An Unlikely Alliance

Bapun Raz

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Implications Of The Tie-up

•The Zee-Star combine distribution JV will become the largest channel distribution company in India with 63 channels and combined revenues of Rs 1,210 crore.
•Media Pro Enterprise might end up controlling 40-45% of the non-sports subscription revenue market and will have enough clout in the industry.
•Multiple system operators (MSOs) have called the shots till now but if Zee and Star are able to nurture Media Pro Enterprise, the power equation could shift to the broadcaster.
•Once the bargaining power shifts, carriage and placement charges could decrease and at the same time Zee-Star might be able to negotiate higher subscription revenue from the MSOs.
***

Key Figures

•Rs 1,000 and Rs 800 crore Revenue of Star Den and Zee Turner, respectively, in FY11.
•Rs 3,000 crore Targeted income of Media Pro Enterprise in two to three years.
•30% Share of income broadcasters spend as carriage fee per year.
***

On a quiet Saturday afternoon in the summer of 2009, Star India CEO Uday Shankar invited Punit Goenka, the CEO and Managing Director of Zee Entertainment, for coffee at the posh Wellington Club in south Mumbai. The agenda: discussions concerning the Indian Broadcasting Foundation, of which both are members. A meeting of the archrivals—even for such a tame reason—is itself cause for much gossip and rumour. But what’s got the entire broadcasting industry talking two years later is a recent development that traces its origins to that tête-à-tête.

What dominated the conversation between the two broadcasters was their common grouse: the distribution anomaly that plagues the Indian broadcasting industry, where channels pay outrageous sums as carriage (content delivery) fees to cable operators but get back a pittance in subscription income. Shankar—who openly admits his “obssession” with cleaning up the cable system—spoke with Goenka on the need for broadcasters to come together to fight the menace. Goenka was doubtful, “But the reason [for joining hands with a rival] was too strong to ignore,” he says. Over the next few months, after several more coffee meetings on the Wellington Club verandah, the two decided to go ahead with their plan.

Late last month, Star and Zee announced the creation of Media Pro Enterprise, a 50:50 joint venture between Star Den and Zee Turner, the distribution arms of both media groups. Media Pro (no connection with the European company of the same name) will take over the distribution of the Zee and Star channel bouquets—nearly 70 in all—and negotiate with cable operators for channel placement, carriage fees and share of subscription revenues. The new company has set itself four goals—improving distribution efficiency; minimising under-declaration; enabling digitisation; and putting a cap on carriage fees. The logic behind the two rivals coming together is simple: backed by the content clout of two networks, they will be able to not only bargain over carriage fees with the multi-service operator (MSO, the wholesale buyer of content) but also push the last-mile cable operator (LCO, the ‘retailer’ of television content) for higher declaration of subscription numbers. India has over 15 MSOs and around 60,000 LCOs and under-declaration and piracy of content is rampant. While the television distribution industry is worth Rs 18,000 crore, the broadcast industry earns just Rs 2,000 crore. Star Den’s revenue in FY11 was about Rs 1,000 crore, while Zee Turner’s revenue was about Rs 800 crore. The new company hopes to bring in revenues of Rs 3,000 crore in two to three years, so such a deal makes immense sense. Or it would, had it involved anybody else.



Strange bedfellows

Star and Zee have a long, acrimonious history and it’s almost inconceivable that the two companies can work jointly with any semblance of harmony. “When I told my team about my meetings with Punit, they said it was a great idea but impossible to pull off. Some even warned me against sharing the idea with James Murdoch [Chairman and Chief Executive of Star’s parent company Newscorp],” grins Shankar.

Goenka’s task was perhaps tougher. Not only did he have to convince his team, he also had the unenviable charge of persuading his father, Zee Group Chairman Subhash Chandra, of the merits of the alliance. Chandra’s bitterness with Star India is still evident, more than a decade after the first association between the two media companies ended. He recalls the exact date (November 26, 1991) the then Star India head, Richard Lee, “bullied” him into paying $5 million for a transponder, against the going rate of $1.2 million. Although Chandra went on to create Zee as an equal joint venture between him and Star India (the Hong Kong-based company was later bought out by Rupert Murdoch’s Newscorp), it wasn’t a happy marriage and the partnership fell apart after Star launched its Hindi general entertainment channel Star Plus in 1995. Battlelines were drawn and it’s been war ever since with Star and Zee fighting for one-upmanship across genres and regions. Which explains why there’s more than a little scepticism about just how long the present bonhomie will last.


