24 May 2019

The Speech by the Chairman of myFreeview at the Digital TV Media Briefing Organised by MCMC on 24 May 2019

By Johan Ishak

BROADCASTING in Malaysia has gone through a significant progression since it was first introduced way back in 1963. We started off watching movies and television (TV) programmes in black and white. Then there was the full colour transmission that was officially inaugurated in 1982. Since then the broadcasting industry, that was in analogue broadcast system, progressed in tandem with technological advancements. We have all grown up in the analogue broadcast era.

Our broadcasting system will soon experience a transition from analogue to digital broadcast system. This is a global progression in the broadcasting industry which began in 2006. The Government is currently working towards the progression to digital broadcast, that will be fully embraced by October this year (2019). In fact, today, the transmission of digital terrestrial radio wave is already completed at 100% coverage of the nation. This is of course from the hard work of the infrastructure owner, MYTV Broadcasting (MYTV). Under the analogue transmission, we are only able to reach 85% to 90% coverage.

To ensure that all Malaysians are able to experience the digital broadcast system when the analogue switch off happens, myFreeview was introduced. It is a brand name for Malaysia’s free Digital TV (DTV) Broadcasting services, i.e. Digital Terrestrial TV Broadcasting (DTTB). myFreeview is an alliance of Free-to-Air (FTA) TV broadcasters in Malaysia. It represents existing FTA TV operators such as Media Prima TV Networks (TV3, ntv7, 8TV and TV9); Radio Televisyen Malaysia (RTM); TV Al-Hijrah and Bernama News Channel. We also have new FTA TV operators, that consists of more than thirteen (13) Content Application Service Provider (CASP) license holders.

myFreeview is aimed at jointly promoting the FTA TV channels through a single or unified brand, i.e. myFreeview, over the DTV platform that is being operated by MYTV. It will also work closely with Malaysian Communication and Multimedia Commission (MCMC) to execute the education and awareness campaign on-air, on-ground, on-line and on social media. At this juncture, myFreeview would like to thank MCMC for the continuous and valuable support. In implementing the roll out of DTV, myFreeview will also constantly discuss common areas of concerns and challenges that all of its members are facing and hence, present suggestions and recommendations to regulators and stakeholders for the betterment of the FTA TV industry.

Now that you know who is myFreeview and its objective let us talk about its benefits. With myFreeview, viewers can watch their favourite channels in high quality and clear image, enjoy high quality sound, have various subtitles and gain access to Electronic Programme Guide (EPG) that provides programme details and synopsis. They can also watch content in High Definition (HD). With digital transmission, viewers can rest assured that they will not face any disruption in transmission due to bad weather conditions. Furthermore, myFreeview services will be offered without any monthly subscription charges.

With internet connection, viewers can watch more of their favorite content by pressing the Red Button on their remote controls. In our case, viewers can access online streaming channels such as tonton.com.my content on demand by pressing the red button. In addition, such internet capabilities, if connected via internet line or Wifi, can give users the access to various online content including video games and e-commerce. Under the current analogue transmission, not only we are missing such services, there is also limitations in offering more FTA TV channels due to the transmission spectrum congestion.

How do you get access to myFreeview channels? Basically there are two ways to do so – i.e. DTTB approved Set Top Box or via integrated Digital TV (iDTV or Smart TV) sets that are already with DTV tuner built-in. Consumers only need to purchase a decoder (Set Top Box) to enable their current analogue TV sets to receive the DTV channels, or, purchase an iDTV with a built-in decoder. They only have to plug in a Ultra High Frequency (UHF) antenna to receive DTV services. Most new flat screen Smart TV sets in the market have DTV decoders built-in today. Those who are buying DTV enabled equipment such as Set Top Boxes or iDTV sets should look out for the SIRIM certified DTTB logo. This is to ensure that they are getting the right Set Top Box or iDTV set that would give them access to myFreeview channels. We understand that to date there are twelve iDTV brands that are already SIRIM certified such as Samsung, Panasonic and Sony, to name a few.

To date, myFreeview has compelling content in the form of 15 television channels and six radio channels. We expect to add four more channels very soon. Four broadcasters have come on board, namely, RTM, Media Prima TV Networks, Al-Hijrah Media Corporation and Malaysian National News Agency (Bernama). As for Radio, we have RTM Radio stations across the nation that are now on this DTV platform. Currently, myFreeview is being led by Media Prima TV Networks' Chief Executive Officer (CEO), Johan Ishak, being the Chairman of myFreeview. We also have Cik Adiwati Zainuddin, the CEO of Borneo TV, as myFreeview's Deputy Chairperson.

