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Tune in to emerging entertainment markets

Spotlight on Brazil, Russia, India and China

Foreword

Companies are spending more executive time investigating opportunities in emerging markets (Brazil, Russia, India, China). In the long term, these emerging markets are expected to expand, driven by their fast-growing middle class. The increasing importance of these markets is a major opportunity that should not be underestimated. Thats what we said in 2008 and 2009 when we introduced our Business Risk Report for media and entertainment (M&E). And its still true. Whats also true is some of these economies have been experiencing double-digit growth annually in recent years and continue to grow, despite the global economic crisis. Growth strategies in most companies in the US and Western Europe are linked to growth in these new markets. Companies are focused on the best way to enter, grow and brand their business in these markets. Brazil, Russia, India and China (BRIC) are attracting signicant attention because of a surge in demand for content. Accounting for 40% of humanity, they are the future for global media growth. Currently, some of the largest M&E companies are making less than 10% of their global sales from BRIC economies, but management within these companies is spending a disproportionate amount of their time dealing with these markets. To win in these markets, there are several success factors that global companies need to take into account. While there are many opportunities to tap, there are some unique challenges, too, in the areas of technology, distribution, regulations, piracy and so on, which global companies need to address. In the report that follows, we examine the M&E landscape in each of the BRIC nations and provide an overview of the opportunities, success factors and key challenges in doing business there. I would like to thank our team in India under the leadership of Farokh Balsara for their efforts in preparing this report and providing valuable insights.

John Nendick Global Media & Entertainment Leader, Ernst & Young

Contents

Executive summary

Brazil

Russia

17

India

25

China

33

Conclusion

41

Contacts

43

Economic growth coupled with large populations in Brazil, Russia, India and China, is leading to growing purchasing power. A multitude of consumers with increasing disposable income offer myriad opportunities to global M&E companies. However, these dynamic markets also present a unique set of challenges. To enter and win in these BRIC markets, companies must prepare, plan and partner carefully.

Global Media & Entertainment Center

Executive summary

Brazil, Russia, India and China (BRIC) economies are the future building blocks of the world economy. BRIC economies together account for over 25% of the worlds land coverage, 40% of the worlds population and hold a combined (GDP) of US$8.7 trillion.1 Together, they are among the fastest-emerging economies and will be the growth engines of the global economy. In this report, we examine the M&E landscape in each of the four countries and provide an overview of the key opportunities, challenges and critical success factors in doing business there.

As companies think through their globalization strategies, we decided to look at some of the important indicators of the market attractiveness for each of the four countries. Market size, growth rates, demographics and penetration of new media platforms are some of the indicators used. Figure 1 below, indicates that while Brazil and Russia have a high GDP per capita and urbanization rate, India and China score high on population, number of television households and mobile subscribers. This highlights the immense potential that these countries hold and the several opportunities they present.

Figure 1: Performance indicators across BRIC economies1


Indicators GDP1 (US$ billion) GDP growth (% change from 2008) GDP per capita1 (US$) Ofcial language Urbanization
2 1

Brazil 1,482 0.1% 10,200 Portuguese 86% 88.6% 17.1 4.2% 199 28.6 67% 53
5

Russia 1,255 -8.5% 15,200 Russian 73% 99.4% 13.9 7.7% 140 38.4 72% 50
5

India 1,243 6.1% 3,100 Hindi/English 29% 61% 14.8 8.2% 1,157 25.3 64% 134
4

China 4,758 8.4% 6,500 Mandarin 43% 90.9% 50.5 8.7% 1,339 34.1 72% 1744 124 117 741

Literacy rate3 M&E industry size (US$ billions) M&E industry growth rate (200509) Population4 (millions) Median age (years)
1

Working population between 15 64 years (% of population) Television household (millions) Internet subscribers6 (millions) Broadband subscribers (millions) Mobile subscribers (millions)
1

23 14 174

21 9 204

17 9 489

2009 estimate 2 end of 2008 3 2004 estimate 4 July 2009 estimate 5 as of January 2009 6 as of 31 December 2009

Brazil economy, The Central Intelligence Agency website, https://www.cia.gov/library/publications/the-world-factbook/geos/br.html, accessed 4 February 2010; Brazil people, The Central Intelligence Agency website, https://www.cia.gov/library/publications/the-world-factbook/geos/br.html, accessed 4 February 2010; Media in Brazil: industry prole, December 2009, Datamonitor; Brazil - Convergence and Pay TV Market, Industry Prole, July 2009, via ISI Emerging Markets. Russia economy, The Central Intelligence Agency website, https://www.cia.gov/library/publications/the-world-factbook/geos/rs.html, accessed 26 February 2010; Russia people, The Central Intelligence Agency website, https://www.cia.gov/library/publications/the-world-factbook/geos/rs.html, accessed 25 February 2010; Russia - Convergence - Triple Play & Digital TV, 9 August 2009, via ISI Emerging Markets; Media in Russia: industry prole, December 2009, Datamonitor; India economy, The Central Intelligence Agency website, https://www.cia.gov/library/publications/the-world-factbook/geos/in.html, accessed 4 February 2010; India people, The Central Intelligence Agency website, https://www.cia.gov/library/publications/the-world-factbook/geos/in.html, accessed 4 February 2010; Media in India: industry prole, December 2009, Datamonitor; China economy, The Central Intelligence Agency website, https://www.cia.gov/library/publications/ the-world-factbook/geos/ch.html, accessed 4 February 2010; China people, The Central Intelligence Agency website, https://www.cia.gov/library/publications/ the-world-factbook/geos/ch.html, accessed 4 February 2010; Media in China: industry prole, December 2009, Datamonitor.

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Identifying addressable opportunities in BRIC countries


Brazil
Brazil is the second-largest economy of the BRIC economies (in terms of GDP) with the M&E industry generating revenues of US$17.1 billion.2 The country has 67% of its population in the working age group.3 Brazil, which has been dominated by free broadcast television for a long time is gradually shifting to pay television and other networks. Over the past few years, entry barriers for foreign investors in the Brazilian M&E industry have been reduced. The under-penetrated internet and pay television markets now look very attractive to media companies globally. As television operators in Brazil digitize their networks, various international players may consider entering into technological or strategic alliances. The Government in Brazil is also promoting nancial investment in the M&E industry through tax incentives and sector funds, offering loans and direct investments in exchange for equity, in both lmed projects and other M&E opportunities. Also, it is allowing broadcasters and pay television programmers to invest part of their tax money in lms and television shows. These changes have opened up Brazils audio-visual market for partnerships in several areas, including co-productions.

Russia
Russia is the eighth-largest economy in the world with a GDP of US$1.25 trillion in 2009.4 While Russias population declined by 0.47% year-over-year to reach 140 million as of July 2009, it has a growing urban population and a large working population accounting for 72% of the total.5 The Government in Russia is planning to create a favorable regime for foreign companies, especially those who will bring in new technologies into the country. The TV and Radio Broadcast Development Program introduced by the Ministry for Communications and Information in November 2007, is expected to bring many new foreign entrants to the Russian market to help the Government to digitize the television and radio networks of the country. Studies have shown that Russian internet users socialize more than some of the Western Europe countries such as France.6 Digital media presents several opportunities for domestic as well as foreign investors.

As the M&E industry in developed markets copes with the digital revolution amid an economic downturn and stagnating growth rates, emerging markets offer an attractive alternative, driven by their fast-growing middle class and relative youth. John Nendick, Global Media & Entertainment Leader, Ernst & Young

2 3 4 5 6

Brazil economy, The Central Intelligence Agency website, https://www.cia.gov/library/publications/the-world-factbook/geos/br.html, accessed 4 February 2010. Brazil people, The Central Intelligence Agency website, https://www.cia.gov/library/publications/the-world-factbook/geos/br.html, accessed 4 February 2010. Russia economy, The Central Intelligence Agency website, https://www.cia.gov/library/publications/the-world-factbook/geos/rs.html, accessed 26 February 2010. Russia people, The Central Intelligence Agency website, https://www.cia.gov/library/publications/the-world-factbook/geos/rs.html, accessed 25 February 2010. Russia - Broadband Market - Overview, Analysis & Forecasts, 22 November 2009, via ISI Emerging Markets; Ernst and Young analysis; Broadband forecast pack: 200914, via Ovum, accessed October 2009; Mobile connections forecast pack: 200914, via Ovum, accessed December 2009.

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India
The Indian economy is on the path of robust growth. It remains the second-fastest growing major economy in the world after China. The country is headed for a demographic sweet spot. Besides having the second-largest population in the world, it is also the youngest nation among the BRIC economies. India has a large pool of technical and non-technical graduates joining the workforce every year and has the second-largest Englishspeaking population in the world.7 As the largest lm-producing nation in the world, India holds immense opportunities for foreign players.8 Many global studios have already entered the Indian lm market and partnered with Indian directors to make Indian language lms. India is becoming a hot bed for media content outsourcing from animated lms to special effects, post-production and print media services such as layout design, graphics and data compilation. India also has a vibrant content market. Global television content producers can localize their content for the Indian market to tap further opportunities.

China
China is the largest economy of the BRIC economies with a GDP growth rate of 8.4% in 2009.9 The M&E market generated revenues of US$50.5 billion in 2009, reecting a year-over-year increase of 7.4%.10 The country has 72.1% of its population in the working age group, a growing urban population (constituting 43% of total population in China in 2008) and is fast becoming a literate population, with 91% literacy rate for those 15 years and older. Economic growth, coupled with a large population, is leading to a growing purchasing power in China, and the youth are driving higher discretionary spending in media-related activities. China is the worlds largest television market with an estimated 160 million television households. It has some of the largest internet and broadband subscriber bases globally with 117 million and 124 million, respectively. The emergence and proliferation of the new media platforms offer an attractive avenue to foreign companies looking to enter China. For those looking to make money in Chinas M&E market, the internet will increasingly dominate. Chinas mobile media market is bracing for a new phase of growth too. The advertising industry, which is experiencing rapid growth, also offers various opportunities for global giants. China currently leads the world in the number of digital displays deployed. All major advertising agencies have a presence in China through joint ventures with local partners. Under the new regulations, foreign-invested advertising enterprises can engage in design, production, publication and some other types of advertising businesses, for both domestic and overseas customers after receiving ofcial approval. Although there are a number of barriers to success in China, rewards have and will continue to be considerable for companies that manage to navigate its unique environment.

7 8 9 10

India people, The Central Intelligence Agency website, https://www.cia.gov/library/publications/the-world-factbook/geos/in.html, accessed 4 February 2010. India in focus at Cannes, Financial Express (India),12 May 2009, via Dow Jones Factiva 2009 Indian Express Pty. Ltd China economy, The Central Intelligence Agency website, https://www.cia.gov/library/publications/the-world-factbook/geos/ch.html, accessed 4 February 2010. Media in China: industry prole, December 2009, Datamonitor.

