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egistered P
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Phase III will enable greater reach and revenues for the radio industry. Multiple frequency, networking and rationalization of music royalty will directly add to margins, enabling strong players to invest behind content differentiation, better market segmentation, measurement of radio listenership across more markets and thereby contributing to revenue maximization and profitability
- Asheesh Chatterjee
CFO Reliance Broadcast Network Limited
“
Revenue growth
The industry will see growth from existing licenses (through increased prices in metros and increased utilization levels in non-metros), new licenses in the existing cities and through the addition of new cities as a part of Phase III. As the new cities being added in Phase III are primarily small towns, they are not expected to contribute a large share of industry growth in the medium term. However, the large players with extensive reach post Phase III may be able to charge a premium by offering a countrywide advertisement solution.
Cost economics
With expected revenue growth after Phase III and steps towards resolution of the royalty issue, cost economics for the industry have the potential to improve significantly. In addition, permission for multiple frequencies in a city is expected to be granted as part of Phase III. This could also improve the cost economics as the incremental cost for additional frequency is significantly lower than that for an independent station. There is potential for operational cost savings on staff/manpower, premises, marketing and overheads related costs. On the capital expenditure front, there is potential for savings on studio infrastructure, IT and office infrastructure as a large part of infrastructure for leading players is already in place and hence they will be able to reap the benefits of additional frequencies at limited capital expenditure in Phase III.
Also, permission for networking content across categories of cities is expected to be granted as part of Phase III licensing (with a stipulation of a minimum 20 percent local content). This could help players build more cost effective models, with potential of over 20 percent savings on operating costs.
Impact on Industry structure
Permission for content networking is likely to result in increased development of regional network models, given the potential for better cost economics.
The permission for multiple frequencies is expected to result in established players looking to acquire additional stations in larger cities to build focused formats. Also, the reduction of shareholder lock-in period from 5 to 3 years and increase of license period from 10 to15 years may encourage consolidation post the Phase III auctions.
Content innovation
Permission for multiple frequencies and permission to allow news, sports and current affairs may encourage players to come up with innovative content. However, addition of more stations in metros will be instrumental in driving niche content provided the license fee is adjusted to encourage non-commercial content like classical music, regional music or old Bollywood music.
Expected capital inflow after Phase III
Some estimates23 claim that Government may fetch INR 15
- 17 billion from the auction of Phase III licenses. However, we believe this may be an optimistic estimate. Given the revenues from Phase II and uncertainty about royalty issue, the bids are likely to be conservative, especially in the non-metro cities where the existing players already have excess capacity. The industry feels there may be a need for re-evaluating the high minimum reserve price set by the government especially for some of the smaller cities.
23. “Aggressive bidding to beat govt target for FM-III”. Published in Financial Express on 11th July 2011
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12 KPMG, an Indian R
egistered P
artnership and a member firm of the KPMG net
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ork of independent member firms af
filiated
with KPMG International Cooperativ
e (“KPMG International”), a S
wiss entit
y.
All rights reser
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Source: Industry discussions, annual reports of listed players and KPMG in India Analysis
Private FM Radio industry - Potential incremental revenue till 2016
Multiple frequency ownership, networking of stations, decrease of lock-in period are progressive policy changes announced in Phase III. We expect that cost synergy opportunities thrown up by these would act as catalyst for consolidation in the industry
- Satish Chander
Director India Value Fund Advisors
There is also expected to be capital investment after Phase III as industry sets up new stations. If we do not take into account the benefits of multiple frequencies and networking then additional Capex is expected to be INR 18 to 20 billion. However, this is a very unlikely scenario as the existing players have aggressive plans for Phase III bidding for top 30- 40 Indian cities. Some of the existing players already have the
infrastructure in place for existing stations and expect to gain from networking and multiple frequencies. Also, we expect only limited number of new players entering the medium in the top 30-40 cities given the high capital expenditures involved in starting fresh. Given the benefits offered by multiple frequencies and networking we expect the capital expenditure in the range of INR 7.5 to 11 billion.
Note: For calculation of range, it is assumed that there will be between 20 percent-40 percent stations that will have to set up new stations in category A&B towns and these will have limited benefits in terms of existing infrastructure. In category C&D towns, it is assumed that Networking will play a major role in bringing the capital expenditure costs at reasonable levels.
© 20
12 KPMG, an Indian R
egistered P
artnership and a member firm of the KPMG net
w
ork of independent member firms af
filiated
with KPMG International Cooperativ
e (“KPMG International”), a S
wiss entit
y.
All rights reser
ved.
Source: “Aggressive bidding to beat govt target for FM-III”. Published in Financial Express on 11th July 2011, Industry discussions, KPMG in India Analysis
Source: Industry Discussions, KPMG in India Analysis
Expected revenues for Government from Phase III auctions
Expected Capital requirements post the Phase III bidding
Category Average price expected per
license (INR billion) No of licenses Total collection (INR billion)
Category A+ 0.21 4 0.85 Category A 0.13 19 2.51 Category B 0.05 29 1.60 Category C 0.04 175 7.00 Category D 0.008 609 4.87 Total 839 16.83
Category Cost of setting up radio
station for a new player (INR million)
Incremental cost of setting up for existing players (INR million)
Total capex range (INR billion)
Category A&B 25 – 45 8-10 0.6-1
Category C&D 10-20 5-7 7-10