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M&E Hits The Ad Spend Barrier

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It is not a pretty picture; yet there is a note of cautious optimism in the reports and analysis emerging out of the annual media and entertainment (M&E) jamboree — Frames. KPMG's keynote report at the Frames Conclave says the Indian M&E industry grew at 12 per cent to a revenue size of Rs 72,800 crore in 2011 (calendar year) from Rs 65,200 crore in 2010. "Backed by strong consumption in Tier 2 and 3 cities, continued growth of regional media and fast increasing new media businesses, the industry is set to achieve a growth of 13 per cent in 2012 to touch Rs 82,300 crore," the report says.
"The story is of rapid growth by new media — at 54 per cent — while traditional media is on a slowdown. Out-of-home advertising, for example, grew just 6 per cent in 2011," says Jehil Thakker, KPMG's head for M&E.

For a market with an insatiable appetite for new forms of entertainment and other content, 10-12 per cent growth is disappointing. The biggest drag is the recessionary conditions putting a brake on advertising revenue — a mainstay for the M&E industry, accounting for Rs 30,000 crore or 41 per cent of the industry's revenue.

The KPMG report says: "Ad rates have generally remained flat or declined in 2011" and advertising revenue growth has slowed to 13 per cent compared to 17 per cent in the previous year. It is also not expected to rise very quickly thereafter, too, with a compound annual growth rate of just 14 per cent forecast for the next five years till 2016.
Ernst & Young's forecast is even more cautious. With advertisers from the FMCG and telecom sectors, the largest ad spenders, pulling back, ad revenues grew only 10 per cent in 2011 "instead of around 15 per cent forecast at the beginning of the year".

The rapid pace of digitisation means more revenues from subscription and, therefore, less dependence on advertising. Many speakers at Frames saw a huge opportunity after the government mandated the shift of cable television from the old analog systems to a set-top box regime by 2014. Added to that is the galloping growth of direct-to-home (DTH) subscribers to 37 million, representing a 31 per cent share.

Digitisation, says Telecom Regulatory Authority (TRAI) chairman J.S. Sarma, is nothing short of a communications revolution. The television industry had an measly average revenue per user (Arpu) of Rs 80, which is "worse than the telecom sector that averaged Rs 100". With television homes expanding to 200 million over the next few years, and with GDP growing 50 times over 25 years, Sarma predicts digitisation taking television revenues to Rs 400,000 crore in the next five years. "Even a 10 per cent profit means Rs 40,000 crore a year — not a number to be scoffed at," Sarma says.
The opportunities are obviously big. India's television penetration is the third highest in the world after the US and China with 146 million households owning a television set. Yet, this represents a television penetration of just 60 per cent as compared to 98 per cent in China, and 90 per cent in Brazil. This means there is huge scope for expansion though TV penetration is expected to only reach 70 per cent by 2016.

"The industry has the capacity to dream," says says Sarma. But the big question is: does it have the capacity to realise its dreams?

(This story was published in Businessworld Issue Dated 02-04-2012)