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"How can we be monopolistic when the entire industry is regulated? We are governed by Trai and can’t suo moto increase our pricing or disadvantage the value chain." —Punit Goenka, CEO and MD, Zee entertainment "I am not opposed to carriage fees. I look at it as a premium every broadcaster needs to pay. My concern is carriage fees coupled with bad quality bandwidth. That’s a killer." —Uday Shankar, CEO, Star India

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"Since the formation of Sun 18, the revenue realisation for our channels has improved significantly." —Gaurav Gandhi, CEO, Sun 18 (North) "When LCOs see broadcasters coming together like this, they worry they will lose their share of wallet. —G subramaniam, CFO, Hathway

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"The challenge is to prioritise channels. Once they [Star and Zee] figure out their priorities, the JV will be here to stay." —Smita Jha, Consulting Head- Entertainment & Media, Pricewaterhouse Coopers "The joint venture will give Star and Zee phenomenal bargaining power for carriage fees." —Pankaj Krishna, CEO, Chrome Media

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"Alliances like this one will force cable operators to change their game. They will be forced to digitise." —Anand Vyas, Managing Partner, Pravi Capital "This will help us bargain for better distribution money and reduce our dependence on advertising." —Sunil Lulla, Times Global Broadcast

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Why It’s Needed

Still, there’s no denying that it’s high time someone tried to make sense of the broadcast industry. Although the government has mandated digitisation of all television channels by 2013, it’s proving to be a painfully slow process and broadcasters have little choice but to rely on the analog cable network to air their channels. Trouble is, there are too many channels chasing too little bandwidth. At last count, there were 400 active channels in India with plans to launch another 100. But the analog cable network has the bandwidth to carry only 106 of which, as a result of inadequate ground infrastructure (poor cable quality, drop in signals, etc), just 60-65 channels make it to viewers’ homes.



The logic behind two rivals coming together is simple. They can bargain over carriage fees with MSOs and push LCOs to declare numbers correctly.


Of these, the first 40 channels (prime band, colour band and S band) are of the best quality and broadcasters pay a higher carriage fee for placement here. As channels proliferate, carriage fees have escalated: from Rs 600 crore a year across all channels in 2006 to Rs 1,600 crore now. According to a report by Batlivala & Karani, the top five MSOs alone garnered Rs 1,300 crore as carriage fee revenue in 2010-11. Broadcasters pay annual fees of around Rs 20-40 crore per channel for top placement. But as competition intensifies, higher sums also change hands: a Chrome Media report says a recently-launched music channel has shelled out Rs 23 crore for a place on the UHF band (channels 40 to 60), where broadcast quality is poorer. And newer GEC channels like Colors and Imagine are said to have paid up close to Rs 100 crore each as carriage fees for prime band placement across all cities. Most broadcasters, including Star and Zee, are believed to spend about 30% of their income on carriage fees.

In sharp contrast to the carriage fees, broadcasters earn next to nothing as distribution revenue (cable operators are supposed to share a portion of their subscription revenue, typically 50%, with the broadcaster). But not only is the share very low, under-reporting of subscriber numbers by LCOs means broadcasters depend on advertising revenue for survival—at present, over 80% of the broadcasting industry’s income is from advertising. The exception perhaps, is Zee, whose earnings from advertising and subscription are nearly equal.The recession has shown just how dangerous it is to rely on a single income stream. “Our business model is completely broken,” says Shankar. “Despite being pay channels, distribution revenues don’t come our way. The MSOs find it difficult to discipline the LCOs and, therefore, have no option but to take carriage fees from the broadcasters. Unless we find a way to fix the industry, there is no way Star or the broadcast industry will survive.”



Media pro to the rescue?

So, just how will Media Pro clean up the system? “This seems an ideal way to ensure that a fair share of distribution revenue reaches every stakeholder on the value chain. If more money is available, we can invest that money to launch new and better content. We can even launch speciality channels,” says Goenka. Adds Shankar: “My mandate is to improve addressability and push for digitisation.”

Here’s how addressability could be taken care of. If two broadcasters with a large bouquet of channels get together, they will have enough power to negotiate terms with the MSOs: the threat of withdrawing their content should be sufficient to make MSOs, and through them the LCOs, pay up more acceptable revenues. Additionally, the distribution company will talk down carriage fees and, when that happens, MSOs will be under pressure to ensure higher subscription numbers to keep up their own revenues. They, in turn, will force LCOs to declare higher subscriber numbers and make up the shortfall through subscription income.

