28 May 2019

Digest Facts of the Malaysian Creative Industry

By Johan Ishak

RESEARCH is an important element of any business. Research provides a clear vision of the industry that helps us strategise what we need to do now, or in the future, in response to, or in anticipation of, the current state of affairs, or some projected future possible scenario, for a given business venture, within the limitations of our scarce resources, regulatory landscape as well as technological disruptions. Notice how many commas are there in that sentence? This demonstrates how important research is as a component to the overall mechanism of a business venture. As how the Malays would put it, “Pergi merisik dulu sebelum melamar!” which means, “Recce first before proceeding”.

What sort of facts do we pursue to uncover from our research efforts? There are many aspects really. The professors in the universities have put it quite correctly when they preach about S.W.O.T Analysis, BCG Matrix, Maslow’s Hierarchy and 5 Forces Model. All these models are not merely academic. They are quite practical actually. We should research to find out what our strengths are, our inherent weaknesses, the opportunities in the market as well as emerging threats. We should know which products are with high growth requiring intense capital and which ones are already steadily generating cash with low capital requirements. We should know the needs of our audiences and what excites them. We should coordinate the relationships of the various inputs and outputs coming from or going to suppliers, customers, employees, regulators and competitors. These are all critical aspects. These are the bases of what governs our “gut feel” and not simply plugging ideas.

In the recent years we have seen so many industries meeting their death prematurely because they lack research that could have provided them with facts that are relevant for them to make critical business decisions. Kodak is a perfect example. Nobody could have imagined the death of the camera film industry in 2000, but yet, it eventually hit us when the digital camera spread across the world. In fact, Kodak was the inventor of the digital camera. They used Kodak to snap the first photograph of the planet Earth from the moon. Despite being the inventor of digital camera, they remained focused in their film business that had provided them 95% of their revenues. In the end, Kodak failed to realise consumers’ preference and their propensity to adapt new technologies. Kodak then had to file for bankruptcy.

Let us analyse a particular industry globally. Let us take filming as a start. The global box office for all films released in each country around the world reached USD36.4 billion in 2014, up 1% over 2013’s total. The growth was driven primarily by the Asia Pacific region (+12%). Chinese box office (USD4.8 billion) alone had increased by 34% in 2014, becoming the first international market to exceed USD4 billion in box office. Cinema screens increased by 6% worldwide in 2014 to over 142,000, due in large part to continued double digit growth in the Asia Pacific region (+15%). Over 90% of the world’s cinema screens are now digital. However, admissions, or tickets sold was at 1.27 billion with average tickets sold per person per screen of 3.7 which meant, a decline of 6% from 2013. This was compensated by increase in the average cinema ticket price by 4 cents that is less than the rate of inflation in the Asian economy. What does this suggest from the pure Demand and Supply explanation? Are we experiencing a glut?

PricewaterhouseCoopers’ Global Entertainment and Media Outlook research paper suggests that new multiplexes are driving admissions particularly in China. In China, it is expected that there will be 60,000 screens by 2020,more than 6 times the 2012 total, which will then drive box office spending in China by more than 20% compounded annually from2012 to 2020. Global box office spending is projected to grow at a 6.3% compound annual rate, while home video will be relatively flat, averaging only 0.5% growth compounded annually. Overall spending on film entertainment will rise at a 3.1% compound annual rate to USD100 billion by 2020 from USD85 billion in 2012.

In the past years, prior to the excellent performances of titles such as Polis Evo (1 and 2), The Journey, Khurafat, Munafik (1 and 2), Paskal and the Hantu Kak Limah series (together referred to as the “Malaysian Box Office Game Changer”), the Malaysian film industry did see an increase in cinema admissions from 50 million to 70 million garnering an increased gross collection from RM500 million to RM700 million per annum. This is on the back of the increase in cinemas from 100 to 140 giving an increase in screens from 600 to 800. The numbers of seats had also increase from 100,000 to 150,000. When analysed from local content supply perspective, the number of local films had increased from 50 titles a year to 80 titles a year with an increased average production cost from RM70 million per year to RM100 million per year.

Despite the increase in the number of titles, the number of admission for local films had decreased from 13 million to 6 million per annum resulting in the reduction in gross takings from RM120 million to RM70 million. This means the overall increase in admissions and collections were due to foreign titles such as those from Hollywood. The local film industry essentially consists of the Malay film industry that produces largely for the local Malay market. In recent years, however, a more Malaysian outlook has evolved with the emergence of a group of independent film makers whose low-budget productions are targeted at a wider international audience. Hence, the production of local movies has doubled whilst a noticeable decline in the average production costs by about 5.5% from RM1.3 million to RM1.2 million.

