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Zee: Time to change - Views on News from Equitymaster
 
 
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  • Sep 29, 2001

    Zee: Time to change

    A Pioneer in Satellite TV….
    After staying on top for over six years, India’s first private TV channel, Zee TV, is now facing severe heat from Star and Sony. Zee was the first channel to introduce satellite television in India way back in 1991. Even after the entry of Sony Entertainment Television (SET) in 1996, Zee had consistently maintained its numero uno position in the Indian entertainment market. Today, the channel reaches 225 m people worldwide and covers around 25%-30% of television homes on a pan India basis. Zee Network is South Asia’s premier broadcasting and cable organisation having presence in areas including Internet, education and convergence.

    …. Is losing out to its competitors
    The competitive scenario among the satellite channels however intensified when Star Plus transformed itself into a 24 hours Hindi channel in year 2000. Star’s big hits including game show and family soaps run on prime time (9 pm to 11 pm) dragged down the viewership of Zee TV. Consequently, this has led to a dip in advertisement revenues for the company. Although, Zee came up with a spirited response in the form of a costly game show, ‘Sawal Das Crore Ka’, it failed miserably. Zee’s programmes, which were on top once, did not feature at all on the top 50 list. Zee Network has consistently lost market share to its peers as shown in the chart below.

    An attempt to regain glory
    Nevertheless, Zee has again responded to this with all new zeal. The flagship channel ‘Zee’ has changed its attire. It has launched India’s first interactive programme, ‘Aap Jo Bolein Haan To Haan, Aap Jo Bole Naa to Naa’. Zee Network changed over 90% of its programmes on its main channel ‘Zee TV’ from August 27, 2001. The company is planning to invest Rs 150 m to promote its channels with new programmes to rebuild viewership.

    The initial response to this change however signaled tough times for the company going ahead. According to the latest Intam rating report, Zee’s newly launched programmes failed to click in the Top 20 list, as Star continues to dominate the top television rankings. Even though its nine programmes appeared in the top 100, its much hyped interactive show did not figure anywhere in the list.

    Sliding television rating is likely to get reflected in Zee’s advertisement revenues, which already showed a dip of 13% in 1QFY02 (on a consolidated basis). It is said that any change even a change for the better is always accompanied by drawbacks and discomforts. Going by past experiences it is observed that television soaps gain viewership after 4-5 weeks. The company needs to catch the pulse of viewers in order to regain its past glory.

    A pioneer in regional channels- Needs to maintain lead
    Apart from the main channel ‘Zee TV’, the network’s stable boasts of 14 other channels. These include Zee Cinema, Zee News, Zee English and a strong lineup of 4 regional language channels under the ‘Alpha’ brand. Alpha Marathi and Gujarati have in a short span obtained a strong foundation in their respective market space and are expected to break even over the next 18 months. The regional markets are poised to grow at a rapid pace in the coming year. This would open up new markets for advertisers and consequently a rise in ad revenues for broadcasters. Zee being a strong player is likely to reap maximum benefits. As has been the case with ZEE TV, the company has also been a pioneer in introducing regional channels. However, going forward competition is likely to hot up even in regional channels and the only way to stay ahead would be to remember ‘content is king’.

    Exploring new revenue streams
    Though advertising remains the major source of revenue for the network, the company is increasingly shifting towards a subscription regime. The Zee network has successfully launched the direct to operator (DTO) encrypted channel bouquet and transformed most channels from free-to-air to pay mode. Beginning from June 2001, the company has started charging Rs 30 per month as cable subscription for the entire Zee bouquet (15 channels in all). The pay channel prices are priced competitively. Star has priced its bouquet of 6 channels at Rs 30 per month and Sony is charging Rs 22 per subscriber for its package of 4 channels. Given the over 20 m household reach of Zee’s channels in India and assuming a disclosure level of 25%, the company should easily be able to generate revenues of Rs 1 bn in the current year from subscription charges. On a consolidated basis subscription revenues soared by 37% in 1QFY02 and accounted for 29% of its total revenues.

    Shift towards pay revenues
    % contribution to sales 1QFY01 1QFY02 Change*
    Advertisement revenues 74.0% 58.8% -12.9%
    Subscription fees 22.9% 28.6% 36.7%
    * YoY change in revenues

    Subscription revenues are not only high margin but also a lot more stable. This revenue stream could prove to be a silver lining for the company’s topline growth, which has shown a dismal growth of 10% in the June quarter. Zee is spreading its wings into US, Canada, UK, South Africa, Australia and New Zealand through its wholly owned subsidiaries, which would help in increasing its subscriber base further. Zee also plans to form tie-ups with overseas television channels in countries like Malaysia, Sri Lanka & Indonesia and offer rights to telecast its existing programmes. The company expects to earn revenues of Rs 90–120 m annually from such tie-ups.

    Dreams Unlimited….
    Among the other new initiatives, production of films and selling its distribution rights are also expected to be revenue streams for the company in years to come. During the current year, it has already raked in large profits from sale of distribution rights of Hindi movie ‘Gadar’. The company had earlier indicated to produce 20 new films in FY02 but is now planning to release only one film in the current year. Film production and distribution is a relatively new area for the company and is considered to have a high-risk return ratio. If the film fails to generate enough revenues, it could depress Zee’s financial ratios.

    Zee’s future plan does not end here. It is also foraying into broadband through its wholly owned subsidiary, Siticable. The company is India’s largest MSO (Multi Service Operator) with total connectivity of 5 m subscribers. It aims to spend Rs 3.5 bn in the current fiscal in acquiring control over the last mile by extending cable connections and hybrid fiber optic (HFC) networks. Siticable expects 100,000 Internet cable subscribers by FY02. It already has 4,000 subscribers in Bangalore and has been testing services in Delhi. The company is in the process of laying out a HFC network in four cities across the country. However, Its original plan to launch the service in 100 cities has been scaled down due to lack of funds. Siticable is expected to be the most valued company in Zee’s stable and on a conservative estimate could be valued at US $ 250 m (Zee’s current market cap US$ 790 m). However, its value will be realised once Zee is able to stitch the numerous joint ventures within Siticable’s fold and have a strategic partner inducted.

    To summarize, Zee has its hands full with new programmes, potential to increase pay revenues, spread networks (international presence) and ambitious initiatives including broadband & film productions. However, in a race to consolidate its presence in entertainment market, it seems that the company has lost focus. It has to prevent succumbing to ‘Jack of all trades, master of none’ situation. Again the company’s ambitious strategies are getting ignored due to concerns regarding quality and transparency of its management. On the corporate governance part, the promoters have yet to come out clean. They have already paid debt of Rs 1.3 bn of the total Rs 2.2 bn debt due to the company and aim to repay the remaining by October end. Apart from this, management’s involvement into stock market activities has cast a shadow on its valuations. Although the company is hunting for a strategic partner, in light of the above facts, it might find it difficult to attract potential buyers. Multiple numbers of subsidiaries is another concern, which makes dilution of the stake in company unattractive.

     

     

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