The ‘Hannibalisation’ of TV networks

What is the way forward for the Indian TV networks venturing into OTT?

Well if you haven’t guessed already, the answer is cannibalism. And as Anthony Hopkins in his Hannibal Lecter guise would gloat, in certain cases, it is not necessarily a bad thing. However, rather than dwelling on the morbid, I wanted to focus on the business world. In a rapidly evolving market, it may be the only way to secure market leadership as Apple realized when it launched its iPhone when the iPod was still a significant revenue generator. Nonetheless, the balancing of existing and new product portfolio for incumbent companies means that new entrants with no existing arrangements with suppliers/distributors have an opportunity to upend the ecosystem.

Apple cannibalising iPod sales as iPhone sales took off

OTT (Over the top) in TV networks does not refer to the acting prowess displayed in Ekta Kapoor mega serials but rather to the trend where paid content is offered online on a standalone basis without a cable subscription. The era of bundled packages where the customer had only limited choice in customising to his/her needs and still ended up with a swathe of unwanted channels has necessitated this development. Cord-cutters, as this group of customers is now known, favour a limited set of channels they are genuinely interested in and would want to pay for. Netflix, in the US, of course was the harbinger of this trend and slowly prompted channels such as HBO and Showtime to provide OTT offerings.

Not the kind of OTT we are talking about!

Predictably, with a time-lag, this business model has washed up on our shores as well. While Netflix has itself made an entry this year, we now also have a plethora of desiones as well. Specifically Hotstar (Star Network), Sony LIV (Sony) and Ditto (Zee) are online counterparts of the established cable channel networks. And it is in particular, these offerings that I believe will lead to revenue cannibalisation for the parent networks and here’s why.

1. Content monetization from the customer alone remains challenging: There is a reason why that 9pm movie you sat down to watch on TV stretches late into the night. As long as you were not watching Sholay or LOTR (which would be edited anyway) the primary reason is the frequent ad breaks. Given the price sensitivity of the Indian customer (aka the sabse bada rupaiya phenomenon), in the early days, ad revenue was the only way to make cable channels economically viable in India. Unlike the US, where HBO and Showtime were launched as premium channels with higher pricing for quality content that was delivered relatively ad-free, such an offering does not exist in India.

2. C(H)annibalisation of ad revenues will happen in the transition to digital: Brands of the old world such as FMCG companies pay premium rates for TV ads (INR 3.5L/$5k per 10 seconds) during primetime. This is predicated on the fact that maximum eyeballs would be captured during this period. Now, there is a strong linkage between primetime and top rated shows, each mutually reinforcing the value of the other — top rated shows want to be on primetime and networks only want the best of content for primetime. Moving to online channels offers the customer flexibility to view content at his/her leisure leading to a decoupling of this linkage. As such, it is hard to assume that brands would still be willing to pay the same rates on TV. Assuming that the customer does not front up the cost, digital ads have to be the way to go. However with very little data on how digital ads should be priced vis-à-vis good ole TVCs will lead to a cannibalisation of TV ad revenues and give these networks plenty of food for thought — in terms of what content to display (exclusive vs. same), when to display (same as TV or how much earlier/later) and where to price the digital ads at.

Precisely concern number 1 is what prompted noted entrepreneur/investor Ronnie Screwvala to opt out of Arré. And so the question remains: how can this pan out for new players? Those who are betting on content to be monetized by the customer will either have to be satisfied with a niche market or be ready to stick out for quite a while. Even Netflix, the doyen of this space, has had a tepid response from the Indian public in the 7–8 months it has been in India.

Realization: Brands still need to pay for content although the medium may change

Companies such as Spuul, Hooq and Hungama have the inherent advantage of not having to make the trade-offs that face the others. As such, they have been busy sourcing content from abroad to plug the gap that they have in their existing networks in terms of content. However, they will also need to plug the gap in terms of profitability by getting brands to pay for content. Digital ads will appear on these media much earlier than even the companies may themselves acknowledge. Others may produce innovative branded content of the likes TVF have been successful at with Permanent Roommates (Commonfloor, Ola) and Pitchers (Ponds, Uber, Kingfisher). These will of course have to be targeted and less intrusive than current TVCs but will be the way forward in my view. However, significant challenges remain

  1. Marketing spend has historically been allocation rather than ROI-based: Most brands until now have gone with allocated marketing ”budgets” with x% on TV, y% on print and so on. Convincing them that the ROI on digital ads/branded content would be worthwhile by cutting down spend on other media will require some convincing.
  2. Production of a steady pipeline of quality content: These new players lack the financial muscle of the more established players and as such, maintaining a pipeline of quality content over a period of time will be demanding. Content acquisition costs will need to be kept in check in the face of heft sums that will be paid by Netflix and Amazon to capture some of the premium content.
  3. Some content producers are going OTT themselves: Players such as EROS Now and even Ekta with Balaji’s Alt Digital Media are deciding to ditch the middleman in TV/digital networks and going OTT themselves.

Nevertheless, until the Indian consumer is ready to pay more for content and the established players have balanced their content portfolio across the digital and television mediums, new players who are able to decode the magical formula to get brands to pay for their content have a sliver of opportunity they should be looking to grab with both hands.

Cross posted on LinkedIn Pulse here