The Zee Group made news throughout 2016. Its chairman, Subhash Chandra, entered the Rajya Sabha as a Bharatiya Janata Party member, its global news channel Wion, the first to come up in the South Asian region, came onstream, and it has slowly been building up its regional television network, a strategy of which its recent TV acquisitions in Odiya and Marathi are a part.
It sold its sports property last year - sports is something that is not working out for this otherwise successful group. But at the same time, it also bought up Anil Ambani’s radio channels in FY ‘17. And then it expanded the Zee footprint into yet a few more parts of the world.
With the Group’s third quarter results having just come in, it is an apt moment to assess the financial health of the Zee media companies.
The structure of the Group’s media businesses, as its chairman has explained in the past, follows neither a corporate umbrella logic, nor the logic of putting allied businesses under one corporate entity. It follows, quite simply, a family division logic.
One son of Subhash Chandra's has the television entertainment business, another has infrastructure, one brother of Chandra's controls the TV distribution businesses of Direct to Home and cable, another brother has the TV and print news businesses, and a third brother has the packaging company.
The separate media businesses
Zee Entertainment Enterprises Limited (ZEEL) is a company which houses the general entertainment category of television broadcasting for the Group. Zee Media Corporation (ZMCL), which controls the news business under both broadcast and print streams (besides a clutch of regional language broadcast entities of the Group) is an independent listed entity.
If the recent decision of the Board of Directors of ZMCL is anything to go by, we will soon see the birth of another independent listed company (Diligent Media Corporation) that will house the Group’s English language daily, DNA, which until now has been a part of ZMCL.
Two entities control backend infrastructure to deliver broadcast content to households. The group owns Dish TV India, a company in the Direct to Home (DTH) television broadcasting and SITI Network, a Multi System Operator offering television broadcast content to local cable operators through a fibre optic cable network.
The segmented structure helps us to answer a number of questions relating to the media business in a straightforward manner.Should one be in the media business at all? And if so, what is the most lucrative segment of that business? Is it news or general entertainment? Within news, is it better to be in broadcast or in the print segment? What is the future of the English language print news media.
Should television broadcast players also expand into the business of delivery channels such as DTH mode of delivery or cable network or both? Answers to these and many such other questions can be directly gleaned from the segmented operations of the Zee media Group.
The general entertainment business
Let’s look at some numbers. The general entertainment business in the broadcast media can be a lucrative business. Zee Entertainment Enterprises, the television general entertainment arm of the Group, posted a consolidated post-tax profit of Rs 455 crore in the first six months of the fiscal 2016-17 improving in the process the record of performance by roughly 26% over the same time last year.
The company thus generated a return of 14% on an annualized basis on the shareholders’ funds (‘net worth’) deployed in the business at the beginning of the year. This is lower than the rate of return that the top 50 companies on the National Stock Exchange which managed a 16% return last year, but not to be sniffed at, nevertheless.
The profitability of broadcasting is at least superior to being engaged in the media business.
The media business and DNA
Zee Media Corporation, a sister company which runs the Group’s television news broadcast business along with the English language daily, DNA, through a subsidiary company (Diligent Media Corporation) reported a consolidated pre-tax loss of Rs 20.33 crore for the first six months of the fiscal 2016-17. The best that can be said about the latest half yearly performance is that the losses were even higher - Rs 31.20 crore - during the same period last year (2015-16).
The company doesn’t give a break-up of the results of the operations of the print news business and broadcast news business. That the print news operation is the one that is proving to be a drag on the news media business overall, can be easily inferred from another piece of information that is available. The company has disclosed segment-wise financial performance which shows that while the television broadcasting business (news primarily, but regional language broadcasts included) registered a surplus of Rs 27 crore for the six months of the current financial year (2016-17). On the other hand, the print business registered roughly, a loss of Rs 10 crore in the same period.
True, these are reckoned before appropriating the interest and other finance charges. But considering that the print business has far greater sums invested in it, the allocation of finance charges between the two businesses isn’t going to alter the overall general picture.
Another interesting insight from the operations of the print media business is that at the margin, a reduction in the page levels or the number of subscribers - whether or not it is accompanied by reduction in the number of centres from which a newspaper is printed - does not make a significant difference to the potential for generating advertising revenues. No doubt, the flip side of that proposition is that there is a proportionate reduction in circulation revenues.