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Challenges
Piracy, foreign direct investment (FDI) restrictions, Government regulations and censorship continue to be the major challenges for the M&E players operating in the BRIC economies.

Russia
The regulatory framework in Russia is restricted. The Government has planned to restrict foreign investment in strategic internet portals and websites, as a national security measure.11 While Russia has rapidly adopted new technologies, effective monetization of digital content continues to be a challenge. Also, Russias incumbent broadcasting network operators are facing challenges related to digitizing analog networks and are threatened by entry of new market players, especially telecom operators. Pay television operators in Russia have relatively poor average revenue per user (ARPU) levels due to the availability of high quality content on the free terrestrial television.

Brazil
The M&E industry in Brazil has been extensively regulated by various Government bodies. Cable and other television distribution platforms such as direct to home (DTH) and internet protocol television (IPTV) are subject to different rules. Widespread launch of IPTV is restricted in Brazil, due to telecom regulations, which prohibit xed-line telephone operators from offering pay television services on their networks. Music piracy and signal piracy are some of the most common forms of piracy in Brazil. Signal piracy in 2008 corresponded to almost 13% of the legal cable television subscriber base.

Global M&E companies are increasingly focusing on the role that emerging markets are playing in content consumption as well as content creation. Leading global companies that fail to optimize the opportunities in emerging markets may lose out. Howard K. Bass, Ernst & Young

11

Dragana Ignjatovi, Russia planning to restrict foreign investment in Internet rms, Global Insight Daily Analysis, 10 April 2009, via Dow Jones Factiva, 2009 Global Insight Limited.

Global Media & Entertainment Center

India
Distribution in India is largely based on analog technology which suffers from lack of addressability and transparency. Rampant piracy is another challenge in the country. ARPUs are still low compared to the global average, although large and growing volumes make up for it. Distribution is largely based on analog technology, which suffers from lack of addressability of the subscriber base. By international standards, India is still very low on personal computer (PC) and broadband penetration.

China
The State Administration of Radio, Film and Television (SARFT) is responsible for laws, policies and editing specic types of sensitive content for the countrys radio, television and lm industries. The M&E market in China has been highly regulated for years. International media companies have faced many difculties in effectively penetrating the Chinese market. Unauthorized reproduction of content and price levels have led to skepticism about the ability of companies to make money in Chinas digital markets. While local players have been able to adopt creative solutions to produce prots, the challenges for content-based foreign ventures continue to be profound. Like many other emerging markets, the due diligence processes can pose unique challenges. Investors also need to address the lower transparency, integrity of nancial data, revenue recognition and exposure to nancial contingencies.

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Critical success factors


Localize content: To succeed in the BRIC economies, global media companies need to localize their content and be sensitive to local cultures. Content needs to be repurposed to suit the local audiences of these countries. Assessment of pricing and distribution channels: To succeed in the BRIC economies, global companies also need to thoroughly assess the market and distribution channels to price the content appropriately. The price point in a BRIC economy is just a fraction of what consumers would pay in a developed market due to competition, regulations and piracy. However, the huge and fast-growing volumes more than make up for the low prices. Understand the regional nuances within each country: Global media companies should understand that large countries such as Russia, India and China have several internal markets. For example, the M&E market in South India is distinctly different from the North. Therefore, to succeed, global companies need to adopt different strategies for each region as there will be differences in the demand, the type of content desired, the mode of distribution of content and the revenue models employed. Flexible business plans: It is evident that various local media companies are beating the global players in these countries and therefore, need to have exible business plans. Also, the growth in demand for local content is expected to outpace the growth in supply of local talent, leading to super-ination, which needs to be factored into the business plans. Financial risk mitigation: Foreign investors should remember that the due diligence process in emerging markets can pose unique challenges. Lack of transparency and concerns over the integrity of nancial data can signicantly diminish the ability to get a true picture of the nancial results. Investors need to understand their exposure to nancial contingencies. Identifying key risks and exposures would increase the chances of completing successful transactions in emerging markets.

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Brazils growing economy, favorable demographics, rising disposable incomes and an under-penetrated market make it an attractive M&E investment destination.

Global Media & Entertainment Center

Brazil

Economy and demographics


Brazil is the tenth largest economy in the world with its GDP surpassing US$1.5 trillion in 2009.12 On account of the global economic slowdown, the countrys GDP in 2009 increased by 0.1% year-over-year. Brazil is the fth most populous country in the world with approximately 199 million people in 2009, reecting a yearon-year growth rate of 1.2%. The country is considered to be a relatively young country with a median age of 28.6 years and almost 67% of its people are in the age group of 1564 years.12 Brazil has been able to attain a high level of literacy at approximately 88.6%. It is essentially an urban country with around 86% of the total population living in urban areas.12 Television: Brazil, which has been dominated by free broadcast television, is gradually shifting to pay television networks. The market provides a wider scope for global television companies to establish their presence. While many global content providers have a presence in Brazil, the large domestic companies have signicant advantages due to their strong brands and an understanding of local culture and tastes. Movies and entertainment: The lm market has been supported by nancial investments made through tax incentive laws. One such initiative is the sector fund managed by the Ministry of Culture, which offers loans and direct investments in exchange for equity in both lmed projects and other companies. Due to a growing younger population, live concerts and sports, especially football, attract very large audiences in Brazil. Digitization: With consumer preferences shifting toward digital media, the television operators in Brazil are digitizing their networks. This trend is expected to attract various international players entering the market through technological or strategic alliances with the local players.

Key opportunities
Internet: Over the past few years, regulatory bodies have reduced the entry barriers for foreign investors in Brazils M&E industry. The under-penetrated internet market is an attractive avenue for global M&E companies. Also, the growing usage of PCs in the country is expected to drive the internet demand. The emerging middle-class and changing demographics have also led to an increasing demand for broadband services and digital content.

12

Brazil economy, The Central Intelligence Agency website, https://www.cia.gov/library/publications/the-world-factbook/geos/br.html, accessed 4 February 2010.

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Challenges
Piracy: There is widespread piracy in Brazil, with more than one billion music tracks downloaded illegally each year. Counterfeit discs account for up to half of all CDs and DVDs sold in the country. Signal piracy has always been a problem for cable television operators. According to Brazils pay television providers syndicate Sindicato das Empresas de Television por Asinatura (SETA), signal piracy in 2008 corresponded to 13% of the legal cable television subscriber base.13 Although piracy is rampant in Brazil, the Government, private companies and associations related to the M&E industry have set several policies, including educational campaigns and police actions against street vendors. The National Anti-Piracy Council (a department within the Ministry of Justice) has joined efforts with the private sector to promote anti-piracy policies. However, it is imperative to strengthen the intellectual property rights (IPR) enforcement legislation and take more rigorous action to address piracy issues. Few players dominate the industry: Brazil is a highly concentrated market with a few large players dominating the M&E industry. Six family rms control almost 80% of the television networks, and seven out of the top ten magazines across the country are owned by a single group. Also, just two newspaper corporations in the state of Sao Paulo have a tenth of the national market share.14 These companies have signicant advantages over foreign companies. Regulatory issues: The M&E industry in Brazil has been extensively regulated by various Government bodies where cable and other television distribution platforms such as DTH and IPTV are subject to different rules. The widespread launch of IPTV is restricted in Brazil, due to a regulation that prohibits xed-line telecom operators from offering pay television services on their networks. However, as an alternative, operators can offer Video-On-Demand (VoD), which is a byproduct of IPTV. Over the past few years there have been some regulatory amendments that allow 30% foreign ownership in domestic media companies. Foreign capital participation is permitted up to 100% of the voting capital for Multichannel Multipoint Distribution Systems (MMDS) and DTH providers (through a subsidiary formed under Brazilian laws and with its principal place of business in Brazil), and up to 49% of the voting capital for cable television providers.15 Earlier, legislation prohibited pay television operators in Brazil from offering telephony services, but this changed with the deregulation in January 2002, although there are still certain restrictions. Since then, many television companies have entered the telecom sector with broadband or voice services such as VoIP.

With signicant regulatory changes expected in the near future, technological advancements and favorable demographics, the under-penetrated M&E industry in Brazil is poised for growth. Paulo J. Machado, Media & Entertainment Leader, Ernst & Young, Brazil

13 14 15

ISI Brazil - Convergence and Pay TV Market, Industry Prole, July 2009, via ISI Emerging Markets. Ernst & Young analysis. Brazil - Convergence and Pay TV Market, Industry Prole, July 2009, via ISI Emerging Markets.

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Global Media & Entertainment Center

Overview of the M&E industry in Brazil


The M&E industry in Brazil has been consistently growing, generating total revenues of US$17.1 billion in 2009. The industry has grown at a compounded annual growth rate (CAGR) of 4.2% during the period 2005-09.16

Figure 2: The M&E industry in Brazil


17.5 17 M&E industry value (US$ bllion) 16.5 16 15.5 15 14.5 14 1 13.5 13 2005 2006 2007 2008 YoY growth (%) 2009 M&E industry value (US$ billion)
Source: Datamonitor, Media in Brazil, Industry Prole, December 2009

6% 16.2

17.1 6%

7 6 5 4 YoY growth (%)

15.3 14.9 14.6 2% 3%

3 2

Figure 3: The M&E industry by segments in 2009


Segment Broadcasting and cable television1 Publishing
1

Market size (US$ billion) 9.1 3.6 2.7 1.7 0.5

Movies and entertainment1 Advertising Radio


1

Datamonitor Media in Brazil, Industry Prole, December 2009 2 Intermeios Report

16

Media in Brazil: industry prole, December 2009, Datamonitor.

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Segment analysis
Broadcasting and cable television
Free broadcast television dominates: Often known as the television country, Brazil had 53 million television households with a household penetration of 95% in 2009.17 Free broadcast television remains the dominant media provider in Brazil, reaching a majority of viewers across the country. This segment derives 80% of its revenue from advertisements.18 The free broadcasting segment is dominated by six privately-owned national broadcast television networks and a Government-owned national public television network.19 Pay television is on the rise: Twenty years after pay television began in Brazil, it continues to expand, with nearly 6.6 million subscribers in 2009, registering approximately 18% growth over the last year.20 Over the past few years, the sector has witnessed a huge growth, owing to the importance of triple-play and quadruple-play solutions for pay television customers and operators. Cable television has consistently dominated the pay television market, capturing an average 60% share in the last ten years. DTH with a 33% share and MMDS with a 6% share in the total pay television market are also some of the widely used technologies. In March 2009, cable television had more than four million subscribers, whereas DTH managed about two million customers.20 New technologies are redening the market: IPTV and Digital Terrestrial Television (DTTV) are some of the emerging service models in the pay television market, giving tough competition to DTH and cable television services. DTTV was rst launched in Sao Paulo in 2007, and by the end of June 2009, there were 200,000 DTTV set-top-boxes in households across 15 cities.20 Also, the convergence of xed and mobile voice services along with video over a single broadband connection is booming, as it offers billing solutions and discount packages to customers along with lower operating costs for the suppliers. Soap operas and football are among Brazils favorite genres of content: Popular genres differ widely in free broadcast television and pay television market. While soap operas and news channels are the favored ones in the former segment, kids channels and sports events (especially football) are preferred in the latter.

