 billion. It is also expected that the
broadcasters will get a fairer share of the subscription pie. Advertising revenue is
24
expected to grow at a modest rate of 8 percent to reach INR 78 billion in six
years.
The true potential of television advertising however is much higher. It could touch
INR 150 billion by 2010, depending on the following factors:
! Speed and effectiveness of the roll-out of the broadcasting sector reforms;
! The quantum of investments made by various players over the next few
years on rolling out digital platforms; and
! The entry of telecom companies into the distribution sector.
The ensuing sections discuss the various drivers of growth that could take
television to the next phase of evolution.
Advertising
As per industry estimates, the total advertisement spend in India last year was
approximately INR 118 billion. However, at 0.50 percent, India continues to have
one of the lowest 'Advertising spend to GDP' ratios amongst peer economies.
This underscores the significant potential India has yet to achieve vis-à-vis
advertising budgets.
However, this is set to change. A growing middle-class will spur the increasing
tide of consumerism and a growing lineup of global brands will continue to be
attracted by this expanding market. Consequently it is expected that the 'ad
spend to GDP' ratio will increase steadily over the next four years.
Shift in advertising over last three years (INR billion)
Medium 2002 2003 2004

Share of total Share of total Share of total
Spend Spend Spend
spend spend spend
Television 39.1 41.1% 43.0 41.3% 48.6 41.1%
Press 44.0 46.3% 47.5 45.6% 54.5 46.1%
Radio 1.5 1.6% 1.8 1.7% 2.2 1.9%
Cinema 3.3 3.5% 3.6 3.4% 3.75 3.2%
Out-of-home 6.9 7.3% 7.9 7.6% 8.5 7.2%
Internet 0.3 0.3% 0.4 0.4% 0.6 0.5%
Ad Industry Size 95.1 104.2 118.2
Source: TAM Adex
The above table indicates the allocation and growth of the advertising spends in
India across various media. Print is still the largest recipient of advertising
revenues, accounting for 46 percent of the advertising pie and, after a temporary
25
A CII - KPMG Report
slump, is currently growing at a rate faster than that of television. The share of
television seems to have stabilised at around 41 percent, after increasing
consistently for about 6-8 years. The overall media mix in India mirrors that in
most advanced countries, where television and print jostle for dominance in the
space of advertising expenditure.
Advertising pattern in developed countries

100%
90%
80%
70%
Others
60%
Radio
50%
Magazines
40%
30% Television
20% Newspaper
10%
0%
US Japan Germany UK France
Source: World Association of Newspapers
For the next three years, In the Indian context, there is further potential for television to increase its ad
share. It is expected that over the next three years, both print and television will
print and television will
each command around 43 percent of the market, with the balance 14 percent
command equal share of the being split between radio, outdoors and others.
advertising market
Who is advertising
Until recently, FMCG companies and consumer durable marketers were the main
advertisers on TV channels. Today, the advertiser segment has expanded to
include youth and teen products, financial products and services, educational
products and services, corporate image building, telecommunications,
computing, vehicles, and mobile telephony, to name a few. It is interesting to note
that according to TAM Media Research, on-air promotions that are carried out by
the channels themselves account for almost 40 percent of the total airtime, with a
significant portion of them being shown on prime time. Going forward, with
capacity utilisation of airtime improving, the opportunity cost of self-advertising
will increase and it is expected to decline.
26
Top ten spenders on television in 2004 (INR Million)
2500
2000
1500
1000
500
0
os ps rs ep
s s es )
po oa ag
e
uid
s es ele Je ste on ed
m ts im liq vic he pa ph at
S ha ile nd / ser
- w r s/ o th a r ( aer
To ra er e o C a To l s
/b wd on Tw llu ink
te po ph Ce dr
ora n g C ell oft
rp hi S
Co W
as
Source: TAM Adex
Where does the money go

Mass entertainment Mass entertainment continues to attract maximum ad-spends, but its share is
being gradually ceded to niche channels. The major beneficiaries have been News,
channels are slowly ceding
Regional and Sports channels.
viewership to niche channels
Share of ad revenues among television genres
100%
Others
80% Music
Sports
60% English Entertainment
Films
40%
News
20% Regional
Mass
0%
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Source: TAM Adex
Some of the key aspects of television advertising in India are:

! Mass entertainment channels have the largest loyal advertising base. Around
17 -18 of the top 25 advertisers advertise only on mass entertainment
channels.
! Consumer goods advertise mostly on mass entertainment, films and Hindi
news.
! Luxury and lifestyle products are advertised across all major genres.
! Financial products like banking and insurance advertise primarily on English
news and business channels.
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A CII - KPMG Report
! Organised retail, which is one of the larger advertising segments in
developed economies like the US, has yet to impact the Indian advertising
industry in a significant way. As the retail industry in India develops and
begins to realise its potential in the near future, it is expected to follow its
global counterparts and become a major advertiser on television.
Is advertising volume reaching saturation point?

An analysis of television programming indicates that advertising in India, on an
average, amounts to 192 seconds (3.2 minutes) per hour. It is still significantly
lower than several other countries. Of course, in the case of prime time for mass
entertainment channels, this number could go as high as 600 seconds (10
minutes).
International norms on ad clutter

With addressability, the The norms and standards for the amount of advertising that can be shown on
television vary from country to country. TAM Media Research has compiled an
effectiveness of ad spend illustrative list of standards, some of which are mentioned below: -
will become more ! Australia Broadcasting Authority recommends 10 minutes of advertising per
hour of children's programming and up to 15 minutes for non-prime
transparent
programmes.
! Philippines stipulates a commercial load for television in Metro Manila to 18
minutes per hour, while for provincial television stations, commercial load
permissible is a maximum of 20 minutes per programme hour.
! In China, a maximum of 9 minutes of ad time per hour of programming is
allowed.
! Canada recommends 8 minutes of advertising per hour for children's
programming and 12 minutes per hour for other programming.
! The average for other Asian countries is around 8 minutes of ad time and 2
minutes of programme promotion time, i.e. a total of 10 minutes of break
duration per hour.
Pure advertising time for every hour of programming in India
219 208
Average Secs/Hour
192
102
DD FTA PAY All Channels

Type of Channel
Source: TAM Media Research
28
With advances in the technology platforms available and the introduction of
addressability the effectiveness of ad-spend will be more transparent. This will
further redefine ad spend patterns among genres, channels and advertising
segments. Addressability will give additional tools to media planners, leading to
significant improvements in media planning. This, in turn, is likely to cause radical
shifts in media buying on television, which presently is largely a function of TRPs.
Channels that succeed in convincing buyers of a better value for money by clearly
identifying the right target group will be able to charge a significant premium to
the market.
Effectiveness of advertising
Television viewing (hours /week)
Television advertisements
Over-deliveries & typically bombard certain
over-exposure audience with over exposure
This is what the
while completely skirting others
audience sees at
a superficial level
Sub-optimal
85
deliveries
60
50 Under-deliveries
& under
exposure
20
Total TG Heavy Medium Light

Source: TAM Survey over a sample Target Group
There is a point of view that in a more transparent market, with the introduction
of addressability, the duration of advertising will fall even as subscription revenues
increase. However, this may not necessarily be the case. As has been seen in the
past, the more popular channels have been able to garner almost the same
quantity of advertisements (in volume terms) while simultaneously charging a
subscription fee, compared to some of their free-to-air (FTA) counterparts. This
situation is expected to continue and, barring short term dips, the average ad
duration per channel is expected to sustain itself and, in fact, increase in the
medium term as a result of an increase in non-prime time advertising. The fear
that compulsory addressability could lead to a flight of advertisers to FTA
channels may not be entirely justified; flagship channels, whether FTA or pay, will
continue to garner premium advertisements.
Subscription revenue
Television reaches over 40 percent of the billion people in India, commands the
highest mindshare among consumers and cuts across rural-urban and class
divides. Currently, 91 million households own a television, out of which 48 million
households are cable and satellite households, the state-owned terrestrial
broadcaster, Prasar Bharti, accounting for the balance 43 million. Though the cable
TV penetration in India continues to grow at a brisk pace, the untapped potential
is still very significant. Over the next few years, cable and satellite, along with
emerging delivery platforms like DTH and IP-TV are expected to close in on the
29
A CII - KPMG Report
gap further. It is expected that television connectivity in India can reach 134
million households by 2010, of which as many as 85 million, or 63.5 percent could
be connected through cable and satellite, DTH, IP-TV or other non-terrestrial
broadcast platforms.
Cable television Penetration

90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
a a s
ali ina di
pa
n
ine po
re re
a an
US
A da an
y
str Ch In
Ja Ko iw na
Au ilipp inga t h Ta Ca Gr
m
Ph S
So
u
Source: www.worldscreen.com
The wide disparity in ARPUs Along with a growth in subscriber volumes, the cable subscription charges (ARPU
per month) too is expected to grow at a pace faster than that of per capita GDP.
is not commensurate with
At around INR 150, India has one of the lowest ARPUs in the world. In fact, the
the quality or offering or ARPU for cable television has actually fallen in real terms, growing at sub-inflation
service rates over the past seven years. An average urban Indian cable connected
household receive as many as 100 or more channels for which it pays anywhere
between INR 100 to 300 per month, while in certain rural and semi-urban areas,
this number could be as low as INR 60 per month. The wide disparity in ARPUs
between locations and, often, between various localities within the same city, is
not proportionate to the quality of content or service offering by the distributor
but has been guided mostly by the relative bargaining power of the cable operator
with both the consumer and the broadcaster.
Cable subscription rates have fallen in real terms

155
150
145
140
135
130
125
120
115
110
105
100
1997 1998 1999 2000 2001 2002 2003 2004
Consumer Price Index Cable Prices

Source: Industry
30
Global Cable ARPUs (USD/ month)
60
50
40
30
20
10
a
e
n
an
da
lia
ilip a
a
s
ia
SA
ng
sia
d
nd
K
di
Ph ore
in
ne
or
pa
ys
an
U
ra
iw
na
Ko
ne
In
Ch
U
la
ap
Ja
pi
st
al
ala
Ta
Ca
ai
do
ng
Au
g
Ze
Th
M
on
In
Si
ew
H
N
Source: worldscreen.com
Apart from the low subscription fees, subscriber declaration by cable distributors
to broadcasters in India is one of the lowest in the world, resulting in a grossly
inequitable distribution of subscription revenues. According to an independent
research, operator-broadcaster split in India of subscriber revenue has the worst
skew in the world. It is estimated that the LCO corners 79 percent of the total
subscription revenues of the industry and leaves just about 17 percent for the
broadcaster. The residual 4 percent is retained by the MSO who downlinks the
broadcasters' signals and transmits them through a combination of fibre and co-
axial cable network to consumers' homes via the LCO, who, almost in all cases,
owns the coveted 'last mile'. The low levels of declarations are attributed to the
lack of transparency at the last mile distribution end of the business, owned by
the 30,000 odd LCOs across India.
This combination of low subscription fees (ARPUs) and chronic under-declaration

of the subscriber base by the LCOs has significantly constrained the growth in
the subscription revenues for the broadcasters.
Attempts at increasing transparency have been made through a combination of

technology and regulations. In 2003, an attempt was made to introduce CAS. As
per CAS, the Indian home would receive two sets of channels:
! FTA channels - a basic bouquet of channels for which the customer would
pay a flat amount, the pricing for which may be regulated by the Government
as required;
! Pay channels - for which the customer would pay an amount fixed by the
channel/bouquet owner. All pay channels would be routed through an
addressable system.
31
A CII - KPMG Report
However, the implementation of CAS did not take-off due to lack of uniform
acceptance by all segments of the television value chain i.e. Broadcasters, MSOs,
LCOs, alternate platform providers and end consumers.
The CAS saga
Stakeholder What they thought What they said
Supported addressability
Most pay broadcasters wanted to
on the grounds of increased
avoid/ delay addressability, as they
Broadcaster transparency and more
feared a revenue fall in the short-
equitable share of
medium term.
distribution revenues.
Genuinely wanted early

implementation of CAS as such early
MSO mover advantage in seeding the Supported addressability.
Consumer Premises Equipment can
reduce strategic vulnerability.
Positions shifted between pro and

anti addressability and finally settled Conditional support for
LCO for addressability as the threat addressability, bargain for
perception of alternative platforms higher FTA charges.
was enhanced.
Consumer did not want

addressability, as it was perceived Confused positions arising
Consumers
to be a mechanism for charging from the lack of information.
more and delivering less.
Alternate Wanted addressability as it ensures

platform a level playing field. But wanted to Highlighted implementation
providers delay the implementation depending issues whilst supporting
on the level of preparedness to addressability.
(DTH/ IP-TV) launch services.
In the midst of the debate, CAS was finally implemented in Chennai and in some
parts of Delhi. While there were few takers for CAS in Chennai, many cable
operators in South Delhi did not even supply their subscribers with the required
STBs.
To resolve the potential deadlock, the Government of India has brought all
broadcasting platforms under the regulatory ambit of the TRAI and CAS has been
de-notified, pending a clearer regulatory direction from TRAI.
32
Making sense out of the chaos
In a consumer economy, consumer interests should ideally drive the market
structure and regulations. Today the consumer has little real choice regarding
platforms or operators in the monopolistic last mile environment, created through
informal agreements amongst cable operators. Unwillingness to proactively
intervene to correct such market distortions amounts to protecting an informal
monopoly, denying consumers their rightful operator and technology choices and
constraining the growth and employment potential of the industry in the long
term. Therefore, appropriate regulator intervention should focus on evolving an
industry structure and a regulatory environment that facilitates the realisation of
industry potential through correction of the following anomalies:
! Lack of consumer choice in the last mile.
! Under-declaration by last mile operators leading to:
- Subscription revenues falling out of tax net;
- Broadcasters being denied their share of the subscription revenues.
- Lack of level playing field for alternative platforms like DTH, IP-TV, etc;
- Lack of investments in distribution infrastructure upgrade and expansion;
- Lack of visibility of consumer viewing patterns resulting in inefficient
media spends.
Putting the issues in perspective

The existing players, viz It is unreasonable to expect the 30,000 strong LCO & ICO fraternity (which
employs over 500,000 people) to either shut down or fall in line overnight. On an
LCOs, MSOs and
as-is basis, it is unlikely that the declaration percentage will improve significantly
broadcasters need to look from the current level of 23-25 percent to more than 30-35 percent, unless such a
at partnering solutions for move to increase declaration is accompanied by either a steep increase in
subscription fee or a significant reduction in channel pay-outs, or a combination of
the last mile
both. This would necessitate all existing stakeholders, viz the LCOs, MSOs and
broadcasters to act in unison and look at partnering solutions for the last mile. In
the interim period when the market moves towards a correction in the imbalance,
the incremental gains to the various stakeholders, including consumers will be
disproportionate. However, if each stakeholder insists on maximising his own gain
in the short term, it would only lead to a lose-lose situation in the long term. An
effort in trying to correct the skew overnight may result in 'no correction' at all.
Significant changes in the way broadcasting content is packaged and distributed
currently can be initiated through the following measures:
! Introduction of voluntary addressability, enabling the distributors to select
their business model.
! Tiering of channels: Distributors should offer multiple tiers of programming
with the basic tier offering popular general entertainment and news channels
like Star Plus, Zee, Sony, NDTV, CNN, BBC etc, along with FTA channels. The
basic tier should be available to all consumers. Premium programming tiers
containing sports, lifestyle and other niche segments can be made available
in an addressable environment.
33
A CII - KPMG Report
! Government could cap the basic tier pricing till the market matures. The
state of effective competition can be established by the extent of consumer
choice available.
! While, within the price band, the pricing needs to be left to the broadcasters
and market forces, the fundamental decision to include a channel in the FTA
basic tier package could be mildly regulated, till the market matures.
Viewership-based formula could be worked out and though such formulae are
not foolproof, it could serve as a basic guideline to ensure that the average
consumer is not deprived of popular content.
However, in the long run, there should be no ambiguity about the fact that better
offering is linked to higher price; adequate consumer awareness campaigns may
need to be undertaken by both the regulator and the broadcaster-distributors to
ensure that pay revenues are eventually aligned with service. This situation, in a
way, is akin to a toll road or an urban utility project, where privatisation of
infrastructure eventually results in the user paying for a similar facility which he
was hitherto enjoying for 'free'.
To ensure smooth implementation, government could consider mandatory

licensing for cable operators. All registered cable operators should be given a
reasonable deadline to switch over to such a licensing regime without any
licensing fee. The licensing authority could be given powers to conduct surprise
audits to establish the declared subscriber numbers and to invoke penal
provisions, in case of any material discrepancy.
Simulated revenue flow for a large LCO
Current Scenario Optimised Scenario Increase/month
Number of subscribers 1500 1500

declared 375 25% 1500 100%
undeclared 1125 75% 0 0%
Subscription fee (INR/sub/month) 150 190 40 27%

Split (for declared subscribers)
Broadcasters 75 50% 35 18%
LCO 53 35% 145 76%
MSO 22 15% 10 5%
What the subscribers pay INR 225000 285000 25%

(LCO's gross revenues)
Split (for total revenues)
Broadcaster revenues 28000 12% 53000 16% 25000 89%
MSO revenues 8000 4% 15000 4% 7000 88%
LCO revenues 189000 84% 217000 80% 28000 15%
Estimated tax loss 45000 0 45000
Source: Industry
34
In the above simulation, it can be seen that 100 percent declaration can be
brought about through a moderate increase in subscription rates, and an increase
in inflows for all the players, resulting in a long term win-win:
! Consumers’ outgo goes up by 27 percent. This is not a very high price to pay,
considering that the same consumer was:
- Paying almost the same amount, in real terms (after factoring in inflation)
around 10 years ago for only 4-5 channels;
- Bracing himself for a much higher increase in rates, if mandatory CAS
were to be implemented.
! Broadcasters' revenues will go up by almost 90 percent, significantly higher
than what they can expect through organic growth in pay channel rates;
! LCO revenues will increase by 15 percent and therefore they have the
incentive to declare their subscriber base fully and simultaneously secure
their long term sustainability. One time Amnesty Schemes and deadlines for
A 100%-declaration is disclosure can be worked out as a further carrot and stick measure.
possible, through only a ! MSOs revenues too will virtually double. 100 percent declaration will ensure
that the consumer is now 'owned' by the MSO and this would throw open
moderate increase in rates, several possibilities of increasing ARPUs through value-added services and
through partnering solutions premium content, which can be pushed through more rapidly.
As can be seen, the biggest beneficiary would be the government, since the
taxes that are not paid due to a lack of subscriber declaration can be brought back
into the system. The funds thus garnered could be used to form a corpus for
development and reforms in the distribution sector.
Content
Broadcasters are beginning to recognise that audiences cannot be taken for
granted. An increase in the number of channels, coupled with a surfeit of “me
too” content on channels within the same niche has led to fragmentation in
viewership patterns. Advertisers too, now, have the option of lower priced niche
channels to reach a more focussed target group, and their advertising spend
reflects this.
An increasingly sophisticated Indian audience, now exposed to international fare,

benchmarks television entertainment with the best when it comes to quality and
treatment. Capturing the mood of the viewer, sports and Hindi film channels have
gained viewership, but have had to spend heavily in order to acquire prime
properties. News channels registered a 100 percent increase in viewership over
the last three years, as have English entertainment stations and channels for
children. The success of quality programming in certain segments indicates the
potential for entertainment channels to move up the content value chain.
35
A CII - KPMG Report
Genrewise Viewership Share in 2004 (In percentage)
4 3 1
2
8
40
5
38
Mass Entertainment Regional Channels News Channels

Hindi Film Channels English Entertainment Sports Channels
Infotainment / Kids Music Channels
The shifts in viewing patterns have put a high pressure on mainstream channels,
necessitating them to revisit their content strategy to attract new audiences and
to retain existing ones.
Several big budget shows have been launched on Indian television in the recent
past. The line-up included reality shows, professional dramas, game shows,
interactive programmes, daily soaps and adult programming. These were high-
budget, high star-value programmes on which channels spent millions on
development and promotion, not all of which proved successful and were
subsequently pulled off air or thematically re-oriented.
Sports channels
With an increase in cricket as well as non-cricket viewership, sports channel
viewership has gone up manifold. The boom was primarily on account of World
Cup Cricket 2003, followed by India's tours of Australia and Pakistan in 2003-04.
The popularity of Indian cricket has been rising rapidly, as can be seen from the
price at which the television rights have been sold in the recent past. For
instance, as opposed to a mere USD 10 million which the broadcast rights for
World Cup in Australia-New Zealand (1992) garnered, the rights for the 2003
World Cup in South Africa fetched around USD 85 million, an increase of 750
percent in ten years. Compared to this, the Olympic rights have moved from USD
350 million (Atlanta, 1984) to USD 1.5 billion (Athens, 2004), an increase of just
over 300 percent in twenty years.
In addition to cricket, viewership of Formula 1, tennis, soccer, hockey, basketball

and baseball is also on the rise, helped to a great extent by the rise of Indian
sportspersons like Narain Karthikeyan (Formula 1) and Sania Mirza (tennis) who
have recently made it big in the international arena. Sports channels are
36
proactively trying to attract the audience with a mix of sports, entertainment and
amusement. Indian viewers currently have a choice of five sports channels. It is
expected that the share of viewership of sports channels will be cyclical
depending on the occurrences of popular sports properties in that year, with a
continued heavy dependence on cricket.
News channels
The news and business channel space grew from virtually nothing in 1995, to just
over INR 2 billion in 2002 (comprising two dominant news channels, one major
business channel and two international English news channels). Since then, this
segment has grown further - currently, there are around 11 mainstream news
channels and a slew of regional channels which together generate revenues of
over INR 5 billion. Increased production values, introduction of tabloid news
formats and entering into bouquets have helped this segment in attracting more
eyeballs in the recent past. A few more news and current affairs channels are
reportedly in the offing with large corporate houses planning forays into this
segment.
The business channel space, originally an offshoot of the news channel space,
hitherto dominated by CNBC, is believed to be the next growth driver, within the
news and business space. Currently valued at INR 1 billion, this space is expected
to grow at 40-50 percent over the next 2-3 years.
Children's channels
Close on the heels of news channels, the children's channel space is emerging as
one of the fastest growth drivers. Children's channels currently garner INR 1.4
billion in advertising revenues, while pay revenues too are expected to kick in, in a
large way. Advertisers of general products are increasingly getting interested in
this space - apart from a growing market for children's products, children are
believed to exert a strong 'pester power', which influences buying decisions for a
large range of consumer durable and non-durable products.
Currently, there are around ten children's channels. International majors in

children's broadcasting, Cartoon Network and Nickelodeon already have an
established presence in India, while Disney has commenced operations recently.
Established Indian broadcasters like Zee and content providers like UTV and
Pentamedia have also entered this space over the last two years. The domestic
players appear to be well-placed to exploit the current void in localised
programming, which has empirically proven to be a strong driver in other mature
television economies. The international channels too currently have a high degree
of dubbed multi-lingual programming and are reportedly looking at including local
programming in their offering as well. As a result of increased depth of
37
A CII - KPMG Report
programming, together with the expansion of the advertising space and the
emergence of addressable distribution platforms facilitating pay television, the
children's channel segment seems to have entered a period of sustained growth.
Regional channels
Regional channels have been jostling for viewership, in the face of increasing
quality and variety of offering by mass channels, and the emerging popularity of
niche channels. In West Bengal, Maharashtra and the four Southern states
Andhra Pradesh, Karnataka, Kerala and Tamil Nadu, though, consumers have
continued to establish a definite demand for regional content. However, this
space is characterised by low ad rate realisations, low production budgets, “me
too” programming and fierce competition between various channels.
Large regional variations in The large regional variations necessitate the need for a more targeted and
segmented approach for content, in an addressable scenario.
viewership necessitate a
segmented approach in an
Viewership pattern across locations
addressable market 2003
Total Market
Hyderabad
Bangalore
Chennai
Delhi
Kolkata
Mumbai
0% 20% 40% 60% 80% 100%

English entertainment Hindi films Infotainment & kids
Mass Hindi Music Others
Regional Sports News
1999
Total Market
Hyderabad
Bangalore
Chennai
Delhi
Kolkata
Mumbai
0% 20% 40% 60% 80% 100%

English entertainment Hindi films Infotainment & kids
Mass Hindi Music Others
Regional Sports News
38
Viewership of other genres such as English entertainment has risen by around
two thirds over the previous year. Currently, there are seven English
entertainment and film channels that cater mostly to the urban households.
English film channels enjoy the highest ads-to-viewership ratio, i.e. they command
a relative premium on a proportionately lower viewership base, as opposed to
mass channels. Regional channels, on the other hand, have the lowest ads-to-
viewership ratio.
Content trends
The television software sector, which supplies programming content to
broadcasters, is currently estimated at INR 28 billion. The increasing number of
programmes on prime time, a swell in the number of hour long weekly
programmes and enhanced consumer interest in niche content are considered to
be driving growth. Further, the increased use of content libraries for export to
both Indian and non-Indian viewers abroad have also led to growth in this sector.
While mainstream entertainment programming will continue to be the bulwark of

Indian television, other genres such as news, sports, children and special
interests (viz. religion, home, health, etc.) will form an increasingly important part
of the software pie.
It is important to note that despite the boom in the television sector and the
spiralling demand for content, stand alone television production houses have not
been able to grow their business, barring the market leader and a few others who
have further consolidated their positions. Going forward, it is believed that both
broadcasters and content producers will begin to work out backward and forward
integration models respectively with broadcasters developing a higher proportion
of content in-house and more production houses getting into the broadcasting
business.
Another growth area in the Indian television software industry will be adaptation
of the existing content for digital and on other delivery platforms. Most of the
Indian television software is generated on analog platforms, going digital only in
the last phase of broadcasting. All content will first need to be converted to digital
formats and then fine-tuned to suit the delivery needs of each individual format
such as HDTV, IP-TV, etc.
The road ahead

The television industry is now ready to advance to the next stage of its evolution,
grasp the opportunities presented by the digital age and completely change the
home entertainment landscape. In the process, it is expected to continue its rapid
growth and reach INR 371 billion by 2010.
39
A CII - KPMG Report
Over the next six years, television advertising spend is expected to grow at a little
over 8 percent annually, to reach INR 78 billion in 2010. Such growth will be a
function of an increase in number of advertisers and an increase in paid ad
seconds.
Going forward, digital distribution players like DTH, IP-TV are expected to emerge
as new contenders for the total ad pie, as new revenue streams like (advertising
on) Electronic Programming Guides (EPG) emerge.
The total distribution revenues are expected to grow from the current INR 73
billion to around INR 250 billion by 2010, of which the share of declared revenues
will improve significantly from INR 19 billion (26 percent) to INR 134 billion (54
percent). It will be driven more by the conversion of existing analog subscribers to
addressable digital subscribers, rather than a plain vanilla increase in the
declaration percentage, which will increase only from 25 percent to 30 percent in
six years.
Subscription revenues (INR billion)
declared & addressable revenues

undeclared revenues
116
110
91
83
71 134
64 103
49 54
72
52
19 26 36
16
2003 2004 2005E 2006E 2007E 2008E 2009E 2010E

Source: - KPMG Research
The increased addressability will significantly improve both the Pay television
revenues to broadcasters and to organised distributors (MSOs, DTH operators,
IP-TV operators etc.) which will emerge as a stronger, powerful community, as
has been seen in evolved markets like the US.
(INR billion)
Distribution of Revenues 2003 2004 2005E 2006E 2007E 2008E 2009E 2010E Growth
Pay TV Revenues to broadcasters 12 13 16 19 29 42 62 82 37%
Distributors' retention 1 3 5 11 16 23 32 41 55%
Last mile operators 52 58 69 77 90 99 120 126 14%
Total Subscription Revenues 65 73 90 107 136 163 213 250 23%
40
Broadcasters' pay revenues will grow six-fold, from INR 13 billion to INR 82 billion,
while organised distributors, currently at a fledgling INR 3 billion, will command a
significant share of the television market with subscriber revenues of around
INR 41 billion. The LCO community, though growing at a lower compounded rate,
too will benefit from increasing ARPUs, seeing their revenues growing from
INR 58 billion currently to INR 126 billion.
Riding on a strong base and strong economic indicators, C&S connections are
expected to grow at a CAGR of 10 percent over the next six years to reach 85
million households. Content will be the key driver and demand for premium
content will increase. Though the market is expected to be price sensitive,
operators are likely to be able to charge significantly higher fees for premium and
value-added content.
Demand for premium Anomalies like regional discrepancies in price will reduce and offerings will be
uniformly priced across geographies and classes, which is not currently the case.
content will increase The same consuming class currently pays the same price for consumer goods
across geographies and it is anticipated that televised content would also
eventually follow a similar trend.
ARPU for analog and digital subscribers (INR per month)

