Hotstar, Star India-owned and in turn owned by Rupert Murdoch’s 21st Century Fox is clearly the front runner in the Indian Video-on-demand (VOD) space. Live sports and key content rights have helped drive robust growth in subscribers to over 75mn in a trice. A freemium business model is a marked contrast to Netflix & Amazon Prime Video, and one wonders if it is designed entirely to leverage advertising tailwinds originating from live sports.
Hotstar - Running Away with a Meaningful Lead
Home-grown Hotstar, with an estimated 75mn+ subscriber count is clearly the front runner among all the OTT platforms within the Indian landscape. Hotstar app was downloaded 170mn times in 2017. This implies about 325 downloads per minute on an average, a remarkable statistic, in my view. Furthermore, about 90% of Hotstar’s watch time is on mobile resulting in an average user consuming about 3GB of data per month. All very impressive data points.
However, there is a massive caveat - a substantial portion of the subscriber base is non-paying (due to a freemium model) implicitly pressuring Hotstar to rely on advertising and advancement of free subscribers to paid plans in order to drive growth in revenue and profitability.
That being said, given its dominant positioning in live-sports programming, I believe, Hotstar’s freemium model makes intuitive economic sense - discussed later.
Key Content Rights at Hotstar’s Core
In my view, compelling feature of Hotstar lies embedded in the content rights it has managed to accumulate. Its Star India ownership (in turn owned by Rupert Murdoch’s 21st Century Fox) has helped Hotstar pile up key exclusive linear and digital distribution rights to HBO and Disney programming among others. These encompass TV titles such as Game of Thrones, True Detective, Ballers, Sacha Baron Cohen’s Who is America, Jon Oliver’s Last Week Tonight from HBO, The Americans, Homeland etc from Fox along with a plethora of others. This is in addition to several other Hollywood and Bollywood movie titles.
Furthermore, from the domestic circuit, courtesy Star India ownership, Hotstar distributes Star TV content which includes several successful regional soaps and TV shows. While premium programming requires a paid subscription, a wealth of content is free (hence “freemium” model). I suspect such a library in its own right offers meaningful value to the consumer and we haven’t even talked about sports yet.
It’s anyone’s guess on how much impact aforementioned titles have had on subscriber loading, but I am fairly certain that rights to Indian Premiere League (until 2023), BCCI rights for all bilateral series involving India, rights to English Premier League, Bundesliga, Formula 1, Wimbledon, French Open, US open in addition to other live sports content are all far-reaching attributes to the value proposition. It’s the only purposeful offering in the Indian market for a ‘cord-cutter’ sports watching consumer. Furthermore, there are just not that many sports-first OTT players in the world to even take cues from (Amazon Prime’s Thursday Night NFL and EPL distribution deals are fairly nascent and not as robust, as alluded to in the previous post). Last week, Facebook signed a deal with La Liga for exclusive distribution of all 380 matches on Facebook in the Indian subcontinent – a landmark deal worth keeping track of, but still very early for any meaningful readthroughs.
Sports content has some unique attributes, which, in my view, makes the exercise of building a business model around it somewhat distinctive.
So Why Does ‘freemium’ Make Sense; Why Are Advertisements Part of the Equation
Hotstar is a sports-first platform, and I believe this is exactly why advertising is integral to its business model. Sports formats by design give you advertising windows be it break in play moments or pre-match and post-match analysis. In fact, cricket (the most watched sport in India) is an advertisers dream, in my view. Advertisers get marketing slots after every over and fall of wicket in addition to typical half-time breaks. Throw in strategic time outs in T20 and the potential advertising air-time further spikes. In that context, it makes sense from Hotstar’s perspective to deploy a freemium model where some recurring and stable subscription revenue can be traded off for advertising revenue by leveraging swings in traffic.
As an interesting side note, Hotstar experimented with a real-time game wherein if the mobile device is held in portrait mode, bottom-half of the screen is used to predict the outcome of the next ball (in exchange of coupons and other rewards) whilst watching the game on the top-half– an experiment designed to drive up user engagement which I believe will reflect in higher CPM’s (Cost per thousand impressions).
