The NewsreelA newsletter for the media and entertainment sectorFamily entertainment centers in India

May 2013

Welcome to the April 2013 edition of The Newsreel, Ernst & Young’s newsletter on the media and entertainment (M&E) industry.

The M&E industry in India saw increased activity in the TV distribution space, with the second phase of digitization. Several TV distribution companies are planning to divest their stakes to fund digitization. Bharti Airtel has begun the process of selling a stake of up to 25% stake in Airtel Digital TV and Siti Cable is raising INR3.24 billion from its promoters; Reliance Communications and the Sun Group are in preliminary talks to merge their DTH businesses. And Den has sold stake to Goldman Sachs.

The industry has also witnessed increased M&A activity across other media segments. In the TV broadcasting space, Kalanithi Maran is in talks with FIIs to sell a 2% stake in the Sun TV Network, Sony is planning to buy out PE firm Capital International’s 6% stake in Multi Screen Media and Viacom seeks to buy its remaining stake in ETV’s GECs. In the publishing space, HT Media has sold its entire stake in HT Burda Media and the Network18 Group has divested its local search businesses, Infomedia Yellow Pages and AskMe. The marketing services segment has also witnessed acquisitions, particularly in the digital advertising space, with several agencies consolidating their position in the market.

There were also some interesting developments in the post-production and VFX space, with Prime Focus obtaining US$10 million from AID Partners Capital and announcing its plans to establish a JV with the latter in China, while Prana Studios has acquired US-based VFX studio Rhythm & Hues.

This month’s “In-focus” section covers the key trends in, the challenges facing and the way forward for Family Entertainment Centers in India, a concept whose time has clearly come, with the launch of Kidzania, Smaaash and Imagica.

In the “Point of view” section, Shripal Morakhia of Smaaash shares his views on the country’s family entertainment segment.

I hope you enjoy reading this edition of The Newsreel. We look forward to your valuable feedback and suggestions to enable us to make this newsletter even more interesting and useful for you.

With kind regards,

Farokh T. Balsara National Sector Leader — Media & Entertainment

Foreword

In this editionIndustry news:

In-focus:

Point of view:

4

9

12

Latest news in the media and entertainment space across various sectors

Family entertainment centers in India

Interview with Shripal Morakhia, owner of Smaaash

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Industry newsTelevision

Sony to buy out PE firm’s 6% stake in MSM

Sony Pictures Television (SPT) plans to buy out PE firm Capital International’s 6% stake in Multi Screen Media to take full ownership of the company. Earlier, SPT had bought a 32% stake in the Indian shareholders of Multi Screen Media, taking its shareholding to 94%.1

TV18 offers Viacom option to buy remaining stake in ETV’s GECs

TV18 Group has offered Viacom the option of buying the remaining 50% stake in ETV’s general entertainment channels (GECs) as part of its plan of broadening its JV partnership with the global media giant. Viacom is conducting due diligence of ETV’s assets before it decides to participate in TV18’s regional language entertainment ambitions. ETV’s GECs will come under the ambit of Viacom18 after securing the latter’s equity participation.2

Maran in talks with FIIs to sell 2% stake in Sun TV Network

Kalanithi Maran, founder and chairman of Sun TV Network Ltd., is in talks with foreign institutional investors to sell a 2% stake in the broadcaster to meet the minimum public shareholding norms for listed companies. Maran is likely to obtain around INR3.3 billion from the stake sale.3

Star launches new sports channel

Star India has launched a new sports channel under the Star Sports brand on 11 March. Named Star Sports 2, the channel will have international football as its driver content. It will also air other sports content. Star has the broadcast rights to football properties such as the English Premier League, the Spanish league La Liga, the Italian league Series A and the FA Cup for India.4

Neo sells broadcasting business in US to Willow TV

Nimbus Communications continues to trim down the operations of its sports business. Neo Sports Broadcast, a subsidiary of Nimbus Communications, has sold its US subsidiary Neo Broadcast America to Willow TV, the largest cricket broadcaster in the US and Canada. This is part of its restructuring exercise to focus on Neo’s core market, which is India and the subcontinent.5

PE firm Apollo to sell its stake in Dish TV

US private equity firm Apollo Global Management is in talks to sell its 11% stake in Dish TV India. Apollo has reportedly hired Swiss bank UBS to manage the sale, but it has to decide whether to do this through secondary deals or sell it to a strategic buyer. It had bought the stake in the company in 2009 for around US$100 million is aiming to raise between US$150–200 million for it. The stake has a market value of around US$144 million.6

