Hrithik Roshan signed a Rs 36-crore (Rs 360 million), three-movie agreement with Anil Ambani's Adlabs [Get Quote] Group in October, making Roshan the highest-paid Indian actor.

Hindi film Kabhi Alvida Na Kehna is the biggest-ever Indian blockbuster overseas, earning more than Rs 44.5 crore (Rs 445 million) abroad, overtaking Kabhi Khushi Kabhie Gham's Rs 35.25-crore (RS 352.5 million) record.

Last week, Television Eighteen Group, which owns the CNBC-TV18 business news channel, bought financial newswire Crisil MarketWire.

Individually, these are impressive nuggets of news. Together, they are clear pointers to the explosion in the Indian media and entertainment industry.

There's further proof. Last month, the strategist asked professional services company Ernst & Young for a comparison of earnings before interest, income tax, depreciation and amortisation data of India'sM&E industry.

It wasn't a random thought, but a logical follow-up to E&Y's recent report "Spotlight on Profitable Growth", which included a similar examination on a global scale. The findings, in a nutshell: M&E will grow exponentially, but only if the industry adapts to evolving business models.

EBITDA explained

The Indian industry is fragmented and most firms are privately held. E&Y stayed with listed M&E companies, including Adlabs, Balaji Telefilms [Get Quote], K Sera Sera, Zee, Sri Adhikari Brothers and UTV Software.

But focusing on listed companies meant missing out on biggies like Star, Disney and Sony Entertainment, whose financials are not in the public domain.

Between 2001 and 2005, Indian M&E companies achieved a higher EBITDA growth than the companies included in the BSE Sensex and the NSE Nifty.

While the 23 M&E companies recorded an average EBITDA compounded annual growth rate of 23 per cent, the EBITDA CAGR for the 30 companies in the Sensex and the 50 in the Nifty were significantly lower, at 18 and 17.5 per cent, respectively.

Simply put, these numbers imply profit growth in media and entertainment is faster than in other Indian industries. The picture changes somewhat when you take a closer look at EBITDA margins (EBITDA divided by net sales).

The Sensex and Nifty companies achieved higher aggregated EBITDA margins than M&E companies. The takeaway? On average, media companies are less profitable than other industries.

Granted, the numbers aren't truly representative of the industry, but they do indicate the general direction in which Indian M&E is heading. Or does it? E&Y executives believe the numbers will change dramatically in just a few years' time, as the industry adapts to the rapidly evolving technology and begins delivering value-added products and services.

"India is on the threshold of a major technological change," confirms Farokh Balsara, industry leader, media and entertainment, E&Y.

How did the companies in the global report fare? The industry as a whole achieved better EBITDA growth and margins than companies in the S&P 500 and the FTSE 100. While the Nikkei Index grew faster than the global media companies, its EBITDA margins were still lower.

The big picture

The E&Y global report had mixed reports on the television, cable and satellite industry. A 2004 study had identified television broadcast (free to air services; the Indian equivalent would be Doordarshan) as the sector "most challenged to thrive in the future", thanks to dropping audience and advertising shares.

The threats to free TV are very real, particularly as satellite TV (direct-to-home, or DTH) and cable operators establish themselves more firmly.

The rise of digital video recorders that allow viewers to record programmes and skip ads has also been a severe blow. (Unlike cable and DTH operators, whose revenue models are a mix of subscription and advertising, free TV depends heavily on ad revenues.)

In contrast, cable operators (Indian equivalent: Siti cable and so on) were the sector "most likely to thrive in the future", given their growing base of services (the ability to bundle digital television, high-speed Internet, video-on-demand and, more recently, telephony).

Globally, the sector's been growing steadily, with EBITDA CAGR at 16 per cent for 2001-05, and 39 per cent margins. Those numbers may be challenged as DTH expands its subscriber base, but cable is gearing up by promoting the video-on-demand service and developing unique content.

Meanwhile, DTH is thriving internationally, with strong EBITDA growth and margins, as a growing customer base finally offsets the huge initial investments. Operators have also hit upon a near-perfect way of warding off competition from cable: by promoting DVRs and emphasising the TV viewing experience.

