Lead Story

The Rise of The OTTs

The video streaming market is likely to explode to $5 billion by 2023. Sit up and watch

Alfonso Cuarón’s masterpiece Roma won three awards at the 2019 Oscars but it ended up dividing Hollywood after noted filmmaker Steven Spielberg’s outburst that Netflix movies should only compete with TV releases at the Emmys and not with movies at the Oscars. But then the video-streaming service has always pushed the envelope — be it in the way it uses technology or creates cutting-edge content that’s close to a cinematic experience. Spielberg’s rant is proof of Netflix’s growing clout in the entertainment business. Despite establishing supremacy in video streaming, Reed Hastings, the 58-year-old founder of Netflix is going all out to create original blockbuster content. It has a target to meet — of bagging more than 500 million subscribers across the world to keep up with investor expectations that has driven the Netflix stock to trade at higher multiples of 130x. It is one of the favoured tech stocks alongside Facebook, Amazon, and Google.

Clocking over $16 billion revenue globally, Hastings is banking on emerging markets such as India to fuel Netflix’ growth outside of developed countries. The video-streaming major is looking to garner 100 million subscribers in a country that it streamed into in 2016. “The next 100 million is from India,” he had said at an event early last year. To understand why Hastings is bullish on India, one needs to get the context — of 139 million subscribers globally, Netflix has about 59 million subscribers in the US vis-a-vis 170 million pay-TV homes (100 million cable TV and 70 million DTH) in India.

Though the most expensive service at Rs.500-800 a month in India, the ad-free video streamer has already turned profitable in the first year of operation, eking out a net profit of Rs.2 million for FY18 on revenue of Rs.580 million. The numbers are just for seven months starting September 2017, post the transfer of business from Singapore to the Indian entity. Hence, on an annualised basis, Netflix would have easily clocked Rs.1 billion for the fiscal.

Not surprising, Hastings is putting his money where his mouth is. Netflix has announced India-centric 12 original web series and 13 original films. After starting out with the launch of a not-so-appreciated Brahman Naman, an Indian sex comedy, the streamer tasted success with Sacred Games and Lust Stories. Thus far, four original series (Sacred Games, Ghoul, Little Things and Selection Day) and five original movies (Love Per Square Foot, Lust Stories, Brij Mohan Amar Rahe, Rajma Chawal and Soni) have already been aired. Netflix’s chief content officer Ted Sarandos had said at the Jio MAMI 20th Mumbai Film Festival that Sacred Games — which won acclaim across the world after its screening over Netflix’s international streaming service — proved that local storytelling has a universal appeal. “The more localised the content, the more powerful it is,” he had said. Netflix, globally, spent $12 billion on creating fresh content in 2018, though it is not known how much of the $15 billion content budget earmarked for 2019 would find its way to India.

Globally, Netflix spends about 70-75% of its revenue on content and has, thus far, spent more than Rs.6 billion in India since its foray. Jaykumar Doshi, analyst, Kotak Institutional Equities, mentions in a report that assuming programming cost of Rs.17.5 million/hour, Netflix can potentially produce about 20 shows (of 10 hours each) annually from India.

As expected, the big budget of video streaming majors has proved to be a huge bonanza for production houses and directors who have thrived so far on stereotypical soap operas that focus more on per episode economics rather than quality. In fact, Sarandos had termed Sacred Games, which is due for a second season, “a long movie in parts,” thus blurring the lines between TV and movie production.

The arrival of video streamers with a refreshing content library is also getting users excited — including movie exhibitors. Ajay Bijli, chairman and managing director, PVR, the country’s biggest multiplex chain, is one such impressed customer. “I find both Netflix and Amazon Prime to be an enjoyable experience, especially when I am travelling. I like a wide variety of content on both platforms, especially the documentaries.”

While Netflix is leading from the front, it’s not alone. A host of players right from Amazon to home-grown Zee5 have upped the ante in the streaming war that has intensified in recent years, thanks to the arrival of Jio, the biggest telecom disruptor.