Bharti Airtel to sell stake in DTH arm

Bharti Airtel has started the process of selling a stake of up to 25% in Airtel Digital TV, its DTH arm. The company has already signed a non-disclosure agreement (NDA) with at least seven strategic and private equity players for the stake sale. US-based companies such as Comcast and Liberty Global are reported to be in talks with Bharti Airtel for buying the stake in its DTH line. Some private equity players such as KKR, Providence, Bain Capital and GAAP are also reported to be in the fray. Bharti is looking at raising more than US$200 million through the stake sale.7

1. “Sony to buy out private equity firm’s residual 6% stake in MSM,” Indiantelevision, 13 March 2013, via Factiva. 2. “TV18 offers Viacom option to buy remaining stake in ETV’s GECs,” Indiantelevision, 9 March 2013, via Factiva.3. “Maran in talks with FIIs to sell 2% in Sun TV Network,” Mint, 8 March 2013, via Factiva.4. “Star to launch a new sports channel on 11 March,” Indiantelevision, 5 March 2013, via Factiva.5. “Neo sells broadcasting biz in US to Willow TV,” Indiantelevision, 18 February 2013, via Factiva.6. “PE firm Apollo in talks to sell its 11% stake in Dish TV,” Financial Express, 14 March 2013, via Factiva.7. “Bharti Airtel to sell stake in DTH arm,” The Economic Times, 8 March 2013, via Factiva.

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Siti Cable network gets FIPB approval for capital-raising

Siti Cable has received the approval of the Foreign Investment Promotion Board (FIPB) to raise INR3.24 billion from promoter entities. The company has received the first tranche of INR810 million as part of the INR3.24 billion it is raising from promoter firms to fund digitization and cut its debt. On the basis of this approval, the company will issue 162 million warrants that will be convertible into an equivalent number of equity shares at the price of INR20 per warrant. The total promoter shareholding after conversion of all the warrants will rise to 73.08% from 63.43%.8

Reliance Communications and Sun Group in talks to merge their DTH businesses

Reliance Digital TV and Sun DTH are in preliminary talks to merge their businesses into a single entity. The deal is still at a nascent stage and the valuations are yet to be finalized, but sources suggest that Sun Group is likely to own a majority stake in the merged company, while Anil Ambani’s Reliance Communications is likely to own less than 26% in the company.9

Cable and DTH operators to pay 10% as import duty on set-top boxes

The Union Budget 2013 has imposed an increased import duty of 10% on set-top boxes from the present 5%. With almost 100% of the set-top boxes being imported, this directly affects not only operators but also the consumers, since this rise will be passed on to them eventually.10

TRAI directs MSOs, LCOs and broadcasters to comply with QoS

The Telecom Regulatory Authority of India (TRAI) has directed multi-system operators (MSOs) and local cable operators (LCOs) to make their subscriber management system (SMS) fully operational in DAS. The systems are

provided for under Regulation 20 of the Standards of Quality of Service (QoS) Regulations. TRAI has asked MSOs and LCOs to file their compliance report pertaining to the QoS.

In another release, TRAI has notified fresh regulations restricting advertising time on TV channels to 12 minutes per hour. The regulator has asked the channels to inform it about the volume of advertising they carry on a quarterly basis following the notification of the Standard of Quality of Service (Duration of Advertisements in Television Channels) Amendment Regulations, 2013.11

Publishing

The Hindu’s publishers to bring out Tamil newspaper and English tabloid

Kasturi & Sons Ltd. (KSL), which publishes The Hindu daily newspaper, plans to launch an English tabloid and a Tamil newspaper later in the year. A market survey has been conducted and the company is expecting a circulation of 600,000 within two years for its proposed Tamil newspaper, which will be initially launched in Chennai and Bangalore.12

HT Media to sell its entire stake in HT Burda Media

HT Media Ltd. has decided to sell its 51% stake in HT Burda Media Ltd., its JV with Burda Druck Gmbh, for INR600 million. This decision follows its strategic review of HT Media’s long-term plans. The company felt that gross margins in the printing business are far lower than those in the print media business.13

