The FICCI Entertainment Committee in collaboration with Arthur Andersen has prepared the first ever definitive study in India on The Indian Entertainment Industry. This report, which has received wide acclaim both within India and abroad has become the accepted referral document on the Indian entertainment industry.

Highlights of the Arthur Andersen Report

The report focusses upon the uniqueness of the Indian Entertainment Industry and its huge potential for growth, resulting in employment generation, revenues and taxes.

The entertainment industry has been segmented into the following categories: Films, Television broadcasting, Cable television, Television software, Music, Radio and Live entertainment and event management.

An in-depth analysis of each industry segment, detailing its overall shape and size, revenue streams, the technology trends and future potential is summarised below.

FILMS

The current size of the films segment, in terms of costs, is estimated at Rs 13.0 billion, with the industry budget increasing at about 10 percent per annum over the last 5 years. The future growth of the segment will be driven by expansion in exhibition infrastructure and development of multiplexes, availability of finance from institutional sources, exports of film and animation software and emerging revenue sources such as web-casting, etc. On account of the above factors, the segment is estimated to grow at 25 per cent per annum to a size of about Rs 40 billion by Financial Year 2005. The government should take the following measures for the segment to achieve its growth potential:

Corporatisation:
This is an imperative for the players to tap formal sources of finance and fund their growth plans. The Government can drive corporatisation by providing incentives such as exemption from capital gains tax to corporatising entities.

Diversification:
Film companies should diversify into other segments of the entertainment industry like their global peers. This not only will mitigate risk associated with films but also enable the companies to cross promote their offerings across several delivery platforms in the era of convergence.

Expansion in exhibition infrastructure:
At 12.5 screens per million people, film exhibition infrastructure in India is much lower than in developed countries and woefully inadequate for the large population. In order to boost revenues, there is a compelling need to expand and spruce up the exhibition infrastructure.

Rationalisation of ET:
The entertainment tax in India is much higher than in other Asian countries. Besides, the level and nature of taxation varies from state to state. The Government should reduce and standardise ET to encourage fresh investment in theatre infrastructure.

Ceilings on ticket rates:
This regulation, present in some states, has rendered operations of numerous theatres unprofitable. The state governments should consider doing away with this regulation.

Multiplexes:
Globally, multiplexes have led to a boom in film exhibition. In India, this nascent concept should be nurtured through fiscal incentives such as ET holidays etc.

TELEVISION BROADCASTING

The size of the television broadcasting segment is currently estimated at Rs 30 billion. In the future, this segment is expected to grow as a result of growth in advertisement revenues and subscription revenues. While advertisement revenues will increase because of the rising share of television in the total advertising expenditure, subscription revenues are expected to surge as a result of consolidation and regulation in the distribution market. These factors will lead to a growth in the segment to about Rs 84 billion by Financial Year 2005 and Rs 289 billion by Financial Year 2010.
The growth of the segment can be significantly aided by:

Service tiers and addressability
Classification of television channels into free-to-air and pay channels will decide the allocation of advertisement revenues and subscription revenues among channels. Addressability through installation of conditional access systems at the subscriber level will ensure that the subscriber numbers are transparent and the fair share of subscription revenues flow to the broadcaster. The government should speedily institute regulation in this regard.

Introduction of DTH television:
In overseas markets, Direct To Home TV has become an assured revenue stream for broadcasters and complimented the growth of this stream. While the government has come out with preliminary guidelines, it should speedily bring about the introduction of DTH services.

CABLE TELEVISION

The current size of the cable television segment is estimated at Rs 24 billion. Going forward, the principal growth drivers for the segment would be increase in number of cable households, increase in subscription rates and revenues from value-added services such as internet over cable, pay per view, video on demand, etc. The segment is expected to grow to about Rs 70 billion by Financial Year 2005. Further, the segment is expected to witness consolidation in future, which will be driven by the desire of media companies to straddle the entire entertainment value chain from content creation to delivery.

For the cable segment to develop in future, the government should implement the following:

Introduce service tiers and addressability
This has been elucidated in the television broadcasting segment above. These measures would benefit the cable television segment too. Cable TV will then have viewership with distinct demographic profiles, which will lead to higher cable advertisement revenues.

