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India’s digital future – Mass of niches

While there may be bumps in overall consumption levels as economic sentiments shift and technology continues to disrupt, the secular trend for media and entertainment consumption in India is most decidedly favorable.

The global economic activity has significantly weakened, especially in the second half of 2018 on the back of escalation in US-China trade tensions and financial tightening alongside the normalization of monetary policies in the larger advanced countries. While real gross domestic product (GDP) growth slowed from 3.8 percent in 2017 to 3.6 percent in 2018, it is projected to decline further to 3.3 percent in 2019. With 2019 starting on a soft note, the second half of the year is expected to be better with pickup expected to be supported by accommodative policies by central banks of major economies.

The slowdown in consumption had a moderate impact on some sectors in the Indian media and entertainment (M&E) industry, which grew by 13.3 percent in FY19, to reach a size of ₹1.63 trillion, with a CAGR of 11.5 percent over FY15 to FY19. While there was an impact of the slowdown on TV and print advertising, the strong growth displayed by the digital, gaming, and the film segments contributed to the performance of the sector. Further, the continued increase in high-speed internet penetration and mobile consumption has led to an evolution of consumption habits and distribution channels, resulting in the emergence of new business models, which have significantly added to the overall M&E pie.

The digitization and evolution of consumption has had a positive impact on the lesser penetrated rural markets, and with regional markets also emerging as the next growth frontier, there is an increasing demand in terms of media consumption across both traditional and digital media, with respect to these markets. This ever-expanding reach of media distribution coupled with the relatively strong fundamentals of the economy, have resulted in a robust advertising growth for the industry across both traditional and digital media in FY19.

Going ahead, with digital media distribution and consumption taking center stage, traditional businesses will need to innovate around their business models to stay relevant. However, given the vast demography of the country, the growth of digital media in the short to medium term does not spell doom for traditional media. Rather, there is scope for a harmonious co-existence. With an expected greater focus on monetization of emerging digital business models, and favorable regulatory and operating scenario across traditional businesses, the M&E industry in India is likely to continue soaring, with an expected CAGR of 13.5 percent over FY19 to FY24, to reach a size of ₹3.07 trillion.

Satya Easwaran Partner and Head – Telecom, Media, and Technology, KPMG India
“By 2030, we estimate that there will be a billion people in India connected to the internet, and digital M&E expenditure in itself will unlikely be perceived as a luxury. The differentiation across consumer archetypes will be more around their level of digital sophistication, cultural factors, demographics, and the like, combined with the ability to spend on hardware and immersive experiences.”

Girish Menon
Partner & Head, Media & Entertainment, KPMG India
“Cyclical events, while impacting short-term performance, are unlikely to alter the strong fundamentals and momentum of M&E consumption, especially digital, in India. We remain upbeat on the prospects for both.”

India’s digital demography
With a rapid uptake of digital-media consumption, it is imperative for organizations to segment and understand the current and prospective Digital India. The erstwhile early digital adopters – those who consumed content on the internet even prior to the massive fall in data prices in 2016 – were a fairly homogeneous group but the user base of 563 million broadband subscribers today is much larger and more diverse. We have attempted to study what the projected Indian digital billion by 2030 means to businesses and how their strategies must adapt to serve this large user base optimally.

Our hypothesis is that the digital consumer in 2030 will likely be non-English-speaking mobile phone user from a developed rural area/non-metro urban setting and who is increasingly willing to pay for content online.

Based on socio-economic data and commonly observed consumption characteristics, we have developed four main consumer archetypes that we believe help build a framework for easier analysis of these billion consumers.

There is likely to be significant progression in sophistication of digital users over the next decade due to the following factors:

  • Income effects and greater affordability alongside availability of high-speed internet and growing consumer confidence with digital engagement.
  • The majority of new users will be connected by 2025 an addition of close to 300 million – with only the long tail remaining to be added by 2030.
  • The additions to the digital enthusiasts between 2018 and 2030 will be mainly on account of a significant upward progression of users from the digital mainstream
  • The entry of millennial and generation-Z into the workforce will also be represented by the growth in the number of digital enthusiasts that will emerge as the largest category of users by 2030.
  • The maximum incremental additions – entirely new digital users – will primarily be into the digital mainstream and a small number into the fringe category.