Astro’s Getit buys Infomedia Yellow Pages & AskMe

The Network18 Group has entered an agreement with Astro’s Getit to divest its local search businesses, Infomedia Yellow Pages and AskMe. Getit, a digital marketing company, which offers a platform for local searches, classifieds, micro communities, deals, etc., will be named Getit Infomedia. Network18’s divestment of its Yellow Pages and AskMe businesses forms a part of a series of asset monetization transactions undertaken by it.14

8. “Siti cable network gets FIPB approval for capital raising,” Indiantelevision, 20 March 2013, via Factiva.9. “Reliance Communications, Sun Group in talks to merge their DTH businesses,” The Economic Times, 15 March 2013, via Factiva.10. “Cable and DTH operators to shell out 10% as import duty on set top boxes,” The Economic Times, 28 February 2013, via Factiva.11. “Trai directs MSOs and LCOs to comply with QoS in DAS areas,” Indiantelevision, 25

February 2013, via Factiva; “Trai notifies 12-minute per hour advertising rule for TV channels,” Mint, 22 March 2013, via Factiva.

12. “The Hindu’s publishers to bring out Tamil newspaper and English tabloid,” Business Standard, 21 February 2012, via Factiva.

13. “HT Media decided to sell its entire stake in HT Burda Media,” MediaMughals, 6 March 2013, via Factiva.

14. “Astro’s Getit buys Infomedia Yellow Pages & AskMe,”exchange4media, 28 February 2013, via Factiva.

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Filmed entertainment

Cinepolis India opts for small cities and seeks to double screens in 2013

Mexican multiplex chain Cinepolis India plans to double its number of screens to 100 this year as it expands its operations to smaller cities such as Pune, Thane, Kochi and Ghaziabad. It seeks to invest around INR1.3 billion on this expansion this year. Currently, it has 49 screens across nine properties.15

Ajay Devgn signs INR4 billion deal with Star India for movie rights

Bollywood actor Ajay Devgn has signed a deal worth around INR4 billion with Star India for exclusive satellite rights to all his upcoming releases until 2017. This is the second such contract the network has entered after it inked a pact with Salman Khan. The deal with Star India is for a period of five years and is reported to include at least 10 films.16

Capital18’s possible stake sale in Colosceum Media

Network18 Group’s investment arm Capital 18 is in talks to sell a majority stake in TV production company Colosceum Media Pvt. Ltd. as part of its continuing efforts to divest its non-core units. Watchtower Pictures is in talks to buy a majority stake in the unit. The production house is valued at around INR500 million. Colosceum has produced TV shows such as Master Chef India, Roadies, Splitsvilla and Jai Shri Krishna, among others.17

Radio

Radio Mirchi announces a studio in Dubai

Radio Mirchi has announced its opening of a new studio in Dubai. This expansion positions the station as the only channel in South Asia to have multiple studios in Abu Dhabi and Dubai. Radio Mirchi offers listeners across the UAE an opportunity to listen to Bollywood music.18

Auction of FM radio Phase III gets eGoM’s nod

The Empowered Group of Ministers (eGoM) have given the green signal to the auction of 839 FM radio channels in Phase III. It is learnt that the eGoM have decided to refer some issues relating to fees to TRAI. The auctions are expected to be completed within a year.19

Marketing services

Publicis acquires digital agency Convonix

The Publicis Groupe has taken over the full service digital marketing agency and consulting firm Convonix, which provides search engine optimization, paid search marketing, social media marketing and online reputation management services to its clients. This acquisition fortifies Publicis’ position as India’s largest digital marketing operation. Convonix will align its operations with the Starcom MediaVest Group (SMG) in India and will operate as SMG Convonix.20

15. “Cinepolis India bets on small cities; to double screens in 2013,” The Economic Times, 24 February 2013, via Factiva.16. “Ajay Devgn signs INR4 billion deal with Star India for movie rights,” The Economic Times, 4 March 2013, via Factiva.17. “Capital18 may sell its stake in Colosceum Media,” Mint, 12 April 2013, via Factiva.18. “Radio Mirchi announces studio in Dubai,” Radio & Music, 11 March 2013, via Factiva.19. “Auction of FM radio Phase III gets eGoM nod,” Indiantelevision, 7 March 2013, via Factiva.20. “Publicis acquires Indian digital agency Convonix,” Indiantelevision, 11 March 2013, via Factiva.