600
500
400
300
200
100
-
2003 2004 2005E 2006E 2007E 2008E 2009E 2010E
ARPU - analog ARPU - digital ARPU - combined
ARPUs for analog cable are expected to grow moderately, and organic growth in
this segment could eventually stagnate since the consumers in both urban and
rural areas are likely to shift to digital offerings at a particular price barrier, once
such offerings become available.
The digital offerings are likely to be split into:

! Basic: These will be benchmarked at the analog cable prices of INR 125-150
and the offerings will include the current FTA channels and the most popular
general entertainment channels and few genre-specific channels like news,
children, etc to complete the bouquet.
41
A CII - KPMG Report
! Premium: The mass entertainment, film, sports and other channels which
have a significant consumer-pull in select consumer segments will be offered
as the premium tier. Consumers are expected to pay around INR 500-700
(inclusive of the basic channels mentioned above). The channel's content
combined with the operator's ability to bundle them attractively will
determine the pace of conversion from analog to digital basic and from digital
basic to digital premium subscribers.
(In million)
2004 2005E 2006E 2007E 2008E 2009E 2010E CAGR
Total Households (HH) 205 213 221 229 237 246 254 3.6%
TV HH 91 98 105 112 119 126 134 6.7%
Connected HH 48 53 58 63 70 77 85 9.9%
TV penetration 44% 46% 48% 49% 50% 51% 52%
Connected HH to TV HH 53% 54% 55% 57% 59% 61% 63%
Connected HH to total HH 23% 25% 26% 28% 29% 31% 33%
Value-added services: These will include pay-per-view of new films, specific

events like a major cricket match, interactive content like gaming,
T-commerce etc. Channels may also strive to create a differentiated offering of the
same content (e.g. ads-free telecast of cricket matches with a differentiated on-
ground coverage) at a higher price for this segment, which is the most price-
inelastic. The ARPUs for this segment could be around INR 900-1000.
Year 2010 penetration Break-down by tiered offerings (million subscribers)

Analog cable Digital - basic package
100%
Digital - premium package Digital - value added services
90
90%
80
80%
70
70%
60% 60
50% 50
40% 40
30% 30
20% 20
10% 10
0% 0
Top 20 cities Others Total 2003 2004 2005E 2006E 2007E 2008E 2009E 2010E
Analog Cable Digital cable

DTH IP-TV and copper
42
The digital subscriber off-take is expected to be more rapid in metros, while the
roll-out will be slower in other cities, towns and rural areas. The price wars with
existing cable offerings will be more intense.
While DTH and digital cable will see a moderate subscriber off-take in smaller
towns and even rural areas (where the state-owned Prasar Bharti's low-priced
DTH offerings are expected to have a higher market share compared to that of
private operators), IP-TV and broadband over copper will be restricted to the major
cities, given the high per-line investment required.
In 2010, out of the estimated 85 million connected households (a household with

C&S, DTH, IP-TV or any other form of connectivity other than terrestrial), digital
platforms will have a market share of around 18 percent, or 13 million. There is a
potential for this number to go up significantly, depending, inter alia, on the
regulatory environment which will induce new players like established telecom
operators to make the necessary investments.
Break-down by access (million subscribers)
Analog cable subs Digital cable DTH IP-TV and copper

80
71.9
70 67.9
64.1 8.6
60
60 56
52
50 48
43 5.7
40
30 3.5
20 2.8
2 2.2
10 1.6
1 1
1.0 1.3
0.7
0
2003 2004 2005E 2006E 2007E 2008E 2009E 2010E
In terms of offerings, it is expected that the majority of subscribers, irrespective

of the platform they are on, will continue to opt for a basic package, which is self-
contained and fulfils the minimum infotainment requirement. 'Light viewers' (i.e.
Less than 20 hours a week) form the bulk of television viewership and watch the
maximum number of genres. The behaviour of this segment in the face of an
onslaught of channels and competing platforms, and the ability of broadcasters
and distributors to tap these eyeballs effectively through attractive packaging and
pricing will have a direct bearing on the subscriber off-take. This, in turn, will
determine how soon the basic subscriber, can move to the premium category.
43
A CII - KPMG Report
2005 could be the turning Conclusion
2004 was an eventful year for the industry. The industry saw a further
point for the industry’s life
strengthening of the C&S dominance and increasing reliance on subscription
cycle revenues. Persistent efforts by broadcasters enabled them to get higher
disclosure rates. These superior disclosure rates coupled with higher subscription
charges, post lifting of the price freeze that had been in force for around two
years, increased the broadcaster revenues. It also helped the broadcast industry
continue its progress from an advertisement dependant one to one with more
balanced revenue streams.
2005 could be a turning point in the industry's life cycle. The launch of DTH, DSL
and IP-TV is expected to reshape the landscape of the industry, by introducing
competition in the last-mile for the first-time. The forces unleashed by them will
determine the future of the industry.
44
Film
Back to the future
Film
Back to the future
India is the world's largest producer of films by volume - producing almost a

thousand films annually. However, revenue-wise, it accounts for only 1 percent of
global film industry revenues. Film and film-based entertainment together occupy
a considerable part of the Indian consumer's mindshare. In terms of its sheer
impact and visibility, film and film-based entertainment transcend well beyond
what their 27 percent direct share of the Indian entertainment industry's
revenues would indicate. Indian films, especially the mainstream Hindi film
industry (or “Bollywood”) dominate segments like music and live entertainment
as well as television, where popular films and film-based programmes attract the
highest viewership along with cricket.
Apart from the growing international success of Indian themed films like
'Monsoon Wedding', 'Bend it like Beckham' and 'Bride and Prejudice' (which
debuted at the top spot at the UK box office), global curiosity about Bollywood is
on the rise - Bollywood has been featured in recent issues of 'National
Geographic' and 'Time'. All these point to the fact that the Indian film industry is
now reaching the sophistication that is required to cater to global audiences.
Gross worldwide revenues
Film
0% 20% 40% 60% 80% 100%
USA Japan UK France India Others

Film and film-based Although over ninety years old, the Indian film industry was accorded the status
of an industry as recently as 2000. Consequently, it is only during the last five
entertainment jointly
years that organised financing from banks, financial institutions, corporates and
command a significant venture funds became possible. Earlier, it was almost solely reliant on private and
consumer mindshare largely individual financing at extremely high interest rates.
Over the last few years, there has been some change in the operating style of the
industry. Film financing from organised sources is on the rise: around 100 films
availed of organised funding of INR 7 billion in 2004, compared to virtually nil a
few years ago. This number could be higher in the future if
! on the demand side, the industry responds pragmatically, by creating an
environment conducive to organised funding; and
! on the supply side, more financiers from the organised sector enter the fray -
spreading the risk for a single financier and deepening the market.
45
A CII - KPMG Report
India can establish itself The seeds of corporatisation have been sown and early forms of vertical
integration between content producers, distributors, exhibitors, broadcasters and
as an important global
music companies can be observed in the industry. The stakeholders, especially
film-making hub the new generation of producers, directors and performers, are now much more
receptive to international best practices to redefine the way of doing business.
Better discipline has resulted in a slow turnaround in the industry, which
recovered from an unsuccessful 2002 to record better profitability in the last two
years.
The film industry has entered a new phase of growth

First wave of growth Second wave of growth
Institutional
financing Integration of
Evolution of the Indian film industry
value chain
Limited IPOs
Bonds, Entry of MNCs
Low insurances
Golden era for studios corporate
governance
Venture capital,
Prabhat Studios High cost private equity
J F Madan New Theatres private
monopoly Bombay Talkies financing
on Corporatisation
exhibition
Gradual rise of Dubious
‘banners’ channels of
Early finance
distribution
networks
Individual
film
makers
1910 1920 1930 1940 1950 1960 1990s 2001 2004 2005 onwards
Integration and rightsizing of all functions across the value chain is expected to
lead to a consolidation among the fragmented players in the industry. This would
result in increased market power, better economies of scale (through sharing of
common resources across different areas of the value chain) and initiatives to
mitigate risks as against transferring risks on to the next player. This will lead to a
more efficient film-making process, where relevant content will be developed,
distributed and exhibited in a more synergistic manner and on a larger canvas.
Aided by investments in technology (like networking the last-mile through digital
distribution) and the right measure of governmental intervention, India could
establish itself as an important global film-making hub outside of Hollywood.
46
The changing paradigm
! The opening up of new markets overseas, with viewership of Indian films
spreading beyond the Indian diaspora into Asian, and eventually non-Asian
audiences.
! Nationwide distribution of well-made, big-budget regional films, some of
which could cross over into countries like Japan and China.
! Rising penetration of home video and greater demand for pay-per-view
content with the advent of alternate delivery platforms like DTH and IP-TV.
! Increased theatrical attendance consequent to
- right-sizing and upgradation of theatres and
- introduction of multiplexes to enhance the viewing experience
! Reduced leakages and piracy, with greater investments in digital
distribution technology and network for:
- eliminating/ reducing the time lag between releases in mainstream and
other centres
- more effective monitoring and recording of revenues
Components of the Indian film industry

The Indian film industry comprises of a cluster of regional film industries, like
Hindi, Telugu, Tamil, Kannada, Malayalam, Bengali, etc. This makes it one of the
most complex and fragmented national film industries in the world. These regional
language films compete with each other in certain market segments and enjoy a
virtual monopoly in certain others. The most popular among them is the Hindi film
industry located in Mumbai, popularly referred to as “Bollywood”.
Indian films certified by the censor board

120 0
Number of films
100 0
800
600
400
200
0
1999 2000 2001 20 02 2003
Hindi mainstream Other Hindi Regional
Source: Central Board for Film Certification
Bollywood
Out of the 200 Hindi films made in India each year, around 150 are made in
Bollywood. These Bollywood films are released throughout India on both big and
small screen formats, with several of them being screened overseas as well.
Though there have been sporadic instances of regional films, enjoying a national
release or even an overseas release, virtually all films having a national audience,
47
A CII - KPMG Report
are made in Bollywood. It accounts for over 40 percent of the total revenues of the
overall Indian film industry, which is currently estimated at INR 59 billion. It is
estimated that only INR 50 billion finds its way to the industry coffers, with the
balance INR 9 billion being cornered by pirates1.
Regional films
The major regional film industries are Tamil and Telugu, which together earn around
INR 15 billion, followed by Malayalam, Bengali and Punjabi. The average cost of
production of a regional film, in keeping with its limited market (compared to a
Hindi film) and lower revenue potential, are only a fraction of that of a mainstream
Bollywood film. With increased viewer exposure to a plethora of entertainment
options on satellite television, the number of regional films produced annually has
fallen from around 800, three years ago, to around 650 currently.
However, in terms of discipline and cost control, the level of professionalism

prevalent in certain regional film industries (like Tamil) is higher than that observed
in Bollywood. For instance, the average time frame for completion of a relatively
big-budget Tamil film is 4-9 months, as opposed to 15-18 months in Bollywood.
Some key reasons for this are:
! Appropriate importance given to script development and pre-production,
! Leading actors working on limited number (usually one or two) of
assignments at a time and
! Large scale of operations of studios giving them:
- flexibility to amortise and spread costs and risks over a larger portfolio
- greater degree of integration
In terms of discipline and Market Share by R even u es
cost control, certain regional

Hind i Mainstre am
film industries are more 4 3% Cross-o ve r Hindi
2%
professional than Bollywood
Fore ign
2%
O the rs Malayalam
8% 10 %
Other Hind i Tam il

2% 1 7%
Be ngali
1%
Telug u
15 %
Source: Industry
1
I n d u s t r y e s t i m a t e s t h e t o t a l r e v e n u e l o s s d u e t o p i r a c y a n d l e a k a g e s i n t h e a t r e c o l l e c t i o n s a t I N R 15 - 2 0 b i l l i o n . S i n c e t h e p r i c e p a i d b y t h e e n d c o n s u m e r
f o r s u ch i l l e g i t i m a t e p r o d u c t s i s s i g n i f i c a n t l y l o w e r t h a n t h e n o r m a l p r i c e , w e h a v e c o n s i d e r e d t h e r e t a i l v a l u e o f s u ch i l l e g i t i m a t e i n c o m e a t I N R 9 b i l l i o n
48
English films
Big budget Hollywood films are beginning to make a mark, with their dubbed
versions making inroads into the semi-urban and rural markets. A recent case in
point is 'Spiderman 2', which along with its dubbed version, grossed a whopping
INR 342 million, higher than 'Murder' and 'Hum Tum' - two mainstream
Bollywood hits of 2004. On a cumulative basis, box office collections of foreign
films grew in both revenues and number of releases, from INR 1.5 billion from 60
films in 2003 to INR 1.8 billion for 72 films in 2004.
Enthused by the international success of India-themed English films made in UK

and US (like ‘Monsoon Wedding’, ‘Bend it like Beckham’, and ‘American Desi’),
there is now a growing trend among younger film-makers to make English
language films in India for the overseas viewers. Though the market share of such
English language films made in India is still insignificant, both by volume as well
as by revenues, there exists a niche audience for them, which is growing.
Arthouse films, short films and documentaries

Parallel film-makers like Satyajit Ray and Shyam Benegal have won plaudits
internationally for adapting the neo-realistic style of film-making to an Indian
milieu. Even in commercial Indian cinema, during the 50s and the 60s, film-
makers like Bimal Roy, Guru Dutt, V. Shantaram and Mehboob Khan made films
with powerful social messages that were box office hits, successfully walking the
tightrope between critical acclaim and commercial success.
Interaction between art and Gradually, from the 60s, a distinction started developing between the so-called
'commercial' and 'art' films. The art film-makers could not compete at the box
commercial film arenas is
office due to the lack of commercial viability of the subjects they attempted. The
expected to raise the quality mainstream films kept growing in terms of budgets and star cast. From the 70s
of cinematic content onwards, there was a clear divide between commercial and art films.
In the last few years, the tide seems to have turned again with barriers between
art and commercial films beginning to wither away. Noted art house film-makers
like Shyam Benegal, Govind Nihalani and Ketan Mehta are foraying into big
budget, star-studded films while commercial actors are increasing performing in
art films. Such interaction between art and commercial film arenas is expected to
bring about an overall improvement in the quality of content.
In addition, India also produces around 1300 short films, documentaries and non-
feature films, several of which have won critical acclaim and international awards.
However, there has been no organised attempt at commercial exploitation of the
non-feature genre.
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Emerging genres
Till date, categories like tele-films and special-effects driven films, which drive film
revenues internationally, were virtually absent in India. Efforts in producing tele-
films have been few and far between. However, with the advent of additional
distribution platforms like DTH and IP-TV, this could become a considerable
revenue-earner for the industry in the future, with established film producers,
directors and actors helping in realising its potential.
The recent success of films like ‘Koi Mil Gaya’ and ‘Bhoot’ and the domestic
success of Hollywood films like ‘Spiderman-2’ and the Harry Potter movies
indicates a growing taste for special-effects driven films in India. Indian visual
effects houses have acquired the sophistication and skill-sets to handle the
special effects requirements of Indian mainstream films, though they may still
have some distance to travel before they bag any large Hollywood contracts.
Increased
demand coupled with a supply push (post-production and visual effects houses
investing in films) could increase revenues from this genre.
Sequels of very successful commercial films, another genre hitherto non-existent

in India, are being attempted for the first time. It remains to be seen how
effectively the new generation of film makers leverage these genres to generate
revenues.
Current revenue distribution

Distribution of film revenues
Leakages/
piracy
14%
I n ci nema ads
2%
Music
2% Domesti c
theatrical
57%
Satel l i te/ DTH/
I P -TV
9%
DVD/ VCD/
overseas cable
4%
Overseas -
theatri cal
12 %
Source: Industry
The industry realises almost 70 percent of its total revenues (around 80 percent
of legitimate revenues) of INR 59 billion from domestic and overseas theatre
viewership, unlike in countries like the US which earn only 35 percent of revenues
from theatre viewership while the remaining 65 percent is derived from other
revenue sources such as DVD/ VHS/ cable, satellite, pay-per-view, etc.
50
For a brief period which ended in around 2001-02, sales of music rights accounted
for 20-30 percent of the cost of production for a major film, selling for as much as
INR120-150 million. Such prices were not sustainable and consequently, the sale
of music rights ceased to be a major source of financing of productions. Lately,
however, producers have been able to extract high prices from television channels
by selling the satellite rights of major films in advance. Established producers
have also been able to tap in-films advertisements as another source of revenue,
their clients mostly being consumer goods companies.
Along with an overall With the deepening of the home video market, sale of DVD/ VCD rights have now
emerged as a considerable source of revenue, though at present, such rights are
reduction in costs, each of
mostly bundled along with overseas theatrical rights and sold at lump sum prices.
the revenue components Overseas income from sale of theatrical and home video rights have been
can grow. increasing from INR 2 billion in 1998 to INR 4 billion in 2000 to INR 9 billion now,
accounting for 16 percent of total revenues.
Size and growth

With an overall reduction in costs, there is a potential for each of the revenue
components to grow, albeit in varying degrees.
Domestic theatrical revenues are estimated to grow at 17 percent, aided largely

by multiplicity of ticket rates and higher occupancy due to rightsizing of screens
from INR 34 billion to INR 86 billion in 2010. Satellite rights, including pay-per-view
and broadband rights, could take off in 2007, when DTH, IP-TV and broadband
cable networks are expected to be rolled out on a large scale. Satellite revenues
are expected to grow at 22 percent from INR 5 billion to INR 17 billion in 2010.
Growth in other income from in-film promotions and merchandising is anticipated
to flatten out after the initial spurt, while growth in revenues from the sale of
music rights could be minimal. The combined forces of digital technology and
more stringent regulations should be able to reduce the menace of piracy, though
in absolute terms, it may still continue to account for around INR 6 billion in
revenues in 2010.
The current realisation on overseas theatrical and home video at retail value, i.e.
the amount that the overseas end-consumer pays on Indian filmed entertainment
is believed to be around USD 360 million a significant 90-100 percent over the
USD 190 million (INR 9 billion) at which these rights are sold. The end-user
consumer revenues of USD 360 million are projected to grow at 13 percent
annually to reach USD 750 million in six years (some optimistic projections put it
at over USD 1 billion), while the realisation for the Indian IPR owners will be
better, narrowing down the margin from 100 percent to around 40 percent by
2010. Consequently, overseas theatrical and home video are expected to grow at
22 percent annually from INR 9 billion to INR 30.5 billion in 2010. This would still
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A CII - KPMG Report
be well below the true export potential of Indian content and the appropriate
marketing focus, synergistic alliances and co-productions could push this number
up significantly.
Growth of the Indian film industry (INR billion)

160
140
120 Leakages / piracy
100 In cinema ads
80 Music
60 Satellite/DTH/IPTV
DVD/VCD/overseas cable
40
Overseas - theatrical
20
Domestic theatrical
0
2002 2003 2004 2005E 2006E 2007E 2008E 2009E 2010E
Overall, the industry is expected to grow annually at 16 percent to cross the INR
100 billion mark by 2007, and reach INR 143 billion in 2010.
If the combined efforts of the various stakeholders and the government create
the desired impact in terms of charting a structured roadmap for the future, this
growth rate could even exceed 30 percent in the next 4-5 years. The later part of
this section focusses on the need for such collaboration.
Segment-wise growth of film revenues (In percentage)
Domestic theatrical Overseas - theatrical

140%
DVD/VCD/overseas cable Satellite/DTH/IPTV
120%
Music In cinema ads
100%
Leakages / piracy Total
80%
60%
40%
20%
0%
-20%
-40%
-60%
2003 2004 2005E 2006E 2007E 2008E 2009E 2010E
Setting an industry agenda for accelerated growth

Though the growth prospects for the Indian film industry are quite strong, it is still
performing below its underlying potential. It is a fact that India's per capita
monthly spend on films is less than INR 4, which is extremely low for an
entertainment-crazy country like ours.
52
Concerted efforts undertaken by the industry participants can launch the industry
on an accelerated growth path, so that it can beat the forecasts. Some of the key
drivers that can enable such accelerated growth could be:
! Corporatisation
! Developing economies of scale
! Organised film financing
! Value chain integration
! Last mile consolidation in distribution and exhibition
! Piracy and its control
! Expanding the international market
! Outsourcing to India
! Training and education and
! Government incentives.
Corporatisation
In the 1990s, the Indian film industry was completely fragmented, with no
individual entity - content producer, financier, distributor, exhibitor, music company
and satellite broadcaster - commanding any considerable presence across the
value chain. As a result, the revenue earning capacity of any given film became a
function of the relative bargaining power of the concerned parties. Consequently,
creative freedom and quality of content suffered. Risk mitigation, contracts and
insurance were alien terms, while time and cost overruns were commonplace.
A corporatised approach to production implies and includes the following mix of

initiatives or actions:
! Intelligent selection of scripts which factors in an understanding of consumer
preferences and market trends
! Project feasibility analysis for target audience preferences, box office results
talent popularity and story viability in domestic and international markets
! Active participation and consent of each activity head at the green-lighting
stage
! Investing in equipment, technology and management information systems to
bring down costs and build in flexibility in shooting schedules
! Control over production timelines, budgets and quality with periodic
monitoring
! Outsourcing non-critical functions to focus on the core aspects of film-
making
! Introducing a profit sharing system thereby reducing initial risk on full upfront
payment etc.
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A CII - KPMG Report
In the last few years, the industry has taken a few steps towards corporatisation.
However, it is currently in the first stage of corporatisation, without a clear
delineation of creative and management functions. More often than not, the
promoter/ CEO doubles up as the chief creative person, getting involved in every
stage from script selection to casting, while creative people also function as
operational managers.
In the industry, there are six or seven large production houses which have built a
formidable track record and capabilities over the years and possess rich
experience in managing practically all the elements of the value chain. This
experience enables them to operate with greater efficiency compared to the rest
of the industry. In a way, they have also corporatised themselves.
Corporatisation can greatly aid this industry in the following ways:

! Imposing transparency and discipline in the film-making process
! Higher emphasis on scripting, planning and documentation
! Very high focus on cost-control
! Developing an institutional memory of best practices
There are only six or seven In these ways, it could help make the film-production process much more
efficient.
large production houses that
have the experience of The Indian film industry is far behind Hollywood in terms of its efficiency in the
managing all elements of myriad aspects of film production, as illustrated below.
the value chain

Component India Hollywood
Scripting and development
Pre-production
Above-the-line cost control
Below-the-line cost control
Risk reward sharing and mitigation
Contracts and documentation
Product marketing
Merchandising
54
The film producers will have While the Indian film industry has advanced to a significant extent in controlling
direct costs, the below-the-line costs are rather poorly managed. This affects the
to change their mantra from
film's budget adversely through time and cost over-runs. Scripting and
‘make the costliest film of development is another vital part of film production that is largely neglected in
the year’ to ‘make a portfolio India. Contracts and documentation and merchandising are a few other elements
of film-making where India lags far behind Hollywood. On a brighter note, India
of cost-effective films in a
has made some basic progress in pre-production and product marketing, in recent
year’ times.
Corporatisation, with its accompanying emphasis on transparency, accountability

and consolidation in the various elements of film-making and distribution, can
bring about an overall improvement in enhancing the profitability of the sector.
Developing economies of scale

The film producers will have to change their mantra from 'make the costliest film
of the year' to 'make a portfolio of cost-effective films in a year'. They will have to
blend films of different genres and budget segments aimed at different markets
and different audiences to dissipate their risk profile. It is estimated that the
producers can reduce their costs by 10-12 percent by:
! owning studio infrastructure and equipment
! signing long-term contracts with creative talent
! signing multiple contracts with distributors and exhibitors.
They can also raise their revenues by signing long-term contracts with distributors
and exhibitors. This will enable them to get a higher share of the domestic
theatrical revenues and also help in plugging leakages. On a simple estimate, a 10
percent reduction in costs in the medium term, coupled with a 15 percent
increase in revenues can more than double the industry profits. It is expected that
the combination of key drivers at play could bring the industry closer to its optimal
level of profit generation in the near future.
Portfolio approach: a simulation
Reduced costs and expanded revenue streams go towards reducing

return volatility and project risk substantially
Existing Possible cost Revised
Cost reductions costs increase (reduction) costs
(%) (%) (%)
Pre production 2 2 4 Cost mitigation / planned
Artists’ costs 30 (3) 27 strategies can typically
Post production costs 7 (2) 5 bring down production
Equipment 4 (1) 3
costs by approximately
10-12 percent
Production expenses 35 (4) 31
Distribution costs (print + publicity) 22 (3) 19
Total 100 (11) 89
Existing Revenue Increase/ Revised

Revenue enhancements revenues (decrease) revenues
Revenue enhancement (%) (%)
strategies can boost
Domestic theatrical 65 9 74
income by around
Overseas theatrical 11 - 11
10-15 percent
Satellite 14 - 14
Music 6 - 6
Others 4 - 4
Leakages - 5 5
Source: KPMG Research Total 100 14 114
Resulting in favourably altering the risk reward profile by 20-25%
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A CII - KPMG Report
It is estimated that by developing a portfolio of films, it is possible to shave 10
percent off the artist's costs, reducing it from 30 percent to around 27 percent of
the overall filming cost. The distribution costs (print and publicity) can be cut by
approximately 14 percent, reducing it to 19 percent of the overall cost. The
production expenses can also be similarly reduced to 30 percent of the overall
filming costs, from 35 percent, while a higher budget could be allocated for pre-
production.
In all, it is estimated that corporatisation and economies of scale slash film

production costs by over 10 percent. Side by side, it is also expected to increase
revenues by 14 percent, by raising domestic theatrical revenues by 9 percent and
plugging leakages of 5 percent. This can significantly improve the risk-reward ratio
by almost 25 percent. Even at the current revenue numbers, cost reduction
undertaken in this manner could lead to a complete turnaround in the risk
perception of the industry, by improving the risk-reward ratio.
By creating a portfolio of films in various genres and stages of production and the
attendant cost-amortising and revenue-enhancing methods, the returns could go
up to even 40 percent.
Organised film financing

Till 2000, films were mostly financed through private sources, since commercial
lending agencies considered the industry to be a risky and low-priority sector. The
two major sources for finance were:
! Distributors and music companies, who would pay advances to established
film-makers and films with reputed star casts to acquire the theatrical/ music
rights.
! High-net worth individuals
Due to the unorganised nature of this funding and its perceived riskiness, the
interest rates charged were usurious.
Curiously, despite several downturns and the apparent riskiness, private financing
continued unabated, even during lean periods. For instance, even in 2002, annus
horribilis for the industry, fresh capital continued to enter. This indicates that the
industry was able to generate sufficient returns, despite the high financing cost.
This also implies that it is quite likely that in the absence of proper accounting and
reliable data on costing, coupled with the continuous game of one-upmanship
among large producers/distributors (prompting them to make exaggerated
statements about their expenditure), the costs of production may have been
grossly overstated in the past. In other words, it is possible that the bottom-line
for the industry may actually have been much healthier over the last few years
than what it was believed to be.
56
The availability of organised financing from commercial banks and lending
institutions, primarily IDBI, triggered the entry of private equity funds and large
corporate houses in this space. It is believed that the general experience of the
organised sector has been satisfactory, which should lead to the entry of more
players in the near future.
Organised funding has significantly reduced the average financing cost in this
sector. However, institutional lending rates are still high compared to other
sectors, since film financing is perceived to be riskier. Limited or non-recourse
financing, akin to project financing, is not common. It is believed that institutional
financing could bring in stipulations like completion bonds, insurance, well-defined
contracts, etc. The production houses' willingness to accept these conditions will
determine the comfort level of the financiers. Once financiers earn reasonable
returns for a sustained period, the risk-perception could change. Then one may
even see sophisticated financial structures like securitisation, credit enhanced
bonds, etc being introduced into the market.
In the existing model of funding, financing is done on a project-wise basis. The

bank finances upto 50 percent of the cost of a project and retains the negative
rights as collateral. The producer brings in the rest of the money from his own
sources. The bank also insists on a completion guarantee from the producer and
insurance against delay.
Institutional lending rates Corporatised financing structures - First generation (existing)

