Beruflich Dokumente
Kultur Dokumente
Foreword
Companies are spending more executive time investigating opportunities in emerging markets (Brazil, Russia, India, China). In the long term, these emerging markets are expected to expand, driven by their fast-growing middle class. The increasing importance of these markets is a major opportunity that should not be underestimated. Thats what we said in 2008 and 2009 when we introduced our Business Risk Report for media and entertainment (M&E). And its still true. Whats also true is some of these economies have been experiencing double-digit growth annually in recent years and continue to grow, despite the global economic crisis. Growth strategies in most companies in the US and Western Europe are linked to growth in these new markets. Companies are focused on the best way to enter, grow and brand their business in these markets. Brazil, Russia, India and China (BRIC) are attracting signicant attention because of a surge in demand for content. Accounting for 40% of humanity, they are the future for global media growth. Currently, some of the largest M&E companies are making less than 10% of their global sales from BRIC economies, but management within these companies is spending a disproportionate amount of their time dealing with these markets. To win in these markets, there are several success factors that global companies need to take into account. While there are many opportunities to tap, there are some unique challenges, too, in the areas of technology, distribution, regulations, piracy and so on, which global companies need to address. In the report that follows, we examine the M&E landscape in each of the BRIC nations and provide an overview of the opportunities, success factors and key challenges in doing business there. I would like to thank our team in India under the leadership of Farokh Balsara for their efforts in preparing this report and providing valuable insights.
John Nendick Global Media & Entertainment Leader, Ernst & Young
Contents
Executive summary
Brazil
Russia
17
India
25
China
33
Conclusion
41
Contacts
43
Economic growth coupled with large populations in Brazil, Russia, India and China, is leading to growing purchasing power. A multitude of consumers with increasing disposable income offer myriad opportunities to global M&E companies. However, these dynamic markets also present a unique set of challenges. To enter and win in these BRIC markets, companies must prepare, plan and partner carefully.
Executive summary
Brazil, Russia, India and China (BRIC) economies are the future building blocks of the world economy. BRIC economies together account for over 25% of the worlds land coverage, 40% of the worlds population and hold a combined (GDP) of US$8.7 trillion.1 Together, they are among the fastest-emerging economies and will be the growth engines of the global economy. In this report, we examine the M&E landscape in each of the four countries and provide an overview of the key opportunities, challenges and critical success factors in doing business there.
As companies think through their globalization strategies, we decided to look at some of the important indicators of the market attractiveness for each of the four countries. Market size, growth rates, demographics and penetration of new media platforms are some of the indicators used. Figure 1 below, indicates that while Brazil and Russia have a high GDP per capita and urbanization rate, India and China score high on population, number of television households and mobile subscribers. This highlights the immense potential that these countries hold and the several opportunities they present.
Brazil 1,482 0.1% 10,200 Portuguese 86% 88.6% 17.1 4.2% 199 28.6 67% 53
5
Russia 1,255 -8.5% 15,200 Russian 73% 99.4% 13.9 7.7% 140 38.4 72% 50
5
India 1,243 6.1% 3,100 Hindi/English 29% 61% 14.8 8.2% 1,157 25.3 64% 134
4
China 4,758 8.4% 6,500 Mandarin 43% 90.9% 50.5 8.7% 1,339 34.1 72% 1744 124 117 741
Literacy rate3 M&E industry size (US$ billions) M&E industry growth rate (200509) Population4 (millions) Median age (years)
1
Working population between 15 64 years (% of population) Television household (millions) Internet subscribers6 (millions) Broadband subscribers (millions) Mobile subscribers (millions)
1
23 14 174
21 9 204
17 9 489
2009 estimate 2 end of 2008 3 2004 estimate 4 July 2009 estimate 5 as of January 2009 6 as of 31 December 2009
Brazil economy, The Central Intelligence Agency website, https://www.cia.gov/library/publications/the-world-factbook/geos/br.html, accessed 4 February 2010; Brazil people, The Central Intelligence Agency website, https://www.cia.gov/library/publications/the-world-factbook/geos/br.html, accessed 4 February 2010; Media in Brazil: industry prole, December 2009, Datamonitor; Brazil - Convergence and Pay TV Market, Industry Prole, July 2009, via ISI Emerging Markets. Russia economy, The Central Intelligence Agency website, https://www.cia.gov/library/publications/the-world-factbook/geos/rs.html, accessed 26 February 2010; Russia people, The Central Intelligence Agency website, https://www.cia.gov/library/publications/the-world-factbook/geos/rs.html, accessed 25 February 2010; Russia - Convergence - Triple Play & Digital TV, 9 August 2009, via ISI Emerging Markets; Media in Russia: industry prole, December 2009, Datamonitor; India economy, The Central Intelligence Agency website, https://www.cia.gov/library/publications/the-world-factbook/geos/in.html, accessed 4 February 2010; India people, The Central Intelligence Agency website, https://www.cia.gov/library/publications/the-world-factbook/geos/in.html, accessed 4 February 2010; Media in India: industry prole, December 2009, Datamonitor; China economy, The Central Intelligence Agency website, https://www.cia.gov/library/publications/ the-world-factbook/geos/ch.html, accessed 4 February 2010; China people, The Central Intelligence Agency website, https://www.cia.gov/library/publications/ the-world-factbook/geos/ch.html, accessed 4 February 2010; Media in China: industry prole, December 2009, Datamonitor.
Russia
Russia is the eighth-largest economy in the world with a GDP of US$1.25 trillion in 2009.4 While Russias population declined by 0.47% year-over-year to reach 140 million as of July 2009, it has a growing urban population and a large working population accounting for 72% of the total.5 The Government in Russia is planning to create a favorable regime for foreign companies, especially those who will bring in new technologies into the country. The TV and Radio Broadcast Development Program introduced by the Ministry for Communications and Information in November 2007, is expected to bring many new foreign entrants to the Russian market to help the Government to digitize the television and radio networks of the country. Studies have shown that Russian internet users socialize more than some of the Western Europe countries such as France.6 Digital media presents several opportunities for domestic as well as foreign investors.
As the M&E industry in developed markets copes with the digital revolution amid an economic downturn and stagnating growth rates, emerging markets offer an attractive alternative, driven by their fast-growing middle class and relative youth. John Nendick, Global Media & Entertainment Leader, Ernst & Young
2 3 4 5 6
Brazil economy, The Central Intelligence Agency website, https://www.cia.gov/library/publications/the-world-factbook/geos/br.html, accessed 4 February 2010. Brazil people, The Central Intelligence Agency website, https://www.cia.gov/library/publications/the-world-factbook/geos/br.html, accessed 4 February 2010. Russia economy, The Central Intelligence Agency website, https://www.cia.gov/library/publications/the-world-factbook/geos/rs.html, accessed 26 February 2010. Russia people, The Central Intelligence Agency website, https://www.cia.gov/library/publications/the-world-factbook/geos/rs.html, accessed 25 February 2010. Russia - Broadband Market - Overview, Analysis & Forecasts, 22 November 2009, via ISI Emerging Markets; Ernst and Young analysis; Broadband forecast pack: 200914, via Ovum, accessed October 2009; Mobile connections forecast pack: 200914, via Ovum, accessed December 2009.
India
The Indian economy is on the path of robust growth. It remains the second-fastest growing major economy in the world after China. The country is headed for a demographic sweet spot. Besides having the second-largest population in the world, it is also the youngest nation among the BRIC economies. India has a large pool of technical and non-technical graduates joining the workforce every year and has the second-largest Englishspeaking population in the world.7 As the largest lm-producing nation in the world, India holds immense opportunities for foreign players.8 Many global studios have already entered the Indian lm market and partnered with Indian directors to make Indian language lms. India is becoming a hot bed for media content outsourcing from animated lms to special effects, post-production and print media services such as layout design, graphics and data compilation. India also has a vibrant content market. Global television content producers can localize their content for the Indian market to tap further opportunities.
