Disney is reportedly weighing its options on Star India, according to multiple media reports. What makes the business unviable, despite a formidable TV and OTT presence?
We asked stakeholders: What does a new owner / JV partner need to bring to the table to turn it around?
‘There is still plenty of fire left in this STAR’: Paritosh Joshi, Provocateur Advisory
News media have been rife with speculation about what Disney Inc. intends to do with its Indian arm, Star India. A recent visit by some top Disney executives to India appears to give credence to the prospect of the parent seeking to divest, in part or entirety, a business which began as a Hutchison Whampoa subsidiary back in 1990. Hutchison sold the business to Rupert Murdoch’s NewsCorp in 1992. Disney became the beneficial owner in December 2017, when it acquired 21st Century Fox, Star India’s parent within the NewsCorp world. What might explain Disney’s (rumoured) intentions?
A January 2023 report in the Mint newspaper paints a picture of a business which seems to be in robust financial health, at least as at the end of FY 2021-22 with revenues of Rs.17,480 crore, up 38 pc and profits of Rs.1,421 crores, up a massive 74 pc over the Covid-battered 2020-21 fiscal. No data is available in the public domain, as of this writing, about how it fared in financial year 2022-23. It is possible that sports rights, including the TV rights for IPL 2023-27, which DisneyStar bought for a massive Rs.23,575 crore, will create fresh cost pressures for the business, but that impact really kicked in in the ongoing 2023-24 financial year.
In the meantime, Star continues to maintain its dominant position as a pan-India, pan-genre broadcaster, with offerings in every major language from Punjabi to Malayalam, from Gujarati to Bengali, in its portfolio. Other than news, which is prohibited for foreign ownership, this portfolio embraces all five major genres too: GEC, sports, films, kids and infotainment. What is more, the brand enjoys strong leadership positions in many language segments, making it indispensable both for advertisers and distribution services.
After a 9 pc GDP bounce-back in 2021-22, India’s GDP growth has been on a declining trend, which persists this financial year too. Current estimates range between 6 to 6.5 pc and these may be re-rated further down. What’s more disturbing from a quasi-consumer business is that the single largest line item in calculating the GDP, Household Final Consumption Expenditure, has actually been decreasing after peaking in the massive post-pandemic relief rally.
While small media players are relatively immune to the changing tides of consumer spending, Disney Star is not. As big advertisers experience demand sluggishness, their first reaction is to prune advertising spends. Priorities shift from big launches and aggressively pushing the AIDA (Awareness-Interest-Desire-Action) cycle to conservative defence of existing business, not nearly as advertising thirsty. It gets worse for traditional media like TV. Every year, the Federation of Indian Chambers of Commerce and Industry, in partnership with E&Y, issues a report on the Media & Entertainment sector. This year’s report makes sobering reading for television executives, for it is the first time that their industry slips to the bottom of the growth pecking order. At a CAGR for the 2022-2025 period of just 3.9 pc, as against an M&E CAGR of 10.5 pc, TV is set to lose its top spot in the table to digital media (CAGR 14.7 pc). Worse still, as experience from developed markets has shown unequivocally, this will not reverse. Ever.
IPL rights, shared between Star and Reliance in last year’s auction, have only made things harder. For Reliance, this huge asset can be easily treated as a loss leader for widening and deepening the reach and usage of its Jio platforms business, which is precisely what has happened. Assuming that Star’s expense structure for legacy business remains unchanged from FY 2021-22, at around Rs.15,000 crore, the additional burden of IPL will, by itself, drive this up by Rs.3,000 to 4,000 crore.
While Disney Hotstar, the company’s OTT platform, has been seen as a major new asset created in the last decade, it was still reporting losses on a standalone basis, in 2021-22 (ibid). With IPL cricket out of its offering, the likelihood of using it as the primary driver of future growth is now fraught.
A brief look at the parent, the Walt Disney Company, is in order. While its revenues continue to rebound after the pandemic year, they come at a nearly-halved operating margin, down from 15 pc in 2019 to just 8 pc. Disney’s sense of being besieged was evident when, in November 2022, it brought back retired chairman Bob Iger to repair the business. It is increasingly clear that the company’s global linear-television business is in the crosshairs of his deep-cleaning project. A CNBC report datelined July 13 quotes him as being “very pessimistic” adding that “it is worse than he expected”.
