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On Home Turf

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James Murdoch did not know that kabaddi is an Indian sport. It was even tougher explaining how it is played. Yet he said: let’s go for it.” This is how Uday Shankar, chief executive officer of Star India, de scribes the reaction of his boss and chief operating officer of 21st Century Fox to the proposal to beam kabaddi on the Star network in mid-2014.
It was not exactly an altruistic decision. Star had launched four sports channels, and two more in high definition (HD). And it was desperately looking for live sports content to air. Cricket, everybody’s mantra, was not enough. So it meant looking for and reviving sports that hadn’t been looked at in decades. To grow and succeed in India, Star had to jettison its ‘foreign’ mindset. And, that’s exactly what Shankar did. “We have foreign parentage, but we have become an Indian company.”

Sport is currently at the centre of Star India’s strategy and cricket is its mainstay. Having acquired broadcasting rights to International Cricket Council (ICC) matches for eight years last October for a humungous $1.98 billion, the network is preparing at fever pitch for the upcoming World Cup in Australia and New Zealand. It is launching two more HD channels­ — one in Hindi; and the sports network will broadcast matches in six languages in an effort to reach larger audiences and earn higher ad revenues.

Star, in alliance with Reliance-IMG, launched the local version of English Premier League football with teams owned by top cricketers and film stars. The Hero Indian Super League (ISL), a two-month extravaganza held from October to December last year, drew viewers two-and-a-half times that of the FIFA World Cup in Brazil. The final match on 20 December — played between Atletico de Kolkata and Kerala Blasters — was watched on TV by 57 million people.

Star has made no secret of the fact that it is in the process of pumping in Rs 20,000 crore over the next few years for acquiring and developing a wide spectrum of live cricket and other sports programmes. The push in sports is expensive and, is eroding the profit margins Star had built up; but it has taken the network to a new high by harvesting a whole new crop of eyeballs. It has also propelled Star India to the status of the country’s largest media and entertainment (M&E) company. It has now convincingly moved ahead of Bennett, Coleman & Co. (the Times Group), with a turnover close to $1.2 billion, or approximately Rs 7,200 crore, in financial year 2014.

At the core of Star’s success is its dominant position in Hindi entertainment television, which occupies around 40 per cent of the audience and revenue pie of the M&E business in the country. But the company’s sports gamble will decide whether it will make it to the next level,or be forced to lick its wounds in the years to come.

ESPN Exit The Trigger?
In June 2012, it was announced that the sports joint venture ESPN Star Sports (ESS) was being wound up. It was a bombshell. The 50:50 JV between two M&E powerhouses — Walt Disney’s ESPN and News Corp’s (now 21st Century Fox) Star Sports in Asia ­— had become synonymous with sports broadcasting; the two together had dominated acquisition of cricket and other sporting rights ever since they got together 16 years ago. The parting though was fairly seamless and without rancour. ESPN found the cricket environment too traumatic — the bidding was over the top and the investments being ploughed into cricket too expensive, given the returns. Star, on the other hand, saw sports and cricket as the way forward, and bought out ESPN’s stake and rights.

“At the start of the decade, when there were only two players in sports programming, it made sense for ESPN and Star to come together. It gave them a monopoly,” recounts Peter Mukerjea, who was CEO of Star India till 2007. “But later, ESPN became a drag for Star when bidding for rights. They were too conservative. Rupert (Murdoch) kept bringing it up: Why are we still in the alliance?”

ESPN’s exit forced Star to strategise anew. The approach took all sports pundits by surprise. Star went into the ring with its gloves off. It had already acquired the Board of Control for Cricket in India (BCCI) broadcasting rights in April 2012 for six years for Rs 3,852 crore, paying out Rs 40 crore for each international match compared to the previous average of Rs 32.5 crore paid by erstwhile rights holder Nimbus. Then, Star acquired Team India’s sponsorship rights for Rs 203 crore. It also did a bit of aggressive ambush marketing by becoming ground sponsor for the Twenty20 Indian Premier League (IPL)  — whose broadcasting rights are with competitor Sony’s Multi Screen Media — for Rs 100 crore and by buying out IPL’s Internet rights from the Times Group. And, in mid-October last year, it clinched the ICC rights for eight years, including two ODI World Cups and two Champions League rounds, for a whopping $1.98 billion — up from $1.1 billion it paid for the previous cycle of eight years.

