Thanks dhwanil- I incidentally spent half a day with an ex-radio industry veteran and someone in the advertising industry to understand the dynamics of the radio business.
- the radio business has huge network effect which I will explain in the following paragraph:
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all the yield comes from low volume local advertisers – eg. small shops, city specific activities and all the volume comes from large, national advertisers. So, sort of like facebook’s same side network effect, the larger get more profitable and attract more volumes. This is the reason why ENIL has more than 100% of the profits from the industry.
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This also leads to a reduction of marginal costs incrementally – which is the reason as channels move to tier III cities, the smaller guys drop out – it costs about for eg., Rs. 70 lakhs to run a FM station in say a salem every month and this can be done only if your content costs, DJ costs are shared with say a chennai where costs will be about Rs. 2-3 Cr. a month. This is the only way to get access to the high yield local advertisers and at the same time add volumes from a national advertisers like HUL – the lattter helps you break even and the former sis the pudding that throws out FCF’s
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the point you mentioned about high fixed costs is a double edged sword – I think the margins will shrink given the addition in fixed costs before they come up. So, I expect ROIC’s to fall significnatly as the high upfront cost of licence, setting up stations kicks in and margins to climb down until FY 17 or FY 18 and then climb back for the better.
I am waiting for a couple of deep cuts in earnings on the EBITDA/PAT line over the next 12 months and will look to add then.
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