It's different in India. The 68 million cable and satellite homes account for 61 per cent of all television homes in India and, given the social imperative, you won't see Doordarshan fading away anytime soon. It follows that free-to-air channels will continue to get their ads.

But the future lies in the paid channel route, according to E&Y. Subscription revenues are already double those from advertising and, in addition, are growing twice as fast. On a base of 52 million subscribers last year, ad revenues were $1.2 billion (14 per cent CAGR) and subscription revenues were $2.5 billion (26 per cent CAGR).

There's potential for further growth: the average revenue per user in India's cable industry is just $4 a month, compared to $16 in Taiwan, $20 in Indonesia and $42 in the US. A mere $1 increase in Arpu will lead to an over-$2 billion increase in subscription revenues by 2009, even keeping the subscriber base constant.

How can cable operators increase their Arpu? By providing value-added services, such as better reception quality, increased channel carrying capacity, and adding new features such as programme guides and interactive services, suggests the report.

"The industry is at a tipping point, where broadcasters have realised there is huge scope in subscription revenues, compared to ad and content revenues," comments Balsara.

Already, about 30 per cent of Star India's revenues come from pay TV and recently, the South-based Sun TV [Get Quote], too, announced its flagship Sun TV channel would become paid from December.

E&Y is equally bullish about DTH. By 2008, it estimates that India will become Asia's largest DTH market. But even if it is growing fast, the sector will probably show negative EBITDA margins for a while, as it scales infrastructure and invests in subscriber growth. Meanwhile, the TV boom means demand for content will also increase exponentially.

Waves of change

Like TV, the global and Indian radio sectors are hugely different. Internationally, radio is a mature market - its profitability growth is slow (EBITDA CAGR was 2 per cent from 2001 to 2005), but margins are strong (41 per cent in 2005). Radio's biggest threat there is from the all-pervasive iPods, Discmans and MP3 players.

In India, radio is still young. But unlike in the West, where radio had a chance to grow, peak and now settle down to a relaxed old age, here, the boom came along with other technological advancements - the Internet, satellite radio, iPods and FM all took off at the same time.

Not only is radio struggling to cope with simultaneous attacks on so many flanks, it's also leaving vital territories unguarded.

Instead of reaching out to niche audiences, private FM players are falling into a trap of sameness, says E&Y. A good example would be Mumbai's Go 92.5, which played mostly Western music, until it revamped its image, changed its name to Radio One and started airing the same Hindi pop and film music all other channels played.

"The effectiveness is lost when all channels sound similar," points out Balsara. Still, FM in India will grow, especially now that the government allows 20 per cent foreign direct investment in private non-news radio broadcast.

Satellite radio isn't so lucky. It's got three strikes against it: huge initial costs, battling free broadcasters and trying to "establish a 'for-pay' business model in a space that historically has been free".

Internationally, satellite radio has been growing its subscriber base by tying up with car makers who sell its equipment. That is still to be tried here. Meanwhile, the government is finalising a satellite radio policy where it proposes to lower the FDI cap from 100 to 49 per cent. Which means Worldspace, India's only satellite radio operator and a fully-owned subsidiary of an American parent, will have to offload a majority share to an Indian partner.

There's more to media

It's not just TV and radio: other M&E sectors also are growing in importance. The past few years haven't been good for the music industry: it's worth Rs 1,150 crore (Rs 11.5 billion), of which Rs 450 crore (Rs 4.5 billion) is lost to piracy.

The rise of mobile music, though, has changed the industry's tune, so much so that Star, Sony and Bennett, Coleman have set up separate business divisions to tap into this market.

According to reports, Star expects to eventually earn 30 per cent of its revenues from mobile telephony.

Last year, the industry earned Rs 150 crore (Rs 1.5 billion) from ring tones, caller ringer back tones and music clip ring tones. "Digital music is going to drive this industry in the next five years," says Balsara.

Then there's films. While multiplexes are helping box office receipts in India, global audiences are also contributing significantly. KANK apart, Fanaa earned Rs 53 crore (Rs 530 million) at home and Rs 28 crore (Rs 280 million) overseas; Omkara, too, made Rs 28 crore here and Rs 10 crore (Rs 100 million) abroad. There's another angle to the "go global" strategy: international co-productions.