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John Harrison: Indian media and entertainment industry is big market: John Harrison, EY - The Economic Times

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John Harrison: Indian media and entertainment industry is big market: John Harrison, EY - The Economic Times

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According to EY, the global audit and consulting firm, the media and entertainment (M&E) sector is likely to see increased mergers and acquisitions (M&A) activity, driven by convergence and digital disruption. And while in 2017 the deal activity in the sector is down, John Harrison, global Media & Entertainment Sector Leader at EY, feels that internet and tech businesses are really upending every aspect of the traditional media ecosystem. In an exclusive interaction with ET's Gaurav Laghate, Harrison spoke about M&E's potential in India, opportunities and challenges for MNCs and attractiveness of Indian market.

Edited excerpts...
Q. How do you see Indian market in terms of media & entertainment industry?
First of all, it's already a big market - 183 million TV homes, 1.3 billion people, a middle class that's rising, multiple extremely large cities and urban areas and from outside in, it seems like a culture that really enjoys consuming media.

It is an extremely attractive marketplace, which is why you have got so much foreign investment here already.

What struck me about this market is that how well developed it is from the major media company perspective. It has both - global players that have a national or local footprint, and local players that have a national footprint.

The other thing is the vibrancy of the entrepreneurial community here, both around content development and technology development. Those two pieces are drastically changing the media landscape globally and also changing how the media companies are considering their approach to content development, ad sales and ultimately interacting with their audiences.

I have been struck by India's sophistication around all of those components.

Q. Does it still provide enough opportunities for foreign companies?
A. For the parties that aren't here today, they track India like they track China and other growing markets around the world. I think ultimately, it's a question of what's the viable entry strategy for a company to get scale that makes sense for it today, relative to other priorities it has for its capital. Conversely, is there a path for the company to enter the market without having to create an infrastructure? Global companies are looking at the markets where there aren't present today and asking if they can deploy their technology stack on a direct-to-consumer (DTC) basis to essentially enter the market with asset-light footprint.

Q. But still India has seen lesser activity in deal transactions this year. Why?
A. The India market place within the M&E sector is very spotty year-on-year in terms of transactions. Some years you could have north of a billion dollar of aggregated M&A, and some years you are going to have less than half of that.

From an outside-in perspective, people view India as a highly attractive market today with huge potential going forward, based on demographic and economic factors. You have a business climate, which is solid and improving.

However, I think the real struggle is trying to find attractive targets of a size that will move the needle for the major media companies around the world relative to other opportunities they have today to deploy capital.

Q. Even globally the deal volume has seen a drop in the M&E space... Your views?
A. I think overall, in the global M&A marketplace we have seen steady growth in 2011-2016 timeframe in media sector, in terms of value of overall transactions. That growth has been driven by mega deals in both content and distribution, like AT&T and Time Warner, Charter and Time Warner Cable, AT&T and DirecTV, Liberty Global and Virgin in the UK.

However, in 2017, we are pacing down year-on-year because we have not seen any gigantic transaction. that could be because of less certainty around geo-political environment, regulation and taxation, and whole lot of macro reasons that are impacting the marketplace.

The other thing within media is that the companies have to reconcile the value they have to pay today - trading plus a premium - versus what they think of business is going to be long-term, given all the industrial changes that are happening. You have to very confident that you can get synergies out of the transaction that justify the premium and put you where you want to be in long term.

Q. What is your view on the M&E industry and the changes globally?
A. At EY, we believe that a strategic realignment of the industry is happening and it's driven by convergence of all types - vertical integration and horizontal consolidation. Within the M&E space, a lot of it is a result of the disruption caused by the internet and tech leaders and how their businesses are really upending every aspect of the traditional media ecosystem.

So if we look at the kind of deals that are happening - people are definitely investing in content, because they need to pull in audiences and to differentiate themselves from the pack. They are investing in capabilities and often times through transactions outside their core business. They are buying tech, talent and could be access to new markets where they are not present. And they are making the decision that they need to acquire rather than build organically because the timing of the speed to market is so essential here.

