Barely a week after the Ambani brothers officially announced the division of their business empire in June 2005, younger brother Anil acquired a majority stake in Mumbai-based film processing and exhibition company Adlabs. The ₹360-crore deal — a pittance by Reliance Group standards — got Ambani junior a 51% holding in the company, marking the entry of the newly demerged Reliance into the entertainment business. The Adlabs investment was made by Reliance Capital, a company that Anil now owned and one that would spearhead the group’s foray into a business that — for some years — had caught his fancy.
The line of thinking was pretty simple: following the fallout with his brother, Anil had received businesses such as financial services, power and telecommunications as his share of the vast Reliance kingdom. At the time of the Adlabs deal, broadband and telecom were fledgling fields and the triple play opportunity that this field offered — voice, video and data — was too big for Ambani to miss. With the company’s foray into entertainment, a Reliance mobile customer could chat, download a movie clip and watch it on a relatively cheap handset. Adlabs, then a ₹100-crore company with a net profit of ₹22 crore, already had a significant presence in film processing, production and multiplexes. The deal and the ensuing synergy it guaranteed was a no-brainer.
Reliance owns various entertainment businesses, but most aren't profitable
Though the group built on the Adlabs purchase by setting up other businesses in the entertainment space, most of them are now struggling financially. The group’s core businesses — telecommunications and power — are reeling under debt and pressure on profitability. In the process, the entertainment businesses have been either substantially downsized or, in some cases, sold or shut down. Starting with Adlabs in 2005, the group struck deals in businesses as diverse as film production, distribution, television broadcasting, music, mobile gaming, home video, DTH, FM radio and post production.
Of these, its social media platform BigAdda and a TV channel joint venture with CBS were shut down, the Reliance Home Video network, the company’s film production and distribution units and video-on-demand service BigFlix were scaled down, multiplex chain Big Cinemas and Reliance’s music business were sold, Reliance ND Studios never took off and only gaming, radio and DTH have seen significant action. In terms of FY14 revenue, Reliance MediaWorks does ₹1,013 crore, Reliance Broadcast Network ₹249 crore, Reliance Big TV ₹373 crore and Prime Focus ₹835 crore.
The company’s decision to exit the multiplex business by selling out to a much smaller player in December last year was preceded by the shutting down of three television channels after the failed joint venture with American broadcast network CBS. Its music business, too, has been pruned, while the film production business is substantially smaller than it used to be, with the focus having moved towards distribution.
If the buzz in the trade is anything to go by, the DTH business is already on the block after a proposed merger with a rival failed. The stars, evidently, have just not aligned for Anil Ambani in the entertainment business despite a head start. While the Reliance Anil Dhirubhai Ambani Group (ADAG) did not respond to a detailed questionnaire from Outlook Business for this story, we try and figure out the reason behind this comprehensive financial failure.
Big bang theory
The investment Ambani set aside for the group’s entertainment and media foray was nearly ₹5,000 crore and this was supposed to help set up diverse businesses that would not just be profitable but also draw synergies from each other. Basically, a film that the group produced would be monetised across platforms such as DTH, music, radio and online gaming. In many ways, this integrated model has worked well internationally since the studio is involved with a film from the time the script is conceived.
But the economics of the Indian film industry could not be more different. Even by conservative estimates, the acquisition cost for movies is at least 2-3 times that of production; the December 2014 release PK was made on a budget of ₹70 crore but was acquired by UTV Motion Pictures for nearly ₹150 crore, while Kites, with its ₹60-crore budget, was sold to Reliance for over ₹120 crore. According to a former Reliance official, studios struggle to get by because nearly 65-70% of the profits in Bollywood are retained by its top five actors. “This makes the model extremely skewed,” he says.
It is this high-risk, unpredictable-return model that has cost companies like Reliance dearly. Most of its projects — Karzzz, Love Story 2050 and Luck By Chance — were duds at the box office, ringing up losses to the tune of ₹90 crore. This does not include movies like the Hrithik Roshan-starrer Kites and Mani Ratnam’s Raavan, on which the company lost at least ₹70 crore after acquiring their worldwide marketing and distribution rights. Both these films — released within a month of each other in 2010 — resulted in Reliance having to renegotiate the satellite rights deals with Colors, a Viacom-owned TV channel that went on air in 2008; if the initial deal was for ₹45 crore, Colors managed to pare it down to ₹30 crore.
