TV India

Some Suggested Answers

Lessons:
(A) It is common for the sponsors (promoters) of a project to
underestimate cash flow needs. Here, “operational breakeven in two
years” was promoted to suggest lower investment needs, and less risk
due to a shorter payback period. Common sense would suggest it will be
challenging to build a TV studio; operate it with directors, writers,
actors, scenery, costumes, etc.; produce TV programs; attract audiences
to a new TV channel; attract advertisers; and become operational
breakeven within a 2 year period.
(B)The main reason startup companies fail is, they run out of cash,
because the estimates of revenue and cash flow turn out to be too
optimistic.
(C) Three deep-pocket founders is impressive on paper. Who is in charge
and running the business(es) is important to establish. Here, HT is the
local shareholder, has majority ownership, and strong government
connections, but knows the least of the 3 founders about how to run a
TV studio, make TV programs, and manage a TV channel.

1. One can think about this as an investment in 3 different businesses:

(1) building and operating a TV studio;
(2) creating Hindi-language television software (programming);
(3) running a TV channel (TV station).

Also, there are 3 primary sources of revenue:

(a) selling advertising time (slots) on the TV channel in and around the programs ( about
90% of revenue);
(b) licensing programming domestically (0%--weak copyright laws); and
(c) licensing programming internationally (about 10% of revenue).
2. Mauritius is an island in the Indian Ocean, near Madagascar. To take benefit of double tax
treaty between Mauritius and India, TV India set up a company called TVM in Mauritius.
According to the tax treaty between India and Mauritius, capital gains arising from the sale
of shares are taxable in the country of residence of the shareholder and not in the country of
residence of the company whose shares have been sold. Therefore, a company resident in
Mauritius selling shares of an Indian company will not pay tax in India. Since there is no
capital gains tax in Mauritius, the gain will escape tax altogether. Example: Hutchison of
HK sold its Indian mobile telephone business to Vodafone, and paid no capital gains tax in
India, nor in Mauritius.
3. A. For the 7 reasons listed under Investment Considerations, including these which seem
quite compelling:
 Fast growing television advertising market (9% p.a.)
 TV India can develop a product which will attract wealthy viewers and thus
advertising revenues
 The founding investors have the collective expertise to make TV India financially
successful
 An exit via IPO on the Indian Stock Exchange is feasible, as Zee TV has proven. So
TV-India should be viewed as a “fast follower” (rather than a “first mover”) strategy.
 B. Some compelling reasons not to invest would include:
 Successful TV programs are very difficult to predict.
 The founding investors have no track record in developing TV programs of THIS
kind (Hindi-language TV programs such as comedy, drama, and entertainment shows
that are according to the taste of Indian audience and that reflect Indian culture)
 It is a rather large financial gamble, spending USD 45 million up front without any
certainty of success. Moreover, the financial forecasts are very aggressive: It has been
projected that TV India will be cash positive in year two whereas comparable channels
(e.g., Zee Telefilms) projected five years to reach a cash positive position.
4. A. Hindustan Times (India): Strong government relations. Has experience at making Hindi-
language television programming (current affairs). Has sold advertising in the local markets
B. Pearson (England): Operates television studios. Has television programming experience
in England. Knows international advertisers.
C. TV Broadcasting (Hong Kong): Know how to build and operate a TV programming
studio. Knows a lot about local language programming (English and Chinese audiences).
The largest international licensor of TV programs (in Chinese and English). Knows
international advertisers.
5. New investors could help to: (a) share the financial risk; (b) bring expertise relevant to TV
India’s business; (c) bring additional international credibility; (d) assist with financial
structuring and exit.
6. a) IPO on Indian stock market – Bombay Stock Exchange (BSE) & National Stock
Exchange of India (NSE) (Examples of a comparable company- Zee Telefilms)
b) Sell to a Founding Investor
c) Sell to a third party

All are likely exit possibilities. If the timing is not right for an IPO, then Hindustan Times, given
its future vision, might like to buy a new investor’s stake. Third parties might be very interested
to buy a company with a built and operating TV studio, making programming, and with a then
proven advertiser base (for example, exit via a sale to Sony or Star TV).
7. (a) Issues operating the studio (directors, actors, script writers, scenery, etc.)
(b) Program production problems
(c) Decent product but slower than expected audience reception
(d) Decent product reception but low advertising revenues due to competition for adspend on
other TV programmes and/or other media
(e) Advertising spending and revenues increase at a slower than expected rate

8. Your decision? In the event, some US$22.5 million was raised from third party investors.
The TV studio was built (on time, on budget) and TV programs were produced. The key
weakness was the art of scheduling the programming so as to maximize revenue from
advertising. Competition for the same viewers in the same time periods was intense. Further,
piracy made it difficult to recoup the full investment in quality programming by showing the
program more than once in the domestic market. TV-India has now gone off the air. The
third party investors lost most of their investment.
The channel could have survived provided the investors were aware of the fact that the
channel will lose money in the initial few years and should have estimated their funding
requirements accordingly. In other words, the estimate of “operational break even in two
years” stated in the Executive Summary of the Business Plan was far too optimistic. The
principal reasons start-ups fail is, they run out of money sooner than expected.

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