Full recourse
are high compared to other
sectors, since film financing Bank
Guarantee / Collateral
Producer
is perceived to be riskier
Loan up 1. Negative rights Equity 50% +

to 50%
2. Completion guarantee
3. Insurance
Film
Project
In the emerging financing structure, credit enhancers like evaluation by a rating

agency and specialised guarantee funds are used to mitigate the risks to the
financing agency. These enhancers help the bank take a larger share of the risk,
say upto 70 percent of the project budget. The interest rates for such finance
could be lower because the risk to the bank is reduced significantly.
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A CII - KPMG Report
Corporatised financing structures - Second generation (evolving)
Limited recourse financing (illustrative)
Interest
Loan guarantee
(say 50% of the
Film bank loan)
Specialized
production Bank
guarantee funds
company
Understand
Equity 30% + risks,
does detailed
appraisal
Takes a non-
fund exposure
Film Loan upto 70%
project
Rating
Credit enhancers
agency
In the futuristic scenario of funding films, the financing will not be project specific,
rather a working capital loan could be given to the integrated entity which owns
the entire value chain. It will be securitised using the exhibition receivables. Such
a scenario will allow the bank to spread its risk across a portfolio of projects of the
film production company.
Corporatised financing structures - Third generation (futuristic)

Receivables based financing (illustrative)
Film library
Home
video Television Exhibition Music
Digital distribution, last

mile integration and higher
transparencies could allow
for direct securitisation of
exhibition receivables Receivables securitisation
Bank
Working capital
Film production company Film project
Complete cash entrapment
58
With cheaper sources of financing becoming available from legitimate sources
and the industry becoming more disciplined, the quantum of unorganised
financing is expected to shrink. In an increasingly professional environment,
unviable products with weak scripts could find it difficult to garner funding.
Consequently, the average number of films produced annually in India is expected
to be reduce to around 600 over the next five years, while the average cost of
production per film will increase. This will include an increased spend on script
development, pre-production, visual effects and marketing.
The changing pattern of film financing

1200 250
1000
200
800
Number of films
150
INR million
600
100
400
50
200
0 -
2002 2003 2004 2005E 2006E 2007E 2008E 2009E 2010E
Corporatised films Other f ilms Average cost of a mainstream film
The percentage of films produced through organised funding in the industry is

expected to grow. Though corporate and institutional funding is currently limited
largely to Bollywood films, it may not be long before regional films begin to qualify
for such financing.
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Have mid-budget films eroded overall industry profitability?
Around 30 percent of the films generate 90 percent of the industry revenues. This
is not surprising considering that out of around 150 mainstream films produced
annually, 40-50 percent would not be considered financially viable in a
corporatised environment. These laggards include
! Very low budget (Category D) films with weak scripts, completely unknown
cast and inexperienced producers and directors
! Certain category AA (super budget) films that suffer due to cost overruns and
a higher risk quotient and
! Several B Grade (mid-budget) films that suffer due to a serious mismatch
between the products' cost and revenue potential.
In an increasingly corporatised environment, films that are motivated more by

passion than commerce are unlikely to get past the approval stage, unless there
is a very strong justification for financing such products.
In order to better understand the risk return profile of mainstream (Bollywood

used as a proxy) films, we have classified films from 2003 and 2004 into the
following four categories based on cost, production value, artists and technicians,
and content.
In an increasingly Categories Lowest Cost (INR) Highest Cost (INR)
AA 150,000,000 300,000,000
corporatised environment, A 80,000,000 150,000,000
films that are motivated B 30,000,000 80,000,000
C 10,000,000 30,000,000
more by passion than
Gross collections include domestic and overseas theatrical receipts, domestic and
commerce are unlikely to overseas satellite and video rights, music rights and in-film advertising and
get past the approval stage merchandising revenues.
Category AA films are typically ‘big banner’ films. These films have a strong star
cast, high level of technological sophistication and typically, socially acceptable
themes. The key factor in an AA category film is that the producer and the director
have a very strong track record and have the ability and the experience to
complete the film on time. Category 'AA' costs are assumed to range from INR
150 to 300 million. Apart from domestic theatrical and other revenues, these films
have an overseas potential as well, depending on the presence of certain lead
actors.
Category A films have costs that are assumed to range from INR 80-150 million.
The costs cover variables like type of shoot, locations, number of shifts, the type
of agreements with artists, post-production costs, capitalised interest, and so on.
At the same time, they enjoy multiple cash flows on the sale of satellite rights,
music rights, cable rights, internet rights and sponsorships. Generally, these films
recover their costs in the first four weeks after release, unless they have been
60
made at a disproportionately high cost.
Category B films are typically made by relatively financially weaker producers. In

many cases, the completion of the film gets delayed due to the lack of last-mile
finance. The producer also does not have his own sources of finance and usually
taps the market for funds. Sometimes, the directors of these films have a
mediocre track record with negligible past box office success to their credit. The
star cast here may not be top grade and may include actors who have
not been completely accepted by the mainstream audience. Often, these films
are not completed due to lack of funds. Their costs are assumed to range from
INR 30-80 million.
Category C films comprise of a heterogeneous mix of low budget, high quality

content films at one end with a high profit potential, to still-born projects
characterised by a lack of quality, content, and good artists fashioned on run-of-
the-mill subjects, espousing mediocre music and virtually no market. Their costs
are assumed to be between INR 10-30 million.
Category D films, which comprise of virtual non-starters in terms of finance,

content, and technical quality, have not been included in the sample examined
due to their inability to get past the approval stage in a more corporatised
environment.
Ranking films by risk and return

Categories Rank by returns Rank by risk Combined rank
AA 2 3 2
A 2 2 1
B 3 4 3
C 1 1 1
The overall sample consisted of over 150 films released in the years 2003 and
2004
It should be noted that the above analysis is indicative and not comprehensive. It
is intended to serve just as an illustration. It is nevertheless observed that B and
AA category films have proved to be relatively more risky investments for
production houses, followed by A and C category which show lesser variation in
their respective returns. B category films also perform poorly in their overall
returns ranking, followed by AA and A category films that share the same return
characteristics, with category C films finishing on top once again. The combined
ranking for both the years shows that category A and C films are better
investment prospects in terms of the balance between their risk-return
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A CII - KPMG Report
characteristics, followed by category AA (super budget) films and, finally, category
B (mid budget) films which appear to be the riskiest.
Significantly, category B films represent an average of 40 percent of the

Bollywood film industry's investments, compared to only 16.5 percent
investments in category C and 26 percent in category A films. Thus, the
performance of the overall film industry could be largely affected by
overinvestment in unprofitable segments like category B and under investment in
profitable segments like categories A and C. By strategically investing in a
balanced portfolio, film companies and production houses can increase their
overall returns considerably, while reducing their overall risk.
This is not to imply that mid-budget films should not be produced or financed;
however, it is imperative that the risks with respect to such films are well
mitigated, costs and schedules adhered to and a proper assessment of the
content and the creative team carried out at the developmental stage before any
financing decisions are taken.
62
Value chain integration
The production phase
A comparison of the stages of film production in the Indian film industry (using
Bollywood as a proxy) with that of Hollywood reveals that the Indian film industry
tends to ignore the most important stage of production - the development stage.
During the development stage, typically, the story is developed from a concept or
an idea into a complete script with a provisional screenplay. The commercial
viability of a creative concept is evaluated carefully by way of market
segmentation, market research and use of sophisticated revenue forecasting
models. In Hollywood, on an average, this stage takes anywhere between 2-4
years and only 20 percent of the stories developed at this stage move on to the
next stage of pre-production.
The film production process
Conception of idea Screenplay Principal photography Editing

Development of idea breakdown Blocking Sound effects
Market research Shooting schedule Lighting Music production
Obtaining rights Location scouting Final rehearsals Special effects
Signing tentative Budgeting Shooting Mixing
cast, crew Casting and unions
Raising capital Equipment rentals
Permits, etc.
Development Pre-production Production Post-production
Source: Film Production Management, Baston Cleve
The general tendency is to In Hollywood, the studio is an integrated entity that oversees all aspects of the
transfer the risk to the next value chain (from production to distribution and at times, even exhibition) and
hence has an incentive to make sure that the product is marketable right from the
link in the value chain conceptual stage, since there are not many opportunities for risk transfer within
the value chain. In the Indian context, due to the unorganised and fragmented
nature of the film industry, the tendency is to transfer the risk to the next link in
the value chain rather than to manage the overall risk effectively. The lack of
allocation of time and budget towards script development and market research
clearly manifests itself in the relative unprofitability of the industry in India,
despite its increasing revenues every year.
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Time allocated to various stages of production (Years)
3 .5
2 .5
1.5
0 .5
0
Development Pre-production Production Post-production
Hollywood Bollywood
Bollywood spends significantly more time in the production stage compared to

Hollywood. Some possible reasons are:
! Cost overruns due to inadequate planning in the development stage itself and
! Lack of smooth funding during various stages of production (especially in the
case of mid and low budget films)
In the post-production stage, too, Bollywood tends to spend relatively lesser time
compared to its US counterparts. Some probable causes are:
! Unavailability of funding (due to the film being over-budget at the production
stage itself)
! Lack of importance given to post production
! Haste in releasing the film in order to recover the money.
Allocation of expenditure across film industries
Bollywood
Hollywood
0% 20% 40% 60% 80% 10 0 %
Marketing Development and Production

Another important difference between Bollywood and Hollywood is that the latter
attaches considerable significant attention and funds to marketing of films. In
India, however, it is the distributors who virtually carry the entire burden of
marketing the film. This leads to the following problems:
! Distributors often go through a working capital crunch due to the failure of
one film, leading to insufficient availability of funds for marketing the next.
! Each distributor uses his discretion in marketing a film. This can lead to the
promotional effort conveying a message completely different from what the
producer intended.
This may be another area where the cost distribution and resource allocation
structure of Indian films can be made more efficient.
64
Last-mile consolidation in distribution and exhibition
With around 12,900 active screens (down from 13,000 in 1990), out of which over
95 percent are standalone, single screens, India's screen density is very low. In
contrast, China, which produces far less films than India, has 65,000 screens,
while US has 36,000. With many more avenues of entertainment available to the
youth (an important target population), it is imperative to create an enhanced
theatre viewing experience.
India is under-screened (Screens per million population)

117
There is a need for at

77 least 20,000 screens in
61 India as against the
52 53 current 12,900.
43 45 46
30
12
UK
Belgium
Germany
Spain
Italy
Ireland
Denmark
France
US
India
Source: UNESCO
The multiplex revolution

The conversion of standalone, poorly maintained single-screen theatres to
sophisticated multi screen theatres, in addition to the new multiplexes within or
around shopping malls and family entertainment centres, is an emerging trend in
urban India today. Multiplexes, though a recent urban phenomenon, have shown
the way forward in increasing domestic theatrical revenues. The reasons for their
success are: -
! They enjoy an average of 50-60 percent occupancy per screen as opposed to
30-35 percent of standalone theatres,
! The customer is willing to pay more for the enhanced viewing experience,
! The government has accorded various tax rebates for multiplexes,
! States like Maharashtra and Delhi have permitted dynamic ticket pricing,
allowing them to change ticket prices according to demand and supply.
! They increase footfalls in shopping malls by 40-50 percent. As a result,
several major malls have multiplexes in or near them. The present retail boom
has led to a significant rise in the number of multiplexes.
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Increasingly innovative promos for Hollywood films and alliances that now
involve a wide spectrum of players - multiplexes, television channels, internet
portals, cellular operators, hotels, cafes and consumers goods - are expected to
percolate to Indian film releases as well.
Multiplexes are ushering in The advent of multiplex chains is expected to usher in a new era of film exhibition,
apart from just an enhanced viewing experience. Some of the expected changes are:
a new era in exhibition of ! Dedicated marketing teams to leverage state-of-the-art technology to address
films the programming needs of exhibitors
! Marketing team to work out content-to-customer matches on the basis of
consumer surveys and other metrics.
! Developing synergistic marketing strategies in conjunction with content
producers, broadcasters, music companies, etc.
! Offering better terms to producers based on
- Presence across multiple locations
- Significantly higher transparency
- The strength of their balance sheet
These activities of the multiplexes could to lead to a possible shakeout and

consolidation among the standalone theatres.
Changing distribution model

Currently, theatrical rights for films are bid out to distributors on a per-territory
basis, against minimum guarantees. Distributors in turn work out flat fee, lease
rental and/or revenue sharing arrangements with exhibitors. However, this model
66
is highly unstable and is not expected to survive in the long term because of the
following:
! Established producers command very high minimum guarantees, leading to
disproportionate risk-reward sharing if the film is not successful.
! The distribution model of the future could become an infrastructure play, run
by utility providers.
! There is lack of reliable information on theatre collection, due to the
fragmented last-mile, which perpetrates under-reporting.
! Many screens/ theatres are expected to be wired up, with the entry of utility
companies in the distribution sector.
! A spiralling demand for content, a considerable portion of which is expected
to be film content, is expected to be sparked off by the digital home
revolution (discussed in detail in the Television section of this report).
The industry could see In the future, the industry could see alliances between producers and exhibitors
on the one hand, and broadcasters and utility players on the other. Traditional
alliances between
distributors could increasingly seek to re-invent their business model by gaining
producers and exhibitors on control over the last mile in select theatres and seeking to enhance the theatrical
one hand and broadcasters value proposition by investing in theatre upgrades and multiplexes.
and utility players on the Aggregation of different parts of the value chain can eventually lead to greater
other revenue capture and enhanced bottomlines.
Revenue aggregation for an integrated film producer

Distributors Additional marketing costs 8
Revenue 75 and exhibitors
Overseas
Revenue 8 rights Ticket sales
Revenue 16
Additional marketing costs 2 Revenue 100
Home video
Producer Revenue 4 rights
Non ticket sales
Revenue 6
Revenue 20
Television
Revenue 10 rights
Revenue 13
Leakages
Music
Revenue 3 rights
Revenue 30
Revenue 3
Revenue to producer Revenue at retail value Untapped revenue

100 138 50
Incremental revenue 38
Incremental revenue 88
Source: Industry
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Piracy and its control
Initiatives to reduce piracy in the years to come, either due to digital encoding
mechanisms or better enforcement of the law, can also lead to an increase in
domestic theatre viewership revenues. In the US, a typical theatrical window
spans six months, where collection amounts to 25 percent of the total gross. In
India typically 70 percent is collected over three months, after which piracy
catches up and virtually nullifies any further theatre revenue potential. There are a
large number of video rental shops across the country, many of which thrive on
pirated videos. It is difficult to estimate the combined revenues of these rental
shops but the impact it has on eroding theatrical revenues is significant. Issues
relating to piracy have been discussed in detail later in this report.
Expanding the international market

While the initiatives mentioned above can expand the domestic market, a better
exploitation of Indian products in other markets can provide another avenue of
growth. These markets include:
! The Indian diaspora
! Neighbouring markets like Pakistan, Sri Lanka and Bangladesh which are now
opening up,
! Non-traditional / new markets like Greece and the CIS countries, where
Indian films were extremely popular 30-40 years ago, through sub-titled or
dubbed content.
The global progress of Indian films
New western countries
Asian countries with common

languages: Pakistan, Bangladesh,
Sri Lanka, Malaysia
Revisit CIS, Greece, other

once popular markets
Indian Diaspora
1995 2000 2005 2007 2010
68
The Indian diaspora is estimated to be 20 million strong and growing. The
combined wealth of the global Indian diaspora is an estimated USD 300 billion.
Apart from being a community binder for Indians across the world, Indian films in
the past few years have contributed in a significant way in promoting culture and
tourism.
The Indian diaspora (In million)

3.5
3.0
2.5
2.0
1.5
1.0
0.5
-
Myanmar
Malaysia
Saudi
Arabia
South
Africa
Trinidad &
Tobago
UK
USA
UAE
Canada
Mauritius
Over the last ten years, overseas theatrical revenues have grown continuously
and are now a major influence in determining the way mainstream films are
made. More Indian films are now distributed and released in mainstream
international theatres, owing to the growing demand from the Indian diaspora.
Most of these revenues accrue from US, UK and Canada owing to their high
concentration in these countries.
However, the success of mainstream films overseas seems to be driven by the

popularity of a few leading performers. To earn sustainable export revenues, it is
imperative that this success extends beyond a few blockbusters to a wider
portfolio. It is now a challenge for mainstream producers to create content that is
universal enough to cater to the Indian abroad and to the man in rural India, while
being technically comparable to a Hollywood film, in order to woo the discerning
audience.
Looking beyond the Diaspora

Another key area of market expansion from an international perspective, is the
export of Indian films to foreign audiences, both to culturally similar countries
(e.g. Pakistan, Bangladesh, Sri Lanka, etc.), as well as to countries where cultural
barriers are considerable. Currently, the non-Indian viewers of Indian films are
largely restricted to Asian expatriates, as opposed to say Americans or
Europeans.
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Pakistan, for example, has a 155 million strong population that has a keen interest
in Bollywood films. Similarly, countries like Bangladesh (136 million strong Bengali
speaking population), Sri Lanka (3.5 million Tamils), Malaysia (1.5 million Tamil
speakers), Singapore, UAE, and Fiji also have good potential for different regional
Indian films, as has been proven by the popularity of Indian regional television
channels in these countries.
It is important for Indian Agents and marketing

Most foreign distributors have a limited understanding of Bollywood's
producers to tie-up with international potential. Therefore, it is difficult for them to commit considerable
agents who have the right investments in marketing the same. Also, there are not many existing overseas
relationships and an distributors of Indian films. Going forward, it is important that Indian film
producers get into distribution tie-ups with global majors to enable mainstream
understanding of different releases of their films, as opposed to releases only in India-centric theatres as
markets was the practice previously. These alliances can also be facilitated by marketing
agents. Internationally, most independent producers do not have relationships
with distributors across countries. So, the representatives or agents form the
critical bridge between the (independent) producer and distributor. It is important
for Indian producers to tie-up with agents who have the right relationships with
major distributors along with an understanding of different markets and theatrical
revenue streams. Similar alliances and a more focussed approach to distribution
and marketing of DVDs, VCDs, etc. Are required to tap the potential of the
overseas home video segment.
In general, a more comprehensive and concerted distribution effort is the key to

maximising the revenue potential of Indian films from international audiences.
70
A Possible Segmentation of Markets
Primary Market Secondary Market Tertiary Market
Hindi speaking Indian Domestic regions within India where the films
Diaspora 20 million have to be dubbed or sub-titled.
strong.
The Bollywood (Hindi) 60 percent of the Countries where the films have to be dubbed
Regional Film population in India. Pakistan 155 million or sub-titled (Pakistan, Sri Lanka, Bangladesh,
8 percent Urdu speaking.
Singapore, Malaysia, Fiji, UAE, etc.) + Russian,
Indian Diaspora in Pakistan. French, Spanish, Arabic, etc.
Urban City population Countries where the films have to be dubbed

The Bollywood Urban Indian Diaspora and
or sub-titled (Pakistan, Sri Lanka, Bangladesh,
Film a la “Jhankar Metro and Multiplex other countries like
Singapore, Malaysia, Fiji, UAE, etc.) and
Beats”, “Dil Chahta Hai”, etc. Phenomenon Pakistan, etc.
Russian, French, Spanish, Arabic, etc.
The English Regional Film English speaking Indian

Cine-going urban English Countries where the films have to be dubbed
a la English August Diaspora.
Speaking Indian population or sub-titled. (all English speaking countries of
(around 1.50 percent) English Speaking Pakistan, the world huge tertiary audience)
(can include Indian Bangladesh, Sri Lanka
Diaspora and Joint etc population and
Ventures made for the Indian Diaspora in
Indian market) these countries
Tamil speaking Indian Domestic regions within India where the films
Diaspora have to be dubbed or sub-titled
11 percent of the
The Tamil Regional Film 18 percent of Sri Lanka, Countries where the films have to be dubbed
population in India.
Malaysia, Singapore, etc or sub-titled Eg, Japan for films starring the
and the Indian Diaspora leading Tamil film actor Rajnikanth.
in these countries
Domestic regions within India where the films

2.50 percent of the Bangladesh and its have to be dubbed or sub-titled
The Bengali Regional Film
population in India. diaspora Countries where the films have to be dubbed
or sub-titled
Pakistan - 48 percent of Domestic regions within India where the films

Punjabi Speaking 155 million speak Punjabi. have to be dubbed or sub-titled
The Punjabi Regional Film
Population in India Punjabi (Indian and Countries where the films have to be dubbed
Pakistani) Diaspora. or sub-titled
Domestic regions within India where the films

10.50 percent of the have to be dubbed or sub-titled
The Telugu Regional Film Telugu speaking Indian
population in India. Countries where the films have to be dubbed
Diaspora.
or sub-titled
Indian Diaspora and
Global (where the India, Pakistan, etc.-
Joint Ventures a la
language of the film is the closer cultural match Countries where the films have to be dubbed
“Elizabeth”, “Bend it
first language of the (films may have to be or sub-titled
Like Beckham”,
country) dubbed or sub-titled)
“Monsoon Wedding”
Malayalam (3.90 percent), Domestic regions within India where the films
Kannada (4.40 percent), have to be dubbed or sub-titled
Other Regional Industries Marathi (1.80 percent),
Gujarati (1.20), Oriya Countries where the films have to be dubbed
(1.0 percent) or sub-titled
Key points:
! These markets experience a strong overlap in the primary markets, relatively
lower overlap in the secondary markets and practically no overlap in the
tertiary market (where the market becomes more heterogeneous with
different countries).
! Audiences would tend to see these films in the theatrical release “window”
more in the primary market than in the secondary market (relative to the
primary market) and least in the tertiary markets (consisting mainly of
satellite, cable and DVD/ video viewing)
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Can the Indian film industry become a global powerhouse?
Wooing the international viewer

India is one of the few markets globally where Hollywood has not been able to
dominate. Hollywood only has a 4 percent market share in India, arguably the
lowest amongst all other exporting countries.
The Indian film industry boasts of a repertoire of 67,000 plus feature films and a
few thousand documentaries made over the years in 30 different languages and
dialects. This kind of body of content is only second to the US and the UK and
therefore, can be a considerable source of export revenue due to its potential of
distribution via multiple formats globally.
In contrast, most countries that had vibrant film-making industries earlier have
seen a decline in their domestic production due to the local dominance of
Hollywood films coupled with lack of competent local language content. Even
countries like France, UK and China have felt the need to institute state initiatives
and control mechanisms like limiting the exhibition of foreign films to help their
local film industries compete with Hollywood.
India is one the few Since these countries are not producing significant content locally, they could be
looked at as an attractive alternative market for all types of dubbed and sub-titled
markets globally where
Indian films. This provides the Indian industry with a new opportunity to exploit in
Hollywood has not been the international film landscape. CIS countries and the Middle East are the most
able to dominate appealing markets for India within this niche segment.
Global box office revenues (USD billion)
0 .6 0 0 .6 9
0 .9 0 0 .8 0
0 .5 2 3 .7 9 3 .7 9
0 .4 7 0 .8 0
0 .7 1
3 .1 4
3 .0 6
4 .9 5 5 .5 8
4 .0 9
4 .0 2
8 .4 1 9 .5 2 9 .4 9
7.6 6
2000 2 0 01 2002 2003
US A EMEA A s ia-P ac ific L atin A m e ric a C anad a
Source: MPAA
Penetrating these markets, however, will require significant upgradation in many

aspects of production, like the quality of subtitles, dubbing, production values,
universality of content, the ability to tell a story keeping an international audience
in mind and, most importantly, the ability to handle a large canvas. It is not
surprising, therefore, that internationally successful films based on Indian themes
have been made by celebrated non-Indian directors, like James Ivory (several
72
Merchant-Ivory) films, Richard Attenborough (’Gandhi’), David Lean (’Passage to
India’) and Roland Joffe (’City of Joy’), or by Indian expatriates like Shekhar Kapur
and Mira Nair who are familiar with the pulse of the western audience.
New generation Indian directors are becoming increasingly aware of the fact that
a different kind of story telling style and skill is required for an international
audience; this is an encouraging development.
Cross pollination of talent and resources

Some of Hollywood's greatest directors and producers have originally hailed from
non-English speaking nations, for instance Fred Zinnemann, Milos Forman, Billy
Wilder, Roman Polanski and Elia Kazan. This confirms the fact that individual talent
and story-telling ability is not constrained by geographies - capable film-makers
will always find their way through to appreciative audiences. With Indian films
becoming more sophisticated and its talent gaining global recognition, new
opportunities for collaboration between the two industries are constantly
evolving. For example, Indian directors like Shekhar Kapur (’Elizabeth’), Gurinder
Chadha (’Bride and Prejudice’) and Mira Nair (’Vanity Fair’) are reinforcing their
credentials in English film-making.
Individual talent and Apart from these individual forays, Hollywood is increasingly importing talent and
concepts generated by Indian film industry. Recent examples are A.R.Rahman's
story-telling ability is not
collaboration with Andrew Lloyd Webber in ‘Bombay Dreams’ and ‘Moulin Rouge’
constrained by geographies - which featured a popular Bollywood film song. International assignments being
capable film-makers always bagged by actors like Om Puri, Nasiruddin Shah, Aishwarya Rai, etc are on the rise.
find their way to The globalisation of the Indian film industry has started - with many more actors,
appreciative audiences directors, producers, composers and technicians getting new opportunities
creating a greater visibility and acceptability for Brand India.
Co-productions and collaborations

The next considerable step in the interaction between the Indian film industry and
the world could be co-production, with established Indian film-makers
collaborating with international majors to create global products.
Elsewhere in the region, involvement by major studios in local film-making and

distribution has brought about a completely new dimension to the end-product.
Columbia produced the landmark crossover film ‘Crouching Tiger, Hidden
Dragon’ (which reportedly grossed an estimated USD 140 million at the box
office worldwide) and few other Hong Kong based films, while Warner Bros has
started distributing films produced in the Philippines. The Miramax-produced
Chinese film, ‘Hero’ opened to a USD 18 million collection in August 2004,
surpassing
any other Hollywood film that week and reportedly ended with well over USD 100
73
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million in box office receipts.
Korea's ‘Taegukgi’ has done brisk business in US and Japan. Film exports from
Korea were negligible till 1997 and have increased manifold to USD 37 million in
the first half of 2004. It is important to note how a focussed approach and thrust
on marketing helped Korea achieve such a significant growth in exports in the last
4-5 years.
Indian history, mythology and literature too have their fair repertoire of compelling
stories that can be adapted for a global audience. For instance, an epic like
'Mahabharata' can be recreated on the screen with the same grandeur as 'Troy',
or the story of Hanuman, can be retold with the same technical finesse as
'Spiderman'. Increased collaborations can permit the scaling up of budgets and
technical capabilities that are necessary to create such magnum opuses on a
global scale.
Indian mythology, literature
English remakes of interesting Indian films can be another potential option for
and history can be a vast such collaboration. At least one such initiative is reported to be underway already
source for compelling (Mira Nair's proposed remake of the successful Bollywood film 'Munnabhai
stories that can be adapted MBBS' in English).Remaking films in a different language and setting is quite a
successful and well-established model globally. 'The Ring', a recent Hollywood
for global audiences. remake of the Japanese horror film 'Ringu' grossed around USD 130 million in
the box office.
Outsourcing to India
Apart from monetising the direct potential of Indian filmed content globally, there
are several applications where India, due to its inherent cost advantage, can
emerge as a major competitor to other countries as a preferred outsourced
destination for films. Some of these are:-
Digital content creation