From an admittedly simplistic perspective, assuming a very conservative 20mn impressions in one IPL game (note that IPL final generated an estimated 56mn impressions) as an assumed CPM of a conservative INR1000 (for a typical 20 second video advertisement slot) up to INR2cr in video advertising could be generated per game. For all sixty games of an IPL season, one can extrapolate it to INR120 cr. All this of fairly conservative estimates. In fact, it won’t be entirely surprising to see higher CPMs, say around INR3,000 and that could drive the per-IPL game advertising revenue to go well over INR6cr.
The Premium Plan at INR999 is Largely in-line With Amazon Prime Membership
Hotstar premium priced at INR999 per year is comparable to Amazon (albeit Amazon’s multifaceted value proposition which includes e-commerce benefits makes this comparison somewhat blurry, as discussed in my previous post). Hotstar has another pricing tier of only-sports at INR299 per year, still significantly short of Netflix’s price points. However, as discussed above, the subscription revenue shortfall can be offset by advertising revenue and sports-rich programming (a notable missing piece in other VOD platforms) making Hotstar a compelling player, in my view.
Noise from Wall St – Is Hotstar part of the equation among all the M&A talk?
21st Century Fox has been subject of major bidding war between Comcast and The Walt Disney Company with a series of bids and counterbids. The most recent one at $71.3 bn from Disney (cash and stock) which appears to put an end the long saga which began in December 2017. While this might be the biggest media merger story this year, we don’t have to go too far back to see other big moves in the Media M&A landscape. These include: AT&T acquiring Time Warner which is under government review, Lionsgate acquired Starz, Viacom and CBS are making some merger noise. Sky is sought after by Comcast and Disney. Discovery acquired Scripps earlier in the year. I believe, such a heightened level of M&A activity is not merely a coincidence but a clear attempt by Media companies to bolster up their defenses from the threat posed by the teach giants of the world such as Amazon, Netflix, Facebook, Google-owned YouTube, Apple and others who all appear to be hovering around the media space.
In Disney’s chase for 21st Century Fox, while there are very attractive assets up for grabs, it would be naïve to discount the value of 21st Century Fox owned Hotstar from the equation. It might not be a beachfront asset, however, a platform with over 75mn subscribers in a mobile-first country with over a billion people ought to be more than just a deal sweetener. Add to it all the sports content rights Star India has racked up, it quickly turns into a valuable component of the transaction. Recall, Disney is not new to the world of sports – it owns ESPN!
Sports content rights are valuable but also heighten Hotstar’s risk profile.
Sports rights are typically sold to the highest bidder. Below is the bidding summary for media rights for IPL which Star emphatically won. STAR won the rights for its consolidated global bid of INR16,346.50 cr, despite lower bids than TIL, Airtel, Facebook and Jio for digital distribution. Interestingly, SONY also outbid STAR for sub-continent TV rights, but fell short of STAR’s global consolidated bid.
As evidenced in the chart, there clearly are other players eyeing these rights. In that context, one wonder’s what happens to Hotstar once current content rights expire and Star fails to win the renewal. What if someone else with deeper pockets swoops in? Note that Twitter and Amazon did not put in bids but were allowed to partake. What if Facebook’s La Liga distribution rights in Indian sub-continent is them ‘testing the waters’ before making a much bigger bet with an EPL or IPL. These are all questions that loom large and as such add to the risk profile for Hotstar. Recall, in my piece on Netflix, I alluded to how Netflix saw a similar challenge coming their way fairly early with their reliance on third-party content and how they started investing heavily in originals to mitigate it. How Hotstar aims to do that in the sports arena is a much more precarious ask and one interesting to keep track of.
One thing we do know is that original programming is not being entirely ignored. On Air with AIB, M Bole Toh, One Tip One Hand etc are all original programming distributed on Hotstar. Furthermore, Star-ownership is a nice platform to fall back onto offering a pipeline of non-sports and scripted content. In that context, I believe Hotstar will continue to build out its value proposition over and above sports whilst it continues to leverage its sports advantage while it has it.