When Richard Li came to India in the summer of 1992, everyone made a pitch. The Chinese tycoon was trying to sell space on the only stable satellite broadcasting into India and China. Those in the fray included Vineet Jain of The Times of India, the Dalmias of the Sunday Mail and Nusli Wadia of Bombay Dyeing among others. It was however an unknown rice trader, Subhash Chandra, who won the race. At $5 million his bid was reportedly 3-5 times more than any of the others. He then went on to launch Zee TV and - on the back of its success - a cable business, a DTH business and so on. This year, 19 years after its birth, Zee became the largest media group in India catching up with the 173-year old The Times Group (see table).
The story is apocalyptic. It reveals what it takes to build a large, profitable media company - ambition. It tells you why Indian media and entertainment companies remain small - most media owners hate giving up control, building an organisation or trying something radically new. It also tells you what happens when owners hang onto their fiefdoms for too long - they become irrelevant like many of the business groups mentioned above. But we are running ahead of the story.
Scale? What scale?
India has always tantalised investors with the promise of over 700 million TV viewers, 345 million newspaper readers, 100 million online surfers and other such numbers. The advertising market is growing in double digits and so is purchasing power. But this potent combination doesn't seem to have delivered big returns.
After more than 15 years of liberalisation, investors are finally questioning their faith in the media industry's ability to deliver scale and profits. In television, valuations have become the biggest roadblock to raising capital. Structural problems make it impossible to predict revenues. "The capital requirements are too high now. They have gone up by more than five times in the last 10 years," says Bala Deshpande, senior managing director, New Enterprise Associates, one of the top 10 VCs in the US. So the risks have gone up. In her former role at ICICI Ventures, Deshpande was one of the first investors in Aaj Tak, long before it went public.
Says Sanjay Gupta, editor and CEO, Jagran Prakashan, "The price to earnings (PE) multiples for newspaper companies in India have come down from 25-27 times to 15-18 times over the last three years. More drumming down could happen unless and until acquisitions happen and companies grow." But mergers and acquisitions (M&As) simply don't happen in this industry. There might be the odd network sale (Asianet to Star) or channel sale (Channel 8 to Sony) but these are too few and far in between.
Ronnie Screwvala, co-founder and CEO, UTV Group, reckons that it has to do with giving up control. To most media owners holding 51 per cent is terribly important, either as a private company or as a public one. Chandra's younger brother and managing director Dish TV, Jawahar Goel, agrees, "In India, personal egos are bloated, no one wants to dilute."
News broadcasting is a great case in point. India now has almost 130 news channels, fighting for a stagnant Rs 1,800-crore ad pie. It is an area ripe for M&As, but none have happened so far. Roughly half of the news broadcasters are in it for the power trip. They are loath to sell. Some of it, however, is evolutionary. As the industry grows out of its entrepreneurial, hyper growth mode, it will seek growth through acquisitions. Some segments that have reached this phase (entertainment television, for instance) are showing signs of action. Star and Zee formed a joint venture for distribution earlier this year. Walt Disney recently bought UTV. And then there is the proposed buyout of ETV by Sony.
But no one is singing hallelujahs as yet.
Neither here nor there
The big problem is fragmentation. As a market we are increasing at a decent rate, but market share is fragmented. This will continue," says Gaurav Gupta, executive director, Kotak Mahindra Capital. He points out that the Mumbai newspaper market has grown, but the No 1 player there (Times of India) hasn't because new players have taken that share.
There are 60,000 cable operators making it a nightmare on the ground to distribute a channel. Each genre from entertainment to music has scores of channels fighting it out. They take the total to 652 channels, a world beating number.
This fragmentation - both on the content creation and content distribution side - makes it difficult to leverage the strengths of the market, large volumes, a rich content industry and rising purchasing power. Consider television, the largest part of the M&E business. According to a TV.NXT report, in 2009, India was (it still is) the world's second largest TV market with 134 million TV homes. Brazil had 54 million. Yet the Brazilian industry logged revenues of $11.3 billion in that year while India did just about half of that at $6.2 billion. Indian TV companies averaged a pathetic 13 odd per cent in operating profits compared to a juicy 29 per cent in Brazil.
This is true for many other segments. There is too much competition in the structurally flawed and regulatory mess of a market. Even the leaders cannot push up prices - either on advertising or on subscription - beyond a point. The topline of a Zee or a Star (see table), while big by Indian standards, is certainly not in alignment with the audience it delivers to advertisers or the variety it offers to viewers. Here is a quick and rough comparison. In a market that has 700 million viewers, Zee, the largest TV group does business (revenues) worth $1billion. Walt Disney made $17 billion on its TV business alone in 2010. And a chunk of this came from the 500-odd million people it reaches in the US and Europe.