The convergence of computer technology with film-making technology is
revolutionising the way films are made. Digital content is an integral part in
Hollywood films such as 'Matrix', 'Twister', and 'Jurassic Park'. Given the fact
that India has a talent pool of world-class software professionals which is available
at much lower cost compared to the West, India could have been at the forefront
of film related software and graphics production. Already, a beginning has been
made by organisations like the Hyderabad-based Ramoji Rao Studios which has
provided equipment, crew, sets, and post-production facilities to at least seven
Hollywood productions including the Oscar-winning 'Gladiator'.
India is steadily growing into a major hub for cost-effective outsourcing for
animation and special effects. According to industry experts the size of the Indian
visual effects industry is currently estimated at around INR 30 billion and has
74
grown at around 30 percent over the last few years. According to NASSCOM, the
size of the animation industry itself is INR 25 billion, while special effects and
other services account for the remaining INR 5 billion.
However, India still forms an insignificant part of the global visual effects value
chain. Over the last couple of years, many new post-production studios have been
set up in India, aided by the fact that the infrastructure requirements for a
medium sized visual effects studio are not very high. Most of these
establishments operate well below their true capabilities and at a relatively low
end of the value chain. They are yet to take appropriate initiatives in terms of
quality control and building the requisite skill sets to move up the value curve.
Also, no Indian studio has yet been able to integrate all the segments to be able
to offer large-scale end-to-end services for discerning clients. As a result, India
has continued to remain a mere low end outsourcing destination for developed
countries with very few notable instances of creative collaboration and
origination.
India forms an insignificant
With prospects of increasing domestic and overseas business in the future, it is
part of the global visual
imperative that the Indian post production and animation houses make the
effects value chain necessary investment in technical and human capital to be globally competitive in
terms of quality and creativity and not merely on costs alone.
Locations
A large number of Hollywood films are presently shot outside the United States
in countries like Australia, South Africa, Canada and even Spain. For example,
‘Matrix’ was shot in Australia, ‘Shanghai Knights’ was shot in the Czech
Republic, ‘Anacondas’ in Indonesia, while large parts of ‘Kill Bill’ and ‘The
Entrapment’ were shot in Beijing and Malaysia respectively. The Indian
subcontinent extends right from the snow capped Himalayas in the north to the
warm coastal regions in the south, with forests and deserts in between - a range
of locales for film shoots covering nearly every conceivable climate and location.
However, despite this, the trend of using Indian locations has not really caught on
internationally. This may be attributed to the commonly held perception in
Hollywood about political and regulatory impediments. Ironically, on the other
hand, several countries like South Africa and New Zealand have been wooing
Indian producers with sops and incentives.
No Indian studio has yet
A facilitative regulatory environment and a focussed promotion drive by the
been able to integrate all
government and industry associations could help create the right visibility and
the segments to offer awareness for India as a shooting destination.
end-to-end services for
Outsourcing: A word of caution
global clients India is now maturing as a outsourcing destination in terms of its ability to offer
end-to-end services of the desired quality to discerning international customers.
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More than 50 percent of the Fortune 500 companies have some form of offshore
outsourcing operations in India. With current revenues of USD 12.5 billion and a
steady growth rate of 30 percent, the business process outsourcing industry in
India is likely to continue to grow.
Traditionally, the back-end post production work has shifted from one country to
another to take advantage of the low-cost, high-quality output. The back-end hub
for films shifted from US to UK and now resides in Australia. The cost differential
for post-production activities between US and India could be as high as 1000
percent. India, with a 2.5 million strong experienced work force, could be a
formidable outsourcing player if it were to invest in appropriate world class
equipment for post production.
However, India's cost advantage is not enough to create a large outsourcing

industry. For Hollywood, quality is a more important factor compared to mere cost
reduction, as has been made clear by its preference for other countries (like
Singapore) vis-a-vis India.
Training and education

Training and education is an area within the Indian film milieu that needs urgent
attention, especially from the perspective of the industry's bid to increase its
market size by going global. Although an estimated 2.5 million people currently
work in the film industry in India, there is a glaring dearth of institutions and
learning centres that impart professional training in creative, technical, and
functional areas of film-making. As a result, most of the current breed of artists
and technicians that make up the Indian film industry are self-taught craftsmen
who have mastered their craft by assisting veteran film-makers, who in turn have
also learnt their art through years of experience rather than any sort of formal
training. Apart from FTII Pune, there are hardly any other film-making school of
repute in India.
For the industry to reach global standards of film-making, there is an urgent need
to develop and align film education to the requirements and opportunities of
mainstream cinema. India needs to develop creative and technical courses which
are focussed and simultaneously, responsive to the current market environment.
For example, computer graphics, animation and special effects courses designed
to match global industry standards are needed in order to take advantage of the
outsourcing potential of the market. A professional approach will also go a long
way in providing the right balance of classroom instruction, hands-on workshops
(learning-by-doing), and academic interaction with like minded peers, further
driving the more knowledge-oriented and systematic approach to film-making.
Apart from being under-trained and under-educated in global production and
76
management processes, a lack of nationally recognised formal training institutes
also gives the Indian film industry and its participants a certain lack of
respectability as compared to conventional professions like engineering, law and
medicine where one cannot enter without formal training. This acts as a
disincentive to many prospective creative talents towards entering the industry.
With a formal degree requirement as one of the qualifiers for entering the
industry, the less talented would ideally be decanted by the system, and raise the
bar for such specialised services. This would eventually lead to better alignment
with global standards of film-making and an improvement in quality of the product
due to superior quality and standards of its creators.
A lack of nationally
However, it is important to note that training and education in films is completely
recognised formal training
unlike training and education in more conventional fields like business and law,
institutes gives the industry where employment is practically guaranteed after the completion of the course.
a certain lack of Due to the intermittent and project-based nature of film-making and the fact that
there are many more people interested in taking it up as a vocation than what the
respectability compared to
industry can support, there is expected to be severe competition on graduation.
conventional professions For example, in USA, out of the thousands of film school graduates produced
where one cannot enter annually at their 125+ film schools throughout the country, only a few students
actually end up 'practicing' film-making while others take up other vocations as a
without formal training
means of sustenance. A good way to tackle this problem in India could be to have
MFA programs in film instead of BFA, which would allow students to get their
Bachelors degree in a vocation they can fall back on, apart from providing them
with a well rounded education.
Government incentives
The role of the government as an enabler and a facilitator has been discussed at
length later in this report. Specifically in the context of films, there are several
areas where the government could act as a catalyst, through direct or indirect
support.
Certain countries like Canada, Iceland etc. offer tax incentives for shifting the
production to a local site in that country from a country where the film is primarily
intended to be exhibited (’runaway film production’). Tax incentives are also
granted by certain countries on co-productions, involving two or more production
companies from different countries jointly financing and producing a film. Co-
production can enable the production houses to avail the benefits that are
available to national films in other countries with which co-production treaties
have been entered into. These tax incentives are by way of special tax credits or
deduction of eligible profits from income subject to tax.
Entertainment tax levied by various states/ municipal bodies on the value of film
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tickets, live stage-shows etc. adversely affects the entertainment industry. This
results in a large portion of theatre ticket receipts diverted towards tax, instead of
being channelled into development of theatre exhibition facilities. At an average
of 60 percent, the entertainment tax levy in India is one of the highest in Asia.
A wishlist of concessions:
! Complete amortisation of production costs in the year of completion of the
film
! Amortisation of costs of incomplete films, subject to furnishing adequate
documentation
! Extending tax-incentives for multiplexes in metro cities
! Tax incentives for newly set-up film ventures, with a corporate set-up and
sizeable amount of investment
! Providing facilities and indirect tax incentives on film production, studios, etc.
! Tax incentives for film-financing activities
! Rationalisation of entertainment tax
! Concessions on customs duty on import of studio and other equipments and
software to promote use of superior technology in film-making.
Government could play a
In addition to fiscal incentives, the government could play a meaningful role in the
meaningful, facilitative role
areas of education and foreign trade, not necessarily through grants or
in the areas of education investments but through facilitation (of say, land allotment and clearances), by
and foreign trade complementing the private sector's initiatives in this regard.
Areas of possible government involvement
Government incentives
u Piracy control u Tax breaks u Training and education

u Legal and regulatory u Import and export
Incentives u Film development
Subsidies
u Film funding assistance

u Investments in education
infrastructure u Strengthening ailing film
assistance bodies
u Setting up professional
training Institutes for u Film appreciation courses
professionals for increasing audiences’
awareness of ainema
The initiatives and ideas suggested above have the potential to play the necessary
assisting role in restructuring the industry and ensuring that it takes off on the
path of sustained growth. What is needed now is a firm dedication to carry out
deep-seated transformational modification including strategic and structural
alterations, implementation of new technologies, superior understanding of the
consumer pulse and better organisational effectiveness to ensure that the sector
realises its true potential.
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The industry is making its leap from a fragmented, unorganised framework to an
organised, commercially focussed structure. It will need to adapt and imbibe the
business processes that would aid this metamorphosis. Simultaneously, it needs
to tap alternate revenue streams by utilising the right technologies and following
the right processes to optimise resource utilisation. The key to success in such a
dynamic scenario will be the ability of the players to adopt global practices with
the necessary degree of customisation and localisation. When it succeeds in
making this transformation, it will compare favourably with the world's most
developed film industry, viz. Hollywood, in terms of functioning and earning
potential.
Slowly but surely, the Indian
In conclusion, it may be pertinent to observe that most of the initiatives discussed
film industry is moving
above - like the integration of the value chain (akin to the studio model of the 30s
Back to the Future and 40s), the emergence of new genres, the merging of barriers between
mainstream and parallel films and the exploration of new markets like Eastern
Europe and Greece, cross over films and co-production - have all been attempted
by the industry during the 30s through to the 70s, with varying degrees of
success. In a way, therefore, it can be said that slowly but surely, the Indian film
industry is now moving ‘Back to the Future’.
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Music
The times they are a changin’
Music
The times they are a changin’
The Indian music industry is over a century old. However, the past few years have
been dismal for the industry. It has shrunk to INR 10 billion from INR 13.5 billion in
the last four years, as the onslaught of piracy, the high cost of acquisition of film
music and the low priority accorded to the sectoral issues by the authorities have
somewhat upset its business viability.
The situation in India is not unique. Globally, the music industry has been in
recession for about four years and is now making a slow recovery. A series of
revenue enhancing and cost-cutting measures have been undertaken by global
music majors, which are expected to bring about a turnaround soon.
In India, the pattern of music consumption and distribution has shifted radically in
recent times. Music buying has reduced and, despite the popularity of the new
Hindi films, which make up for 40 percent of total music sales, the number of
units being sold is falling. On the other hand, piracy has ensured that the average
retail price of music cassettes remains stagnant over the years, while that of CDs
fall. This has led to a spiralling decline in revenues, since such falling prices have
not been compensated through rising volumes.
In recent times, the pattern Over the last few years, the industry also witnessed the rapid rise of remixes, or
cover versions and music videos of original soundtrack, which have attained mass
of music consumption
popularity and received more airplay than the originals, on television and on FM
and distribution has radio, but did not significantly increase the sales of the original music companies.
shifted radically. Future growth is likely to come from non-physical formats like digital downloads,
royalty income and ringtones, among others. The Indian music industry needs to
adapt to this swing in audience preferences by leveraging appropriate technology
in a facilitating regulatory environment. Going forward, the industry will need to
focus on controlling its distribution and manufacturing costs. This is likely to
enhance the industry's bottomline and result in more capital being freed for
investment in technology and infrastructure.
The recovery process for the industry will be slow and a moderate growth is
expected from hereon. There is an immediate need for the various stakeholders,
viz. film producers, music companies and user-segments to come together and
evolve solutions from within, and adopt a collaborative approach as discussed
later.
A unique industry structure

The Indian music industry has a unique structure compared to most global
markets. Till 1990, it was completely dominated by film and devotional music.
With the advent of satellite television and increasing consumer exposure to non-
film music channels, non-film albums and remixes have gained popularity
recently. In the non-film category, devotional music produced by smaller and local
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companies is the most popular. A few late entrants to this category have decided
to stay away from the vagaries of film music and have focussed on high end
classical, devotional and other niche genres instead.
Genre-wise distribution of music sales in India

Others
International 8% New film music
8%
40%
Devotional
10%
Popular music
8%
Regional film music

Old film music
5%
21%
Source: Industry estimates
Genre-wise distribution of music sales in USA
Others
Classical 12% Rock
3%
Jazz 27%
4%
Religious
7%
Country
Pop
11%
13%
R&B urban Rap / hip hop
11% 12%
Source: IFPI
Piracy - A growing affliction

Though the problem of piracy has been in existence for the last twenty odd years,
it has emerged as an all-engulfing menace in the last five years or so. The volume
of pirated units has been rising consistently despite the falling prices of legitimate
music. Piracy, which is currently estimated at INR 4.3 billion, accounts for as
much as 42 percent of the industry's total revenues. Unless stringent measures
are taken now, this is expected to rise further.
A look at the Indian audio-video market shows that the VCD/ DVD/ MP3 segment
is growing at an explosive pace of almost 300 percent. However, this growth has
82
not been reflected in a corresponding growth in the legitimate sale of CDs, VCDs
and DVDs. On the other hand, there has been an alarming rise in the production
and sales of CDs and DVDs, far in excess of demand, in India and certain
countries. Evidently, such growth has only resulted in increased piracy. While local
CD-R burning is assuming a larger percentage of the piracy revenues (replacing
VCDs and manufactured CDs), import of pirated CDs and DVDs from
neighbouring countries continues unabated.
Piracy trends (All disc formats, billion units)
Estimated capacity Total legitimate demand Excess capacity

8 120%
7 100%
6
5 80%
4 60%
3 40%
2
1 20%
0%
an
a
a
a
a
e
ng
ic
nd
nd
di
si
si
in
si
or
bl
iw
Ko
ne
ay
In
Ch
s
la
la
ap
pu
Ru
Ta
Po
al
ai
do
ng
g
Re
M
Th
on
In
Si
H
h
ec
Cz
Alarming rise in capacity despite falling demand indicates growing piracy
Source: IFPI, industry estimates
Apart from physical piracy, another increasing problem is digital piracy. It is

powered by the rising popularity of MP3 technology and rising PC penetration,
making free downloads a convenient option for the consumer.
While India has a large, indigenous copyright industry and a reasonably sound
copyright law, there are several obstacles to reducing piracy. These are:
! Reluctance by law enforcers to accord due attention to the issue,
! Lack of resources and training (to track sophisticated MP3 piracy),
! Lack of an optical disc law and
! Lenient punishments.
However, there is some light at the end of the tunnel. Indian Music Industry (IMI),
an industry body comprising over 50 member companies, has stepped up its
efforts to curb piracy through regulation as well as through technology. The
members have decided to contribute 1 percent of their annual turnover, which
works out to approximately INR 40 million, towards this cause, though this
amount is considered rather inadequate. The recent strengthening of the Civil
Procedure Code and the proposed Optical Disc Law are steps in the right
direction. Strict vigil at the customs check-points and more stringent
implementation of the law by the police will go a long way in reducing physical
piracy in the near future.
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Side by side, it is expected that digital piracy too will be brought under control,
eventually, through:
! Technology push: a wide repertoire of legitimate digital music becoming
available through a variety of convenient platforms and options
! Demand pull: increased internet penetration and the advent of broadband
! Efforts by authorities to educate and deter the free downloader
Global efforts to curb digital piracy

Concerned by the growing trend of free downloads and peer-to-peer networks,
and the inability to control mounting losses due to home piracy, music companies
worldwide have decided to adopt a carrot-and-stick policy. Realising that there is
a significant section of listeners with access to free and convenient downloads,
they are adapting to the same channels of distribution to provide the convenience
of digital downloads. They are also backing this up with a strong regulatory push,
public announcements, litigation warnings and legal cases against users
distributing large volumes of music files over the system. The results have been
positive and for the first time since its origin, music downloads on peer-to-peer
file sharing networks have started reducing.
Also, new global developments have seen better acceptability of new service
offerings. Apple Computer's iTunes Music Store, launched in April 2003, that sells
individual song downloads for 99 cents, has reportedly sold more than 200 million
songs till end 2004. The availability of a wide repertoire of more than one million
songs from all four major labels and over 600 independent labels has contributed
to its success.
The new digital age is likely to see the rapid growth of service providers like
iTunes, Napster, Rhapsody, MusicMatch etc. who have been able to enhance the
music companies' revenues through innovative offerings like:
! Audio books
! Exclusive tracks, in-studio performances, customised playlists and on-
demand video
! Portability - the freedom of accessing the account from any PC
! Flexible payment options, like pay-per-song, monthly subscription, one-off
charge, pre-paid cards and music allowance accounts.
! Tie-ups with retail stores and PC manufacturers.
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Composition of revenues
Currently, the music industry derives annual revenues of INR 10.2 billion, of which
music sales contributes around 92 percent and the non physical formats
contribute the balance. Ring-tones now contribute around 5 percent, and royalty
revenues 2.5 percent. It appears that the negative trend in revenues, seen in the
earlier years, has been reversed. Sales in 2004 have increased at a very modest
1.2 percent vis-à-vis a 4 percent decline in 2003 and 14.5 percent drop in 2002),
while the bottomlines have significantly improved.
Music revenues (INR billion)

15
10
-
2000 2001 2002 2003 2004 2005E 2006E 2007E 2008E 2009E 2010E
Original CDs and cassettes Pirated CDs and cassettes

Ringtones Royalty Revenues
Digital formats
Recovery and growth

From a perspective of pure financial returns, and looking at other alternative and
more attractive avenues available to the entertainment sector, the music industry
will need to completely reinvent its business model in order to attract significant
investments. In the future, it is hoped that the film and the music industries will
work collaboratively, aided by digital infrastructure, effective distribution formats
and a more conducive and effective regulatory regime, to combat piracy and get
the listener back into the buying mode.
Growth in sales
Original CDs and cassettes Pirated CDs and cassettes Ringtones
140%
Digital formats Royalty Revenues Total industry
120%
100%
80%
60%
40%
20%
0%
2001 2002 2003 2004 2005E 2006E 2007E 2008E 2009E 2010E
-20%
-40%
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In the future, the industry is likely to see changes in its distribution and
consumption patterns, aided by technology and more stringent regulations to curb
losses and leakages. The industry is expected to recover and post moderate
growth to reach INR 13.2 billion by 2010, a CAGR of less than 5 percent. However,
as non-physical formats gather momentum, the bottomlines of the music
companies are expected to increase more than proportionately as a result of
improved efficiency and lower delivery costs.
With mobile phone penetration already over 50 million and expected to double in
the next two years, revenues from ringtones are expected to become a
significant contributor to the toplines of music companies. Also, as additional end-
users like pubs and discotheques, hotels and restaurants are brought under the
royalty payers' net, publishing (royalty) income is expected to grow significantly,
from INR 254 million currently to INR 747 million in 2010. This number can
increase significantly with investments in technology to track and record online
usage and a more cooperative approach from the royalty payers.
A firm regulatory push, A firm regulatory push, together with investment in Digital Rights Management,
will eventually bring down losses currently suffered by the original IPR holders.
together with investment in
Digital Rights Management, Split of revenues (INR billion)
Original music sales Pirated music sales
will eventually bring down Loss through cover versions Loss to original IPR owners
16 60%
losses of original IPR
14
50%
holders 12
40%
10
8 30%
6
20%
4
10%
2
- 0%
2003 2004 2005E 2006E 2007E 2008E 2009E 2010E
In the future, music will increasingly be sold through non-physical digital formats,
as technology makes new products and services available and affordable. By end-
2005 digital sales are expected to account for around 6 percent of global music
sales. It is expected that digital distribution of music will become popular in India
by 2007, when large telecom, cable and DTH players roll out their network. In
keeping with the global phenomenon of the emergence of service providers,
there will be a gradual proliferation of such providers in India too. These providers
will sell bundled offerings of digital music, television broadcast and pay-per-view
films and events to their consumers through different delivery platforms like
digital cable, IP-TV and satellite.
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The journey from here...
Though piracy remains a major global issue globally, the solution for the Indian
music industry, because of its inherent nature, will need to be quite different and
will have to come from within the entertainment industry. A few steps that could
rejuvenate this industry are suggested below:
Film industry as a partner

The Indian music industry is quite unique compared to those in other countries,
as it is virtually dependent on new Hindi films for the lion's share (40 percent) of
its revenues. Regional and old Hindi films add another 25 percent to the industry
revenues. The film industry needs to look at the music industry as partners rather
than buyers - the current risk-reward distribution among them is lopsided and
needs to be made more equitable.
The film's performance at the box office and the music company's cost of rights
acquisition determine the profitability of a music album. However, the music
creates the curiosity factor for a film. It is the first phase of promotion that
initiates the entire brand building for a film. Music companies do not have any say
in the way the music is conceived or produced, yet they are expected to market
it. Here, a collaborative approach with the producer of the film, and a revenue
sharing based understanding, could result in improved content and better risk
sharing. In the future, there could be collective efforts where the music
companies are involved at the content-creation stage and also in the marketing of
the film.
Over the last three years, there has been a unified effort in the industry to correct
the price paid for purchasing music rights. In the last few years, while the film
industry went through a phase of rationalisation, the music industry made certain
overvalued acquisitions. One fall-out of this market correction has been that the
sale of music rights has dried up as a significant revenue stream for producers.
Moreover, a new trend of producers setting up their own music companies has
emerged. In the near future, there could be an increased number of alliances, and
even acquisitions, with film production houses taking over music companies, to
avail of their distribution network and operating expertise.
The FM factor
It is believed among certain sections of the music industry that the proliferation of
FM radio stations across the country has led to a decline in the sale of audio
cassettes and compact discs. Globally, FM stations help promote albums and
labels by playing their songs. However, in India, FM is considered more of a threat
than a promotional medium for the music industry the reason once again being
the unique genre-preference of the Indian listener, which is heavily skewed
towards new film music.
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However, since FM radio is limited to a handful of large cities, its impact in
accelerating the downfall of the music industry may be overstated. In the future,
though, there is a need for the music and radio industries to work together rather
than at loggerheads, to work out a common growth path within the given
environment. The possibilities and synergies of co-branding of music products and
properties between radio stations and music companies can be explored. For
example, Radio X could promote a collection of Y Music's songs or artists
resulting in increasing the demand for these songs. On the other hand, Y could
release a 'Radio X Top 10' album consisting of such songs and programmes
promoted on air.
Again, on several occasions, good quality, non-film albums produced by music

companies do not get reasonable airtime. Such experimental or offbeat music
can be effectively promoted on radio and the channel can be incentivised to take
certain risks through intelligent revenue-sharing arrangements.
Strategic thrust on marketing non-film music

Music is not a necessary item on the consumer's shopping list. In the film-centric
Indian music industry, there is virtually no loyalty for the label among the segment
that buys only film music. However, the marketing models developed by FMCG
companies to launch and sell lifestyle and aspirational products can be
implemented by companies to boost the sale of non-film albums. This is possible
by developing brands and charging premium prices once brand loyalty is built
among the target audience. Once a strong brand recall is created through
successful marketing of non-film albums, the same can be extended to film
albums to create a differentiating factor over competing pirated products.
Interestingly, the growing sale of video remixes of old classics has actually
opened up a window of opportunities for the music companies that hold the
original rights. The future could see these (original) music companies themselves
getting into the remix act in a big way. This same move could see them getting
into the cassette segment of non-film devotional songs recorded by unknown
artists, hitherto a stronghold of the lesser music companies.
Online marketing
With increasing PC penetration, the internet is expected to become a significant
influencer in the purchase of music. Online sales involve lower distribution costs
and eliminate the retail margin of 15-20 percent. Part of these savings can be
utilised for innovative net-marketing that offers consumers detailed information
and reviews, and also the flexibility of customised and unbundled offerings.
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Artist and repertoire
One of the strategies adopted by the music industry for the growth of non-film
music segment involves identifying new talent, nurturing it and creating strong
brands around it. Such artist and repertoire (A&R) management will assume
greater brand-building increases. One effective way to build brands with
differentiated content is to create a talent pool of artists who are groomed,
promoted and retained by the label. Notable experiments in recent years have
been 'Band of Boys' and 'Viva', music groups promoted by Universal and
Channel V respectively, which managed to generate significant awareness and
popularity amongst their target segments. Sony Entertainment Television's
'Indian Idol' is another similar exercise in which people vote for their favourite
contestant. Through this show, Sony aims to identify talent which is popular with
the audience and simultaneously connect with the audience, which is an effective
way of pre-selling what would have otherwise been albums by unknown artists.
Similar experiments have proven to be fairly successful in other countries like
Australia and USA. The most successful example of such a strategy is the ‘Spice
Girls’ band that enjoyed global popularity. Music companies could benefit from
the Indian experiences in this arena and further refine this strategy. The benefit of
such a strategy is that apart from generating music sales, the creation of brands
can be leveraged for multiple sources of revenue like brand merchandise and
memorabilia among other things. At the same time, the cost of such talent
acquisition is also relatively low, compared to the fees and royalties that are paid
out to leading singers.
A&R in India can prosper Internationally, A&R forms a significant and steady revenue stream for music
companies. Though in India, the film soundtrack is more important than the
in an environment
singer, there is no reason why A&R cannot prosper in a more transparent and
that is more transparent artist-friendly environment. Currently, there is a certain lack of trust between the
and artist-friendly artists and the music companies. A fair and transparent business model could
provide the platform for a healthy artist-recording company relationship. At the
same time, a more serious effort needs to be put into the content that is churned
out, to increase the shelf life of the artist and the music property, so as to create
a sustainable long-term value proposition. This can be possible if the music
companies consider allocating budgets and setting up dedicated divisions
manned by experienced people.
Royalty collections
Currently, Phonographic Performance Ltd. (PPL) and Indian Performing Rights
Society (IPRS) are the two administering bodies for royalty collection for all music
that is publicly played over radio, restaurants, clubs, discotheques, etc. The scope
and the awareness for such royalty collections has increased manifold over the
last few years. It is expected that in the near future, the music companies will be
able to collect substantial revenues through royalties from a vast cachement of
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users. The increasing user base can also enable PPL and IPRS to reduce the per
user royalties collectible from other industry stakeholders like radio. However,
PPL and IPRS do not the have the manpower, funds and the infrastructure to
monitor and collect royalties on a nation-wide scale.
One solution to increase collections and bring more users into the royalty net
could be to introduce a point of sale tax - an indirect tax collected from all
customers of pubs, discos, etc. It could be coupled with a share of the revenues
from the sales of these establishments. This collection can be allocated among
various music companies depending on certain mutually agreed criteria. A part of
the money collected could be retained towards a development fund that will,
among other things, invest in piracy control.
Judicial leniency
While existing laws have punishments for a term not less than six months and a
fine not less than INR 50,000, offenders for copyright violation often get away
with a single day imprisonment and fines between INR 500 and INR 1000. The
fine too, goes to the government and not to the music company. Such lenient
clauses do not serve any purpose as a deterrent to offenders.
Again, due to lenient copyright laws related to music [like Section 52 (1)(j)], and
the opaqueness of the system, the original rights holders stand to lose every time
a remix of a popular song is made by a second recording company. Smaller
recording companies and new entrants without significant archival content have
successfully exploited this clause to the detriment of the original rights holders.
Coupled with this, the lack of optical disc laws and ineffective implementation of
controlling physical piracy, discussed earlier, have led to huge losses to the
exchequer by way of non-payment of income tax, sales tax, excise duty and
entertainment tax. A tighter regulatory regime and a more stringent enforcement
of law is the need of the hour.
Digital distribution
With the rapid rollout of enabling digital technologies and rising PC penetration,
music companies will need to embrace new technologies. The future will mean
making more sales to more people in more ways but at a lower average price.
Music companies need to re-engage innovatively with the consumer. The future
demands a new consumer-inspired business model that incorporates everything
that modern technology can offer, which is balanced with enhanced retail delivery.
Also, there is a need to monetise access to music on the Internet, a difficult but
not impossible challenge, as Apple’s iTunes experiment has proved. This requires
significant investments in time and money, and a buy-in of all major music labels
90
to agree to come together and put up their repertoire on downloadable platforms.
However, the music companies alone do not have the wherewithal to make the
necessary upfront investment, and they may therefore need to work together
with a digital access provider to home through cable, fibre or satellite on a
revenue sharing basis. Collaborative efforts between access providers and music
companies in this regard are reported to be underway.
Convergent distribution
Convergent distribution Aided by enabling technology and a reasonable subscriber take-up, the music
industry also has the potential of participating in convergent distribution, at least
will enhance the
in the major metros when such services are rolled out. It means simultaneous
value proposition for availability of content to the public (via radio, television, internet, retail), real-time
access providers marketing, promotion and distribution. Convergent distribution will also enhance
the value proposition of the access providers and improve subscriber take-up.
Organised retail
Globally, bundled offerings like books, music and coffee in stores located near
hypermarkets, multiplexes and other entertainment destinations have significantly
increased footfalls. Though hypermarkets alone account for 40 percent of sales in
developed countries like France, Japan, etc., organised retail accounts for less
than 2 percent of the total sale of music in India. With the growing acceptance
and availability of large format retail stores, this ratio is expected to increase to
around 5-6 percent in the next 4-5 years, which will still be rather low by
international standards.
Since the purchase of most media products is instinctive and preference based,
their points of sale have to be spread across the various options available in the
retail arena. Such outlets include supermarkets to service stations to specialised
electronics shops to record shops. If this were to happen, it could help in curbing
physical piracy too, since such pirated products are mostly sold through small
neighbourhood music stores.
Public awareness campaigns