Cable television has consistently dominated the pay television market, capturing an average 60% share in the last ten years. DTH with a 33% share in the total pay television market is also a widely used platform.

17 18 19 20

ISI Brazil - Convergence and Pay TV Market, Industry Prole, July 2009, via ISI Emerging Markets. Ernst & Young analysis. NET SERVIOS DE COMUNICAO S.A.,Form 20-F, 31 December 2008. Brazil - Convergence and Pay TV Market, Industry Prole, July 2009, via ISI Emerging Markets.

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Publishing
While newspapers remain stagnant, magazines continue to grow: The print industry in Brazil is estimated to be a market worth US$3.6 billion in 2009, largely dominated by the newspaper segment.21 There are approximately ten million daily newspaper readers with more than 200 publications in the country.22 There are signicant numbers of international magazine titles that are sold in Brazil as well. Threat from the internet: In recent times, the print media has witnessed growing competition from the internet. There has been a rapid increase in the migration of readers to internet-based publications. Another trend hitting the market is the entry of low-cost newspapers, which are relatively short and direct (3-4 pages). While a newspaper in Brazil costs somewhere around US$1-2, these low-cost newspapers are available at 25 cents.22 now receives annual Government incentives of about US$90 million.24 Over the past few years, there have been numerous co-production agreements between the local lmmakers and media companies abroad. Audio-visual cooperation agreements with Argentina, Paraguay, Uruguay and other American countries will, in the next few years, make Brazil one of the most important audio-visual hubs in the South American continent. Apart from nancial and marketing advantages, Brazil is slowly building its technical and talent base too. Concerts by international performers are on the rise: Live shows are becoming regular events in Brazil. In 2008, there were 249 shows performed by international stars, almost double the number of such performances in 2007. Currency stability and the countrys increasing youth population, which has an increasing propensity to spend on outdoor entertainment, are key factors for the success of these large-scale concerts.

Movies and entertainment


Increasing foreign partnerships: The movie and entertainment industry, valued at US$2.7 billion in 2009, has been growing at a signicant rate over the past few years.21 After making just two movies in 1991, the domestic lmmakers completed around 90 productions in 2008, of which about a dozen were partnered with US, Asian, Canadian and European producers.23 Tax incentive laws are stimulating large-scale productions: The rise in domestic lm production in recent years is due to the Governments decision in the early 90s to give the country a new audio-visual policy. The industry

Radio broadcasting
The radio broadcasting industry in Brazil is still nascent and has been estimated at around US$470 million in 2009.22 Most advertisements come from the private sector, followed by city halls, federal Government and state administration.25 Popular genres differ widely on amplitude modulation (AM) and frequency modulation (FM) radios. The AM stations offer a variety of programs, while FM radio stations concentrate on music.

21 22 23 24

Media in Brazil: industry prole, December 2009, Datamonitor. Ernst & Young analysis. Entertainment; New take for Brazils lm sector, Los Angeles Times, 23 October 2008, via Dow Jones Factiva. Brazil lm biz sails into mainstream; Industry aims at retaking the local box ofce, Daily Variety, 17 September 2008, via Dow Jones Factiva, 2008, Variety, Reed Business Information, a division of Reed Elsevier, Inc. Brazil: Radio advertising worth R$1.4bil in 2007, Folha de So Paulo, 24 September 2008, via Dow Jones Factiva, 2008 SABI South American Business Information.

25

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14

An emerging middle class, which represents almost 40 million consumers along with a growing population of young people, will lead to an increased demand for the internet, broadband and mobile. To capture this market, traditional media incumbents are making forays into the new media segment and making signicant investments.

Digitization is the way forward: The radio industry in Brazil is on the way to be digitized; the only hurdle being the pending decision on the technology to be used. A major revolution took place in 2006-07, when broadcasters formed the Brazilian Alliance for Digital Radio to promote and support the deployment of high-denition radio technology. The issue here is the price and availability of receptors, which can prove to be an obstacle in the radio industry. It is estimated that each company would have to invest US$80,000-120,00026 to migrate from the current analog technology. However, radio companies hope that the digital evolution will raise their advertising income and the share of radio in the overall advertising pie.27

user-generated content are gaining widespread popularity in the country. New media is growing at signicantly higher rates than traditional media. In 2009, there were approximately 174 million mobile subscribers, 22.5 million internet and 14 million broadband subscribers, registering a CAGR of 19.2%, 19.5% and 35%, respectively, in the period 2007-09. Most of the traditional media incumbents are foraying into the internet segment, with leading major M&E companies boosting organic investments and looking out for acquisitions. Ecommerce has been popular since its inception. Studies by a local research rm stated that retail ecommerce transactions increased by 30% in 2008. Online retail purchases reached US$2.2 billion in the rst half of 2009.30 Lured by the growth prospects, some of the major ofine retailers have entered the online space in the last two years. Pricing still an issue: In terms of broadband subscribers, Brazil is the leader in Latin America. Broadband charges in Brazil have been dropping while speeds have been increasing; however, prices are still high for the domestic socio-economic environment. As a result, broadband access is still beyond the reach of the majority of the population in a country that still suffers from a highly unequal income distribution.30 Government incentives: The Government has been active in developing programs aimed at making broadband access available to the lower income brackets of the population. Government incentives to promote internet uptake in Brazil include low-priced subsidized computers and free internet kiosks.

New media
Internet leads the new media story: With a promising economic outlook, rising prosperity and a young population, the demand for mobile, internet and broadband in Brazil is expected to soar. According to a report from a local publication, there are 56 million PCs in use in the country with 100 million anticipated by 2012.28 The growth in PC sales will be driving the continued growth of broadband demand in Brazil. Also, an emerging middle class in the country, which represents around 40 million consumers, will lead to an increasing demand in the new media segment. The growth of mobile broadband in Brazil has attracted more than four million subscribers to date.30 The size of the internet advertising market was US$431.4 million in 2009.29 Brazils youth are keen internet users, especially for social activities. Blogging, online forums and

26 27 28

Brazil: The issues on digital radio technology, Valor Economico, 24 September 2008, via Dow Jones Factiva, 2008 Latinscore. Brazil: Digital radio technology to be decided, O Estado de Sao Paulo, 20 August 2007, via Dow Jones Factiva, 2007 Latinscore. Industry Trends And Developments - PC Growth Driving The Expansion Of Broadband, BMI Industry Insights, 28 May 2009, via Dow Jones Factiva, Business Monitor International. Brazil: Internet advertising needs up to date regulations, IT Digest, 1 April 2009, via Dow Jones Factiva, 2009 Latinscore. Brazil - Internet and Broadband Market, Industry Prole, January 2010, via ISI emerging markets.

29 30

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As revenues from digital media grow much faster than their traditional counterparts, Russia offers several opportunities to global M&E companies in the new media space. However, navigating its cultural and political environment could prove to be a challenge.

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Russia

Economy and demographics


Russia is the ninth largest economy in the world, with a GDP of US$1.3 trillion in 2009. As a result of the global economic downturn, the countrys GDP in 2009 declined by 8.5%. The Russian economy was one of the hardest hit by the 200809 global economic downturn due to falling oil prices and lack of foreign credits that the Russian banks and rms have traditionally relied on. However, in 2010, Russias GDP is expected to grow modestly, reecting that the economy has started recovering from the impact of the nancial crisis. In 2009, Russias population also declined by 0.5% year-overyear, to reach 140 million as of July 2009. The countrys population is slowly aging, with the current median age of 38.4 years. Only 15% of the total population falls in the age group of 014 years, while approximately 72% of the total population falls in the working age group (1564 years).31

Key opportunities
Television: With the ongoing drive towards digitizing the television and radio broadcasting networks in Russia, there is an opportunity for foreign companies to participate. Introduced in November 2007, aims to digitize Russias television and radio broadcasting networks entirely. The move is expected to bring many new foreign entrants in the market to help the Government achieve its goal of digitization. On the content side, foreign players can partner with local companies to cater to the domestic television market. Genres such as soap operas and cartoons are very popular in Russia. Meanwhile, Roskomnadzor, the federal body responsible for licensing channels in Russia, has approved the distribution of foreign television channels on the Russian cable networks. At present, various foreign television channels have already received the media registration licenses to broadcast over the domestic cable networks.

As rapid adopter of technology, Russia leads the race among other European countries in digital content consumption, mobile internet and social networking. However, effective monetization continues to be a challenge. Even so, predicted growth in digital revenues presents an excellent opportunity for investors, domestic and foreign alike. Vadim Balashov, Media & Entertainment Leader, Ernst & Young, Russia

31

Russia economy, The Central Intelligence Agency website, https://www.cia.gov/library/publications/the-world-factbook/geos/ rs.html, accessed 26 February 2010; Russia people, The Central Intelligence Agency website, https://www.cia.gov/library/ publications/the-world-factbook/geos/rs.html, accessed 25 February 2010.

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18

Challenges
New media: The emergence of new media is an attractive avenue for foreign companies. With consumer preferences shifting toward online media, there is likely to be a higher demand for online content in Russia. Internet subscribers in Russia are expected to increase from 21.3 million in 2009 to 40.2 million in 2012. Mobile subscribers are expected to increase from 204.3 million to 226.9 million during the same period.32 Rising broadband usage has also created a demand and market for web-based television content, including news, music and entertainment. Movies and entertainment: A new draft bill that aims to make foreign investments in the movie industry in Russia more attractive, was submitted to the Parliament of the Russian Federation in October 2009. The proposed bill aims to introduce a unied computerized information system to record the number of showings of movies allowable in cinemas. The bill also proposes to increase the share of foreign investment in movie budgets to up to 50% from the previous 30%. Such amendments, if approved, are expected to make foreign investments in the movie industry more attractive.33 Additionally, various foreign companies are entering the M&E market in Russia through licensing arrangements. The trend is expected to be followed by many more foreign companies in the country in the future. Recently, a leading Russian mobile operator has signed an agreement with a US-based lm production and distribution company to sell lms in Russia via the internet.34 Low average revenues: M&E companies in Russia have been continuously facing relatively poor ARPU levels in the countrys pay television market. This is primarily due to the availability of high-quality content on the terrestrial television for free. The terrestrial television service offers 20 free-to-air channels in Moscow alone.35 Plans to restrict FDI for internet companies: The Government is planning to restrict foreign investment in strategic internet portals and websites as a national security measure. The Communications Ministry is in the process of developing a security criteria to determine which companies will be prohibited from seeking foreign investment. In 2008, the Russian anti trust authorities blocked a leading US-based search engine from buying a stake in one of the countrys top internet portals. Consumers and stakeholders have raised concerns that such moves to limit investment will reduce access to information.36 Incumbents face digitization challenges: Russias incumbent broadcasting network operators are facing challenges to digitize analog networks mainly due to the high costs involved in the switchover. At the same time, the incumbents are facing increasing competition from the new entrants, especially telecom operators, who are in a better position to upgrade the broadcasting infrastructure.37

32 33 34

Russia - Broadband Market - Overview, Analysis & Forecasts, 22 November 2009, via ISI Emerging Markets. Duma may expand borrowing opportunities to Russian movie producers, ITAR-TASS World Service, 5 October 2009, via Dow Jones Factiva. Press: MTS inks deal with Paramount to sell lms via Internet, Prime-TASS News (Russia), 2 September 2009, via Dow Jones Factiva; WMI, Nikitin forge license deal for Russia, CIS, Billboard.biz,19 February 2008, via Dow Jones Factiva, 2008, Nielsen Business Media. Russia - Convergence - Triple Play & Digital TV, 9 August 2009, via ISI Emerging Markets. Dragana Ignjatovi, Russia planning to restrict foreign investment in Internet rms, Global Insight Daily Analysis, 10 April 2009, via Dow Jones Factiva, 2009 Global Insight Limited. Russia - Convergence - Triple Play & Digital TV, 9 August 2009, via ISI Emerging Markets.; Russia not to stop foreign companies participating in TVs switch to digital, BBC Monitoring Former Soviet Union, 10 September 2009, via Dow Jones Factiva; Digital challenges for Russia and Ukraine, Broadband TV News, 23 February 2010, via Dow Jones Factiva, 2010 M2 Communications.

