Understanding the Media Sector (Part-1)

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Shuchi. P. Nahar

Companies in the media sector offer ample opportunity for great term investment gains , but successful investing in media stocks takes more than just picking the next hit TV show, predicting the next blockbuster movie, Or finding a new best selling book.

Of the two dozen media companies that we follow, only some of them have economic moats. The key is to identify those companies that will continue to grow consistently and churn out lots of cash for years to come. Many companies in media sector benefits from competitive advantages such as economies of scale and monopolies, which makes it easier to sustain excess profits for long periods of time.

The strong showing in the media sector can be traced to a number of factors, but we will argue that the two most important factors are appealing economics and significant competitive advantage.
Differentiated and focused products give media firms competitive advantage within unique geographic areas or niche categories. Dominating one of these areas normally translates into strong sustainable free cash flow for these firms.

Media is a broad term, so it can be divided further into three groups:
Publishing, broadcast and cable television, and entertainment production.

Some Basic Key Terminologies to Understand Media Companies :

Communication – it is the process of delivering message from one place to other. 

Base-band signal – Signal generated from the source and transmitted without any modulation or
external carrier support. For example, lecturer speaking in the class and is audible to everyone. He is
not using any electronic mediums (mics, microphones etc) to communicate. 

Pass-band signal – Signal generated from the source and transmitted using modulation or external
carrier support. Popular modulation techniques are amplitude modulation and frequency modulation. 

Modulation – Modulation is the process of changing the properties or parameters of the carrier wave.
When the transmitter and receiver are physically separated, that is, not present in the same location,
we use modulation. For example, two people having a conversation in a room (base-band) versus
having the same conversation over phone (pass-band). For pass-band, we need to modulate the signal
to reach the receiver where it will be demodulated.
Drawing from above, whenever we change the amplitude of the signal, the process is known as
Amplitude modulation (AM) and when we change the frequency of the signal, the process is own as
Frequency Modulation (FM). 

Demodulation – It is the process of restoring the signal to its original form. Radio sets, cell phones, set
top boxes are all examples of demodulating devices. 

Spectrum – Spectrum relates to the radio frequencies allocated to the mobile industry and other sectors for
communication over the airwaves. Multiple industries have demonstrated time and time again their potential to utilize spectrum and generate economic value and social benefit. 

Channel – The frequency at which we the signal is transmitted. Think of as an address.

Radio – You might think “radio” is a gadget you listen to, but it also means something else. Radio means
sending energy with waves. In other words, it’s a method of transmitting electrical energy from one
place to another without using any kind of direct, wired connection. That’s why it’s often called
wireless. The equipment that sends out a radio wave is known as a transmitter; the radio wave is sent
by a transmitter and completes its journey when it reaches a second piece of equipment called a

Day part – Designated times during the day that are broken down into specific time periods in
order to rank station listener-ship. For example, the morning drive day part is 7:00 a.m. to 11:00
a.m. in India.

Average Quarter-Hour Persons (AQH) – The average number of persons listening to a
particular station for at least 5 minutes during a 15-minute period. 

Cumes – The total number of unique persons who tune to a radio station during the course of
a day part for at least five minutes. The Cume audience expressed as a percentage of all
persons estimated to be in the specified demographic group. 

Time spent listening – TSL is defined as the amount of time the average listener surveyed spent
listening to each radio station at one time, before changing the station or turning it off. It
shows the traction of the station / of a particular show of the station. It is specifically used to.

Listener-ship is measured in three ways (a). A device carried by a respondent, which listens to the audio around it and uses audio
matching technology to match the station being listened-to. This electronic
information is then sent back to the market research company (b). A telephone call-out exercise, asking people what radio stations they’ve listened-to,
and accompanying demographic details. (c). A paper diary, in which listeners are asked to note what stations they listen.

Breakup of a usual hour of radio
a. Advertisements
b. Music
c. RJ Talk
d. Sparklers
8. Peak hours – when the highest number of radio listeners are active on radio. It is observed
that drive hours (morning hours when people commute to work and during evening on their
way back) are usually peak hours.

