While the clamour for transparency in today’s connected world has made auctions a preferred route to engage suppliers and sell assets, auctioned businesses actually turn out to be a winner’s curse. The auction winner is usually the bidder who offers the highest price for an asset or the lowest cost for a project.
To make the project a commercial success, the firm should be able to cover the higher cost of acquisition by way of cost savings or monetise it better through higher sales of the product or service, or a combination of both.
But more often than not, companies lack the levers to do so. The aggressive bids are usually an outcome of the firm accepting a lower return, and many a times because of a certain perceived strategic advantage over competition. One bid that raised quite a few eyebrows recently is Star’s Rs.16,000 crore bid for IPL rights. The bid was 3.3% higher than the sum total of the highest bid across categories, not outrageously high.
Broadcasting is not on a particularly strong wicket today given that appointment viewing is on a decline. Ad spends on television are rising rather slowly, while digital spends are galloping on a small base. Star has been building its digital platform through Hotstar, where its reach is respectable but revenue is small. However, if you are a major player in a business that is in transition, the management has little choice but to try new growth areas even if they do not promise a guaranteed return. In that sense, Star’s bet is a gamble in uncharted territory. How much digital reach can be monetised is still in question, but as a leading player in the industry it has to bite the bullet. This issue’s cover story examines the economics of IPL and Star’s strategy.
Among other stories, we have one on how leading Indian brands such as Amul, Dabur, Titan and Fabindia are leveraging the Amazon Global Store to reach a worldwide audience. That's called Passage to America.
In our investing section, we have a story on Lupin which is building a niche in the specialty business to counter the price erosion in the US generics. Will the strategy pay off?