China
China is the largest economy of the BRIC economies with a GDP growth rate of 8.4% in 2009.9 The M&E market generated revenues of US$50.5 billion in 2009, reecting a year-over-year increase of 7.4%.10 The country has 72.1% of its population in the working age group, a growing urban population (constituting 43% of total population in China in 2008) and is fast becoming a literate population, with 91% literacy rate for those 15 years and older. Economic growth, coupled with a large population, is leading to a growing purchasing power in China, and the youth are driving higher discretionary spending in media-related activities. China is the worlds largest television market with an estimated 160 million television households. It has some of the largest internet and broadband subscriber bases globally with 117 million and 124 million, respectively. The emergence and proliferation of the new media platforms offer an attractive avenue to foreign companies looking to enter China. For those looking to make money in Chinas M&E market, the internet will increasingly dominate. Chinas mobile media market is bracing for a new phase of growth too. The advertising industry, which is experiencing rapid growth, also offers various opportunities for global giants. China currently leads the world in the number of digital displays deployed. All major advertising agencies have a presence in China through joint ventures with local partners. Under the new regulations, foreign-invested advertising enterprises can engage in design, production, publication and some other types of advertising businesses, for both domestic and overseas customers after receiving ofcial approval. Although there are a number of barriers to success in China, rewards have and will continue to be considerable for companies that manage to navigate its unique environment.
7 8 9 10
India people, The Central Intelligence Agency website, https://www.cia.gov/library/publications/the-world-factbook/geos/in.html, accessed 4 February 2010. India in focus at Cannes, Financial Express (India),12 May 2009, via Dow Jones Factiva 2009 Indian Express Pty. Ltd China economy, The Central Intelligence Agency website, https://www.cia.gov/library/publications/the-world-factbook/geos/ch.html, accessed 4 February 2010. Media in China: industry prole, December 2009, Datamonitor.
Challenges
Piracy, foreign direct investment (FDI) restrictions, Government regulations and censorship continue to be the major challenges for the M&E players operating in the BRIC economies.
Russia
The regulatory framework in Russia is restricted. The Government has planned to restrict foreign investment in strategic internet portals and websites, as a national security measure.11 While Russia has rapidly adopted new technologies, effective monetization of digital content continues to be a challenge. Also, Russias incumbent broadcasting network operators are facing challenges related to digitizing analog networks and are threatened by entry of new market players, especially telecom operators. Pay television operators in Russia have relatively poor average revenue per user (ARPU) levels due to the availability of high quality content on the free terrestrial television.
Brazil
The M&E industry in Brazil has been extensively regulated by various Government bodies. Cable and other television distribution platforms such as direct to home (DTH) and internet protocol television (IPTV) are subject to different rules. Widespread launch of IPTV is restricted in Brazil, due to telecom regulations, which prohibit xed-line telephone operators from offering pay television services on their networks. Music piracy and signal piracy are some of the most common forms of piracy in Brazil. Signal piracy in 2008 corresponded to almost 13% of the legal cable television subscriber base.
Global M&E companies are increasingly focusing on the role that emerging markets are playing in content consumption as well as content creation. Leading global companies that fail to optimize the opportunities in emerging markets may lose out. Howard K. Bass, Ernst & Young
11
Dragana Ignjatovi, Russia planning to restrict foreign investment in Internet rms, Global Insight Daily Analysis, 10 April 2009, via Dow Jones Factiva, 2009 Global Insight Limited.
India
Distribution in India is largely based on analog technology which suffers from lack of addressability and transparency. Rampant piracy is another challenge in the country. ARPUs are still low compared to the global average, although large and growing volumes make up for it. Distribution is largely based on analog technology, which suffers from lack of addressability of the subscriber base. By international standards, India is still very low on personal computer (PC) and broadband penetration.
China
The State Administration of Radio, Film and Television (SARFT) is responsible for laws, policies and editing specic types of sensitive content for the countrys radio, television and lm industries. The M&E market in China has been highly regulated for years. International media companies have faced many difculties in effectively penetrating the Chinese market. Unauthorized reproduction of content and price levels have led to skepticism about the ability of companies to make money in Chinas digital markets. While local players have been able to adopt creative solutions to produce prots, the challenges for content-based foreign ventures continue to be profound. Like many other emerging markets, the due diligence processes can pose unique challenges. Investors also need to address the lower transparency, integrity of nancial data, revenue recognition and exposure to nancial contingencies.
Brazils growing economy, favorable demographics, rising disposable incomes and an under-penetrated market make it an attractive M&E investment destination.
Brazil
Key opportunities
Internet: Over the past few years, regulatory bodies have reduced the entry barriers for foreign investors in Brazils M&E industry. The under-penetrated internet market is an attractive avenue for global M&E companies. Also, the growing usage of PCs in the country is expected to drive the internet demand. The emerging middle-class and changing demographics have also led to an increasing demand for broadband services and digital content.
12
Brazil economy, The Central Intelligence Agency website, https://www.cia.gov/library/publications/the-world-factbook/geos/br.html, accessed 4 February 2010.
10
Challenges
Piracy: There is widespread piracy in Brazil, with more than one billion music tracks downloaded illegally each year. Counterfeit discs account for up to half of all CDs and DVDs sold in the country. Signal piracy has always been a problem for cable television operators. According to Brazils pay television providers syndicate Sindicato das Empresas de Television por Asinatura (SETA), signal piracy in 2008 corresponded to 13% of the legal cable television subscriber base.13 Although piracy is rampant in Brazil, the Government, private companies and associations related to the M&E industry have set several policies, including educational campaigns and police actions against street vendors. The National Anti-Piracy Council (a department within the Ministry of Justice) has joined efforts with the private sector to promote anti-piracy policies. However, it is imperative to strengthen the intellectual property rights (IPR) enforcement legislation and take more rigorous action to address piracy issues. Few players dominate the industry: Brazil is a highly concentrated market with a few large players dominating the M&E industry. Six family rms control almost 80% of the television networks, and seven out of the top ten magazines across the country are owned by a single group. Also, just two newspaper corporations in the state of Sao Paulo have a tenth of the national market share.14 These companies have signicant advantages over foreign companies. Regulatory issues: The M&E industry in Brazil has been extensively regulated by various Government bodies where cable and other television distribution platforms such as DTH and IPTV are subject to different rules. The widespread launch of IPTV is restricted in Brazil, due to a regulation that prohibits xed-line telecom operators from offering pay television services on their networks. However, as an alternative, operators can offer Video-On-Demand (VoD), which is a byproduct of IPTV. Over the past few years there have been some regulatory amendments that allow 30% foreign ownership in domestic media companies. Foreign capital participation is permitted up to 100% of the voting capital for Multichannel Multipoint Distribution Systems (MMDS) and DTH providers (through a subsidiary formed under Brazilian laws and with its principal place of business in Brazil), and up to 49% of the voting capital for cable television providers.15 Earlier, legislation prohibited pay television operators in Brazil from offering telephony services, but this changed with the deregulation in January 2002, although there are still certain restrictions. Since then, many television companies have entered the telecom sector with broadband or voice services such as VoIP.
With signicant regulatory changes expected in the near future, technological advancements and favorable demographics, the under-penetrated M&E industry in Brazil is poised for growth. Paulo J. Machado, Media & Entertainment Leader, Ernst & Young, Brazil
13 14 15
ISI Brazil - Convergence and Pay TV Market, Industry Prole, July 2009, via ISI Emerging Markets. Ernst & Young analysis. Brazil - Convergence and Pay TV Market, Industry Prole, July 2009, via ISI Emerging Markets.