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IPG Mediabrands acquires Interactive Avenues

IPG Mediabrands, the media holding company of Interpublic Group, has acquired the full service digital agency Interactive Avenues (IA). The deal is pegged between INR3.5 and INR4 billion, and is likely to take place in tranches over the next few years. The deal marks the exit for IA’s current investors, WestBridge Ventures II Investment Holdings (formerly Sequoia Capital) and Anupam Mittal. After the acquisition, IA will become part of the Mediabrands Audience Platform (MAP), an IPG Mediabrands company that offers an aggregation of specialist digital practices.21

McCann Worldgroup acquires End To End Marketing Solutions

McCann Worldgroup (MWG) India has acquired Bengaluru-based direct and database marketing company End To End Marketing Solutions. The acquisition will enable MWG India to boost its database marketing capabilities and enhance its presence in the technology sector. Following the acquisition, MWG will operate End To End as a separate entity and the company’s top management will be retained.22

WPP merges Meridian with Soho Square

Meridian Communication, which operates under Ogilvy and Mather, has merged with WPP’s Soho Square. The aim of the merger is to grow Meridian international’s operations in Soho Square’s business in India. Soho Square has three boutique agencies that operate independently in Mumbai, Bengaluru and Delhi.23

21. “IPG Mediabrands acquires Interactive Avenues,” The Economic Times, 6 March 2013, via Factiva.22. “McCann Worldgroup acquires database marketing firm End To End Marketing Solutions,” afaqs!, 4 April 2013, via Factiva.23. “WPP merges Meridian with Soho Square,” Indiantelevision, 21 February 2013, via Factiva.24. “Prime Focus raises US$10 million from PE fund, plans for JV in China,” Indiantelevision, 20 March 2013, via Factiva.25. “Prana Studios acquires VFX studio Rhythm & Hues, Indiantelevision, 30 March 2013,

via Factiva.26. “Reliance Big Entertainment acquires gaming companies inJapan, Korea,”

The Economic Times, 12 March 2013, via Factiva.

Others

Prime Focus raises US$10 million from PE fund and plans for JV in China

Hong Kong-based PE firm AID Partners Capital has invested US$10 million in Prime Focus World (PFW), a subsidiary of the Prime Focus Group. AID Partners Capital is making the investment through PFW’s optionally convertible preference shares, valuing the company at US$250 million. Prime Focus plans a JV with AID Capital Partners and Zhejiang Jingqi Wenhua Chuanbo Company, a China-based company, to offer visual effect and 3D conversion services to the movie industry in the Greater China area.24

Prana Studios acquires VFX studio Rhythm & Hues

A US bankruptcy court has approved the sale of the visual effects and animation studio Rhythm & Hues to 34x118 Holdings, a wholly owned affiliate of Los Angeles-based Prana Studios. Apart from 34x118 Holdings, the auction process saw bidding from Prime Focus World, a subsidiary of Mumbai-based Prime Focus, and Brave Vision Investments, which is part of Chinese-American film distributor China Lion Film Distribution.25

Reliance Big Entertainment acquires gaming companies in Japan and Korea

Reliance Big Entertainment has acquired a 100% stake in the gaming division of Funnel Japan as well as its team and all the games it is developing. It has created a wholly owned subsidiary, Reliance Big Entertainment Japan Co. Ltd., in the region with the buyout. The company has also acquired a 51% stake in Busan, Korea-based gaming studio Bluesom Inc., which will develop games for the Japan and Korean markets. The acquisitions will amount to less than US$5 million (around INR270 million).26

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Pearson buys local partner in TutorVista, IndiaCan

UK education and publishing company, Pearson, has acquired minority investors - serial entrepreneurs K Ganesh and Meena Ganesh in their JV, TutorVista, an education company with an interest in schools and online tutoring. The 20% stake sale values the company, TutorVista Global Private Ltd., at US$213 million (INR11.5 billion). In an another development, the company acquired the entire 50% stake of Educomp Solutions Ltd. in its JV, IndiaCan, a training company, for an undisclosed amount.27

People movement

• Former MD and CEO of Hathway Cable & Datacom, K Jayaraman, has joined the Zee Group as President of its Distribution and Placement business. He will report directly to the MD of Zee Entertainment Enterprises Ltd. and its CEO Punit Goenka.28

• Vikram Malhotra has resigned from his position of COO of Viacom18 Motion Pictures. Malhotra has decided to pursue his entrepreneurial aspirations. He will, however, continue in his current capacity till July 2013, to ensure a seamless transition.29