As we get ready to migrate to digital broadcast system, we intend to offer more FTA DTV channels with quality content, that are appealing to our viewers. We also want to ensure that our viewers will be able to enjoy high quality viewing with crisp and clearer image quality and vibrant colors coupled with better quality audio with multi-channel and surround sound capabilities. In the future, we, myFreeview, hope to roll-out more channels with fresh content, interactive TV services including home shopping, sports, entertainment, video game, video on demand, and customised services as well as mobile and TV shopping. With more choices and better quality content without subscription, we believe that terrestrial TV will get a new lease of life, hence bringing back the glory days where TV is the central entertainment and communal device in the family unit. In an effort to ensure that Malaysians from all walk of life enjoy FTA TV and kept informed at all times, we will focus on offering free TV services, i.e. migrating our existing analogue TV channels on DTV platform. Currently, we have no plans to include Pay-TV channels on myFreeview. We may revisit the idea in future.

As we get closer towards the Analogue Switch Off (ASO), we want to attract viewers to myFreeview. We believe we are able to do so by offering free, new and latest content that is appealing and interesting for viewers of all ages. By offering myFreeview services free without monthly subscription charges, it will definitely be well received. We understand that there are some questions with regards to the difference between myFreeview and ASTRO. First and foremost, myFreeview is a brand that comprise of FTA TV channels that are subscription free and derives its income from advertising, while ASTRO is a pay TV that is subscription-based. In terms of transmission, ASTRO uses satellite while with myFreeview, the content is broadcasted to TV via transmitters in a digital format. This also enables mobile receivers (in-car and hand-held) to be used unlike ASTRO that requires fixed and non-mobile reception. Hence, we do not see ASTRO as a competitor. We believe that myFreeview will be very much accepted as it is subscription free and has lots to offer with the digital experience. As for the difference with ASTRO NJOI, myFreeview channel is broadcasted over DTTB platform, that is not affected by rain, while NJOI operates over ASTRO satellite platform that may be interrupted by weather conditions.

There will be areas, that will not be able to receive the DTV signals due to blockages and its location beyond the transmitter coverage areas. These areas will be serviced using satellite Direct-To-Home (DTH). To ensure that no one is left behind in this migration, my advice to the Rakyat (public) is to get the decoders and install it. Don’t wait until the ASO. They can purchase the DTTB decoders from electronic retailers and partners such as Pensonic and Seng Heng. Once the analogue transmission is switched off and viewers who have not purchased their decoders, they will not be able to watch their favourite programmes on the FTA channels. Decoders or Set Top Boxes mean the same as the term is used by the industry interchangeably. For the 2 million households that have received the decoders under the Bantuan Sara Hidup Rakyat (BSHR), please install them. It is time to experience DTV! For those who are not within the BSHR eligibility, please buy your DTTB Set Top Boxes that are only priced at RM187 and of course, you will need to incur some installation costs as well as the antenna cost if you do not have one already. Alternatively, it is better to get a new Smart TV or iDTV with DTTB capabilities.

There is a growing concern about the ability for the CASP license holders to make money. Basically, the revenue model for the channels under CASP is an Advertisement Revenue model (Adex). Adex is predominantly driven by viewership numbers. Viewership numbers are reported by third party independent TV viewership measurement consultant that broadcasters have to subscribe to. Currently, Nielsen is providing that measurement services. It is with pleasure that some good news have been reported by Nielsen as far as TV viewership is concerned. In the past year or so, we have seen a tremendous increase in FTA TV viewership. Media Prima TV Networks, for example, saw its TV3 achieving 28% audience share in 2019 as opposed to 21% in 2018.

Such good achievement is on the back of strong performances by TV programmes such as Buletin Utama that saw almost 100% increase from 1.5 million views to 3.0 million views per episode. Good Malay drama titles like Leftenan Zan reached an average viewers of 4 million during its last few episodes. This is a good indicator of people wanting to watch TV again. We have seen statistics that show Cord Nevers (Millennials who did not grow up watching TV) and Cord Cutters (Gen X who had earlier abandoned TV viewing) returning to FTA TV viewing habit. This is certainly a good sign, but, broadcasters must strive to give quality content that meets audiences' expectations. This is so because TV broadcasting should also benchmark the quality of its content to that offered by other platforms such as Pay-TV, on-line streaming services (Also known as Over-the-Top (OTT)) and the internet in general (e.g. YouTube and numerous other on-line video players).

