The pay-off for Zee

By Tarana Khan , afaqs!, New Delhi | In Media Publishing | July 27, 2009
Zee Entertainment's case demonstrates that subscription revenue is a broadcaster's best friend in an economic downturn

The period January-March 2009 was a moment of quiet celebration for Zee Entertainment Enterprises Ltd (ZEEL). It was when the company's subscription revenue overtook its revenue from advertising. This is a remarkable achievement for a major TV broadcaster.

Subscription or pay TV revenue in India is mostly generated through the (analogue and digital) cable and DTH (direct to home) networks of distributors. For most TV networks in India, the ratio of advertising to subscription is 70:30. For founder Subhash Chandra Goel, it would have been the vindication of a path he took many years ago.

& #BANNER1 & #Taken for the whole of 2008-09, pay still lags advertising revenue at ZEEL. However, it grew nearly twice as quickly (25.4 per cent for the former, against 13.6 per cent for the latter). In 2008-09, Rs 1,062 crore came from advertising; Rs 919 crore from subscriptions; and Rs 183 crore from other income.

Pay is promising

According to a report by financial services group IDFC-SSKI, subscription's share will continue to rise at ZEEL. It estimates that while ad revenue in 2009-10 will decline by 3 per cent, subscription revenue will rise by 12.4 per cent. Taken for the whole of 2009-10, pay revenue will overtake ad revenue by a small margin, estimates the report. The gap will widen further in 2010-11.

For a variety of reasons, pay has been a weak link in the TV broadcasting business. Channels have managed all these years because rapid economic - and therefore advertising - growth has been an article of faith in a booming economy. The TV industry had learnt to live with the fact that though Rs 20,000 crore is collected from consumers by cable operators, broadcasters can get their hands on only about Rs 4,000 crore of it.

At Rs 8,000 crore, advertising fetches about twice that amount. It is only when the advertising growth turns slow or negative - as it has - that the true worth of the pay part becomes more apparent. The growth of the DTH platform has been a spur for pay revenues.

Vivek Couto, co-founder and executive director, Media Partners Asia (MPA), a Singapore based media consulting and research firm, says that in the developed media markets of the US and the UK, the advertising and subscription revenue split is equal. "Subscription is a great source of profit because it's a stable revenue base, and it often continues in spite of the economic downturn. So, it has something to do with the structural economic process as opposed to the macro-economic process," he adds.

Coming back to Zee, the company has consistently shown faith in the pay aspect of television. Though STAR and CNN were beaming their English channels in India through Asian satellites, Zee became the first private broadcaster originating from India to beam Indian programming into the country in 1992.

It may be recalled, though, that the Indian government at that time did not allow private broadcasters to operate out of India. Therefore, Zee entered into an equal equity joint venture (JV) with STAR TV and based its operations in Hong Kong. In 1993, STAR was acquired by Rupert Murdoch's News Corporation. By 1999, there was a public face-off between Murdoch and Chandra, which ended with Chandra buying the remaining 50 per cent stake in the JV.

Distributing it right

In the early 90s, cable was a tangled mess of small operators, with no clear terms and conditions and no regulation to govern them either. Back in 1995, Zee sought to overcome this mess by entering the cable industry and launching Siticable (now Wire & Wireless India).

Punit Goenka, chief executive officer, ZEEL, says, "There was no organised distribution system and the Essel Group wanted to be in the entire value chain, whether it was content or access. We wanted to make sure that we control the entire value chain ourselves." A former senior manager at the network adds that Zee took full advantage of being the first mover.

He adds that the international model is more subscription dependent, which is what Zee went for as well. "The reason why we have such an advertising-dependent model in India is because of under-declaration of revenue by cable operators," he says. Goenka, Chandra's son, has been a whole time director with ZEEL since 2005 and took over as its chief executive officer in 2008.

Today, domestic pay is beginning to get some size, thanks in part to the DTH revolution. However, till the first half of this decade, ZEEL's dependence on international pay revenue was substantial. STAR Plus was relaunched with Kaun Banega Crorepati in 2001, when it knocked Zee down, leaving it struggling for ad revenue.

All the way till 2006, when the flagship Zee TV revived itself, its share in the GEC (general entertainment channel) space hovered between 12 and 15 per cent (TAM data, C&S, HSM, 4+). Now, half of ZEEL's subscription revenue comes from India and the other half from abroad. In 2003, two thirds came from its international operations.

The overseas payoff

Nowadays, Indian companies seem to think nothing of acquiring firms abroad. However, we are talking about late 1994, when Zee began its international operations. Exports were the most that Indian businessmen thought of and the idea of a newly set up media company trying to acquire overseas consumers was preposterous. Zee acquired TV Asia, the first Asian TV channel founded in the UK in 1990, and then moved on to Southeast and West Asia. Subsequently, it entered the US and Africa.

Most of the deals with the overseas distributors are based on revenue sharing or a minimum guarantee in the developed markets such as the US and the UK. However, in certain South Asian markets such as Bangladesh, Zee resorts to advertising as the declaration by distributors is low. Zee has about 18 international channels, including some free-to-air (FTA) channels such as Zee Aflam and Zee Muzic.

What drove it to foreign shores? Goenka says, "There was a lack of focus on the (Indian) diaspora. Nobody was actively working on it. They just had agents who were simply distributing the content locally. We sent people from here, who set up shop and tailor-made the channels for the local market. It's not the same feed which you see in India. We actually repackage the channels."

Apart from this, Zee created local community programmes and took its shows such as Sa Re Ga Ma and Antakshari abroad. It also hosted the popular Zee Cine Awards outside India. Now, it organises events such as Zee Carnival in London and Zee Nite in Asian countries such as Singapore, Malaysia and Japan.