11
6% 16.2
17.1 6%
3 2
16
12
Segment analysis
Broadcasting and cable television
Free broadcast television dominates: Often known as the television country, Brazil had 53 million television households with a household penetration of 95% in 2009.17 Free broadcast television remains the dominant media provider in Brazil, reaching a majority of viewers across the country. This segment derives 80% of its revenue from advertisements.18 The free broadcasting segment is dominated by six privately-owned national broadcast television networks and a Government-owned national public television network.19 Pay television is on the rise: Twenty years after pay television began in Brazil, it continues to expand, with nearly 6.6 million subscribers in 2009, registering approximately 18% growth over the last year.20 Over the past few years, the sector has witnessed a huge growth, owing to the importance of triple-play and quadruple-play solutions for pay television customers and operators. Cable television has consistently dominated the pay television market, capturing an average 60% share in the last ten years. DTH with a 33% share and MMDS with a 6% share in the total pay television market are also some of the widely used technologies. In March 2009, cable television had more than four million subscribers, whereas DTH managed about two million customers.20 New technologies are redening the market: IPTV and Digital Terrestrial Television (DTTV) are some of the emerging service models in the pay television market, giving tough competition to DTH and cable television services. DTTV was rst launched in Sao Paulo in 2007, and by the end of June 2009, there were 200,000 DTTV set-top-boxes in households across 15 cities.20 Also, the convergence of xed and mobile voice services along with video over a single broadband connection is booming, as it offers billing solutions and discount packages to customers along with lower operating costs for the suppliers. Soap operas and football are among Brazils favorite genres of content: Popular genres differ widely in free broadcast television and pay television market. While soap operas and news channels are the favored ones in the former segment, kids channels and sports events (especially football) are preferred in the latter.
Cable television has consistently dominated the pay television market, capturing an average 60% share in the last ten years. DTH with a 33% share in the total pay television market is also a widely used platform.
17 18 19 20
ISI Brazil - Convergence and Pay TV Market, Industry Prole, July 2009, via ISI Emerging Markets. Ernst & Young analysis. NET SERVIOS DE COMUNICAO S.A.,Form 20-F, 31 December 2008. Brazil - Convergence and Pay TV Market, Industry Prole, July 2009, via ISI Emerging Markets.
13
Publishing
While newspapers remain stagnant, magazines continue to grow: The print industry in Brazil is estimated to be a market worth US$3.6 billion in 2009, largely dominated by the newspaper segment.21 There are approximately ten million daily newspaper readers with more than 200 publications in the country.22 There are signicant numbers of international magazine titles that are sold in Brazil as well. Threat from the internet: In recent times, the print media has witnessed growing competition from the internet. There has been a rapid increase in the migration of readers to internet-based publications. Another trend hitting the market is the entry of low-cost newspapers, which are relatively short and direct (3-4 pages). While a newspaper in Brazil costs somewhere around US$1-2, these low-cost newspapers are available at 25 cents.22 now receives annual Government incentives of about US$90 million.24 Over the past few years, there have been numerous co-production agreements between the local lmmakers and media companies abroad. Audio-visual cooperation agreements with Argentina, Paraguay, Uruguay and other American countries will, in the next few years, make Brazil one of the most important audio-visual hubs in the South American continent. Apart from nancial and marketing advantages, Brazil is slowly building its technical and talent base too. Concerts by international performers are on the rise: Live shows are becoming regular events in Brazil. In 2008, there were 249 shows performed by international stars, almost double the number of such performances in 2007. Currency stability and the countrys increasing youth population, which has an increasing propensity to spend on outdoor entertainment, are key factors for the success of these large-scale concerts.
Radio broadcasting
The radio broadcasting industry in Brazil is still nascent and has been estimated at around US$470 million in 2009.22 Most advertisements come from the private sector, followed by city halls, federal Government and state administration.25 Popular genres differ widely on amplitude modulation (AM) and frequency modulation (FM) radios. The AM stations offer a variety of programs, while FM radio stations concentrate on music.
21 22 23 24
Media in Brazil: industry prole, December 2009, Datamonitor. Ernst & Young analysis. Entertainment; New take for Brazils lm sector, Los Angeles Times, 23 October 2008, via Dow Jones Factiva. Brazil lm biz sails into mainstream; Industry aims at retaking the local box ofce, Daily Variety, 17 September 2008, via Dow Jones Factiva, 2008, Variety, Reed Business Information, a division of Reed Elsevier, Inc. Brazil: Radio advertising worth R$1.4bil in 2007, Folha de So Paulo, 24 September 2008, via Dow Jones Factiva, 2008 SABI South American Business Information.
25
14
An emerging middle class, which represents almost 40 million consumers along with a growing population of young people, will lead to an increased demand for the internet, broadband and mobile. To capture this market, traditional media incumbents are making forays into the new media segment and making signicant investments.
Digitization is the way forward: The radio industry in Brazil is on the way to be digitized; the only hurdle being the pending decision on the technology to be used. A major revolution took place in 2006-07, when broadcasters formed the Brazilian Alliance for Digital Radio to promote and support the deployment of high-denition radio technology. The issue here is the price and availability of receptors, which can prove to be an obstacle in the radio industry. It is estimated that each company would have to invest US$80,000-120,00026 to migrate from the current analog technology. However, radio companies hope that the digital evolution will raise their advertising income and the share of radio in the overall advertising pie.27
user-generated content are gaining widespread popularity in the country. New media is growing at signicantly higher rates than traditional media. In 2009, there were approximately 174 million mobile subscribers, 22.5 million internet and 14 million broadband subscribers, registering a CAGR of 19.2%, 19.5% and 35%, respectively, in the period 2007-09. Most of the traditional media incumbents are foraying into the internet segment, with leading major M&E companies boosting organic investments and looking out for acquisitions. Ecommerce has been popular since its inception. Studies by a local research rm stated that retail ecommerce transactions increased by 30% in 2008. Online retail purchases reached US$2.2 billion in the rst half of 2009.30 Lured by the growth prospects, some of the major ofine retailers have entered the online space in the last two years. Pricing still an issue: In terms of broadband subscribers, Brazil is the leader in Latin America. Broadband charges in Brazil have been dropping while speeds have been increasing; however, prices are still high for the domestic socio-economic environment. As a result, broadband access is still beyond the reach of the majority of the population in a country that still suffers from a highly unequal income distribution.30 Government incentives: The Government has been active in developing programs aimed at making broadband access available to the lower income brackets of the population. Government incentives to promote internet uptake in Brazil include low-priced subsidized computers and free internet kiosks.
New media
Internet leads the new media story: With a promising economic outlook, rising prosperity and a young population, the demand for mobile, internet and broadband in Brazil is expected to soar. According to a report from a local publication, there are 56 million PCs in use in the country with 100 million anticipated by 2012.28 The growth in PC sales will be driving the continued growth of broadband demand in Brazil. Also, an emerging middle class in the country, which represents around 40 million consumers, will lead to an increasing demand in the new media segment. The growth of mobile broadband in Brazil has attracted more than four million subscribers to date.30 The size of the internet advertising market was US$431.4 million in 2009.29 Brazils youth are keen internet users, especially for social activities. Blogging, online forums and
26 27 28
Brazil: The issues on digital radio technology, Valor Economico, 24 September 2008, via Dow Jones Factiva, 2008 Latinscore. Brazil: Digital radio technology to be decided, O Estado de Sao Paulo, 20 August 2007, via Dow Jones Factiva, 2007 Latinscore. Industry Trends And Developments - PC Growth Driving The Expansion Of Broadband, BMI Industry Insights, 28 May 2009, via Dow Jones Factiva, Business Monitor International. Brazil: Internet advertising needs up to date regulations, IT Digest, 1 April 2009, via Dow Jones Factiva, 2009 Latinscore. Brazil - Internet and Broadband Market, Industry Prole, January 2010, via ISI emerging markets.