Another important aspect of this industry that has not been mentioned yet is piracy. myFreeview and Communication and Multimedia Content Forum (CMCF) are working closely with the authorities such as MCMC and the Ministry of Domestic Trade and Consumerism (KPDNHEP) to battle piracy on many levels be it hardwares or content infringement. The Government agencies mentioned have eliminated many unnecessary procedures to ensure that they can react faster and even proactively address piracy. We urge everyone from viewers to content providers to help join us fight piracy. The impact of piracy to the economic well being of the industry is huge. Recently, many pirate sites were closed down in a space of one month and we discovered that that alone had 40 million views. Such number is indeed worrying. We need to fight this. Or else, it will become a cancer to our Broadcasting Industry, Content Industry as well as the Digital Industry making it impossible to grow economically.

Essentially, In a nut shell, the salient points to take away are: (a) DTV is ready at 100% transmission coverage by MyTV across the nation; (b) Do not wait until ASO in October 2019, but, instead, get your Set Top Boxes or iDTV now if you are not one of the 2 million BSHR Set Top Boxes recipients, and do not forget to also install UHF antennas; (c) Enjoy the variety of content that myFreeview channels will be offering free of charge (d) The existing CASP license holders should expedite the commencement of their channels on myFreeview; (e) We welcome more content owners to apply for CASP license and procure channels on myFreeview for better and variety offerings to the viewers as well as the chance to make money; and finally (f) Say no to piracy whether in the form of hardware (i.e. illegal android boxes) or content infringement activities on various platforms like Facebook, YouTube, web sites or even illegal Set Top Boxes. On that note, please embrace DTV and should you need further information, read more about this on the web site myfreeview.tv

19 May 2019

Money Matters in the Creative Industry

By Johan Ishak

MONEY is only a profit when your revenues are more than costs and expenses and when your cash inflow is greater than cash outflow over a particular period of time. Whilst that sounds like a mad accountant, it is a necessary madness if you are to run a business in the Creative Industry. Datuk Zang Toi once quoted, “In the fashion business, creativity only accounts for 10% of the effort; and the remaining 90% are all business acumen”. This is from an international creative practitioner and it is not merely an academic statement. It is a proven concept as evident in Zang Toi’s success stories.

One of the more controversial money issues is the royalties for creative content. This debate has been going on for decades particularly involving TV broadcasters and production houses. The basic concept to comprehend this issue is the understanding of equity stake mechanism for Intellectual Properties (‘IP’) and the relationship between risks and rewards. The party who puts in the investment should be the party that reaps the benefit. If any party to a deal wishes to reap the benefits of a particular IP, then that party should put their skin in the game, i.e. invest fully or partially. Let us use TV production as an example. Typically, a TV production can happen under two models: Commissioning or Licensing. The former is fully invested by the broadcaster and the latter by the production house. 

Under the Commissioning approach, a broadcaster puts in all the financial resources to a TV series and commissions a production house to produce it. The broadcaster owns the IP and any future economic benefits that can be derived subsequently goes to the broadcaster. On the flipside, a production house may put in all the financial resources to produce a particular TV series and upon completion (or partial completion), sells the right for broadcasting to broadcasters under licensing deals. Licensing deals normally have a limit to which extent a broadcaster is allowed to air the content on TV – either on a limited number of runs basis or within a particular licensing period (e.g. 2 years); or even both together. The production house must make this calculation and assess their business position. Are they in the position to earn lower licensing income and endure a longer runway to earn future income? Or, do they want to get all the money up front and not wait for any more in the future? Or, on a more balanced approach, share both revenues and costs with broadcasters.

Under the Commissioning method, the Malaysian broadcasters pay between RM45,000 to RM80,000 per episode depending on the treatment, crew, casting and storyline. So, a 20 episode series can earn revenues of RM900,000 to RM1.6 million for the hired production house but it stops there. Under the Licensing method, the production house incurs the production costs but each episode can only earn less than RM5,000 licensing income from the broadcasters. However, the production houses who are also the ownersof the IP, can get multiple licensing deals with multiple broadcasters and on-line streaming platforms. A sharing model cuts everything in the middle assuming a 50:50 sharing basis. In such cases, instead of the production houses incurring nil costs, the production houses incur RM22,500 to RM40,000 taking 50% of the broadcasters’ burden. Then, whatever revenue that can be derived is split 50:50 between the broadcasters and the production houses. This means, the production houses now bear the same risks as the broadcasters, i.e. the risk of inadequate revenues to recover the production costs.

