Tuesday, January 13, 2009

Incremental Cost

Sorry, this is a bit of an essay, but I got inspired for some strange reason.

Shyam made an interesting comment on yesterday’s post on the concept of incremental costs when launching an additional product. Basically, he rightly argued that the term is highly misused in the media world and frankly I will agree with him here. While many people will argue that the explosion of the media industry has led to glaring examples of bad journalism, one aspect has rarely been discussed, the media boom has led to horrible examples of bad management.
See, the media industry does not work like say the airline industry. Say airline X starts a new station, they have to sink in certain costs – hire ground staff, air-stairs, buses. All of that costs money. Now with one flight a day, the cost is spread out over just 100-150 passengers depending on the aircraft used. Now if the airline operated two, three, four flights a day, preferably at different times, they would hopefully not need to invest in additional staff or equipment, maybe some more staff to cover themselves. There might still be the cost of additional aircraft, but aircraft nowadays are an operating expense thanks to ‘sale lease-back’ policies. Airline X has managed to add flights to the new destination but at an ‘incremental cost’ to itself.
The same philosophy could apply to toothpaste, shampoo, televisions or any industry with a massive initial capital outlay. Where the media industry fails the ‘incremental cost’ test, at least in India it fails rather dramatically. Why? See, the biggest problem in India remains distribution – while South Delhi and South Bombay, India’s two largest media markets have switched en masse to addressable systems – DTH for example (as have outlying rural areas), the rest of the country (admittedly save Chennai, which is why Sun got into the DTH game – even more money) is still beholden to the crappy co-axial cable.
I don’t want to get into the physics of co-axial cables here, but let us be honest, the co-axial cable is 14.4kbps dial-up in an era of 8mbps DSL. It isn’t as if Indians don’t have the television sets to support several channels, any telly sold after 1990 can support god knows how many channels, and only with new addressable systems which feed through standard inputs that the channel wars are ending. The cable industry is dominated by politicians and the underworld who have loved the delicious tax-free incomes it generates at a far lower risk than selling narcotics. Investing in upgrades isn’t their kettle of fish, which is why even set-top addressable cable boxes haven’t really been popular. To cut a long story short, the co-axial cable can only support about twenty-odd channels with a decent picture and though it can be pumped with eighty channels, watching VH1 which is invariably at the end of the band is torture. Heck, it was in mono too. Ugh!
Moving on this meant, our friendly neighbourhood cablewallahs didn’t just enjoy the lard from consumers they also got paid by channels ‘carriage fees’ to carry their channels in the ‘prime’ band. More black money since the networks always accounted for this money as something else. Heck, at one point the PR boss for a network whose owners also owned an airline told me that their flights to Goa were booked out with cable operators and their wives. That same channel suddenly claimed to be number one in the Hindi news space.
So, distribution in India is a pretty screwed-up business aided by ancient technology. I can’t believe there is so much talk of India skipping generations of technology when the advertising and media industry both of whom swear by high-tech depend on a horribly low-tech system. Even terrestrial broadcast is more high-tech nowadays thanks to DVB-Terrestial. Piecemeal solutions such as DTH or IPTV, which is the final piece of the triple-play puzzle will solve the problem until the I&B ministry replicates the forced conversion model. Not that the distribution mess is restricted to television, print is not much easier, but that is more of a logistical exercise. Well, the newspaper business is slightly different – and Times knows that – their rise to the top in Delhi began when they broke HT’s stranglehold on the distribution market, and how!
So back to the incremental cost question, launching a new channel does not mean an incremental distribution cost. Incremental costs mean costs of around 10-odd per cent more I would assume safely, but the cost in this case was rather massive. Admittedly not double, but not incremental either. In fact, the only cost that could be argued to be incremental was ‘marketing’. Because as I carry on, you’ll see that editorial costs were hardly incremental either.
Now, when you launch an additional product, flanking or not, you would need some additional people. To best leverage costs, you would ideally have people work across channels, magazines or papers. Keeps costs down, pay the people slightly more for the excess work, and you can keep hiring down to manageable levels. But in the case of several ‘additional’ channels, and the case of NDTV MetroNation is the one people will talk about for a long time, there was minimal leveraging of resources.
Of course, as Nag argued with me yesterday, that channel had another flaw – wrong language – the English speaking audience isn’t quite hyper-local yet while Total TV and Dilli Aaj Tak do quite well. The case is the same at Good Times, though that is funded by Vijay Uncle’s largesse until that also runs out. And as I’ve said again and again, Travel and Living is there. But the worst example in NDTV and for that matter even in TV18 are the near zero co-ordination between English and Hindi channels. Massive costs operating two independent operations and the Hindi channels can’t bring in the cash. IBN Lokmat on the other hand is a great success – but that is another story and goes back to the hyper-local point – it works with non SEC A/B audiences.
The problem of having such high costs is simple, the additional channels don’t provide anywhere near the revenue streams that the older, primary channel. Sure the costs were lower than the main channel but revenues are much, much lower. And then you get hit with the whammy of a downturn.
Anyway, I’m sure some media managers will take this a bit too critically and given that I’m disliked by that creed more than I’m hated by journalists for some strange reason I don’t know quite why, but anyhow that is another question. I’m not saying that flanking products or additional products don’t work. I’m just saying they should not be hyped up to be something they’re not. They’re not always money-spinners, they are not advertising specials like Bombay Times and Delhi Times!