29 30
15
16
As revenues from digital media grow much faster than their traditional counterparts, Russia offers several opportunities to global M&E companies in the new media space. However, navigating its cultural and political environment could prove to be a challenge.
17
Russia
Key opportunities
Television: With the ongoing drive towards digitizing the television and radio broadcasting networks in Russia, there is an opportunity for foreign companies to participate. Introduced in November 2007, aims to digitize Russias television and radio broadcasting networks entirely. The move is expected to bring many new foreign entrants in the market to help the Government achieve its goal of digitization. On the content side, foreign players can partner with local companies to cater to the domestic television market. Genres such as soap operas and cartoons are very popular in Russia. Meanwhile, Roskomnadzor, the federal body responsible for licensing channels in Russia, has approved the distribution of foreign television channels on the Russian cable networks. At present, various foreign television channels have already received the media registration licenses to broadcast over the domestic cable networks.
As rapid adopter of technology, Russia leads the race among other European countries in digital content consumption, mobile internet and social networking. However, effective monetization continues to be a challenge. Even so, predicted growth in digital revenues presents an excellent opportunity for investors, domestic and foreign alike. Vadim Balashov, Media & Entertainment Leader, Ernst & Young, Russia
31
Russia economy, The Central Intelligence Agency website, https://www.cia.gov/library/publications/the-world-factbook/geos/ rs.html, accessed 26 February 2010; Russia people, The Central Intelligence Agency website, https://www.cia.gov/library/ publications/the-world-factbook/geos/rs.html, accessed 25 February 2010.
18
Challenges
New media: The emergence of new media is an attractive avenue for foreign companies. With consumer preferences shifting toward online media, there is likely to be a higher demand for online content in Russia. Internet subscribers in Russia are expected to increase from 21.3 million in 2009 to 40.2 million in 2012. Mobile subscribers are expected to increase from 204.3 million to 226.9 million during the same period.32 Rising broadband usage has also created a demand and market for web-based television content, including news, music and entertainment. Movies and entertainment: A new draft bill that aims to make foreign investments in the movie industry in Russia more attractive, was submitted to the Parliament of the Russian Federation in October 2009. The proposed bill aims to introduce a unied computerized information system to record the number of showings of movies allowable in cinemas. The bill also proposes to increase the share of foreign investment in movie budgets to up to 50% from the previous 30%. Such amendments, if approved, are expected to make foreign investments in the movie industry more attractive.33 Additionally, various foreign companies are entering the M&E market in Russia through licensing arrangements. The trend is expected to be followed by many more foreign companies in the country in the future. Recently, a leading Russian mobile operator has signed an agreement with a US-based lm production and distribution company to sell lms in Russia via the internet.34 Low average revenues: M&E companies in Russia have been continuously facing relatively poor ARPU levels in the countrys pay television market. This is primarily due to the availability of high-quality content on the terrestrial television for free. The terrestrial television service offers 20 free-to-air channels in Moscow alone.35 Plans to restrict FDI for internet companies: The Government is planning to restrict foreign investment in strategic internet portals and websites as a national security measure. The Communications Ministry is in the process of developing a security criteria to determine which companies will be prohibited from seeking foreign investment. In 2008, the Russian anti trust authorities blocked a leading US-based search engine from buying a stake in one of the countrys top internet portals. Consumers and stakeholders have raised concerns that such moves to limit investment will reduce access to information.36 Incumbents face digitization challenges: Russias incumbent broadcasting network operators are facing challenges to digitize analog networks mainly due to the high costs involved in the switchover. At the same time, the incumbents are facing increasing competition from the new entrants, especially telecom operators, who are in a better position to upgrade the broadcasting infrastructure.37
32 33 34
Russia - Broadband Market - Overview, Analysis & Forecasts, 22 November 2009, via ISI Emerging Markets. Duma may expand borrowing opportunities to Russian movie producers, ITAR-TASS World Service, 5 October 2009, via Dow Jones Factiva. Press: MTS inks deal with Paramount to sell lms via Internet, Prime-TASS News (Russia), 2 September 2009, via Dow Jones Factiva; WMI, Nikitin forge license deal for Russia, CIS, Billboard.biz,19 February 2008, via Dow Jones Factiva, 2008, Nielsen Business Media. Russia - Convergence - Triple Play & Digital TV, 9 August 2009, via ISI Emerging Markets. Dragana Ignjatovi, Russia planning to restrict foreign investment in Internet rms, Global Insight Daily Analysis, 10 April 2009, via Dow Jones Factiva, 2009 Global Insight Limited. Russia - Convergence - Triple Play & Digital TV, 9 August 2009, via ISI Emerging Markets.; Russia not to stop foreign companies participating in TVs switch to digital, BBC Monitoring Former Soviet Union, 10 September 2009, via Dow Jones Factiva; Digital challenges for Russia and Ukraine, Broadband TV News, 23 February 2010, via Dow Jones Factiva, 2010 M2 Communications.
35 36
37
19
38
Russia - Convergence - Triple Play & Digital TV, 9 August 2009, via ISI Emerging Markets; Russian media - Looking Beyond 2009 - Credit Suisse Europe, 7 August 2009, via ISI Emerging Markets; Doing Business in the Russian Federation, Ernst and Young 2009.
20
9 13.3
11.3
1 0
Datamonitor Media in Russia, Industry Prole, December 2009. National Association of Television and Radio Broadcasters.
39
21
Segment analysis
Publishing
The market for newspapers and magazines in Russia grew at a CAGR of 6.1% between 2003 and 2008 with newspapers leading the market, accounting for an 84.2% share.40 Tough competition from online media: Despite printing still being the most commonly used method of mass-producing books, newspapers and magazines, online media is gaining momentum in Russia. This is expected to attract several new players into the market that will bring new technologies to produce and distribute online content to consumers. Impact of the global recession on the segment: Due to the global economic downturn in 200809, more than 200 regional mass media and six federal magazines went bankrupt. In January 2009, a majority of publishers reduced their spending by 10%15% on average, circulations of some publications decreased, free supplements were closed, and various new projects were frozen.41 About 30%50% of the bookstores and bookstalls in Russia were closed in 2009, with a considerable contraction in the literature market.42 Even businesses reduced their advertising spending on print media such as newspapers, magazines and billboards, and channeled their advertising budgets to television and, the internet.43 Some publishing houses have been expanding the scope of their operations within the country to overcome the impact of the economy. For example, a Russian tabloid newspaper recently planned to launch a radio station to expand its media market share.44
40 41
News and magazine in Russia to 2013, Market Research.com, 31 August 2009, via Dow Jones Factiva. Russias printed media market to return to pre-crisis level in 2011., ITAR-TASS World Service, 2 November 2009, via Dow Jones Factiva; Media in crisis undergo serious endurance test ofcial, ITAR-TASS World Service, 13 March 2009, via Dow Jones Factiva. One third of Russian bookstores to disappear?, SKRIN Newswire, 12 February 2009, via Dow Jones Factiva. Irina Filatova, Ad dollars move to TV and Internet, The Moscow Times, 16 December 2009, via Dow Jones Factiva; Russias printed media market to return to pre-crisis level in 2011., ITAR-TASS World Service, 2 November 2009, via Dow Jones Factiva. Radio Komsomolskaya Pravda could go on air in month, Interfax: Russia & CIS Business and Financial Newswire, 18 February 2009, via Dow Jones Factiva. CTC media set to launch international broadcasting in North America, Wireless News, 28 December 2009, via Dow Jones Factiva; Russian state TV starts satellite transmission to Latin America, BBC Monitoring media, 22 July 2009, via Dow Jones Factiva; Russia - Convergence - Triple Play & Digital TV, 9 August 2009, via ISI Emerging Markets.
