Understanding the Media Sector (Part-2)

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Shuchi. P. Nahar

OutLook for Media Industry in India

The world has recognized the fact that
India offers a huge market which is
extremely diverse and spans across
virtually every type of media. Despite the
current vibrancy and strong progress,
the growth story is far from peaking.
Advertising spends as a percentage
of GDP in India are still relatively low. 

Further, the uptick in wireless broadband
connectivity and infrastructure seen
alongside the country’s predominantly
young demographics presents a vast new
opportunity. According to a PWC report, ‘Global
Entertainment & Media Outlook 2018-
2022’, the Media and Entertainment
industry in India is expected to grow
at a CAGR of 11.6% between 2018
and 2022 to reach 3.5 trillion. 

Some
encouraging trends that supported the
growth of this industry were the rise
in device penetration, falling Internet
prices, increasing demand for content and
preferences for portability.


The Indian Television Industry Overview 

The Indian TV industry grew 12%
(gross of taxes) to 740 billion in 2018,
according to the FICCI-Frames 2019
report. TV advertising revenues grew
by 14% to reach 305 billion, while
subscription revenues grew 11% to 435 billion. 

However, the implementation
of the New Tariff Order (NTO) by the
regulator Telecom Regulatory Authority
of India (TRAI) in Q4 FY 2018-19 dragged
the fiscal year’s growth, as advertisers
pulled back spends due to flux around
implementation issues in the distribution
value-chain. 

The New Tariff Order allows consumers
to choose the channels they would wish
to watch and pay for only those channels
they subscribe to, which is a major change
in the broadcasting business model
prevalent in India.
In terms of viewership, the average time
spent on watching television increased
to 3 hours 46 minutes per day. This
amounted to an all-time high total of
around one trillion man minutes. 

Advertising 

Data from TAM Media Research’s AdEX
India reveals that in 2018, TV attracted
10,962 advertisers and covered 16,857
brands. Of these, around 50% (5,382
advertisers) were not on print or radio.
Further, advertising insertions increased
by 15% in 2018, while advertising
revenues grew 14%. 

Economic Moats in Media Sector

Media firms enjoy a number of competitive advantages that help them generate consistent free cash flows, with economies of scale , monopolies, and unique intangible asset being the most prevalent. Economies of scale are especially important in publishing and broadcasting whereas monopolies come into play in the cable and news paper industries. 

Unique intangible assets such as licenses, trademarks , copyrights and brand names are important across the sector. 

Monopolies, Licenses, and Deregulation

Monopolies:

Look for companies that hold monopolies in their respective markets. these companies tend to have very strong pricing power and excellent economic profits.One of the bigger risk with monopoly power is running afoul of regulators, but as long as this relationship is well maintained , media firms with monopolies should be able to increase profits for a long time.

Licenses:

Licenses can lead to strong profits, especially in the television and radio broadcasting industries. even though the participants in these industries don’t necessarily enjoy monopolies, its tough for new entrants to break into the field. That’s because a business must have a licenses from the federal communication commission to transmit a signal in a certain geographic area. Licenses protect media firms from competition because only limited number are available in the given market.

Deregulation:

Deregulation is also a key factor.thanks to deregulation , companies such as fox,Viacom,and clear channels have been able to buy multiple stations in the same market.This serves to further reduce competition and typically leads to higher profits because these companies can spread out their programming and back office cost. 

Publishing Profit

The publishing area is a great place to find investment opportunities. Many of these companies, especially those in the newspaper business, enjoy monopolies in their respective markets. This monopoly status give these companies the power to raise prices without the fear of large customer defections. The companies can then use these monopoly profits to move into other geographic area , expanding their profits and increasing the value of their shareholder’s investment.

Companies in the publishing business also benefit from economies of scale, which result from the largely fixed nature of the industry’s cost structure. As more volume gets pushed through an existing production system, profitability will naturally improve. 