• Times Television Network (TTN) has appointed Jagdish Mulchandani as its CFO. Mulchandani will drive TTN’s finance-related strategy and operations. In addition, he will oversee the functions of distribution, traffic and administration in all its channels.30

• Asianet News Network has appointed Chinta Shyamsundar as its CEO following the exit of Suresh Selvaraj. Shyamsundar is currently serving as a director in JMEV, a subsidiary of Jupiter Capital Venture.31

• Reliance MediaWorks has appointed George Murphy as its Chief Creative Officer to drive its VFX capabilities in the US, India and the UK. Murphy has worked with Industrial Light and Magic, ESC Entertainment, Electronic Arts, WETA Digital and Disney’s ImageMovers Digital.32

• Red Chillies Entertainment has appointed Venky Mysore as its CEO. Mysore will continue in his role of CEO and MD of Kolkata Knight Riders, the Indian Premier League (IPL) franchise.33

• Ajit Andhare, the founder and CEO of Colosceum Media, has decided to step down from his post. Andhare will, however, continue to be associated with Colosceum as a director and act as a mentor to the team.34

• Arun Tadanki has resigned from his position of MD, Yahoo India & Southeast Asia. He joined Yahoo India as its MD in 2009.35

• Manajit Ghoshal has resigned from his position of MD and CEO of Mid Day. Cyriac Mathew, the current COO of Mid Day, will take charge from him.36

• Nimbus Sport has appointed Sunil Manocha as its COO. Manocha replaces Yannick Colaco, who has joined NBA as its India Managing Director.37

• The Indian Broadcasting Foundation (IBF) has appointed Shailesh Shah as its Secretary General. Shah has earlier worked with The Hay Group, PricewaterhouseCoopers, Watson Wyatt, Satyam Computers and the JSW Group. He has also been associated with organizations such as The World Economic Forum, The Economic Development Board of Singapore and NASSCOM.38

27. “Pearson buys local partner in Indian schools JV,” The Times of India, 26 February 2013, via Factiva; “Pearson acquires 50% stake of Educomp in IndiaCan,” Mint, 9 April 2013, via Factiva.

28. “K Jayaraman to head Zee’s distribution and placement business,” Indiantelevision, 11 March 2013, via Factiva.29. “Viacom18 Motion Pictures COO Vikram Malhotra quits,” Indiantelevision, 19 March 2013, via Factiva.30. “Times Television ropes in Jagdish Mulchandani as CFO,” Exchange4media, 5 April 2013, via Factiva.31. “Chinta Shyamsundar returns as CEO of Asianet News Network,” Indiantelevision, 29 March 2013, via Factiva.32. “Reliance MediaWorks ropes in George Murphy as CCO,” Indiantelevision, 9 April 2013 via Factiva.33. “SRK’s Red Chillies Entertainment appoints Venky Mysore as CEO,” Indiantelevision, 19 February 2013, via Factiva.34. “Ajit Andhare steps down as Colosceum Media CEO,” Indiantelevision, 12 April 2013, via Factiva.35. “Yahoo India MD Arun Tadanki to quit,” The Economic Times, 23 February 2013, via Factiva.36. “Cyriac Mathew to replace Manajit Ghoshal at Mid Day,” Exchange4media, 6 March 2013, via Factiva.37. “Sunil Manocha appointed as COO of Nimbus Sport,” Indiantelevision, 21 February 2013, via Factiva.38. “IBF appoints Shailesh Shah as Secretary General,” The Economic Times, 27 February 2013, via Factiva.

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In-focus: Family entertainment centers in India

Family entertainment centers

Family entertainment centers (FECs) are small amusement parks or entertainment zones that typically serve local markets in cities or towns. These centers are designed to keep the entire family engaged, generally at a significantly less per-person cost than a traditional amusement park. They offer varied amusement options such as gaming consoles, arcades, video games, indoor playground systems, soft play areas, redemption machines, children’s rides and skill-based machine games. FECs also host private celebrations such as birthday parties.

The size of the industry is estimated to be around INR 1100 cr annually and over the last decade, India has seen an increase in the popularity of FECs. From small towns to metros, all have thriving FECs. Today, not many people have the time to spend an entire day at theme parks and resorts. FECs have provided them much needed entertainment avenues at convenient locations close to their homes. Increasing disposable incomes, coupled with limited leisure time, has lead to the exponential growth of FECs.