The comparison with the West may not be fair. As Deshpande warns, "We should not compare India to that market because the ability and proclivity to pay is completely different." So what is it that stops Indian media companies from merging or acquiring other businesses?
Why no one is biting
Even ignoring what happens in the US or Europe, it stands to reason that with so much unprofitable competition companies should be buying each other out. They aren't. According to VCCEdge data, M&A deals in the media business were just about $266 million in 2010. That is not even a sliver of $64 billion in M&A deals across corporate India in that year.
The whole acquisition thing in newspapers is a myth, thinks Gupta of Jagran. "There are lots of titles but those worth acquiring are not more than 50-60," says he. Jagran acquired Mid-Day Multimedia in an all-stock deal last year and has been on the prowl for more titles for a long time now. Gupta, in fact, prefers the M&A route. His contention is that if Jagran were to launch a Marathi newspaper for, say, Rs 100 crore, the expense would show up on its profit and loss account and drag profits down. However, if it were to acquire one, that would become an asset on the balance sheet.
There are three factors, however, that make M&As particularly difficult in the Indian context. The first is the shareholding pattern. The ownership of many of the print titles vests with three, four, even six families at times. There are cross-holdings and a million complications that make divesting stake legally hazardous. So investors give up, some times at pretty advanced stages of negotiation. The groups that have managed to unravel their own complicated shareholding structures - Jagran, DB Corp and HT Media - have reaped the benefits of doing that. They are among the fastest growing media companies in India.
Second is the power trip that owners derive from their newspaper, TV channel or cable network. According to an estimate, of the 73,000 odd newspaper titles, only 990 are active members of the INS. The rest just exist to get advertising from the government or to harass local advertisers and businessmen. "Owners still feel that newspapers are for power and many of them are," says Gupta of Jagran. He points to several brands in the Hindi newspaper market - like Jan Vani, Aaj Samaj - that should have folded up by but continue in spite of their commercial non-viability.
Says Vikash Mantri, vice president, research, ICICI Securities, "For five years we have been trying to find an acquisition target for a Hindi daily. We went to many dailies that are not doing too well or the next generation is not interested. But every time we get the answer that 'we are not here to make money.' When the whole argument is not driven by economic rationale then how do you go ahead?" The reason many of them don't shut down is because they have other businesses that subsidise the newspaper.
In cable, according to one estimate, local politicians own more than half of the networks. These, say bankers, are cash machines used to fund local elections. Why would anyone sell them?
Thirdly, "except for 2-3 groups, everything is family owned and nobody wants to give up control. It is like the family silver," says I. Venkat, director, Ushodaya Enterprises (Eenadu). This comes across as the single biggest reason why consolidation is not happening. Much of this could be posturing. In M&As it is a question of, "Who blinks first?" reckons Farokh Balsara, partner, Ernst & Young. There are many companies on the block but the big boys wait for them to bleed some more so that the asking price goes down substantially.
The immaturity of it all
Girish Agarwal, director, DB Corporation, points out that newspaper owners started thinking of their brands as business opportunities only in the '80s. "So in a commercial sense, print is only a 20-30 year old industry. You can't expect any industry to get into a consolidation phase after such a short time. In another five odd years you will see a lot more mergers or acquisitions. The second and third generation in the business are not opposed to M&As unlike their grandfathers," says he. He also points out that some of the biggest, most profitable groups aren't listed or looking for money. The Times Group, Malayala Manorama, Anandabazar Patrika are all still closely held by first or second-generation family members. "True scale will come in only when M&As happen," says Agarwal.
There are other structural issues hampering growth. Balsara points out that one of the big reasons the US industry prospers is the strong protection offered to its intellectual property. Timmy Kandhari, executive director, PwC India, adds that scale will not happen till all the revenues start coming into the mainstream. In TV, for instance, 80 per cent of the Rs 18,000 crore collected on the ground by cable operators, leaks. In films too, thousands of crores leak out of the theatrical system. Till these revenues start being accounted for scale will be difficult to achieve.
It is a bit of a chicken-and-egg situation. The leaks cannot be plugged until decent media infrastructure - addressable pay TV systems or computerised theatre chains - is in place. That requires huge amounts of capital expenditure and will not come in till the industry shows that it has the ability to scale.
Balsara reckons that if advertising continues to grow the way it is at present (15-19 per cent year-on-year), the ad to GDP ratio (at less than half a per cent now) will eventually improve and all segments of the industry will see scale. Also, as DTH spreads to more than 60 per cent of India's TV homes, the industry will see huge upsides on both profit and revenues. The day when the media business will see consolidation does not seem far off, according to some. Deshpande feels that M&As should happen soon because there is now a modicum of structure in the industry.
That said, it is time for the real growth to begin.
(The writer is an independent consultant).First Published : September 22, 2011