Production houses need to be aware of all possible revenue windows if they are to invest in the production of creative content for which they retain the ownership of the IP for that particular content. What are the typical windows? For films, normally the first window would be the cinemas. When that is exhausted, they may choose to sell to Pay-TV operators such as Astro First or sell to Free-to-Air (‘FTA’) TV stations such as TV3, or both, one after the other. The fourth window can be the on-line video streaming platforms such as Netflix, IflixViuDim Sum and many more. A decade ago, selling DVDs used to be a lucrative window. Today, that revenue stream can be considered extinct.

Whatever the windows may be, if the deal with the buyers involve prolonged exclusivity period, it can cause issues in the industry. Extreme exclusivity terms can cause a downward spiralling of the economic well being of the creative industry. It practically kills the production houses’ ability to maximise revenues. Exclusivity that goes to the extent of two years is not good. A better time frame would be six months. Of course, the price should be adjusted accordingly. Under the Astro First model, they used to be priced at a few hundreds of thousand Ringgits. However, with the expansion of various on-line streaming services (also known as Over-the-Top (‘OTT’)), the pricing benchmark has been disrupted and to date, no standard pricing has been established yet. 

What we can see is that, for the very first time in Malaysia, a local movie has been bought by Netflix, i.e. Pulang by Primeworks Studios in 2018. That deal opened the doors for more local movies to be on Netflix, namely Munafik 2, Hantu Kak LimahPaskal and Crossroads One Two Jaga. The previous trend of local movies’ box office collection used to be quite gloomy. Although the cinema collections grew yearly, it is mostly fuelled by Hollywood titles. However, movies such as Khurafat and The Journey, that had collected RM10 million and RM17 million respectively, started a new encouraging local movie box office trend. In 2018, Munafik 2 reached RM47 million, Hantu Kak Limah at RM36 million and Paskal around RM20 million.

The windows of revenue would normally end with a small but recurring long tail of cash flow streams if the IP is successful. One good example would be old movies that kept on reappearing on TV even decades after its initial release. To name a few, Bukit Kepong and Matinya Seorang Patriot have managed to reappear even after the turn of the millennium. P. Ramlee movies would probably hold the record for Malaysian films that have the longest tail of cash inflow streams over so many decades and continue to do so today Pendekar Bujang Lapok being the most popular one. An IP’s potential does not just stop at the content format. Some extended to earn other forms of licensing such as merchandising. This is evident in the case of Upin dan Ipin for which, its Stock Keeping Units (‘SKU’) spans across apparels, stationeries and even restaurants. In fact, the measure of success may even go beyond the local boundaries into other geographical regions.

As mentioned earlier, revenues need optimal costs to tango with before any profits can be derived at. Various aspects of production costs need to be managed up front in order for a viable decision making to be made. Questions such as which director to hire? Who would do the scriptwriting? profile of the casting; crew members selection; and many more. Typically, whilst the amount of time spent during pre-production is quite long, the costs incurred shouldn’t be too high. Pre-production activities that cost 10% of the entire production budget sounds fair. Meanwhile, 50% of the budget should go to the actual production and the remaining 40% on post-production activities that include colour grading, voice overs, music, sound effects, editing and of course, Computer Graphic Images (‘CGI’), if need be. In the case of an animation, one would probably push more percentages for CGI.

Costs do not stop at pre-production, production and post-production only. One important element that must not be forgotten is Advertising and Promotion (A and P). Many producers make the basic mistake of not spending fairly on A and P. What is the point of having a superior product or services when the intended consumers are not aware of it. Benchmarked against various projects, a fair quantum of A and P would probably be at a minimum of 30% of the entire Production budget. So, add up pre-production , production as well as post-production budgets and times that by 30%. That is your optimal marketing strength. There have been numerous examples of good content not achieving financial targets simply because of the reluctance on the producers’ side to incur marketing expenses movies, theatre shows or even concerts are known to be loss making and most of the time it is because people (consumers) do not know its (creative products) existence.

Foreign players have shown really good examples of how marketing can really boost their sales. Netflix is known to have rented huge outdoor billboards at strategic traffic locations so that they catch the eye balls that are intended for their programmes. Netflix is naturally targeting the urban consumers. As such, they have chosen locations such as the Sprint Highway or Lebuhraya Damansara Puchong (‘LDP’). Whilst digital advertising is the first choice of medium for urban advertising, nothing beats the traditional and hard core ‘In Your Face’ billboards.