Such campaigns against piracy and free downloads have been quite effective in
the US. The need for the Indian music industry to invest in public relation cannot
be understated. The formation of a development fund, discussed earlier, could be
thought of, for channelising investments in this area.
New business models

Emerging home entertainment technologies, the growth of high-end mobile
handsets and music's growing role in games, advertising, films, television and
corporations will result in music companies re-inventing their traditional business
models significantly to be able to fully capture these emerging streams. Every
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new technological innovation will also give rise to a new form of piracy, so
continuous investments in digital security will need to be made.
Conclusion
The Indian music industry needs to undertake several strategic shifts going
forward in order to retain its lost glory. It needs to revamp its operating model
with support from key stakeholders and evolve new revenue streams for various
delivery platforms.
The last decade saw a spurt in the number of players who were attracted by the
profits seen during the boom years. The next few years could see a consolidation
and shake-out. The corporatisation in the film industry would have a beneficial
effect on the music industry, as they jointly move towards a more equitable
revenue and risk sharing model.
Music is a creative industry, which needs support in trying times. How willingly
and effectively the various stakeholders come together to adopt a partnering
approach will determine the pace at which the industry re-invents itself to stay
competitive.
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Radio
Tuning in
Radio
Tuning in
Radio is a mass medium and therefore ideally suited for India - leveraging its twin
advantages of wide coverage and cost effectiveness. It is dominated by the state-
owned All India Radio (AIR), which covers 91 percent of India's area and reaches
99 percent of the population, through a wide network of broadcasting centres and
transmitters. Apart from AIR, there are 21 privately-owned FM stations in 12
major cities, all of whom have been granted licences over the past 3-4 years.
Advertising is the sole source of revenue for radio in India. Currently, the sector
generates annual revenues of INR 2.2 billion and is growing at around 20 percent
annually. This implies a marginal rise in radio's share in the advertising pie to
around 1.9 percent. Given that commercialisation of radio is still in a nascent
stage in India, this growth rate is far from flattering.
As a result of unsustainably high licence fees, the sector has been reeling under
heavy losses. A few FM stations have been forced to shut down, as they could
not afford to pay the annual license fees, set at levels significantly above their
earning capacity.
If one considers the private sector FM market in Mumbai, four players

cumulatively generate annual revenues around INR 250-300 million, against total
operating costs of around INR 550-600 million. Given that a significant portion of
the operating costs is the licence fee, which is set to increase at 15 percent per
annum, revenues would need to grow at over 40 percent annually to break even
in the next three years.
The global scenario

Globally radio is enjoying a Globally, radio is enjoying a renaissance based on the support of the youth. They
seem to prefer it since, unlike television, it is more compatible with their lifestyle.
renaissance based on the
support of the youth. Research trends in Australia indicate that radio enjoys a higher level of popularity
among the 15-29 age group. Today's busy teenagers love radio because it
complements a faster-paced lifestyle - they can listen to music and get
information on the move. Younger audiences, particularly those below the age of
25, also have access to new technology like mobile phones. They have taken very
quickly to interacting with their favourite radio stations and RJs via email and SMS
for song requests and competitions.
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FM listeners across age groups
41% 40%
35%
34%
28%
20%
12-14 15-19 20-29 30-39 40-49 50+
Source: - MRUC and AC Nielsen ORG Marg's Indian Listenership Track 2004
The Indian potential

India has an estimated 180 million radio sets, reaching over 99 percent of its one
billion inhabitants - a clear indication of the vast commercial potential in India for
this medium. Plainly, the radio sector cannot and should not be satisfied with a
growth rate in the low 20s.
In India too, it is the younger generation that is the key target audience vis-à-vis
radio. While consumption in India is still largely at home, 'the radio on the move'
trend is catching on in urban and semi-urban areas. The easy availability of FM
radio sets at affordable price points (ranging from INR 40-INR 150) is fuelling its
mass penetration.
FM listening habits
100 72 72
80
60
40
8 7 7 1 5 8 2 4 1 5
20
0
Delhi Mumbai
At home Neighbour/Friend’s place
In Car At office ( incl. Shops)
Commuting Others
Source: - MRUC and AC Nielsen ORG Marg's Indian Listenership Track 2004
According to market research, in Mumbai and Delhi, FM penetration is the

highest in the SEC A segment and least in SEC D. Further, 70 percent of radio
listeners in these cities listen to FM radio all seven days of the week. However,
this sector has not been able to monetise its hold on the listener’s eardrums. In
spite of such attractive statistics, in terms of its advertising spend, radio remains a
94
laggard. It has less than 2 percent share of the total advertising pie in India,
compared to a global average of 8 percent. In the US, radio has a 13 percent
share, in Spain 9 percent and closer to home, in Sri Lanka, radio has a 21 percent
share of the advertising spend.
Global ad spend on radio

Share of total ad spend
25%
20%
15%
10%
5%
0%
ce
n
n
a
lia
a
SA
ly
y
il
K
nk
di
ai
pa
an
az
Ita
U
ra
an
Sp
In
U
La
Ja
m
Br
st
Fr
er
Au
i
Sr
G
Universally, media categories in the growth stage have a share of around 5 per
cent and mature categories average around 10-12 percent of the total advertising
expenditure across various media. We estimate that if its real potential is unlocked
in India, commercial radio could account for approximately 8 percent of media
spends in the short to medium term and up to 10-12 percent in the long term.
Radio revenues (INR billion)
25.0
20.0
Current growth path
Potential growth path

15.0
10.0
Includes only ad revenues
Future subscription revenues
(pay radio) included separately
5.0 under ‘Digital Revenues’ of
TV industry
0.0
2002 2003 2004 2005E 2006E 2007E 2008E 2009E 2010E
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Bridging the gap
Due to the public-broadcaster nature of AIR and its socio-economic rather than a
commercial focus, its ad revenues are expected to grow at a moderate pace.
Since the private FM channels need to survive in a commercial and competitive
environment, they have focussed on mass entertainment to gather listeners.
Hence, it is expected that the private FM channels will drive the future growth of
the sector.
FM radio needs to grow To exploit the true potential of this sector, FM radio needs to grow from the
current 21 stations in 12 cities to at least 300 stations in 100 cities. At an
from the current 21 stations
investment of INR 40 million per radio station frequency, the total additional
in 12 cities to atleast 300 investment required will be INR 11 billion. In its current form and structure, the
stations in 100 cities radio industry will not be able to attract the necessary funding.
TRAI, the designated regulatory body for radio, has proposed a transition from the
existing license fee regime to a revenue sharing one, to help the radio industry
curb it losses. It is hoped that clarity on revenue-sharing emerges, soon.
Apart from rationalising the licence fees, the government will need to promote
and facilitate the growth of private FM radio by:
! Relaxing the entry barriers on foreign investment
! Providing a level playing field in programming for private players
- For example, opening up news and current affairs
! Enabling multi-city broadcasting of common programming content for radio
companies
! Fostering the growth of niche channels by:
- Lifting restrictions on the same player owning multiple stations in the
same city
- Relaxing licence fees for niche channels
- Incentivising existing players to set up additional channels with niche
content
The industry, on its part, needs to develop strategies to expand across the
country and enhance business performance, thereby turning India's promise into
reality. In other words, the challenge confronting radio is to bridge the gap
between the current growth trend and potential growth expectations.
It is expected that increasingly, FM radio stations will concentrate on:

! Focussing on local and smaller advertisers
! Exploiting future value of programming content
! Making niche and differentiated programming a viable option
! Managing costs of operation in line with its business model
! Managing brand association
! Selling radio as part of the multi-media strategy
96
Local mantra
The sales and marketing efforts of the major FM radio stations have focussed on
the large advertising clients. This may be partly attributed to the FMCG-marketing
background of some of the managers and partly due to the sales strategy of the
multi-media groups that own most radio stations.
However, radio is a unique medium and the focus on large advertisers seems to
be at the cost of its largest potential benefactor - the local retailer. The retail
segment globally constitutes a large part of radio's clients and sales, but currently
in India accounts for a small portion of the radio revenue pie. For example, in USA,
70 percent of all radio revenues come from local retailers, and only 30 percent
comes from either national or international advertisers or from the network of
advertisers. In contrast, in India, retail comprises only 8 percent of radio
advertising.
Profile of advertisers on Indian radio

Retail
Telecom 8%
Finance
8%
10%
Others
26% Durables
12%
FMCG
14%
Media
22%
Source: Industry
Radio, by its very nature, is a localised medium, due to it’s ability to transmit a
particular message over a small geographical area. The retailer, with city/ locality-
specific target groups, can be a major beneficiary of radio advertising. Clearly,
there is a need to unlock the advertising potential in the retail segment.
Radio stations offer high frequency ‘opportunity to hear’ for the advertiser.
International research indicates that radio has 60 percent of television’s
effectiveness at increasing campaign awareness amongst an audience of 16-44
year old radio listeners. However, advertising on radio costs just 15 percent that
of television. While the price relativity for other audiences will vary, the
achievement of 60 percent of the result at 15 percent of the cost makes radio
significantly more cost effective than television.
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Revenue composition
11% 11 percent of clients

contribute 60 percent
of revenue
60%
89%
40%
% Clients % Revenue
The price differential between radio and television will vary depending on the area
and the audience. In India, where the cost of television advertising is more than
seven times that of radio advertising, the cost effectiveness of radio advertising
will be even more acute, which can be a great proposition for local retailers. A
high frequency combined with a moderate card rate (effective rates average
between INR 500 to INR 900 per 10 seconds) provides an opportunity for retail
players to promote their products and services cost effectively without
fragmentation as in the case of national or even regional media.
Presently, the advertiser base of FM radio is highly skewed, with around 11

percent of advertisers contributing 60 percent of their revenues. This should not
be the case in a localised, mass-medium like radio. Ideally, the advertiser base
should be broad-based with a large number of local advertisers promoting their
products.
While some radio stations are waking up to this reality, this potential is largely
untapped. It is important for the radio stations to highlight the effectiveness of
using radio for local level promotions and region-specific ad campaigns. Moreover,
since many FM players are associated with larger, vertically integrated media
corporations, cross media promotions could be an added incentive for the
potential advertiser.
98
FM licensing - The story so far
In 1999, the government decided to allow fully owned Indian companies to set up
private FM stations on a licence fee basis. Bids were called for allotting licences
for 108 FM frequencies in 40 cities for a ten-year period. However, the
government imposed a few conditions like:
! Broadcasts will be for education/entertainment only, with a ban on news and
public affairs programming
! No foreign equity was allowed, although foreign institutional investors may
have portfolio investments of up to 30 percent
! Licence fee will be determined by auction for each market. Subsequent
annual license fee renewals will be based on bid price plus a fixed
percentage.
In May 2000, as part of Phase I of radio broadcast licensing, the auction was
conducted and 37 licenses were issued, out of which 21 are operational in 14
cities. The results were not very encouraging, given that only 25 percent of the
available licences were operational. Even the existing licensees claimed to be
making heavy losses in their operations. The main reason for this was that the
licence fees were based on highly optimistic projections.
A committee was established under the chairmanship of Dr. Amit Mitra to make
recommendations for Phase II of radio broadcast licensing. This committee found
that the industry appeared unviable under the existing licensing regime and
suggested a shift towards a one-time entry fee coupled with a revenue-sharing
agreement. In February 2004, as the designated regulatory authority, TRAI was
asked to give its recommendations for the Phase II licensing of FM radio.
In April 2004, TRAI came up with a consultation paper that listed the following
issues:
! Service area: Should it be city-wise or regional or national?
! Duration of licenses: Is there a need to change the present license period?
! Fund for rural roll out and niche programming: Should it be created? What
should be its quantum?
! Licensing process: What approach should be adopted to award the FM radio
licenses?
! Quantum of entry and license fees: How should entry and licence fees be
set? Should it be a revenue-sharing model?
! Multiple licenses: Should multiple licences at the same centre be
restricted? If yes, then to what extent?
! Networking: Should it be allowed between broadcasters in the same city?
! News and current affairs: Should the restriction on news and current affairs
be maintained?
! FDI limit: Should FDI be permitted in this sector and what should be the limit
of FDI?
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! Non commercial licenses: Should certain frequencies be reserved for niche
channels?
! Migration related issues: Should migration of existing licensees to revenue
share regime be permitted? If yes, under what terms and conditions?
In August 2004, TRAI presented its recommendations on the regulatory

framework for private FM stations. The main recommendations are:
! Licences should continue to be allotted on a city-by-city basis.
! The licence period should be ten years, extendable for additional five years.
! A portion of the revenue received by the government to create a fund for
public service broadcasting.
! Change the licensing process from open bid auction to tendering, without
any reserve entry fee.
! Bids for the next phase of licensing should be based on entry fee plus
revenue sharing model (4 percent of gross revenues).
! The winners should be selected in descending order of their entry fees. The
entry fee for a player should be equal to the amount bid by him.
! Multiple licences to the same player in the same city should be permitted,
subject to monopoly restrictions.
! Networking should be permitted across broadcast stations of the same entity
in different cities.
! FM channels should be allowed to broadcast news and current affairs
programs, subject to AIR code of conduct.
! 26 percent FDI should be permitted in FM broadcasting (news and
entertainment) subject to some safeguards.
! Existing players should be allowed to migrate from a licence fee regime to
the model adopted for new FM licence bidders.
! Co-location of transmission towers should be encouraged by suitable
incentives.
The Information and Broadcasting Ministry disagreed with some of TRAI

recommendations. The objections and TRAI's rejoinders to them are listed below:
! The government's stand was that adopting a closed bid tender system
without a reserve entry fee would leave the process vulnerable to
cartelisation. According to TRAI, a reserve price has meaning only when
there is a particular value to an asset, which won't be sold below reserve
price. Here, it is just a mechanism of selection among the bidders. The
government also thought that withdrawal penalties to deter non-serious
bidders were not stringent enough. TRAI suggested a modified proposal to
deter speculative bidders, while protecting smaller players.
! The government opposed TRAI's recommendation to move to a revenue
sharing model because it would be difficult to monitor, cumbersome to
implement and would cause revenue loss to the government. TRAI reiterated
100
the fact that the current fees were too high and would kill the industry
prematurely. Instead, it suggested some accounting safeguards to ensure
ease of monitoring. It also indicated that administrative convenience cannot
be a major factor in deciding the licence fee model and that the government
undertakes much more complex tasks like scrutinising over 30 million
assesses annually for income tax. It also pointed out that the current
revenues received by the central government were unsustainable. Shifting to
a revenue sharing model would ensure that the industry is able to thrive and
could even lead to higher government revenues in the future, as in the case
of cellular telecom industry.
! The government opposed the TRAI suggestion on allotting multiple licences
to the same player in the same city, saying that it would create a monopoly. It
cited a Supreme Court (SC) case in defence of its stand. TRAI explained that
the SC judgement sought to prevent the monopolies in the broadcasting
arena under the garb of the right to free speech. TRAI is of the opinion that it
has built in enough safeguards to prevent monopolisation.
! The government was of the viewpoint that the networking permitted by TRAI
in its recommendations was unfettered and would lead to minimisation of
local content and emergence of virtual national networks. TRAI mentioned
that networking is permitted in a restricted manner. Competition and
monopoly restrictions would also limit the extent of networking.
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Creation of value packs
Most of the programming currently being aired, whether music or not, has little or
no library value. Very little programming is developed to create any strategic
intellectual property. Creating specific IP whether in the form of RJs, programme
formats or around content areas could have the dual advantage of being re-usable
in the future and being syndicated across other channels.
Interactivity is a major content driver within the radio programming strategy.

Radio stations need to start However, if the topics discussed are not affected by the 'recency' factor, there is
enough potential to create a library of recordings that can be used beyond a
establishing their own
single show. Such content, when re-broadcast, saves the cost of producing new
identity through content and generates newer revenues by offering brand association with such a
differentiated content property at reasonably low rates. Besides, such content can be exported for
broadcast in other countries where the demand for Indian content is considerable.
Creation of a good software library can become a source of competitive
advantage for a radio player.
Niche programming
Internationally, content specialisation has been a distinct trend in the evolution of
radio, especially FM radio. Radio stations have traditionally grown by attracting
specialised audiences. These stations address specific audiences based on
geographic, socio-economic or ethnic or combination of factors, like a radio
station that caters to the African-American population of New York or a Malayalam
channel with Indian content for expatriate Indians in the Middle-East. Being
localised, these channels also meet the demands of local advertisers.
Initially, most radio stations in India started off with a defined niche as well.
Between them, they provided the listener with a choice of English, Hindi and
mixed content. However, the pressure to sell airtime forced them to resort to the
lowest common denominator - Hindi film music. Very few have held on to the
English format or even non-film content. Channels that started out with English
programming as a key differentiator have drastically reduced the total airtime
dedicated to it. Since there is very little to differentiate between the various
channels, the resultant effect is constant channel swapping by listeners. Radio
stations have not been able to generate any significant channel loyalty. In fact, a
closer look reveals that even programme loyalty does not exist, with listeners
simply switching from song to song.
This me-too approach towards content has a direct implication on the marketing
of the radio channels as any message or campaign carried by it runs the risk of
being lost in the clutter. Hence, there is an urgent need to evolve programming
towards differentiated content. It may also require a shift from mass marketing of
the radio channels to marketing programmes targeted at specific market
102
segments. Validation of niche audiences would enable differentiated client
targeting with unique value propositions.
With limited sponsored market research done in this area, radio stations find it
difficult to market their USP. However, these radio stations need not look beyond
their walls to get valuable listener data. The innumerable contests and interactive
sessions on air bring in close to 30,000 callers every day for a single channel in a
city like Mumbai - a valuable database that is currently under leveraged.
Radio stations will need to start finding their own niche. Channels that address
specialist listener groups need to emerge.
Correction in the cost structures

Most radio stations in the country are offshoots of larger, vertically integrated
media organisations. The other media units of such organisations work on a much
larger scale. Being a part of such large media houses, radio too seems to have
expense items not necessarily justified by its scale of operations.
Manpower
The most conspicuous item on the expense list is 'salaries'. The salary structure
in radio is comparable to that of other larger media units. This is driven by the fact
that radio stations hire people from high wage industries like television, FMCG
marketing or advertising. This has led to the creation of a people-cost structure
that is incompatible with the current size and revenue earning capacity of the
radio industry. While it is necessary to incur reasonable manpower costs in order
to stay competitive and attract the best talent, innovative cost management
solutions such as the right mix between live and recorded music could reduce
production and salary costs.
Branding
Branding plays an important role in establishing a strong channel and programme
association amongst listeners. The key word is 'association'. What the listener
associates with is the quality of content. Brands that have spent more on
marketing have a higher recall, but that does not necessarily translate into higher
listenership, particularly in a market where lack of niche programming has
resulted in constant surfing for songs of choice.
Some private FM stations have incurred large costs on building merely 'Top of
Mind Recall' for all listeners, irrespective of their preference or affinity to the
station. But as the market matures and niche channels develop with defined
target groups and unique value propositions, branding exercises will become
more meaningful. Channel brands and programmes will be associated with niche
content and specific listener profiles that can be sold to potential advertisers.
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There is no doubt about the effectiveness of radio when it comes to building
brands for its clients. For example, brands like Binaca / Cibaca and Bournvita were
built on radio. These programmes rode on extremely successful content formats.
Branding is expensive and therefore, radio stations with limited budgets need to
make a choice between channel branding and programme branding. What could
work better for them would be a combination of two. Programmes that are
aligned to channel positioning can ride on the channel branding, while other
programmes should develop their individual brands, without diluting the channel
positioning.
The multi - media story

Although most radio stations in India are part of larger media outfits, they do not
necessarily leverage their strengths across multiple media. Business units within
media groups tend to have their own sales teams working in isolation, not fully
selling their integrated media story to prospective clients. While it is necessary to
maintain and operate separate profit centres, going forward, radio stations could
look at a greater degree of integration of sales efforts to fully exploit the multi-
media strategies. This way, the media groups, rather than just being owners of
media assets, will be able to offer an integrated value proposition to the
advertiser.
Conclusion
India's radio industry has a strong growth potential if mechanisms and policies are
put in place to provide it with appropriate support.
India, with its diverse regional influences, is in a prime position to take advantage
of the growth potential of this segment. With privatisation gathering momentum,
the increased number of private radio channels across the country is likely to
transform commercial radio from an urban phenomenon to a national one, as has
been the case with satellite television.
104
Digital radio broadcasting
Two digital radio distribution technologies have emerged recently - Internet radio
and digital radio broadcasting (DRB). Internet radio streams audio through the
Internet. DRB involves the broadcast of digitally encoded audio and data to a
receiver through either terrestrial radio frequencies or through satellite
transmission.
DRB offers a number of advantages over the existing analog system:

! Better quality reception compared to analog AM and FM broadcasts to fixed,
portable and mobile receivers
! Ability to carry a range of additional data, usually programme associated data,
including graphics and text, such as station name, song title, artist's name
and record label, news, weather, time, traffic and promotional information
! Dynamic reconfiguration enabling services to easily change from, say, a high
quality music programme in one time slot to two talk programmes of lesser
technical quality in another
Internet radio and DRB have different modes of transmission, one via cables and
the other terrestrial transmitters and satellite; however, they share some similar
digital concerns. DRB technology comes at a cost - consumers need new
reception equipment and broadcasters require new infrastructure. As with the
conversion to digital television, the speed with which audiences adopt new
technology will depend on the cost of the new equipment.
Different technologies are being developed to deliver DRB services. Those

expected to achieve some success in the next 5-10 years include:
! Eureka 147
! Worldspace
! The USA's IBOC systems
! The USA's S-Band satellite services
! Japan's ISDB system
! Digital AM, both medium and shortwave
! Various cable and satellite technologies (to fixed receivers).
A consortium of broadcasters in Europe developed the Eureka 147 system. The

system converts an audio signal to a digital signal, which is then compressed. A
multiplex can bring together several audio channels and encode them into a single
data stream. Data and other services can then be added to form an ensemble.
Digital receivers separate and decode the ensemble for the listener. Each
multiplex is able to carry five 'compact disc quality' programmes: around six 'FM
quality' services; around 12 'AM quality' services; almost 30 voice channels; or
any combination of these. The signal can be dynamically reconfigured so that a
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high quality service can be readily switched to a number of lesser quality services
or vice versa.
To date, UK has the most advanced use of DRB technology. DRB has
commenced there using Eureka 147. A legislative framework is in place, in which
broadcasters and multiplex managers are licensed separately. The government
has allocated the spectrum to allow seven digital 'ensembles'. The BBC National
Radio and Independent National Radio were each allocated an 'ensemble'. The
remaining five 'ensembles' will carry BBC along with independent local and
regional radio. The BBC launched its national service in 1995. The first commercial
digital radio network was launched in November 1999.
Over the past few years, Internet radio has been making inroads into the Indian
broadcast scenario. It can easily incorporate text, images, even video clips into
the broadcast, which makes it attractive for certain sectors like training, etc.
However, while conventional radio is heavily regulated, there is no regulation at all
for the Internet version. Like the cable television industry, this lack of regulation
can prove to be a double edged sword. On one hand, it makes the process of
starting a radio station easier, thus driving growth. On the other hand, it raises a
number of issues such as content regulation and copyright violations, format
rights, revenue models, etc. Currently, internet radio stations such as
www.indiafm.com and AIR's own www.allindiaradio.com are available to Indian
audiences at no cost.
106
Bridging the gap
What will it take?
Bridging the gap
What will it take?
The Indian entertainment industry maintained very healthy growth rates through
the nineties as it exploited a favourable economic environment and lack of
regulatory controls. This, however,created a very skewed industry structure,
characterised by opaqueness and rampant loss of revenues to rightful recipients.
Today, in television, India is believed to have the worst skew in the distribution of
subscription revenue between broadcasters and distributors. The film and music
sectors suffer revenue losses of over INR 20 billion due to piracy. A closer analysis
of the film industry shows that the extent of value destruction in mid-budget films
(INR 20-100 million) could be as high as 80-90 percent; in many cases, due to a
pronounced lack of process orientation and discipline. Such industry realities,
resulting from structural anomalies and regressive practices, could hamper any
intervention to make a positive change.
Linear growth projections often ignore the underlying potential and carry the
danger of being based on a limited understanding of the potential of the sector.
Consider this:
Required today is an urgent ! India's annual per capita adult spend on films is less than two rupees. At a
projected Compounded Annual Growth Rate (CAGR) of 20 percent this could
commitment to undertake
at best grow to three rupees in the next five years. This, however, does not
fundamental represent the true potential of the film industry in this country of one billion
transformational people, for many of whom cinematic entertainment is the only or primary
leisure activity.
change including strategic ! With 200 channels and 48 million cable homes, India is the third-largest cable
and structural corrections economy in the world after US and China. But India also has the second
lowest (after China's) per capita cable spend at INR150 per home per month.
The hourly price realisation from a family of five with an average television
viewing of one hour per day per person, is just one rupee. Read with the fact
that cable is still not reaching even one fourth of India's 200 million
households, it is clear that the CAGR of 20 percent grossly understates the
real potential of television.
What is required today is an urgent commitment to undertake fundamental

transformational change including strategic and structural corrections, adoption of
new technologies, improved consumer connect and organisational effectiveness
in order to ensure realisation of the sector's true potential. The evolutionary
process followed by different segments of the industry defines the need, nature
and rationale for such changes. The older and relatively conservative segments of
the industry, such as film production and distribution, have evolved slowly through
reluctant experiments in corporatisation, while relatively new and dynamic
sectors like television have experienced accelerated growth and investor
confidence. Consequently, the type and scale of the issues faced differ within
industry segments. The nature of interventions required range from corrective
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measures to facilitative regulation and institutionalisation. Such interventions
differ from each other on the scale of the initiative, degree of difficulty, relative
importance, complexity and level of risk.
Following chart depicts the extent of maturity exhibited by various subsectors of

