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The Outperformers 2017

A Perfect Script
A frugal approach and concerted effort to build its regional presence are paying off for Zee Entertainment

Krishna Gopalan

 "Our strategy is not to buy market share. Our focus is on the format and big names really do not matter"—Punit Goenka (L), MD, ZEE

It has been nine years since Punit Goenka moved into the corner office at Zee Entertainment Enterprises (ZEE). A lot has changed since then, from moving into a new building and managing more businesses across more verticals to the reading glasses that sit on the 42-year-old’s nose. “I was in denial about it but I guess I do need them now,” chuckles the MD of ZEE. The biggest change, though, is in how the business, started by his father, media baron Subhash Chandra, is now run. Chandra kicked off Zee TV’s journey as the first Hindi general entertainment channel (GEC) in the early 1990s. At the time Punit took over, Zee TV drove 90% of the revenues. “Every time our television ratings fell, the stock price would take a beating. There was no way business could be this volatile, and we could not spend our time just looking at the ticker,” he recalls with dismay.

So, where Chandra’s management style was about bold moves, Goenka has been growing the business by moving to the opposite end of the spectrum and focusing on de-risking and frugality. Currently, the Zee network has grown into an entity with 32 channels spread across genres, countries and languages, a growing films business, and is now dipping its toes into emerging and newer entertainment options. De-risking is a strategy that calls for high levels of patience and perseverance, and ZEE has discovered this the hard way. It is now the leading channel in three languages and in second place in another two, but those are hard-won positions that have been gained after literally decades of effort and several costly mistakes. Along the way, the network has also taken hardnosed decisions to divest businesses that don’t generate the right return or that appear too costly for the long run. The plan, for the next five years at least, will be to demonstrate the same level of doggedness in ventures such as digital, overseas distribution and Goenka’s pet passion, live events.

regional shows on zeeRegional zeal
Chandra may have started the first Hindi GEC but he was also equally quick to recognise the need to look beyond that space. Three years before Goenka even took over, his father repeatedly spoke of how regionalisation was the way forward for the network. Chandra’s logic was clear. “Unlike the rest of the world, where Hollywood dominates consumption, local content in India will always prevail, even over Hindi,” Chandra explains. ZEE had already forayed into non-Hindi broadcasting but, at that time, regional channels brought in no more than 8% of advertising revenues. Chandra asked his son to invest disproportionately in these markets. Around 2005, for every 100 ZEE invested in Hindi, regional markets got barely 3; it is estimated that the figure is closer to 15 today. Today, the non-Hindi businesses bring in over 30% of ZEE’s advertising revenue of 3,670 crore.

The first foray outside Hindi was when ZEE decided to launch the Marathi channel in August 1999, followed by Bengali a month later. Since then, it has moved into Kannada, Telugu, Tamil, Oriya and most recently, Bhojpuri. Where ZEE made early mistakes such as not hiring local talent in the south or just being unable to understand what would click in these markets, now it customises its strategy for each of these markets. Expansion has been in the form of new markets and more channels for the existing markets as well. In Marathi, where the network has a 65% market share, it launched Zee Yuva to draw in the younger audience, while it spends disproportionately on films in Telugu broadcasting. It has also recently launched Zee Cinemalu in Telugu, a dedicated movie channel for a region where over a third of content on GECs is film-related. 

Together, Tamil and Telugu account for 17-18% of the 25,000-crore national television advertising pie, the largest chunk after Hindi. Punit Misra, CEO, domestic broadcast business of ZEE says as much as 95% of television media consumed in Tamil Nadu is in Tamil. And the stranglehold over distribution by Sun TV was a huge deterrent for any player in the state. But, “there was an opportunity in non-fiction programming such as talk shows and music. Both these genres have worked well for us,” he explains. Today, Zee Tamil has a market share of 12-13% from barely half that number three or four years ago.

zee regional business growthIf regional markets are tough to manoeuvre through, they are also highly lucrative. For instance, Goenka points out that a key advantage in the south is that film rights are in perpetuity, unlike Hindi, so there’s a chance to monetise them several times. ZEE made its biggest bet yet in the regional market a few months ago when it acquired the satellite television rights of Rajinikanth’s upcoming science fiction film, 2.0, for a staggering 100 crore. The film, to be released simultaneously in Tamil, Telugu and Hindi, is said to have a budget in excess of 400 crore. This is the largest acquisition by any broadcasting network. Misra says the acquisition points to ZEE’s growing position. “This is a clear indication that we are now a strong player. With two superstars in the film (Akshay Kumar being the other), there is a clear opportunity to monetise across markets.”