The show is on

That Jio has proved to be the biggest catalyst in the streaming business is evident from the fact that prior to its arrival, there were nine video streaming players in the over the top (OTT) space in 2012 and that has gone up to 34, currently. The big trigger has been the 98% fall in data costs to Rs.3.5/GB, while cable broadband costs have fallen 80-85% to Rs.5-7/GB (see: The hockey stick effect).

In fact, over 55% of India’s overall OTT traffic and over 65% of OTT consumption on mobile is supported by Jio’s telecom network. The numbers will increase further following the launch of Jio’s fixed-line broadband offering, which is undergoing free trials in some cities though a full-fledged launch is still sometime away.

Stats show that India has about 250 million digital video monthly active users (MAUs) and about 180-200 million digital video daily average users (DAUs). “These numbers have increased 100% and 200%, respectively, over the past two years. We expect digital video users to more than double in five years,” says Doshi of Kotak. EY estimates the number to touch 500 million by 2020, making India the world’s second largest online video market after the US. At present, 77% Indians with an internet connection consume entertainment on their smartphones. Nokia’s annual Mobile Broadband India Traffic Index study of mobile broadband performance in India showed that the average data usage grew 69% in 2018 to touch 10 GB per user per month. Not surprising, video streaming is seeing the highest growth in consumption among smartphone users in the country. Aman Kumar, co-founder and chief business officer, KalaGato, a data analytics firm, says, “The appetite for digital content consumption is much higher than television given that viewers can personalise their consumption, both by time and preference.”

Interestingly, despite its nascency, the video streaming ecosystem, besides the likes of Netflix and Amazon Prime Video, has also seen the entry of broadcaster-backed players such as Hotstar (Disney-owned Star); Zee5 (Zee); SonyLIV (Sony India) and Voot (Viacom18). The sudden rush for streaming play is not without reason. A report by Statista indicates that over 70% Indians with smartphones subscribe to one or more streaming apps, while the average amount spent in a month for paid content is Rs.255, as per a Kantar IMRB Media report. 

In terms of national market share of users, Hotstar leads the pack, followed by Jio, Amazon, SonyLIV, and Netflix (See: Full stream ahead). “Platforms such as JioTV and JioCinema, Voot and SonyLIV, which have a larger library of India-centric content have better penetration and market share in non-metros than metros,” reveals Kumar of KalaGato. Netflix has also seen its reach in Tier-3 markets shoot up over the past one-year — from 0.40% in January 2018 to 6.88% by December-end. “Netflix’s growth in one year is the best among its peers — twice their growth in metros,” explains Kumar. The action in the streaming space is heating up with players such as the Balaji Telefilms-owned ALTBalaji, Times Interactive-owned MX Player and video library major Shemaroo, joining the fray.

The optimism around the OTT space is evident from Times Interactive’s second attempt, after its first OTT venture, BoxTV, shut down in 2016 after a four-year push. The media giant has bet big by buying the Korean video playback app, MX Player, for Rs.10 billion. Given that the app already is quite popular in India, with 175 million monthly users, Times has overlaid a streaming content service over the player. Karan Bedi, CEO, MX Player, says, “The idea behind buying MX was that people were spending so much time consuming video that we could offer them content that they can stream instead of downloading.”

The latest to join the bandwagon is Shemaroo Entertainment with ShemarooME, which will have seven distinct categories — Bollywood Classic, Bollywood Plus, Gujarati, Kids, Bhakti, Ibaadat and Punjabi. “We will be immediately putting out 1,000 movies across all categories and, over that, there will be non-film content as well,” says Hiren Gada, CEO, Shemaroo Entertainment.

