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Balancing the Consolidation equation–
Scope or Scale

February, 2018

Bharat Kedia, CFO, ZEE Entertainment Enterprises Ltd. writes about consolidation in the Media & Entertainment industry in India.

To use an everyday metaphor, consolidation is just like a treadmill, organizations are forced to run on, however simply to stay in same place. So how important is this really? In a fast changing environment such as the world of media and entertainment, which is no longer measured by financial tools like build vs. buy proposition, mergers & acquisitions (M&A) has become the strategic priority. Organic growths are generally limited to an area of expertise, however this plays against the desirable speed of expansion. It is commonly witnessed that inorganic growth widens the playing field through innovative acquisitions outside the industry or sector and accelerates the pace of growth. The corporate dilemma of short-term vs. long-term goals continues to provide space for consolidation to achieve the long-term objective.

According to FICCI KPMG report 2017, The Indian Media & Entertainment sector has outpaced the GDP growth consistently over past 5 years and is expected to grow at a CAGR of 13.9%, to reach US$ 37.55 billion by 2021 from US$ 19.59 billion in 2016, out shining the global average of 4.2%. Over FY 2016-21, India’s television industry, is expected to grow at a CAGR of 14.7%, while digital advertising will grow at 30.8%. However, there is significant room to capture value with Ad spend accounting for only 0.38% of GDP as compared to matured markets of around 1% .

Television segment of the Indian Media Entertainment industry is poised to continue enjoying the lion’s share in terms of revenue. India is the world’s second largest TV market with the segment accounting for 46.61% of revenue share in 2016, which is expected to grow further to 48.18% by 2021. General Entertainment Channels (GECs) accounted for 29.6% of the total television viewership share in 2015 followed by viewership of regional movies with 6.6%. With about 64% Household penetration, nearly 800 television channels having permission to uplink or downlink from the country, TV Viewership is in Hindi Language is about 45% while in regional language accounts for 42%. This makes the fragmented regional market extremely attractive to television broadcasters.

Some recent deals bring to fore the drift in the Industry. Market boundaries are dissolving with Zee Entertainment’s acquisition of GEC / Regional channels Sarthak TV, Big Ganga and Big Magic, Star India’s acquisition of Maa TV, a Telegu Network for an estimated Rs. 2,000-2,500 crore and so on. In another deal, Sony Pictures Networks (SPN) in an all-cash deal acquired TEN Sports’ portfolio of Zee Entertainment Ltd. These players have benefited from economies of scale, channel packaging & bundling and expansion in reach to households. We believe such large TV networks will continue to grow inorganically with opportunistic acquisitions of regional / niche TV assets.

There is another aspect to being a player in such a large pond of even bigger players. In a fragmented market, small media outlets that compete with larger ones often suffer from inadequate resources syndrome. Small media operations often cannot afford to produce programming, hire the talent or the quality of technical staff to compete with their larger counterparts. Cameras, microphones, servers, computers and the necessary editing programs have significant costs more easily handled by a corporate entity than an individual owner. Consolidation may mean survival for such corporations.

Consolidation is the buzz word even in the direct-to-home (DTH) sector which saw Dish TV, an Essel group company, acquire a stake in Videocon Industries Ltd’s DTH firm Videocon d2h. Videocon, owned by the Dhoot brothers, will now have a 44.6% stake in the entity, while Essel group will hold a 55.4% stake. State-owned broadcaster Doordarshan also runs a DTH platform for free-to-air channels called DD Free Dish providing rural reach to broadcasters.

Consolidation is not only crucial for just smaller enterprises but could mean business for larger corporations too. As published in USA Today, a potential deal between Disney and Twenty-First Century Fox that contemplates the sale of Fox's Star, movie studios and stakes in Sky and Hulu, among other properties is underway at an enterprise value of above a whopping $60 billion.

Turning towards how the advent of the digital platforms is changing the ball game, it can be said that digitally integrated customer experience led by content that connects is a challenge and opportunity both. With close to 60% of Indian population below the age of 35 and approximately 300 million smartphone users having around 160 million digital video views, the consumption of content is accelerating rapidly. With no requirement of an operating license nor a restriction on content or pricing, this paves the way for powerful growth of this medium and encourages new entrants to unfold their talent.

However, the size of opportunity for monetization through digital ad spend is yet to be resolved given that digital ad spending in India on a per-user basis is one of the lowest in the world. Trends in online searches in India suggest that entertainment is becoming the largest sought-after category contributing to 31% of all searches as per E&Y Report. Short-form and snackable content is primarily driving the growth in consumption of digital media. Consumers have shown increased preference towards short-form content of around 20 minutes.

While all this gives fuel of motivation to start-ups to get frenzy with digital media, there are two important pieces of puzzle that need to come together a) A brand that attracts audiences and creates loyalty and b) A business model that can effectively turn audiences in cash. Getting both right is getting extraordinary together. More challenging of the two is the revenue machine to match. This is likely to lead to consolidation in digital media where existing media companies are going to look for scale in digital, while tech-savvy start-ups look for cash to survive and grow, advertisers on the other hand get one-stop-shop to deal with their campaign’s success. But, this is not going to be a cake-walk in a market with over 30 OTT players competing for viewership in India. Just to visualize the market share here, YouTube and Facebook alone accounted for 42% and 47% respectively of overall videos consumed online as per IMRB and Culture Machine report.

But there is a ray of hope for the remaining 11%. How I look at it is that a successful consolidation is based on scope deal vs. scale deal when it comes to digital media. Scope deals expand a company’s offerings by adding new customers, route to markets or channels, while scale deals grow a company’s scale by adding similar products or customers.

There are some other factors that contribute to a sunny picture as well. The growing confidence in Indian Economy, improved rating by Moody’s and elevation in ease of doing business ranking are just some of the many enablers conducive to M&A environment in M&E Industry.

M&E industry in India has reached an inflection point – but with the dust settling down on demonetization and GST, opportunities are now bubbling on the horizon and a new window of opportunity is slowly opening.

And with a trend of consolidation sweeping across the industry, the job of a CFO too undergoes some fundamental shifting of gears. The role of a CFO in M&E industry now entails creation of not just compelling and relevant customer experiences that integrate creativity, technology, analytics, and artificial intelligence but in a cost-efficient manner. Cash being a limited resource and M&A adding to its shortage, CFOs need to remain alert in order to safeguard margin deterioration by harnessing synergies of the integration and drive costs efficiencies to shape a leaner organization.

When done with prudence consolidation can unlock a treasure trove of possibilities. It is my firm belief that consolidation in media & entertainment Industry, in terms of both scale and scope, bolstered by digital acceleration is inevitable to future-proof the business.

Opinions expressed in the article are the author’s own.