Implications for digital businesses
Technology will underpin business models. Technology and associated tools, such as artificial intelligence, will provide the much-needed direction around decisions relating to content creation, distribution, and monetization for digital businesses.

The race for reach. Distribution ecosystems are set to become stronger. The role of value chain partners, like OEMs, DTH, ISPs, and telcos, is likely to grow as creators look at multiple avenues to reach the end consumer.

Monetization. Micro-segmentation of target markets in an increasingly upwardly mobile economy would be essential for effective monetization.

Collaboration across the value chain. In a crowded market place, collaboration across players in the value chain would be essential to grow optimally.

Size of Indian media and entertainment industry
The digital segment continued to be the torchbearer of growth of the industry in FY19, with a 43.4-percent growth taking the overall segment (including digital advertising and subscription revenues from OTT video and audio) to ₹173 billion in FY19. The rapid growth in infrastructure led to a spurt in demand for content, and the resultant consumption was driven by an equal focus on the supply of digital content by platforms. Within the digital segment, the advertising sub-segment grew by approximately 38 percent in FY19, with digital now forming a key part of media strategies across industry verticals. The growth in regional consumption also led to the emergence of new avenues for digital advertising. The digital subscription sub-segment is also starting to emerge as significant, especially for the fast-growing OTT video.

Television revenues grew at a rate of approximately 9.5 percent in FY19, a similar rate as in FY18, reaching a size of ₹714 billion. The lower-than-expected growth was due to the long-drawn process of NTO implementation, which disrupted the subscription and advertisement revenues in the last quarter. Also, uncertainty around channel viewership and reach in the new regime led to marketers pulling back from TV advertising starting January 2019.

This has led to blackouts and lack of clarity resulting in temporary loss of subscribers for many MSOs. Advertising spends were also hit by a consumption slowdown due to the slow growth witnessed by the overall economy in the last quarter of FY19. The print sector witnessed a subdued growth of 4.5 percent in FY19 to reach a size of ₹333.2 billion.

FY19 was an excellent year for the film industry, with the segment experiencing a higher-than-expected growth of 15.1 percent in FY19 over the previous year on the back of robust box-office collections, with more than thirteen movies crossing ₹1 billion at the Indian box office. Importantly, with a sharp increase in consumption on OTT platforms, the revenues from digital rights saw a substantial increase in FY19, with the sub-segment growing the fastest at 30 percent in FY19, albeit from a smaller base.

The animation and VFX segment witnessed a strong growth of 18.7 percent in FY19, to reach a size of ₹87.7 billion.

The out-of-home (OOH) segment grew at a muted rate of 5.0 percent to reach a size of ₹34 billion, much lower than expectations.

The radio industry also witnessed a muted growth of 6.2 percent in FY19 to reach a size of ₹28 billion as newer stations were auctioned in the batch 2 of Phase-III continued to operate at a lower capacity of 45–50 percent. Also, auction for Phase-III was yet again delayed during the year, which also resulted in a lower growth than envisaged.

The music industry saw a robust growth rate of 15.3 percent in FY19, reaching a size of ₹17 billion with digital continuing to lead the way.

The Indian M&E industry is expected to grow at a CAGR of 13.5 percent during FY19 to FY24 to reach a size of ₹3070 billion by FY24 with advertising revenues expected to grow at a CAGR of 14.5 percent to reach ₹1367 billion by then. The digital segment is projected to become the second-largest segment by total revenues and the largest segment by advertising revenues in the Indian M&E industry.

Key segmental trends
The digital segment is expected to continue to be the cornerstone of growth as digital consumption becomes deep and ubiquitous. Digital segment is expected to show a rapid growth of 29.1 percent CAGR over FY19 to FY24, as an increasing amount of money starts flowing into digital, with some cannibalization from traditional media as well. By FY24, we expect digital advertising to be the largest medium with 39.5 percent share of total advertising, surpassing TV advertising.

