Uplinking for transparency

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India needs a strong domestic broadcasting industry that is outward-looking. Sanjeev Nayyar suggests a blue-print policy to achieve this http://www.business-standard.com/today/story.asp?Menu=26&story=21941

India’s growing broadcasting business is mostly focused on the domestic market and is dominated by foreign companies. The sourcing of programming software from India and the distribution of satellite TV has generated substantial employment. Having said that, these foreign companies are mostly focused on capturing a larger pie of the Rs 3,000 crore-plus advertising/subscription market. From their perspective, this might make good business sense but from the larger Indian view, it could be considered inward-looking. If India is to share her neoteric forms of entertainment, it needs a strong local industry that is also outward-looking. A change in the regulatory framework for broadcasting companies would be the first in the many steps necessary to make this happen.

I will start with a brief outline of the structure within which broadcasting companies currently operate in India.
Broadly speaking, there are two types of companies, foreign and local. A foreign company is one that receives revenues in dollars directly from the advertiser or through its Indian agent company (existing rules provide that only exporters with realisations of Rs 10 lakh in each of the previous two years can advertise on such channels).

Star TV, Zee Telefilms Limited, BBC, HBO, Ten Sports are some examples. The agent company might also collect subscription and/or is an exporter of programming software. A local company is one that runs its operations as a full-fledged business, meaning its profit and loss account reflects income from dvertising/collection of subscriptions and expenses towards programming, administrative and distribution. NDTV, Sahara and Alpha are some examples. I believe a broadcasting policy should be simple and transparent for investors and consumers alike and should create a level playing field for all players. All broadcasting companies must certainly not be painted with the same brush. Instead, policy should be based on nature of content. The policy must promote competition, diverse viewpoints and localism in broadcasting services. I have deliberately not referred to cross-media ownership issues since it is important for us to have a proper broadcasting policy in place first.

The broadcasting business in India may be classified into three broad categories — entertainment, news and sports. Within entertainment there are Indian and global content-based channels. The former is targeted at Indians and includes Star Plus, Sun and Alpha while the latter is targeted at global audiences, and includes Star World and AXN. Within news too there are similar categories. The former includes NDTV and Star News and the latter CNN. Sports is difficult to categorise because its biggest driver, cricket, transcends borders. This category includes ESPN-Star and Ten Sports. Having segmented the market, I would like to suggest a policy framework for each one of them. Let’s begin with the key guidelines for channels that primarily beam India-based content (at least 50 per cent of a full day’s programme determined on an annualised basis). They must run their Indian operations as full-fledged businesses. They must be capitalised adequately by their shareholders to operate as full-fledged businesses. The cap on foreign/foreign institutional investor (FII) shareholding for entertainment channels should be 49 per cent; news 26 per cent and the balance be held by resident Indians. Listing on BSE/NSE must be made compulsory for the Indian arm of entertainment channels owned by foreign companies and all news channels (Star, Sony, Aaj Tak, CNBC TV18 but excluding regional news channels). Companies owned by resident Indians may access the capital markets if they want to. Current regulations that allow only exporters to advertise on foreign television channels need to be done away with. Any company that runs its channel as a full-fledged business can directly uplink from India. Entertainment channels have the option of uplinking from outside India but news channels have to uplink only from India. They can collect subscriptions from consumers.

Key guidelines for channels whose content is targeted at global audiences are: They operate as agents (collection of subscriptions) for foreign broadcasting companies. The cap on foreign shareholding for entertainment channels should be 49 per cent and news 26 per cent. Since they do not operate as a full-fledged business, they cannot collect advertisements from Indian corporations. If at any point of time during the year India-based content exceeds 50 per cent as defined above, they would have to operate as a full-fledged business with effect from the next financial year. Sports channels have two options. Under option one, the company operates as a full-fledged business in India. However, due to the cyclical nature of cricket the proposal that at least 50 per cent of the programming content be sourced from India should not be applicable. Under option two, it would be an agent only for collection of subscriptions. Foreign shareholding in either case would be limited to 49 per cent.

Considering that the BJP-led NDA government has positioned itself as a nationalist one, it might like to make reciprocity one of the conditions for granting foreign companies access to the Indian market. For example, under the proposed policy BBC can hold 26 per cent equity in its Indian arm. Similarly, British rules must allow an Indian news channel company to hold 26 per cent stake in a similar company incorporated in England. Technology allows any broadcaster to beam over Indian skies but allowing access to your market must result in gains for India. Broadcasters might like to be proactive and identify markets where the Indian government must ask for reciprocal access. Having segmented the market by India-based/global content and suggested the broad contours of a broadcasting policy; let us move to the next step of seeing how the policy would fit into a corporate legal entity. Let us look at three types of broadcasters — entertainment (say Star Plus), news (NDTV 24x7) and English entertainment (HBO). Every broadcaster that has entertainment and news channels would need to have separate companies for each category. The entertainment company would have two profit centres, one for India-based and the other for global content. Thus, the local Star Plus company would operate as a full-fledged business and as an agent for Star Movies. NDTV 24x7 is to be incorporated as a separate company that would operate as a full-fledged business. HBO would need to incorporate a separate company in India that acts as its agent for collection of subscriptions and deals with distribution. There are two reasons why English language entertainment channels (like HBO) and news channels (like BBC) shouldn’t be allowed to sell advertising airtime.

One, only channels that generate India-based content can operate as a full-fledged business in India and are thus entitled to sell airtime. It is an incentive to localise content. Would it be financially viable for these channels to survive on subscription revenue alone? Possibly yes, since channels like HBO are niche players and command loyal viewership. I believe that viewers would be willing to pay a premium for advertisement-free viewing.

Two, when a channel decides to operate as a full-fledged business in India, it means that any transaction with an “associate enterprise” as defined under section 92A of the Income-Tax Act could be scrutinised by the assessing officer to ascertain whether the transaction is on an arms-length basis. While such transactions should be few in the case of, say, a Star Plus, it would be very high for BBC where such content is negligible. To avoid litigation, I suggest that channels similar to BBC incorporate companies to act only as agents. However, if the channel is willing to operate as a full-fledged business, it should be allowed to do so. If the restructuring of the private sector is not accompanied by the corporatisation of Doordarshan, it would amount to not providing the government body with a level playing field. It would be advisable to attach a value to the social service obligation performed by it, which could possibly be funded by the Budget. It must continue to be the country’s sole territorial broadcaster but could for a fee lease its network to private broadcasters. By creating a transparent regulatory framework and operations that are responsible to Indian shareholders, we would be laying the foundations for a strong domestic industry. Since technology is changing at a rapid pace the broadcasting policy needs to be reviewed every two years. The government must ensure that there are at least three national-level players (with India-based content) in the entertainment and news channel categories. If the number of players falls below that it might result in a less competitive programme acquisition market, evidenced by lower output, fewer choices and less technological progress. In a vibrant democracy as ours, no news channel must dominate the market in a manner that the public is not exposed to multiple viewpoints. The purpose of these suggestions is to provoke thought within the government and broadcasting industry alike to frame a broadcasting policy that is in tune with the dynamics of the 21st century.

(The writer is a business consultant and founder www.esamskriti.com. He has also worked with a broadcasting company)