42 43
44 45
22
In order to remain competitive, operators are also introducing video-on-demand (VoD) and high-denition television (HDTV) programming broadcasting services in the country. Domestic Russian television companies expanding to other geographies: Domestic companies have been active in spreading their footprint in other geographies. Recently, a leading media company in Russia, in association with a US-based pay television provider, launched a 24-hour family entertainment channel in North America. Additionally, a Russian state television broadcaster has started unencrypted satellite broadcasts in Latin America.46
Radio broadcasting
Despite the fact that the radio advertising market in Russia has been posting double-digit growth gures in recent years, the countrys radio advertising revenues are expected to decline in 2009 to reach approximately US$329 million.49 The Government is open to foreign participation in order to develop a digital television and radio broadcasting network in Russia.50 The Government has also approved about US$2.5 billion of federal funding for the development of television and radio broadcasting during 2009-15.51
46
CTC media set to launch international broadcasting in North America, Wireless News, 28 December 2009, via Dow Jones Factiva; Russian state TV starts satellite transmission to Latin America, BBC Monitoring media, 22 July 2009, via Dow Jones Factiva. Govt funding of Russian movie industry to grow 55% in 2010 2, ITAR-TASS World Service, 3 November 2009, via Dow Jones Factiva. PRESS: MTS inks deal with Paramount to sell lms via Internet, Prime-TASS News (Russia), 2 September 2009, via Dow Jones Factiva; WMI, Nikitin forge license deal for Russia, CIS, Billboard.biz, 19 February 2008, via Dow Jones Factiva, 2008 Nielsen Business Media. Radio ad sales down 6% on year in Russia in 2008, Prime-TASS News (Russia), 11 February 2009, via Dow Jones Factiva; Ernst and Young analysis; Media industry in trouble, WPS: The Russian Business Monitor, 26 December 2008, via Dow Jones Factiva. Russia not to stop foreign companies participating in TVs switch to digital, BBC Monitoring Former Soviet Union, 10 September 2009, via Dow Jones Factiva. Russia approves $2.5 bln broadcasting plan up to 2015, RIA Novosti, 23 September 2009, via Dow Jones Factiva Russia - Broadband Market - Overview, Analysis & Forecasts, 22 November 2009, via ISI Emerging Markets; Ernst and Young analysis; Broadband forecast pack: 200914, via Ovum, accessed October 2009; Mobile connections forecast pack: 200914, via Ovum, accessed December 2009.
47 48
49
50 51 52
23
Despite increasing mobile phones penetration, messaging and mobile gaming usage is still low: Penetration of mobile phones in Russia has reached the level of developed countries. The mobile subscribers in Russia grew by 24.8% from 163.7 million in 2007 to 204.3 million in 2009. Despite increasing mobile subscribers, the usage of short message service (SMS) and multimedia messaging service (MMS) in Russia is still lower than the developed countries.53 Also, there are fewer gamers in Russia as compared to developed countries, while this number is gradually increasing.53
53
Russia - Broadband Market - Overview, Analysis & Forecasts, 22 November 2009, via ISI Emerging Markets; Ernst and Young analysis; Broadband forecast pack: 200914, via Ovum, accessed October 2009; Mobile connections forecast pack: 200914, via Ovum, accessed December 2009.
24
With a conducive regulatory environment and high volumes of content consumption, India holds signicant potential for foreign investments across all segments of the M&E industry. Many global M&E conglomerates have been present in India for over a decade, and others continue to build there presence.
25
India
Key opportunities
There is a high potential for investments in all segments of the M&E industry. Most of the global media giants have been in the country for over two decades. Recently, there has been a surge in investments by global companies in the M&E industry in India, especially in the television and lms segment. Television: With consumer preferences shifting toward international programming formats, there is an opportunity for global production houses to localize their content for the domestic market. With over 130 million television households, India has a very large appetite for television content. There are several global broadcasters that have been present in India for years and new companies continue to make a foray. There is a growing market for youth-oriented content and regional audiences offer a large opportunity too.56 Rising afuence levels have directly led to increasing levels of consumption across the smaller towns in India. In 2008, these smaller towns and regional markets constituted more
54 55 56 57
India economy, The Central Intelligence Agency website, https://www.cia.gov/library/publications/the-world-factbook/geos/in.html, accessed 4 February 2010. India people, The Central Intelligence Agency website, https://www.cia.gov/library/publications/the-world-factbook/geos/in.html, accessed 4 February 2010. Whats next? for Indian media and entertainment, Ernst & Young, 2008. Telecom subscribers growth for the month of December 2009, TRAI press release, http://www.trai.gov.in/searchdoc.asp, 27 January 2010.
26
Challenges
Piracy: The M&E industry has not been able to fully monetize its content due to rampant piracy. A 2008 report by Ernst & Young indicate, the losses to the industry due to piracy are estimated to be US$4 billion per year.58 However, in the last few years, the industry is adopting cost-effective technologies to curb piracy. Inefciency in distribution: Distribution is largely based on analog technology, which suffers from lack of addressability and transparency. However, the M&E industry is witnessing signicant investments in infrastructure. For the most part, these investments have been made in the distribution and delivery segments of multiplexes, digital lm distribution, DTH and cable. Low average revenues, although compensated by high volumes: The ARPU is still low compared to global averages. The average ticket price for a movie in India is US$0.5.59 However, the large and growing volumes make up for it. Sheer volumes make India a lucrative destination in the global arena. With increased corporatization and value creation, the ARPU is set to increase. Low PC penetration and broadband connectivity: A key indicator for technology adoption is the penetration of PCs and internet in the country. By international standards, India still has a very low PC penetration at 3.7% and broadband penetration at 1.5%, as of October 2009.60
The M&E industry in India has been, and will continue to be, one of the biggest beneciaries of Indias favorable demographics. One of the youngest nations in the world with high volumes of content consumption, a vibrant indigenous content creation industry and a favorable regulatory framework, make India an attractive investment destination for global M&E companies. Farokh T. Balsara, Media & Entertainment Leader, Ernst & Young, India
58 59 60
The effects of counterfeiting and piracy on Indias entertainment industry, Ernst & Young, 2008. India dominates world of lms, 29 July 2009, The Economic Times, via Dow Jones Factiva, 2009 The Times of India Group. Room for growth in IT infrastructure, R&D, Indian Business Insight, 22 October 2009, via Dow Jones Factiva, 2009 Informatics (India) Ltd.
27
Print media Publishing of newspaper and periodicals dealing with news and current affairs Publication of Indian editions of foreign magazines dealing with news and current affairs 26 26 (FDI+FII investment)
100 100
Favorable policy changes: Some segments within the M&E industry have received a fresh lease on life due to critical policy changes. While the migration from xed license fee regimes to revenue-sharing license fee regimes has been a trigger for the radio segment and mandatory roll-out of digital cable in certain areas have been landmark developments in the television segment. The lm segment has been accorded an industry status and multiplexes have been exempted from entertainment tax. Unlike China, India poses no restrictions on the number of Hollywood lm releases in a year.
61
Facsimile editions of foreign papers get govt nod, The Times of India, 13 February 2009, via Dow Jones Factiva, 2009 The Times of India Group.
