More than ever, scale matters in Asian media. As digital fragmentation drives both cost and competition, domestic media companies need to raise capital or consolidate to compete and prosper in a converged world.

For investors meanwhile, Asia media continues to offer a strong consumer proxy and in many cases, the chance to partner dominant players or back a challenger. We highlight key opportunities:

India

India’s TV industry has embarked on a major business transformation that requires investment in both content and distribution.
Digital conversion of cable networks serving 90 million households is unlocking new revenue streams around premium content and services, while stemming revenue leakage from unaccountable analog systems, releasing the handbrake for digital cable and direct-to-home (DTH) satellite platforms.

May’s election of a new majority government, followed by a 20% stock market rise and 15% year-to-date appreciation for the rupee, has sharpened interest in distribution and content. However, unclear returns from the first phases of digital upgrade are still giving investors pause.

In the long run, consumer spends on digital pay-TV are likely to grow at a sprightly pace. At the same time, a more nimble ad proposition, fostered by a greater variety of channels, is well placed to tap an expected pick-up in advertising over 2015. Forthcoming competition – from 4G mobile video, hybrid HITS satellite delivery and free digital terrestrial – should also encourage continued consolidation in pay-TV distribution.

Strategic investors will only commit, however, once more consistent returns from digital investments are realized. Private equity firms, often infrastructure investors, will also monitor the digitalization process alongside other large and small opportunities, such as 4G mobile, FM radio expansion and content players moving into new revenue streams.

India’s top cable companies, meanwhile, have started building out subscriber management systems to increase revenue transparency, changing focus from volume to value. Investors are likely to look favorably on this shift, given that the high cost of acquiring subscribers in the last 18 months has driven debt levels to four times Ebitda for India’s top three MSOs.

DTH operators are more likely to tap equity markets over the next 12-24 months, potentially listing in India or abroad, using the capital to bolster growth. Most DTH operators are already making healthy operating profits, and are only a few years away from generating free cash flow and decent investor returns.

North Asia

Investment opportunities are emerging in North Asian pay-TV markets, with increased consolidation in Korea, Japan and Taiwan likely to bring key assets into play over the next one to two years.

In Korea, over-saturated pay-TV and broadband markets should rationalize in the future, with a handful of carriers and content providers likely to emerge as ultimate consolidators.

New regulations will be a major catalyst as they allow cable operators, which serve 78% of Korea’s TV households, to have a third of the national pay-TV market as opposed to just a third of cable subs. Potential large-scale acquirers include Korea’s largest MSO, CJ Group-backed CJ HelloVision, as well as its closest counterpart, Tbroad.

Underperforming pay-TV channels in Korea might also attract major global investors. International strategics Discovery, Fox International Channels, Time Warner, Universal and Viacom already have joint ventures and/or licensing businesses in Korea, the third-largest pay-TV ad market in Asia-Pacific.

Shareholders may exit or move into new, more profitable or larger ventures, although the likely partners will probably be found amongst the ultimate consolidators, such as entertainment major CJ Group, telecoms and pay-TV giant KT Corp or SK Group, one of Korea’s largest conglomerates.

Investors are also eyeing operators and channels in Taiwan. Local pay-TV broadcaster EBC, backed by private equity firm Carlyle, has been on the block since late last year, but potential investors are reluctant to meet its US$700 million valuation.

EBC, which produces eight channels, covering news, variety, movies, drama and kids, has been 61%-owned by Carlyle since 2006. It has been a strong performer in recent years, with 23% of the TV audience, a turnover of US$190 million (as of end-2013) and US$45 million operating cash flow.

EBC is one of a clutch of content assets on sale. Others include Gala TV, which has suffered since its acquisition by Swedish private equity firm EQT, along with broadcast majors such as Sanlih – not officially on the block but a potential target for a strategic investor or financial player ready to pay a premium.

In any event, the most logical acquirer of these assets would be a domestic player, such as local conglomerate Formosa Plastics, or an international media strategic such as Fox International Channels, Turner Broadcasting or Sony.

The stock market might be another option for Taiwanese companies seeking capital, following Macquarie’s successful listing of its cable asset Taiwan Broadband Communications (TBC) as APTT on the Singapore Exchange in 2013.

Another large MSO, China Network Systems (CNS), which has been actively courting investors, may follow suit. IPO aside, CNS’s digitalization push could still attract strategic investors looking to consolidate Taiwan’s cable market.

Opportunities in Japan, meanwhile, are limited but lucrative. Even though pay-TV penetration seems stuck below 30% of homes, the size of the ad market could heighten the appeal of key channel assets.

First among them would be Jupiter TV, part of J:Com, a leading cable MSO co-owned by Japanese telco KDDI and Sumitomo, a local conglomerate. Jupiter TV, which generates US$500 million in estimated annual revenues, is not for sale, but offers may be entertained over the next 12-18 months for a vertically integrated channel business that may no longer be critical for KDDI and Sumitomo.

Strategic investors such as Discovery, Disney, Fox and Time Warner have already invested heavily into Japanese channel businesses, and may look at scalable assets in a market that boasts few avenues for future organic growth.

Thailand and Vietnam

The arrival of 24 new digital terrestrial TV (DTT) channels in Thailand and planned increases in foreign direct investment (FDI) for free and pay-TV in Vietnam look set to fuel complex new investment opportunities in both nations.

With GDP momentum stabilizing after last year, Vietnam’s per capita incomes are poised to rise, fueling the ad market in turn. New FDI caps to come into force in 2015 will give foreign players more scope to participate in this growth.

In a bid to achieve scale, the number of pay-TV platforms in Vietnam has halved over the last 12 months, with successful operators acquiring less profitable rivals at relatively inexpensive valuations. Once this consolidation runs its course, operators still need substantial funds to digitalize analog networks, to enable premium channels and services.

Greater penetration of digital pay-TV also accentuates the need for local pay-TV channels, as platforms start developing general entertainment and premium local content. Some of these local channels are acquisition candidates for strategic investors.

In Thailand, recently launched DTT channels should be good for the TV market in the long run, providing new outlets and competition for content and advertising. However, the high prices DTT channel licenses fetched at auction – with 17 bidders paying US$1.4 billion in total – raises the likelihood of both future consolidation and outside investment to fund the channels long-term.
Interested firms that did not bid for licenses may also wait for some winners to falter, in order to acquire a license at a discount.

DTT is still in a trial phase in Thailand, making it difficult to gauge how future business models will evolve. At the same time, the recent military takeover is adding uncertainty to the regulatory environment. Nonetheless, despite the coup, seasoned investors in Southeast Asia are unlikely to stay away just yet.

Caps of 25% and 49% on direct and indirect foreign investment on distribution may dissuade international strategic investors looking for control of an asset, although financial investors are more open to minority stakes, provided the management and business are sound.

One option for strategics could be advertising driven free satellite channels. A localized version of Turner’s kids’ channel Boomerang reaches 11 million homes on free satellite via a JV with local studio, Major Kantana Broadcasting.

Other channel networks may follow suit. Kids and factual content historically perform well in the mass market, and could be licensed to a national broadcaster or used to form a basic pay-TV channel.

This article also appears in the current issue of Media Business Asia magazine.