Mohan Sinha said...

Very well put! Now only if some publishers of well known media houses read this and decided to close down some of their loss making editions!

Anonymous said...

Hello K,

I'd like to clear some misconceptions about Cable and DTH that you seem to have.

Cable carries 106 analog channels (48-860 Mhz) and as long as your cable operator has done the bare minimum (and quite cheap these days) upgrade, you should get 100 analog channels without problems. Added to this, if the MSO has fibre distribution, (most do, it's cheaper) picture and sound improve. But Analog is horribly noisy by the time it gets home from the headend because each amplifier in between adds noise. So cable's 100 analog channels can't compete with DTH's 200 digital channels.

Digital cable turns tables. Even with conservative compression on MPEG4, you can pack 15 digital channels in the bandwidth of an analog channel with stereo, multiple languages, zero noise and EPG. A cable operator can switch off 10 analog channels to start 150 digital ones with minimal investment. Replacing 40 analog channels, 600 digital channels can be added. Replacing 10 more gives 150 mbps odd capacity for internet forward path. 10 more and VOD is here. And he still is able to show 40 analog channels for those who want plain vanilla cable. All channels switched to digital mean 1200 SD channels easily or 100 HD and 800 SD. While we won't see that anytime soon, cheap technology and capacity to make that possible is here.

DTH, even with stat mux, high compression and using full transponder capacity, can provide between 200-300 SD channels on MPEG4 (Reliance, Airtel or Sun DTH) off a satellite with no scope for expansion. MPEG2 (used and ridiculously compressed by Dish TV in particular, TATA Sky, DD Direct+) fares worse. This is why action scenes tend to freeze or break up into a maze of boxes. You can forget about the internet via DTH for now. Same goes for a useful VOD. There is no satellite capacity to go further.

BTW, those who desire quality on DTH should avoid Dish TV. They are quite unprofessional with their systems management and too keen on stuffing more channels in the existing space. The secret of equal sound levels also eludes them because of sheer incompetence. Most channels have compression artefacts and excessive smoothing quite noticeable on normal TVs. So if quality is what you are concerned about, go with Reliance or Tata Sky if that is not an option.

So if comparisions are to be made, Cable is actually DSL and DTH is actually the EDGE service on your phone. Where I am right now, I am getting 150 Digital Channels + 70 analog ones over a digital cable set top. Quality is significantly better than Dish TV - which I also have.

Technical lesson done. Part two coming up.

-- A

Anonymous said...

As is usual, the government can take the blame for the horrible state of affairs in the cable industry. Stupid government legislation (Cable was made SSI) that favoured small operators discouraged consolidation of subscriber base into large networks. Instead of laying down and enforcing minimum service levels, morons in the government protected unprofessional, non technical, incompetent and even crimminal small operators. Territories were carved up by these small operators in most areas. No competition. So there was no real need for upgrading, was there?

And some strange 'security problems' held up the entry of DTH for a decade. Competition from DTH would have changed cable long ago, the way it is doing now. How I'd love to string our politicians and babus up with a bundle of coaxial cable!

More info on how things work in the distribution business:

MSOs are rich enough to ignore Goa and demand stiff carriage fees to let the channel show on their network. With nationwide MSOs like Hathway and IN Cable, it is a central deal where the official networks rake in the money and hopefully show it as part of operating revenue.

But with independent MSOs, direct deals are done. If you are in a metro, the carriage fee per channel per MSO can run into crores. In Tier II and III cities, large headends can demand between 5 and 15 lakh per month - especially if the channel is part of a well known family. News channels are all the more susceptible. Headends know that news channel owners are trying to gain influence (for various purposes), extort money or are indirectly funded by someone from the large parties. So the news channels get squeezed. Add these up for the entire country and watch the distribution cost baloon. Most pay up - atleast for some initial months.

But some don't. There is a channel rumoured to be using a parent organisation's print editorial space to pressurise operators into showing it their networks. Several smaller guys have succumbed, it seems. That may be a reason for its success.

But it may get easier for channels soon. With fibre, MSOs are actually expanding their networks to 200-300 km from headend in some cases, thus eliminating a lot of headends. DTH will do the rest. That is less people to deal with for the distribution channel - which will see downscaling as the subscriber base consolidates into a smaller number of headends.

Going off on a tangent...another category of channels that gets squeezed: New religious channels ;-). Especially Christian ones, since everyone knows that they have excellent sources of funding that don't normally dry up.

-- A

GBO said...

Wow, ..A, thanks, that was informative, wonderful and well written too. Now, when will we get satellite audio on simple AM/FM radios, please, and if not, why not?

Travel hinterland India, and grab an earful - that's where the power lies.

vikasgupta said...

Please leave spaces of enough girth between paragraphs! That makes it easy on the eye. Thanks.

J said...

That show Road trip kinda makes the whole channel(Good times) worth existing..
But then I am biased.