What has come as a surprise though is the company’s push into games like kabaddi, football, hockey and badminton that others like Zee had dabbled with earlier with dismal results. Star had no other way to go. It had launched six sports channels, and needed live programming to populate them.

“We knew something was wrong with the old sports programming in 2012. The choice before us was: either we go the whole hog, or we pull out,” says Nitin Kukreja, president, Sports, Star India. As is clear now, Star chose the former option. But the strategy, Kukreja says, involved localising sports programming to give it a ‘connect’ with the masses, and investing substantially in good production quality to wow viewers. Cricket had become an ‘elitist’ game with most of the commentary and data research being put out in English. Star Sports changed that by creating a pool of Hindi commentators and an exclusive Hindi cricket channel.

For the coming World Cup, the network will be broadcasting in Tamil, Malayalam, Kannada and Bengali apart from Hindi and English. Its commentary panel has lined up 13 cricket captains, and the broadcast quality, for those willing to spend on new set-top boxes, will be available in 4K technology that promises ultra HD clarity. The stakes are high as the 2011 World Cup had notched up 27 per cent viewership share, higher than that of Hindi entertainment, at 24 percent. This time round, Star is hoping to push cricket’s share even higher by carpet-bombing across eight channels.

Meanwhile, Star has been reaching out to old sports associations like the All India Football Federation (AIFF). Kukreja describes it as a three-way partnership between the sports associations, the rights holder for the game and Star, the broadcaster. In the case of football, there was a 100-year league in Kolkata, but it had remained a local circuit. The new rights holder for AIFF, Reliance-IMG, worked with the international body FIFA to build up the football teams. In the case of Pro Kabaddi, the Anand Mahindra-promoted Mashal Sports acquired the rights to the kabaddi tournaments, and Star pledged to put money in for development of the sport.

“When I told Mahindra of our plans to develop kabaddi programming, he said: ‘You are a very brave man. How did you convince your bosses?’ ” recalls Shankar. James Murdoch understood that ‘local’ sports must take primacy over ‘international’ events, Shankar points out. “We had clinched the EPL (English Premier League) rights for India, but James (Murdoch) was not excited about it.”

Kukreja’s task was to make the new sporting additions look classy. “We have spent Rs 600 crore in three years. We realise the need for good production quality — right down to ensuring the colour of the kabaddi mats,” he says. It meant going into uncharted territory. New cameramen had to be trained for kabaddi; for ISL, football commentators had to be found in five different languages. “In developing sports, you have to look at the whole ecosystem. The stadia have to be constructed. The teams have to make money, the federations have to make money; and, most importantly, the players must make money.”

When Pro Kabaddi’s 37-day season ended on 31 August, Star Sports had reason to celebrate. One of every four Indian TV viewers had watched the finals between Jaipur and Mumbai; the tournament reached 435 million viewers over its 5-week span; and with a TV viewership rating of 3.7 among 15+ males, kabaddi became the second most-watched sport after IPL. Similarly, the inaugural season of the ISL was a runaway success. It was watched by 429 million viewers. With an average in-stadia attendance of 26,000 fans per match, it became the fourth most-attended football league after Germany’s Bundesliga, the EPL and Spain’s La Liga.

Kukreja says he has a tight agenda. His next task is to revive the failed Indian Hockey League, give badminton a boost, and bring university cricket to TV screens. “It will be some time though before we make money,” he concedes.

Galloping Topline, Eroding Margins
It remains to be seen how the sports business shapes up, but what is evident is that it has completely transformed the company’s balance sheet. Star, an unlisted company and subsidiary of News Corp’s 21st Century Fox (21CF), does not put out its financials in the public domain. However, Media Partners Asia (MPA), a Hong Kong-based consultancy that researches media and entertainment companies, says Star India’s turnover surged to $1.02 billion in the financial year ended 30 June 2013, up from $725 million the previous year, a 40 per cent jump on the back of eight months of sports business after the ESPN split. In FY 2014, by MPA estimates, Star’s topline rose to $1.17 billion.