Even as pure-play OTT players are making their presence felt, telecom players, especially Jio, are proving to be the 800-pound gorilla. It began with Reliance Industries (RIL) picking up 25% stake in Balaji Telefilms in 2017, leading to a content-sharing deal between Jio and ALTBalaji in 2018, wherein ALTBalaji’s original shows will be free for Jio’s subscriber base of 280 million. In doing so, Jio has emerged as an OTT aggregator with the biggest reach. Similarly, RIL bought a 5% stake in Eros International, following which Eros Now’s entire multilingual library is available on JioTV and JioCinema. Meanwhile, even as the video on demand (VOD) ecosystem is taking shape, players are competing to stay on top in the content game.

Looking for blockbusters

All VOD players backed by broadcasters have put their vast TV content online, besides creating fresh content through licensing and originals. In the rush for eyeballs, the focus on originals has been the biggest among the leading players, with close to 100 originals being released in 2018. The basket for originals is only going to get bigger in the coming days. “Similar to the 24-hour news channel, OTT platforms have to build a library to attract and retain the subscriber, that perhaps explains the rush for originals,” mentions Bijli.

Zee, one of the leading Hindi general entertainment channels in the country, on the occasion of Zee5’s first anniversary in February, announced that an extensive line-up of 72 new original shows will be rolled out by March 2020. “We are the only ones to produce original content in Tamil, Telugu, Marathi, Punjabi, Malayalam, besides Hindi on an ongoing basis,” says Tarun Katial, CEO, Zee5, which currently has 56 million monthly active users. While the VOD player will screen a couple of originals in Hindi every month, there will be about three to four originals each in every language in a quarter. 

Hotstar, which claims to have 150 million monthly active users, derives 80% of its viewership from drama and movies, while sports, that includes all cricket (IPL and BCCI matches), Pro Kabbadi and Indian Super League, make up for the balance. The OTT recently secured Rs.5.16 billion in funding from its parent and has earmarked Rs.1.2 billion for creating original content. In the past, it had streamed Sarabhai Vs Sarabhai Take 2, On Air With AIB, and Tanhaiyan.

Similarly, SonyLIV has more than 80 originals, of which most are drama and youth-centric stories, in five languages, including The Big Bong Connection, Married Woman Diaries, Kacho Papad Pako Papad and Rs. LoveBytes. Currently, SonyLIV, which has 40-50 million monthly active users, offers about 30,000 hours of content, with an average time spent per user on the platform ranging between 40 and 45 minutes a day. Uday Sodhi, head-digital business, Sony Pictures Network India, points out: “Content on SonyLIV is more urban- and male-centric, targeted at 18 to 34 age group. The kind of stories we end up telling is more flexible since we are not targeting a large homogenous group like a family. Unlike in TV, digital is usually watched individually.”

Given that the customer base and viewing time on streaming platforms are different from that on TV, players such as Eros Now, which has been in operations since 2012, are experimenting by creating short-duration originals. While it already owns a library of 11,000 movies, Eros Now is now offering short-form series, titled Eros Now Quickie. These eight to 10-minute narratives will play out under less than 10 episodes with multiple seasons. By the end of 2019, it will release 50 short series across genres ranging from comedy, horror, romance, drama and crime, both fiction and non-fiction and across languages such as Hindi, Tamil, Telugu and Marathi.

“Short-format content is part of the broader strategy to dominate the original content space — catering to those who want to watch 40-minute content to those looking for snacky, 10-minute videos,” says Ridhima Lulla, chief content officer, Eros Group. The company will pump in $50-70 million annually to create original content, including the mini-series which will also be made in Tamil, Telugu and Punjabi. As of Q3 FY19, Eros Now reported 128 million registered users, of which 13 million are paid subscribers.

Since its launch in 2016, Netflix has also grown its regional language content across several languages, including Hindi, Tamil, Gujarati, Marathi, and Punjabi. “We’ve found that people love a great story no matter where they’re from. We will continue to add support for more languages over time,” says a Netflix India spokesperson. For example, Ghoul was dubbed in Tamil and Telugu, and Netflix’s original film Mowgli: Legend of the Jungle was dubbed in Hindi, Tamil and Telugu. But now Netflix has ventured into regional originals and will be releasing two Marathi movies, 15th August, produced by Madhuri Dixit, and Firebrand, produced by Priyanka Chopra Jonas.