The advent of the malls that have mushroomed across the country has further contributed to the growth of FECs. Mall developers are increasingly including FECs in their plans, since they help in increasing and retaining footfalls at malls and increase the number of hours consumers spend in them. New developers have begun to plan bigger spaces in their malls and consider FECs an USP at them.

Currently, India has the highest number of tickets sold in the FEC sector, but the market size is low because of the low-priced tickets as compared to other developed markets. However, the overall market size of FECs is increasing in India with the growth in their number and in average footfalls in them. Furthermore, the Indian FEC sector is dominated by locally owned and operated FECs that typically operate in a large number of non-chain individual venues. However, of late,

bigger players have been entering the market and there has been a significant increase in the number of FEC chains and franchises. For instance, PVR bluO, a JV between PVR and Major Cineplex Group of Thailand, has several bowling centers and the company is also in talks with real estate players to expand its operations to cities such as Chandigarh, Ludhiana, Cochin, Hyderabad, Mumbai and other tier II cities in India. Pan India Paryatan Pvt. Ltd. (PIPPL), which runs Essel World, has also entered the FEC business and is expanding its operations, with around 15–20 planned indoor play zones planned by December 2015.39

Key considerations for building FECs

Due to the scale of investment, FECs typically purchase off-the-shelf products with little customization from industry vendors. Therefore, in order to differentiate and sustain a competitive advantage, they need to keep the following points in mind while developing FECs:

1. Ambience: The overall ambience is one of the most important facets of an FEC and is what attracts prospective customers. Since the rides, games and activities are more or less the same across FECs, their overall ambience and décor are perceived as their distinguishing factor by customers.

2. Games/Activities: FECs should provide games and activities for customers across age groups to keep the entire family engaged. Children are attracted to activities such as bumper cars, video games and small kids rides, while older customers prefer games with simulators, billiards and bowling, etc. .Invariably, there is a neexd for a loss leader i.e. a game with a sub 10% - 15% grow margin to attract visitors.

3. Refreshing and entertaining: FECs should include several activities to maintain the fun factor. Typically, they should offer five or more anchor activities, with enough to do so that customers can spend an hour or two at them without getting bored or waiting too long in queues and return again. A mid-sized FEC would offer 15-25 entertainment options.

39. “PVR bluO eyes bowling centres, dart stations to hit bull’s eye,” The Hindu Business Line, 19 March 2013, via Factiva; “Riding on amusement,” Hindustan Times, 12 August 2012, via Factiva.

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4. Layout of facility: Another factor to keep in mind is the location and layout of an FEC. Developers should search for locations that offer superior visibility, proximity and access to customers — this can be difficult since the economics of FECs are not attractive as compared to most other forms of urban land use. Their design, layout and staffing requirements are important factors, since during the peak period (weekends), their business is much more than during the non-peak period (week days). Customer throughput during peak periods is therefore a vital factor to be considered while designing FECs.

5. Price: The price of the ticket is also one of the most important things to keep in mind. FECs should keep their pricing affordable, and based on the locality, plan the range of activities/games and the overall fun factor in their centers. The game related revenue starts at INR50 per head and goes upto INR1000 per head for exciting action games. Overall, the average is around INR 100-125 per head. Food and beverage revenue generates margins of 35% to 65% and forms around 20% - 35% of total revenues. They should also try to keep on attracting customers through different marketing and promotional activities targeting customers in their ‘catchment area’ as well as bulk deals for schools, corporate, etc.. In addition, they should announce promotional programs, varying by “dayparts” and “weekparts,” targeting specific customer niches. Without constantly working on creating awareness, FECs face the prospect of seeing their businesses decline as their potential customers seek other forms of leisure-time entertainment.40

Critical success factors:

1. Location assessment: The catchment area of the FEC needs to be evaluated in terms of population profile, propensity to spend and available entertainment options. If in a mall, footfalls are important, but their break up into children, youth, etc. is also key. Cost of alternative entertainment also plays an important role.

2. Equipment mix: The overall capex requirement of the business is very high. The maintenance and upkeep cost of machines is also high, which makes it difficult for FEC owners to run a sustainable business. Furthermore, the machines have a landing duty of 36% and a freight duty of 20%–24% — and a typical digital machine is very expensive in the range of US$160,000–US$195,000. The mix of local and imported machines as well as cost of machines must align to expected revenue/ user.