Iger may take some tough calls, and the network may even find a strategic investor. But India’s television opportunity is far from over, with a reach of over 800 million viewers spending over three hours every day. Star may well shake out its portfolio to try and prune unaffordable content, but it would be irresponsibly precipitate to read this as the end of a stellar journey.
There is still plenty of fire left in this STAR.
– Paritosh Joshi is Principal, Provocateur Advisory and a former senior executive at Star India.
‘What does the new owner or JV partner bring to turn around, depends on who it will be’: Karan Taurani, Elara Securities
What makes the business unviable is the cash flow and the profitability. If you look at the TV and streaming industry in the last five years, OTT is making losses while profitability of TV has come down. This is the issue here, because the advertising revenue is volatile because of macro headwinds and on OTT there are no unit economics proven. Despite lower data cost, whether OTT platforms will turn profitable is a question and there is no path to probability now. I think these two reasons are making the business unviable.
What does the new owner or JV partner bring to turn around, depends on who it will be. It could be a financial partner who will probably bring in capital to infuse because it is a hefty business in terms of content investment on digital and it is a long haul business. If it is a strategic partner, then it can bring expertise, it could be a global giant who could bring in tech expertise. It could be somebody from the telecom ecosystem, who could bring in distribution expertise. I think, definitely, you could get local expertise here in a market like India. It is a very price sensitive, fragmented and overcrowded market right now and ARPUs are very low while the distribution and content costs are very high.
So I think it’s a very troubled environment and it is tough to monetise digital assets. Advertising is a highly fragmented industry. You got commerce and social giants competing with broadcasters and streaming platforms. On the subscription front, the ARPUs are phenomenally low. So, you cannot actually build OTT platforms with a reasonable scale. To top it all, you have got concerns on content cost, distribution cost and tech cost which are on the higher side. I think it is an alarming sign right now. Even on TV there are concerns as there is no growth in households. The number got tapered in some of the metro and urban cities. We are not seeing any ARPU growth in TV because of regulatory headwinds on NTO and advertisement on TV is weak, remaining stable because of lack of increase in time spent and consumption metrics.
Both the TV and streaming business have their own set of concerns and that’s the reason why they are looking at some sort of consolidation or partner to drive them in the correct path by providing some sort of expertise in the business.
– Karan Taurani is Senior Vice President – Research Analyst (Media, Consumer Discretionary & Internet), Elara Securities.
‘Stop bleeding, get rid of Hotstar and rethink digital strategy’: media veteran
At the global level, Disney CEO Bob Iger himself is under pressure to deliver as the board and shareholders have pinned huge expectations on his return. In this scenario, a leader who evaluates international portfolios of the corporation will surely look at India as an issue. If we ask why – Disney Star India is commanding more than 30 pc share in Indian television in terms of revenue and market share. However it is bleeding in streaming.
What guided Disney+ Hotstar to its growth path was the IPL streaming rights. Now, without IPL it is struggling with eroding subscription in millions quarter after quarter. What is the use of having millions of unpaid subscribers? It might look attractive for venture capitalists for valuation. After putting money in, you should find a way to get it back. But, Indian streaming market is highly competitive with very high content costs. With Prime Video attached to its e-Commerce and Jio Cinema looking to grow on the popularity of IPL, they both have a reason to invest and strategy to gain in the long run. Unfortunately Disney+ Hotstar was looking to make profit after the initial investments. The sudden change in ecosystem and loss of IPL streaming rights has put the platform and its owners in a fix.
Secondly, the leadership of Uday Shankar makes a lot of difference. He is a hard act to follow. One has seen him from the days of being a producer in AajTak and then becoming the head of Star News, and finally when he took over Star India after the exit of Peter and Sameer, when he was looked at as a weak leader. But the way he built Star India by playing with competitors made him a big risk-taking, gutsy guy. With IPL and other sports properties under Star Sports, he built a formidable broadcasting network. While TV is doing well under K Madhavan and Star is still profitable and making money, digital is becoming painful.
Well, how to fix it. Where would someone start, no clue. In theory, stop bleeding, get rid of Hotstar and rethink digital strategy. It might look attractive for a VC, but putting money is just one part. If you got a tub which is leaking, it doesn’t make sense pouring more water. Disney Star needs to rework the business model. Any investor would want to exit after three years with profits. But how will it help build the business in the long run?
A deep-pocketed Indian investor with long term vision can change the equation. Is there any player other than Reliance is a big question mark.
– Media veteran, on condition of anonymity.