ZEE Re-enters Sports

Karan Taurani Aug 31, 2022

To explain briefly, Disney Star will license the TV broadcasting rights of the ICC Men’s and Under 19 global events for four years, to ZEE. Disney Star will continue to be the exclusive home for streaming of all ICC tournaments through its digital platform - Disney+ Hotstar. ICC has in principle approved this arrangement.

With this, ZEE will be the exclusive television rights holder of ICC men’s events, including the coveted ICC Men’s T20 World Cup (2024, 2026), ICC Men’s Champions Trophy (2025), and the ICC Men’s Cricket World Cup (2027) along with key ICC U-19 events.

What works in favour of ZEE?

- Sport is a genre that is least impacted in terms of the eyeball, as the consumer wants to watch it live, as compared to other genres which are more catch-up in nature

- ZEE’s entry into sports will be added advantage for ZEE/Sony as an entity, as Sony too has multiple properties in the sports genre. It will help go to market together, in case of the merger goes through

- Cable ARPU’s in India are much lower for TV (INR 300-350 for more than 700 channels), as compared to digital wherein the monthly ARPU’s could be as high as INR 800-1000 for key OTT platforms; this just indicates that TV is for the masses and is here to co-exist as a medium with digital

- ZEE has acquired marquee national cricket properties, which have a larger fan following base in India and globally; IPL as a tournament may get monotonous with a consistent increase in the number of matches, but international tournaments have their advantage. Most of these tournaments are preferred to be watched live on large TV screens than just on mobile

- ZEE gets some advantage on the distribution side too, as having a sport offering somewhat positively impacts bargaining power in the distribution

- It will also enable exposure or dealing with a larger set of advertisers (cricket as a segment is more male-centric and has a very different set of advertisers as compared to GEC); may lead to bundled deals in advertising and help cross-sell other content

What works against ZEE?

- Usually, it’s only one marquee cricket tournament that happens every year and the time frame of some of them is very limited (3 weeks sometimes), which limits monetisation opportunity as compared to IPL, which goes on for two months (may increase further going ahead with more matches)

- Key matches in the marquee tournaments account for almost 20-30% of the matches (play-offs and India matches), as other country (non-India) matches offer a low potential in terms of monetisation

- TV as a medium has the highest reach in terms of eyeballs; however, viewership for TV is expected to remain stable or decline marginally due to limited growth opportunities

- ZEE will have to 1) invest aggressively to build a new sports offering, spend on marketing and promotion of the same and 2) build a subs base in current market conditions for TV, wherein ARPU’s are regulated; sports is a scale business and a company owning all types of sports with a wide variety has an edge in general bargaining power with the ecosystem; Star had an unmatched advantage all over the years due to its strong positioning in the sports genre

- Our assessment indicates that ZEE has paid approx. INR 53 cr on per match basis for the marquee tournaments (Champions trophy, World Cup and World Cup T20); we believe the acquisition price is mere 7% lower than that paid for IPL (INR 57 cr per match for TV); the pricing per match are not comparable for World Cup as that has 50 overs (more inventory than a T20 match) (pricing (10 sec slot) for a 50 over match is generally much lower as compared to a T20 match). We believe this is a negative as World Cups have lower viewership share for most matches which are non-India, whereas IPL generally has a higher share of eyeballs; makes it tough to monetise content costs

Innovation in other genres could have been a better strategy

We believe a new content strategy was the need of the hour as the company was consistently losing viewership share across major genres (Hindi GEC and regional); however, sports content will lead to lower ROI potential and it would have been better had the company invested into other genres; investment in sports will lead to increased eyeballs for the group, but margin woes persist. We believe the above rights have been acquired from Star, and not directly, as these rights may not have been unbundled, like in the case of IPL which had four bundles (TV, digital, cluster and overseas); acquiring TV rights is a better proposition in our view as losses on TV are much lower as compared to that on digital, due to better monetisation opportunities; the digital segment is much higher in terms of losses due to 1) high content acquisition cost (highly competitive market) and 2) lower potential for APRU’s (India market ARPU for every app on an average is ~INR 70 - 200 per month ). In terms of the AVOD market too, it’s highly overcrowded with large tech giants on social media and aggregators; hence investment on TV is more of a haven (lower growth potential, but better profitability). The bigger risk on the above acquisition will be rapid chord cutting trends due to the launch of air fiber or any convenience viewing trend, wherein the audience will only pay for OTT and stop subscribing for TV channels; however, the risk for the same is limited as 1) TV ARPU’s are low (approx. INR 19 per month for a channel), 2) customer may not have access to high-speed data for live content always and 3) sports is preferred to be watched on the large screen.

Valuation - Big earnings downgrade with little or synergies due to sports

We believe ZEE may have paid approx. 50% of the total rights value for TV rights, similar to what was paid for IPL (49% accounted for TV rights). ZEE content costs are ~ INR 44 bn (annualised) and basis this acquisition the content cost will inch up by 67%, which will negatively impact EBITDA margin by 1010 bps towards 12.4% (FY25) (current range of 17-23%) over the near term. We believe there may be an earnings downgrade of ~ 30% due to the above acquisition; we believe merger with Sony will enable a bigger sports offering, which will have a larger overall advantage. There is also a potential for profitability to improve over medium to longer term on this content acquisition led by 1) India’s qualification (final stage) in most of the tournaments and 2) growth in ad revenues. We currently have a BUY rating on the stock with a Sep’23 TP of INR 415. Await mgmt. commentary for more details.

*The author is Karan Taurani, SVP – Research Analyst (Media, Internet & Consumer Discretionary), Elara Capital