Maximising revenues and optimising costs achieve profitability but it does not necessarily put us in a positive cash flow position at the right time. The timing of revenue recognition is never the same as cash inflows. Likewise, the timing of costs incurrence is never the same as cash outflows. Cash collection from cinemas or even TV broadcasters can be late. In the case of cinemas, the box office collection normally requires weeks before a complete calculation is done to confirm the final numbers. When this happens, production houses will find themselves stuck in a situation where payments are due but cash is not yet in. Producers often pays their crew members, directors and casting upfront. This causes cash shortages and disrupts all other production within the company’s slate of projects in a particular time frame. More care must be taken when that slate of production involves multiple productions that happen at the same time or significantly overlapping for a good portion of the production runs for the multiple projects.

How do you then address that cash shortfall? For those with adequate cash, they will use their own money. Others may take loans from various Financial Institutions (‘FI’) although many FI’s are somewhat allergic to creative businesses. Some would give (loans) but charges expensive interest rates as high as 12%. The financial facilities obtained from the FI’s need to be standby facilities whereby production houses should only draw the loans when production has been confirmed and locked in. Having discussed the timing of cash inflow, we must not forget that the funding from the loans are meant to pay for the on-going production costs. When the actual revenue collection comes in, that cash must strictly be channelled back to the FI’s with the view of repaying back the loans drawn inclusive of the interest expenses that have been accrued on the loan amounts from the day it was drawn.

Many producers forget that they also need to pay fixed overheads. Not that they forget that they need to pay those costs but they forget to acknowledge that the profit margins from the various projects need to be enough to cover fixed expenses that recur on monthly basis. These are items that you will need to pay regardless of whether you have any projects in hand. Examples would be rental expenses, utilities, salaries of permanent staff, maintenance of equipment and of course, any interest expenses incurred as a result of loans taken to finance the company as a whole. The sum of all this is what investors normally refer to as the ‘Burn Rate’. When a potential investor asks, “What is your Burn Rate?”, it means that they want to gauge how much would you need as a basic before you can comfortably embark on the project itself. A healthy business should already have enough cash balance in the bank to fund its Burn Rate for a minimum period of 3 months. In fact, many investors prefer a longer period such as 6 months to a year.

In 2013, a well known American animation company, Rhythm and Hues, hired many Malaysians as their core workforce. They were big and highly skilled. However, given their Chapter 11 status (American bankruptcy regulatory status), the company had to be shut down leaving hundreds of staff unemployed. Had Rhythm and Hues preserve sufficient cash for their Burn Rate, a White Knight might have been able to complete its due diligence in time to inject funds for the continuation of the projects in hand. It was a ‘Chicken and Egg’ situation. The staff wouldn’t stay unless they were comforted with salary payment and the investors wouldn’t come in if they were not comforted with project delivery commitment. This demonstrates the importance of cash flow management. A company that records a huge profitability can still go bust when cash flow management is down the drain. The basic understanding to remember is that the timing of cash inflows must be adequate to cover committed cash outflows at the minimum rate of allowing continuous operations a ‘Going Concern’ assumption.

The critical need to ensure cash flow viability warrants effective negotiating skills. Prices and timing of collection need to be negotiated with buyers. If the timing is prolonged, it is effectively suggesting that you (producers) are bearing the costs of financing on behalf of the buyers. This is because the ideal situation would be otherwise, i.e. Buyers drawdown loans with interest expense in order to pay producers. Hence producers would not have to take up loans to pay their suppliers. A healthy cash inflow level can be determined by ensuring adequate quantum, inclusive of some buffer, to cover production costs. Likewise the management of production costs, both incurrence as well as payment timing, will also need to consider the conditions of cash inflows. The difference between revenues and costs is the gross margin. Gross margin needs to be enough to cover the Burn Rate (or also known as overheads). However, this is only possible if that is reflected in the excess of cash inflows versus cash outflows.

At the end of the day, the company must make a profit. All revenues less all production costs and overheads as well as interest on loans should leave behind residual as Net Profit that is worthwhile. If not, all the efforts will be put to waste. The question is, “What is a worthwhile Net Profit?” A good measure for this is by comparing to other forms of profits. Had you invest the same amount of money (i.e. the sum of production costs, overheads and interest income) elsewhere, you would have earned a certain income such as dividends of 7% from unit trusts, or 3% interest income from a fixed deposit bank account. In fact, given the efforts being put into creative production projects, that 7% benchmark would probably need to be added with a premium making it reach 10% or higher. Generally, as a rule of thumb, any business needs to achieve a minimum Net Profit margin of 10% to 15%. Otherwise, you might as well close the business and put the money into money market instrument that earn passive income without having to put in a lot of effort, or any effort.