The potential in regional markets has led ZEE to explore inorganic expansion as well. In mid-2015, the company bought over an Oriya GEC, Sarthak, for 115 crore, instantly catapulting it to the top slot in Odisha. Then, last November, the company acquired Anil Ambani’s television broadcasting business and 49% in his radio business for 1,900 crore. The television deal, which included Big Ganga and Big Magic channels, has given ZEE a foothold in Bihar and eastern UP, both key Bhojpuri-speaking markets. Big Ganga is the market leader with 37% market share, followed by a channel called Bhojpuri Cinema, which has 31% of the market; Big Magic is much smaller, not featuring in the top five. “This buyout gives us a growth opportunity in two big hyper-local markets,” says Misra. It is estimated that these two Bhojpuri-speaking markets account for 7-8% of the total television advertising pie. Ganga — which mainly broadcasts shows about music, films and religion — is a profit-making business, while Magic is losing money. That has not unnerved Zee, with the management saying that Magic fills in the missing slot of male comedy and kids shows. “There is no choice in Bhojpuri; Sab TV is the monopoly in this space and we want to challenge that. With Magic, we will have comedy, historicals and crime shows,” says Goenka.

Punit Misra, CEO, domestic broadcast business, ZEEBeing in a strong position in television gives a broadcaster a disproportionate share of revenue since it can charge higher advertising rates (see: Zee’s advantage). Zee has that advantage in Marathi. The Marathi TV advertising market is about 1,000 crore, with entertainment making up 65% of the total. Zee Marathi channel has a 45% share here but accounts for at least 70% of the revenue. With three Marathi channels in its bouquet (Zee Marathi, Zee Talkies and the recent Zee Yuva), the network has significant power in the market among advertisers. 

To that extent, ZEE is soundly placed in markets where it is the leader or even a No. 2. In Telugu, it is a four-cornered market, with all incumbents (Gemini, Star Maa, ETV Telugu and Zee Telugu) getting almost an equal share of viewership. In Tamil, Sun TV’s dominance continues unabated; the network accounts for half the market, leaving Star Vijay and Zee Tamil fighting for the second and third slots. “If Zee has a dominant presence in a few markets outside Hindi, it reduces the dependence on it. Therefore, even if Zee TV is at No 3 or 4, it is still protected,” says Goenka.

Preserving cash
If ZEE has upped its investment in regional channels, it’s also become frugal when it comes to spends on its flagship, Zee TV, especially compared to its competitors. From the time he took over, Goenka has seen rival networks investing serious money in creating big-ticket shows and acquiring rights to cricket and films. Viacom18, a joint venture between Viacom and the Network 18 Group, launched its GEC, Colors, around the time Goenka became ZEE’s boss. Over the next few years, celebrities such as Aamir Khan, Amitabh Bachchan and Salman Khan would play host to shows on Star, Sony and Colors, all ZEE’s rivals.

Mahesh Manjrekar, producer and directorBig money was being spent in the non-fiction genre with the intention of getting in viewership. ZEE also ventured into the non-fiction genre, but not with the deep pockets that characterised its rivals’ forays. Of the 400 hours of new programming that the Zee network airs every week, around 370 hours are devoted to fiction (including soaps and movies) with the rest being non-fiction. Though non-fiction accounts for just 30 hours or a little over 10% of programming time, it eats away at least 30% of programming costs. 

There is almost nothing to differentiate one channel from another when it comes to soaps, but non-fiction is a different story. Colors spends as much as 4-5 crore per episode of Bigg Boss, hosted by Salman Khan; Star Plus’ dance reality show Nach Baliye costs the network upwards of 3 crore an episode. In contrast, Zee’s non-fiction shows such as Sa Re Ga Ma Pa and India’s Best Dramebaaz are devoid of high-cost celebrities, and hence cost just 30 lakh to 50 lakh per episode.

Not surprisingly, there’s an impact on ratings: according to BARC ratings for the week ended June 23, Star Plus is on top of the charts, while Zee TV is at sixth place, behind Sony Pal, Rishtey and Colors. (Free-to-air Zee Anmol is at No.2, but even with the viewership numbers, it cannot charge high advertising rates since none of the big-ticket shows are shown on the channel.) Goenka is unfazed by his competitors’ big-ticket shows. “Our strategy is not to buy market share. Our focus in on the format and big names really do not matter. Sa Re Ga Ma Pa is a great example and our belief is that ratings will come if the format is good,” he insists.