If they are unprofitable, LCOs may be compelled to sell out to MSOs; as it is, MSOs have been consolidating their presence by acquiring LCOs (Hathway, for instance, has acquired 600 LCOs in the past five years). As the subscriber base increases, broadcasters can also hope to better their pay revenues. It’s a win-win for everyone (except LCOs that have been skimming the books by under-reporting subscriber numbers).

Shankar says that it shows “a lack of strategic insight” to see the new venture as a mechanism to reduce carriage fees rather than a step to correct the ills plaguing the broadcast industry. “I am not opposed to carriage fees,” he insists. “I look at it as a premium every broadcaster needs to pay. My concern is carriage fees coupled with bad quality of bandwidth. That’s a killer.” In any case, Telecom Regulatory Authority of India (Trai) recommends that carriage fee be done away with once 100% digitisation is achieved (deadline: 2014) and there is bandwidth for at least 500 channels.

But not too many are willing to buy Shankar’s argument at this point. It is widely accepted that the main objective of deals such as this is to monetise channels and reduce carriage fees. Gaurav Gandhi, CEO of Sun 18 North (the distribution joint venture between Network18 and the Sun Group), agrees. “Since the formation of Sun 18, the revenue realisation of our channels has improved significantly,” he says. Adds Pankaj Krishna, CEO of Chrome Media & Design, a TV distribution analysis agency, “The joint venture will give Star and Zee phenomenal bargaining power for carriage fees.”

That thought is echoed by Smita Jha, Consulting Head-Entertainment & Media, Pricewaterhouse Coopers, “Earlier, they were negotiating separately. But when they go to the ground as one entity and talk on behalf of 70 channels, they will obviously have a stronger voice.”

Which will be good news for Star and Zee, but may not work out so well for other broadcasters. There are concerns that channels that aren’t part of any bouquet (such as those from UTV) and new entrants may end up paying higher carriage fees to make up for the anticipated shortfall. Says the CEO of an independent broadcast company, “The MSO can’t afford to switch off Star and Zee as they are hugely popular. So if they negotiate cheaper carriage deals, standalone channels will automatically feel the brunt.”

More worrisome are fears of cartelisation. While the Competition Commission of India has already proposed examining the deal to ensure it conforms to anti-trust norms, the cable operators’ community does expect monopolistic trends. Ejaz Inamdar, CEO of Pune-based MSO, ICC Network, agrees that it’s early days yet to predict how Media Pro will operate, but fears Star and Zee may try to exercise more muscle power over the industry. “Star and Zee will definitely push us to place only their channels,” adds Dheeraj Mhatre, an LCO operator in suburban Mumbai.

That concern is understandable, says G Subramaniam, CFO of Hathway, one of the largest cable TV operators in the country. “When LCOs see broadcasters coming together like this, they worry they will lose their share of wallet.”



Thinking of each other as the enemy is so ingrained in the culture of both companies that it will be a challenge to work as a team.


For his part, Shankar rubbishes all such apprehensions as “fear of the unknown”. “The cable industry has not taken any steps to rejuvenate itself. It has been taking a hit from DTH [direct-to-home television], but hasn’t done anything to counter it. When you are not dynamic, you tend to get scared if anyone else takes a dynamic step.” Goenka is equally quick to dismiss all fears of undue domination. “How can we be monopolistic when the entire industry is regulated?” he asks. “We are governed by Trai and can’t suo moto increase our pricing or disadvantage the value chain.” According to Trai regulations, a broadcaster can’t price its channels beyond Rs 10 per consumer and the monthly cable bill per connection can’t exceed Rs 260. Not everybody is convinced and broadcasters are already mulling ways to counter Star and Zee’s increased muscle power. “At airport lounges and hotel lobbies, you are likely to see the head of a media company talking with another head. I have got several calls from broadcasters who would like to join my bouquet,” says a senior executive of a leading distribution company. “All broadcasters are suddenly talking to each other.”

Indeed, even the existing distribution alliances are said to be seeking new partnerships to bolster their positions: Sun 18 is scrambling to get more broadcasters to join its 33-channel bouquet. Sunil Lulla, CEO of Times Global Broadcasting (which has three channels in its bouquet), looks on this as an opportunity to create a pathway into his company for small broadcasters who are not part of any bouquet or don’t want to be part of a large bouquet. “This will help us bargain for better distribution money and reduce our dependence on advertising,” he predicts.

Meanwhile, Multi Screen Media’s One Alliance is reportedly in talks to join its 18-channel bouquet to Media Pro. One Alliance doesn’t have many strong channels in its bouquet, apart from Set Max, and the new joint venture will almost certainly weaken its position with cable operators. So, this seems more a pre-emptive measure along the lines of if you can’t beat them, join them.