35 36

37

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The regulatory scenario


Introduced in December 1991, the Law on Mass Media regulates the broadcasting industry in Russia. Under this law, any media organization, either print or broadcast, is required to rst register as a divison of mass media. In March 2006, a federal advertising law limited television commercials to 20% of the airtime per hour and 15% per day with advertising time not permitted to exceed four minutes. In 2008, advertising during commercial airtime was further reduced to 15% of the airtime per hour. In April 2008, the Parliament passed the law on FDI in strategic industries. Overall, 42 economic activities are classied as strategic, including the mass media activities (such as television or radio broadcasting and major print media). The law prohibits foreign investors from obtaining control over Russian companies conducting activity in these strategic sectors. The Government is also reviewing a draft proposal that aims to limit the television content and length of advertisements during childrens programs. Television content is limited to exclude violent and other aggressive content. The state provides funding to major television channels that cover signal distribution in Russian towns having populations of less than 200,000. The aim is to expand the reach of terrestrial television services in Russia.38

38

Russia - Convergence - Triple Play & Digital TV, 9 August 2009, via ISI Emerging Markets; Russian media - Looking Beyond 2009 - Credit Suisse Europe, 7 August 2009, via ISI Emerging Markets; Doing Business in the Russian Federation, Ernst and Young 2009.

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Overview of the M&E industry in Russia


The M&E industry in Russia grew by 4.5% in 2009 to reach a value of US$13.9 billion. Even though the industry growth rate declined briey in 2009, revenues are expected to return to their previous growth levels in the future. Revenues are expected to increase at an average annual growth rate of 7.5% for the ve-year period 20072012 to reach US$16.9 billion in 2012.39

Figure 4: The M&E industry in Russia


16 M&E industry value (US$ bllion) 14 12.3 12 10.4 10 8 6 4 2 2 0 2005 2006 2007 2008 YoY growth (%) 2009 M&E industry value (US$ billion)
Source: Datamonitor, Media in Russia, Industry Prole, December 2009.

9 13.3

10 13.9 9 8 YoY growth (%) 7 6 5 5 4 3

11.3

1 0

Figure 5: The M&E industry by segments in 2009


Segment Publishing
1

Market size (US$ billion) 5.6 4.5


1

Advertising1 Broadcasting and cable television Movies and entertainment Radio2


1 2

1.9 1.9 0.3

Datamonitor Media in Russia, Industry Prole, December 2009. National Association of Television and Radio Broadcasters.

39

Media in Russia: industry prole, December 2009, Datamonitor.

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Segment analysis
Publishing
The market for newspapers and magazines in Russia grew at a CAGR of 6.1% between 2003 and 2008 with newspapers leading the market, accounting for an 84.2% share.40 Tough competition from online media: Despite printing still being the most commonly used method of mass-producing books, newspapers and magazines, online media is gaining momentum in Russia. This is expected to attract several new players into the market that will bring new technologies to produce and distribute online content to consumers. Impact of the global recession on the segment: Due to the global economic downturn in 200809, more than 200 regional mass media and six federal magazines went bankrupt. In January 2009, a majority of publishers reduced their spending by 10%15% on average, circulations of some publications decreased, free supplements were closed, and various new projects were frozen.41 About 30%50% of the bookstores and bookstalls in Russia were closed in 2009, with a considerable contraction in the literature market.42 Even businesses reduced their advertising spending on print media such as newspapers, magazines and billboards, and channeled their advertising budgets to television and, the internet.43 Some publishing houses have been expanding the scope of their operations within the country to overcome the impact of the economy. For example, a Russian tabloid newspaper recently planned to launch a radio station to expand its media market share.44

Broadcasting and cable television


Free broadcast television dominates: The television broadcasting market in Russia consists of both pay and free television services. Average daily viewing time for a Russian family of four people is equivalent to 3 hours 30 minutes. Terrestrial television is available for free and is the most popular mode to television viewing.45 A majority of the population has access to at least one terrestrial television channel. Advertising is the main source of income for terrestrial channels. Cable dominates the pay television market: The pay television market in Russia had 19.3 million households as of January 2009.45 Cable television contributed 65% to the total pay television market revenues and accounted for 80% of total pay television subscribers in 2008.45 More than 600 operators offer cable television services in Russia.45 Satellite pay television services accounted for another 33% of the total pay television market and 19% of the total subscribers, followed by IPTV, which contributed 2% of the total pay television market and accounted for 1% of the subscribers.45 Digital television is on the rise: Digital television is gaining momentum in the country as the Government is investing in the transition of the existing broadcasting networks to digital. The move is a part of the Ministry for Communications and Informations TV and Radio Broadcast Development Program, launched in November 2007. The plan entails offering all Russian viewers ve to six free-to-air national channels and one regional channel by 2015, using the European Digital Video BroadcastingTerrestrial (DVB-T) standard. During 200815, the investment in digitization by the Government is likely to reach approximately US$14.71 billion.45

40 41

News and magazine in Russia to 2013, Market Research.com, 31 August 2009, via Dow Jones Factiva. Russias printed media market to return to pre-crisis level in 2011., ITAR-TASS World Service, 2 November 2009, via Dow Jones Factiva; Media in crisis undergo serious endurance test ofcial, ITAR-TASS World Service, 13 March 2009, via Dow Jones Factiva. One third of Russian bookstores to disappear?, SKRIN Newswire, 12 February 2009, via Dow Jones Factiva. Irina Filatova, Ad dollars move to TV and Internet, The Moscow Times, 16 December 2009, via Dow Jones Factiva; Russias printed media market to return to pre-crisis level in 2011., ITAR-TASS World Service, 2 November 2009, via Dow Jones Factiva. Radio Komsomolskaya Pravda could go on air in month, Interfax: Russia & CIS Business and Financial Newswire, 18 February 2009, via Dow Jones Factiva. CTC media set to launch international broadcasting in North America, Wireless News, 28 December 2009, via Dow Jones Factiva; Russian state TV starts satellite transmission to Latin America, BBC Monitoring media, 22 July 2009, via Dow Jones Factiva; Russia - Convergence - Triple Play & Digital TV, 9 August 2009, via ISI Emerging Markets.

42 43

44 45

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In order to remain competitive, operators are also introducing video-on-demand (VoD) and high-denition television (HDTV) programming broadcasting services in the country. Domestic Russian television companies expanding to other geographies: Domestic companies have been active in spreading their footprint in other geographies. Recently, a leading media company in Russia, in association with a US-based pay television provider, launched a 24-hour family entertainment channel in North America. Additionally, a Russian state television broadcaster has started unencrypted satellite broadcasts in Latin America.46

Radio broadcasting
Despite the fact that the radio advertising market in Russia has been posting double-digit growth gures in recent years, the countrys radio advertising revenues are expected to decline in 2009 to reach approximately US$329 million.49 The Government is open to foreign participation in order to develop a digital television and radio broadcasting network in Russia.50 The Government has also approved about US$2.5 billion of federal funding for the development of television and radio broadcasting during 2009-15.51

New media Movies and entertainment


Government funding continues: Government funding for the movie industry in Russia is likely to increase by 55% to reach US$163.2 million in 2010. The funding will be used to produce cartoons, childrens movies, ction and documentaries. The Culture Ministry in Russia will continue to fund movies, including art houses, youth movies and debuts.47 Increasing licensing arrangements: Foreign companies are entering into the M&E market in Russia by signing licensing agreements with local companies. Recently, a leading Russian mobile operator has signed an agreement with a US-based lm production and distribution company to sell lms in Russia via the internet. Additionally, a leading US-based M&E company signed an exclusive licensing agreement with a Russian independent music rm, allowing the Russian company to market, manufacture and distribute the US rms physical product in the country.48 Internet gaining momentum: The internet market is growing, primarily dominated by increased broadband and PC penetration. In 2009, internet subscribers in Russia grew by 37.7% over 2007 to reach 21.3 million, with the broadband subscribers growing signicantly by 118.9% to 9.1 million.52 Additionally, with increasing numbers of Russians going online, there is a higher demand for online content that has resulted into the emergence of signicant search engines. Foreign companies have also shown interest in the internet market in Russia. Broadband to create demand for web television: Rising broadband usage has also created a demand for web-based interactive television (web television) content, including news, local content, music and entertainment. Web television providers include both traditional terrestrial and cable television broadcasters.

46

CTC media set to launch international broadcasting in North America, Wireless News, 28 December 2009, via Dow Jones Factiva; Russian state TV starts satellite transmission to Latin America, BBC Monitoring media, 22 July 2009, via Dow Jones Factiva. Govt funding of Russian movie industry to grow 55% in 2010 2, ITAR-TASS World Service, 3 November 2009, via Dow Jones Factiva. PRESS: MTS inks deal with Paramount to sell lms via Internet, Prime-TASS News (Russia), 2 September 2009, via Dow Jones Factiva; WMI, Nikitin forge license deal for Russia, CIS, Billboard.biz, 19 February 2008, via Dow Jones Factiva, 2008 Nielsen Business Media. Radio ad sales down 6% on year in Russia in 2008, Prime-TASS News (Russia), 11 February 2009, via Dow Jones Factiva; Ernst and Young analysis; Media industry in trouble, WPS: The Russian Business Monitor, 26 December 2008, via Dow Jones Factiva. Russia not to stop foreign companies participating in TVs switch to digital, BBC Monitoring Former Soviet Union, 10 September 2009, via Dow Jones Factiva. Russia approves $2.5 bln broadcasting plan up to 2015, RIA Novosti, 23 September 2009, via Dow Jones Factiva Russia - Broadband Market - Overview, Analysis & Forecasts, 22 November 2009, via ISI Emerging Markets; Ernst and Young analysis; Broadband forecast pack: 200914, via Ovum, accessed October 2009; Mobile connections forecast pack: 200914, via Ovum, accessed December 2009.

