MUMBAI: We believe the merger of Viacom18 and Star India will have a big impact on the entire M&E ecosystem as the combined entity will command a huge market share. The merger will create a large media juggernaut with 108 plus channels (Star India has 70+ TV channels in eight languages whereas Viacom has 38 TV channels in eight languages), two large OTT apps (Jio Cinema and Hotstar) and two film studios (one each of Reliance and Disney India). Large market opportunity (TAM) for the merged company, as India’s M&E market for print, TV and digital is at $18 billion in CY22, poised to post a CAGR of 8.2 per cent  over CY22-25 (Source: EY FICCI).

Post the merger, the combined entity will command a TV advertisement/TV subscription (excluding distributors/DTH/MSO revenue)/Total TV market share of 40 per cent /44 per cent /42 per cent  (as of FY23) respectively. The merged entity is expected to command a digital OTT market share of ~34 per cent  in CY23, while the TV viewership share in top 10 channels (according to BARC) is ~40 per cent  as of CY23. The consolidation between RIL and Disney on the India TV side could have a negative impact on other linear TV broadcasters, such as Sun TV, Zee, Sony, and others, as they may not be scale up on market share. The merged entity's focus on maximizing market share through increased investments in content, synergies, and enhanced marketing power poses challenges for individual broadcasters to compete and grow. With a large customer base across various genres, including regional genres and urban GEC, the combined entity aims to dominate key markets, potentially leading to market share loss and challenges for other players, including the possibility of smaller channels shutting down.

Jio Cinema + Disney Hotstar merger - potential negative for global OTT giants

The merger of JioCinema and Hotstar poses a challenge for global OTT platforms, as India's market values bundling and is price sensitive. The combined entity can offer a comprehensive package including web series, movies, sports, originals, and a global catalogue. This bundled premium plan, possibly in collaboration with Jio's large subscriber base, may hinder the ability of global OTT platforms to raise Average Revenue Per User (ARPU).

Better prospects of profitability in the medium to long term

The merger may result in improved profitability for the combined entity as there may be a reduction in employee cost, production cost and marketing costs on the TV side and content costs, particularly on the OTT side, which could contribute to a more sustainable path to profitability over the medium to long term. Currently, both platforms are facing heavy losses due to high content costs, and Jio Cinema relies solely on AVOD without significant paid subscriber revenue. With the combination of Hotstar and JioCinema, the merged entity can enhance its subscription revenue by increasing subscription prices and attracting a larger subscriber base. Reliance may drive the entire business through Jio Platforms, with a significant influx of ad revenues in digital advertising. The digital advertising market, being a winner-takes-all business, heavily relies on scale. They may also have a pay-based mechanism via Jio Cinema/Hotstar at a larger scale which will propel healthy subscription revenue over the medium term

Monopoly in sports properties may lead to higher ad revenues

On the sports front, the merged entity is set to become monopolistic, with Disney and Jio collectively controlling approximately ~75-80 per cent  of the Indian sports market across both linear TV and digital platforms. This dominance in sports, primarily cricket, positions them to command a substantial share of the overall ad market, showcasing strong growth in an industry where sports is a key driver of viewership on both linear TV and digital platforms. In CY22, sports adex (TV+Digital) in India stood at  Rs 71billion (according to GroupM) out of which Disney India had a contribution of ~80 per cent . The combined entity will have lucrative sports properties like Indian Premier League (both TV and digital), ICC cricket tournaments (both TV and digital), Wimbledon, Pro Kabaddi League, BCCI domestic cricket etc.