28
Segment analysis
Broadcasting and cable television
Television, which reaches around 134 million households in the country, forms an integral part of the M&E industry in India.63 The industry generated US$5 billion in revenues in 2009. The number of cable and satellite television households in India has more than doubled in the last six years. The reach of cable and satellite is expected to touch 100 million households in 2010 from around 90 million in 2009. India is the worlds third-largest cable and satellite market after China and the US. Increase in number of channels: A number of new television channels continue to be added every year across genres such as general entertainment, news and movies. In 2009, as many as 512 television channels, including 249 news channels, were operational.64 Increasing thrust on subscription revenues: Subscription revenues are expected to increase with the transformation in distribution, increasing addressability of the subscriber base and rapid adoption of digital technologies. Shift in content preferences: Changing consumption preferences and entry of new channels is leading to innovation in content. Television content has moved from soaps to reality formats and game shows. There have been a number of reality shows adapted from popular global formats to suit local tastes. The new formats have helped television companies earn revenues from mobile VAS services such as audience votes. Several regional language television networks have emerged to leverage the potential of the semi-urban markets. High carriage fees: Due to increasing competition, a high carriage fee is being paid by broadcasters. In 200809, the carriage fee market was estimated between US$245.9 million and US$307.4 million.65
Datamonitor Media in India, Industry Prole, December 2009. Pitch-Madison Report Media and Advertising Outlook 2010.
The M&E industry in India is one of the fastest-developing industries in the country, driven by changing consumption patterns, increasing middle-income households and the propensity of consumers to spend on leisure and entertainment. M&E companies in India are rapidly diversifying beyond their traditional domains to leverage synergies and have a presence across multiple segments of the M&E industry. Digitization of content and platforms, redenition of prevalent business models, globalization of the M&E industry and relatively easier access to capital and emergence of multiple entertainment options have been some of the key trends that are shaping the M&E industry in India.
62 63
Media in India: industry prole, December 2009, Datamonitor. India to have 100-mn cable homes this year, Business Standard,4 January 2010, via Dow Jones Factiva, 2010 Business Standard Ltd. ; Tune-in to Indias entertainment economy: From emerging to surging, Ernst & Young, 2008. HITS a gain but government mum on FDI hike in 2009, Indiantelevision.com, 21 January 2010, via Dow Jones Factiva. Carriage fees business may decline 20% this year, Indian Business Insight, 5 November 2009, 2009 Informatics (India) Ltd.
64 65
29
Technology advancements transforming the distribution landscape: The increasing adoption of digital distribution platforms like DTH and digital cable is helping television distribution to become more organized. Several large cable multi system operators (MSOs) have emerged. There are as many as six countrywide subscription-based DTH operators in India. From 2.2 million DTH households in 200607,66 the platform currently caters to an estimated 20.5 million subscribers as of December 2009.67 Another technological move made by MSOs is toward HITS. HITS is a platform to deliver signals directly to the local cable operators (LCOs) through a satellite, unlike cable. This will lead to enormous cost savings and elimination of digital headends across locations. Telecom companies becoming media companies: Leading telecom players are investing signicantly in M&E services. In fact, the largest music company in India is a leading telecom operator, due to revenues it earns from ringtones and music.
shows healthy signs of growth and protability. The newsprint prices have stabilized and the Government has exempted customs duty on import of newsprint. The Union Budget also announced the extension of the stimulus package for print media companies. Diversication beyond print: Growth aspirations fueled by capital availability have led publishers to enter into other media and forge partnerships with television channels. Newspaper companies are entering into other businesses, such as internet, radio, television and the movie business. India is becoming a popular destination for media services outsourcing: Globally, media companies are outsourcing print media services such as layout designing, graphics, data compilation and so on, to India, on account of low costs and a qualied English-speaking talent pool.
Magazines Increase in specialty magazines: The growth in Indias economy has created a demand for content, covering niche segments such as travel, health care, nance and lifestyle.68 The entry of luxury magazines in the country has helped luxury brands directly reach out to potential customers.69 Increasing foreign investments in the sector: The Government has granted permission for publishing local editions of foreign news and current affairs magazines in India. Foreign players can form a partnership with Indian publishers to print the Indian edition of a magazine with up to 100% foreign content. This is likely to provide Indian readers with foreign magazines at affordable rates.70 Foreign publishers are entering into licensing agreements with Indian publishers to launch foreign titles in India.71 Leading US and European publishers have launched titles in India. At the same time, Indian magazine companies have begun to release international editions too.72
Publishing
Newspapers While in most parts of the world the newspaper industry is losing battle to the digital media, the newspaper industry in India is actually growing. The growth is expected to continue, driven by factors such as increase in advertising spends, rise in literacy rates and growth of the regional language newspapers. Newspapers account for almost 90% of the print industry revenues, while the remaining is contributed by magazines. Protability of newspaper companies is improving: In 2008, the newspaper industry in India was affected by curtailed ad spends due to the economic slowdown. Despite the challenges witnessed, the newspaper industry
66 67 68
Ashish Sinha, DTH sales to cross Rs 1K cr in next scal, Business Standard,14 March 2008, via Dow Jones Factiva, 2008 Business Standard Ltd. Focus: Direct to home, Broadcast & CableSat, 22 February 2010, via Dow Jones Factiva, 2010. ADI Media Pvt. Ltd. Arcopol Chaudhuri, Magazine publishing scene is hotting up, DNA - Daily News & Analysis, 30 September 2008, via Dow Jones Factiva 2008 Diligent Media Corporation Ltd. Priyanka Mehra, As niche magazines proliferate, advertisers embrace new choices, Livemint, 15 July 2008, via Dow Jones Factiva 2008 HT Media Ltd. Sruthijith K.K, Govt gives green signal to editions of foreign news magazines, Livemint, 19 September 2008, via Dow Jones Factiva, 2008 HT Media Ltd. Expected soon, Indian editions of Time, Newsweek and more, Indo-Asian News Service, 21 September 2008, via Dow Jones Factiva, 2008 HT Media Ltd; Sruthijith K.K, Govt gives green signal to editions of foreign news magazines, Livemint, 19 September 2008, via Dow Jones Factiva, 2008 HT Media Ltd; Forbes India Launched: Content Hosted At Business.In.Com, Medianama (India), 21 May 2009, via Dow Jones Factiva 2009 Mixedbag Media Pvt Ltd. Indian company to launch lm magazine in Germany, Media Blab, 22 January 2008, via Dow Jones Factiva, 2008 News Bites Pty Ltd.
69 70 71
72
30
The Indian lm industry is the largest in the world, in terms of the number of movies produced annually. India also has the highest number of theater admissions. Last year, 3.3 billion tickets were sold for lms shown on more than 10,000 theater screens.
73 74
India dominates world of lms, 29 July 2009, The Economic Times, via Dow Jones Factiva, 2009 The Times of India Group. Indian entertainment down South: from script to screen, Ernst & Young, 2009.
