Sony-Zee Merger: The Battle With Disney For Indian Audiences
On December 22, 2021, ZEE Entertainment Enterprises (ZEE) announced that they had signed a merger agreement with Sony Pictures Networks India (SPNI). SPNI is an indirect subsidiary of Sony Corp’s (Sony) subsidiary, Sony Pictures Entertainment Inc. (SPE). Two of the most respected names in the industry were merging.
The announcement stated that the new entity would have a 50.86 per cent shareholding by Sony, and the balance being held by the Zee shareholders. The promoters of ZEE would eventually hold 3.99 per cent in the final company, the same percentage as is being held currently.
What does this mean?
This would make SPNI India’s second-largest entertainment network by revenue and with 75 TV channels, 26.7 per cent viewership share become the largest entertainment network in India, with a large share in entertainment, sports and regional markets, two video streaming services (ZEE5 and Sony LIV), two film studios (ZEE Studios and Sony Pictures Films India), a digital content studio (Studio NXT), and huge programming and music libraries.
The combined entity would have revenues of USD1.79 billion, slightly behind Disney Star India’s revenues of USD 1.8 billion. This would bring the battle between the global entertainment giants, Sony and Disney right into the Indian television market.
This depends on regulatory and other permissions, and also the pending issue of Zee’s largest shareholder being unhappy and having taken legal action, which could potentially disturb these plans. But let us not consider this for the moment and look beyond these factors.
The question is why was this merger needed? Let us take a closer look.
SPNI is an indirect subsidiary of Sony Group. Sony globally, has been preferring to stay away from entering the digital space, and has preferred to be supplier to these OTT platforms. A recent article in the press, stated that in 2019, it had sold its 30year old series, Seinfeld for US$500mn, to Netflix, in a five year exclusive deal. Since then, it has preferred to follow the “arms dealer” approach of providing its content, theatrical and TV rights to the highest bidder. Sony got US$3bn in 2021 for a five year deal for streaming its theatrical films from Netflix and Disney+. Given the fact, that the platforms are on the way to spend over USD$100bn in 2022 for acquiring content, this may appear to be a smart choice. Sony globally was consolidating and wanted to be in the top leadership position in all markets else would want to exit the market. It was implementing this strategy worldwide including India.
OTT Platforms are fighting for exclusive content, worldwide and in India. But not everyone is winning. A few days ago, Reed Hastings, co-founder of Netflix, stated that India was a challenging market for Netflix. But they also expect the next 100 million viewers to come from India. Perhaps this is why Netflix has reduced its prices in India, whereas it has raised it in the US. So, digital OTT platforms will have to continue to pay for good content, as they realise what every media industry person knows, to quote ViacomCBS’ Sumner Redstone’s famous line, “Content is King”. Perhaps this was belatedly realized when the last season of Game Of Thrones was exclusively broadcast on HBO. Or when Netflix paid US$100mn for one year’s streaming rights for the American Serial “FRIENDS” for 2019, and subsequently lost to a bid of US$425mn for five years. But the growth rates in the Digital media space is much higher (27%) than for the traditional pay TV (9%). But yet, OTT platforms are extremely dependent on the subscriptions as they do not have any advertising revenues. Remember? There are no advertisements on these digital streaming services. In 2021, Netflix was supposed to have spend US$17bn, Amazon US$11bn, WarnerHBO US$20bn, and Disney US$20bn for content, totalling to about US$68bn.
So inspite of spending huge sums of money on acquiring content, streaming services like Netflix, Amazon Prime, Disney and so on, still face the challenge of not being able to get steady revenues. Amazon Prime Video is bundled free with Amazon Prime and hence is actually making money on the free delivery option, which research has shown, increases the buying from its customers. So, it is still profitable for Amazon to continue bundle Prime Video along with Amazon Prime subscriptions. And Disney has its studios for the content. Imagine a parent saying no for a Disney channel subscription! In fact, its subscriber base shot up during the last two years, as parents working from home, needed to distract their kids (who were not going to school) and what better than to watch a Disney movie? In fact, Disney+ met their five year subscriber targets within two years of launch! Netflix also got a bump in the sign ups during this time, when people were forced to stay indoors. But this is still not as profitable for Netflix or for anyone else too.
So, what is profitable in India?
In one word, Cricket. More specifically, IPL.
There is only one guaranteed money spinner for broadcast and TV platforms, which is Cricket. Or more specifically, the IPL. The IPL rights were first auctioned with Sony winning the rights. Sony setup the entire infrastructure for its sports channels around the IPL and tasted success. And profits. Then the rights were won by Star, now a part of Disney -Star India, who paid close to Rs.16,000crs (US$2.13bn approx). Which was also hugely profitable for Disney-Star. Now these are again coming up for auction this year, with a rumoured price of Rs 30,000Crs. (US$4bn) for a five year term.
And Star was estimated to earn ad revenue to the extent of Rs. 3600-3800Crs from IPL 14 this year. Hence the stakes are high. No wonder, there is interest from Amazon, Jio besides Disney – Star, Zee, and Sony. and maybe who knows? Netflix?
Now coming back to Zee. Zee has a very good base in the regional channels but does not have any significant presence in the sports and kids channels. These are areas where, Sony is well established. Zee has had some hiccups but otherwise is a profitable and well-run business with loyal viewers. (Though some shareholders may disagree with my assessment).
But the fact remains, that there is plateauing of the viewer numbers over the last two years, and an undeniable shift over to the digital platforms, especially on mobile devices. There is a need for good content. Either to create it or buy it. Both need deep pockets. Which Sony has. Its international studios and music divisions are hugely profitable. And, the “Arms Dealer” strategy is profitable. But it is not as successful in India for the regional content. It can handle sports very well, and has very good team, but it lacks the experience and expertise in the regional markets. Broadcast industry is in the midst of consolidation, and not many new players have entered. In fact, existing players have wrapped up or sold out. And these are also from very well-funded media houses. So the broadcast market is not a growth market.
And so, the smart move would be, to become an entity which can bid for the IPL at the increasing high prices, and at the same time, create more content for the regional markets. Then use this to distribute across a wide range of channels to focus on the increasingly specialized audiences watching pay TV. And yes, also use the inhouse content to drive a digital platform, which offers compelling content, which can be distributed across all these channels (Pay TV and Digital), driving costs down still more.
And yes, let it be driven by an experienced CEO who understands that India is more than just cricket. And you probably have a recipe for success. Maybe this is a smart move by Sony and Zee to ensure that they not only survive, but thrive, given the disruption in the entertainment broadcast market. But only time will tell. I will however place my bets on this one.