Indian entertainment industry.
Sub-sector
Maturity Factor
Television Film Music Radio
Industry history
Regulatory maturity
Adoption of technology
Extent of competition in content
Extent of competition in
distribution
Maturity of internal processes
Ability to attract & retain talent
Ability to attract investments
Extent of piracy
Other revenue leakages
Demand growth projections
Note: The extent of shadow in the circle indicates the degree of maturity for each
of the subsectors.
108
Based on a comprehensive understanding of the industry, the interplay between
its drivers and our interactions with various stakeholders, the following initiatives
are recommended to be undertaken by industry and the regulatory authorities. A
stakeholder charter for concerted action will trigger thinking and meaningful
interaction in this sector, which would lead to clarity of direction and urgency of
action.
The KPMG-CII 10/10 Charter
Industry initiatives Regulatory initiatives

1 Improve organisational Implement addressability for
effectiveness through focussed broadcasting distribution in a
projects phased manner
Review programming code and
2 Improve yield
censorship laws
3 Develop alternative revenue Define service obligations and
streams grievance redressal mechanisms
4 Improve consumer connect Rationalise last mile licensing
5 Develop new markets through Evolve a framework for regulating
aggressive market making cross media / value chain holdings
6 Increase market activity in newer Allow the freedom to choose the
genres business model
Constitute a national anti-piracy
7 Improve governance standards
force
8 Improve organisational ability to Provide investment and
attract and retain talent operational incentives
9 Explore consolidation options Constitute a unified regulator
10 Leverage technology strategically Develop national media and
entertainment policy
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Getting the house in order – The industry charter
The Indian entertainment industry has the opportunity to enter an exciting phase
of growth driven by favourable socio-economic changes and smarter distribution
technologies. The realisation of such opportunities would depend on the
aggressiveness of the industry players and the pragmatism of policy makers and
regulators. To unlock value, the Indian entertainment industry would need to:
! develop marketable products keeping in mind the socio-economic realities of
the Indian market
! improve operational effectiveness through global benchmarking, adoption of
best practices, technology and strategic innovation
! leverage the capabilities thus developed in international markets
This requires a fundamental mindset shift from complacency which breeds

inefficiencies, to an insatiable quest for excellence. This section, focusses on the
Industry requires a specific steps that the industry needs to undertake for such a transition to take
place. Such initiatives need to address:
fundamental mindset ! structural issues that have contributed to destroying value and inhibiting
shift from complacency growth; and
to an insatiable quest for ! strategy and operational issues across the value chain.
excellence Markets
An analysis of industry structure and value chain reveals a need for corrective
measures for ensuring profitable growth across market segments.Regulatory
changes can enable and facilitate the introduction of new distribution platforms,
thereby bringing in much-needed competition and consumer choice. However, to
leverage an enhanced market opportunity, the industry needs to manage costs
better, reduce revenue leakages, improve operational effectiveness and develop
and leverage deeper consumer insights.
In the past an environment of 'convenience alliances' created skewed market

structures without effective competition which bred inefficiencies. This resulted in
an inability to meet performance expectations and an industry that is
characterised by:
! most segments being resource starved, consisting of smaller entities with
limited potential to scale. Television is probably the only segment, which has
adequately funded scalable players.
! Lack of management depth, especially in the film industry, has been the
outcome of a lack of process rigour and measurement, the reluctance to
invest in systems and procedures and in technology adoption.
! Inadequate organisational capabilities and lack of governance transparency
impair the industry's ability to attract resources like investments and talent at
reasonable costs. That, in many ways, also defines the fundamental premise
of corporatisation in the entertainment industry.
110
In order to effectively manage the 'growing up' process, the industry needs to
question and review its current structure and several aspects of the operating
strategy. The schematic below segments the industry based on its level of
maturity with respect to governance standards and process orientation.
Low High
High
Alternative
DTH Operators Platform
nCorporate Governance
Vendors
MSOs
Broadcasters
Radio Stations
Corporatised
Content
Movie producers
Distributors
Low
Theatre owners
Music
distributors
Music retailers
Unorganized
Content
producers LCOs
nOperational effectiveness
nMature segments nAspirants nLaggards

n
‘Maturing segments' consists of segments with reasonable process orientation

and governance standards, comprising largely corporatised entities. Due to the
comparatively recent evolution of sectors like broadcasting, digital distribution,
FM radio, and the licensing and investment requirements, organised players had
an opportunity to enter these spaces on equitable terms. This facilitated a certain
level of organisational maturity in these sectors.
However, an assessment of constituent players of these segments point to large

spaces which are yet to evolve. As the extent and intensity of competition
increases with more resourceful players entering the market, players in the
maturing segments should move swiftly to plug such gaps and ensure profitable
survival.
'Aspirants' comprise players who recognise the importance of effective

corporatisation but, either due to lack of adequate expansion capital or an “if-it-
ain't-broke,-we-won't-fix-it” attitude, have been able to achieve very little in that
direction. Multi-system operators, organised content producers, music publishers,
etc fall in this category.
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With the entry of organised, Most players in these sub-segments either started as offshoots of corporate
entities or took steps to transform themselves to corporatised entities, when
resourceful players the such positioning became 'fashionable' in the last few years. However, in most
incumbents need to cases the initiative was confined to incorporating companies, constituting boards,
understand their strategic creating formal structures and inducting professionals in a very limited manner. A
power shift to professional, process driven organisations is yet to be seen.
vulnerability and take
immediate corrective The third segment, 'Laggards', consists of players yet to wake up to the
demands of the emerging business environment. These elements of the value
measures
chain made a significant contribution towards accelerating the growth of
entertainment industry. For instance, the Local Cable Operators (LCOs)
demonstrated an enterprising approach that contributed to the aggressive growth
of cable television in India. Most other sub-segments of this cluster like theatre
owners, music distributors, etc., also made similar contributions to the overall
industry growth. For the overall sustainability of a profitable growth of the sector,
the opaque practices, rampant piracy and inherent inefficiencies in these sub-
segments are issues that need to be addressed immediately.
This should be seen in the context of the changing competitive environment.

With the entry of organised, resourceful players with alternative technologies
offering attractive value propositions, the constituent players need to understand
their strategic vulnerability and take immediate corrective measures.
While these clusters throw up some unique, sector specific issues depending on
the nature and extent of evolution, most industry issues cut across such clusters.
These issues fall under the following four categories:
! Structural issues, including issues relating to distribution of value amongst
value chain participants, extent of competition and level playing field.
! Revenue related issues emanate from the industry's inability to achieve and
sustain growth rates commensurate with the industry potential.
! Profitability related issues resulting from a combination of the first two
issues along with an inability to manage costs.
! Resource related issues with regards to the industry's difficulties in attracting
resources like investment, talent, etc.
Any corrective action should therefore focus on correcting structural anomalies

and improving sector performance. Even though structural corrections need to be
addressed largely through regulatory interventions, there are several aspects
which lend itself to an industry led correction. The analysis of such aspects
highlighted seventeen key issues that demand urgent steps from Indian
entertainment industry.
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These initiatives have been prioritised in the table below to identify high-impact
initiatives using a weighted average with the 'Ability to drive value' as the most
influential factor.
Weightages 50% 30% 20%
Ability to Ease of Weighted

Ranking Possible industry initiatives Drive implement Extent of
inaction score
value ation
1 Improve operational effectiveness 5 4 3 4.3
2 Improve yield 5 3 3 4
3 Develop alternative revenue streams 5 2 4 3.9
4 Develop consumer connect 4 3 3 3.5
5 Aggressive market making 4 3 2 3.3
6 Enhanced activity in newer genres 4 3 2 3.3
7 Improve governance standards 2.5 4 4 3.25
8 Create an environment to attract and retain talent 2.5 4 4 3.25
9 Industry consolidation 3.5 2 4 3.15
10 Adoption of technology 3 3 3 3
Support the evolution of a meaningful regulatory

11 3 3 3 3
regime
12 Improve process orientation 3 3 2 2.8
13 Improve quality of content 3 3 2 2.8
14 Financial innovation 3 2 3 2.7
15 Remove value chain frictions 2 2 4 2.4
16 Performance measurement 1 4 3 2.3
17 Aggressive benchmarking 1 3 4 2.2
From the above, the top ten initiatives were selected for closer scrutiny with a
view to focus the spotlight on select high value opportunities the industry can
pursue for each one of them.
1. Improve operational effectiveness

Margin pressures will induce the entertainment sector to focus their attention on
costs. To achieve sustainable efficiencies, the priority should be on enhancing
organisational effectiveness in delivering strategy and addressing the following
key aspects of effectiveness:
! Organisation structure and its alignment to operational strategy
The entertainment ! Streamlined processes, including measurement mechanisms
! Inculcating global entertainment industry best practices to enhance the
businesses need to
process delivery quality
assimilate experiences of ! Consistent global benchmarking to facilitate continuous improvement
pathfinders in other sectors ! Strategic use of technology.
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The entertainment businesses need to assimilate experiences of pathfinders in
other sectors. A holistic approach towards operational effectiveness, along with
the adoption of best practices and learning from other regions and industries will
not only facilitate the desired performance turnaround but also ensure
sustainability of benefits.
Recommended steps
(A) Develop organisational understanding on the need for effectiveness
improvement
(B) Conduct a diagnostic to identify improvement opportunities
(C) Form dedicated teams for the identified projects
(D) Measure the improvement
2. Improve yield
The compulsions outlined in the earlier section will drive entertainment
businesses to endeavour to maximise revenue yield from their products. Such an
initiative could have the following dimensions:
! Maximising revenue from traditional revenue sources. For example the
traditional revenue streams from television include airtime sales and
subscription revenues
! Ensuring yield from the traditional revenue sources involves the following:
- Effective marketing to communicate the proposition of the product to
generate awareness and trial
- Efficient distribution to ensure availability of the product to an interested
consumer
- Ensuring utilisation at optimum price levels
! Developing and encashing alternative revenue streams like merchandising,
events, supplementary content, export, etc
While all the three are important to all genres of entertainment, some
considerations are more important in the context of certain genres. For example
the first two considerations are very important for the film industry which is trying
to maximise the opening weekend yield. The last is particularly pertinent in the
context of airtime sales in television, considering the perishable nature of airtime.
Indian entertainment businesses must focus on developing systemic maturity and
process orientation required to ensure yield maximisation. The absence of a
facilitating environment that provides reliable data and other services required for
yield management initiatives underlines the need to put in place the required
internal processes and systems for enhanced data quality. The relevant internal
processes cover the following functions:
! Market research and demographic profiling to understand consumer
expectations and consumption patterns
! Marketing communication planning in terms of content, channels, etc and
campaign execution
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! Distribution planning for cost effective coverage and yield maximisation
A disciplined process ! Airtime inventory management and dynamic pricing
! Tiering and pricing of programmes
supported by adequate ! Strategic product innovation
systems, and prior planning ! Monitoring sales and taking corrective measures, etc
will help improve yield and
Often decisions on the revenue side across genres are taken on an intuitive
minimise risks understanding of the market and depend on the judgement of a few key
individuals. A disciplined process supported by adequate systems, and prior
planning will help improve yield and minimise risks. Global organisations follow
mature processes in managing yield and use systems evolved in other industries
with similarly perishable products like airline seats, hotel rooms, etc. The Indian
entertainment business should inculcate global best practices, not just from the
entertainment space but also from similar industries. For such initiatives to be
impactful, industry-wide efforts to develop a mature infrastructure for reliable data
gathering from the last mile points need to be coordinated. The Industry needs to
put in place the following systems to be able to improve the quality of data:
! A data gathering and warehousing system to collate and analyse theatrical
revenues of films. Such a system can be front ended by remote ticketing to
enhance the reliability of data.
! Cable television subscriber information system centrally administered and
funded by the industry. A subscriber card issued by the system should be
made mandatory for all cable subscribers. A subscriber card should be
produced for inspection by the licensing authority or by agencies authorised
by industry bodies. A consensus on such a process for the subscriber
validation can significantly reduce the extent of revenue leakage in the
system.
! The current system of audience tracking, which largely determines media
buying on television could be enhanced through broadbasing the existing
sample size; enhanced automation of the tracking mechanism and the entry
of more research agencies.
Recommended steps
(A) Develop and implement revenue assurance processes and systems
(B) Improved process orientation in other customer facing functions
(C) Put in place shared systems to collect and analsze last mile consumption
information
3. Develop alternative revenue streams

Global experiences in developing and encashing alternative revenue streams in
sectors like films, television, etc provide compelling evidence for the commercial
attractiveness of such products.
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Some examples are:
! Taking the products to newer geographic territories; crossover of Tamil films
to the Japanese market illustrates such territorial extensions
! Product innovation, such as un-film advertising and strategic use of brands
inside mainstream content, resulting in improved revenue opportunities.
! Development of new products leveraging key assets of the core product
category. Merchandise options or supplementary programming like the 'The
making of Lagaan' are examples of developing new categories.
In order to develop alternative streams of revenues, the industry needs to have a

vision for an enlarged revenue model. Alternative revenue opportunities should be
identified at the product planning stage itself. Planning for alternative revenues
should be undertaken with a view to establishing definitive targets and assigning
clear organisational ownership for achieving revenue objectives. Alternative
streams will become significant revenue contributors as the entertainment
industry stabilises and entertainment consumption becomes more sophisticated.
Recommended steps
(A) Identify possible alternative revenue streams for each product category
(B) Target for 10-20 percent revenues from such sources
(C) Create dedicated teams focused on alternative revenue stream
4. Develop consumer connect

The entertainment industry value chain across genres needs to connect more
closely to the voice of the consumer, employ the feedback to enhance consumer
experience and thereby enhance value. For this, the content producers / content
owners need to establish formal channels for consumer connect. While the need
for creative space is well appreciated, creative professionals and content
producers need to work together to also balance consumer needs and
commercial realities when developing products.
The high uncertainties and failure rates of individual entertainment products like
films, television serials, etc highlights the viability issue of a majority of the ideas
getting funded. The industry needs to take note of the gap in systemic research
The industry needs to take and feedback in the new product development process. Some initiatives that can
be undertaken to increase the viability of products at the conception stage include:
note of the gap in systemic ! Market research to develop consumer insight for new product development,
research and feedback in evaluate acceptability of product ideas and plan distribution
the new product ! Customer segmentation and profiling of target segments
! Developing points for brand experience and consumer dialogue
development process ! Continuous consumer interaction and customer satisfaction surveys to
gather feedback on consumption experience
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! Formalised mechanisms to inculcate such feedback into organisational
processes and future projects
! Employee training to develop consumer orientation, especially in last mile
distribution
! Consumer support and complaint management processes in last mile
distribution
The transition to a consumer focussed business has to be well thought through

as it involves fundamental shifts in business models and operational strategy.
Recommended steps
(A) Redesign the customer facing processes to enhance the quality of
experience
(B) Ensure consumer feedback flow through to product design, marketing and
distribution
(C) Establish consumer satisfaction measurement and linkages of such
measures with remuneration
5. Aggressive market making

The entertainment industry will see increased market activity across genres and
across the entire value chain. A combination of new technologies, regulatory
changes and a growing awareness of a professional business and market oriented
approach can make the difference. Consider the following developments:
! Three Direct To Home (DTH) players are expected to be fully operational by
end-2005, providing the much needed consumer choice in broadcasting last
mile
! Telecommunication majors are introducing broadcast distributions services.
An IP-TV based service is currently undergoing advanced trials and is
expected to enter the market in the near future
! Several MSOs may consider investing in CAS enabling equipment and
digitising the last mile, even without a regulatory directive, to effectively
compete with DTH/ IP-TV players
! Digital distribution of films is finally off the ground in 2004. Though the initial
Increasing intensity of experiments lack scale, the emergence of multiple scale players in digital film
distribution is expected in the next couple of years. DTH players and IP-TV
market activity in the last players may also extend their services to cover digital cinema
mile distribution will spur ! Large corporate houses are demonstrating serious interest in the
entertainment industry either by setting up own experimental outfits or
demand for quality content,
through investments
triggering action across the ! Indian Music Industry (IMI) is exploring options to partner to digitise and
value chain electronically distribute music across India
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Increasing intensity of market activity in the last mile distribution will spur
demand for quality content, triggering action across the value chain. However, this
assumption is premised on middle class India's enormous appetite for
entertainment. We believe that such demand is a function of the following:
! Quality and diversity of content
! Compelling value proposition in terms of quality of service, pricing, etc
! Low initial investments
While the market developments mentioned above are capable of bringing about a
quality shift in entertainment delivery, businesses need to develop models with:
! Focus on content quality
! Attractive price propositions, often based on subsidising the consumer
acquisition costs or consumer premises equipment costs
! Imaginative re-engineering of the cost structure through redistribution of risks
and rewards
! Aggressive marketing, branding and distribution to ensure market visibility
and coverage
Companies need to
constantly define new/ As these initiatives require significant investments and increase the risk profile,
entertainment businesses that are adopting an approach to enlarge the market,
changing genres based need to assess the viability of such a plan through a careful examination of market
on the demographic profile potential, competition, costs, potential risks and mitigants. Such an assessment
of the market should also take into consideration the learning from other developed markets, as
they offer key signposts on the road ahead.
Recommended steps
(A) Rethink growth targets in the light of emerging distribution scenario
(B) Develop 'low entry barrier, low cost' business models
(C) Establish the viability of such models through quantitative business cases
6. Enhanced activity in newer genres

Media and entertainment content, like any other product, needs constant
evolution to meet changing consumer needs.
Media companies need to blend artist creativity with consumer tastes and
preferences. In this pursuit they need to constantly define new/ changing genres
based on the demographic profile of the market and a surveyed understanding of
consumer likes. Creativity needs to be channelised in the right direction so that its
commercial attractiveness can be exploited.
To its credit, the Indian music industry has constantly looked at new genres to
keep it afloat. Indi-pop, Sufi, fusion, re-mix, folk, etc. are all successful genre
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creations in the popular Indian music space over the last ten years. The music
industry's foray into devotional music partly revolutionised its fortunes.
In a similar manner, television saw an era being dominated by Mahabharat and

Ramayan, where the protagonists achieved 'a demi-God 'status in India. Religious
programming continues to have its share of success in the television space,
through independent channels on Christianity, Hindu mythology and devotional
music - 'bhajjans'. This genre is relatively unexploited in films.
The “tried and tested formula” in Indian film making is being challenged. The
industry has witnessed how new genre creations have set new trends and
reaped rich rewards. However, any new genre success 'formula' is quickly
replicated and often the weak treatment of the 'me-too' results in failures.
In the television space, potentially lucrative genres such as lifestyle, education

and health are still under-leveraged. An assessment of the Indian demographic
profile, as well as increased programming on these genres on mass
entertainment, and even news channels, indicates a potential to exploit each of
these genres separately, and targeted marketing to advertisers could result in
unlocking this potential to some extent.
Themes need to be consumer centric and contemporary. Entry into new genres
may include rekindling genres of the past, if that is what the consumer demands.
Success hinges on a good understanding of consumer behaviour, likes and
dislikes, sampling of content, creative programming, effective marketing and
distribution.
Recommended steps
(A) Explore and innovate - develop new genres
(B) Consumer research to be undertaken continuously to be in sync with
changing consumer preferences
(C) Redirect creative resources towards genres in line with consumer interests
The investor community
tends to display limited 7. Improve governance standards
The investor community tends to display limited conviction towards the
conviction towards the
entertainment industry, citing issues such as: family run enterprises, lack of
entertainment industry, transparency, lack of professional management, inadequate financial discipline
citing issues of corporate and reporting. As large industrial houses, financial institutions and private savings
evince interest in this sector, the industry players need to institutionalise
governance
processes that will lay the foundation for good corporate governance.
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Typically, an effective corporate governance framework is based on the following
principles [drawn from the OECD (Organisation for Economic Co-operation and
Development) Principles of Corporate Governance]:
! It should promote a transparent and efficient market and be consistent with
the law. It should protect and facilitate the exercise of shareholders' rights
and ensure the equitable treatment of all shareholders, including minority
shareholders.
! It should recognise the rights of stakeholders established by law or through
mutual agreements and encourage active co-operation between corporations
and stakeholders in creation of wealth and the sustainability of financially
sound enterprises.
! It should ensure that timely and accurate disclosure is made on all material
matters regarding the corporation, including the financial situation,
performance, ownership, and governance of the company.
! It should ensure the availability of appropriate strategic guidance to the
management of the company; effective monitoring of the management by
the board and the board's accountability to the company and its
shareholders.
While the responsibility to actualise corporate governance rests with individual

organisations, industry associations can play a crucial role in developing corporate
governance standards that should reflect both the maturity of the industry as well
as the practical constraints faced by participants.
Recommended steps
(A) Industry association to create a corporate governance cell
(B) Cell to set up processes in line with corporate governance principles
(C) Cell to define reporting requirements
(D) Cell to set up an audit committee to audit governance procedures among
members
8. Create an environment to attract and retain talent

The attractiveness of the entertainment industry as a professional option needs to
be re-established in a challenging talent market (both on the creative and the
business management side) against stiff competition from sunrise sectors such
as BPO, software, aviation, etc.
If the industry seeks to
continue attracting talent With the intensity of market activity and the extent of competition rising, the
need for attracting and retaining top talent assumes greater significance. If the
against stiff competition, it
industry seeks to continue attracting talent, it would need to undertake a number
would need to undertake a
of measures that are infrastructure building in nature and also lead to a change in
number of measures mind-set.
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Some of these include:
! Developing an educational infrastructure catering to the sector by
- creating world-class institutes in India, on the lines of the IITs and IIMs
for attracting young talent, providing training in both the creative and
business aspects of the entertainment business
- private-public partnership models should be encouraged to develop the
required infrastructure
! Improving the attractiveness of the sector by
- benchmarking itself with competing sunrise sectors in terms of
remuneration and career growth to make the sector attractive for
prospective employees
- establishing an exciting and professional working environment by
instituting appropriate systems, process and organisational practices
- establishing a quantitative performance management system which sets
measurable performance targets, measures and rewards performance in
a fair manner
- establishing meritocracies founded on sound principles of organisation
building
! Establishing a brand in the talent market by
- articulating its value proposition to professionals in terms of growth
potential, development, compensation and lifestyle
- adopting consistent communication of its value proposition at the talent
market
- this would need to be actioned through media campaigns and presence
at college campuses as well as career fairs
Recommended steps
(A) Benchmark compensation, employee policies and working environment
and take measures to plug the gaps
(B) Implement quantitative performance management systems
(C) Aggressive branding in the talent market
9. Industry consolidation
The Indian entertainment industry is fragmented. There is a vast disparity
between a few large players and multiple small players, all of whom are
competing for a finite market with a finite set of resources. Certain elements like
the last mile distribution, content production, etc are far more fragmented than
other parts of the value chain.
For example, there are a large number of small independent film producers, who
typically operate in the mid-budget range of INR 20-100 million. An analysis of the
profitability of such projects reveals that this segment of the industry has been
the least attractive. While the contribution of this segment to the industry in
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terms of investments and the platform it provides for talent development are not
The inability of fragmented to be underestimated, there does exist a case for a more efficient utilisation of
players to be more efficient resources that will not only add greater value to the industry but will also raise the
is a consequence of the profitability of these small players.
greater cost of resources
that they bear due to their The large production houses can realise efficiencies at three different levels:
! Financial - Having larger budgets and established names, the level of risk that
inefficient scale of
financial investors perceive is far lesser, resulting in lower interest costs
operations ! Risk management - With multiple projects, the production house can spread
its risk across projects of varied themes and financial sizes. This enables the
management of risk at a portfolio level
! Utilisation of resources - Apart from financial resources, these production
houses have shared resources in terms of infrastructure that can be more
effectively utilised across various productions to bring down the project
costs. Additionally, the availability of multiple projects makes possible the
setting up of a repository of talent to be recruited and effectively employed
within the production house
Inefficiencies across genres and across the value chain result in the following
detrimental effects:
! Lower profitability of small players
- Independent players with inefficient mechanisms and low resources
suffer from an inability to realise profits.
! Reduced attractiveness of the industry
- Lower profitability and losses reduce the attractiveness of the industry,
because of the increased level of risk and lower return on investment
- The repercussions of this are felt when players need to attract
investment, evident from the unwillingness of investors or high rates of
interest demanded for the perceived level of risk
! Quality of services
- Lack of resources (a key issue faced by small players) means that the
quality of services to the end consumer could be affected
- The inability of small local / independent cable operators to upgrade their
service offering by investing in better infrastructure illustrates the point
The inability of fragmented players to be more efficient is a consequence of the

greater cost of resources that they bear due to their inefficient scale of
operations. Therefore industry participants need to explore consolidation options
to build up scale efficiencies.
Recommended steps
(A) Review the long term growth strategy to evaluate the desirability and
practicality of inorganic growth
(B) Explore inorganic growth opportunities.
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Lack of sophistication is not 10. Strategic adoption of technology
just a limiting constraint to Technology can play the dual role of a demand driver and process enabler.
organisational effectiveness, Technology adoption in last mile distribution has the potential to revolutionise the
entertainment sector in the country. The initial adoption is expected to see the
but also a significant risk
launch of DTH/ IP-TV/ DSL services, digital cinema, digital radio, etc. This will set
from a business continuity the stage for an exciting phase of technology led growth. The ability of operators
perspective to leverage exciting new technologies like Interactive Television, broadcasting to
mobile devices, etc will drive growth as the digital entertainment matures into
digital commerce.
In addition, such strategic technology adoption will also emanate from the need to
improve process efficiencies dramatically. The entertainment sector remains
relatively lesser technology-enabled with respect to process delivery. It is
interesting to note that sophisticated operators with technologically well
developed core processes in production, broadcasting, etc continue to have
business functions using legacy spreadsheets and primitive applications. The
entertainment industry should learn from the large strides made by traditional
sectors like manufacturing in technology adoption in the last decade and the
consequent gains in productivity and competitiveness. Such lack of sophistication
is not just a limiting constraint to organisational effectiveness, but also a
significant risk from a business continuity perspective.
Entertainment businesses should take immediate steps to address both these

dimensions, vis-à-vis the strategic use of technology as a competitive tool and as
a process enabler and aim to evolve a medium-to-long term strategy to leverage
technology.
Recommended steps
(A) Identify opportunities for strategic use of technology
(B) Develop a long term blue print for technology adoption with quantitative
business justifications
(C) Increase the technology spend
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Stakeholder charter
It is hoped that the industry should undertake the following initiatives to
participate in the industry's next phase of growth and set a progressive long-term
direction.
Degree of impact on
Resistance to Complexity of
# Action points
change implementation
Industry Consumer
Improve organisational
1 effectiveness through High Medium Medium Medium
focused projects
2 Improve yield High Medium Low High
Develop alternative
3 High Medium Low Medium
revenue streams
Improve consumer
4 High High High High
connect
Develop new markets

5 through aggressive High High Medium Medium
market making
Increase market activity in

6 High High Low Medium
newer genres
Improve governance
7 High Medium High High
standards
8 ability to attract and retain High Medium High High
talent
Explore consolidation
9 High High High High
options
Leverage technology
10 High High Medium Medium
strategically
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Getting the house in order – The regulatory charter
The objective of regulation

Most modern economies use selective multi-dimensional regulatory / policy
interventions to ensure growth and consumer choice. While the nature and extent
of such interventions typically depend on the industry context involving specific
issues to be addressed, there are several common objectives which define such
initiatives. Each of these objectives acquires a different level of importance
depending on where the industry lies on its evolutionary curve and the prevalent
market dynamics. Some of the primary objectives that regulatory interventions
seek to achieve include:
! Protecting stakeholder interests with consumer interests being the priority
! Ensuring adequacy of competition
! Ensuring sustainable industry growth
! Facilitating the adoption of new technologies
! Protecting investments
! Ensuring business viability
The government and ! Protecting intellectual property rights
regulators must lay out a ! Regulatory oversight
clear agenda and set of
A large part of the growth of Indian entertainment industry has taken place in a
initiatives to bring about the regulatory vacuum. This has given rise to distorted structures to develop and
desired transformation protect monopolistic positions and opaque distribution chains facilitating revenue
leakages. At the same time, as mentioned earlier the industry is at the threshold
of a potentially steep growth curve if the stakeholder groups meet expectations.
Given this context, the government and industry regulators must lay out a clear
agenda and set off initiatives to bring about the desired transformation. The
desired initiatives are analysed below from the perspective of the three key
objectives of government / regulatory intervention, viz:
! Protecting stakeholder interests
! Ensuring adequacy of competition
! Fostering growth
Protecting stakeholder interests