47 48

49

50 51 52

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Global Media & Entertainment Center

Despite increasing mobile phones penetration, messaging and mobile gaming usage is still low: Penetration of mobile phones in Russia has reached the level of developed countries. The mobile subscribers in Russia grew by 24.8% from 163.7 million in 2007 to 204.3 million in 2009. Despite increasing mobile subscribers, the usage of short message service (SMS) and multimedia messaging service (MMS) in Russia is still lower than the developed countries.53 Also, there are fewer gamers in Russia as compared to developed countries, while this number is gradually increasing.53

53

Russia - Broadband Market - Overview, Analysis & Forecasts, 22 November 2009, via ISI Emerging Markets; Ernst and Young analysis; Broadband forecast pack: 200914, via Ovum, accessed October 2009; Mobile connections forecast pack: 200914, via Ovum, accessed December 2009.

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With a conducive regulatory environment and high volumes of content consumption, India holds signicant potential for foreign investments across all segments of the M&E industry. Many global M&E conglomerates have been present in India for over a decade, and others continue to build there presence.

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Global Media & Entertainment Center

India

Economy and demographics


The Indian economy is on the path of robust growth. Annual growth in GDP during the last three years averaged 7.5%. Indias GDP stood at US$1.2 trillion in 2009. As a result of the global economic downturn, growth in GDP dropped to 6.1% in 2009 from 9% in 2007. However, India remains the second-fastest growing major economy in the world after China.54 The country is headed for a demographic sweet pot. Besides having the second-largest population in the world, it is the youngest of the BRIC nations with a median age of 25.3 years. It has the second-largest English-speaking population in the world.55 than 70% of the total consumption market of the 100 towns mapped. These towns are growing at a rapid pace, much faster than the metropolitan cities. Therefore, regional markets have been an area of focus for M&E companies. Print: The print media is also witnessing interest from the foreign media majors. Foreign companies are entering into content alliances with Indian companies. Globally, media companies are outsourcing print media services such as layout design, graphics, data compilation and so on, to India, on account of low costs and a qualied English-speaking talent pool. Films: As the largest lm-producing nation in the world, India holds immense opportunities for foreign players. With a completely indigenous lm content market, many global studios have entered the Indian lm industry to co-produce Indian lms with Indian talent. Its not only the studios that are eyeing opportunities in this market, but also Hollywood stars, technicians, directors and producers who are trying to leverage Indias talent pool. Leading global studios outsource animation, visual effects and post-production services to India.56 New media: India has witnessed an explosive growth in mobile penetration. In 2010, the number of mobile subscribers is said to have crossed the 500-million mark.57 Further, the impending launch of third generation (3G) and Worldwide Interoperability for Microwave Access (WiMAX) is expected to throw open myriad opportunities in the value-added-services (VAS) segment. In fact, the largest music company in India is now a leading telecom operator, due to ringtones that it sells. The internet and broadband penetration is still limited in India, however.

Key opportunities
There is a high potential for investments in all segments of the M&E industry. Most of the global media giants have been in the country for over two decades. Recently, there has been a surge in investments by global companies in the M&E industry in India, especially in the television and lms segment. Television: With consumer preferences shifting toward international programming formats, there is an opportunity for global production houses to localize their content for the domestic market. With over 130 million television households, India has a very large appetite for television content. There are several global broadcasters that have been present in India for years and new companies continue to make a foray. There is a growing market for youth-oriented content and regional audiences offer a large opportunity too.56 Rising afuence levels have directly led to increasing levels of consumption across the smaller towns in India. In 2008, these smaller towns and regional markets constituted more

54 55 56 57

India economy, The Central Intelligence Agency website, https://www.cia.gov/library/publications/the-world-factbook/geos/in.html, accessed 4 February 2010. India people, The Central Intelligence Agency website, https://www.cia.gov/library/publications/the-world-factbook/geos/in.html, accessed 4 February 2010. Whats next? for Indian media and entertainment, Ernst & Young, 2008. Telecom subscribers growth for the month of December 2009, TRAI press release, http://www.trai.gov.in/searchdoc.asp, 27 January 2010.

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Challenges
Piracy: The M&E industry has not been able to fully monetize its content due to rampant piracy. A 2008 report by Ernst & Young indicate, the losses to the industry due to piracy are estimated to be US$4 billion per year.58 However, in the last few years, the industry is adopting cost-effective technologies to curb piracy. Inefciency in distribution: Distribution is largely based on analog technology, which suffers from lack of addressability and transparency. However, the M&E industry is witnessing signicant investments in infrastructure. For the most part, these investments have been made in the distribution and delivery segments of multiplexes, digital lm distribution, DTH and cable. Low average revenues, although compensated by high volumes: The ARPU is still low compared to global averages. The average ticket price for a movie in India is US$0.5.59 However, the large and growing volumes make up for it. Sheer volumes make India a lucrative destination in the global arena. With increased corporatization and value creation, the ARPU is set to increase. Low PC penetration and broadband connectivity: A key indicator for technology adoption is the penetration of PCs and internet in the country. By international standards, India still has a very low PC penetration at 3.7% and broadband penetration at 1.5%, as of October 2009.60

The M&E industry in India has been, and will continue to be, one of the biggest beneciaries of Indias favorable demographics. One of the youngest nations in the world with high volumes of content consumption, a vibrant indigenous content creation industry and a favorable regulatory framework, make India an attractive investment destination for global M&E companies. Farokh T. Balsara, Media & Entertainment Leader, Ernst & Young, India

58 59 60

The effects of counterfeiting and piracy on Indias entertainment industry, Ernst & Young, 2008. India dominates world of lms, 29 July 2009, The Economic Times, via Dow Jones Factiva, 2009 The Times of India Group. Room for growth in IT infrastructure, R&D, Indian Business Insight, 22 October 2009, via Dow Jones Factiva, 2009 Informatics (India) Ltd.

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The regulatory scenario


A conducive regulatory environment for the M&E industry: In recent years, the Government has relaxed entry regulations and restrictions governing foreign companies in India. Presently, FDI up to 100% is allowed in the lm and advertising industry, 100% in television broadcasting (except news) and 26% in publishing newspaper and periodicals dealing in news and current affairs.61

Figure 6: FDI and foreign institutional investor (FII) investment by segments


Segment Broadcasting FM radio Cable network DTH Headend-in-the-sky (HITS) Setting up an uplinking facility/hub Uplinking news and current affairs channel Uplinking non-news and current affairs channel 20 (FDI+FII investment) 49 (FDI+FII investment) 49 (FDI+FII investment) FDI component should not exceed 20 74 (FDI+FII investment) 49 (FDI+FII investment) 26 (FDI+FII investment) 100 Sectoral limits (%)

Print media Publishing of newspaper and periodicals dealing with news and current affairs Publication of Indian editions of foreign magazines dealing with news and current affairs 26 26 (FDI+FII investment)

Others Advertising Films, music and live entertainment


Source: Ministry of Commerce and Industry - Department of Industrial Policy and Promotion.

100 100

Favorable policy changes: Some segments within the M&E industry have received a fresh lease on life due to critical policy changes. While the migration from xed license fee regimes to revenue-sharing license fee regimes has been a trigger for the radio segment and mandatory roll-out of digital cable in certain areas have been landmark developments in the television segment. The lm segment has been accorded an industry status and multiplexes have been exempted from entertainment tax. Unlike China, India poses no restrictions on the number of Hollywood lm releases in a year.

61

Facsimile editions of foreign papers get govt nod, The Times of India, 13 February 2009, via Dow Jones Factiva, 2009 The Times of India Group.

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Overview of the M&E industry in India


The M&E industry in India generated total revenues of US$14.8 billion in 2009. The industry has grown at a CAGR of 8.2% during the period spanning 2005-09. The industry is forecasted to grow at a CAGR of 6.6% to reach a value of US$20.4 billion in the next ve years.62

Segment analysis
Broadcasting and cable television
Television, which reaches around 134 million households in the country, forms an integral part of the M&E industry in India.63 The industry generated US$5 billion in revenues in 2009. The number of cable and satellite television households in India has more than doubled in the last six years. The reach of cable and satellite is expected to touch 100 million households in 2010 from around 90 million in 2009. India is the worlds third-largest cable and satellite market after China and the US. Increase in number of channels: A number of new television channels continue to be added every year across genres such as general entertainment, news and movies. In 2009, as many as 512 television channels, including 249 news channels, were operational.64 Increasing thrust on subscription revenues: Subscription revenues are expected to increase with the transformation in distribution, increasing addressability of the subscriber base and rapid adoption of digital technologies. Shift in content preferences: Changing consumption preferences and entry of new channels is leading to innovation in content. Television content has moved from soaps to reality formats and game shows. There have been a number of reality shows adapted from popular global formats to suit local tastes. The new formats have helped television companies earn revenues from mobile VAS services such as audience votes. Several regional language television networks have emerged to leverage the potential of the semi-urban markets. High carriage fees: Due to increasing competition, a high carriage fee is being paid by broadcasters. In 200809, the carriage fee market was estimated between US$245.9 million and US$307.4 million.65

Figure 7: The M&E industry by segments in 2009


Segment Broadcasting and cable television Publishing1 Movies and entertainment1 Radio
1 2

Market size (US$ billion)


1

5.0 4.4 2.5 0.2

Datamonitor Media in India, Industry Prole, December 2009. Pitch-Madison Report Media and Advertising Outlook 2010.

The M&E industry in India is one of the fastest-developing industries in the country, driven by changing consumption patterns, increasing middle-income households and the propensity of consumers to spend on leisure and entertainment. M&E companies in India are rapidly diversifying beyond their traditional domains to leverage synergies and have a presence across multiple segments of the M&E industry. Digitization of content and platforms, redenition of prevalent business models, globalization of the M&E industry and relatively easier access to capital and emergence of multiple entertainment options have been some of the key trends that are shaping the M&E industry in India.

62 63

Media in India: industry prole, December 2009, Datamonitor. India to have 100-mn cable homes this year, Business Standard,4 January 2010, via Dow Jones Factiva, 2010 Business Standard Ltd. ; Tune-in to Indias entertainment economy: From emerging to surging, Ernst & Young, 2008. HITS a gain but government mum on FDI hike in 2009, Indiantelevision.com, 21 January 2010, via Dow Jones Factiva. Carriage fees business may decline 20% this year, Indian Business Insight, 5 November 2009, 2009 Informatics (India) Ltd.