ZEE’s frugality may be taking a toll on it ratings, but it’s also helping boost margins. The tight-cost model has ensured that the company enjoys margins upwards of 25% at the operating level (it was 31% in FY17 after selling the Ten Sports business), compared with an estimated 20-21% for both Star and Sony, and around 12-13% for Colors. Between FY13 and FY17, Zee’s income has risen from 3,700 crore to 6,434 crore, a rise of 71%, while operating profit has more than doubled from 950 crore to 1,927 crore; at the net profit level, the increase has been 3x (see: Tell-tale tally of the telly business).

Abneesh Roy, senior vice president, Edelweiss SecuritiesGoenka believes cost control is in the organisation’s DNA, stopping momentarily when he realises he has inadvertently referred to his newspaper business. “No pun intended,” he smiles, before stating that the broadcasting business is quite simple. “If I put in 100 as programming costs, I will need to spend another 100 on marketing, promotion and distribution. On that, I have to make 3x to justify being in the business,” he explains.

And businesses that don’t meet that benchmark are shown the door. Abneesh Roy, senior vice president at Edelweiss Securities says Zee displays ruthlessness when it comes to shutting down unprofitable ventures, which is quite uncommon in the media business. “Zee Q was a late entrant in the kids’ channel business and had differentiated Indian content. But it was quick to shut it down when it realised it was not working,” he points out. Other examples are those of Zee Next, a GEC launched in 2007 and shut down the next year, and Zindagi, a channel for the upmarket audience, which was moved on July 1 to Zee’s video-on-demand platform, Ozee. 

Perhaps the most stand-out divestment was that of the sports business. Zee had earlier shown great interest in the business, acquiring Ten Sports in 2006 and launching the Indian Cricket League the following year. Last September, it sold Ten Sports to Sony for $385 million; that money was used to fund the buyout of Anil Ambani’s television and radio businesses. Industry watchers were taken by surprise: after all, Star, Zee’s biggest rival, had bet big on sports, especially cricket (it owns the rights to all matches played in India apart from those that India plays in Australia and England, as well as rights to marquee tournaments such as the World Cup and the Champions Trophy), while Sony, too, was looking to expand after its IPL experience. But Goenka’s reasoning was clear. Even the most well-run sports broadcasters globally, he points out, do not make a margin of more than 12-15%. “We ran the sports business for 10 years, with peak losses hitting 250 crore. We finally managed to break-even, but it was really a case of too much effort yielding very little,” he says firmly. Goenka’s rule of thumb: a return of at least 25% is mandatory. And this is why he’s now re-entered the films business.

De-risking deux
The movie business now appears attractive to ZEE for two reasons: the projected returns from the business, and the helping nudge to ZEE’s de-risking strategy. “We will de-risk the broadcasting business by getting a foothold in other parts of entertainment,” Goenka explains. ZEE changed its strategy last year by producing nine films, including the Akshay Kumar starrer, Rustom, which grossed over 200 crore at the box office on an 80-crore budget. Rustom was the only release in Hindi, the rest were in Marathi. ZEE tasted success here as well, with Sairat and Natsamrat going on to become big hits. The former, produced by Zee for 4 crore, grossed over 100 crore at the box-office, while Natsamrat, which the company only distributed (and acquired satellite rights), made 40 crore on a 4 crore budget. The films business, Essel Vision Productions, clocked revenues of 285 crore in FY17, up from 193 crore in FY16.

zee profitability growthAccording to Goenka, Zee plans to release 14-15 films this year, including four Hindi and six Marathi releases. Well-known filmmaker Mahesh Manjrekar, who directed Natsamrat, says a key reason for Zee’s success with Marathi films is its putting in place a dedicated team for the language. “Unlike other broadcasters, ZEE has a separate division for Marathi films run by the local people, who speak the language and understand what films will work. Others will have a division run by people with an English-speaking background and it becomes difficult to deal with them,” he points out. That’s what happened with Natsamrat: Manjrekar says the Zee team watched the film late one evening and called in the morning itself to say the company would acquire the satellite and distribution rights.

The film strategy, to Goenka’s mind, will be no different from what Zee has always done. “We will take small steps and do things slowly,” he says. Zee has been in film production for a long time with films such as Gadar in 2001, but it was never considered a long-term business. In 2008, the company decided to try something new: Zee picked up films at the pre-release stage; its buys included Hindi films such as Kambakkht Ishq, Love Aaj Kal, Joker, Agent Vinod and Desi Boyz. “We tried the studio approach and lost around 80 crore. The lesson was that we needed to be a producer and not a studio,” says Goenka. This foray is more measured and is based on the “integrated model” where Zee is involved from the production level, and where the strength in broadcasting would be used to build on creating a successful films business. A good example is the Marathi film Sairat. The film was produced by Zee and the company was involved right from the script-development stage. Zee held on to the distribution and music and released the film at theatres, while the satellite rights were with Zee Marathi. The company also produced the film in Kannada. “Having a presence in regional broadcasting means we can enter the film industry in different states,” says Goenka. “In larger markets, the plan is to first co-produce and then produce. There is no question of getting back to buying out projects outright, as we have done in the past.”