The stakeholder universe of the entertainment industry includes the following
groups:
! Industry players
- Content producers / owners
- Distributors
- Last mile access providers
! Consumers
! Government
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Industry players
Regulatory direction to ensure stakeholder interests should originate from an
analysis of the extent and adequacy of competition in the entertainment value
chain. A high level scan of the value chain reveals three clusters with varying
levels of competition and opaqueness. This necessitates the need for
differentiated treatment at the regulatory level. These three clusters of industry
participants are:
! Mature segment
! Laggards
! Growth engines
Alternative
Platform
Vendors
Radio Stations Broadcasters
DTH Operators
Radio Carriers
nExtent of transparency
Corporatised
Content
producers
Movie
Distributors Music
distributors
MSOs
Unorganized
Theatre owners Content
producers
LCOs
Music retailers
nIntensity of competition
nMature segments nLaggards nGrowth engines
The sections below discuss the constituents of each cluster and their regulatory
needs.
Mature segments
This segment consists of players operating in a highly competitive market with a
reasonable level of transparency. Television broadcasters and corporatised content
producers can be considered mature as compared to other segments. As in the
case of broadcasters, most genres offer the choice of more than three players.
Popular genres like general entertainment, sports, news, etc offer much more
choice today. This cluster, with higher overall levels of corporate ownership,
operates under a relatively more transparent environment. The free play of market
forces that has fostered competition and value creation in this cluster, should not
be tampered with.
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Illustrative list
General Entertainment Star Plus, Sony, SET MAX, Zee, Sahara One, SAB, DD
CNN, BBC, NDTV India, NDTV 24X7, NDTV Profit, CNBC, Zee News, Star News,
News
Headlines Today, Aaj Tak, Sahara Samay, DD News etc
English Entertainment Star World, Zee English, AXN, Adventure, FTV, Trendz etc.
Sports ESPN, Star Sports, Ten Sports, DD Sports etc.
Music V, MTV, B4U, etc
Infotainment National Geographic Channel, Discovery, The History Channel, Animal Planet etc.
Kids Hungama TV, Cartoon Network, Pogo, Nickelodeon, Animax etc.
Films Star Movies, HBO, Hallmark, Zee Cinema, Zee MGM, Star Gold, CVO, etc.
Laggards
These are characterised by relatively lower levels of competition and
transparency. Significant sections of the conventional last mile of the
entertainment sector fall under this category, along with the unorganised sector
in content production. They account for over 50 percent of the value created by
the industry. They need to be seen in the context of a peculiar industry dynamic,
which is simultaneously the cause and the effect of a unique set of evolutionary
processes. Therefore, any intervention that ignores the evolutionary context and
forces driving it is likely to fail and can also be counter-productive. The following
factors need to be considered before formulating regulatory position vis-à-vis
laggards.
! Socio-economic distribution of Indian consumers and affordability of
entertainment products: A large majority of Indian consumers are in the low
income brackets. As many as 75 percent of Indian cable homes have
incomes lower than INR 8,000 per month. When an industry services large
low-income segments of the society, it will be forced to adopt 'innovative'
methods to re-engineer the cost structure, which may not be always
legitimate, equitable and fair.
! Revenue leakages through piracy and under declaration: Such re-engineering
(as mentioned above) typically takes the familiar route of piracy and under
declaration. Leakages stretch from the under-declaration of the number of
cable subscribers and theatrical revenues to the unauthorised reproduction
and distribution of copy-righted content.
! Unviable tax structures: Most state governments view the entertainment
sector as an easy revenue target and hence, tax it heavily.
! Existence of last mile monopolies: While adequate competition exists in
Any intervention that ignores
several parts of the entertainment last mile, some significant segments
the evolutionary context and demonstrate monopolistic behaviour. The problem is acute in the last mile of
forces driving it is likely to cable services where operators have managed to develop a monopolistic
environment through informal arrangements on the ground. Such
fail and can also be arrangements impact the consumers the right to select their operators.
counter-productive
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! Lack of transparency: The distribution chain of the entertainment industry is
characterised by a lack of transparency across genres. The resulting lack of
visibility of the consumer and his consumption pattern causes inequitable
distribution of value, influences investor perceptions negatively and protects
vested interests.
Innovative, practical solutions as well as efficient implementation to resolve these

issues are imperative today. Impractical solutions are unlikely to work, as they
often do not address the complex equilibrium of cause-effect relationships
effectively, triggering overall discontent. Our experience with conditional access
implementation or investment subsidies for films have proved that isolated efforts
will not have the appropriate impact.
Growth engines
These comprise emerging media like FM radio and alternative distribution
platforms like DTH, IP-TV, digital movie distributors and exhibitors, etc. This cluster
represents the future of Indian entertainment industry not only because of the
Impractical solutions are increasing share of these media and platforms in the overall entertainment
unlikely to work, as they activity, but also because of their ability to be a positive change agent for the
often do not address the entire sector. However, the operating environment is skewed against them
because of the disparities in license conditions and cost structures. Governments
complex equilibrium of and regulators need to recognise the relevance and significance of alternative
cause-effect relationships platforms and facilitate a conducive environment.
Having discussed the regulatory need of industry participants, let us look at the
regulatory needs of the most important participant in the industry value chain –
the consumer.
Consumers
Protection of consumer interests should be high on the agenda of the
government and regulators. Consumer interests can be defined along the
following lines:
! Consumer choice: Consumer's right to choose a content-quality-price
combination
! Access to customer service: Right to receive prompt and effective service
and avoidance of any discrepancy between original product promise and
functionality delivered
In most segments of the entertainment industry freedom of choice is either non-

existent as in the last-mile of television cable services or limited as in the case of
sectors like film/ music distribution etc. The scenario with respect to customer
service and grievance redressal mechanisms is not very different. Governments,
regulators and industry players should devise specific measurable actions aimed
at improving consumer choice and service levels.
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governments, regulators and industry players should devise specific measurable
actions aimed at improving consumer choice and service levels.
Government
The government's engagement with the sector should be guided by its interest in
expanding the economic activity in the entertainment sector in a sustainable
manner with a view to:
! expand the direct and indirect tax base of the sector
! increase the employment potential of the sector
! increase the foreign exchange earnings of the sector
The government should play a role in promoting art and culture in our society and
should own the tools/ channels for disseminating information, providing
recreational content to communities not accessible in a commercially viable
manner and making social interventions to facilitate positive change, like in the
case of literacy or family planning. Government should also safeguard national
Best way to safeguard interests like security or national assets like spectrum.
stakeholder interests is to
Ensuring adequacy of competition
ensure the free play of The best way to safeguard stakeholder interests is to ensure the free play of
market forces in a market market forces in a market environment where adequate competition exists. Such
conditions minimise the need for corrective regulatory interventions. As analysed
environment where
in earlier sections of the report, adequate level of competition does not exist in
adequate competition exists several clusters in the entertainment value chain. As a result, the corrective
interventions are often far less effective and decisive than required. For instance,
in the case of the broadcasting last mile segment where near monopolistic
conditions exist in most parts of the country, government and regulatory bodies
agree that the entry of alternative platform operators like DTH , IP-TV or xDSL
operators will be able to increase the extent of competition significantly. However
there are certain aspects that need to be kept in consideration:
! In the absence of effective regulatory provisions and enforcement measures
to ensure transparency, cable operators enjoy an unreal cost structure built
on the premise of cost avoidance and under-declaration. Alternative platforms
operating in an open, addressable manner will not be able to compete
effectively
! Further, alternative platforms do not enjoy a level playing field vis-à-vis cable
services in the current regulatory environment:
! For example, DTH operators need to pay an INR 100 million license fee and a
10 percent revenue share on adjusted gross revenues. Cable operators only
need a registration from the local post office. It is also pertinent in this
context to note that cable services are an established business and the
infrastructure is already amortised, while for DTH, which is a new business,
the 10 percent gross revenue share will push back the break even point by a
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few years. In the initial years this share will effectively have to be paid out of
capital, there being no positive cash flow or profits, and this will have a long
term cascading effect on project costs and cash flows.
! The extent of Foreign Direct Investment (FDI), which could be a significant
source of funding, is limited to 20 percent for DTH, while in cable services
FDI can be up to 49 percent;
! DTH set-top boxes currently need to be interoperable across various DTH
platforms, while no such restrictions are imposed on cable operators, where
there exists a virtual monopoly at the last mile.
Last mile corporatised entities across the sector face similar disadvantages in
cost structures because of rampant piracy. To ensure adequate competition to
protect stakeholder interests, the government and regulators need to take
forceful policy/ regulatory positions and follow it up with effective
implementation.
Fostering growth
It is clear that most sub-sectors in the entertainment industry are performing sub-
optimally and unable to tap the opportunity and potential available. The eventual
realisation of such potential is a function of focussed and coordinated stakeholder
action. The government and regulators have to make considerable contributions
to make such coordinated action happen. An analysis of sub-sector performance
clearly shows that television is the prime mover for the industry so far. Through
the nineties, the television sector has emerged as both the largest and the fastest
growing cluster in the entertainment industry. Moreover, several positive steps
like the introduction of alternative platforms (DTH and IP-TV) have been taken to
accelerate the rate of growth. Given such a context, government should consider
proactive interventions for other sub-sectors like films, music, radio, etc with a
The government and
view to:
regulatory bodies should ! facilitate an investment friendly environment
play the role of a change ! provide policy/ regulatory clarity and
! ensure a level playing field for competition
agent
In summary, as the industry goes through an evolutionary process to realise its
actual potential, the government and regulatory bodies should play the role of a
change agent. With a view to protecting stakeholder interests, ensuring adequate
competition and sustainable growth, a charter for governmental/ regulatory
intervention, needs to be identified.
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Key issue Television Films Radio Music
Protecting stakeholder
interests
Consumer n Choice of content n Choice in price- n Diversity of content n Choice of price -

Platform - operator quality combinations n Alternative access quality combinations
quality-price n Diversity of content points n Alternative access
combination points
n Customer service and
grievance redressal
Industry players n Addressability n Transparency n Rationalisation of n Stringent anti-piracy
licensing regime regime
n Transparency n Free play of market
forces n Freedom in choosing n Investments and
n Free play of market
the technical operational incentives
forces n Investment and
operational incentives architecture for
n Non access Broadcasting
n Stringent anti-piracy
regime n Credible measure for
n Investment and listenership of stations
operational incentives
n Investment and
operational incentives
Governments n Policy/ regulatory n Policy clarity n Policy/ regulatory n Transparency

clarity n Transparency clarity n Enhanced tax
n Transparency n Enhanced tax n Enhanced licensing compliance
n Enhanced tax compliance fees
compliance n Continued control of
select genres
Ensuring adequate n Ensure level playing n Stringent anti-piracy n Adequate competition n Stringent anti-piracy
competition field regime exists regime
n Stringent anti
regime
Ensuring growth n Policy / regulatory n Policy / regulatory n Policy/ regulatory n Stringent anti-piracy
clarity clarity clarity regime
n Investments and n Investments and n Establish a credible n Investments and
operational incentives operational incentives measure of listenership operational incentives
of stations
A high level analysis of the key issues highlights the following priorities across
sub-sectors:
! Ensure consumer choice
! Improve customer service and redressal mechanisms
! Improve last mile transparency
! Ensure non-discriminated access to content and platforms
! Rationalise licensing conditions
! Allow operators the freedom to select the business model
! Develop stringent anti-piracy regime
! Provide investment and operational incentives
! Provide policy / regulatory consistency and clarity
Clearly, to address these priorities, governmental/ regulatory interventions with

varying degree of complexity, and close coordination between stakeholder groups
is essential. We have attempted to prepare a short list of high impact
interventions from a larger set of possible interventions identified against the
above listed compulsions, through extensive industry interaction.
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The following criteria were developed after extensive industry interactions and
were applied to prepare the shortlist:
! The nature of impact the intervention can make on fostering growth and
competition and protecting stakeholder interests
! Complexity of implementation including possible stakeholder resistance
Below, we profile our top ten governmental/ regulatory interventions with a view
to initiate an industry dialogue to evolve a consensus on sector priorities
1. Implement addressability for broadcasting distribution in a phased

manner
Most industry analysts agree that mandatory addressability is the best possible
solution for the issues plaguing the broadcasting and cable services industry. The
government has initiated steps in line with this thought process to implement
conditional access systems (CAS). However, several factors specific to CAS
implementation in the Indian context need to be given sufficient consideration
before devising a strategy for implementing addressability.
As mentioned earlier in this section, more than 75 percent of Indian cable homes
earn less than INR 8,000 in a month. Currently, an average cable home pays
around INR 150 per month for around 100 channels.
! Impact on broadcaster revenues

- Mandatory implementation of addressability may increase the cable
prices significantly as pay channel revenue models will be impacted
significantly by a falling subscriber base and resultant negative impact on
advertising revenues
! Infrastructural investments required by the cable operators get factored into
the price.
- At 30 percent penetration, the cost of conditional access implementation
in four metros with secure digital STBs, will work out to be about INR 11
billion. (Source: Media Partners Asia).
- MSOs will have no option but to carry forward this cost to consumers
! Increased consumer cost
- In order to maintain the current set of channels, a consumer needs to
spend around INR 350 without providing for the STBs (FTA with taxes at
around INR 100 and five prominent bouquets at current prices at INR
250).
- With a provision for STBs, the monthly bill can easily cross INR 400,
putting most popular entertainment channels beyond the reach of a
majority of consumers, triggering a spiral of reduced advertising
revenues and rising channel prices. For the consumer, this would be a
case of 'paying more and watching less'.
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! Market-driven conditional access
- No other country mandates the use of conditional access systems for
accessing pay content. The decision to distribute the signals in an
encrypted fashion and therefore force the use of conditional access
devices is purely a business model decision of the cable operator.
- In that sense, a consumer transitioning to a conditional access system
takes a conscious decision based on the attractiveness of the services
on offer.
! Keeping in mind the digital transition
- Most countries consider migration to an addressable environment as
part of a larger transition to a fully digital environment.
- Industry players and regulators in several advanced countries like USA,
UK, Australia, etc are committed to effect such a transition as soon as a
majority of the cable homes are in a position to migrate and realistic
timelines are set.
An example of planned migration: China's digital upgrade timeline
2002 Finish testing the technical standards for terrestrial transmission
2002 Publicise national standards for digital cable television transmission
2003 Adoption of national digital television standards
2003 Publicise national digital television standards
2005 Launch digital television broadcasts in selected cities
2008 Transmit Beijing Olympic Games on HDTV
2008 Launch digital television commercial broadcasts in major cities
2015 Switch-off analogue system nationwide
Source: www.china.org.cn
In summary, whatever be the mode of implementation, addressability, if not

implemented keeping in mind practical compulsions, it may deny a majority of
consumers access to quality entertainment and slow down the growth of the
industry considerably. The government also needs to develop a phased, long-term
plan to migrate to a fully digital environment and set a realistic date for analogue
transmission.
Whatever be the mechanism of implementing addressability, the government

needs to evolve a framework for the classification of channels, which will then
enable the industry (through consumer choice) to determine what is valued and
what is not. International experience suggests the following three tiers of
programming:
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Government needs to A. Free to air channels: Most elementary tier of programming consists of free
to air channels only. Every cable operator should dedicate a 'stipulated share'
develop a phased, long-term of capacity to carry the FTA tier. Such an FTA tier should consist of:
plan to migrate to a fully a. Stipulated number of public broadcasting channels
b. Most viewed channels in the relevant community to ensure mandatory
digital environment
carriage of popular free to air channels in a specific region.
c. Other FTA channels that the cable operator chooses to include in the FTA
tier
Scores from the existing viewership rating system should be used to pick
channels for the class (b) slots. The government/ regulator may need to
consider regulating the prices of the FTA tier till effective competition and
consumer choice come about in the natural course.
B. Basic pay programming: Cable operators should put together a basic tier of
pay programming comprising the following:
a. Genre leading pay channels in general entertainment, sports, news,
music, etc. Such leadership needs to be established through viewership
monitoring mechanisms like TRPs. In such a system a stipulated number
of leading channels in each genre should be necessarily included in the
basic pay tier.
b. Pay or FTA channels that the cable operator chooses to carry. Such a
layer should involve niche channels, channels catering to niche
ethnic/linguistic/religious communities and other pay channels not
included as part of class (a) mandatory carriage. The choice of channels
in these slots should be left to the discretion of the operator.
In addition, the cable operator should reserve a specified number of slots for
piloting new channels. The pricing for the basic tier of pay programming could
be left to market forces, with government supervision of predatory or
monopolistic pricing policies. Consumers should be able to watch the FTA
tier and the Basic Pay tier without investing in a Conditional Access Device.
C. Premium tier of programming: Cable operators should be allowed to offer

premium content in a digital addressable environment. Consumers will need
Conditional Access Devices for accessing these premium programming
channels or pay per view content. Such programming can include premium
movie channels, high end sports programming, niche thematic channels, etc.
Content providers operating in this tier and cable operators should be
allowed to enter exclusive distribution arrangements. Such exclusivity of
content is an integral part of digital addressable broadcasting in the transition
to a fully digital last mile environment.
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The government should evolve a framework with clearly defined guidelines for the
classification and tiering of channels. Such a framework should also stipulate the
nature of price regulation in FTA tier and monitoring mechanisms to protect
consumer interests. Such tiering of programming along with a few other
initiatives like licensing of cable operators (discussed below), would enhance
consumer choice and transparency in the last mile environment.
Recommended actions
(A) Prepare a long term plan for digitial transition
(B) Encourage voluntary implementation of addressability
(C) Allow addressable operators exclusive access to premium content
(D) Stipulate a system for classifying channels
(E) Evolve an acceptable mechanism for FTA price determination
(F) Evolve a fair system for sampling new channels
2. Review programming codes and censorship laws

Mature content has proven to have large demand globally. This is true of India
too. Such content is commonly available over television, film, internet and print,
without any checks and balances across the country.
Effective legislation of such content will help enforce discipline and responsibility
to transmit or show such content with adequate precautions and warnings.
However, the current legislation and mechanisms are ineffective and not
completely practical in dealing with this subject.
! For example, the current films' rating system is relatively narrow; there is a
case for multi-tiering the rating system and revisiting the approval process.
! Similarly, there is a lack of clear, practical norms for mature content on
television. Given the medium it is not practicable to enforce a mechanism on
a day-to-day basis and therefore it is essential to find a solution that is
acceptable to all stakeholders and involves an element of self-regulation.
Any moves could however invite strong reactions from various sections of
society. As there exist strong, but divergent points of view on this subject, the
government should initiate a process to gather and analyse all such opinions along
with an understanding of the ground realities before reviewing/developing
legislation.
3. Define service obligations and grievance redressal mechanisms

The last mile of the service delivery in the entertainment sector in India is largely
dominated by the unorganised sector which lives by its own set of rules resulting
in a plethora of rights abuses. This results in a peculiar situation with the
consumer rights being completely ignored.
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For example, disputes between cable operators and broadcasters often result in
denial of consumer access to popular sporting events without notice leaving the
consumer without any choice. In a monopolistic situation, access has become an
instrument of blackmail, without any regard for consumer rights. Most consumers
are scared to take the fight to consumer courts fearing retaliation from the
'unorganised' sector.
The government should examine such abuses of monopoly power and bring out
implementable mechanisms to ensure appropriate service delivery and customer
service. Such mechanisms should include clear definitions for quality of service,
customer service standards and guidelines for record keeping. Government
should also specify grievance redressal mechanisms. The initiatives taken by the
telecom regulatory authority to improve customer service in the
telecommunications space offer a benchmark to emulate.
4. Rationalise last mile licensing

The discontinuities and unplanned evolution of licensing in the entertainment last
mile has resulted in inconsistencies for similar products/ services. In the
The discontinuities and broadcasting distribution space no licensing is required for cable operators while
unplanned evolution of unified licensing exists for DTH and IP-TV. The unified licensing regime is a
licensing in the movement towards such a system. Film or music distribution, exhibition and
retailing do not require licenses. However, radio, being a broadcast medium,
entertainment last mile has carries unviable license conditions including a hefty license fee. Licensing has a
resulted in inconsistencies very positive role to play in an industry that hopes to streamline its unorganised
players. Most part of the entertainment value chain needs external facilitation to
attain the level of discipline and openness required to operate in an efficient and
equitable structure. Any attempt to review and rationalise disparate licensing
regimes in the sector should take into account the following important factors:
! License fee should not jeopardise the commercial viability of the sector.
10 percent gross revenue share in DTH broadcasting and flat license fees in
radio affects the viability of these genres.
! Within a sub-sector, license conditions should ensure a level playing field. As
explained earlier, such level playing fields do not exist in several parts of the
entertainment last mile, most notably in the case of broadcasting
distribution.
The government should consider the following to initiate corrective measures:

! Migrate to a commercially viable revenue sharing model for radio
! Review DTH license conditions to ascertain whether INR 100 million one time
license fee plus 10 percent of gross revenue share make commercial sense
! Consider licensing unorganised distribution and last mile entities including
cable operators, film distributors, movie hall owners, music distributors and
retail outlets. The objective of such licensing should be limited to enhancing
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transparency and order in the last mile entities. As part of such licensing, the
government should clearly specify the following:
- Qualifications for becoming a last mile operator. Such qualifying
conditions should not exclude existing operators, as it would result in on
ground and logistical issues.
- Record keeping and reporting requirements;
- Quality of service and customer service requirements
! Harmonise licensing conditions across platforms in a given genre so as to
allow a level playing field as is indicated in the recommendations for unified
licensing brought out by TRAI
! Introduce strict penal provisions including fines, revocation of licenses for
non-compliance, wrongful declarations, consumer rights abuses, etc
The success of such a licensing system will critically depend on the monitoring
and enforcement mechanisms put in place. The government/ regulators need to
define the monitoring mechanisms including provisions for surprise audits by the
licensing authority or agencies authorised by the licensor. Strict penalties should
be enforced for non-compliance.
Recommended actions
(A) Consider licensing last mile entities currently not under licensing
(B) Harmonise license conditions in a given genre
(C) Introduce strong penal provisions for violation of license conditions.
5. Evolve a framework for regulating cross-media/ value chain holdings

Media integration is used as an important strategic tool by the media industry.
Such integration provides significant competitive advantage in the market. The
strategic reasons for such integration typically include:
! Horizontal integration (cross-media integration) with a view to leverage
content and client relationships.
! A television broadcaster owning a radio station is an example of such
integration. In such a case the competitive advantage comes from cross-
media usage of content as well as the ability to offer an integrated marketing
solution targeting multiple consumer segments.
! Vertical integration (value chain integration) which significantly enhances the
competitive positioning because of the potential to gain preferential/
exclusive access to distribution or content.
It is reasonably common to see such strategies in action in most large media

markets in the world. For examples in the United States, an analysis of the
business interests of top ten media companies shows that all of them are
integrated media players with interests in either multiple media or multiple
segments of the value chain.
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Company Major Business Interests
Disney's interests span theme parks, hotels, and consumer goods, such as toys, and
broadcasting, in addition to movies. The businesses are organised in the following
Walt Disney
segments: media networks, studio entertainment, theme parks and resorts and
consumer products.
Viacom is a leading global media company, with interests in creation, promotion and
distribution of entertainment, news, sports, music and comedy. Viacom's well-known
Viacom brands include CBS, MTV, Nickelodeon, VH1, BET, Paramount Pictures, Viacom
Outdoor, Infinity, UPN, Spike TV, TV Land,CMT: Country Music Television, Comedy
Central, Showtime, Blockbuster, and Simon & Schuster, etc.
Comcast has interests spanning creation and distribution of content and is one of the
leading players in cable. Leading Comcast businesses include Comcast cable, CN8.TV,
Comcast
E! Online, Comcast spectacor, Comcast sports, Philadelphia Fliers, 76ers, Golf
Channel, Outdoor Life Network, etc.
Newscorp is an integrated media company with interest in publishing, film and

Newscorp
television production, broadcasting and distribution, network stations and radio
Clear Channel Diversified media business spanning television, radio, outdoor, leisure, etc
The oldest network in the US owned by GE. This group owns assets including NBC,
NBC CNBC, MSNBC, Bravo Cable Network and Telemundo. NBC has also invested in
History Channel, Value Vision, Praxis Communication Corporation, etc.
Integrated media and communication company had interests in creation and

AOL
distribution of content. The group businesses include AOL, Time Warner Cable, Time,
Time Warner
HBO, CNN, etc.
Cox Cox is an integrated distribution play offering voice, data, broadcasting and pay per use
Comm. services
Echostar Integrated satellite based distribution player. Owns Dish TV

Comm.
Source: Company annual reports
However, vertical integration could lead to anti-competitive behaviour/ unfair

discrimination. Several countries are currently formulating/ reviewing regulations
regarding cross media holdings and mandatory access obligations. In India also
Telecom Regulatory Authority of India (TRAI) has opened up the matter for
consultation. The following critical factors need to be considered before finalising
regulatory positions on the issue:
! Integration restrictions will constrain investments and growth.
! Industry needs significant investments to transition to digital last mile, seed
STBs, enhance the programming quality, etc.
Such investments are most likely to come from large integrated media
players. Any restrictive regulation will be detrimental to the long term growth
of the sector.
! Safeguards to manage abuse by integrated operations
- It is possible to evolve safeguards against abuse of advantages arising
out of such integration.
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- Mandatory access obligations like 'Must Provide' and 'Must Carry'
provisions should be judiciously used to restrict such abuse.
- However, the nature of content / access to be covered under such 'Must
Provide' / 'Must Carry' regulation needs to be carefully considered as it
critically impacts the ability of the broadcaster/ platform owner to
function in a commercially viable manner.
The government/ regulator should consider integrated ownership with clearly

defined safeguards to prevent anti-competitive behaviour. Thus, the regulator can
undertake a supervisory role with the powers to intervene and take decisive
action when required.
Recommended actions
(A) Bring out policy on cross media integration and value chain integration in
media and entertainment
(B) Define mandatory access obligations of broadcasting and distribution
players
6. Allow the freedom to choose the business model

Indian entertainment industry across genres operates under regulatory/ policy
restrictions imposed over the years. These restrictions have resulted in locking up
value in the sector. Some of the existing or proposed restrictions that are
hindering growth include:
! Architectural restrictions [uploading restrictions for television, transmission
restrictions for radio, etc.] (Existing);
! Structural restrictions like FDI limits (Existing);
! Service provisioning restrictions on television/ distribution/ radio, etc
(Existing)
! Price regulation (Proposed for television broadcasting)
! Cross holding restrictions and mandatory access obligations (Proposed)
! Limiting the extent of advertising on television broadcasting (Proposed)
Such restrictions seriously impair an operator's ability to define the business

model in a commercially sustainable manner according to the emerging market
conditions. For instance, FM radio players operating in multiple cities are forced to
set up transmission stations in each city. As a result they are unable to leverage
the benefits of scale and a pan Indian presence, escalating costs significantly in
the process. Most above-mentioned restrictions result in such cost escalations or
revenue losses.
Restrictive regulation should be put in place with the objective of safeguarding

national security or protect consumer interests in markets where sufficient
competition does not exist.
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Recommended actions
(A) Review restrictive regulation across media and entertainment to remove
value locking restrictions
(B) Clearly articulate circumstances / qualifying conditions for imposing such
restrictions
7. Constitute a national anti-piracy force