And unlike India, which has organic high growth potential, lot of the media markets in the developed economies are seeing slowing growth. So companies are very focused on optimising their portfolio. The diversified companies are looking at their assets and really making a clear-eyed, and even cold-eyed in some cases, determination of whether the asset is core for the long term future. And if it's not, they are open to hive them off.

Q. While international companies have invested and grown in India, very few Indian media companies have expanded footprints outside and then als, they are targeting the diaspora. Is there an opportunity loss?
A. Every vertical within the Indian M&E industry in India is growing and the aggregate is growing north of 10%. The overall Indian market is about $20 billion today, and it's not that one media company has got 45% market share. It's wide open.

If I am an Indian media company with good diversified capability that's generating cash, I don't know if I would find a better opportunity outside of this market to grow. It looks pretty good here.

Q. Distribution platforms have not seen major FDI. Why?
The Indian cable market is very different and there are numerous local cable operators who effectively control the consumer connections. So it's a complex relationship starting from consumer to all the way back to the network. I think anyone looking to make an investment in this marketplace would want to be very sure that the marketplace that the company is buying into makes economic sense.

DTH on the other hand, while has no such problem of last mile connection, but what it does not have, long-term, is a broadband connection.

Basically you are buying the coverage of an enormous country in terms of population, but are you buying just for the remainder of this generation of technology and foreclosing on the future.

Q. What do you think about the IPL bid?
Apart from being amazingly transparent and the aggregate value that was ultimately paid, the most interesting aspects of the IPL auction for me was the types of bidders that showed up. You had a social media company (Facebook) bid very aggressively (Rs 3,900 crore for India digital rights for 5 years), a mobile company did something similar (Reliance Jio and Airtel). In the last generation of bids, those parties weren't around.

What you are seeing is a whole new universe of competitors for high value rights. In this case, sports rights. And you are seeing this globally and that could upend the marketplace for those rights down the road.

There are search, social, mobile - all deep pocketed - companies that have a strong desire to get access to the content that's going to engage their audiences and hopefully drive core business.

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Indian media and entertainment industry is big market: John Harrison, EY

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According to EY, the global audit and consulting firm, the media and entertainment (M&E) sector is likely to see increased mergers and acquisitions (M&A) activity, driven by convergence and digital disruption. And while in 2017 the deal activity in the sector is down, John Harrison, global Media & Entertainment Sector Leader at EY, feels that internet and tech businesses are really upending every aspect of the traditional media ecosystem.

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INDIA TOPS EY LIST OF PROMISING MARKETS GLOBALLY: HARRISON

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INDIA TOPS EY LIST OF PROMISING MARKETS GLOBALLY: HARRISON

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Impact is weekly print magazine publishing information on Advertising and Ad Marketing news specifically targeted towards Agency & Business Managers.

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John Harrison, Global Media & Entertainment Sector Leader at EY, gives insights on how M&E organizations can rebuild their strategies to thrive in the digitally changing landscape. BY NEETA NAIR

John Harrison, Global Media & Entertainment Sector Leader at EY - the global audit and consulting firm - may have taken home an image of a flooded Mumbai on his very first visit to India, but he also saw something he found very impressive. Despite the challenges posed by demonetization and GST in the short term, Harrison believes India has got growth fundamentals that will always exceed the overall global average. "The media sector here is so vibrant, with a great mix of local leaders, traditional media companies plus emerging entrepreneurial economy within media - be it distribution, digital, or content. And lastly a great collection of global players within the subsidiaries that are real drivers of the industry," says Harrison The Indian M&E sector is one of the fastest growing industries in the country and has consistently outperformed economic growth. In FY16, the M&E sector registered a Y-o-Y growth of 11% to reach US $20 billion. The sector is expected to touch US $34.8 billion by FY21, witnessing a CAGR of 11.8% between 2016 and 2021. Assessing the evolution of the M&E landscape in India, Harrison says, "Today India is a massive mobile market place where you have a billion phones, and mobile connections, 300 million smartphone users and operators who are unleashing data plans at very affordable rates. This will drive the smartphone population higher and bring a whole new group of consumers into the mobile video landscape. For me, the most striking aspect about India is that it is fundamentally developing as a mobile first market."

