Barely a week after the Ambani brothers officially announced the division of their business empire in June 2005, younger brother Anil acquired a majority stake in Mumbai-based film processing and exhibition company Adlabs. The Rs 360-crore deal — a pittance by Reliance Group standards — got Ambani junior a 51% holding in the company, marking the entry of the newly demerged Reliance into the entertainment business. The Adlabs investment was made by Reliance Capital, a company that Anil now owned and one that would spearhead the group’s foray into a business that — for some years — had caught his fancy. The line of thinking was pretty simple: following the fallout with his brother, Anil had received businesses such as financial services, power and telecommunications as his share of the vast Reliance kingdom. At the time of the Adlabs deal, broadband and telecom were fledgling fields and the triple play opportunity that this field offered — voice, video and data — was too big for Ambani to miss. With the company’s foray into entertainment, a Reliance mobile customer could chat, download a movie clip and watch it on a relatively cheap handset. Adlabs, then a Rs 100-crore company with a net profit of Rs 22 crore, already had a significant presence in film processing, production and multiplexes. The deal and the ensuing synergy it guaranteed was a no-brainer.
The company’s decision to exit the multiplex business by selling out to a much smaller player in December last year was preceded by the shutting down of three television channels after the failed joint venture with American broadcast network CBS. Its music business, too, has been pruned, while the film production business is substantially smaller than it used to be, with the focus having moved towards distribution. If the buzz in the trade is anything to go by, the DTH business is already on the block after a proposed merger with a rival failed. The stars, evidently, have just not aligned for Anil Ambani in the entertainment business despite a head start. While the Reliance Anil Dhirubhai Ambani Group (ADAG) did not respond to a detailed questionnaire from Outlook Business for this story, we try and figure out the reason behind this comprehensive financial failure.
Big Bang Theory
The investment Ambani set aside for the group’s entertainment and media foray was nearly Rs 5,000 crore and this was supposed to help set up diverse businesses that would not just be profitable but also draw synergies from each other. Basically, a film that the group produced would be monetised across platforms such as DTH, music, radio and online gaming. In many ways, this integrated model has worked well internationally since the studio is involved with a film from the time the script is conceived. But the economics of the Indian film industry could not be more different. Even by conservative estimates, the acquisition cost for movies is at least 2-3 times that of production; the December 2014 release PK was made on a budget of Rs 70 crore but was acquired by UTV Motion Pictures for nearly Rs 150 crore, while Kites, with its Rs 60-crore budget, was sold to Reliance for over Rs 120 crore. According to a former Reliance official, studios struggle to get by because nearly 65-70% of the profits in Bollywood are retained by its top five actors. “This makes the model extremely skewed,” he says.
Good Money After Bad
But it is not just films where Reliance’s decisions defy logic. The company’s flagging financials have been exacerbated by the fact that — barring radio — it has not made any investments of consequence in the media and entertainment world since 2010. The company’s net income has dropped from Rs 284 crore in FY13 to Rs 249 crore in FY14, while losses rose from Rs 113 crore to Rs 126 crore during the same period. The radio business, for the most recent fiscal, hit Rs 193 crore in revenue.
At its peak, Big Cinemas operated 252 screens and was the third-largest player in the multiplex business, after PVR with 454 screens and Inox with 361 screens. Its properties included leased screens like Mumbai’s iconic Metro theatre, which the company is said to have spent Rs 15 crore redoing. “The rational approach would have been to spend as little as possible on leased properties. But here, there was no limit on how much was being spent,” explains a former MediaWorks executive. The mandate given to the top management, he says, was to get to 500 screens “at any cost and as soon as possible.” According to Aditya Shastri, head of films at Relativity-B4U and former MD of 20th Century Fox India, every business has its own timeline for growth and profitability, more so the cash-heavy ones like exhibition. “A lot of Big Cinemas’ assets were performing poorly or weren’t profitable. While the company had a large number of assets under control, they were all acquired at a high premium and that too in a cash-bleed business like exhibition. This strategy is almost always fatal,” he says.
Reliance’s geographical blindness has also cost it dear. The most important factor in the exhibition business is location and this is where Big got it wrong. Most of its screens were concentrated in north, west and south India, with a minimal presence in the film-crazy south. It doesn’t have a single screen in Bengaluru, a market where films in six languages do well — Malayalam, Tamil, Telugu, Kannada, English and Hindi. Big has no presence in Chennai either, which is too big a market to miss. In contrast, players like Inox and PVR have a good presence in the south. In the north, too, Big made the mistake of entering into agreements with mall owners in Ghaziabad and Noida. Most of these malls were facing each other and occupancy levels were consequently just around 35%. Combined with its over-spending, this region-blind expansion strategy took a toll on the company’s finances.