64 65

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Technology advancements transforming the distribution landscape: The increasing adoption of digital distribution platforms like DTH and digital cable is helping television distribution to become more organized. Several large cable multi system operators (MSOs) have emerged. There are as many as six countrywide subscription-based DTH operators in India. From 2.2 million DTH households in 200607,66 the platform currently caters to an estimated 20.5 million subscribers as of December 2009.67 Another technological move made by MSOs is toward HITS. HITS is a platform to deliver signals directly to the local cable operators (LCOs) through a satellite, unlike cable. This will lead to enormous cost savings and elimination of digital headends across locations. Telecom companies becoming media companies: Leading telecom players are investing signicantly in M&E services. In fact, the largest music company in India is a leading telecom operator, due to revenues it earns from ringtones and music.

shows healthy signs of growth and protability. The newsprint prices have stabilized and the Government has exempted customs duty on import of newsprint. The Union Budget also announced the extension of the stimulus package for print media companies. Diversication beyond print: Growth aspirations fueled by capital availability have led publishers to enter into other media and forge partnerships with television channels. Newspaper companies are entering into other businesses, such as internet, radio, television and the movie business. India is becoming a popular destination for media services outsourcing: Globally, media companies are outsourcing print media services such as layout designing, graphics, data compilation and so on, to India, on account of low costs and a qualied English-speaking talent pool.

Magazines Increase in specialty magazines: The growth in Indias economy has created a demand for content, covering niche segments such as travel, health care, nance and lifestyle.68 The entry of luxury magazines in the country has helped luxury brands directly reach out to potential customers.69 Increasing foreign investments in the sector: The Government has granted permission for publishing local editions of foreign news and current affairs magazines in India. Foreign players can form a partnership with Indian publishers to print the Indian edition of a magazine with up to 100% foreign content. This is likely to provide Indian readers with foreign magazines at affordable rates.70 Foreign publishers are entering into licensing agreements with Indian publishers to launch foreign titles in India.71 Leading US and European publishers have launched titles in India. At the same time, Indian magazine companies have begun to release international editions too.72

Publishing
Newspapers While in most parts of the world the newspaper industry is losing battle to the digital media, the newspaper industry in India is actually growing. The growth is expected to continue, driven by factors such as increase in advertising spends, rise in literacy rates and growth of the regional language newspapers. Newspapers account for almost 90% of the print industry revenues, while the remaining is contributed by magazines. Protability of newspaper companies is improving: In 2008, the newspaper industry in India was affected by curtailed ad spends due to the economic slowdown. Despite the challenges witnessed, the newspaper industry

66 67 68

Ashish Sinha, DTH sales to cross Rs 1K cr in next scal, Business Standard,14 March 2008, via Dow Jones Factiva, 2008 Business Standard Ltd. Focus: Direct to home, Broadcast & CableSat, 22 February 2010, via Dow Jones Factiva, 2010. ADI Media Pvt. Ltd. Arcopol Chaudhuri, Magazine publishing scene is hotting up, DNA - Daily News & Analysis, 30 September 2008, via Dow Jones Factiva 2008 Diligent Media Corporation Ltd. Priyanka Mehra, As niche magazines proliferate, advertisers embrace new choices, Livemint, 15 July 2008, via Dow Jones Factiva 2008 HT Media Ltd. Sruthijith K.K, Govt gives green signal to editions of foreign news magazines, Livemint, 19 September 2008, via Dow Jones Factiva, 2008 HT Media Ltd. Expected soon, Indian editions of Time, Newsweek and more, Indo-Asian News Service, 21 September 2008, via Dow Jones Factiva, 2008 HT Media Ltd; Sruthijith K.K, Govt gives green signal to editions of foreign news magazines, Livemint, 19 September 2008, via Dow Jones Factiva, 2008 HT Media Ltd; Forbes India Launched: Content Hosted At Business.In.Com, Medianama (India), 21 May 2009, via Dow Jones Factiva 2009 Mixedbag Media Pvt Ltd. Indian company to launch lm magazine in Germany, Media Blab, 22 January 2008, via Dow Jones Factiva, 2008 News Bites Pty Ltd.

69 70 71

72

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Movies and entertainment


The Indian lm industry is the largest in the world, in terms of the number of movies produced annually. More than 1,000 lms are produced every year in more than 20 languages. India also has the highest number of theater admissions. In 2008, 3.3 billion tickets were sold for lms shown on more than 10,000 theater screens.73 Revenues dominated by domestic box ofce: The industry remains dependent on domestic theatrical collections, which generate almost 70% of a lms total revenue. Rise of multiplexes: The concept of multiplexes has progressively gained prominence across major Indian cities. There are presently more than 800 multiplex theaters in India, and this is expected to grow to 1,500 theaters in the next two to three years. Regional language cinema forms an integral part of Indias lm industry: The four South Indian languages of Telugu, Tamil, Kannada and Malayalam cumulatively account for 60% of all movies produced in India. The South Indian states of Andhra Pradesh, Tamil Nadu, Karnataka and Kerala account for around half of the countrys operational theater screens.74 Digitization is leading to reduction in costs and piracy: As the cost of a digital print is only about one-fth the cost of a conventional lm print, the producer can now, for the same cost, reach ve times the number of screens as before. Digital cinema enables companies to control exactly where movies are showing and how many times they are shown. It not only enables the release of movies in larger cities, but also in remote town and villages across India.74 Foreign investments: Many global studios have entered the Indian lm market. Large US studios are now producing Indian language lms. Its not only the studios who are eyeing opportunities in this market, but also Hollywood stars, technicians, directors and producers who are trying to leverage Indias talent pool. Leading global studios outsource animation, visual effects and post production services to India. Globalization of the Indian companies: Indian companies are expanding their international footprint by acquiring theater chains and production studios in the US and Europe. Also, Indian companies are now producing Hollywood lms. Cricket is the most popular sport in India: After movies, cricket is the most popular form of entertainment for Indians. The recently formed Indian Premier League (IPL) has already become one of the most-valuable sporting brands in the world and is currently valued at US$4 billion, as per industry estimates. Many foreign investors have expressed interest in investing in the IPL franchises.

The Indian lm industry is the largest in the world, in terms of the number of movies produced annually. India also has the highest number of theater admissions. Last year, 3.3 billion tickets were sold for lms shown on more than 10,000 theater screens.

73 74

India dominates world of lms, 29 July 2009, The Economic Times, via Dow Jones Factiva, 2009 The Times of India Group. Indian entertainment down South: from script to screen, Ernst & Young, 2009.

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Global Media & Entertainment Center

Radio broadcasting
Revenues from the FM radio segment in India were US$200 million for 2009. In India, the Government-controlled All India Radio (AIR), together with 37 private FM radio companies that operate nearly 280 FM radio stations, cater to the radio segment.75 Following the opening of the sector to private players in March 2000, the rollout of Phase-II of the FM radio licensing policy in 2005 provided a further thrust to the sector. Growth impetus through Phase-III FM radio licensing policy: The yet-to-be-announced Phase-III FM radio licensing policy is likely to give further impetus to the FM radio industry and open up the sector for further licenses to almost 700 stations.76 The policy may also address issues such as raising the FDI limit, which is currently at 20%, allowing multiple licences in a city to a single player and allowing news broadcasts on radio. High royalty costs: The biggest challenge for the radio sector is the issue of royalty fees. It constitutes over 40% of the total costs borne by radio companies and is calculated on rates mandated through litigation over ve years ago.77

New media
Mobile entertainment has strong potential: India has witnessed an explosive growth in mobile penetration. In January 2010, the number of mobile subscribers has crossed the 500-million mark. Further, the impending launch of 3G and WiMAX is expected to throw open a myriad of opportunities in the VAS segment. Internet is still at a nascent stage: The size of the internet advertising market in 2009 stood at US$93 million.78 There were approximately 16.6 million internet and 9 million broadband subscribers, registering a CAGR of 27% and 73%, respectively, during the period 2007-09. Content producers are packaging new content/repackaging existing content for delivery over the internet. Almost every major M&E player now has a presence on the internet. Although companies still havent been able to fully monetize the online content, this segment has potential, as internet and broadband penetration levels increase.

With audiences (especially youth audiences) becoming fragmented across platforms, new media platforms such as mobile are playing a vital role in enabling advertisers to reach their target audiences.

75 76 77 78

Ashish Sinha, FM radio expansion hits small-town hurdle, Business Standard, 28 January 2008, via Dow Jones Factiva, 2008 Business Standard Ltd. Music royalty row casts shadow over FM-III auctions, Financial Express (India), 8 November 2009, via Dow Jones Factiva, 2009 Indian Express Pty. Ltd. Shobhana Subramanian Sun TV : Clouds on the horizon, Business Standard, 4 July 2008, via Dow Jones Factiva, 2008 Business Standard Ltd. Sam Balsara & Amit Agnihotri, Is the Worst Over?, Pitchonnetwebsite, http://www.pitchonnet.com/PitchMadisonMediaAdvertisingOutlook/July-issue-AD-Outlook-Ad-Outlook-2009-Intro.asp, accessed 16 March 2010.

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The third-largest economy in the world, China, with its large and growing population, offers signicant opportunities to global M&E companies.

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Global Media & Entertainment Center

China

Economy and demographics


China was the third-largest economy in the world with a GDP of US$4.76 trillion in 2009. Despite the global economic downturn, its GDP in 2009 grew by 8.4%, as compared to a GDP growth rate of 9% in 2008 and 13% in 2007.79 China is the most populous country in the world with 1.3 billion people at the end of July 2009.80 It is also among the worlds youngest nations with 72.1% of its population in the working age group (15-64 years) and 19.8% of its population aged at 0-14 in 2009. The adult literacy rate in China is approximately 91% for those above 15 years.80 Economic growth and the favorable demographics of China make it an attractive market for media-related businesses. New media companies have achieved far higher growth than their traditional media rivals and now play a key role in driving media spending in China. Chinas online advertising market increased 21.2% year-over-year to US$3 billion in 2009.85 Mobile commerce (mcommerce) the next wave of opportunity: With increasing mobile internet penetration in China, mcommerce is likely to make a strong inuence on business activities and consumer behavior. mcommerce involves buying and selling of goods and services through mobile phones. As content delivery over wireless devices becomes faster, more secure and scalable, mcommerce is expected to surpass wireline mcommerce as the method of choice for digital commerce transactions. Chinas mobile banking is at a nascent stage but holds enormous growth potential. By June 2009, China had 19.2 million mobile payment service users. There were 62.7 million mobile payment transactions made in the rst half of 2009, worth US$2.5 billion.86 Advent of digital television: Chinas digital television market has been increasing rapidly during the past few years. From 2006 to 2009, the number of digital television subscribers increased at a compounded rate of 69.2% reaching 62 million in 2009. Services like IPTV, DTTV and interactive television (iTV) expected to play a key role in Chinas M&E market. The iTV market has the potential to turn Chinas television viewers into online participants and buyers. iTV allows service providers, content aggregators, advertisers and commercial operators to enhance their offerings and interact with their target customers. iTV offers options such as watching two or more live games simultaneously using split screen, choosing camera angles during live action and instant reports on tournament results.87

