'Reliance-Disney deal can be structurally disruptive'

As Reliance is in talks to acquire Disney India assets (with OTT) for $10 billion, at a steep 40% discount versus Disney’s acquisition of Star India at $15-16 billion in 2019, this is a clear structural disruption for India content and telecom ecosystem, Karan Taurani, Senior Analyst at Elara Capital said.

Taurani stated that this may lead to early consolidation signs for India OTT, strain on global OTT giants (behind the paywall), India OTT shifting to free offerings and hit on other telecom players – Jio’s content may widen.

This will also be a win-win proposition for Zee Entertainment Enterprises and Sony merger on valuations as the Zee-Sony merged play will have a much higher EBITDA margin than Disney India which is valued at $ 10 billion despite much lower EBITDA margin for TV and hefty losses in digital (Disney+ Hotstar saw a PAT loss of Rs 3,432 million in FY22).

“This deal may also arrest the growth in content costs for TV and digital, thus improving profitability. The only risk may be the Competition Commission Of India (CCI) disallowing the Reliance-Disney deal, to deter any duopoly on TV/OTT in India (assuming Zee-Sony merger goes through),” Taurani added.

Consolidation in video OTT

“As per our assessment, Jio Cinema and Hotstar have an AVOD (advertising video on demand) market share of 28% and 9% respectively (after adjusting for IPL). Post the Zee-Sony merger, with merged OTT businesses, their combined AVOD market share may touch ~12%. This may mean that the two behemoths may have an AVOD market share of over 45%. AVOD forms approximately 60% of the Indian OTT market (Rs 2.5 billion) and may grow faster to a higher share, with Jio Cinema offering premium content free,” Taurani said.

This may strain other OTT platforms, which may resort to takeovers/partnerships as OTT is a play on scale. Thus, the Reliance-Disney deal could start a spree of consolidation for India OTTs (posting hefty losses in the past seven years since the launch of affordable 4G by Jio). Consolidation in OTT may pare content costs, thus driving OTT platforms towards breakeven and profitability.

Dominance in TV – Big overlap in urban

Disney and TV18 had a TV ad market share of 34% and 11% in FY22. If the Zee-Sony merger goes through, the combined ad market share will be 23% on TV (FY22). This means that the TV industry may also see heavy consolidation, with these two behemoths forming 68% of the market together. Thus, a duopoly may manifest in the TV industry, improving ad pricing for an industry with a sharply converging growth rate.

It may not help create higher revenue share from the TV distributor ecosystem, as this segment is regulated post-NTO (New Tariff Order). Disney (Star Plus) and TV18 (Colors) are market leaders, with 25% and 18% viewership share – in mega metros, as per BARC data (as of Q2FY24). A large overlap may lead to the shutdown of some channels for the merged company. Overall, this acquisition may ensue consolidation for the TV segment too, as many channels would move to just OTT or shut down completely.

TV/digital – Content cost to be arrested

As per Taurani, content cost on TV has seen a steady acceleration of 7-15% annually, based on the nature of the content (fiction/non-fiction). This is despite the TV industry's CAGR decelerating at 1% in FY19-23. Thus, any consolidation in TV may arrest content costs, improving profitability.

On the sports side too, content costs may pare sharply for TV, given that fewer platforms may participate in bidding. In digital, content cost inflation (content cost for web series 3-5x higher than for TV non-fiction shows, per episode) has been sharper due to heavy fragmentation in the OTT market and the entry of global giants with deep pockets. With Disney-Jio joining hands, content costs in digital may see much lower growth, which may improve the unit economics for the OTT business.

Convergence in OTT industry growth rate

With JioCinema expected to offer premium content free in the near term, India OTT may see lower growth as SVOD revenue growth may be arrested due to the lower bargaining power of global OTT platforms to offer content behind a paywall.

Jio Cinema and Disney have a larger content variety. This may strain global OTT giants (APRU/price hikes). Further, their over-dependence on Jio in the ecosystem may hit related bargaining power, as per Taurani.

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