This is not surprising if you consider that none of the producers or co-producers retain the intellectual property (IP) rights for such films, let alone get to see the final edit. With Kites, Reliance was walking in blind and banking on Roshan’s star power to deliver. With the IP rights vested with Roshan’s producer father Rakesh, the company was depending only on ticketing revenue to break even. Sadly, Kites failed to soar and added to Reliance’s string of duds. “Today’s film business is all about too much money chasing very little profit, which is not sustainable. Most producers who are pumping in money are not familiar with the Indian terrain and will continue to lose money,” says Mukesh Bhatt, chairman, Vishesh Films.
Good money after bad
But it is not just films where Reliance’s decisions defy logic. The company’s flagging financials have been exacerbated by the fact that — barring radio — it has not made any investments of consequence in the media and entertainment world since 2010. The company’s net income has dropped from ₹284 crore in FY13 to ₹249 crore in FY14, while losses rose from ₹113 crore to ₹126 crore during the same period. The radio business, for the most recent fiscal, hit ₹193 crore in revenue.
Reliance’s exhibition business is also gasping for air, and not completely without reason. Here, the company failed to negotiate real estate prices and made big investments in properties at a time when the competition was spending a fraction of that. As a result, the payback for this sub-division took a serious beating and Reliance decided to exit the business by selling BIG Cinemas to south-based Carnival Films last December for ₹700 crore. The deal does not include the real estate owned by Reliance MediaWorks, the company that was earlier known as Adlabs and which controls the exhibition business.
At its peak, Big Cinemas operated 252 screens and was the third-largest player in the multiplex business, after PVR with 454 screens and Inox with 361 screens. Its properties included leased screens like Mumbai’s iconic Metro theatre, which the company is said to have spent ₹15 crore redoing. “The rational approach would have been to spend as little as possible on leased properties. But here, there was no limit on how much was being spent,” explains a former MediaWorks executive.
The mandate given to the top management, he says, was to get to 500 screens “at any cost and as soon as possible.” According to Aditya Shastri, head of films at Relativity-B4U and former MD of 20th Century Fox India, every business has its own timeline for growth and profitability, more so the cash-heavy ones like exhibition. “A lot of Big Cinemas’ assets were performing poorly or weren’t profitable. While the company had a large number of assets under control, they were all acquired at a high premium and that too in a cash-bleed business like exhibition. This strategy is almost always fatal,” he says.
In contrast, rivals such as PVR and Inox not just spent a lot less on property but also managed to ring in profits. In FY14, while PVR had revenues of ₹1,359 crore and a profit of ₹50 crore, MediaWorks’ net income for the same period was ₹1,013 crore, with losses of ₹891 crore. The company has been in the red since 2009, with a burgeoning debt of over ₹2,000 crore. According to the company’s annual report for FY14, its theatrical exhibition business, which largely is accounted for by Big Cinemas, had a net income of ₹725 crore and a loss of ₹280 crore for the 18-month period. While PVR and Inox grew by putting up new properties or acquiring others, Big chose to acquire older properties and spent time and money redoing them.
Even a new entrant like Mexican multiplex chain Cinépolis knew better than to sink money on old single-screen properties, acquiring Essel Group’s Fun Cinemas for ₹470 crore instead, adding its 83 screens to the 110 it already had. Javier Sotomayor, MD, Cinépolis India, says that in this business, focus on operations is critical. “Therefore, only those players for whom the core business is running multiplexes will survive in the long run. Others will either get acquired or merge themselves with a large player,” he says. This is why even biggies like PVR decided to focus solely on exhibition after a brief flirtation with film production.
Reliance’s geographical blindness has also cost it dear. The most important factor in the exhibition business is location and this is where Big got it wrong. Most of its screens were concentrated in north, west and south India, with a minimal presence in the film-crazy south. It doesn’t have a single screen in Bengaluru, a market where films in six languages do well — Malayalam, Tamil, Telugu, Kannada, English and Hindi. Big has no presence in Chennai either, which is too big a market to miss. In contrast, players like Inox and PVR have a good presence in the south. In the north, too, Big made the mistake of entering into agreements with mall owners in Ghaziabad and Noida. Most of these malls were facing each other and occupancy levels were consequently just around 35%. Combined with its over-spending, this region-blind expansion strategy took a toll on the company’s finances.
Nothing but static
This expensive strategy cost Reliance dear in its other media verticals as well. Take the case of radio, for instance. This industry is characterised by crippling regulations, such as no news allowed on air and prohibitively high upfront fees. Here, Reliance Broadcast Network (RBNL), the arm that was spearheading the company’s radio business, yet again decided to take the big bang approach by aiming for a presence in as many cities as possible. Of the ₹1,800 crore that is spent on radio advertising, nearly 65% comes from the northern and western regions of India. To carve its niche, Reliance decided to play large in the south and east.