Piracy is the single largest value destroyer in the media and entertainment
business as it prevents the rightful owner of content from realising the true value
of their content. It raises the costs of officially available content putting content
providers and content users in a vicious cycle, creating a parallel unorganised
market. Leakages account for over INR 20 billion revenue losses annually. The
various forms of leakages include:
! Losses to the exchequer through under declaration by last mile cable
operators, MSOs and theatre operators
! Illegal reproduction of content including illegal film/ music DVDs, illegal
music CDs/cassettes, etc
Piracy is the single largest ! Use of copyrighted intellectual property without compensating the legal
value destroyer in the owner of such property. Examples of such violations include illegal remixes,
media and entertainment illegal use of copyrighted content in advertising, etc.
business A multi-pronged approach is required to deal with such leakages and analyse the
nature of its real economic impact, which not only addresses the genuine demand
for a product with a lower cost but also thereby expands the market. Therefore
the response to piracy, copyright infringements and last-mile leakages should be
premised on the following:
! Stringent legislation and enforcement and
! Introduction of appropriately priced products or low cost variants
An analysis of piracy and copyright related laws, enforcement mechanisms and

cost structures reveals several areas for possible improvement. Such laws require
tightening up in terms of content and enforceability. It is quite difficult for
individual businesses to coordinate with state level law enforcement machinery
and the legal system to fight piracy and infringements. Thus, there is a need to
coordinate proactive action, powered by stringent legal provisions. At the same
time, government should support the industry in developing attractive price
propositions to address lower income segments. Given such a context, the
following steps can be initiated:
! Creation of a national force with the specific mandate to crack down on
piracy and infringements of all forms
- The government should consider constituting a national body with law
enforcement powers to fight piracy. The constitution of such a body can
140
be part-funded through industry contributions. The enforcing entity
should conduct its own surveys, maintain subscription/ retail off-take
related data and should have the powers to conduct surprise audits,
search and seize operations and initiate criminal proceedings.
! Plug the loopholes in piracy and copyright related laws

- The government should review current legislation to identify and plug
commonly abused loopholes like the one relating to music reproductions
and introduce stringent penal provisions.
! Review taxation policy in the sector

- Indirect taxation through entertainment tax, sales tax and service tax is a
significant part of the total 'cost to the consumer' of all products and
services in this sector. For the fight against piracy and last-mile leakages
to be effective, governments should take a more imaginative approach to
taxation in this sector and enhanced revenues through lower taxes and
improved compliance, thereby bringing the price levels to affordable
levels.
Recommended actions
(A) Constitute national anti-piracy force
(B) Review current piracy related legislation and plug the loopholes
(C) Include stringent penal provisions to disincentivise piracy
(D) Rationalise taxes
8. Provide investment and operational incentives

For several segments of the industry, investment and operational incentives are
the only mechanism to ensure survival in the face of an exorbitant cost structure.
Direct to Home broadcasting is a classic case where a DTH operator is expected
to pay the following kind of tax/regulatory pay outs:
! Sales tax as high as 25 percent in several states
! Service tax at 10 percent
! Entertainment tax which assumes significant proportions in certain states.
With such a tax structure, DTH can never be competitive with local cable
Entertainment sector operators who also do not declare most of their subscriber base. In contrast, tax
requires massive exemptions for multiplexes have resulted in a virtual multiplex boom.
investments to upgrade the
last mile infrastructure The story goes beyond tax incentives. This sector requires massive investments
to upgrade the last mile infrastructure. Unless the sector's attractiveness is
significantly enhanced, such investments are unlikely to happen. The following
steps are recommended to improve the sector's attractiveness to investors:
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! Rationalise the tax regime - transition to a low tax, high compliance model;
! Introduce tax slabs with cable FTA subscriptions,
- Low cost film tickets/ CDs/ cassettes, etc can either be exempted from
tax or be subjected to very low taxes;
! Consider deferred tax schemes for new entrants, especially with regard to
those involved in infrastructure creation;
! Review and rationalise FDI restrictions;
! Introduce transparent processes for the approval and disbursement of
investment subsidies.
Recommended actions
(A) Review taxation policies
(B) Develop schemes to incentivise investments
9. Constitute a unified regulator

In 2004, the government amended the definition of telecommunication services
in the Telecom Regulatory Authority of India (TRAI) Act to include broadcasting
and cable services, bringing the broadcasting and cable services industry under
the regulatory oversight of TRAI. The move triggered hurried stakeholder
consultation to evolve regulatory positions on issues including the
implementation of conditional access systems, possible cross-holding
restrictions, price regulation, mandatory access obligations, possible advertising
restrictions and customer service.
While this is a laudable initiative to make a meaningful regulatory intervention in

the broadcasting and cable services space, it is still a case of 'too little, too late'
and is more of a reaction than a reflection of long-term vision for the sector. As
the media and entertainment sector prepares itself to enter another explosive
growth phase, it requires a progressive regulatory environment that can facilitate
growth while protecting consumer rights and minimising any negative socio-
economic fall-out. However, such regulatory action can only evolve from a clarity
of vision for the sector taking into account the following key factors:
! Digital distribution platforms (such as DTH, IP-TV, digital distribution of films,
etc) will revolutionise the last mile of the entertainment sector across sub-
segments.
! Such platforms will deliver a rich menu having multi-media offerings and
interactive services along with other voice and data services like telephony,
Internet, video conferencing, etc. For example, an IP-TV operator will deliver a
convergent menu, offering a myriad of information and entertainment
services.
! Evolution of access equipments, which are capable of receiving convergent
offerings. Such access equipments would include smart digital televisions,
mobile devices, intelligent home entertainment systems, etc.
142
Government, in consultation
For the market to mature to a level of reasonable stability, it has to endure a long
with the industry, consumer
transition period with the following kind of players co-existing:
interest groups, investors
and other stakeholder ! Full-service convergence players
! Niche convergence operators offering select services
groups should define the ! Traditional platform owners like pure play cable operators and movie theatres
roadmap to realise the
Clearly, there is an urgent need for a comprehensive regulator who shares an
actual potential of the sector
exciting vision of the emerging telecommunications, media, broadcasting and
entertainment sectors, has the depth of regulatory capabilities and understands
the regulatory process well enough to perform such a role in a transient economy.
TRAI, having effectively anchored the regulatory process in the
telecommunications space and conducted the initial round of consultation in the
broadcasting and cable services industry, is probably best placed to take over the
role of a convergence regulator. The government could consider upgrading TRAI
as a National Convergence Regulator. In this role, it should have the regulatory
oversight over all businesses dealing with carriage of voice or data including
information, news, entertainment related content over cable, fibre, copper,
wireless, radio, etc. Such a move will ensure consistency and continuity of
forward looking regulation driven by a shared vision.
Recommended action
(A) Appoint TRAI as the National Convergence Regulator with oversight over all
businesses dealing with carriage of voice or data including information,
news, entertainment related content over cable, fibre, copper, wireless,
radio, etc.
10. Develop a national media and entertainment policy

The effectiveness of a regulatory intervention will critically depend on the clarity
of vision articulated through a comprehensive policy. The success of telecom
regulation was built on the policy direction set by the NTP 1999 which articulated
a vision for the telecommunication space. Such clarity is the need of the hour in
the media and entertainment industry. The government, in consultation with the
industry, consumer interest groups, investors and other stakeholder groups
should define the roadmap to realise the actual potential of the sector. The
following corner stones could define the nature of the national media and
entertainment policy:
! Sustainable growth orientation
! Increasing choice for consumers
! Eliminating piracy
! Accelerated adoption of newer technologies
143
A CII - KPMG Report
Such a policy making exercise should combine several legislative initiatives of the
past including amended cable television bill, convergence bill, etc. The process
adopted to evolve the policy must involve composite stakeholder discussion as it
is critical to establish the credibility and therefore the acceptability of the
outcome. The time is ripe to initiate the process to develop a comprehensive
national media and entertainment policy.
Recommended actions
(A) Conduct stakeholder discussions to develop a shared vision for the sector
(B) Develop a national media and entertainment policy before the end of year
2005
Regulatory charter
The following table summarises ten initiatives that the government/ regulators
should take to give direction and impetus to the long-term growth of the
entertainment sector:
Degree of impact on Resistance to Complexity of

# Action points
Industry Consumer change implementation
1 effectiveness through High High High High
focused projects
2 Improve yield High Medium Low High
Develop alternative revenue

3 High Medium Low Medium
streams
4 Improve consumer connect High High High High
Develop new markets

5 through aggressive market High High Medium Medium
making
Increase market activity in

6 High High Low Medium
newer genres
Improve governance
7 High Medium High High
standards
8 ability to attract and retain High Medium High High
talent
9 Explore consolidation options High High High High
Leverage technology
10 High High Medium Medium
strategically
Conclusion
The twenty initiatives (ten governmental initiatives and ten industry initiatives)
presented above have the potential to play the necessary facilitating role required
to iron out structural distortions and take off on a phase of sustainable growth.
While this KPMG-CII 10/10 CHARTER is not intended as a prescriptive
intervention, it is a starting point for an intense corrective dialogue within the
industry and outside. We hope that such a dialogue will set the stage for ushering
in a new and exciting entertainment economy.
144
The tax perspective
In the fine print
The tax perspective
In the fine print
Exchange control regulations

In the course of liberalisation of exchange control regulations, the Government of
India has allowed 100 per cent FDI in the film sector under the Automatic Route
without entry level conditions, with only certain post filing requirements to be
complied with. The film sector for FDI purposes broadly covers film production,
exhibition and distribution related services and products.
However, the Automatic Route is not available for broadcasting sector. The
permissible limits for this sector are:
Segment Limit
TV Software Production 100 percent FDI allowed subject to certain conditions
Setting up hardware facilities 49 percent FDI allowed
Cable network 49 percent FDI allowed subject to certain conditions
20 percent FDI allowed within the overall limit of 49

DTH
percent of foreign equity
Up linking of news and current

26 percent foreign equity allowed
affairs TV channel
20 percent portfolio investment allowed; direct
FM Broadcasting
investment by foreign entities is not permitted
There may be merit in permitting greater foreign equity in DTH, which is

extremely capital intensive and is, in a sense, akin to a telecom infrastructure
project. Currently the cable industry is unorganised, fragmented and resorts to
large scale under-reporting of revenues which results in revenue leakage for the
central and state government on account of direct (income) and indirect (service,
entertainment, etc.) taxes. Therefore an alternative medium such as DTH may be
encouraged fiscally by providing a income-tax holiday benefit (as available to
broadband network) and indirect tax benefits (such as excise duty and sales tax
exemptions for set-top boxes) since this access mechanism indirectly benefits the
government by partly protecting it from revenue leakage.
The current scenario on the liberalisation of FM broadcasting is not very

encouraging in India. Private radio stations generally face a long/ uncertain
payback period. Nonetheless, the foreign investment policy for FM broadcasting
is in variance with the FDI policy in other media segments as no direct investment
by foreign entities, NRIs and OCBs is permitted in this segment.
145
A CII - KPMG Report
Income tax and allied laws
Film production and distribution cost

As per the prescribed rules1, a film producer who sells the entire exhibition rights
of the film is entitled to a deduction of the entire cost of production incurred by
him in the same year in which the Censor Board certifies the film for release in
India. A similar deduction is also available to a film distributor for outright sale of
the film distribution rights acquired. In case of a partial sale and/ or partial
exhibition of film rights by the film producers/ distributors, it is necessary that the
film should be released at least 90 days before the end of the tax-year (the tax
year is 1 April to 31 March) to claim a full deduction of specified production costs/
specified costs of acquiring distribution rights.
Where the film is not released at least 90 days before the end of such tax year,
then the cost of production, limited to the amount earned from the film, shall be
allowed as a deduction in the tax year and the remaining cost of production shall
be allowed in the following year.
Where the feature film is not exhibited by the producer himself or not sold, leased
or transferred on a minimum guarantee basis, no deduction in respect of the cost
of production shall be allowed in the tax year. The entire cost of production shall
be allowed in the succeeding tax year(s) in which the film is exhibited or the rights
are sold.
Sale of rights of exhibition also includes the lease of such rights or their transfer
on a minimum guarantee basis.
Multiplexes
The government has introduced partial tax holidays for income of multiplex
theatres. A deduction of 50 percent from profits is allowed for a period of five
years from the year of commencement of operations in respect of the business
of building, owning and operating a multiplex theatre of prescribed norms.
Some of the norms prescribed under the rules are:

! The multiplex theatre should be constructed during the period from 1 April
2002 to 31 March 2005.
! The multiplex theatre should comprise of at least three cinema theatres and
at least three commercial shops.
! The total seating capacity of all the cinema theatres comprised in the
multiplex should be at least 900 seats and no cinema theatre should consist
of less than 100 seats.
! The multiplex theatre cinema should be centrally air-conditioned.
! The ticketing system employed by the cinema theatres should be fully
computerised.
1
R u l e 9 A a n d 9 B o f t h e I n c o m e - t a x R u l e s , 19 6 2 ( t h e R u l e s )
146
! The multiplex in order to be eligible for tax holiday should be located in a
place other than New Delhi, Chennai, Kolkata and Mumbai.
There are no specific/ separate provisions in respect of the taxation of film artists,
technicians, etc. They are entitled to a deduction of the income derived from
foreign sources, subject to the satisfaction of certain prescribed conditions. In
the case of overseas performance, taxation in the host country needs to be
examined in the context of the applicable Double Tax Avoidance Agreement
(DTAA) and availability of foreign tax credits against Indian tax on such income.
Live shows and stage performances being held in India are taxed as per the
general principles of personal taxation, applicable DTAA provisions and the special
circular1 issued by the Central Board of Direct Taxes (CBDT)2. As per these
provisions, income arising from such live shows is generally taxable in India.
However, certain exclusions have been provided in case of:
! Gratuitous performance without any consideration;

! Performance in India for promoting sale of records, without any
consideration; and
! Acquisition of copyrights of performance in India for subsequent sale abroad.
In other cases, the amounts are taxable in India, depending upon the facts of
each case and the applicable provisions of the DTAA.
Foreign television channels/ telecasting companies (FTCs)

The two primary sources of revenue for FTCs, amongst others, is income from
sale of advertising airtime on the TV channel and subscription revenues. Under
the domestic tax law, income of the FTCs would be taxed in India in case they
constitute a business connection in India.
In case an FTC operates from a country with which India has a tax treaty, it would
be taxable in India only if it constitutes a Permanent Establishment (PE) in India.
The provisions of the DTAA would apply to the FTC to the extent they are more
beneficial as compared to the provisions of the domestic law. The term “business
connection” is widely interpreted and based on case law. The definition of PE is
generally narrower as compared to the term business connection. In case the
FTC has a business connection/ PE in India, the profits attributable to such
presence in India would need to be computed. In case the FTCs do not maintain
country wise accounts, then this could pose considerable difficulty in computing
the profits which would be taxed in India.
1
C i r c u l a r N o 7 8 7 d a t e d 10 Fe b r u a r y 2 0 0 0
2
The Apex Income-t ax administering authorit y in India
147
A CII - KPMG Report
Subscription revenues are collected by Indian distributors and subsequently paid
to the FTCs. The Indian tax authorities are contending that the payments of
subscription fees repatriated to the FTCs are liable to tax withholding considering
the same to be royalties.
Some other issues which the FTCs need to consider is withholding taxes on the
payments made to foreign satellite owner for transponder lease and up-linking
charges. The tax authorities contend that the charges are in the nature of
royalties/ fees for technical services which are deemed to accrue or arise in India.
There have been conflicting tax rulings on this matter and the matters are
currently pending before the appellate authorities.
General tax provisions

Withholding tax
Certain payments to non-residents (e.g. interest, royalties, fees for technical
services) would not be tax deductible if withholding tax provisions are not
complied with.
Effective 1 April 2003, even certain payments to residents (on account of interest,
commission or brokerage, fees for technical services or fees for professional
services etc) are non tax deductible if withholding tax provisions are not complied
with.
Set off of accumulated loss and unabsorbed depreciation

In case of a business combination (e.g. merger/ amalgamation) the ability of the
merged entity to carry forward the business losses/ unabsorbed losses of the
merging/ amalgamating entity is extremely important. However, the tax laws only
permit such a benefit to entities which have industrial undertakings. The
entertainment industry, primarily a service industry, would not be eligible for
these benefits and accordingly, it acts as a hindrance to the growth and
consolidation of the industry.
In case of demergers (i.e. carve-outs) the accumulated losses/ unabsorbed

depreciation of the demerged (carved out) undertaking would be available to be
carried forward by the resulting entity.
Scheme of taxation
Film producing and distributing companies typically go through cycles of profit
and losses, which cannot be predicted. Specific methods of accounting and
provisions for taxation for the film industry could be evolved to take into account
such fluctuations.
148
Potential service area
India is a globally preferred destination for setting up call centres and business
process outsourcing centres. One of the reasons for this is the English speaking
skills of the Indians. Even Indian teachers are in demand overseas for teaching in
English language. These language skills could be used for making India a global
centre for dubbing in English language.
Transfer pricing
India has transfer pricing regulations in place. Transactions between a resident
and non-resident being associated enterprises are considered as international
transactions. The Indian Income-tax Act specifically provides that “any income
arising from an international transaction must be transacted at an arm's length
price.” Accordingly, determination of taxable income of foreign companies in
entertainment industry having a “permanent establishment” in India may have to
be done in accordance with such transfer pricing regulations. The transfer pricing
regulations also contain provisions for maintenance of documents to evidence
that the transactions have been effected at an arms length price.
Global scenario
The film industry is a highly mobile, globally competitive industry, and all
developed countries use incentives to attract and retain film production. For
instance, a foreign investor in an East European country is entitled to exercise
three tax incentives viz. tax incentive on production/ co-production, development
tax allowance and accelerated depreciation.
A certain Asia Pacific country has introduced a “refundable tax offset” to

encourage production of large budget films. The incentive represents a cash
subsidy of 9 - 12.5 percent of the total budget of a production, on satisfying
certain prescribed conditions.
The treaty co-production system has existed for decades and has been used
extensively to encourage a pooling of creative, artistic, technical and financial
resources among producers of treaty countries. Films produced under the terms
of a co-production treaty qualify as national content in the country of each
participating co-producer and thus make the production eligible for applicable cash
assistance/ rebates from the Government and tax benefits from each co-
production territory. Currently, countries such as Australia, UK, France, Germany,
Italy, New Zealand etc have entered into such co production treaties. India
currently does not have any co-production treaties. Indian film/ content
production/ post production entities would benefit with such co-production
treaties.
149
A CII - KPMG Report
Indirect tax laws
There are other levies (central and state) also which are applicable to the film
industry. Excise duty, customs duty, sales tax, service tax, entertainment tax are
some levies, which directly affect the film industry.
Excise duty is payable on manufacture. The central excise tariff covers various
cinematographic goods. Presently, the excise duty rate for exposed and
developed cinematographic films is nil. Accordingly, production of films does not
attract any excise duty. However, excise duty is payable on manufacturing,
processing and development of films. This is also subject to certain exemptions.
Further, manufacture of equipments such as camera, projectors and other
equipment are also liable to excise duty.
A state High Court has held that production and sale of a film resulted in creation
of a work of art and not sale of goods. However, some other state sales tax laws
have included films as 'goods' liable to sales tax. Further, certain states levy sales
tax on intangibles like copyright and also on grant of film rights to use/ hire. There
is need for greater consistency and uniformity in taxation for such an important
industry.
Entertainment tax is levied on various modes of entertainment such as on film

tickets, cable television, live entertainment etc. The rates of entertainment tax
payable by theatre owners vary form 0 percent in Andhra Pradesh to 130 percent
in Assam. India has one of the highest rates of entertainment tax across the
globe. Recently, some states have granted exemption from entertainment tax to
multiplexes.
In addition to the above taxes, service tax is now becoming a major source of
indirect tax revenue for the government. Currently, service tax at the rate of 10.2
percent is levied on the following services relating to the entertainment industry:
! Advertising agency services

! Broadcasting services
! Cable services
! Event management services
! Sound recording services
! Video production agency services
150
Glossary
AIR All India Radio

ARPU Average Revenue Per User
BFA Bachelor of Fine Arts
BPO Business Process Outsourcing
BSNL Bharat Sanchar Nigam Limited,
A leading Indian telecommunications company
C&S Cable and Satellite
CAGR Compounded Annual Growth Rate
CAS Conditional Access System
CIS Commonwealth of Independent States
DRB Digital Radio Broadcasting
DSL/ xDSL Digital Subscriber Line (variants)
DTH Direct To Home
EPG Electronic Programming Guide
FDI Foreign Direct Investment
FMCG Fast Moving Consumer Goods
FTA Free To Air
FTII Film and Television Institute of India
GDP Gross Domestic Product
HDTV High Definition Television
IDBI Industrial Development Bank of India
IIM Indian Institute of Management
IIT Indian Institute of Technology
IMI Indian Music Industry
INR Indian Rupees
IP Intellectual Property
IP-TV Internet Protocol Television
IPO Initial Public Offering
IPRS Indian Performing Rights Society
IT Information Technology
LCO Local Cable Operator
LIC Life Insurance Corporation of India
MFA Master of Fine Arts
MSO Multi System Operator
NASSCOM National Association of Software and Service Companies
NRS National Readership Survey
NTP New Telecommunications Policy
OECD Organisation for Economic Cooperation and Development
PPL Phonographic Performance Ltd.
PVR Personal Video Recorder
RJ Radio Jockey
SEC Socio Economic Category
SMS Short Messenger Service
STB Set Top Box
TG Target Group
TRAI Telecom Regulatory Authority of India
TRP Television Rating Points
UAE United Arab Emirates
USD United States Dollar
About CII
The Confederation of Indian Industry (CII) works to create and sustain an environment
conducive to the growth of industry in India, partnering industry and government alike
through advisory and consultative processes.
CII is a non-government, not-for-profit, industry led and industry managed organisation,

playing a proactive role in India's development process. Founded over 108 years ago, it is
India's premier business association, with a direct membership of over 4,800 companies
from the private as well as public sectors, including SMEs and MNCs and indirect
membership of over 50,000 companies from 283 national and regional sectoral
associations.
A facilitator, CII catalyses change by working closely with government on policy issues,
enhancing efficiency, competitiveness and expanding business opportunities for industry
through a range of specialised services and global linkages. It also provides a platform for
sectoral consensus building and networking. Major emphasis is laid on projecting a positive
image of business, assisting industry identify and execute corporate citizenship
programmes.
With 45 offices in India, 13 overseas in Australia, Austria, China, France, Israel, Japan,
Malaysia, Russia, Singapore, South Africa, Switzerland, UK, USA and institutional
partnerships with 239 counterpart organisations in 101 countries, CII serves as a reference
point for Indian industry and the international business community.
About KPMG
KPMG is the global network of professional services firms of KPMG International.
KPMG member firms provide audit, tax and advisory services through industry
focussed, talented professionals who deliver value for the benefit of their clients
and communities. With nearly 100,000 people worldwide, KPMG member firms span
715 cities in 148 countries.
The member firms of KPMG International in India were established in September

1993. As members of the cohesive business unit that serves the Middle East and
South Asia (KPMG's MESA business unit), they respond to a client service
environment by leveraging the resources of a globally aligned organisation and
providing detailed knowledge of local laws, regulations, markets and competition.
KPMG has offices in India in Mumbai, Delhi, Bangalore, Chennai, Hyderabad and Kolkata
and services over 2,000 international and national clients. The firms in India have access to
more than 900 Indian and expatriate professionals, many of whom are internationally
trained.
KPMG strives to provide rapid, performance-based, industry focussed and technology

enabled services, which reflect a shared knowledge of global and local industries
and our experience of the Indian business environment.
www.in.kpmg.com www.ciionline.org
For further information contact:
KPMG Confederation of Indian Industry
Rajesh Jain Jayant Bhuyan
National Industry Director Deputy Director General
Information, Communication and Entertainment E-mail: j.bhuyan@ciionline.org
E-mail: rcjain@kpmg.com
Gayatri Gulati
Anindya Roychowdhury Executive Officer
Associate Director E-mail: gayatri.gulati@ciionline.org
E-mail: anindyaroychowdhury@kpmg.com
Mumbai
Anuj Poddar 105, Kakad Chambers, 1st Floor
Manager 132, Dr Annie Besant Road, Worli
E-mail: apoddar@kpmg.com Mumbai 400 018
Telephone: +91 22 24931790/0565/0287
Fax: +91 22 24939463/24945831
Mumbai
KPMG House, Kamala Mills Compound Head Office
448, Senapati Bapat Marg, Lower Parel CII Mantosh Sondhi Centre
Mumbai 400 013 23, Institutional Area, Lodhi Road
Telephone: +91 22 24913131 New Delhi 110 003
Fax: +91 22 24913132 Telephone: +91 11 24629994
Fax: +91 11 24621649/24633168
Delhi
4B, DLF Corporate Park
DLF City, Phase III
Gurgaon 122 002
Telephone:+91 124 2549191
Fax: +91 124 2549101
Bangalore
KPMG House, 20/2, Vittal Mallya Road
Bangalore 560 001
Telephone: +91 80 22276000
Fax: +91 80 22273000
Chennai
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Chennai 600 018
Telephone: +91 44 24332533
Fax:+91 44 24348856
Hyderabad
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Road No. 4, Banjara Hills
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Telephone: +91 40 23350060
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Kolkata
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71 Park Street
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Telephone: +91 33 22172858
Fax: +91 33 22172868
The information contained herein is of a general nature and is not intended to address the '2005 KPMG, the Indian member firm of
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Indian Entertainment Industry Focus 2010

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Foreword

The Indian entertainment industry is on the threshold of emerging as a large

The spend on entertainment in India is significantly lower than most advanced

CII is committed to facilitate the Indian entertainment industry to achieve new

Sunil Kant Munjal

Bridging the gap 107

The tax perspective 145

Let the fun begin

New delivery platforms and technological breakthroughs: Increasing penetration

Together, these are expected to change the viewing habits of people.

The past and the future

Growth of the entertainment industry (INR billion)

2003 2004 2005E 2006E 2007E 2008E 2009E 2010E

Source: KPMG Research

Spending power and awareness

The forthcoming metamorphosis

Though in revenue terms, films contribute just 27 percent of the entertainment

Segment-wise composition of the entertainment industry (INR billion)

! Additional distribution platforms: The last-mile of television distribution will

Presently the distribution of subscription revenues is heavily skewed towards

! More entrants in niche genres offering additional content variety to the

! Conducive and liberalising regulatory intervention: A beginning has already

Compared to television, this sector is rather unorganised and individualistic, with

Country Share of radio in advertising

Emerging opportunities in the entertainment space

Animation: India's large pool of software talent has made it an appropriate

Outsourced production facilities: With the relentless rise in Hollywood film

Live entertainment: The live entertainment industry in India is largely unorganised

Reaching for the heights - A need for action

The importance of this stakeholder classification is two-fold:

The industry initiatives can be grouped under two major heads:

The government initiatives can also be classified into two categories:

The macro-economic environment

GDP growth rate (In percentage)

To be able to appreciate the contours of this industry, it would be useful to take a

Technology Key Advertising

Rise of India’s earning and consuming classes

basic needs are met, his Rich

discretionary items, such

Climbers 66 million 78 million

A number of economic trends are testimony to this advancement:

GDP Total ad spend Ad spend to GDP

Australia 412 4 1.0%

2003 2004 2005E 2006E 2007E 2008E 2009E 2010E

Number of brands advertised on television

Subscriber declaration by cable distributors to broadcasters in India is extremely

Market Operator Broadcaster

Piracy of music through illegal downloads, unauthorised CDs and remixed

In all these sectors, differential pricing would require a thorough understanding of

In most media markets, the consultative process leading to formulating

Going forward, it is expected that the ratio of illegitimate revenues to total

It is important to note that any regulatory intervention should be supported by a

Content creation has benefitted significantly from technological breakthroughs,

If one were to look at emerging trends in technology and their impact on

The Personal Video Recorder

High Definition Television

However, at present, current-generation television sales have not demonstrated a

Fixed broadband wireless systems

Internet radio stations

Downloadable digital audio

Today and tomorrow

A combination of purposeful regulatory interventions and technology adoptions

Television revenues (INR billion)