Local films face stiff competition from imported films. Hollywood films continues to dominate the local cinema industry holding a market share of over 66% every year. Tamil and Chinese movies also saw some growth during this period. In 2014, a basic survey was done on the profile of Hollywood movies. The top five grossing films in 2014 was used as a test case, namely, Guardians Of The Galaxy, Captain America: The Winter Solider, The Lego Movie, Transformers: Age of Extinction and The Hunger Games: Mockingjay Part 1. The first 4 movies attracted majority male audiences. The Hunger Games: Mockingjay Part 1 showed the strongest female attendance of the top 5 films, with 57% of box office revenue coming from women. Transformers Age of Extinction drew the most ethnically diverse audience: 38% are Caucasian; 22% are African-American; 26% are Hispanic; and 14% are Asian and other ethnicity. Similar studies should be done in Malaysia in order to gauge the market’s taste.

The local film industry also faces competition from the advent of home videos and Video onDemand (VOD) on the internet or illegal pirated android boxes. In addition, as mentioned earlier, box office collection from local movies had declined despite the gradual increase in the number of local Malay films produced and released in the market. Of course these were all before the so called “Malaysian Box Office Game Changer”. Our hope is that more of these “Malaysian Box Office Game Changer” titles can and will be produced in the future shifting the viewers’ attention from Hollywood to Malaysian titles.

In one of Malaysia’s growth regions, Iskandar Malaysia in Johor (adjacent to Singapore), Khazanah Nasional Berhad (the Government of Malaysia's strategic investment fund) and Pinewood Shepperton PLC have opened a USD120 million studio complex boosting its regional status as an international film production hub. The creative sector surrounding Pinewood Iskandar Malaysia Studios is expected to lead to spin-off investments of USD323 million and create 8,000 jobs over the years to come, as well as boost the local film entertainment market. Has this effort bear any fruits yet? So far, other than the famous Marco Polo television series, we have not yet heard any further success stories. Presumably such investment will require other incentives to help boost its usefulness. Amongst others is the Film in Malaysia Incentive (‘FIMI’) by Film Nasional (‘FINAS’). If FIMI is not enhanced to attract both local and foreign producers to use Pinewood Iskandar Malaysia Studios, then we may be facing another white elephant potential. The Malaysian Government must, without delay, create proper mandate and affirmative actions for the industry to kick start its engine vis-a-vis huge investments that have been made in the past.

To be fair, the Malaysian Government, via its Ministry of Communication and Multimedia, has developed many incentives for content development specifically for film, television and other projects. It is anticipated that these incentives will encourage production activities and increase local skill sets to match those of international standards throughout the creative content industry. FIMI is expected to give up to 30% cash rebate on all Qualifying Malaysian Production Expenditure (‘QMPE’) incurred by both local and foreign producers. The scheme kicked off on 1 February 2013 and includes both production and post-production activities. It is good that Malaysia has started this, but like any efforts, the output needs to be measured against the input and a conclusion derived on its effectiveness and efficiency, particularly when it uses the tax payers’ money.

Let us look at the global home video trend. According to a research done by PricewaterhouseCoopers LLP and Wilkofsky Gruen Associates, in 2007, physical home video (i.e. VHS or DVD) used to garner USD50 billion revenues as opposed to less than a billion USD for digital home video. Now, with the growing demand for on-line streaming services, the position has switched. Digital home video platforms are garnering billions of revenues now with the physical method plunging 6 feet under with a tombstone on it. Obsolescence is the new disease now. Along with most of the rest of the region, the Malaysian home video market has seen a decline too.

With piracy as a concern for the region, much content makes its way onto the internet less than 24 hours after release. Thus, piracy remains one of videos biggest competitors, albeit its illegitimacy. Retail piracy in kiosks and malls, including pirated movies claiming to be in Blu-ray format, has notably cut into potential home video revenues. In fact, Blu-ray format has probably been sent 6 feet under as well. A team of Intellectual Property officers from Media Prima Berhad recently took a proactive (or rather reactive) action in pulling down hundreds of pirated on-line sites with the help of the Malaysian Ministry of Communication and Multimedia as well as the Malaysian Ministry of Domestic Trade and Consumerism. The sites that were pulled down are believed to have garnered up to 40 million to 60 million on-line views per month. This is a huge number equivalent to 50% of the views reached by the number 1 YouTube account in Malaysia, i.e. TV3Malaysia.

Let us move on to television (‘TV’) now since the physical home video method has now reside in the graveyard. There are currently 8 national, Free-to-Air (‘FTA’) terrestrial TV channels in Malaysia and two national pay subscription TV services. In addition, a 24-hour TV was introduced in Malaysia in 1989 (‘TV1’). Currently, analogue is the most widespread TV delivery standard in Malaysia. Analogue terrestrial transmissions have been scheduled to be switched off in phases as part of a digital switchover, expected to be completed in quarter 3 or 4 of 2019. The frequency of these digital switchovers has mostly been delayed to avoid signal jamming with TV stations in Thailand as well as Indonesia. In any case, we will not go too detail into the digital TV platform now as that will require a fresh train of thoughts. Let us concentrate on the traditional TV first.

