CCI clearance without divestments positive for Disney Star-Reliance merger: Karan Taurani

New Delhi: The Competition Commission of India's approval for the merger of Disney Star with Reliance Industries without any channel shutdown, is a positive development for both entities, said Karan Taurani, SVP-Research Analyst (Media, Consumer Discretionary, and Internet) at Elara Capital.

Taurani believes there is a strong likelihood that the National Company Law Tribunal (NCLT) will approve the merger within 4-5 months, potentially finalizing the deal by January 2025, and forming India’s largest media and entertainment entity.

On Wednesday evening, in a post on X, CCI announced that it has cleared the "proposed combination involving Reliance Industries Limited, Viacom18 Media, Digital18 Media, Star India and Star Television Productions, subject to the compliance of voluntary modifications".

Earlier, the antitrust watchdog flagged the $8.5 billion merger as a potential competition buster, with concerns over their combined grip on cricket broadcast rights. After this, the companies expressed willingness to sell television channels to ease concerns about market dominance and secure early approval. 

Taurani said, “In CY22, sports adex (TV+Digital) in India stood at Rs 71bn (according to GroupM) out of which Disney India had a contribution of ~80%. The combined entity will have lucrative sports properties like the Indian Premier League (both TV and digital), ICC cricket tournaments (both TV and digital), Wimbledon, Pro Kabaddi League, BCCI domestic cricket etc.”

On February 28, 2024, The Walt Disney Company sold its India business to Mukesh Ambani’s Reliance Industries at a $3.5 billion valuation, which it bought from Rupert Murdoch for $14 billion seven years ago.

The might of the combined entity

As part of the transaction, the media undertaking of Viacom18 will be merged into Star India Private Limited (“SIPL”) through a court-approved scheme of arrangement. In addition, RIL has agreed to invest Rs 115 billion into the JV valued at Rs 704 billion. 

Post completion of the above steps, the JV will be controlled by RIL which would have a 53% stake through cash infusion and its subsidiaries, whereas a 36.8% stake will be held by Disney.  Disney may also contribute certain additional media assets to the JV, subject to regulatory and third-party approvals. 

The JV will have over 750 million viewers across India and will also cater to the Indian diaspora across the world. The JV will also be granted exclusive rights to distribute Disney films and productions in India, with a license to more than 30,000 Disney content assets, providing a full suite of entertainment options for the Indian consumer.

Taurani said, “We believe the merger of Viacom18 and Star India will have a big impact on the entire M&E ecosystem as the combined entity will command a huge market share.” 

The merger will create a large media juggernaut with 108+ channels (Star India has 70+ TV channels in 8 languages whereas Viacom has 38 TV channels in 8 languages), two large OTT apps (Jio Cinema and Hotstar) and two film studios (one each of Reliance and Disney India). 

He shared with BestMediaInfo.com that post the merger, the combined entity will command a TV advertisement/TV subscription (excluding distributors/DTH/MSO revenue)/Total TV market share of 40%/44%/42% (as of FY23) respectively. 

The merged entity is expected to command a digital OTT market share of ~34% in CY23, while the TV viewership share in top 10 channels (according to BARC) is ~40% as of CY23. 

Taurani further highlighted that the consolidation between RIL and Disney on the India TV side could hurt other linear TV broadcasters, such as Sun TV, Z Sony, and others, as they may not scale up on market share. 

He commented, “The merged entity's focus on maximising market share through increased investments in content, synergies, and enhanced marketing power poses challenges for individual broadcasters to compete and grow. With a large customer base across various genres, including regional genres and Urban GEC, the combined entity aims to dominate key markets, potentially leading to market share loss and challenges for other players, including the possibility of smaller channels shutting down.”

Jio Cinema + Disney Hotstar merger potential threat for global OTT giants

The merger of JioCinema and Hotstar poses a challenge for global OTT platforms, as India's market values bundling and is price sensitive, emphasised Taurani. 

