Is IPL a dent or a cushion for HotStar?
If you peer into the Star Network, HotStar to an outsider is the typical youngest one in a joint family — he’s bratty, the parents favorite and he gets the best of clothes and toys to his disposal (read marketing inventory on Star network) on a whim.
But when you peer into the lives of teenagers like that you also see the anxiety within, a corroding sense of self-worth because he or she is competing with far richer boys and girls in the neighborhood (read Netflix, Prime Video, Facebook) and he also has the ever looming pressure to perform. With the IPL rights in its kitty, HotStar is just not any other content app anymore. It never was but between April 7th and May 27th, it will have the most sought after content for the 500 million internet consumers in India.
So what exactly is HotStar doing with it? And how does HotStar’s five year plan look with the dent of the IPL costs attributed to it. Let’s take a look at some of the business drivers one by one. This piece was prepped for and written just before Star Sports/HotStar also bagged the BCCI India Cricket rights. For more on the implications of that move, there’ll be a separate follow-up post.
There’s been talk about HotStar’s downloads across all platforms exceeding 200 million. Since you and I know, that most media executives inflate their numbers, let’s give them a respectable cover of 180 million downloads for the time being.
While a number of 180 million sounds very impressive, in most apps the monthly active users only make up for 20–25% of the overall numbers. The worse news however is that less than 1% of any app downloads end up as paid subscribers, which pegs the number of HotStar to 1.8 million at the maximum. The other data point to be considered alongside, is that as per FY 16 , HotStar’s subscriber revenues stood at 25 Cr. At a 50 million downloads level (at the time), the Average Revenue per download works out to 5 Rs. With these in mind, here are three stabs at what HotStar’s current subscriber revenue could be:
- Double Average Revenue per user since FY 2016. That makes it Rs. 10. Now multiply it by 180 million. That’s 180 Cr. You ask why double it? Well, to get to the most optimistic number possible+inflation of two years post 2016+better product offering+ more languages etc. Let’s corroborate or counter this number below through a couple of other ways.
- 1% of paying users would make it 1.8 million. Multiple it by an average transaction value of 1,000 Rs. (again on the higher side). It still works out to 180 Cr. If you take a more realistic transaction value of 800 Rs, that number would come to 144 Cr.
- Let’s try a more simplistic linear method now? At 50 million downloads, they were at 25 Cr subscriber revenue. At close to 200 million downloads, they must be in the range of 100 Cr of subscriber revenue.
With the above assumptions, it’s fair to say that their top-end subscriber revenue can be no more than~180 Cr and the other end of the range is potentially~100 Cr. By any estimate, no company can jump in subscriber revenue from 25 Cr to 180 Cr in 2 years , so in all likelihood, the number is much closer to 100 Cr and infact below it. For the purposes of this exercise, let’s peg it at 100 Cr.
From Year 1 to Year 5 of their holding the rights, let’s assume a 30% jump year on year in their subscriber revenues. More on what’s it going to look like in the next section.
IPL Costs Attribution
Here’s the chart of bids of all relevant players for the IPL rights.
While Star bid 16,347 Cr for 5 years, it was inclusive of digital rights. The highest to bid for digital was FB at 3,900 Cr and it seems perfectly reasonable to assume that internally Star would ’ve have allocated 25% of their bid value to HotStar. So that’s roughly 4,000 Cr for 5 years.
We know the potential subscriber revenues from the assumptions above. A linear distribution of costs and subscriber revenues from the above would perhaps look like this. Since we had taken an optimistic view of the subscriber revenue number above, for the next five years, I have taken a YoY growth of 30%. Their subscriber revenue alongside their IPL attribution costs would shape up something like this.
Monetization through ads
While this is a tricky one, let’s step back a bit and see what’s happening in the US. According to the Mary Meeker Internet Report, (Slide 15, I know it’s a long one!) FB and Google, command 85% of the digital advertising market. In India, currently by estimates of this excellent piece by Sajith Pai, and through IMRB-Kantar estimates, the digital advertising market in India can be pegged at ~10,000 Cr for 2017.
This figure was ~7,500 Cr for 2016. The same year when HotStar made 130 Cr from advertising operations. Essentially, one could say they were at about 2% of overall digital spends in India for the year, at best.
Going forward, competition with FB and Google isn’t going to slow down by any measure and yet given an imminent windfall for five years, due to IPL, let’s see where they end up.
Once again, we have first begun with the best case scenario. At the above ramp up in Year 5 at 8% of overall digital spends in India, it would be in a league of its own but here’s the kicker. Even if one assumes that HotStar isn’t able to take it’s share above 3% in Year 5 of IPL, it will still make 920 odd Crores (3% of 30,688 Cr) in 2022. That’s a staggering number.