Licensing:
Lack of licensing for cable has led to the financially weak local cable operators (LCOs) owning the last mile to subscriber homes. As substantial investment is required for the future development of the industry, the Government must auction licences for cable TV services as soon as possible.

Content:
At present it is the cable operators that are responsible for the content beamed over cable networks. Going forward, broadcasters should be asked to register themselves with the regulator, and be made responsible for conforming to advertising and programming codes.

Technological upgradation
As is happening in the advanced economies, in India too, in due course of time, DTH and wireless cable are expected to give stiff competition to the cable industry. The industry needs to prepare for this competition by rapidly upgrading its network to provide value-added services and reduce dependence on TV subscription revenues.

TV SOFTWARE

The television software segment, currently, has a size of Rs 14 billion. Continued growth in domestic demand for quality content, re-exploitation of library content, increasing export of software to international markets and emerging revenue sources such as web-casting will be responsible for rapid growth in this segment in future. As a result of the above, the segment is expected to grow to Rs 54 billion by Financial Year 2005. Going forward, consolidation is expected to happen in this fragmented industry. Financial strength, programming ability, genre versatility, client relationships and success record will become the key factors for survival and success.

The industry should implement the following agenda in order to grow and reach global standards:

Expansion
In order to reach global size, Indian content companies need to invest in substantially in infrastructure and expand operations rapidly across media segments. At the same time, they should aim to become global content players by leveraging on their cost advantage and developing content for the global market.

Consistent accounting
At present, in India, television software companies follow diverse accounting practices and there is a lack of uniformity in presentation of financial information. The industry, along with the ICAI (Institute of Chartered Accountants of India), should formulate standard accounting policies, in line with international norms. This will substantially improve the level of transparency and disclosures to the benefit of investors and enhance the image of the industry globally.

MUSIC

The music business today is worth Rs 12.5 billion but piracy takes away roughly 40 per cent of the market. Indian Music Industry (IMI), the industry body which spearheads the industry’s combat against piracy, has been instrumental in bringing down piracy from an astronomical level of 80 per cent to the current 40 per cent. The segment is projected to grow to a size of Rs 19 billion by Financial Year 2005 as a result of such several factors such as organised music retailing, promotion of music albums by music television channels, exports of film music, potential of the internet as a powerful music distribution channel and demand for music from private radio channes. The business is expected to become more diverse in terms of different genres of music. Segments like international music and Indipop will grow in importance. In this respect, some of the global trends can serve as a pointer to the future.

Digitally compressed music
The popularity of digitally compressed music (in MP3 format) is expected to catch on in India. Once copyright issues are resolved, music companies can harness the power of the internet effectively for music distribution.

Cross-media presence
Globally, music companies are conglomerates having presence in several media segments. Indian music companies should diversify to gain presence in other media segments besides music.

Publishing revenue
Publishing revenue refers to the revenue that music companies derive from television channels, restaurant owners, etc who play the company’s music. Music companies should execute arrangements with channels and establishments to exploit this revenue source.

RADIO

Radio receives only 2 per cent of the total advertising expenditure of the country despite its coverage of almost the entire population. The current size of the segment is about Rs 0.8 billion. This is however, expected to change with the privatisation of FM Radio, which will result in radio content with slick presentation, good hardware and software, catchy jingles, and a keen empathy with the listener. This segment’s share in total advertising expenditure is expected to increase to the international average of 8 per cent by Financial Year 2010, resulting in an industry size of Rs 7 billion by Financial Year 2005 and Rs 34 billion by Financial Y ear 2010.

The golden age of radio will materialise if the government adopts measures as under:

License fee structure:
As the private radio business is capital intensive, the industry and the Government together should devise a licensing structure that is sustainable in the long term.

FM stations:
In its privatisation policy, the Government has clarified that while a company can own any number of stations, each station must be independent in terms of content. Removal of this constraint will enable radio broadcasters to exploit the nation-wide / region-wide audience for a particular kind of programming.

Ban on news and information:
This restriction denies private radio the role of an active community participant and neighbourhood watchdog. The industry should convince the Government to give private radio operators operational freedom, as is given to the private television channels.

Restrictions on leasing of AIR studios:
Leasing or hiring of under-utilised All India Radio studios will enable the private radio operators to reduce their capital costs and at the same time, result in revenues for AIR. Therefore, the Government should consider removing this restriction.