Key opportunities
China is the worlds largest media market in terms of consumer volume, with the highest number of television households (174 million),81 internet subscribers (384 million)82 and mobile subscribers (741 million).83 China set to emerge as a digital giant: While conventional wisdom holds that internet and mobile services in China are more backward than those in the more developed nations, the reality is that China leads the way in its adoption of digital technologies and applications. Chinese consumers have emerged as leading users of mobile phones, instant messaging (IM) and internet services, pushing the boundaries of digital activity. In 2009 alone, more than 120 million Chinese started using mobile internet and nearly 100 million became new internet users.84

79 80 81

China economy, The Central Intelligence Agency website, https://www.cia.gov/library/publications/the-world-factbook/geos/ch.html, accessed 4 February 2010. China People, The Central Intelligence Agency website, https://www.cia.gov/library/publications/the-world-factbook/geos/ch.html, accessed 4 February 2010. Broadcast industry revenues total USD24 billion in 2009 - SARFT, Interfax: China Business Newswire, 15 January 2010, via Dow Jones Factiva 2010 Interfax Information Services, B.V. Chinas Net users total 384m, Shanghai Daily, 16 January 2010, via Dow Jones Factiva 2010 Shanghai Daily Company. Mobile connections forecast pack: 200914, via Ovum, accessed February 2010. Chinas net users total 384 million, Shanghai Daily, 16 January 2010, via Dow Jones Factiva 2010 Shanghai Daily Company. Chinas online advertising market size tops USD3 bln in 2009, Asia Pulse, 7 January 2010, via Dow Jones Factiva 2010 Asia Pulse Pty Limited. China home to 19.2 mln mobile payment service users in H1, Interfax: China Business Newswire, 23 July 2009, via Dow Jones Factiva 2009 Interfax Information Services. China - Convergence - Triple Play & Digital TV, 17 August 2009, via ISI Emerging Markets.

82 83 84 85 86

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Challenges
International partnerships for magazine titles: Magazines have been more successful in keeping up with general media growth. Privatization, or at least semi privatization, has resulted in the magazine sector being relatively less regulated. Local publishers have managed to partner with international companies and results have been strong in lifestyle, leisure, nance and golf publications. With China emerging as one of the largest markets for luxury goods and lifestyle products, the future of magazines looks brighter than it does for newspapers. Flourishing outdoor advertising market: Outdoor advertising is one of the fastest growing advertising markets in China. Rising TV advertising costs have led more marketers to look for the outdoor medium to reach consumers. The market is shifting away from neon and static posters towards light-emitting diode (LED) interfaces. The market is currently recovering from the economic slowdown, with accelerating demand from key ad verticals such as consumer goods, transportation and nancial services, resulting in improved pricing in 2010. The M&E industry in China is tightly regulated. Government restrictions on access to certain content deemed sensitive, nationalism, nurturing of domestic companies, strict media regulations for foreign-controlled entities, a desire for further legal and political transparency, certain free market restrictions and intellectual property rights (IPR) issues are the main challenges in China. Beyond the regulatory challenge, most Chinese new media companies have yet to generate sufcient advertising or subscription revenues to offset their expenditures on hosting and bandwith. The M&E industry in China has been affected by widespread unauthorized reproduction of content. A great deal of money is being spent on entertainment in China, but a low proportion reaches the intellectual property holder. The International Federation of the Phonographic Industry (IFPI) estimates that 99% of Chinas music digital downloads are pirated. Low price levels and unauthorized reproduction have led to skepticism about the ability of companies to make money in Chinas digital markets.

There are a number of hurdles in the path to success in China, but rewards have been and will continue to be considerable for companies that manage to navigate its unique environment. Experience shows that with the aid of trusted advisors, determined and resourceful corporations can alter the odds in their favor by understanding the Chinese market. Taking some simple but essential precautions would increase the chances of success and reduce transactional and operational risks.

The M&E industry in China is tightly regulated. Currently, global players cannot compete directly with state-owned enterprises. The key success factor to establish a business in China is the relationship with local partners and the provincial and state Governments.

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Global Media & Entertainment Center

The regulatory scenario


For many years, the M&E industry in China has been tightly regulated. Since the industry is dominated by state-owned enterprises and has high entry barriers, international media companies have faced many challenges in effectively penetrating the Chinese market. SARFT is responsible for laws, guidelines and policies for the countrys radio, television and lm industry. It is also responsible for restricting access to any materials that might be deemed sensitive to the Chinese Government or cultural standards. Foreign investment in the broadcasting sector: Under the regulations jointly issued by SARFT and the Ministry of Commerce, foreign investors are prohibited from setting up or running news organizations in China. In the case of radio and television, the Chinese partner must hold a controlling stake in the production and distribution. The joint ventures, comprising 49% foreign investment, are required to broadly present Chinese themes in their programs.88 While all broadcasters must be state-owned, the Government is also pushing them to become commercially viable. These reforms are expected to change the ownership of M&E enterprises from state-owned to privately/publicly owned.89 In August 2005, China issued restrictions, forbidding foreign satellite broadcasters from entering the market in a bid to preserve its culture from diluting. Although foreign programming is restricted, exceptions include: A major cable television operator in Guangdong has permission to carry Hong Kongs four terrestrial channels. Hotels identied as suitable for international visitors are permitted to operate satellite dishes to receive a full range of television programs. Digital cable television subscription fees: In August 2009, the National Development and Reform Commission (NDRC) and SARFT jointly announced regulations relating to subscription fees for digital cable television, a move that will negatively impact the digital cable television operators. The digital cable monthly service fees will be set by the pricing bureaus of regional governing bodies, leaving digital cable television operators with the authority to set prices only in the area of value-added services. Under the policy, digital cable operators will be prohibited from charging installation fees and will be required to provide the rst digital cable set-top box and conditional access card for free. Charges related to cancellation, reinstatement and transfer of services will be eliminated and operators will be required to provide subsidized monthly subscription fees to households living below the poverty line.90 Regulations impacting advertising on television and radio: According to new measures issued by SARFT relating to radio and television advertisement broadcasting, the length of the advertisements during radio and television programs is restricted to no more than 12 minutes per hour for every program, and those appearing from 7 p.m. to 9 p.m. are not expected to run over 18 minutes of advertisements in any episode of a television show. These measures became effective on 1 January 2010.91 Movie and entertainment market is highly regulated: The Government exercises tight controls over the type and number of foreign lms released in China and may edit specic types of content deemed to be sensitive that may appear in them. China tries to nurture its domestic lm industry by restricting the number of foreign movies allowed into theaters and the lengths of their runs. It allows 20 foreign lms a year to be shown on mainland screens, splitting revenue among producers, theaters and local distributors. Those few foreign lms compete with a growing number of domestic lms, including those co-produced with foreign companies.

Cable operators cannot easily acquire a license to own satellite dishes that allow access to foreign transmissions. Most companies in the broadcasting sector tend to practice various forms of editing or avoiding content relating to areas deemed to be sensitive to the Government regulators.

88 89 90

China bans foreign investment in publishing, news organizations, Asia Pulse, 5 August 2005, via Dow Jones Factiva 2005 Asia Pulse Pte Limited. China - Convergence - Triple play & digital TV, ISI Emerging Markets, 17 August 2009. NDRC and SARFT issue policy regulating digital cable TV prices, Interfax: China Business Newswire, 31 August 2009, via Dow Jones Factiva 2009 Interfax Information Services. China prohibits funny, chaotic TV programmes as anniversary approaches, BBC Monitoring Asia Pacic, 18 May 2009, via Dow Jones Factiva 2009 The British Broadcasting Corporation.

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Overview of the M&E industry in China


The M&E industry in China has been consistently growing, generating revenues of US$ 50.5 billion in 2009, reecting a year-over-year increase of 7.4%. Industry revenues are projected to reach US$77.1 billion by 2014 at a CAGR of 8.8% for the period 200914.92

Figure 8: The M&E industry in China


60 M&E industry value (US$ bllion) 10% 50 40 30 20 10 0 2005 2006 2007 2008 YoY growth (%) 2009 M&E industry value (US$ billion)
Source: Datamonitor, Media in China, Industry Prole, December 2009

12 10% 47 36.1 39.6 43.3 9% 8 7% 6 4 2 0 50.5 10 YoY growth (%)

Figure 9: The M&E industry by segment size in 2009


Segment Broadcasting and cable television Publishing
1 1

Market size (US$ billion) 24.3 18.0 7.1


1

Advertisement1 Movies and entertainment Radio2


1 2

1.1 0.8

Datamonitor Media in China, Industry Prole, December 2009 SARFT, 2009 Report

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Media in China: industry prole, December 2009, Datamonitor.

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Global Media & Entertainment Center

Segment analysis
Broadcasting and cable television
The worlds largest television market: With an audience of over one billion people, television remains a dominant segment in terms of the audience size, revenues and content. In 2009, there were 174 million cable television households.93 In China, television is a popular source for news. Guangdong province has the largest number of cable television users. Television accounts for almost half of all media revenues in China. Digitization is the way forward: The value of the digital pay television market in China reached US$12 billion in 2009 and is expected to reach US$181.2 billion by 2014. The Government aims to broadcast all television programs in a digital format by 2010 and complete cable television digitization by 2015. A major hurdle to the development of digital television in China has been the lack of compelling content.94 Pay television is on the rise: China is also becoming a major market for pay television. In 2009, the number of digital cable television subscribers in China reached 62 million. Digital pay television users reached 7.05 million, up 57%.95 Triple-play model: Chinas cable television network is set to play a pivotal role in the M&E market as the triple-play model involving converged delivery of television, telephony and broadband internet services over a single network begin to be delivered over the cable television infrastructure. Emerging platforms: IPTV and DTTV are some of the emerging service models in the pay television market. Though digital cable television gets much of the attention in the converged media environment in China, IPTV and DTTV will play key roles in the future. In China, IPTV subscribers reached 1.9 million, but the growth has dropped from a high of 480% in 2005 to 65% in 2008.96 New technologies like iTV are redening the market: China is taking various steps to develop the iTV market, which has the potential to turn Chinas television viewers into online participants and buyers. Sporting events are considered to be a major draw for the use of interactive television in China. Based on the estimates of consumer spending on iTV, future iTV business would be valued at US$1.2 billion and the estimated value-added services associated with iTV will be worth an additional US$1.2 billion. However, a major concern is that iTV services are very limited and there is still much to be done in the area of content development.96

Strong economic growth, coupled with a large population, is leading to growing purchasing power in China. Being the worlds largest television market with one of the largest internet and broadband subscriber bases, Chinas M&E industry offers several opportunities, provided one can learn to navigate its unique regulatory environment. Lawrence Lau, Media & Entertainment Leader, Ernst & Young, China

93

Broadcast industry revenues total $24 bln in 2009 - SARFT, Interfax: China Business Newswire, 15 January 2010, via Dow Jones Factiva 2010 Interfax Information Services, B.V. China - Convergence - Triple Play & Digital TV, 17 August 2009, via ISI Emerging Markets. Broadcast industry revenues total $24 bln in 2009 - SARFT, Interfax: China Business Newswire, 15 January 2010, via Dow Jones Factiva 2010 Interfax Information Services, B.V. China - Convergence - Triple Play & Digital TV, 17 August 2009, via ISI Emerging Markets.