“The combined entity can offer a comprehensive package including web series, movies, sports, originals, and a global catalogue. This bundled premium plan, possibly in collaboration with Jio's large subscriber base, may hinder the ability of global OTT platforms to raise Average Revenue Per User (ARPU),” he commented. 

Better prospects of profitability in the medium to long-term

The merger may result in improved profitability for the combined entity as there may be a reduction in employee cost, production cost and marketing costs on the TV side and content costs, particularly on the OTT side, which could contribute to a more sustainable path to profitability over the medium to long term. Taurani said, “Currently, both platforms are facing heavy losses due to high content costs, and Jio Cinema relies solely on AVOD without significant paid subscriber revenue. With the combination of Hotstar and JioCinema, the merged entity can enhance its subscription revenue by increasing subscription prices and attracting a larger subscriber base.” 

He further elaborated, “Reliance may drive the entire business through Jio Platforms, with a significant influx of ad revenues in digital advertising. The digital advertising market, being a winner-take-all business, heavily relies on scale. They may also have a pay-based mechanism via Jio Cinema/Hotstar at a larger scale, which will propel healthy subscription revenue over the medium term.”

Monopoly in sports properties may lead to higher ad revenue

On the sports front, the merged entity is set to become monopolistic, with Disney and Jio collectively controlling approximately ~75-80% of the Indian sports market across both linear TV and digital platforms. “This dominance in sports, primarily cricket, positions them to command a substantial share of the overall ad market, showcasing strong growth in an industry where sports is a key driver of viewership on both linear TV and digital platforms.” 

On the contrary, the continuance of hefty losses of the merged entity over the near to medium term due to high-cost sports properties (IPL, ICC tournaments & BCCI bilateral rights) could negatively impact valuation prospects for the merged entity.

Telco customer retention and bundling

As per Taurani, with the vast content library of Jio and Disney, the merged entity's content could prove advantageous for Jio subscribers and make it a one-stop content hub. 

“There might be initiatives such as a Jio Prime offer, providing subscribers access to content at an affordable or even free price through last-mile resources and 5G wireless access. The company will have a big advantage of the last mile with Jio having a subscriber base of more than 450 million smartphone users. This will hit Bharti Airtel as it has tried to tie up with OTT players in the content ecosystem to offer value-add. Thus, Bharti Airtel may have to invest heavily in its own content or shape partnerships with global OTT giants such as Netflix and Amazon or other OTT platforms to generate clout in the content ecosystem,” he said.

Synergy prospects

Taurani believes that the ad revenue potential from IPL is expected to increase significantly with the merged entity having exclusive rights (TV+Digital) to IPL. He said, “This consolidation may result in bundled advertisement revenues, potentially mitigating the higher cost of IPL rights and reducing overall losses; due to IPL rights being split between TV and digital between two different platforms and digital platform offering IPL free, there was a big dent in the IPL revenues on TV, which could see some respite.”

He also said that the merger is anticipated to bring about restructuring in employee costs, reduced production expenses, and lower advertisement costs for TV. These potential cost synergies could contribute to improved margins for the merged entity. On the sports side too, content costs may pare sharply for TV, digital over the medium to long term, given that fewer platforms may bid aggressively for expensive properties.

Taurani said, “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 entry of global giants with deep pockets. With the merger, content cost in digital may see much lower growth, which may improve the unit economics for the OTT business, potentially resulting in lower EBITDA losses for Jio Cinema and Hotstar.”

Considering the critical role of technological advancements in the success of OTT platforms, the integration of Disney's technological expertise is expected to enhance the user experience on Jio Cinema. “This improvement may subsequently drive higher subscriber numbers and revenue growth,” he said.  

On the other hand, he also said that a below-par customer experience on the video apps despite a wide variety of content, may not augur well in subscribers paying for the same; global OTT giants like Netflix have a very superior experience to command a premium ARPU.