Television continues to be a critical mass entertainment medium and is expected to grow at a CAGR of 11.2 percent on the back of strong TV viewership from rural and urban markets as well as continued investment in new regional channels and sports properties by broadcasters. Advertisement revenues are likely to be driven by a recovery in the economy and upcoming events like the 20-over cricket world cup in 2020. Meanwhile, subscription revenues are expected to see benefits, particularly over the next couple of years due to the new tariff order, especially in Phase-III and Phase-IV markets.

Print in India continues to be relevant though changing consumer behavior and the resultant advertiser response is likely to continue to result in muted growth at a CAGR of 4.2 percent from FY19 to FY24.

The film industry in India is expected to grow at a CAGR of 7.3 percent from FY19 to FY24, driven primarily by theatrical revenue from India and overseas and growing share of digital rights. Digital film rights are expected to grow the fastest as OTT platforms penetrate further across the country and ramp up their film libraries.

The animation and VFX industry is expected to grow at a CAGR of 16.0 percent from FY19 to FY24.

The radio segment is likely to grow at a CAGR of 10.1 percent over the next five years on the back of content differentiation and combined offerings to listeners including music, live hyper-local news, and games/talk shows.

The OOH segment is expected to grow at a CAGR of 9.3 percent from FY19 to FY24, primarily driven by factors, such as expansion in transit infrastructure including airports and metros in metro cities, development of smart cities and increasing transparency for brands on account of improved monitoring technology.

Industry Performance-Projected
Overall industry size (INR billion) FY19 FY20 FY21 FY22 FY23 FY24 CAGR
(FY19-FY24)
Digital 173 234 303 386 492 621 29.1%
TV 714 824 935 1,025 1,121 1,215 11.2%
Print 333 346 360 375 390 409 4.2%
Films 183 198 214 228 242 260 7.3%
Gaming 62 88 119 154 200 250 32.2%
AnimationandVFX 88 103 121 140 161 184 16.0%
OOH 34 37 40 44 48 52 9.3%
Radio 28 31 34 38 41 45 10.1%
Music 17 19 22 26 30 35 15.8%
Total 1,631 1,880 2,148 2,415 2,725 3,070 13.5%
*Beginning FY18, the OTT video and audio subscription revenues are being recognized under the digital segment. Prior to FY18, the OTT video and audio subscriptions were nominal
Advertising-Overall industry size (INR billion) FY19 FY20 FY21 FY22 FY23 FY24 CAGR
(FY20-FY24)
Digital Advertising 160 210 266 333 423 539 27.5%
TV 251 277 314 355 402 455 12.6%
Print 221 231 241 251 262 276 4.5%
OOH 34 37 41 44 48 52 9.3%
Radio 28 31 34 38 41 45 10.1%
Total 693 786 895 1,021 1,176 1,367 14.5%
KPMG India analysis, 2019

The Indian music industry is expected to grow at a CAGR of 15.8 percent over FY19 to FY24.

Key industry themes
The new tariff order (NTO). The new tariff order was devised with the motive of ushering in an era of transparency and equitable distribution of revenues across the value chain with consumer choice at the center of change. After multiple delays, the NTO, which introduced channel pricing for the first time in the country, was eventually implemented over the course of the last quarter of FY19 with consumers facing multiple issues ranging from blackouts and higher TV bills to confusion over the process of channel selection.

As per initial trends, consumers are expected to face higher cable/DTH bills for the same number of channels in the new regime with the introduction of base fee as NCF (network capacity fee) of ₹130+taxes even for availing FTA channels. However, broadcasters, especially the large ones, are expected to benefit from the accrual of higher share of revenues from the distributors, especially the MSOs. The NTO appears to be mildly positive for the distributors with content cost being a pass-through. In case of a disagreement, the order has mandated that MSOs and LCOs share the network capacity fee and distribution fee in the ratio of 55:45. This is expected to result in higher realizations for MSOs. Going forward, the increase in subscription fees for TV may result in some early adopters shifting to OTT for their entertainment needs, especially for niche genres like English.

Regional markets
The year 2018-19 saw the emergence of regional as a major driver across the segments including television, print, cinema, music, and OTT. Regional content has led to widening of TV viewership with about 70 percent of total channels launched during the year being regional channels. The growth in the Indian print industry is also on account of the increasing readership in regional languages, as English has started to see a decline.

