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Some months ago, India's media and entertainment sector was the darling of most investors. Today, with the ad market looking ready to settle into a deep slumber and the global financial meltdown adding to the gloom, things don't look rosy anymore.

BMR Advisors, which was launched by breakaway partners when Andersen Consulting merged with Ernst & Young, consults with several media companies on tax and M&A issues.

BMR partners and media specialists Nitin Atroley and Vivek Gupta refuse to share details of the merger they're working on between Jagran TV Private Ltd and IBN 18 or the Star India-Balaji Telefilms split, but talk of the sector's growth potential in the current context of the slowdown.

Excerpts from an interview:

How does the current crisis affect  media growth?

Gupta: There are three themes around which India's media and entertainment sector will work. The first is digitalisation of content -- we already have video-on-demand, internet music etc -- and making it transportable across digital and mobile platforms. This is a big thrust for entertainment and media companies including print. Dainik Jagran has joined hands with Yahoo to launch a co-branded Hindi portal.

Times Internet now has full mobile versions of its newspapers (The Times of India and The Economic Times), much like The Financial Times mobile in the UK. Network 18 has built up a separate division of web 18 entirely devoted to monetising its content over the internet.

Atroley: Of course, monetising this will take five years. The revenue base is still from consumers and not so much from advertising.

Gupta: But in the next five years, the advertising is expected to explode. We've already started seeing internet ads for both live and recorded video feeds. We foresee digital and media convergence, multiple distribution platforms and, therefore, growth.

Growth is what we are questioning.

Gupta: All predictions on growth are dictated by what is happening around us. So, on a day when the markets crash, we feel low. The second growth theme is regional. A lot of regional chains have come up and national players are showing interest in those regional chains.

Atroley: This has been happening for three-four years though Zee built its regional channels' business much earlier. But there's no clarity on the size of the market. It looks small since it is fragmented. It'll be interesting to see how many national players will have a sustainable regional strategy.

And the third growth theme?

Gupta: New forms of advertising. Out of home will become strong. We are seeing huge private equity investments in the sector from Goldman Sachs, Lehman and Warburg Pincus.

Atroley: OOH is still going into places (read metros) where things are little more organised. If you look at other towns and cities, OOH is pretty splintered.

Print and TV are also fragmented and cluttered.

Gupta: Yes. A study says that over the last five years, the cost of reaching the target audience has risen four times, even though the basic TV viewing time has increased. But because there is an increase in the number of channels, advertisers are forced to purchase more spots to reach the target audience.

Why are people launching more channels?

Gupta: For a moment, ignore the clutter. A medium like TV will continue to grow at twice the economy's growth rate. A lot of play exists on the subscription and distribution side. If cable gets smoother or large parts of audiences migrate to DTH, the entertainment play becomes very viable immediately.

Today it is not viable because channels spend a lot of money on distribution and advertising revenue gets fragmented. Subscription revenue kicks in only when you become a Star Plus (read leader).

Atroley: It's going to be very tough for the general entertainment channels, which all look alike unless there is a subscription model which supplements revenue streams. But within general entertainment, there is space for niche channels.

Are channels valuation- or revenue-driven?

Gupta: Eventually everything has to be revenue-driven. Media valuations are all based on the expectation something dramatic will happen on the subscription side. Imagine what will happen if under-declaration goes away or if consumers start paying for niche channels.

Will the consumer pay?

Gupta: Tata Sky started with a family pack at Rs 200, then Rs 250 and Rs 300. It got audiences used to channels and then started withdrawing them.

For example, Ten Sports became pay separately at Rs 15. Star Sports, Star Cricket and ESPN became pay from October 1 at Rs 40-45. We have not reached the UK level where Sky charges �17a month for five channels. Yes there is clutter. But if a couple of issues are resolved, the five-year story is very good.

How much private equity exists and is it difficult to find investors now? 

Gupta: I don't have a number for you. But there is a fair amount of funding in radio, TV and print companies like 9X, Sun TV [Get Quote], NDTV, UTV, Radio City, HT Media Ltd [Get Quote] and others. Of course, the environment has worsened. But that's not sector-specific, it is situational and all investors have become much more careful.

Atroley: Going forward, we will see selective investments in the media. The area where investment potential exists is distribution. That's really the big opportunity waiting to happen if the regulatory framework is streamlined.

What about consolidation?

Atroley: It will be marginal because most large players have a play in most areas. Unless there's some serious value the smaller players can add, I don't see anyone willing to pay a lot of money for them.

Are you being approached by companies keen to sell off?

Gupta: There are some strains that are visible but I would not call it a trend.

Atroley: If the economy becomes a little soft over the next year, we might see something more visible then.

How has the media market changed?

Atroley: There's less dominance. There are more players and more cost pressures. Three years ago, fewer players had the ability to make big investments -- the distinction between global players with deep pockets and Indian players with small pockets has narrowed.

Capital is no longer a huge differentiator. Who plays the game better will determine success.

Gupta: If we see any more loosening of regulation -- one hears talk of FDI and FII limits being treated separately for the media -- it could open up more funding.

Atroley: It should happen. It will improve liquidity of the stock for FIIs and therefore more institutions will follow the stock and demand will increase. If 26 per cent is owned by a foreign strategic investor, it leaves nothing for the FII today.

Also, this limit includes NRIs. Even after this, 51 per cent can be owned by Indians and will give Indian management control in sensitive sectors where it is required.