SECTOR UPDATE - MEDIA WatchDog : It’s show time for OTT industry India Equity Research | Media COMPANYNAME In our first edition of WatchDog, we explore India’s over the top (OTT) market, its key players and evolving dynamics. We expect the robust momentum of a few key players—ZEE5, Netflix and Amazon prime—to sustain given their focus on customer acquisition and differentiated as well as voluminous content creation. We also explore implications for pay TV in the wake of the OTT disruption. Netflix’s story and the censorship angle are also touched upon. Finally, we explore brewing innovation that entails potential to spur a paradigmatic shift in industry dynamics. Our top picks are ZEE and PVR. Massive investments underway; pricing among key pivots In the race to grab eyeballs, in our view, differentiated content and pricing will play a crucial role in generating traction (ZEE5 is the most aggressive in this). Netflix and \ Amazon Prime will be investing aggressively towards regional content. While Netflix charges INR500 for one month, ZEE5 is priced at INR499 for 12 months and INR49 for one month. SUN NXT charges INR480 for 12 months and INR50 for one month – international OTT platforms charging higher than the domestic broadcasters’ OTTs. Along with partnering with telcos, ZEE5 is also aggressive in tie ups—OYO, RailYatri and Paytm— to provide discounts and free trial periods. End of pay TV?; Censorship risk for OTTs Among OTTs, we expect the AVOD model to outclass the SVOD model, in line with the global phenomenon, as highlighted by WARC, a global marketing and advertising research firm in its recent ad forecast. The sheer size of India’s demographics and low propensity to pay for content points towards the same. That said, we do not expect significant dip in pay TV’s subscribers as OTT will largely be an add-on since the former is a single source for varied content consumption, particularly news and sports. There has also been a hue and cry for policing OTT content. If OTT platforms are censored, it could dilute the propensity of consumers to pay for content. However, considering this is a sensitive topic, we expect censorship guidelines to shape up over the long term. Convergence of linear TV and OTT; innovation in distribution Threatened by the acceptance of OTT platforms and rising online content consumption, cable and DTH providers are working aggressively to introduce hybrid set-top boxes (STBs), which enable OTT viewing on normal televisions. OTT platforms are also exploring content dissemination via telcos to tap wider catchment. Abneesh Roy +91 22 6620 3141 Top picks: ZEE, PVR [email protected] We remain positive on ZEE and reiterate it as one of our top picks in the media space Prateek Barsagade based on: a) strong programming pipeline of ~90 shows likely to be added on ZEE5 in +91 22 4063 5407 [email protected] FY19; b) deals with leading telcos (Jio, Airtel) to stream OTT content; c) management’s vision to take its OTT platform ZEE5 global by tying up with a global player with cutting-edge technology; and d) asset monetisation at the group level. December 4, 2018 Edelweiss Research is also available1 on www.edelresearch.com, Edelweiss Securities Limited Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Media Massive investments underway; competition in OTT intensifies Considering the sheer size of the Indian OTT market (currently about USD700mn) and its potential (expected to touch USD2.4–5bn by 2023 according to various industry estimates), investments from both domestic and international players are pouring in for developing differentiated content and promoting their OTT platforms via attractive offers. Apart from content spends, the international and pure-play OTT players such as Netflix and Amazon Prime Video will need to invest reasonably more than the likes of ZEE5 and Hotstar to market their brand and content to a large audience. Players such as ZEE5 primarily leverage their existing network’s ad inventory to market the OTT platform. Netflix plans to invest INR5–6bn every year to produce original content for the Indian audience. Hotstar, whose USP is sports, has also secured capital infusion of up to INR5bn from parent Star US for content production and improving its technology platform. Similarly, ALTBalaji is looking to spend about INR5bn over a period of three years to strengthen its content. Amazon Prime Video has proclaimed it would continue to invest aggressively to produce content for the Indian audience, particularly regional audiences. Even YouTube has started Youtube Originals for the Indian audience, which will not be behind a paywall. All in all, the number of OTT platforms catering to the Indian audiene has gone up from nine in 2012 to 32 in 2018. The influx of such huge investments will eventually crowd out the OTT market and intensify competition. Table 1: Snapshot of Indian OTT players Platform YouTube Jio TV Netflix Amazon Prime Video Hotstar Owner