Today, of its 45 stations, as many as nine are in the south and six in the east. In contrast, market leader Radio Mirchi, owned by Times Group, counts only two stations in the east among its 32 stations, with the rest being spread across north and west India. Vineet Singh Hukmani, MD and CEO, Radio One, a company that operates stations in seven cities, is blunt when he says radio is a city-by-city business and that is what makes it challenging. “It is very different from television broadcasting, where it is possible to reach out to a large audience in one shot. We need to make investments in each city and each of these need to be profitable to fund expansion plans,” he explains.
Given that radio is so heavily dependent on advertising, pricing is a delicate proposition. If that was not bad enough, the FM radio business employs a disproportionately large number of people for the kind of advertising money it brings in. “To generate the ₹380 crore of revenue that we did last year, we had to employ nearly 750 people,” adds Prashant Panday, CEO, Radio Mirchi; Reliance’s staff strength was 600 for ₹193 crore of turnover in FY14.
With the third round of spectrum auctions coming up soon, it is unclear how generous Reliance will be with its bids. Rivals insist that it will renew licenses for only 20 cities and put in bids for another seven or eight, indicating the group’s reluctance to invest significantly in the media and entertainment business of late. That said, the company will need to invest at least ₹700 crore — ₹450 crore for renewals and another ₹250 crore for new stations — during the third phase of auctions. How it funds this growth will be interesting to watch, given that Reliance Capital, the company funding radio thus far, has stated its intention to focus on its core financial service business and reduce its overall leverage.
Another business that ran into choppy waters was BigAdda, which, according to former executives, was launched to take on Facebook. As many as 600 people were hired for the business, which today is all but defunct and operates as an online shopping website. This is a destructive pattern of wastage that the company has repeated often and in different media — a five-film deal with Excel Entertainment for ₹250 crore, a studio project in Mumbai’s Film City Studios for an escalated price of ₹200 crore against the original ₹135 crore, a joint venture called Big ND Studio with production designer Nitin Desai that was called off after the group invested ₹150 crore, the launch of three TV channels in a JV with Los Angeles-based CBS Studios International that ended with all three being pulled off air. In the last case, lack of investment and disagreements over carriage fees paid to cable and satellite representatives are said to have killed the deal.
Reliance’s failed broadcast deals are symptomatic of the malaise that is afflicting its DTH business. The company’s foray into this business under the brand name Reliance Big TV has been none too impressive — last year, its losses were to the tune of ₹190 crore, up from ₹125 crore in 2013. Revenue has grown marginally from ₹354 crore in 2013 to ₹373 crore in 2014, with the company servicing around five million subscribers. Jawahar Goel, founder, Dish TV, says this is in line with the DTH business in general, which is a game of patience. He should know — his company, the largest player in India’s DTH business, has been around for more than a decade and only now boasts of over eight million subscribers. For FY14, Dish TV had revenues of ₹2,509 crore and a loss of ₹158 crore.
The first obvious sign of pressure at Reliance was in March 2013, when it was reported that the company was looking to merge its business with the Kalanithi Maran-owned Sun Direct. The deal was never finalised and it has now emerged that Reliance pumps in at least ₹20 crore each month into its loss-making DTH business. According to Goel, a third of a DTH operator’s revenue is accounted for by taxes, while an equal proportion is paid to content providers. “You are left with barely 30% and all your costs have to be accommodated within that. That makes DTH a very tricky business,” he exclaims. Much like Dish, competitors Tata Sky, Airtel Digital TV and Videocon d2h are also in the red. What route Reliance takes in the light of this reality remains to be seen.
In the light of multiple failures on the broadcast front, it seems unlikely that Ambani’s ambitious $325-million bet on Hollywood director Steven Spielberg’s DreamWorks Studios will pay off anytime soon. This deal was finalised in 2009 with the intention of making five to six films each year. The only productions to emerge from this stable so far have been films like Lincoln, War Horse and The Help. And that one big hit remains elusive, for now.
Ambani’s dream of creating an end-to-end approach, whereby his group “would create own content and own everything” has come under serious stress. His focus, by the looks of it, seems to be on getting the group’s telecom and power businesses back on track, which is a time-consuming task. Till this goal is achieved, the group’s entertainment and media businesses will likely need to fend for themselves in an extremely competitive environment. For now, between dreaming big and going home, the latter seems to be the option Reliance’s media experiments have chosen.