But don’t be surprised if MSOs also look to forming similar alliances. “If Hinduja Cable and Hathway strike a deal, they can end up controlling 90% of Mumbai’s cable market,” points out PwC’s Jha. Such a move would be welcome, say Star and Zee officials, as alignments at the MSO level would help the cause of improving transparency in the cable system. “Unless the MSO is empowered, it would be under pressure to increase carriage fees. The MSO, who is supposed to be a fair intermediary between the broadcaster and the LCO, has ended up a victim of the LCO,” Shankar declares.

What about Media Pro’s second objective, of pushing for digitisation? Industry watchers are cautiously optimistic that the new alliance just may make it happen. For starters, the balance of power is likely to shift from the cable operators to the broadcasters. “Powerful broadcast alliances such as this one will force cable operators to change their game. They will be forced to digitise and become more transparent,” says Anand Vyas, Managing Partner, Pravi Capital. And a recent report by Kotak Institutional Equities says broadcasters could be “channelising improved subscription revenues into niche and HD channels, which are not amenable to distribution on analog cable platform. The resultant consumer pull for these channels would result in LCOs agreeing to digitise their distribution networks.”

Through digitisation cable operators can offer subscribers more channels and earn pay revenue. That’s possible because while digital cable, too, has a fixed upper limit on the per channel rate, unlike analog cable, there’s no cap on the maximum monthly bill—so, technically, it is possible for a digital cable provider to offer a viewer all 400 channels at Rs 10 each for Rs 4,000 a month; it’s another matter that no viewer opts for all available channels and besides, the rate comes down when you select entire channel bouquets. The MSOs, too, favour early and quick digitisation. “Complete transparency will come only with digitisation,” agrees Hathway’s Subramaniam. Indeed, he wonders the two biggest broadcasters aren’t coming together rather late in the day—too late, he fears.

“It will be at least another 12-15 months before the deal comes into action, as distribution commitments have already been made. Post that, the government’s digitisation deadline of 2014 will be just around the corner.” “Our effort will be to push the government’s digitisation agenda of 2014,” says Goenka. “We will first try and curb under-declaration and piracy and eventually push for complete digitalisation.”

Digitisation is really the only way for the broadcast industry. It will allow broadcasters the freedom to launch more niche channels, MSOs will be able to charge a slight premium for better picture quality, and customers will also be able to pay for the channels they want. “This will further boost the financial health of broadcasters as well as MSOs,” says Lulla of Times Global Broadcasting.

Will it last?

All of which sounds great on paper. But can Star and Zee really set aside their differences—and more importantly, their individual ambitions—to work together as a team? Of the nearly 70 channels that will now come under the purview of Media Pro, at least 16 are in direct competition with each other. If Star has a Star Plus, Star News and Star Gold, Zee has a Zee TV, Zee News and Zee Cinema—the same audience, the same. And those are just the Hindi channels. Between them, the two broadcasters’ bouquets cover seven languages and six genres. The possible flashpoints, then, are numerous.

First, managing people. Both Star and Zee are run by relatively-young teams that shouldn’t have legacy issues. But thinking of each other as the enemy is so ingrained in the culture of both broadcasters that it will be a huge challenge to get them to set aside their differences and work together as an integrated unit. There are also likely to be logistical and housekeeping issues—managing headcount, locations, duplication of roles, etc—since both Star Den and Zee Turner were fully functional companies before the merger.

The bigger problem will relate to channel placement. Which should be the No. 1 channel in South Mumbai: Star Plus or Zee TV? Should Gariahat in Kolkata run with Zee Bangla first or Star Jalsha? Expect fireworks, say industry watchers, as Media Pro grapples with these and similar problems. “Since the JV consists of equally well-performing channels, there will be complications in managing network priority,” says Chrome Media’s Krishna. Adds Jha of PwC, “The greatest challenge will be about prioritising their channels in various markets. The tricky bit is that they are fierce competitors across genres. Once they figure out their priorities, the JV will be here to stay.” Shankar and Goenka concede that the road ahead isn’t going to be easy. “Managing people and systems will definitely be a challenge as both companies have distinct cultural backgrounds,” agrees Shankar.

“But when it comes to tackling discrepancies at the ground level, both the teams have lived through the pain of haggling for carriage fees and fighting against piracy on a daily basis. Therefore, there is a commitment to be focused on fixing the breakdown at the ground level.” Adds Goenka, “This is a strategic alliance where both of us are benefiting. What we need to create is mutual trust and confidence among both teams. Then there will be no looking back.”


sorce- http://business.outlookindia.com/article.aspx?277266
 
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