94 95

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Publishing
The publishing industry in China, including books, newspaper and magazine publishing, is projected to grow from US$17.3 billion in 2008 to US$20.7 billion by 2013, indicating a 3.6% growth over the next ve years. It is the second-largest segment in Chinas M&E market, constituting 35.6% of the industrys aggregate revenues.97 With China emerging as one of the largest markets for luxury goods and lifestyle products, the future of magazines looks brighter than it does for newspapers. Companies are diversifying to capitalize on new media platforms: In 2009, the publishing sector in China was challenged not only by the decline in advertising revenue but also by competition from new media platforms such as the internet and mobile. Traditional print media companies can achieve sustainable growth by providing digital newspapers and magazines through the internet and mobile phones.

Figure 10: The publishing industry in China


Newspapers 10.5%

Magazines 41.7% Books 47.8%

Movies and entertainment


A relatively fragmented segment: The movie and entertainment segment in China, which was worth US$ 1.2 billion in 2009, is fragmented.99 In 2009, a total of 456 lms were made in China, up from 262 in 2005,100 indicating an emerging market in the country. Chinas lm industry has developed rapidly. During the past year, 626 new screens have been added, taking the total number to 4,723, of which 600 are 3D-enabled screens.101 Also, the markets huge potential and lower production costs are expected to drive collaborations between China and the foreign lm industries. While blockbuster movies require considerable up-front investments that only large companies can afford, the diversity of audiences in this market means that smaller players can thrive. Movie and entertainment market is highly regulated: China tries to nurture its domestic lm industry by restricting the number of foreign movies allowed into theaters and the lengths of their runs. It allows 20 foreign lms a year to be shown on mainland screens, splitting revenue among producers, theaters and local distributors. The Government thus exercises tight control over the release of foreign lms in the country.

Source: Datamonitor, Publishing in China, Industry Prole, November 2009

Book sales have the highest market share: Book sales generated total revenues of US$8.3 billion in 2008, equivalent to 47.8% of the overall publishing segment. In comparison, sales of magazines generated revenues of US$7.2 billion in 2008. The newspapers market generated total revenues of US$1.7 billion in 2008.98 International partnerships for magazine titles: Magazines have been more successful in keeping up with general media growth. Privatization, or at least semi privatization, has resulted in the magazine sector being relatively less regulated. Local publishers have managed to partner with international companies and results have been strong in lifestyle, leisure, nance and golf publications.

97 98 99 100 101

Media in China: industry prole, December 2009, Datamonitor Publishing in China: industry prole, November 2009, Datamonitor; Newspaper in China: industry prole, August 2009, Datamonitor. Media in China: industry prole, December 2009, Datamonitor. China Looks To Be Major Movie Power, Nikkei Report, 22 February 2010, via Dow Jones Factiva 2010 Nihon Keizai Shimbun, Inc. Chinas box ofce receipts hit RMB 6.2 bln in 2009, China Knowledge Press, 11 January 2010, via Dow Jones Factiva 2010 China Knowledge Online Pte Ltd.

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Global Media & Entertainment Center

Radio broadcasting
In 2009, Chinas radio advertising revenues declined by 3.6% to reach US$800 million.102 Although, the radio industry faces competition from television and new media, it is still expected to be a popular means of entertainment due to its live coverage of big events, wide signal coverage, low cost, easy access and the popularity of interactive shows. According to new regulations, effective January 2010, television and radio stations would have to pay to broadcast any copyrighted music. Broadcasters would have two methods by which they can calculate payments for broadcasting copyrighted music: pay a royalty of 0.01% to 0.8% of annual advertising revenue to the copyright holder, or pay a fee based on per minute of airtime. For the fee-based method, radio stations are required to pay US$0.04 per minute for each piece of music aired, while television stations will pay US$0.22 between the years 2010 and 2014 and US$0.29 starting in 2015 for each piece of music aired. entertainment. Furthermore, the development of 3G technology offers new opportunities to online video operators, as people will be far more willing to pay for mobile video services. In addition, the forthcoming online video platform by the state-owned broadcaster will bring further challenges to private operators, due to its strong and mature brand.103 Multiplayer online games The online gaming platform dominates the overall video gaming market in China. The online gaming market in China has seen rapid growth over the last few years, primarily due to the support from the Government. It has made it a policy objective to develop the local online gaming industry and improve its standards. As a result, there are over 500 companies in China that engage in online games operations, which have received support from the Ministry of Culture (MOC) and General Administration of Press and Publications (GAPP). The multiplayer online gaming market has also benetted from advances in communication technologies and improved broadband access. The online gaming operators generate revenues from subscription monthly or per session, in-game advertising or in-game sales of virtual merchandise. Mobile media In 2009, the number of mobile internet users reached 233 million, an increase of more than 100% year-over-year. This rapid growth is attributed to the ongoing national 3G rollout, lower mobile internet fees and continuous efforts made by telecom operators to promote mobile internet services. Currently, there are no dominant players in this market, and there is less inuence and control by the Government (as compared to television, radio and print). The internet market is expected to extend its success of traditional internet to the mobile internet segment too.104

New media
By December 2008, internet usage in China grew at a phenomenal pace reaching 384 million users, surpassing the US to become the world leader. With internet penetration at 28.9% and increasing mobile internet access, the market is expected to see a rapid growth in the coming years, with an average growth of more than 35%. Online videos The online video market will continue to be driven by increasing internet penetration. The current challenge facing Chinas popular online video platforms is monetization of video content. Chinas traditional television business is being disrupted by a youth-driven consumption culture that expects free on-demand

102 103

Chinas advertising revenue up 9.11% in 2008, China Knowledge Press, 17 March 2009, via Dow Jones Factiva 2009 China Knowledge Online Pte Ltd. Chinas online video market to see more opportunities this year, Interfax: China Business Newswire, 14 April 2009, via Dow Jones Factiva 2009 Interfax Information Services. Chinas Net users total 384m, Shanghai Daily, 16 January 2010, via Dow Jones Factiva 2010 Shanghai Daily Company.

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Global Media & Entertainment Center

Conclusion

In the not-so-distant future, Brazil, Russia, India and China could account for much of the global growth in the M&E sector. These emerging entertainment economies should not be considered only as auxiliary markets as they are too large and powerful to ignore. Global companies that do not give their emerging markets strategies sufcient attention and fail to optimize the opportunities in these markets may lose out. In order to succeed in the emerging markets, it is necessary for companies to understand and adapt to the economic and social fabric of the operating environment and invest in content and services tailored for these markets. While M&E companies operating in emerging markets continue to be exposed to risks ranging from local competition, fraud, corruption and piracy, ongoing structural and regulatory reforms and the development of corporate governance norms could mitigate these threats.

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Global Media & Entertainment Center

Contacts

Telephone Global Media & Entertainment Center


John Nendick, Global Sector Leader (Los Angeles, US) Sylvia Ahi Vosloo, Associate Director, Marketing (Los Angeles, US) Karen Angel, Global Implementation Director (Los Angeles, US) Yooli Ryoo, Knowledge Manager (Los Angeles, US) Peri Shamsai, M&E Senior Manager (New York, US) Pam Walker, Events Coordinator (Los Angeles, US) + 1 213 977 3188 + 1 213 977 4371 + 1 213 977 5809 + 1 213 977 4218 + 1 212 773 9172 + 1 213 977 3046

Email
john.nendick@ey.com sylvia.ahivosloo@ey.com karen.angel@ey.com yooli.ryoo@ey.com peri.shamsai@ey.com pam.walker@ey.com

Global Area Leaders and Advisory Panel members


Farokh T. Balsara (Mumbai, India) Mark Besca (New York, US) Neal Clarance (Vancouver, Canada) Noriharu Fujita (Tokyo, Japan) David McGregor (Melbourne, Australia) Gerhard Mueller (Munich, Germany) Bruno Perrin (Paris, France) Michael Rudberg (London, England) + 91 22 4035 6550 + 1 212 773 3423 + 1 604 648 3601 + 813 3503 1355 + 613 9288 8491 + 49 891 4331 13108 + 33 1 46 93 6543 + 44 207 951 2370 farokh.balsara@in.ey.com mark.besca@ey.com neal.g.clarance@ca.ey.com fujita-nrhr@shinnihon.or.jp david.mcgregor@au.ey.com gerhard.mueller@de.ey.com bruno.perrin@fr.ey.com mrudberg@uk.ey.com

Global Service Line Leaders and Advisory Panel members


Thomas J. Connolly, Global M&E Transaction Advisory Services Leader Alan Luchs, Global M&E Tax Leader (New York, US) Chris Pimlott, Global M&E Tax Leader (Los Angeles, US) Gregg Sutherland, Global M&E Business Advisory Services Leader + 1 212 773 7146 + 1 212 773 4380 + 1 213 977 7721 + 1 720 931 4435 tom.connolly@ey.com alan.luchs@ey.com chris.pimlott@ey.com gregg.sutherland@ey.com

Advisory Panel members


Howard Bass (New York, US) Glenn Burr (Los Angeles, US) Vincent de La Bachelerie, Global Telecommunications Leader Pat Hyek, Global Technology leader (San Jose, US) Bud McDonald (Stamford, US) Ken Walker (Los Angeles, US) + 1 212 773 4841 + 1 213 977 3378 + 33 1 46 93 6205 + 1 408 947 5608 + 1 203 674 3510 + 1 805 778 7018 howard.bass@ey.com glenn.burr@ey.com vincent.de.la.bachelerie@fr.ey.com pat.hyek@ey.com bud.mcdonald@ey.com kenneth.walker@ey.com

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Ernst & Young Assurance | Tax | Transactions | Advisory


About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 144,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit www.ey.com. About Ernst & Youngs Global Media & Entertainment Center Whether its the traditional press and broadcast media, or the multitude of new media, audiences now have more choice than ever before. For media and entertainment companies, integration and adaptability are becoming critical success factors. Ernst & Youngs Global Media & Entertainment Center brings together a worldwide team of professionals to help you achieve your potential a team with deep technical experience in providing assurance, tax, transaction and advisory services. The Center works to anticipate market trends identify the implications and develop points of view on relevant industry issues. Ultimately it enables us to help you meet your goals and compete more effectively. Its how Ernst & Young makes a difference. 2010 EYGM Limited. All Rights Reserved. EYG no. EA0038
This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.