On the other hand, the expensive cricket rights and expenditure on other sports ate into  the company’s margins. Operating profits thus dropped from $189 million in FY 2012 to $185 million in FY 2013, and further to $110 million for FY2014 (see Widening Gulf). “There are enormous cricket costs flowing through Star India’s P&L right now,” says Vivek Couto, executive director, MPA.

Will these expensive cricket and sporting rights result in the expected returns or will they burn a hole in 21st Century Fox’s wallet? Nimbus Communications, which acquired the rights to BCCI matches in the previous cycle at Rs 32.5 crore per international match, passed up in 2012 as it could not afford them. Shankar, however, believes the BCCI price was ‘not over the top’ and the group would have turned a profit had it not been for the overly expensive but under-performing Champions League T20 tournament.

Nimbus’s chairman Harish Thawani, on the other hand, thinks Star is hurtling towards disaster. He estimates the broadcasting network pumped in Rs 1,150 crore in FY 2013 and Rs 1,400 in FY 2014, and there is no way this kind of investment can be recovered in the next three to four years. “While I respect Shankar, the math does not add up; nor is there a magic wand to turn these around to becoming profitable properties,” says Thawani, adding, “This scenario will persist till some sanity emerges in the prices of cricket rights acquisitions.”

KPMG’s head of M&E practice Jehil Thakkar believes Star’s sports strategy follows its parent News Corp’s learning. “With the big three — ABC, CBS and NBC — of US television, nobody gave Fox a chance till Murdoch used NFL (National Football League) rights to change all that. He used football to hook distribution and scale.” On how long it will take Star to record decent returns, Thakker says: “I am not too fussed about losses in 1-2-3 years; the return on investment comes later, very much like setting up a steel plant.”

According to Couto, “Star Sports should be breaking even by FY 2018, and Star will be delivering a profit of $1 billion by 2020. That’s why 21st Century Fox has made India a beachhead for a long-term investment.”

In revenue, has Star really outstripped the Times Group? Couto replies in the affirmative, putting Times Group’s revenues at around $1 billion, or a little over Rs 6,000 crore. While the Times Group too does not put its financials in the public domain, the company’s website claims a topline “exceeding a billion dollars”. Needless to say, it has a different model, largely print based. While it has almost doubled revenues from Rs 3,300 crore in 2007, it has relied on a more margin-driven, conservative approach. While this has not given it galloping growth, it has delivered steady operating margins in the range of 18 to 30 per cent annually.

In many ways Zee, Star’s immediate competitor in the broadcasting business, has followed a similar low-cost, high-returns formula. Punit Goenka, managing director and CEO of Zee Entertainment Enterprises (ZEEL), in an earlier interaction with BW, said: “There is an exorbitant cost to being No. 1; we prefer being No. 2 or 3, and make higher profits.” ZEEL’s revenue for the financial year ending 31 March 2014 was $736 million, with an earnings before interest, taxes, depreciation and amortisation (EBITDA) of $229 million and a margin of 31 per cent. Sun TV did even better, notching up an EBITDA of $266 million on sales of $445 million.

‘Indianisation’ Of Star

It has not been a seamless success story. Rather, Star’s India strategy has been one of hits and misses; and it has taken all of two decades to bash it into shape. Star, originally a Hong Kong-based broadcasting house owned by Hutchison Whampoa and Li Ka-shing, was bought out by Rupert Murdoch’s News Corp in early 1993. For years, the broadcasting network remained headquartered in Hong Kong, and India was just a side show. Murdoch’s focus was on the lucrative China market. In 1998, he even hired Chinese Communist Party patriarch Deng Xiaoping’s relative, Gareth C.C. Chang, as chairman and CEO of the Star Group to smoothen things out. But ‘imperialist’ media was always an area of concern for China’s Communist rulers, and Murdoch never got much of a foot in.

Meanwhile, Star got some things right in India. And Murdoch tore up his alliance with Zee’s Subhash Chandra that had barred him from entering entertainment programming in Hindi. By 2000, Star Plus became an overnight leader following the launch of Amitabh Bachchan-hosted Kaun Banega Crorepati and later the saas-bahu serials. But Star India continued to be run by Hong Kong-based executives like Michelle Guthrie, CEO, and COO, Steve Askew.