Not surprisingly, all traditional media companies are restructuring their business and everyone, from publishers to broadcasters, is going the Digital way, with their respective apps and websites. But monetization continues to be a challenge for such players unlike the West, where publications like Wall Street Journal make it mandatory for all readers to pay a bare minimum subscription fee if you were to read their stories online. Similarly if you look at the over-the-top (OTT) players in the country, even the leading ones like Hotstar have a very small percentage of viewers who are on the subscription model. "Something that struck me during this visit is that cable TV subscriptions in India are not very expensive. When you are competing against a cable bundle that's Rs 180 for around 400 channels it's hard to charge a premium for digital subscription. You can't charge a premium for something I can get at a lower price on my cable bundle, especially in a price sensitive market like India. Having said that, differentiated content always has value. But I feel flipping Print media or News media into a subscription model in India will be very difficult especially as it has been an advertising driven model for so many years," adds Harrison. In 2016, total advertising spend across all segments in India stood at US$8.18 billion which is estimated to reach US$16.69 billion in 2020. Print media and TV together accounted for 76.2% of the total revenue from advertising in 2016, while Mobile advertising emerged as the third largest medium as per an EY report.

Talking about the promising markets for EY globally, Harrison says, "India is absolutely at the top of our list. We are working with companies that are in transition, attempting to uncover growth strategies while working hard to maximize efficiency within their business, and looking to keep costs under control, while minimizing risks. When you get into the digital world, new risks arise, which you need to protect yourself from or respond to. Especially when you have got a market place that is as fragmented as India's, there is going to be M&E activity and supporting our clients through all phases of M&E activity is our core competency."

'2017 is pacing down in terms of deals by value'

John Harrison, Global Media & Entertainment Sector Leader at EY, talks to Neeta Nair on how M&E organizations can rebuild their strategies to thrive in the digitally changing landscape and how 2017 has been rather disappointing as far as big ticket mergers and acquisitions are concerned

It has to be convergence, which has been a buzz word for a really long time, but we are finally starting to see it happen. And that really is the convergence of communications and networks, network distribution, what we call channels here, cable networks elsewhere, and production, so, the marriage of network and production. And then there is convergence across technology and media. For example, One of the largest wireless companies in the U.S. -AT&T, acquired one of the largest media companies in the U.S. which is Time Warner. So, AT&T has wireless, pay television through satellite, and now it's going to have a gigantic film and television studio, plus cable networks. It's going to be a fully integrated operator across telecom and media. Another good example is the acquisition of NBC Universal by Comcast which equals to giant pay TV operations along with an equally huge entertainment studio.

We will have to wait to see what these converged enterprises are going to be able to do eventually, but in theory it will really drive the seamless distribution of content to consumers across any platform they want in the most efficient way possible. And because they only underline networks upon which this content is getting consumed, they are going to be able to extract data that's going to allow for a much more robust and enriched advertising sales environment. Another type of convergence is tech companies investing in content. We have had very public stories about Apple, Facebook investing a billion dollars in original content. You have Facebook here, which bid a pretty significant amount for the Indian Premier League (IPL) digital rights. So, rather than just being a platform for social connectivity and advertising sales, now there is a content element to pull people in, so that's convergence between tech and media, that's going to continue to happen around the world.

A number of the major trends that are impacting media around the world are 100% aligned with what's going on here, which is explosion of content, and an increasingly robust digital landscape that is parallel or potentially competing with the traditional landscape. What I feel the world could learn from India over the next 5-7 or 10 years is how the distribution over mobile evolves. The population that is using smartphones is growing significantly and it's a youthful population here on an average. So, there is the generational change that's happening in terms of the consumption of media.