Google Reliance Industries Netflix Amazon STAR India Revenue Model AVOD AVOD SVOD SVOD Freemium Susbcription Fee (INR) - - 500-800 per month 999 per year; 199 per Premium: 999 per year; month 199 per month Content User generated content; Aggregates LIVE TV International (Movies, TV Shows, Movies Sports (Cricket music, broadcast channels, catch-up TV Shows); Netflix (Bollywood, Hollywood, tournaments), Movies content, exploring content; Partnered with Originals; Indian (TV Regional), Amazon (Bollywood, Hollywood, original content multiple OTT platforms shows, Movies, Originals, Kids content Regional), Hotstar for content Regional) Originals, Live TV, catch- up content, Star India channels, HBO Originals, 21CF content MAUs (mn) 245 - 5-10 20-30 70-150 Edelweiss Securities Limited 2 Sector Update Table 1: Snapshot of Indian OTT players (Contd…) Platform ZEE5 Voot Sony Liv Sun NXT Eros Now ALTBalaji Owner Zee Viacom18 Sony Pictures Network Sun Network Eros Balaji Telefilms Revenue Model Freemium AVOD Freemium SVOD SVOD SVOD Susbcription Fee (INR) Premium: 499 per - NA INR50 per month Premium: INR99 INR300 per year year; 49 per month per month Content Live TV, Movies Movies, Viacom18 Sports (Ten Sports Sun Network Movies, catch-up Originals, Select (Bollywood, content, Kids feed), Sony catch-up content (Movies, content, Religious movies, Kids Hollywood, content, Voot content, Movies TV Shows) music content Regional), Originals (Bollywood, Originals, Music, Hollwyood) Network group channels MAUs (mn) 41.3 45 20-35 2-5 0.5-0.8 1.5-2.5 Source: Edelweiss research However, this upheveal in the OTT space will boost smaller, upcoming and maybe niche production houses. Production houses such as Arre Studios, TSP, TVF and others are likely to benefit greatly given the spike in demand for diffrentiated content. Such content is particularly targeted towards youth and is will only increase in the coming years, thereby providing a strong business opportunity to newer production houses, thereby eating into the opportunity for long-standing players such as Balaji. Given the scale of investments and the alliances being forged in the sector, smaller players are likely to eventaully find their way out through integration/content-sharing with either bigger OTT players or content aggregators. Recent deals such as HooQ partnering Hotstar and ALTBalaji tying up with YuppTV are setting the stage for alignment of smaller platforms with larger players. AVOD or SVOD? End of pay TV? Most large players are betting that the SVOD market would drive the OTT industry going ahead. However, for a market such as India with markedly lower willingness to pay and availability of cheaper options, we estimate that the SVOD market would remain smaller than the AVOD/Freemium market in our view. The major reasons are: i) pay TV is relatively cheap in India; ii) globally too, growth (and investment) in AVOD is outpacing SVOD; iii) in online video consumption, audiences in small towns and the SEC D/E segment of the demographics show highest consumption (number of hours), implying a larger market; iv) proliferation of piracy; and v) the prooblem of too-many. In light of the above, we believe AVOD models would remain more popular than SVOD counterparts. Taking this into account, with the significant investments being made to produce original programming, we estimate OTT players’ profitability would continue to be 3 Edelweiss Securities Limited Media under pressure for at least 3–4 years largely due to their inability to monetise content. In addition, the AVOD model provides an excellent medium to direct targeted advertising towards a richer dataset. Similar forecasts were released by WARC, a global marketing and advertising research firm, in its International Ad Forecast, wherein the AVOD expenditure is seen to outpace the paid media. It also mentioned that, though SVOD has propelled the OTT services among consumers, it will be the AVOD-led services which present a better opportunity for the companies and hence, firms such as Amazon and AT&T will be be exploring measures in the AVOD segment in the next year. In our view, pay TV’s share in the advertisement pie will not diminsh greatly, mainly because of traditional consumption habits and the fact that it is the cheaper alternative with better reach as well as pricing. What we do believe though is the loss of share for the print segment will accentuate instead of the television segment. Additionally, OTT is currently percieved as secondary viewing medium in India, and not the primary one as most such platforms do not provide access to sports, news and varied content (music, current events, religious programmes, etc). Hence, we do not foresee any imminent risk to the pay TV business due to the accretion in OTT/online video platforms. Building on this, over the medium term, if subscribers continue to pay for pay TV, it is less likely that they would also pay for multiple other OTT platforms.