Streaming sans cash generation may hurt media companies

New Delhi: The proliferation of over the top (OTT) platforms—in which content is streamed directly to consumers over the Internet--could entail intense pricing pressure on TV broadcasters and compel them to commit investments in developing and marketing content.

Competitive pressure from the OTT platforms have now elevated because of the inroads made by large global players. This apart, the industry will also have to tackle Reliance Jio’s entry into TV distribution. While traditional TV broadcasters still have significant competitive advantage, aggressive investments on both OTT and traditional TV will drag their profit growth and cash generation ability, says a research report.

It says OTT entails upfront cost commitment without any earnings visibility. Imperatives of viewer retention will drive up cost for OTT platforms as they require continuous enrichment of content even as subscription-led monetisation in a price sensitive market poses challenges. “Amid intense competition, we see clear risk to broadcasters’ cash generation. Further, rising data penetration and affordability are driving piracy of premium content, which is impacting adoption of SvoD (subscription video on demand),” says a sector update from Emkay Global Financial Services.

Global majors like Netflix and Amazon have started to launch India-centric content after aggressively acquiring movie rights. They are now looking to aggressively market their content, increase visibility and drive subscriptions.

Besides, viewers will be inundated with content choice following Jio’s entry into TV distribution. Jio’s ability to funnel TV content through its existing data broadband pipe enables it to offer services at disruptive pricing and grab meaningful subscribers, giving it negotiating strength for content deals.

In this scenario, though traditional TV will still stay relevant given their prevailing moats,. uncertainty over the longer term emanates from changing content consumption habits. Risk of changing business landscape, sharp increase in content cost and potential threat to TV viewership quality portend moderation in the earnings growth trajectory.

Among broadcasters, Zee Entertainment is investing in original digital content while Sun TV is lagging and progress in OTT execution would be the key to their future valuations. Accordingly, Emkay Global has downgraded Zee to Hold but maintained the Hold rating on Sun TV. It has also downgraded Dish TV to Hold in the wake of potential disruption in the distribution space as well.

The report says content consumption through digital platforms has been rising over the last 12 months and is expected to accelerate further with increasing content options, rising data penetration and continued fall in data prices. Further, fixed broadband penetration is expected to accelerate with Jio’s potentially disruptive entry, with a target of 50 million homes. This could transform the way traditional TV is consumed, with high-speed broadband and explosion in content offerings.

Rising competition and fragmentation in OTT are compelling broadcasters to increase content investments on OTT platforms without compromising spends on traditional platforms. Netflix and Amazon have started to launch India-centric content with aggressive marketing. This would impact the cash flows of traditional broadcasters and their OTT execution will decide the future valuation trend.

With more and more media companies creating video content for OTT platforms with big budgets, the OTT market is booming with multiple content choices.

Companies spanning the entire ecosystem—from content developers to intermediaries to device manufacturers—-have lau-nched their own OTT platforms in order to capitalise on the high-growth OTT space. Mounting competition and fragmentation in the OTT market is compelling broadcasters to step up spends on digital content. Global OTT players like Netflix and Amazon Prime are enticing consumers with their vast library of premium global content while scaling up their India-dedicated content gradually. To remain relevant, broadcasters have no other option but to increase investments in OTT (content and marketing) without compromising spends on traditional platforms.

Premium service providers like Netflix and other OTT players will have to keep providing original content to increase subscribers and if subscriber addition remains muted, then they will start offering free content. So this might keep India as a freemium market, where basic content is offered free, says the report. Moreover, purchasing power of Indian middle class is different from its peers, which will also force companies to offer free content.

India has about 170 million TV homes with an implied reach of 850 million. Amid increasing data penetration, India is expected to have data subscriber reach of 700 millio in the next four-five years. Further, data consumption per user is expected to stay elevated at about 8 GB a month. This implies that video consumption will explode and could become one of the preferred mediums of advertisement, putting at risk monetisation of urban content consumption trends on Traditional TV, says the report.