31
Radio broadcasting
Revenues from the FM radio segment in India were US$200 million for 2009. In India, the Government-controlled All India Radio (AIR), together with 37 private FM radio companies that operate nearly 280 FM radio stations, cater to the radio segment.75 Following the opening of the sector to private players in March 2000, the rollout of Phase-II of the FM radio licensing policy in 2005 provided a further thrust to the sector. Growth impetus through Phase-III FM radio licensing policy: The yet-to-be-announced Phase-III FM radio licensing policy is likely to give further impetus to the FM radio industry and open up the sector for further licenses to almost 700 stations.76 The policy may also address issues such as raising the FDI limit, which is currently at 20%, allowing multiple licences in a city to a single player and allowing news broadcasts on radio. High royalty costs: The biggest challenge for the radio sector is the issue of royalty fees. It constitutes over 40% of the total costs borne by radio companies and is calculated on rates mandated through litigation over ve years ago.77
New media
Mobile entertainment has strong potential: India has witnessed an explosive growth in mobile penetration. In January 2010, the number of mobile subscribers has crossed the 500-million mark. Further, the impending launch of 3G and WiMAX is expected to throw open a myriad of opportunities in the VAS segment. Internet is still at a nascent stage: The size of the internet advertising market in 2009 stood at US$93 million.78 There were approximately 16.6 million internet and 9 million broadband subscribers, registering a CAGR of 27% and 73%, respectively, during the period 2007-09. Content producers are packaging new content/repackaging existing content for delivery over the internet. Almost every major M&E player now has a presence on the internet. Although companies still havent been able to fully monetize the online content, this segment has potential, as internet and broadband penetration levels increase.
With audiences (especially youth audiences) becoming fragmented across platforms, new media platforms such as mobile are playing a vital role in enabling advertisers to reach their target audiences.
75 76 77 78
Ashish Sinha, FM radio expansion hits small-town hurdle, Business Standard, 28 January 2008, via Dow Jones Factiva, 2008 Business Standard Ltd. Music royalty row casts shadow over FM-III auctions, Financial Express (India), 8 November 2009, via Dow Jones Factiva, 2009 Indian Express Pty. Ltd. Shobhana Subramanian Sun TV : Clouds on the horizon, Business Standard, 4 July 2008, via Dow Jones Factiva, 2008 Business Standard Ltd. Sam Balsara & Amit Agnihotri, Is the Worst Over?, Pitchonnetwebsite, http://www.pitchonnet.com/PitchMadisonMediaAdvertisingOutlook/July-issue-AD-Outlook-Ad-Outlook-2009-Intro.asp, accessed 16 March 2010.
32
The third-largest economy in the world, China, with its large and growing population, offers signicant opportunities to global M&E companies.
33
China
Key opportunities
China is the worlds largest media market in terms of consumer volume, with the highest number of television households (174 million),81 internet subscribers (384 million)82 and mobile subscribers (741 million).83 China set to emerge as a digital giant: While conventional wisdom holds that internet and mobile services in China are more backward than those in the more developed nations, the reality is that China leads the way in its adoption of digital technologies and applications. Chinese consumers have emerged as leading users of mobile phones, instant messaging (IM) and internet services, pushing the boundaries of digital activity. In 2009 alone, more than 120 million Chinese started using mobile internet and nearly 100 million became new internet users.84
79 80 81
China economy, The Central Intelligence Agency website, https://www.cia.gov/library/publications/the-world-factbook/geos/ch.html, accessed 4 February 2010. China People, The Central Intelligence Agency website, https://www.cia.gov/library/publications/the-world-factbook/geos/ch.html, accessed 4 February 2010. Broadcast industry revenues total USD24 billion in 2009 - SARFT, Interfax: China Business Newswire, 15 January 2010, via Dow Jones Factiva 2010 Interfax Information Services, B.V. Chinas Net users total 384m, Shanghai Daily, 16 January 2010, via Dow Jones Factiva 2010 Shanghai Daily Company. Mobile connections forecast pack: 200914, via Ovum, accessed February 2010. Chinas net users total 384 million, Shanghai Daily, 16 January 2010, via Dow Jones Factiva 2010 Shanghai Daily Company. Chinas online advertising market size tops USD3 bln in 2009, Asia Pulse, 7 January 2010, via Dow Jones Factiva 2010 Asia Pulse Pty Limited. China home to 19.2 mln mobile payment service users in H1, Interfax: China Business Newswire, 23 July 2009, via Dow Jones Factiva 2009 Interfax Information Services. China - Convergence - Triple Play & Digital TV, 17 August 2009, via ISI Emerging Markets.
82 83 84 85 86
87
34
Challenges
International partnerships for magazine titles: Magazines have been more successful in keeping up with general media growth. Privatization, or at least semi privatization, has resulted in the magazine sector being relatively less regulated. Local publishers have managed to partner with international companies and results have been strong in lifestyle, leisure, nance and golf publications. With China emerging as one of the largest markets for luxury goods and lifestyle products, the future of magazines looks brighter than it does for newspapers. Flourishing outdoor advertising market: Outdoor advertising is one of the fastest growing advertising markets in China. Rising TV advertising costs have led more marketers to look for the outdoor medium to reach consumers. The market is shifting away from neon and static posters towards light-emitting diode (LED) interfaces. The market is currently recovering from the economic slowdown, with accelerating demand from key ad verticals such as consumer goods, transportation and nancial services, resulting in improved pricing in 2010. The M&E industry in China is tightly regulated. Government restrictions on access to certain content deemed sensitive, nationalism, nurturing of domestic companies, strict media regulations for foreign-controlled entities, a desire for further legal and political transparency, certain free market restrictions and intellectual property rights (IPR) issues are the main challenges in China. Beyond the regulatory challenge, most Chinese new media companies have yet to generate sufcient advertising or subscription revenues to offset their expenditures on hosting and bandwith. The M&E industry in China has been affected by widespread unauthorized reproduction of content. A great deal of money is being spent on entertainment in China, but a low proportion reaches the intellectual property holder. The International Federation of the Phonographic Industry (IFPI) estimates that 99% of Chinas music digital downloads are pirated. Low price levels and unauthorized reproduction have led to skepticism about the ability of companies to make money in Chinas digital markets.
There are a number of hurdles in the path to success in China, but rewards have been and will continue to be considerable for companies that manage to navigate its unique environment. Experience shows that with the aid of trusted advisors, determined and resourceful corporations can alter the odds in their favor by understanding the Chinese market. Taking some simple but essential precautions would increase the chances of success and reduce transactional and operational risks.
The M&E industry in China is tightly regulated. Currently, global players cannot compete directly with state-owned enterprises. The key success factor to establish a business in China is the relationship with local partners and the provincial and state Governments.
35
Cable operators cannot easily acquire a license to own satellite dishes that allow access to foreign transmissions. Most companies in the broadcasting sector tend to practice various forms of editing or avoiding content relating to areas deemed to be sensitive to the Government regulators.
88 89 90
China bans foreign investment in publishing, news organizations, Asia Pulse, 5 August 2005, via Dow Jones Factiva 2005 Asia Pulse Pte Limited. China - Convergence - Triple play & digital TV, ISI Emerging Markets, 17 August 2009. NDRC and SARFT issue policy regulating digital cable TV prices, Interfax: China Business Newswire, 31 August 2009, via Dow Jones Factiva 2009 Interfax Information Services. China prohibits funny, chaotic TV programmes as anniversary approaches, BBC Monitoring Asia Pacic, 18 May 2009, via Dow Jones Factiva 2009 The British Broadcasting Corporation.