Because of this characteristic, most of the companies in the publishing arena are continually looking for acquisitions that will increase market share and boost profitability. The larger the scale,the greater the advantage over rivals. Companies that build scale in a conservative and deliberate manner tend to do very well over time, both in terms of profit and shareholders returns.

Broadcasting and Cable

Companies in the radio ,broadcast television , and cable television industries also tend to have some solid competitive advantages, which often lead to above average and sustainable profitability. Previously as we discussed one of the most important : FCC Licenses. Recent deregulation in the broadcasting industry has led to less competition, as companies own more broadcasting licenses in a specific market. 

Broadcasters make most of their money from adverting , which they attract by offering programming to as many as possible. The programming that broadcasters show is one of their largest expenses and the cost is basically fixed. A broadcaster pays essentially the same amount for the right to show a program regardless how large is the audience. 

Overall, broadcasters have a solid business model , so investing in this segment is mostly a matter of valuation. If you can buy these companies at a discount to fair value , your long term return should be pretty good. Make sure though , that the company isn’t involved in another business that could potentially be a drain on cash.

Investing in the Entertainment Industry 

As I mentioned previously, companies that depend on one time user fees often have shortcomings, including cash-flow volatility and low profit margins. In the film , television , and music industries , which largely revolve around creating and distributing feature films, television series and musical recordings , there aren’t many positives to offer these negative characteristics. 

On the positive side , most of these businesses have large libraries of films,television series and music recording , which are legally protected from duplication’s. Revenue from these tends to be lucrative because the of production were recorded in the past. Also , the barriers to entry are high in most cases. It takes a significant amount of capital to develop television series on a ongoing basis and create multiple feature film.

Barriers to entry in distribution also have historically been high. Over the past few years , though the Internet has weakened this barriers , especially in the music industry. Peer to Peer distribution of recorded music has meant hundreds of millions of dollars in lost profits for the large record labels. 

The most common investing pitfall

Some investors look to to invest in media company that is responsible for the current blockbuster movie, the latest triple platinum album or the hot new television drama. Don’t ! In all likelihood, the current hit is making up for the flops that no one even heard about .

The media conglomerates that bring these hits to market are big , complex entities that need much more than one hit to spur long term profit growth. Unless they are trading at deep discounts to their intrinsic value (which is not always easy to determine because of volatile cash flows).

Revenue Model for Media Sector

As the world of media moves beyond its traditional
boundaries, media operators need to broaden their thinking about potential
revenue sources. In a connected world, the possibilities transcend the classic
advertising, sales and subscription models.

Hallmarks of Success in the Media Sector

In general, the media sector is a great hunting ground for solid investment ideas. 

Free Cash Flow

In general, we like to see free cash flow margins of at least 8 % to 10% in this sector. This level of free cash flow indicated one of the three things: the company has a product or service for which customers are willing to pay a premium, the company is very efficient or the business doesn’t require much ongoing capital investments. 

As always , use this as a general rule rather than an absolute one , if a media firm is investing heavily in a new business with excellent prospectus , a low current free cash flow margin may be a worthwhile trade off for the prospect of faster growth in the future.

Sensible Acquisitions

One of the characteristics that we look for in a media investment is a willingness and ability to make sensible acquisitions that lead to grater scale. The word ‘sensible’ here means smaller acquisitions that can be easily integrated into the acquiring firm’s operations. In general , beware of companies that are attempting large mergers predicated on synergies between unrelated businesses . These ” growth” acquisitions rarely succeed, especially in the media business. look for firms that stick to their knitting and make digestible purchases. 

In addition, look for companies that can fund these acquisitions without causing too much damage to their balance sheets. this is another reason that strong free cash flow is so important , because the cash can be used to make acquisitions , reducing the need for outside capital.

Risk in the media sector

Many media companies are still controlled by the families of the founders, which can sometimes lead to corporate decisions that are more beneficial to the family than outside shareholders. No matter how well managed these firms may be shareholders as a group simply do not have the voting power that they would with a company whose majority ownership resided with public.