3. Skilled manpower: Frequently, technicians who deploy and maintain arcade gaming machines lack expertise. This results in machines being frequently “out-of-order,” which adversely affects their performance and life, and also results in loss of prospective customers. The user experience is also impacted by the operators and their training. Several times, training can result in a direct impact on revenue.

4. Repeat visitors: FECs face a significant challenge in attracting visitors again and again because they cannot make changes in their offerings. This significantly limits their revenue growth in the long run. There is a need for them to continually innovate with their set of offerings to continue attracting visitors to them, or provide incentives to encourage repeat visits.

40. “Family Entertainment Centers,” International Real Estate News, 1 January 2012, via Factiva.

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5. Food & Beverages (F&B): The availability of an adequate variety of F&B options to cater to various age-groups can significantly impact overall margins.

6. Queuing: Ability to reduce waiting time between rides, as well as time at the cash counters and F&B outlets can increase revenues.

7. Payment options: Ease of payment – by card or cash – generates increased revenues. Cash counting machines are important to enable quick acceptance of large amounts of cash. Value cards also drive increased usage of games and F&B.

Raghav Anand

Raghav is a Manager in the Business Advisory Services practice at Ernst & Young. He has assisted both traditional and new media companies in market entry strategy, feasibility studies, operational developments,

technology design and techno-commercial due diligences.

Raghav is the segment champion for gaming and mobile entertainment at Ernst & Young.

Tel: + 91 22 6192 1517

Email: raghav.anand@in.ey.com

Therefore, before rolling out an FEC business, an operator needs to consider and assess consumers’ requirements, potential footfalls, types of entertainment options, etc. The design and layout of an FEC has to be planned with professional assistance. Financial considerations, including impact of duties and taxes, also need to be assessed. Overall, the success of an FEC hinges on the robustness of its business planning, optimal floor design and the engaging entertainment options offered by it.

Future outlook

The FEC sector is expected to see significant growth in the near future and more investment is expected in it with the entry of big players. As an entertainment option, FECs are also seeing an expansion with new types of games and activities. Furthermore, new types of FECs such as Kidzania, an edutainment theme park for children in the age group of 4–12, are launching their operations in India. We expect growth to be in excess of 20% per annum for the next three years.

The challenge however is to maintain a high per ticket realization without affecting footfalls. FEC operators are looking to leverage ancillary revenue streams such as food and beverages, and souvenirs to grow their topline. FECs are expected to account for a greater share of the overall amusement park industry in India in the near future as their penetration extends out of the metros into tier I and tier II towns, and their overall footfalls and the variety of their offerings increase.

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Interview with Shripal Morakhia, owner of Smaaash

On the family entertainment space in India

Family entertainment in India is currently at a very nascent stage and a part of the reason for this is that Indians are typically used to passive entertainment such as watching movies in a theater, dining in a restaurant, etc. Other entertainment options are seriously limited. Till now, game entertainment in India has been restricted to largely buying second-hand gaming consoles and deploying them in malls. The potential for all types of quality entertainment is therefore huge in the country!

On the Smaaash entertainment center concept

Indians love Bollywood and sports as entertainment options. At Smaaash, we have used sports as the main theme to create entertainment, with a focus on – what else? – cricket. The entertainment center has a controlled environment, and along with cricket, offers an F1 simulator, football and more than 25 arcade games, coupled with quality food and beverage facilities, which make it much more than just a gaming center. We do not consider ourselves as family entertainment in the true sense, since our entertainment center means different things to different people. It is not defined by age or gender. We would like to consider it an interactive entertainment center, where people bond over high adrenaline.

On the willingness of people to pay for premium entertainment costing INR500 for 15 minutes of bowling

I intend to provide quality entertainment and a world-class product to my customers. My target audience is not the affluent class, but middle class Indians, whose spending capacity we need to redefine. Middle class Indians are willing to pay for good quality entertainment. This was the same question asked when India moved from single screens to multiplexes. Once a superior experience is created and experienced, people find it is worth it. Therefore, we are focusing on creating a center that provides high adrenaline entertainment and to which people will come over and over again to play.

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On the growth potential of Smaaash centers outside of Mumbai

I see scope for the growth of Smaaash centers in all big Indian cities, but I see a larger growth potential — in a different format — in smaller ones. Our plan is to have mega centers in big cities and “sachet” centers in smaller locations.