The smart phone user base with data subscription will continue to grow. That's highly interesting to content distributers, content owners and advertisers. It's the fundamental expansion of the consumer class and middle class here, and a culture that loves entertainment - I mean Bollywood is very real, sizeable, and popular even outside of India. So, it's a dynamic enriching entertainment market place that is always going to have a huge existing audience, and potential audience.

The entire movie industry right now is in a state of flux. You have got new competitors that are producing films and distributing it straight to consumers digitally. The traditional studio system has seen its sizeable home entertainment revenue stream fading on account of falling DVDs purchases, reproducing that revenue stream is important for studios. So, there is a lot of evaluation about shortening the theatrical window before home viewing, to enable the studio to do a premium video on demand offering of the movie much closer to its theatrical debut. That's going to be a very rich negotiation between the studios and exhibitors, the studios have come out publically lately saying that it's an important window to establish because they are spending a lot of money to market they film upfront for the theatrical debut and then they go dark for months until the movie is then available under a traditional Pay TV.

Ad blocking is a real issue. The consumer wants to be in charge of how they access, watch, pay for content, and whether the content is going to be burdened with ads or not. So, content owners, who rely on advertising, need to make the content so compelling that people pay for it on a subscription model, but that's going to be tricky. Otherwise, they need to work with their advertising plans to devise ad strategies that basically keep the consumer in the fold, whether it's shorter ads, creative ads, or targeted ads, because you got access to more data on that consumer, so ads that are more relevant to them won't be inclined to turn off. There is just going to have to be a much more aggressive approach to playing out every potential advantage you have as an advertiser when you have a universe of consumers fond of ad blockers.
Q] Earlier you said 2017 will be a year for acquisitions, alliances, joint ventures, with sector lines being blurred. But have there been big ticket deals?
I think I turned out to be wrong on one thing, in terms of 2017 from a media and entertainment, or even TMT (Telecommunications, Media and Technology) perspective. The year is pacing down in terms of deals by value, even though the actual number of deals year by year isn't pacing down nearly as much. In 2017, we haven't had a single giant mega deal like last year when we had had the AT&T & Time Warner deal worth $100 billion; a year before that in the U.S. we had a huge cable transaction, that was $ 80 billion; and the one before we had AT&T and Direct TV deal worth $80 billion. We haven't had one of those big mega deals here but the pace of activity defined as number of transactions is still there.

However, the types of deals that companies are executing are 100% consistent with the themes we laid out over the last year or so. Companies are buying to get access to content and capabilities that they might not otherwise have and those they don't have time to build themselves. It could be technology or talent, or access to an audience that they are not currently reaching today through their existing portfolio. They are definitely buying outside their core to get new capabilities. Companies are also buying for scale. And lastly they are deploying a 'shrink to grow' type of strategy, peeling out businesses from their portfolio to make the overall company smaller but to leave behind assets that have the most vitality from a growth perspective.

It's very important to make smart experimental investments, and to understand where the consumer and market could go. You need to get a foothold in those markets, be it launching a digital distribution in over-the-top (OTT) network for your content, or investing in ad technology to deliver ads or measure them or create a more highly targeted advertising offering, which ultimately will drive advertisers to digital. One needs to have the capability to invest in content that is both relevant and important for your platform today, as also for the emerging platforms down the road. So, making targeted investments, distribution in content and in the advertising ecosystem to make sure your position does not get caught off guard is essential.

As indicated by the rate of investment in the Indian media sector, there appears to be a view that it's a favorable place to do business. If you just use that as an indicator, capital continues to come in, content continues to get made, international capital whether it's corporate or financial investors are still playing in the sector. I don't know the specifics around key regulatory issues, but just holistically if there is a big concern then investment wouldn't be happening.

@ FEEDBACK

neeta.nair@exchange4media.com

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INDIA TOPS EY LIST OF PROMISING MARKETS GLOBALLY: HARRISON

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John Harrison, Global Media & Entertainment Sector Leader at EY, gives insights on how M&E organizations can rebuild their strategies to thrive in the digitally changing landscape.