Bharat Ranga, chief operating officer, international operations, Zee, explains, "We remained a pay channel in all conditions and continued to offer value to subscribers who got emotionally linked to the brand Zee. We kept launching new products even if they were not profitable in the beginning, and hence created network strength. We brought in innovations such as English subtitling to cater to younger audiences in our subscribers' homes."

Today, Zee claims to have 8.1 million paying subscriber households outside India. More than half of them live in Southeast Asia, the second largest bunch coming from West Asia. Its recent launch includes Zee Russia, which reaches about 2,000 subscribers. A back of the envelope calculation shows that Zee's pay revenue per international subscriber is about Rs 550 per year (based on paying subscribers).

Couto of MPA observes, "Zee's international business has been extremely strong for the last few years, and it's been robust throughout Asia, Europe, North America and other parts. Zee content is serving Indian audiences across various genres overseas, not just on traditional cable and satellite platforms, but also on emerging IPTV, online and video on demand (VOD) platforms."

About 10-15 per cent of Zee's international content is produced locally in those countries, as the company has now started targeting other viewers besides the diaspora. Goenka says that Zee MIB in Malaysia, running in the local language, is among the top 20 channels there. Zee Aflam in West Asia broadcasts Hindi movies with Arabic subtitles and is among the top five channels.

Big in India, too

Within India, the Zee channels are distributed (since 2002) through Zee Turner, a JV between ZEEL (which owns 74 per cent equity) and Turner International. Apart from Zee's bouquet of 35 channels in eight languages, including Ten Sports, in which ZEEL has a 50 per cent stake, Zee Turner distributes Real, Cartoon Network, Pogo, WB, HBO and CNN.

Dinesh Jain, chief executive officer, Zee Turner, says, "No other broadcaster has as many languages as Zee has. That has given Zee a huge head start over competition. Though Zee is at the forefront of getting pay revenues, our channels are reasonably priced. That's one of the reasons why Zee Turner gets higher declarations than anyone else in the industry."

Zee distributed its own channels until 2002 and its bouquet of offerings kept growing. Jehil Thakkar, executive director and head of media and entertainment, KPMG India (a consultancy), agrees, "Zee has a large roster of channels, which gives it bargaining power with the cable industry. It has always been ahead of the pack as far as subscription is concerned."

The cable industry in India is a strong, albeit largely disorganised, union of distribution companies that usually do not follow a standard revenue sharing arrangement (less politely put, they keep a large part of the money to themselves).

Industry analysts are unanimous that DTH is a major driver for subscription in India. According to a Centrum Finance (an investment services firm) report, ZEEL's revenue from DTH will have more than trebled between 2007-08 (Rs 61 crore) and 2009-10 (Rs 197 crore).

By 2010-11, estimates Centrum, DTH's contribution to ZEEL's subscription revenue will rise to almost 25 per cent from a mere 8 per cent in 2007-08. Domestic and international pay revenue will contribute an estimated 34 per cent and 41 per cent respectively to total subscription revenue.

Jain of Zee Turner says that DTH will not grow at the cost of cable, adding, "The satellite and broadcasting industry is about 20 years old. It's not a very long time. The DTH growth is phenomenal but cable is far bigger and it's not getting smaller."

The market is opening up to other platforms, too, which will only add to the growth story. This includes Headend in the Sky (HITS), Internet protocol TV (IPTV) and mobile TV. Zee is set to become the first HITS operator in the country. The platform allows the distribution of TV signals to cable operators through satellite dish, improving the quality many times for consumers, who can access the channels through a set top box.

On the Platter
Wire & Wireless India Ltd (WWIL), formerly SitiCable launched in 1995, reaches 6.7 million subscribers in 109 cities and offers analogue cable, digital cable and broadband internet. WWIL recently launched HITS under the brand SitiSatellite and will soon be launching triple play services (broadband, digital cable and telephone). Zee launched its DTH company, Dish TV in 2003. Although the category is now fiercely competitive with about half a dozen players and everyone losing money, Dish claims to be a leader with a 42 per cent share. Dish TV was formed when Zee Telefilms was restructured in 2006 and the cable business was demerged.

One of the major roadblocks to the growth of pay television is carriage fee, which is paid by broadcasters to cable operators to place their channels in the prime band. MPA estimates that of the money that broadcasters made in distribution revenue, about half was paid back to operators and distributors as carriage or placement fees.

It is expected that with digitisation of cable, carriage fee will eventually be replaced by a better revenue sharing system.

Goenka says that it is actually the Indian news channels that introduced the bane of carriage fees. "Carriage fee is only paid for FTA (free-to-air) channels globally, never for pay channels where revenue sharing exists.

Rightly so, no broadcaster who has a pay channel has a right to ask for 100 per cent from the operator, who has collected it from the ground.

"In my view, 45-50 per cent is fair payment for our content (as the revenue which we would get as part of the arrangement). If that model can be fixed, things will be back to normal," he suggests.

Clearly, there is a long way to go. However, companies such as Zee are proving that pay television is where we are headed and there are no two thoughts about it. Goenka expects subscription revenue to make up 70 per cent of the TV industry's revenue in five to six years, but aims to get Zee to that position at least two years before the industry.

The man who started it all

Subhash Chandra Goel (popularly known as Subhash Chandra) was the entrepreneurial spirit which probably formed the foundation of the cable and satellite television industry in India. Chandra was bold enough to venture into the uncharted waters of television entertainment and with Zee TV, he brought into people's homes the kind of programming which state broadcaster Doordarshan could not have been expected to. At the young age of 19, Chandra took over his family's export business and was soon bringing in millions. In 1981, he entered the packaging business and went on to create India's first amusement park. Zee TV was launched in 1991 and since then Chandra's Essel Group has diversified into businesses such as sports, education and wireless communication.