Non-Refundable One-Time Entry Fee (NOTEF or OTEF) – it is a capital expenditure for the radio
operator and is a onetime fee paid to earn the rights of operating a radio channel in a city. It
is paid for the entire license period of 10 years. Under the Indian accounting system, this
amount is amortised over the 10-year period at 10% per annum. 

Annual license fee – fee paid by FM operators annually. It is either 4% of gross revenue (also
known as annual gross revenue) or 2.5% of NOTEF, whichever is higher. 

Music royalty fees – broadly divided into fees paid to music companies and the one paid to
music artists. Post the court order in 2011, FM stations now only pay to music companies.

Analog signal – An analog signal is a continuous wave denoted by a sine wave (pictured
below)and may vary in signal strength (amplitude) or frequency (time). For example, The
sound from a human voice is analog, because sound waves are continuous.

Digital signal – A digital signal – a must for computer processing – is described as using binary
(0sand 1s), and therefore, cannot take on any fractional values. As illustrated in the graphic
below, digital signals retain a uniform structure, providing a constant and consistent signal.
Because of the inherent reliability of the digital signal, technology using it is rapidly replacing
a large percentage of analog applications and devices.

Sampling – It is the process of selecting a portion of the signal. First, the most relevant
portion is selected and then the additional portions. As we continue to pick additional
information, the quality continues to go up and so does the size. 

Analog Vs Digital Transmission– The diagram below illustrates difference between analog and
digital transmission. The first diagram is of analog transmission where all three steps –
content creation, transmission and consumption,are happening in analog form only whereas
in latter, which is the digital transmission, an analog signal is first transformed into a digital
one and later restored back to analog form for consumption.

C Band – This band is comprised of Analogue or Digital signals in the 4 to 8 GHz frequency
range-used for Television Receive Only (TVRO) broadcast and requires larger size of dish
antenna (6 to 8 feet) to receive the signals and is not effected by bad weather conditions like

Ku Band – This band is comprised of Digital signals in the 12 to 18 GHz frequency range used
for Direct to Home (DTH) broadcast and requires much smaller dish antenna (2 to 4 feet) to
receive the more focused signals but is susceptible to outages during bad weather conditions
like heavy rains. 

Geostationary satellite – A geostationary satellite is an earth-orbiting satellite, placed at
an altitude of approximately 35,800 kilometers (22,300 miles) directly over the equator, that
revolves in the same direction the earth rotates (west to east). 

Transponders – A communications satellite’s transponder is the series of interconnected
units that form a communications channel between the receiving and the transmitting
antennas. It is mainly used in satellite communication to transfer the received signals. Most
transponders operate on a bent pipe principle, sending back to Earth what goes into the
conduit with only amplification and a shift from up-link to down-link frequency. The
transponders are either of 36 MHz or 54 MHz.

MPEG 2 – This is the older standard of signal compression which was used by incumbent
DTH operators like Dish TV and DD free dish where each transponder can carry approximately
20 SD channels (Fewer in case of HD). 

MPEG 4 – This is the newer standard of signal compression introduced in 1999 and is being
used in India by the newer DTH operators like Airtel Digital, Videocon D2H, Reliance digital
TV, Sun DTH and now since October 2015 even Tata sky has completed switching over from
MPEG 2 to MPEG 4. With this compression standard each transponder can carry
approximately 40 SD channels (Fewer in case of HD).

Multi-system operators (MSO) – “Multi-System Operator ( MSO )” means a cable operator
who receives a programming service from a broadcaster and/or his authorized agencies and
re-transmits the same or transmits his own programming service for simultaneous reception
either by multiple subscribers directly or through one or more local cable operators (LCOs),
and includes his authorized distribution agencies by whatever name called.

Gross subscriber base – the total number of customers a company has or the total number
of set-top boxes deployed by the company.

Churn or subscriber attrition –the number of subscribers that stop renewing their
respective subscriptions. There is no defined industry on how the churn is measured. Till that time, the subscriber is considered as a paying subscriber or a part of
net subscriber base. 