91
36
1.1 0.8
Datamonitor Media in China, Industry Prole, December 2009 SARFT, 2009 Report
92
37
Segment analysis
Broadcasting and cable television
The worlds largest television market: With an audience of over one billion people, television remains a dominant segment in terms of the audience size, revenues and content. In 2009, there were 174 million cable television households.93 In China, television is a popular source for news. Guangdong province has the largest number of cable television users. Television accounts for almost half of all media revenues in China. Digitization is the way forward: The value of the digital pay television market in China reached US$12 billion in 2009 and is expected to reach US$181.2 billion by 2014. The Government aims to broadcast all television programs in a digital format by 2010 and complete cable television digitization by 2015. A major hurdle to the development of digital television in China has been the lack of compelling content.94 Pay television is on the rise: China is also becoming a major market for pay television. In 2009, the number of digital cable television subscribers in China reached 62 million. Digital pay television users reached 7.05 million, up 57%.95 Triple-play model: Chinas cable television network is set to play a pivotal role in the M&E market as the triple-play model involving converged delivery of television, telephony and broadband internet services over a single network begin to be delivered over the cable television infrastructure. Emerging platforms: IPTV and DTTV are some of the emerging service models in the pay television market. Though digital cable television gets much of the attention in the converged media environment in China, IPTV and DTTV will play key roles in the future. In China, IPTV subscribers reached 1.9 million, but the growth has dropped from a high of 480% in 2005 to 65% in 2008.96 New technologies like iTV are redening the market: China is taking various steps to develop the iTV market, which has the potential to turn Chinas television viewers into online participants and buyers. Sporting events are considered to be a major draw for the use of interactive television in China. Based on the estimates of consumer spending on iTV, future iTV business would be valued at US$1.2 billion and the estimated value-added services associated with iTV will be worth an additional US$1.2 billion. However, a major concern is that iTV services are very limited and there is still much to be done in the area of content development.96
Strong economic growth, coupled with a large population, is leading to growing purchasing power in China. Being the worlds largest television market with one of the largest internet and broadband subscriber bases, Chinas M&E industry offers several opportunities, provided one can learn to navigate its unique regulatory environment. Lawrence Lau, Media & Entertainment Leader, Ernst & Young, China
93
Broadcast industry revenues total $24 bln in 2009 - SARFT, Interfax: China Business Newswire, 15 January 2010, via Dow Jones Factiva 2010 Interfax Information Services, B.V. China - Convergence - Triple Play & Digital TV, 17 August 2009, via ISI Emerging Markets. Broadcast industry revenues total $24 bln in 2009 - SARFT, Interfax: China Business Newswire, 15 January 2010, via Dow Jones Factiva 2010 Interfax Information Services, B.V. China - Convergence - Triple Play & Digital TV, 17 August 2009, via ISI Emerging Markets.
94 95
96
38
Publishing
The publishing industry in China, including books, newspaper and magazine publishing, is projected to grow from US$17.3 billion in 2008 to US$20.7 billion by 2013, indicating a 3.6% growth over the next ve years. It is the second-largest segment in Chinas M&E market, constituting 35.6% of the industrys aggregate revenues.97 With China emerging as one of the largest markets for luxury goods and lifestyle products, the future of magazines looks brighter than it does for newspapers. Companies are diversifying to capitalize on new media platforms: In 2009, the publishing sector in China was challenged not only by the decline in advertising revenue but also by competition from new media platforms such as the internet and mobile. Traditional print media companies can achieve sustainable growth by providing digital newspapers and magazines through the internet and mobile phones.
Book sales have the highest market share: Book sales generated total revenues of US$8.3 billion in 2008, equivalent to 47.8% of the overall publishing segment. In comparison, sales of magazines generated revenues of US$7.2 billion in 2008. The newspapers market generated total revenues of US$1.7 billion in 2008.98 International partnerships for magazine titles: Magazines have been more successful in keeping up with general media growth. Privatization, or at least semi privatization, has resulted in the magazine sector being relatively less regulated. Local publishers have managed to partner with international companies and results have been strong in lifestyle, leisure, nance and golf publications.
97 98 99 100 101
Media in China: industry prole, December 2009, Datamonitor Publishing in China: industry prole, November 2009, Datamonitor; Newspaper in China: industry prole, August 2009, Datamonitor. Media in China: industry prole, December 2009, Datamonitor. China Looks To Be Major Movie Power, Nikkei Report, 22 February 2010, via Dow Jones Factiva 2010 Nihon Keizai Shimbun, Inc. Chinas box ofce receipts hit RMB 6.2 bln in 2009, China Knowledge Press, 11 January 2010, via Dow Jones Factiva 2010 China Knowledge Online Pte Ltd.
39
Radio broadcasting
In 2009, Chinas radio advertising revenues declined by 3.6% to reach US$800 million.102 Although, the radio industry faces competition from television and new media, it is still expected to be a popular means of entertainment due to its live coverage of big events, wide signal coverage, low cost, easy access and the popularity of interactive shows. According to new regulations, effective January 2010, television and radio stations would have to pay to broadcast any copyrighted music. Broadcasters would have two methods by which they can calculate payments for broadcasting copyrighted music: pay a royalty of 0.01% to 0.8% of annual advertising revenue to the copyright holder, or pay a fee based on per minute of airtime. For the fee-based method, radio stations are required to pay US$0.04 per minute for each piece of music aired, while television stations will pay US$0.22 between the years 2010 and 2014 and US$0.29 starting in 2015 for each piece of music aired. entertainment. Furthermore, the development of 3G technology offers new opportunities to online video operators, as people will be far more willing to pay for mobile video services. In addition, the forthcoming online video platform by the state-owned broadcaster will bring further challenges to private operators, due to its strong and mature brand.103 Multiplayer online games The online gaming platform dominates the overall video gaming market in China. The online gaming market in China has seen rapid growth over the last few years, primarily due to the support from the Government. It has made it a policy objective to develop the local online gaming industry and improve its standards. As a result, there are over 500 companies in China that engage in online games operations, which have received support from the Ministry of Culture (MOC) and General Administration of Press and Publications (GAPP). The multiplayer online gaming market has also benetted from advances in communication technologies and improved broadband access. The online gaming operators generate revenues from subscription monthly or per session, in-game advertising or in-game sales of virtual merchandise. Mobile media In 2009, the number of mobile internet users reached 233 million, an increase of more than 100% year-over-year. This rapid growth is attributed to the ongoing national 3G rollout, lower mobile internet fees and continuous efforts made by telecom operators to promote mobile internet services. Currently, there are no dominant players in this market, and there is less inuence and control by the Government (as compared to television, radio and print). The internet market is expected to extend its success of traditional internet to the mobile internet segment too.104
New media
By December 2008, internet usage in China grew at a phenomenal pace reaching 384 million users, surpassing the US to become the world leader. With internet penetration at 28.9% and increasing mobile internet access, the market is expected to see a rapid growth in the coming years, with an average growth of more than 35%. Online videos The online video market will continue to be driven by increasing internet penetration. The current challenge facing Chinas popular online video platforms is monetization of video content. Chinas traditional television business is being disrupted by a youth-driven consumption culture that expects free on-demand
102 103
Chinas advertising revenue up 9.11% in 2008, China Knowledge Press, 17 March 2009, via Dow Jones Factiva 2009 China Knowledge Online Pte Ltd. Chinas online video market to see more opportunities this year, Interfax: China Business Newswire, 14 April 2009, via Dow Jones Factiva 2009 Interfax Information Services. Chinas Net users total 384m, Shanghai Daily, 16 January 2010, via Dow Jones Factiva 2010 Shanghai Daily Company.
104
40
41
Conclusion
In the not-so-distant future, Brazil, Russia, India and China could account for much of the global growth in the M&E sector. These emerging entertainment economies should not be considered only as auxiliary markets as they are too large and powerful to ignore. Global companies that do not give their emerging markets strategies sufcient attention and fail to optimize the opportunities in these markets may lose out. In order to succeed in the emerging markets, it is necessary for companies to understand and adapt to the economic and social fabric of the operating environment and invest in content and services tailored for these markets. While M&E companies operating in emerging markets continue to be exposed to risks ranging from local competition, fraud, corruption and piracy, ongoing structural and regulatory reforms and the development of corporate governance norms could mitigate these threats.
42
43
Contacts
Email
john.nendick@ey.com sylvia.ahivosloo@ey.com karen.angel@ey.com yooli.ryoo@ey.com peri.shamsai@ey.com pam.walker@ey.com
44