The challenge: Move it’s share of advertising from the current sub-par sub-2% levels to 3% over a period of 5 years in the face of Facebook and Google and Instagram (and burgeoning native advertising options) throwing their hats in the ring for the same consumer.
It’s the sort of thing that looks easy on paper but to move a percentage point away and eat into some revenue share from Google and Facebook, both products that are fine tuned to an unthinkable measure for advertiser efficiency is going to be a tough ask.
A bright spot that HotStar has on the advertising platform challenge front is that it’s a technical challenge at best. It’s intrinsic and hence addressable with top notch engineering talent. If I were the HR Head at HotStar, a big chunk of my time with the CEO would be spent on snagging a big name from FB or Google in the next 3–4 months.
Currently their advertising mechanics are like a lavish but ill-maintained swimming pool. You want to dive in but it feels a little messy. To the best of my knowledge, HotStar outsources most of it’s core back-end work which they have slowly but surely bringing in-house. This shift from a content delivery platform to an advertiser-friendly platform with infinite data slicing capabilities for its advertisers will be the make or break dance for HotStar.
They have made their first attempt with the new advertiser tool but knowing how poor their core viewing experience itself is, they will have a lot of work to do. According to The Ken, they are charging a Rs. 565 CPM with a minimum investment of 10L without a robust audience planner tool. Not surprising.
Here I can also speak from my personal experience of having dealt with their sales teams while working at PUMA, HealthifyMe and Discovery. I always found their sales teams to be dwelling on the scale of the platform not the precision that the platform can or should deliver.
On the costs side, it will need to rein in its marketing costs significantly. As per RoCE for FY 2016, it spent 154 Cr on marketing. With the scale they’re already at and sharper focussed spending over the next 5 years, it shouldn’t exceeed 350–400 Cr. The temptation to be avoided here will be for someone within the organization to clamp down on stupid campaigns like these, which to my mind takes home the crown for the worst advertising campaign ever in the history of streaming services in India.
Apart from marketing, content acquisition and syndication costs would form a significant chunk of the P&L. If there’s one thing we can say for now after the BCCI rights auction today, it’s that going forward HotStar’s plans of investing in original content is going to take a back seat. My gut tells me they might just hinge a lot more on sports going forward than be in the fiction space.
Additional engineering additional costs involved in running a content marvel (no pun intended about their future money spinners) like HotStar are going to be high too. It was hard to get an approximation on this but the seemingly good news from these simplistic back of the envelope-ish number crunching is that even with these costs being added in, it perhaps is in a better place than its conventional big brother- Star Sports.
As a last step, let’s look at the completed table with subscriber and advertising revenue factored in keeping IPL attribution costs the same. For the below, I took a more realistic ramp of HotStar increasing it’s share from 2% in 2017 to 3% in 2020 and this is what it looks like. Please bear in mind that we have attributed the maximum possible costs of IPL here. It’s possible that within the organization, they decide to apportion only 3,000 Cr for IPL rights. This will make their P&L a lot glossier than below.
A Mint report already suggests that HotStar is set to make 200 Cr from this year’s IPL which means that our above number of 378 Cr for the year is in the reasonable ballpark.
Other revenue channels
- HotStar in addition to the above can continue to have live-streaming partnerships with other telcos / devices for it’s IPL rights. Their current arrangements with Airtel and Jio will yield incremental revenues that will sit on top of these. While I think it will not yield a game-changing number in the first 2 years, there could be a potential upside of 50–100 Cr in Year 3, 4 and 5.
- In all of these assumptions, we haven’t considered any international revenue coming through for HotStar. The Indian diaspora can easily add another 100+ Cr to it’s topline over the course of five years
- Both point 1 and point 2 could have have a significant upside with the India cricketing rights in the bag. In a follow-up post, I will attempt another stab at what the P&L could look like with the additional costs.
A final word
Three years ago, if anyone said that for 1GB data you’d be paying all of 4 Rs, he or she would’ve been the laughing stock of the city. As marketers, we are racing at a blink and a miss pace in terms of catching up with the latest on both the demand and supply side of video consumption. What sticks and what doesn’t is anyone’s guess in five years.
Potential new entrants in the advertising world like FB Watch could sway these advertising numbers over a five year term. At any point if an Amazon or Flipkart also joins the video advertising bandwagon, it could hurt HotStar’s chances.
It’s safe to assume, that HotStar will face atleast one major advertising disruptor before 2022. As of now, I am a bit skeptical if the new BCCI rights handed out today to HotStar is the best thing that could’ve happened to them. With the increased acquisition costs, the brand could have a hard time finding a tangible commensurate upside but that’s for a later post.
The other way to look at HotStar’s business model would be that with its scale it could equally eat into TV advertising revenues as well, which can only be a plus for the brand.
In any case, at best, I think we can just about be confident enough to star gaze till 2020. Beyond which, as good old Sherlock would say, “the game is afoot…”