But in a situation where advertising revenues constitute an overwhelming share of the total revenues of the print media business, a reduction in the page levels or overall number of copies sold can significantly impact the bottom line for the good. More so, when this is also accompanied by a proportionate reduction in marketing and editorial manpower costs. Diligent Media Corporation’s full financial figures for 2015-16 are a pointer to such a possibility.
DNA cuts costs
Consider these numbers. Diligent Media Corporation consumed 9,913 tonnes of newsprint in 2014-15. This went down to 7,818 in the next year, 2015-16. It is not clear if this was due to a reduction in the number of copies sold or due to a reduction in the page levels. Again, the reduction in the number of copies sold was due to a reduction in the number of centres from which the newspaper is published. But it does not matter. The larger point is this: in tune with the reduction in the consumption of newsprint, there is a reduction in the circulation revenue.
What is interesting is that the reduction in circulation revenue at 21% matches exactly the 21% reduction in the consumption of newsprint in 2015-16. But the fact that fewer copies have been sold or that the reader is getting a reduced percentage of editorial content does not seem to have dented the advertising revenues.
At Rs 83.50 crore in 2015-16, there is only a marginal reduction in the figure of advertising revenues generated in the previous year which stood at Rs 84.13 crore. What is more, the reduction in editorial content/reach or both has been instrumental in downsizing the size of the work force, resulting in a reduction in employee costs from Rs 29.41 crore in 2014-15 to Rs 16.99 crore in 2015-16.
The DNA’s strategic blend of downsizing the newspaper’s reach and volume of copies sold, accompanied simultaneously by a significant reduction in manpower costs, suggests that such an approach can shore up the bottom lines of other struggling print media operations.
In any case, for DNA it was also about time too. The accumulated losses of Diligent Media Corporation as of March 2015-16 stand at Rs 971 crore. Even if the present momentum of reduction in losses can be sustained (roughly Rs 11 crore per annum) or even improved upon in the future, the company is a long way from wiping out losses and generating some returns on investments by the shareholders of the Zee Group.
Zee Media Corporation’s Board had resolved last October to hive off Diligent Media Corporation which is practically a wholly owned subsidiary into a stand-alone company whose shares will be listed in the stock exchange. When it materializes, the decision may pave the way for a strategic investor to be brought into the picture. But for such a happy denouement it is necessary for the present ownership restrictions (foreign ownership cannot exceed 26%) in law to be liberalized. There is currently a proposal to increase it to 49 per cent which this government is said to be considering. But it remains a politically sensitive issue.
Customers willing to pay for TV, not print
The analysis of Zee’s media operations reveals another interesting insight into consumer behaviour. Consumers are willing to pay for content either by way of subscriptions or purchase of programmes in the case of television broadcast, but consumers seem to balk at coughing up more for content when it comes to the print business.
Take a look at the following numbers of Zee Media Corporation for the financial year 2015-16. The company earned roughly 24% of its total broadcast revenues by way of subscriptions and sale of programmes. In contrast, the print business could generate only 14% of the total revenues by way of circulation and content syndication revenues. The percentages for the previous year are marginally higher. But the overall relationship between content revenues and advertising revenues across the broadcast and print streams of businesses are largely intact.
This suggests that there is a structural factor at work as to why content should fetch a premium in the consumer’s perception when it comes to broadcast but not so when it comes to print. It is a truism that proprietary content can command a premium in the market place. But news has been largely commoditized with very little scope for exclusives to draw in consumer audience. The dominance of select media brands both in print and broadcast is more due to the stickiness of consumer preferences once made, than to any inherent capacity of these brands to score over rivals in news coverage.
But we do have the paradox of television channels being able to generate more revenue from their audience than what the print media is able to generate from its reader-customer. Perhaps because the visual treatment of commoditized news provides a perception of exclusivity that print offerings are unable to replicate by the very nature of the medium.
Most businesses are confronted with the question how far they should be integrated across the value chain in a product. There are two points of view. One holds that a business should decide what part of the value chain they are good at and, having come to a conclusion, should pour their managerial and fiscal resources into improving their performance on that segment of the value chain.