Customer Acquisition cost – cost incurred by the company to acquire a customer. It includes
the hardware cost, marketing cost and cost of installation.

Average revenue per user (ARPU) – the average revenue generated from the subscribers on
a monthly basis.

Carriage Fee – The fee paid by the channels to the distribution companies (MSOs, DTH etc)
to carry / broadcast their channel on their network. 

Dealer Commission – commissions or fees paid to the dealers for selling your connections
or recharge coupons. 

Content cost – the biggest cost (~40% of the subscription revenue) incurred. It is paid to
the content providers.

Telecom Regulatory Authority of India (TRAI) – Telecom Regulatory Authority of India was established on 20 February 1997 by an Act
of Parliament to regulate telecom services and tariffs in India. Earlier regulation of
telecom services and tariffs was overseen by the Central Government. TRAI’s mission
is to create and nurture conditions for growth of telecommunications in India to
enable the country to have a leading role in the emerging global information society. 

One of its main objectives is to provide a fair and transparent environment that
promotes a level playing field and facilitates fair competition in the market. TRAI
regularly issues orders and directions on various subjects such as tariffs,
interconnections, quality of service, Direct-To-Home (DTH) services and mobile
number portability.

Ministry of Information and Broadcasting – Government body responsible for formulating laws
and operating guidelines for information and broadcasting domain in India. Some of the
notable recent decisions include Digital Addressable System, roll out of 3G and 4G services,
Spectrum auction in telecom, roll out of Phase 3 of FM radio among others.

Overview of the Broadcast Value Chain

How Media Companies Make Money

Media companies generate cash by producing or delivering a message to the public. The message or content can take several shapes,including video , audio, print. the method of delivery is even more varied. television, movies, radio, the internet, books, magazines and newspapers are the popular means of distributing content, but there is no real limit on how a message can be delivered.

User Fees

Business models in the media sector can vary significantly depending on a firms primary source of revenue.we are all familiar with one time fees that we must dole out to see the current hit movie,read the best selling novel, or buy the hot new CD. Companies that rely on time user fees sometimes suffer volatile cash flows because they are heavily affected by the success of numerous individual products, such as newly released films and novels. while having a string of hits can result in a bonanza for the firm, while the converse is also true. Several flops in a row can lead to disaster this uncertainty can make it difficult to forecast future cash flows. 


Subscription  based businesses are generally more attractive than one time user fee business because subscription revenue tends to be more predictable which makes forecasting and planning easier and reduces the risk of the business. There is another advantage to subscription : Subscribers pay at upfront for services that are delivered at a later date.

Although firms can’t recognize this cash right away , they can use it to fund operations , thus decreasing their reliance on outsourced capital. Because of the ongoing customer relationship and the cash received up front , subscription based models usually are less sensitive to economic downturns. Moreover,there aren’t many other businesses in which you can paid upfront before you have to spend the money to create a product.

Many subscription based companies have fixed cost , giving them significant operating leverage. thus swings in revenue have a large impact on earnings and cash flow. magazines and newspapers are good examples. the most important variable cost for these business is paper , other than expenses , almost all other cost are fixed , regardless of the number of magazines or newspapers that are sold, thus as these companies gain market share , profit margins should increase dramatically. 

Advertising Revenue

Companies with advertising bases models can enjoy decent profit margins, which are often enhanced by high operating leverage. The reason for the high operating leverage is that most of the cost in an advertising bases model is fixed.Advertising revenue streams can be somewhat volatile , advertising is one of the first cost that company executives cut when the economy turns south, which is why advertising revenue growth tends to move with the business cycles. Media firms that rely on advertising are fairly sensitive to the state of overall economy.

This blog post is first in the series of Understanding the media sector , further blogs will contain in detail metrics to be tracked , moats , checklist to be followed before investing in media companies.

f. Annual Reports

                                      Shuchi. P. Nahar   

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Shuchi Nahar

Shuchi Nahar

Shuchi is NISM Certified Equity Research Analyst, CFA - Level 1, a student of Law and Finance, and an aspiring CS.
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