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!