To illustrate how distant Hong Kong was from the Indian reality, a senior Star executive related this story: the Hong Kong brass always thought India had an easy regulatory environment compared to China. Fed up with being upbraided, the Indian team played a little trick on James Murdoch. He was to address Ficci’s annual M&E jamboree called ‘Frames’ in 2003, and his Indian speech writers tutored him to go after the Indian cable networks. James obliged with all guns blazing, calling cablewallahs ‘thieves’ and ‘fraudsters’. The reaction was instantaneous: Sushma Swaraj, then information and broadcasting minister, also on stage, chided Murdoch Jr for crossing the line and insulting national pride. James learnt the hard way that India was no piece of cake.

Meanwhile, Star India went into an organisational spin. Then CEO Mukerjea and his No.2 and programming chief, Sameer Nair, continued to be at loggerheads and their spats made decisions difficult. A temporary truce was called in January 2007, when both were given ‘equal’ status as CEOs. It was an arrangement that was doomed to fail. By October the same year, Nair and Mukerjea had both quit, and Shankar assumed charge. However, the preponderance of Hong Kong continued with Paul Aiello replacing Guthrie as group CEO. Star India was then contributing more than 60 per cent of the company’s revenue and more than 70 per cent of its operating profits. It did not make sense to have the tail wag the dog. Hong Kong had to be wound up, and that is what Rupert Murdoch did in August 2009. He sent Aiello packing, got rid of 150-200 of the ‘mandarins’ in Hong Kong and restructured the company, creating three verticals.

Finally, Star India became an autonomous organisation with Shankar as CEO holding independent charge. He stopped reporting to Hong Kong.  The English channels were bunched separately under the charge of Fox International; and a third vertical — Star Greater China — was created, headed by John Lai. Both Uday Shankar and John Lai reported to James Murdoch. “Our genes had to become ‘Indian’ if we wanted to maintain leadership,” says Shankar. It was what he pushed for, but diplomatically gives the credit for the restructuring to Murdoch Jr.

There are two legs to Shankar’s ‘Indianisation’ strategy. The first was to maintain leadership in Hindi entertainment, the company’s core business. This was done by widening the audience catchment with a second Hindi general entertainment channel — Life OK. “Star Plus’s stories concentrate on challenging the status quo, while Life Ok has shows like Mahadev that reinforce sanskar (culture) and parivaar (family),” explains Sanjay Gupta, Star India’s COO. “They were two sides of the same coin; it allowed us to deliver differentiated content,” he adds.

Star also invested heavily in research and production. Mahabharat, for instance, was four years in the making before it was launched on Star Plus last September. Production and marketing costs exceeded Rs 120 crore, and Gupta says the average investment per episode was Rs 50 lakh to Rs 60 lakh. Star also put money on booking the best talent — Aamir Khan to anchor Satyamev Jayate and film producer-director Ashutosh Govarikar to helm the series Everest, which launched in November. These initiatives, along with long-running hit series like Diya Aur Bati Hum (since August 2011) and Yeh Rishta Kya Kehlata Hai (since January 2009), have enabled Star Plus to retain its primacy in Hindi entertainment.  

The second leg was the ‘regionalisation’ strategy, which Rupert Murdoch personally announced in November 2008. It included an investment of Rs 600 crore on developing six regional channels. The line-up included buying the Malayalam network Asianet from Rajeev Chandrasekhar, and setting up Star Jalsha as a Bengali general entertainment channel. Today, Star India has 34 channels on air.

Challenges Abound
An important aspect of Star’s Indianisation story has been the aggressive organisational leadership of Shankar. He replaced the quiet, under-the-radar style of his predecessor Mukerjea with the demeanour of a tough general. Shankar built his team afresh with new, young talent — Gupta from Airtel, Kukreja, Prateek Garg came in from HSBC for business development, chief financial officer Sanjay Jain and Gayatri Yadav, the chief marketing officer. But with a background of journalism, it is Shankar who has been Star’s ‘Indian’ face.

