Don't Write Off This Sector Yet

Apr 14, 2021

Aditya Vora, Research analyst

In our country Bollywood stars are worshipped as much as our cricket stars.

In 2019, theatres recorded a billion footfalls. That's the power on Indian cinema!

However, it has been a year since most of us have visited a theatre, enjoyed overpriced popcorn, and relished the Dolby surround sound.

Such has been the impact of covid on the film distribution industry.

In fact while I was browsing my phone, I realised Book My Show was my most unused app this year.

It would be the same for many of you too.

So do we write off the film distribution industry? Should we have a perpetual sell on multiplex stocks?

Last year, based on news and updates about the virus, stocks in the Multiplex, Hospitality, and Airline industries were classified as 'reopening stocks'.

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Positive momentum for these stocks increased when positive news on the vaccine or covid numbers did the rounds. On any adverse news, these stocks were hammered.

During such uncertain times how do we play the so called 'reopening trade'?

Let us take the film distribution industry as an example.

Will apps like Netflix, Amazon, Hotstar replace the theatre industry?

After all, theatres, and these 'over the top' (OTT) apps are competing for the same audience. In fact, they are competing for the same wallet share of consumers.

Observation 1: Prior to covid, theatres and OTT co-existed.

In spite of the rising clout of OTT led by many soft factors such as increase in data and smart phone penetration, gross box office collection of theatres was steadily rising.

In fact box office collection for the first time ever crossed Rs 100 bn before covid. To add to it, the number of movies entering the 1 bn revenue club reach its highest level in December 2019.

This reminds me of a saying. In a jungle if the lion and tiger make peace and coexist, neither will go hungry!

The CEO of Netflix, Reed Hastings, once jokingly remarked, "We compete with sleep".

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Observation 2: This is like the chicken and egg story. Read the two statements below...

Statement 1: The occupancy levels in theatres are dismally low as there are no movies.

Statement 2: There are no movies, so the occupancy levels are dismally low.

However, once the vaccine penetration increases, movie producers are likely to release more movies.

Just like how we witnessed pent up demand in consumer durables, automobiles, and other industries when the lockdown was lifted, the film industry is also likely to see a Tsunami of movies going ahead.

Observation 3: Can OTT players afford to buy movie content as an ongoing practice?

In a normal scenario, film producers have two options. They can release the movie in theatres and let the popularity of the movie determine the box office earnings.

Or they can sell it to deep pocketed OTT players at a predetermined price. In this case, the upside is fixed and not many big ticket movie producers will give up that upside.

OTT players in the initial days of covid purchased movies with the intent of increasing their customer base. They treated these movie purchases as a customer acquisition cost.

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Now my point is this.

It normally takes Rs 1 bn to purchase a good movie. In that budget, OTT players can produce at least 10 shows.

Also the ARPU (average revenue per user) can't be raised beyond a point. If prices go up too much, customer acquisition slows down.

Also don't forget that the OTT players can buy the theatrical rights post 6-8 weeks at a fraction of cost.

If you go by the past year, big ticket movie producers have refrained from releasing their movies on OTT apps.

From a return perspective too, OTT players, on a sustainable basis, are better of focusing on small ticket shows which will fetch them higher return on investment.

Observation 4: In a crisis, the strong get stronger, while the weak wither away.

The pandemic has led to many single screen operators shutting shop. In fact, the consolidation in the industry is at its peak.

This benefits large, organised players with strong balance sheets. The share of the top 4 players has increased from 14% in FY15 to 24% in FY20.

The second wave of infections definitely gives OTT players the upper hand in the short term. frame,

However, the current scenario for multiplexes is more of a forced/unnatural demand destruction.

I do believe their challenges are huge but are we being too short sighted in casting a death sentence to the multiplex industry?

Only time will tell.

Warm regards,

Aditya Vora
Aditya Vora
Financial Writer

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