In fact, the growing demand for content from VOD players has also created new opportunities. Take the case of Saregama, which used to produce Tamil content for Sun TV and has the world’s largest collection of Indian music. In 2017, it ventured into film production under the banner of Yoodlee Films, and has already hit paydirt. Vikram Mehra, managing director, Saregama India, explains: “Yoodlee is a writers’ studio where the script is given importance and not actors or directors.” The company has put in place a standard operating procedure with a detailed outline of the entire film-making process. “From the approval stage of script and the final go-ahead to ‘complete and ready for release’, details are provided along with breakdown of payouts offered at each stage to the writer and director,” mentions Mehra.

A big feather in the cap for Yoodlee is the fact that of its 13 titles produced since launch, five have already been acquired by Netflix. “We’re thrilled to work with some of the finest creators and talent across the world, including India, since they tell new and unique stories, stories that dazzle with their diverse, inventive scripts. It has never been a better time to be a creator or consumer of television,” says the Netflix spokesperson. In fact, Yoodlee’s Ajji has been critically acclaimed at 25 film festivals, including Rotterdam, MAMI, Göteborg, and Tallinn Black Nights. All its originals are completed in the Rs.40-50 million budget and 30% of the movie proceeds are shared between the writer and director, to ensure their skin in the game. “What we love about Netflix is their ability to take diverse content and give space to independent cinema,” says Mehra. The content creator is now close to signing a 12-movie deal with an OTT aggregator in the coming days, though Mehra refuses to divulge details. 

However, striking a note of caution, Bijli, whose foray into movie-making proved to be a damp squib, says, “There is no short cut or any set formulae for making a good script. In the past, studios and producers have struggled to sustain quality and consistency, especially when they attempted to scale up rapidly.”

But for now, that’s not a concern as newer and newer players are entering the streaming game. MX Player, besides streaming over 100,000 hours of licensed content from leading content creators and partner platforms such as ALTBalaji, TVF, Arré and SonyLIV, has launched five original series. Without revealing the quantum of investment but referring to Hotstar’s reported Rs.1.2 billion investment, MX Player’s Bedi says, “We will be investing easily double that number.”

The other player which has been ramping up its platform is Amazon Prime Video, which will be releasing six new originals in India soon. The announcement comes in the wake of the success of its latest crime drama, Mirzapur. The new line-up includes Made in Heaven, an Indian wedding drama; Bandish Bandits, a romantic musical series; The Last Hour, a crime thriller; Comicstaan, featuring upcoming stand-up comedians. But what’s pertinent to note is that Amazon Video, which entered the country a year after Netflix, is aggressively buying exclusive digital rights of Bollywood movies. According to Kotak Institutional Equities research, of the top 25 box office grossers released between June 2017 and 2018, Amazon bought 13 rights, including the Salman Khan-starrers Tubelight (net box office collection or NBOC: Rs.1.2 billion) and Tiger Zinda Hai (NBOC: Rs.3.3 billion), as well as Golmaal Again (NBOC: Rs.2.5 billion) and Padmaavat (NBOC: Rs.2.8 billion). Doshi of Kotak points out, “It (Amazon) has 54% share (value terms) in the top 25 Hindi movies released in the past 12 months.” (see: Full house) 

Zee5, too, has bought digital rights of six films. However, except for one movie, the broadcaster-owned OTT has only gone in for non-exclusive rights. On the fear that competition will distort the economics of buying movie rights, Katial sounds sanguine. “One, Bollywood makes enough movies and, two, while there are many OTTs, beyond the top five no one is buying movies. Also, hasn’t competition existed even when movie rights were being bought for satellite?” explains Katial.