With reference to Oxford Economics, it is estimated that the TV industry directly contributes an estimated RM1.64 billion to the Malaysian economy in Gross Domestic Product (GDP) in 2013. In the process, they directly supported approximately 4,548 jobs. Moreover, TV programming and broadcasting consist of 55% of the total film and TV industry. Today in 2019, huge portion of that RM1.64 billion, to be exact 50%, has migrated to Facebook and Google. I repeat, gone to the giants, Facebook and Google. The 2020 digital revenue forecast is expected to be flat but Facebook and Google are expected to record positive growth. With that much revenue lost (migrated from FTA TV), one might wonder how much longer can the 4,548 jobs be sustained. As it is, a few broadcasters have already embarked on efforts to right size their human resources structure by the hundreds of headcount.

The export market of film and TV exports is minor at present. Data from MSC Malaysia (Malaysia’s national ICT initiative) indicated that the creative multimedia industry as a whole (i.e. including animation, film, TV and video effects, as well as games, mobile and new media) accounted for only RM490 million in exports in the year 2012. The value of exports accounted for by film and TV would therefore be expected to be a sub-set of this figure. Exports from Malaysia typically find their way to Singapore, Brunei and Indonesia, although the Philippines, South Korea and South Africa broadcasters have also been recipients of Malaysian film and TV products.

Media Prima Berhad is the dominant FTA broadcaster, operating channels TV3, ntv7, 8TV and TV9. Its channels account for 38% of the TV viewing in Malaysia. The advertising market used to be resilient with Advertisement Expenditure (ADEX) growth of 1.5 times the GDP growth and up to 54% of the overall advertisement revenues goes to TV. Today, that connection has been broken. Not only 50% of the TV revenues have gone to digital platforms, the correlation to GDP growth is haywired. The economy can move in whatever direction but the TV industry continues to face digital disruptions. The holy multiplier of 1.5 times of GDP has disappeared. Media Prima Berhad has seen a gradual decline in its audience share over the past 2 decades as satellite Pay-TV services increase their bouquet of channels. It is a dilution game. A very damaging game to the industry as it offers downward spiralling of economic values. Facebook and Google’s entrance into the market further compounds the effect to the extent even Astro is seeing dents in its revenue.

FTA public broadcaster, RTM, is leading the transition from analogue transmission to digital terrestrial TV (‘DTT’) transmission. RTM conducted a “DVB - T2” trial transmission and started DTT services in early 2013. With such tests, the Government has finally announced that the Analogue Switch-Off (“ASO’) is set for quarter 3 or 4 in 2019. The platform began offering 15 channels from 2013, many of which airs High Definition (‘HD’) programming. It was deliberated that the local RTM channels should have the name RTM and the state name, for example “RTM Penang” in Penang. Each channel per state was to have its own schedule and broadcasting hours, and some channels relay programming from the national RTM1 and RTM2 (usually news programmes and Government programmes). Today, that has not yet happened. In the future, when the DTT platform has been fully implemented, we might see such variety in content offerings.

A Pay-TV satellite service provider, Astro, launched a free satellite TV service, NJOI, in February 2012. The service currently provides 18 TV channels and 19 radio stations, that include RTM's TV1 and TV2, TV3, TV9. ntv7, 8TV, TVi, CCTV-4, Bernama TV, Astro Prima, Astro Oasis, Astro Awani, Astro AEC, Astro Xiao Tai Yang, JiaYu, Astro Vaanavil, MakkalTV and all AMP Radio channels including hitz.fm, ERA and MY FM. An existing Astro customer can receive this service through a separate account. The set-up consists of a set-top box, out-door unit (‘ODU’) satellite dish, smartcard and a remote control unit, all available at RM288. As NJOI gains its market acceptance, the Pay-TV subscribers have been gradually migrating to it with the view of enjoying free of charge TV content like that of FTA. This means Astro is metamorphosising its Pay-TV business (or parts of it) to a FTA Satellite TV.

Astro dominates Malaysia’s Pay-TVmarket via Direct-to-Home (DTH) platform. Its more than 5 million subscribers represent almost the entire local Pay-TV sector. However, as mentioned earlier, many have reverted to Astro’s free platform, NJOI. To date, it is believed that many of that 5 million subscribers have unsubscribed their Pay-TV account. Opportunities for rival Pay-TV companies are limited because Astro controls most of the popular content. It used to hold exclusive rights from the Malaysian Government to offer satellite TV broadcasting services in the country up until 2017. Although that exclusivity is no longer enforced, the barrier to entry (for competitors of Pay-TV) is still virtually in existence given their significant first mover advantage that was untouched for 2 decades or so.