Telco customer retention and bundling

Telecom companies have used OTT as a value-add to retain/gain subscribers. And OTT companies piggyback on telecom plays to scale up their subscriber base – TSPs (telecom service providers) have larger access to a wide variety of customers. With the vast content library of Jio and Disney, the merged entity's content, spanning 1) international movies, 2) web series, 3) sports content and 4) catch-up TV content, could prove advantageous for Jio subscribers and make it a one-stop content hub. There might be initiatives such as a Jio Prime offering, providing subscribers access to content at an affordable or even free price through last mile resource and 5G wireless access. The company will have a big advantage of last mile with Jio having a subscriber base of more than 450 million smartphone users This will hit Bharti Airtel as it has tried to tie up with OTT players in the content ecosystem to offer value-add. Thus, Bharti Airtel may have to invest heavily in own content or shape partnerships with global OTT giants such as Netflix and Amazon or other OTT platforms to generate clout in the content ecosystem.

Synergy prospects

- The ad revenue potential from IPL is expected to increase significantly with the merged entity having exclusive rights (TV+Digital) to IPL. This consolidation may result in bundled advertisement revenues, potentially mitigating the higher cost of IPL rights and reducing overall losses; due to IPL rights being split between TV and digital between two different platforms and digital platform offering IPL free, there was a big dent in the IPL revenues on TV, which could see some respite.

- The merger is anticipated to bring about restructuring in employee costs, reduced production expenses, and lower advertisement costs for TV. These potential cost synergies could contribute to improved margins for the merged entity. On the sports side too, content costs may pare sharply for TV, digital over the medium to long term, given that fewer platforms may bid aggressively for expensive properties.

- In digital, content cost inflation (content cost for web series 3-5x higher than for TV non-fiction shows, per episode) has been sharper due to heavy fragmentation in the OTT market and entry of global giants with deep pockets. With the merger, content cost in digital may see much lower growth, which may improve the unit economics for the OTT business, potentially resulting in lower EBITDA losses for Jio Cinema and Hotstar.

- Considering the critical role of technological advancements in the success of OTT platforms, the integration of Disney's technological expertise is expected to enhance the user experience on Jio Cinema. This improvement may subsequently drive higher subscriber numbers and revenue growth.

Risks

- Post CCI approval, NCLT (National Company Law Tribunal) approval may take another eight to 12 months

- A below par customer experience on the video apps despite a wide variety of content may not augur well in subscribers paying for the same; global OTT giants like Netflix have a very superior experience to command a premium ARPU

- Continuance of hefty losses of the merged entity over the near to medium term due to high costs sports properties (IPL, ICC tournaments & BCCI bilateral rights) could negatively impact valuation prospects for the merged entity

Shareholding pattern of the merged entity

After the merger, the ownership structure of the combined entity will be as follows: Reliance will hold 53 per cent  stake through cash infusion, after acquiring Paramount’s balance stake and factoring TV18 and Viacom 18 stake in JV, which are RIL’s subsidiaries;  Disney will hold 36.8 per cent , whereas the Bodhi Tree (stake through Viacom18) /TV18 (ex of Reliance stake) will hold balance 6.2 per cent /3.8 per cent  stake respectively.

Valuation

The joint entity, including cash infusion, is valued at  RS 704bn. This valuation comprises  Rs 115 billion in cash,  Rs 330 billion for Viacom18 (including Jio Cinema) and the remaining  Rs 260 billion (~USD 3.2 billion) is the combined valuation of Star India and Hotstar. This valuation of Star India and Hotstar is much lower compared to pre-covid valuation of $12-13 billion which may be due to 1) loss of IPL digital rights leading to ~50 per cent  ad revenue decline and 40 per cent  subscription revenue decline for Hotstar, 2) TV ad revenue remaining flat over FY19-23 and 3) sports content which may continue to incur hefty losses in linear TV due to slower revenue growth. From a valuation standpoint, the impact on TV18 (which owns 13 per cent  in Viacom18) is minimal to negative, as the combined entity is expected to generate substantial losses in the near term due to sports content. Additionally, TV18's stake in the merged entity is valued at  Rs 42 billion, implying a hefty premium for its news business at  Rs 40 billion (considering TV18's overall current market cap of  Rs 82 billion).