However, the digital buying spree of OTTs might end up posing a challenge to multiplex players. Currently, multiplexes are protected by a time frame of eight weeks or sixty days, before a movie’s digital release. However, some Bollywood titles such as Hindi Medium were digitally available in just over a month, while K.G.F. Chapter 1 and Tumbbad were available within six weeks. Abneesh Roy, analyst, Edelweiss Financial Services, mentions in a report that the time frame for digital release is typically negotiated among producers, distributors and exhibitors. “Producers acknowledge the increased product life and monetary benefits of releasing movies on digital platforms given the rising number of subscribers and mitigation of piracy risk,” states Roy. 

In terms of footfalls too, video streamers seem to be catching up with multiplexes. Roy mentions that in the nine months of FY19, PVR and Inox cumulatively generated footfalls of around 110 million. “This is not materially different from the cumulative MAU count reported by leading OTTs — Hotstar: 70-150 million, Zee5: 40 million, Voot: 40 million, Amazon Prime Video: 20 million, Netflix: 5 million — wherein multiple people can watch on the same screen,” writes Roy. 

However, Bijli is not reading too much into the analogy. “The dynamics of content and audiences vary with each platform and in the foreseeable future, OTT will remain an ancillary to the theatrical business of a film. Having said that, reasonable and responsible windowing between theatrical release date and debut on OTT is the way forward,” he says. 

While OTT players are going about ensuring that content remains the king, they are still figuring out how to play the pricing game.

Still ad-driven

At present, India has daily active digital video viewers of around 180-200 million, but the universe is significantly behind those of TV channels. Doshi of Kotak mentions, “The general belief among media planners and advertisers is that an advertisement aired on TV is far more impactful than one aired on mobile screens.” The big reason: India’s TV universe includes 836 million individuals, of which 614 million tune-in daily, with Hindi GECs reaching 315 million individuals (see: Prime time). While smartphone users are installing streaming apps in their phones, TV viewers are not going to cut the cord anytime soon, thus ensuring that TV remains the most lucrative medium for advertisers.

However, the Broadcast Audience Research Council (BARC) is building a digital viewership measurement system to compare metrics across digital and TV platform. Industry observers expect the system to be rolled out in the current year or in the next. Only then can one predict the possibility of ad spends moving away from TV to OTTs.

Sodhi of Sony, though, points out that the shift has begun. “Advertisers are considering OTT in their media spend and that’s a huge change in recent years.” For example, during the FIFA World Cup, the OTT player saw 36 sponsors, a record for a digital property. “OTT is becoming mainstream for an advertiser,” mentions Sodhi, adding that the platform sees 150-200 advertisers every quarter without disclosing the revenue numbers. Katial of Zee5 adds, “We are also working with top media agencies and brands whether it be in terms of targeting audience in metros or Tier-1 and Tier-2 cities.”

Players such as Hotstar, which has brought marquee cricketing properties, is already calling the shots in digital. According to reports, the Indian Premier League 2019 inventory on Hotstar will cost up to 70% higher than the previous edition. The OTT player is selling the IPL 2019 co-presenting sponsorship rights at Rs.500 million against the previous year’s Rs.300 million price tag. Sodhi, too, adds that SonyLIV is strong in sports. “We have probably one of the largest catalogue of football, cricket, wrestling, NBA, and volleyball. We aired the Olympics, live streaming of FIFA World Cup…we are one of the best in sports streaming in this part of the world.”

However, the OTT players are not unduly worried about whether they are making money at the end of it all. For now, they are following two mainstream subscriptions models, one that entails direct customers (B2C) and, second, through B2B2C tie-ups with telecom companies and consumer durable OEMs such as mobile and TV manufacturers. Going ahead, analysts believe that B2B2C subscription opportunity may not scale up beyond a certain limit. Doshi of Kotak believes that Jio, in particular, will not continue to bear content cost for long without seeking a share in ad revenue.