Astro is more likely to show independent TV programmes and independent feature films given its less reliance on advertising revenue. TV3 and RTM is less likely to show such niche programmes as its advertisement revenue reliance model would mean that they prefer mass market content. While many of the networks do have in-house production arms, they still receive a notable amount of content from outside partners. In-house production typically produces non-drama and non-movie programming. For example, many channels will create their own reality shows along with licensing finished products (e.g. Idol, X-Factor, Project Runway, etc.) from foreign countries particularly Hollywood.

Malaysia’s primary language is Bahasa Malaysia with English Language as its secondary language. The country also features the second largest Chinese population after the mainland itself. Therefore, the country features many Chinese FTA channels as well as Pay-TV Chinese channels. The content on these channels typically does not come from Chinese companies only but also features programming from local Malaysia companies. Most of the product is sub-titled, though many in Malaysia are literate in both Mandarin and Cantonese.

Internet Protocol Television (IPTV) is the most likely challenger to Astro. Telekom Malaysia has conducted lengthy IPTV trials and launched its HyppTV service commercially in March 2010. It has since been rebranded into UnifiTV. There are several other IPTV platforms that aim at more niche markets such as the country’s Indian or Chinese populations but many did not survive. In Malaysia, the adoption of IPTV, mobile TV and Video on Demand (VOD) has been slow in the beginning. The first Over-the-Top (‘OTT’) or on-line video streaming to start its operation in Malaysia in 2009 was tonton.com.my ('Tonton'). Tonton operated on 2 levels, first being the simulcast of FTA TV live on-line and, second, VOD menu of a library of content.

It took quite a while for the other players to enter the market. It only started to show any growth over the past few years when Iflix and Netflix started their operations in Malaysia in 2016. Now we have VIU and Dim Sum joining the bandwagon. Whilst OTT services grew in the recent years, continued growth is expected in digital delivery through IPTV and Pay-TV operators such as Unifi TV and Astro. Astro had also launched its Astro First and Astro Best services that offer Hollywood and Asian movies as early as three months post any theatrical release and in HD where available. Titles are available for RM10 (USD2.50) each and are made available for 48 hours from the purchase point. Astro continues to work with international studios like The Walt Disney Company, Lionsgate, Sundance Channel, Animax, Fortune Star, CJ Media and Unitel Classica.

Astro has lower risks associated with the economic conditions (or at least less risky than FTA TV). The risk of impaired revenue earning capacity is somewhat mitigated as revenue from Pay-TV is predominant derived from subscription charges rather than from advertising money. Pay-TV and Government backed FTA TV would still have strong appetite to purchase content especially from overseas since these channels do not depend heavily on advertising revenue. Hence, RTM and Astro would still continue to purchase latest films despite any contractionary advertising industry during an economic crisis.

Let us move on to theatres rather quickly. Istana Budaya was built in 1995 with a cost of RM210 million on a 5.44 hectare land giving a built up floor area of 21,000 square metres. It is the first theatre in Asia that has sophisticated stage mechanism for theatre performance. Istana Budaya charges approximately RM15,000 per day. It attracts on average 150,000 attendees a year who buys tickets from an average of 25 local shows and 5 international shows a year garnering RM10 million revenue a year. This sub-industry provides jobs to a dozen of companies that employs about 100 to 200 workers per show at an average salary of RM5,000 to RM10,000. For a year, Istana Budaya alone can provide jobs on project basis to more than 4,000 people in total. Production costs for a show will depend on the creative treatment and can range from as cheap as RM500,000 to RM1 million inclusive of advertising and promotion budget of about RM200,000 for each show.

Creative content production companies should, therefore, consider theatre as a potential revenue stream. When an Intellectual Property (‘IP’) is created successfully, it should be pivoted from TV, to cinemas and finally the theatres. A good example would be Puteri Gunung Ledang where its success in the filming scene had led to multiple rounds of musical theatre productions at Istana Budaya.

One other fact that is quite delightful to the celebrities vis-a-vis their appearance on the screen would be the source of income from their involvement in advertising. This is a good opportunity not to be ignored. Some good examples are: Nora Danish (UniQlo, Mamee), Shaheizy Sam (Digi, Nescafe, Petronas, WeChat), Farid Kamil (Cleanpro, Cadbury, Downy), Mira Filzah (100 Plus), Nabilah Razalli (Samsung) and many more. Creative production houses should also diversify their roles to include talent management. After all, we do live in an era of 360 degrees diversification. If we do not arrest opportunities, then that ignorance will be the very reason for our demise as a creative production house. How would you make yourself aware of the opportunities to capitalise? Well, go back to the first word in the first paragraph of this article. I rest my case.


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