Nothing But Static
This expensive strategy cost Reliance dear in its other media verticals as well. Take the case of radio, for instance. This industry is characterised by crippling regulations, such as no news allowed on air and prohibitively high upfront fees. Here, Reliance Broadcast Network (RBNL), the arm that was spearheading the company’s radio business, yet again decided to take the big bang approach by aiming for a presence in as many cities as possible. Of the Rs 1,800 crore that is spent on radio advertising, nearly 65% comes from the northern and western regions of India. To carve its niche, Reliance decided to play large in the south and east. Today, of its 45 stations, as many as nine are in the south and six in the east. In contrast, market leader Radio Mirchi, owned by Times Group, counts only two stations in the east among its 32 stations, with the rest being spread across north and west India. Vineet Singh Hukmani, MD and CEO, Radio One, a company that operates stations in seven cities, is blunt when he says radio is a city-by-city business and that is what makes it challenging. “It is very different from television broadcasting, where it is possible to reach out to a large audience in one shot. We need to make investments in each city and each of these need to be profitable to fund expansion plans,” he explains.
Given that radio is so heavily dependent on advertising, pricing is a delicate proposition. If that was not bad enough, the FM radio business employs a disproportionately large number of people for the kind of advertising money it brings in. “To generate the Rs 380 crore of revenue that we did last year, we had to employ nearly 750 people,” adds Prashant Panday, CEO, Radio Mirchi; Reliance’s staff strength was 600 for Rs 193 crore of turnover in FY14. With the third round of spectrum auctions coming up soon, it is unclear how generous Reliance will be with its bids. Rivals insist that it will renew licenses for only 20 cities and put in bids for another seven or eight, indicating the group’s reluctance to invest significantly in the media and entertainment business of late. That said, the company will need to invest at least Rs 700 crore — Rs 450 crore for renewals and another Rs 250 crore for new stations — during the third phase of auctions. How it funds this growth will be interesting to watch, given that Reliance Capital, the company funding radio thus far, has stated its intention to focus on its core financial service business and reduce its overall leverage.
Another business that ran into choppy waters was BigAdda, which, according to former executives, was launched to take on Facebook. As many as 600 people were hired for the business, which today is all but defunct and operates as an online shopping website. This is a destructive pattern of wastage that the company has repeated often and in different media — a five-film deal with Excel Entertainment for Rs 250 crore, a studio project in Mumbai’s Film City Studios for an escalated price of Rs 200 crore against the original Rs 135 crore, a joint venture called Big ND Studio with production designer Nitin Desai that was called off after the group invested Rs 150 crore, the launch of three TV channels in a JV with Los Angeles-based CBS Studios International that ended with all three being pulled off air. In the last case, lack of investment and disagreements over carriage fees paid to cable and satellite representatives are said to have killed the deal.
Reliance’s failed broadcast deals are symptomatic of the malaise that is afflicting its DTH business. The company’s foray into this business under the brand name Reliance Big TV has been none too impressive — last year, its losses were to the tune of Rs 190 crore, up from Rs 125 crore in 2013. Revenue has grown marginally from Rs 354 crore in 2013 to Rs 373 crore in 2014, with the company servicing around five million subscribers. Jawahar Goel, founder, Dish TV, says this is in line with the DTH business in general, which is a game of patience. He should know — his company, the largest player in India’s DTH business, has been around for more than a decade and only now boasts of over eight million subscribers. For FY14, Dish TV had revenues of Rs 2,509 crore and a loss of Rs 158 crore.
In the light of multiple failures on the broadcast front, it seems unlikely that Ambani’s ambitious $325-million bet on Hollywood director Steven Spielberg’s DreamWorks Studios will pay off anytime soon. This deal was finalised in 2009 with the intention of making five to six films each year. The only productions to emerge from this stable so far have been films like Lincoln, War Horse and The Help. And that one big hit remains elusive, for now. Ambani’s dream of creating an end-to-end approach, whereby his group “would create own content and own everything” has come under serious stress. His focus, by the looks of it, seems to be on getting the group’s telecom and power businesses back on track, which is a time-consuming task. Till this goal is achieved, the group’s entertainment and media businesses will likely need to fend for themselves in an extremely competitive environment. For now, between dreaming big and going home, the latter seems to be the option Reliance’s media experiments have chosen.
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