Among his first decisions in 2008 was to end an expensive distribution deal with Nimbus for ICC World Cup rights. Shankar suspected Star had been sold a lemon, when the company had the option of doing the distribution sales on its own. In another controversial decision in 2008, Shankar sold Star’s 26 per cent stake in Balaji Telefilms and ended Balaji creative director Ekta Kapoor’s reign over Star’s entertainment programming. While Balaji’s hold over Star was expensive, it was also stifling creativity. Balaji went to court, but Star won the legal battle.

“Uday aims for the big picture. He’s willing to take risks and isn’t hemmed in by cost-saving,” says Couto. “He is respected by industry and regulators.” Shankar puts it down to the long rope he’s been given by his parent company. “My very first venture for Star Plus  — Kya Aap Paanchvi Pass Se Tez Hain? — was a disaster. But that did not go against me.” Despite talent and aggression, Shankar and his team are facing a tough market. Considering the quality of content and size of investment in television content, Star’s returns are low. It has also not been able to improve its subscription revenues substantially though cable TV has in part migrated to the less leaky digital system. “Subscription from DTH has improved dramatically, but digitisation of cable TV has not made a qualitative difference; ARPUs (average revenue per user) have not changed as yet,” says Gupta. “Advertising and subscription revenues are still in the 65:35 ratio, when internationally they are the other way round,” he adds.

The regulation of channel pricing and the stubborn opposition of cable networks have steadfastly prevented Star from enhancing its subscription revenues. Since 2003, as a pro-consumer measure, the Telecom Regulatory Authority of India (Trai) has imposed a freeze on the pricing of channels. With cable networks migrating from analogue to digital systems, broadcasters had hoped that they would be allowed to price channels on an a la carte basis, but the bundling or selling of channels on fixed bouquet prices continued. Hathway Cable, a large multi-system operator (MSO), has been in a running battle with Star on a la carte pricing. In recent weeks, Star has been inching forward in courts and on the ground, but with cable networks controlling 65 per cent of the distribution market, it will be some time before Star will be able to harvest subscription revenue that it thinks rightfully belongs to it.

“Digitisation is not just the seeding of boxes, but an exercise to give consumers choice. Cable networks have seeded millions of boxes as a means to grabbing territory,” says Deepak Jacob, president, Regulatory, Star India. 

Gupta also bemoans the slowdown in advertising growth. “India is spending just 0.35 per cent of GDP on advertising when, for most countries, the norm is 1 per cent. For the US, it touches 2 per cent. A dramatic shift is needed in ad spends if media is to grow,” he says.

To beat the slowdown, Star has been among the first broadcasters to introduce an advertising model called ‘Ad-Sharp’, wherein for the same content, varied ads play out in different markets. “Ads of the Ghari brand of soaps and detergents, popular in UP, can be playing in Kanpur even as Mumbai viewers see a Surf ad,” explains Gupta. This helps enhance ad revenues by offering flexible deals and, therefore, attracts advertisers targeting specific markets.

Big investments are not always a guarantee of success, and Star has learnt it the hard way with last year’s Fox Star release Bang Bang. The movie had everything going for it — a glitzy line-up with Hrithik Roshan and Katrina Kaif in the lead, an action-adventure script, a movie-making budget of Rs 140 crore, and packed auditoriums for the first two weeks. Yet, even with Rs 230 crore from box-office collections worldwide, the movie did not make a profit after accounting for distribution commissions and marketing costs. On the other hand, Haider released by UTV Motion Pictures proved that small is beautiful. Selling on controversy, tight editing and word of mouth, the Hamlet remake did business of over Rs 70 crore in the same period whereas production costs, including marketing, were limited to Rs 40 crore.

Be that as it may, Shankar continues to bat for the big picture. Speaking as chairman of the Ficci media and entertainment committee in March last year, he commended the industry for notching up 12 per cent growth in a bad financial year. He, however, noted that the industry’s size was barely Rs 90,000 crore or $15 billion — a far cry from the goal of growing to $100 billion, and lower than the turnover of Bharti Airtel and Vodafone put together. For Shankar, the media and entertainment industry’s growth requires substantial investment; and, for that, he says the new government must unshackle the sector from over-regulation. 

(This story was published in BW | Businessworld Issue Dated 23-02-2015)