Just as IPL can be shown in Dharamsala and draw crowds, we believe Smaaash can be taken to smaller cities and investors will get returns on their investments. A sachet center will typically have a café and one cricket lane, where people can come and meet. The centers can also be used effectively for product launches.

In addition, we have plans for mobile Smaaash centers, which can be deployed at corporate off-sites, channel partner meets and cater effectively to the MICE industry.

Apart from India, there is also a scope to set up Smaaash centers in other cricket-loving countries such as the UK and Australia.

On the growth model

I would ideally not want to go the franchisee route because I want to try and provide the same experience throughout the country. What we are developing now is not only excellence in games but excellence in service, which is critical for the success of any high-

end experiential product. We have taken the help of an imagineering associate to help us train our staff. We want to manage as many units on our own as possible because we want to create and maintain a level of excellence of service. Our brand is very young and we do not want to change the level of service we provide. At this point in time, our focus is to invest as much as we can and create our own properties. We have entertained 200 thousand people in the last two months and we aim to reach 1 million by the end of this year.

On the break-even period for a Smaaash center

Mumbai is an exception for us, since we were learning as well as experimenting in our first center. We had to invest heavily at the initial phases, and given Mumbai’s humid and dusty climate, the machines needed to be re-calibrated on an almost daily basis. Now we have recovered almost 50% of our capital cost. We believe the payback can be anywhere between two to five years in a big or a small city.

On the threats that could hurt your growth plans

People losing their interest in cricket could be one threat, but that seems a remote possibility at present! However, to counter this, we are introducing new sports such as F1, bowling, basketball and football to cater to young audiences. We are continuously investing in sports other than cricket.

The business of experiences: The Indian events and activation industry

This report was released in association

report on the events and activation industry, this report captures the emerging trends and challenges that this nascent sector faces.

Our M&E publications

Monetizing your content in a digital world

This publication offers perspective on the changing nature of media and entertainment consumption and how M&E companies are tailoring their offerings to suit the same.

Spotlight on China: Building a roadmap for success in media and entertainment

This report was released at the inaugural M&E Emerging Markets Executive Forum in Shanghai and focuses on the Chinese media and entertainment landscape.

Spotlight on the Indian Media & Entertainment economy: Seizing new growth opportunities

The publication features the trends in the various

entertainment, radio and music and sports and the impact of digital media on each of the sub sectors. The publication also studies the growth opportunities for global companies.

Poised for growth: FM radio in India

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Entertainment: Establishing industrywide consistency and comparability

This publication focuses on the new business models in the various sub sectors of the M&E industry and highlights factors M&E

report digital revenue.

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Film industry in India: New Horizons

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on the digital landscape and how changing business models are shaping the future of the industry.

Monetizing digital media: Creating value consumers will buy

This report offers perspective on how media and entertainment companies can take the monetization of digital media to the next level by creating premium product and service bundles that can increase future

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Industry is the cornerstone of Ernst & Young’s approach to

across more than 100 countries, who focus on various issues and challenges the industry faces. Globally, Ernst & Young leads the audit market share in the overall M&E industry on the 2008

in the overall M&E space on the 2007 Russell 3000® Index.

Whether it is the traditional press and broadcast media or the multitude of new media options, audiences now have more choice than ever before. For M&E companies, integration and adaptability are becoming critical success factors. Ernst & Young’s Global Media & Entertainment Center brings together a global team of professionals with in-depth technical experience in assurance, tax, transaction and advisory services to help you achieve your potential.

For further information on Ernst & Young’s services for the media and entertainment industry, please contact:

The center works to anticipate market trends, identify the implications and develop points of view on relevant industry issues. Ultimately, it enables us to help you meet your goals and compete more effectively. This is how we make a difference.

Ernst & Young India has a dedicated M&E practice of more than 160 professionals across 15 key segments of the industry. We provide services to many of the country’s leading M&E companies as well as to global media giants operating in the country. We have developed a wide range of services, such as entry strategy, private equity placement, due diligence, IT security review, organization structure, performance improvement and tax structuring, to name a few. This has enabled us to establish a strong presence in each segment of the industry.

As your advisors, we can help you respond quickly and effectively to the challenges the entertainment industry faces today.

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Ernst & Young Private Limited The Ruby 29 Senapati Bapat Marg, Dadar (W) Mumbai — 400028

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Email: farokh.balsara@in.ey.com

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