But recently, an alternative view has gained ground which holds that having linkage with the ultimate consumer is strategically important and along the way there will be opportunities for monetizing that relationship with the end-consumer in ways that would not be very evident in the immediate term.
E-Commerce businesses are very good examples of this proposition. They are known to pour enormous resources in acquiring a customer even if it means suffering huge losses in the initial years.
The distribution business
The Zee Group’s operations exemplify the latter proposition. It was first in the country to invest in the DTH business (Dish TV India) and this is now paying off. In the first six months of the current financial year (2016-17), this business had generated an after-tax profit of Rs 110 crore on a shareholders’ funds of Rs 482 crore at the end of September 30, 2016, giving an annualized return of 42% on their investments.
But its cable TV business has not been so fortunate with Siti Network turning in a loss of Rs 100 crore in the first six months of the current fiscal on a gross revenue of Rs 564 crore. The losses have only increased further with numbers in the region of Rs 68 crore for the same period last year. Taking DTH and cable TV operations together, the Group is has neither gained nor suffered from its strategy of complete vertical integration. For the present at least, the jury is still out on the question.
To sum up then, there are few worry lines on its broadcast business with general entertainment doing exceptionally well and news and regional channels holding their own. The DTH business can only get better with greater urbanization and increasing customer preference for direct delivery of content.
But rural India isn’t going to disappear off the map. Customers in rural areas with limited requirements by way of entertainment and news content may find the initial upfront cost for DTH infrastructure an avoidable burden. So cable TV will still have its adherents. Things can be turned around.
That leaves only the print business - DNA- for the Group to think about. With Rs 900 crore in accumulated losses, one would think that is an issue that needs a quick resolution one way or the other. Yet at the close of last year DNA added to costs by starting up a Delhi edition.
Comparisons with another media mogul, Rupert Murdoch, may be somewhat misplaced at this stage but there is no doubt that Subhash Chandra, the Chairman of the Group, is a man in a hurry. The DNA losses have not deterred the media arm of the Essel Group from seeking fresh opportunities within the media space, including acquisitions in the content distribution infrastructure space.
The last couple of years have seen the group expanding its foot print across newer geographies and where it is already present, expand its bouquet of offerings. The acquisition of Sarthak Entertainment, an Oriya language channel and the launch of Zee Yuva (a channel targeted at the Marathi youth) and Zee Marathi in HD format, are some of its more recent initiatives. Further acquisitions of regional TV channels are believed to be on the cards.
Then there is the acquisition of the FM radio broadcast business (Big FM) of the Anil Dhirubhai Ambani Group, as also the proposed acquisition of Videocon’s DTH business. Along the way, the Group concluded an agreement to divest its sport broadcast business (Ten Sports) in favour of Sony.
A striking feature is that their overseas operations seem to matter less and less. They have been showing a steady downward trend. From about 36% in 2012-13, overseas operations are hovering around 25% in 2015-16. Revenues from the domestic market have nearly doubled for ZEEL. For ZMCL, the news broadcast affiliate of the Group, the overseas revenues are practically non existent. Yet the drive to increase the group’s footprint continues; last year saw expansion into Germany and the Philippines, and two Bollywood channels for the African continent have just been launched.
This raises the question: Is the Group financially overstretching itself? Two points can be made in defence of its strategic intent. One, the media business valuations are still a function of the subscriber/viewership base and, as such, a business case can still be made for a strategy aimed at increasing such a viewership base even in the case of companies facing acute financial stringency.
Their revenues in the third quarter are flat compared to the second quarter. Usually the third quarter is supposed to be the best from a business perspective because of a string of festivals. The improvement in profits, such as it is, is due to a significant reduction in programming costs and wages.
But overall the flagship arm of the Group, Zee Entertainment Enterprises, is far from facing any kind of stringency. Its acquisitions and new initiatives are largely internally funded, albeit through complex multi-layered corporate structures. On a consolidated basis, ZEEL’s interest costs in the first six months of the current financial year are a mere Rs 16 crore against a pre-tax profit of Rs 804 crore. The truth is, there is a lot of headroom available to pursue meaningful business opportunities for acquisitions that are in the pipeline.
* The author is an editorial consultant with The Hindu Business Line.