Cinema has also bet big on regional content with a significant proportion of movies being produced in Tamil, Telugu, Malayalam, Kannada, Bengali, Punjabi, Marathi, Malayalam, and Gujarati. The year also saw an increase in the investment by OTT in non-Hindi video content.
Considering the number of people speaking regional languages, marketers are tying up with content creators in regional languages, using regional media platforms to take into account cultural values and nuances of local languages with the intent of building trust with potential customers.

Digital privacy
Media companies are now monetizing by collecting, analysing and processing huge amounts of data to create customer profiles in a new and unique way. However, due to cyber and privacy risks, such as data breaches, it is causing irreparable damage to personal relationships, which are critical in the media and entertainment industry than in any other industry. Regulators across the globe have adopted two key approaches in addressing the growing privacy concerns by framing omnibus regulatory frameworks and sectorial regulatory frameworks. Media and entertainment industry should take cognizance of this and work on strengthening data privacy by wearing the end-user lens rather than just a regulatory lens.

Key Technology Trends
8K content and hardware Content Delivery Networks
• Leading TV manufacturers have started releasing 8K TVs in mature markets like the US, China, Japan and Europe

• With the advent of 5G, streaming of HD content is going to be more mainstream which can benefit the sales of 8K TVs

• In India, we are yet to see a strong traction in the development of 8K content, but is expected to get better in the coming years

Content Delivery Networks (CDN) significantly

reduce the site latency, boosts webpage load time, reduces bandwidth usage cost and ensures global availability of content

• AI based predictive acceleration and use of hyper local CDNs are couple of key trends in this space

• India is experiencing significant growth in data consumption – specifically with respect to video, hence the importance of CDNs is bigger than ever before

Short to medium term impact –

Minimal

Short to medium term impact –

Adoption rate is high

 
Digital labour Augmented and Virtual Reality
• Digital labour can be broadly classified into basic robotic process automation, enhanced process automation and cognitive automation based on the maturity levels

• In the M&E space, digital labour has found use cases in content generation, discovery and regulation, and also in support function automation

• Several start-ups have come up in India focusing on intelligent automation, artificial intelligence, machine learning and big data

• AR and VR continues to disrupt the way media is created and consumed

• Big players like Facebook, Google, Microsoft and Magic Leap are coming up with their innovative products and solutions to the market

• In India, VR content production is gaining traction in areas like gaming, tourism, sports, advertising, etc.

• While usage of AR/VR is on the rise, widespread adoption is still in its early stages

Short to medium term impact –

Rapid adoption expected

Short to medium term impact –

Gaining mainstream traction

Digital monetization
The primary monetization model for digital platforms has been advertising over the years to attract users and build substantial user base. However, with increased investment in creating original content and acquiring exclusive content to differentiate, it is increasingly becoming difficult to justify a business case with just advertising as the source of monetization. Thus, platforms have increasingly started focusing on subscription revenues through innovative pricing strategies like sachet pricing, content bundling, regional packs, offline payments, and the like. However, key challenges hindering successful digital monetization include affordable traditional media (e.g., television), price sensitivity, content fragmentation, and consumer readiness. To alleviate these challenges, OTT platforms have started exploring monetization through the collaboration/syndication route, with partnerships across telcos, cable/DTH operators, other digital platforms, cab aggregators, and hardware platforms. Such strategic partnerships have helped digital platforms get access to a wide customer base and monetize their content, with minimal spends on customer-acquisition costs.

Technology trends
Key technological innovations in the media and entertainment sector aim to enhance customer experience by improving quality and performance, offering newer and more innovative channels for content consumption, and bringing in greater operating efficiencies for organizations in the M&E space. A key catalyst for adoption of technology across the M&E industry would be the impending 5G rollouts in the country. 5G is likely to usher in an evolution of broadband infrastructure, coupled with the ease of accessibility of fixed broadband infrastructure, which could be a transformative change in terms of the way media is consumed in India, as well as how. From being a catalyst for cord cutting/shaving operate through digital distribution to being an enabler for innovations like AR/VR and digital labor, 5G holds tremendous potential in shaping the M&E industry of the future.

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