Restrictions on lease of channel time:
If a private operator has idle channel time because it does not have adequate programming, the operator should be allowed to lease out the idle time. At the same time, in the interests of the industry, the Government should ensure that private operators do not get into the business of resale of channel time.

Reduction of import duties
Given the fact that the business is capital intensive, the Government could assist the private operators by reducing import duties on transmitters, studio equipment, etc, thereby reducing the capital costs

LIVE ENTERTAINMENT AND EVENT MANAGEMENT

The live entertainment and event management segment has grown from a miniscule size of about Rs 20 million a decade ago to the present size of Rs 1.5 billion. With corporates increasingly using events to communicate with their target consumers and the rising popularity of live entertainment events, the segment is poised to grow rapidly. According to industry sources, the segment is expected to reach a size of about Rs 11 billion by Financial Year 2005, which translates to a growth rate of about 50 per cent per annum. However, the segment faces several hurdles as outlined below. Clearing these would give a strong impetus to growth and enable the industry to move towards global standards.

Rationalisation of taxes:
Rationalisation of the tax regulations as suggested below will enable the players to invest substantially in infrastructure and expansion of operations.

Entertainment tax:
The entertainment tax in India is much higher than in other Asian countries. Besides, the level and nature of taxation also varies from state to state. The Government should reduce and standardise entertainment tax across states.

Income tax:
India has complicated income tax regulations for international artists. If India has to become a popular destination for international artists, the income tax regulations should be made as unequivocal and artist-friendly as possible.

Duties on imports:
Relaxation in duties on imports of sophisticated lighting and special effects equipment would assist the event management companies in getting access to better quality infrastructure which, in turn, would result in better quality events and more revenues.

Single-window clearance:
At present, for an international event, numerous clearances are required to be taken from various agencies. The Government can streamline the approval process by instituting a single-window clearance procedure.

Establishment of industry forum:
Unlike in the US, the Indian event management industry does not have a forum or a self-regulatory body. Establishment of an industry forum or association will assist the industry players in tackling their problems collectively and taking growth-enabling measures.

Corporatisation:
But for the few large players, most of the companies in the industry are non-corporate entities. Corporatisation and institution of clear and transparent accounting policies would enhance the reputation of these companies. This would also be necessary from the viewpoint of future fund-raising for scaling-up operations, whether from the capital markets or from private equity investors.

Exhibition infrastructure:
There is a lack of adequate exhibition infrastructure in India for staging of events. Events are held in sports grounds, etc, which are not meant for this purpose. There is clearly a need to build exhibition infrastructure specifically for such events.

Macro Analyses

Essentially, the overall success of the entertainment industry is largely dependent upon the revenues earned from advertisements, sponsorships, ticket sales and subscription revenues. The Indian advertising industry has shown strong growth in the recent past. This was facilitated by strong domestic economic growth and liberalisation, which resulted in the introduction of competition for several products and services. With more sectoral deregulation anticipated and increased competition, it is expected that advertising expenditure will grow at a healthy clip.
For similar reasons, the sponsorship market is expected to grow substantially. By all estimates, the numbers in the subscription market are exciting and due to current penetration levels, strong growth potential exists. In the global economy, a country’s total advertising expenditure and its Gross Domestic Product (GDP) have a strong positive correlation. In India, the ratio of advertising expenditure to GDP is about 0.4 per cent. This is quite low in comparison to the developed economies. As the Indian economy develops, its advertising expenditure to GDP ratio is expected to increase to 0.5 per cent of its GDP over the next 5 years.

Further, internationally, the average share of print media in the total advertising expenditure is about 45 per cent. Currently, in India, the share of print media in total advertising expenditure is as high as 55 per cent. This is expected to come down to international levels as the penetration levels of other media increases. Therefore, the advertising revenues accruing to non-print media will increase over the next few years. This will result in healthy growth of the entertainment industry.

Currently, the industry size can be conservatively estimated at about Rs 96 billion. This is estimated to grow to about Rs 286 billion by Financial Year 2005.

Conclusion

In conclusion, the Indian entertainment industry’s immense potential for growth is very evident. The ingredients for success are present but the growth drivers need to be enabled by the Government and the industry through implementation of the various regulatory and policy measures suggested in this report. The industry will then be able to realise its dreams of becoming globally competitive and establish the country as a significant player in the global entertainment industry.

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