Films are a risky business but Edelweiss’ Roy believes Zee may be able to mitigate it. “They have a bouquet of television channels that can air the films, apart from owning the music and distribution rights. This is a huge plus in their favour,” he says. Goenka himself maintains that by holding the rights, he can decide the costing at each level, leading to savings of upto 50%. 

Baby steps
Most parts of the regional businesses made their initial moves a decade ago before getting to a point of consequence. Now, ZEE is looking at more such opportunities for the future. Within broadcasting, the company is looking at international operations to be one such growth driver. In FY17, this division had revenue of 730 crore, up from 695 crore the previous year. Goenka’s younger brother, Amit, is CEO of ZEE’s international broadcast business and runs this operation out of the company’s Dubai office.

Although ZEE has a presence in over 170 countries just by beaming its bouquet, the overseas foray has really gained some momentum only over the past five or six years, with the launch of country-specific channels. Among these are Zee Aflam and Zee Alwan for the Arabic market, launched in 2009 and 2012 respectively, and two channels, Zee Bollymovies and Zee Bollynova, which went on air early this year in Africa.

According to Amit, the US brought in half of ZEE’s international revenue five years ago. “By launching our own channels, the Middle East gives us 35%, with an equal proportion coming from the US. Africa, too, is a growing market and gives us 10-12%,” he says. Edelweiss’ Roy, while pointing out that ZEE has a first-mover advantage in the international markets, explains that the Indian diaspora is still a limited market. “A healthy mix of more local channels may be required, though the overall business will grow slowly. However, Zee makes more subscription revenue outside India than Star and Sony and can easily build on this. It will take time but it is a long-term story.”

Like the Indian operations, Amit, too, has a foot in film production demonstrating the cost structure that is today easily associated with Zee. This is the first time ZEE has done film production in the international markets, with the average budget in the $2-6 million range, depending on whether it is a production or co-production. “A large theatrical release may not be done all the time. The strategy will be to sell theatrical rights, with the primary audience being digital or television,” points out Amit. The first film, Romans, is a co-production starring Orlando Bloom and is expected to be released shortly. “The plan is to make six or seven films each year. If we produce it on our own it will have a $2 million budget, while a co-production will mean a budget of $6 million,” he adds.

Meanwhile, Amit’s other responsibility, ZEE’s digital business, is struggling. A newly created entity called Z5X houses all ZEE’s digital properties — dittoTV, the over-the-top service launched in 2012 and Ozee, a video-on-demand platform that went live last February. But where Star’s Hotstar clocks revenue of over 200 crore each year, ZEE makes barely 40 crore. The lack of sports broadcast is felt keenly: sports contribute 70% of Hotstar’s revenue. Roy defends ZEE, saying that Star always adopts a high-cost strategy and Hotstar is in line with that. “The truth is that digital has not really taken off for anyone and there is no meaningful revenue to speak of. Unlike other mediums, measurability here is a question mark.”

The plan is to invest 250 crore this fiscal in digital initiatives, says Amit. “There are 6 million new internet users every month in India who are up for grabs. We see tremendous growth in video,” he adds. 

Even if ZEE’s digital business will take some time to get off the ground, Goenka has no doubts about the potential of the live entertainment business. This is an industry that is unorganised and is ripe for the entry of a large player, he believes, adding, “I am an entertainment company and my job is to increase the consumer’s share of entertainment time.” The plan has been in operation for over two years now and Sunil Buch, CEO (Zee Live), points to opportunities in three key segments: theatre, live entertainment and talent management. “They are all at an early stage of evolution and with our channel network, there are several ways to monetise it,” he adds. Zee Live’s division Zee Theatre has staged 13 plays across nine Indian cities in its debut this year; there are plans to go overseas later in 2017. The next focus area is live events, which is a 7,000-crore unorganised industry. 

Goenka estimates that the advertising opportunity in live entertainment could be half the 50,000-crore national advertising pie. “By 2020, the plan is to do one spectacular show on Broadway,” he says in all seriousness. It’s too early to judge how this foray will play out but there is little doubt that ZEE will have to do a lot of the old ideas differently and simultaneously keep coming up with new ideas in a very dynamic market to continue clocking steady growth.

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