In such a scenario pricing content will become a huge challenge for OTT players. However, given that Netflix, despite its steep pricing, is gaining ground in Tier-3 cities is a validation that there is a market for superior content offering. For now, Zee5 is offering packages as low as Rs.99 per month or Rs.499 a year. Amazon Prime Video’s Rs.999 per year is bundled with other offerings such as Prime delivery service and Prime Music. Lulla of Eros Now points out that the company has taken an approach where at Rs.49 a month, it is giving access to its entire library of 11,000 movies. Shemaroo, however, is not going the whole hog. It is only offering partial access to its library of movies. “We will do a weekly refresh in each category, depending on the feedback that we get from viewer response and analytics,” points out Gada, adding that its entire library will come at a monthly price of Rs.129 and an annual package of Rs.999 a year. Shemaroo is, however, not putting money in originals for now. “Everyone seems to be doing originals and the differentiation is very difficult. We have a very distinct offering of movies. Besides, we are also offering non-film content around interviews of film stars, travelogues to spiritual destinations and live darshan of popular shrines,” adds Gada.

Interestingly, Times Interactive has taken a completely different approach. It is offering its entire content library for free to subscribers. MX Player, which claims over 100,000 hours of licensed content, is offering free viewership since its programming is ad-based. “We are offering the entire content, including originals, for free and not behind a paywall as we can offer advertisers the reach and scale that no other OTT can. If you have scale, you can make money through advertising,” points out Bedi.

The script ahead

Just like every other industry forecast, the future for the Indian video OTT space appears like a blockbuster in the making. The domestic video-streaming market is expected to hit $5 billion by 2023 from $500 million in 2018. According to a Boston Consulting Group (BCG) report, factors that will drive the development include the rising affluence and penetration of data in rural area, since 48% of India’s internet users (about 650 million by 2023) could well end up being from the hinterlands.

Not surprising that the report highlights the significant investment being made in content. As of 2017, according to BCG, Hotstar had invested Rs.40 billion, Netflix around Rs.6 billion, Amazon Prime Video Rs.5 billion, SonyLIV and Eros Now Rs.4 billion each and ALTBalaji Rs.1.2 billion.

In terms of market domination, after Hindi, video content is most consumed in Tamil, Telugu, Kannada and Gujarati followed by Bangla. For Zee, going regional is natural. Katial says, “The regional market is where the future of entertainment lies — our next viewers will come from there.” Similar is the case for most other players.

However, content production cost for OTT platforms is 30-50% higher than TV, since fixed cost is distributed over shorter eight to 10-episode series in OTT as against 300-plus episodes in case of TV. Is that a spoiler? “Monetisation will not be on a per view basis but over the lifetime (till such time it is aired) of the content,” points out Katial.

Though Zee has not yet started reporting independent figures for Zee5, rival Sony Pictures’ earnings from digital and licensing income (includes SonyLIV revenue) has grown 37% to Rs.3.02 billion in FY18. Balaji Telefilms in Q3 FY19 clocked losses in ALTBalaji, but showed promising subscriber additions. At Rs.360 million, losses more than doubled from the year-ago quarter but revenue grew 8x to Rs.80 million and paying subscribers surged from 0.52 million to 10.5 million at the unit. At Rs.25 per month or Rs.300 for a year, ALTBalaji is the cheapest of all OTT services. Making money on a standalone basis is certainly some time away.

Yet, competition is showing no signs of receding. YouTube, the biggest streaming player, has made its intention public about hopping on to the originals bandwagon. Facebook, which had unsuccessfully bid for the IPL rights, has roped in Ajit Mohan, who was heading Hotstar operations in India. Clearly, the social media major has big plans for video streaming. 

Even as the future for video OTT players looks bright, customer retention will be a big challenge as 81% mobile consumers have up to three video apps on their smartphone. Beyond the top three video apps, while users try out more options, on an average, 50% OTT apps are uninstalled in the first seven days of installation (see: Viewer’s discretion).

But Sodhi believes that as long as the telecom industry keeps adding 10-12 million to its 4G users every month, the overall digital video users base will move from 300 million to 600 million in three years. “In a market that is doubling, there is enough room for many more players to come and create their niches,” believes Sodhi.