Media firms are also known for extensive cross ownership holding , which means that another media firm could potentially have much more say in your company’s decision making than individual shareholders. 

The entertainment industry revolves around glitz, glamorous, cash , and sometimes industry executives get caught up in the scene. Be wary of firms that reward executives with ridiculous compensation packages and excessive perks.

Four Driving Forces

The future is concealed behind a diaphanous veil. While the
details are obscure, we can generate valuable insights into the emerging shape
of media by examining the most consistent and enduring trends. Here are four of
the most important trends you must recognize in mapping a path forward.

Infinite information

In a connected world, we have access to every publisher in
the world that makes its content available in digital format. Not only that,
literally hundreds of millions of people have effectively become publishers
themselves, creating a phenomenal explosion in the amount of information
available. Absolutely, just a small proportion of this infinite pool of
information is worth digesting, but all of it distracts and entices readers
throughout their day. Media has fragmented into literally hundreds of millions
of pieces.

Advertising shifts from print to online

The advertising revenue figures are in. In the developed
world, they point in just one direction. In the case of print, downwards. In
the case of online, upwards. There is no good reason to believe either will
change direction soon, particularly as the scope of online content expands.

Rise of mobile media

The majority of the more than 25 million owners of Apple’s
iPhone 3G use their mobile phones to read articles and sometimes even books.
This landmark in mobile media is just the beginning. 

The launch of a swathe of
e-book readers and tablet computers is now shifting how we read digital
documents from the desktop to lightweight portable devices that you can browse
comfortably in a train, on a deckchair or sitting on the toilet.

Content discovery changes

One of the most fundamental shifts in media has been how we
find the content we want. It is becoming rare to pick up a newspaper or switch
on the TV just to browse and find what’s there. Now we discover the articles,
music and movies we consume through recommendations, most-popular lists, social
media and aggregates. Single source content is being replaced by word of mouth
discovery.

Regulatory Prerequisites:

Eligibility criteria

Total foreign equity holding including FDI/NRI/OCB/FII in the applicant company can be
100%. No FIPB approval is required to and the companies can invite the equity funds
through direct route itself. 

The applicant company must have Indian Management Control with majority representatives
on the board as well as the Chief Executive of the company being a resident Indian. 

Broadcasting companies and/or cable network companies shall not be eligible to collectively
own more than 20% of the total equity of applicant company at any time during the license
period. Similarly, the applicant company not to have more than 20% equity share in a
broadcasting and/or cable network company. 

The Licensee shall be required to submit the equity distribution of the Company in the
prescribed Proforma (Table I and II of Annexure to Form-A) once within one month of start
of every financial year.

High Definition content continues to be in big demand thereby compelling content creators
and distributors to furnish the demand .

Dish TV launched dedicated movie service Dish Flix and Dish on Wheels to cater to the
growing demand of uninterrupted movie watching and of entertainment on the go .

Additional value added services are becoming key differentiation .

Tata Sky is leading the way with Cooking classes, live Darshan of various shrines,
Fitness and Education services among others.

Cross-pollination with digital mediums (mobile) is critical for the operators .

Checklist for media sector analysis:

1. Look for media companies that consistently generate strong free cash flow.

2. Seek out companies that have high market share in their primary market share in their primary markets , monopolies are often great for profits. Licenses , especially in broadcasting , also serve to reduce competition and keep profit margins high.

3. Seek out companies with a history of well executed acquisitions that have been followed by higher margins.

4. A strong balance sheet enables media companies to make selective acquisitions without increasing the risk risk for shareholders or diluting the shareholders stake.

5. Look for candid management teams , a history of sensible acquisitions, and either conservative reinvestment of shareholders capital or the return of capital to shareholders through dividends and stock repurchases.

6. Don’t chase hits , buying a stock because there is a lot of buzz about hit movie or a TV show.

                                           SHUCHI.P.NAHAR

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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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