Decoding the Reliance-Network18 deal

Mukesh Ambani’s entry into media threatens to shake up both telecom and media industries. A look at the implications and why the move makes sense

e4m by Nawal Ahuja
Updated: Jan 11, 2012 7:30 AM
Decoding the Reliance-Network18 deal

Amidst all that talk of impending gloom and a slowdown that has almost arrived, the industry woke up to big news last week – tycoon Mukesh Ambani’s dramatic announcement that he was getting into an investment deal with Raghav Bahl’s Network18, marking his entry in the media business.

As all Ambani’s endeavours go, the Reliance Industries Limited (RIL)-Network18 tie-up too promises to be a mega venture with the potential to create much disruption in the industry. For one, the deal is likely to make other telecom companies sit up and take notice, and possibly go aggressive on media, though none of the major players we approached were willing to comment. Secondly, it is the first high ticket investment in the media, especially the television sector, in a long time. After the collapse of 9x and Real, very little fresh capital had been invested in the business. Therefore, Ambani’s move reposes faith in the broadcast business and holds out hope for the future.

"Reliance will leverage its deep understanding of Indian markets - consumer insights, technological expertise and the ability to build and manage scale to make this a win-win partnership," an RIL statement said.

Bahl, Founder, Editor & Managing Director of Network18 has termed the deal a “truly seminal moment in the 18-year history of Network18/TV18” and said by inducting such a significant amount of equity, the group’s balance sheets will become among the strongest in the industry.

According to brokerage firm Edelweiss, “Acquisition of RIL's stake in ETV (Eenadu) is a huge positive for Network18. This will enable Network18 to have a strong bouquet of channels like Star and Zee networks and edge ahead of Sony."

This definitely bodes well for RIL, especially considering its soon-to-be-launched 4G tablets that will now get the widest possible range of high quality content from Network18 and the Eenadu channels. Latest reports say that RIL plans to offer high speed fourth generation or 4G data services on the tablets priced around Rs 3,500 in 700 cities by 2012-end. Rival media companies will find it tough to match this offering of low cost tablets to penetrate the market.
If all goes well, one could see Ambani reaching for more in the media space.
So far, RIL’s only official media involvement has been buying the Sunday Observer and launching the Business and Political Observer in 1991. But both ventures did not succeed.

Tech and media interplay
Will the RIL-Network18 tie-up follow the Apple model and create the perfect synergy between media and technology? One would think so. When Apple launched the iPod in 2000, it sought to sweep the technology and music industries with a single product. A decade down the line, technology has helped music companies earn record revenues, which in turn has kept the content pipeline of good quality music.

Apple sought to do something similar with the publishing and TV industries with the iPad launch in 2010. Rather than owning content, it partnered with publishers and TV companies to sell their content through its tabs. Two years down the line, both publishers and broadcasters are happy with the early signs. And Steve Jobs’ recently published biography has given life to rumours about the impending launch of Apple TV, which might do to the TV industry what iPod did to the music industry. News reports say Apple is in talks with content producers for a pay per view model for TV content. Rather than subscribing to channels and paying for content which is neither wanted nor watched by viewers, subscribers will have the ability to buy their favourite content off the shelf. In one stroke, this move threatens to shake the foundations of the TV industry that has been built painstakingly over layers and layers of subscription models.

Back home, as part of the RIL-Network18 deal, Infotel Broad Band Services Limited, a subsidiary of RIL, will get preferential access to all Network18 content for distribution through the 4G Broadband Network being set up by it. This includes the content of all the media and web properties of Network18 and its associates as well as programming and digital content of all the broadcasting channels of TV18 and its associates on a first right basis.
The combination of a leading TV content provider, with a bouquet of nearly 25 channels, and Infotel will be a significant step in bringing a high quality “live TV” experience to broadband customers across the country. Likewise, Network18’s market-leading web portals and e-commerce operations will provide several value-added services to Infotel’s broadband subscribers.

Telecom - Media interplay
Reliance will be hoping to expand the business model with its interplay of telecom and media. When airwave licences were being auctioned in 2008, most telecom companies focused on 3G services as the next logical step in the business evolution. A hitherto unknown company called Infotel Broadband Services quietly picked up pan-India licences for 4G broadband services. What slipped under the radar at that time made the entire telecom industry sit up and take notice when Reliance Industries picked up a majority stake in Infotel a few months later. With 4G being touted as the next big thing in the telecom industry with data speeds in the 50- 100 Mbps range, it has potential to shake up many industries. Throw in high quality content sourced from the Network 18 group of channels and its recent content partnership with UTV - Disney and the picture is complete.

The three ingredients a media product needs to thrive- good quality content, good distribution and easily available hardware for watching - will all be in place. Reliance, through its acquisition of software content and distribution airwaves, aims to seek ownership of the entire value chain.

With a pan India 4G licence, Reliance hopes to own both content and delivery hardware and airwaves, thus making it a seamless play which isn’t dependent upon any outside forces.

Making the TV business look attractive again
The TV broadcasting industry is currently plagued with high carriage fees and low profitability. Despite riding years of growth, broadcasters are finding it increasingly tough to carve out healthy bottom- lines as a large portion of revenues are sunk into ensuring visibility for the channel on cable networks. On top of that, under-declaration of revenues by cable operators robs the industry of hard-earned money. India remains one of the cheapest entertainment markets on the planet. As, Sunil Lulla, MD and CEO, Times TV Network puts it, “People in India pay 50 paisa per hour of TV viewing on an average per day. This is the biggest ‘social service’ via the entertainment and information sector, considering the first class content we create for viewers. Globally, people pay 10-20 times of that.”

With the government making it mandatory for cable operators to digitize their networks phase-wise in the next few months and years, the industry is on the verge of a fundamental shift, which might make it more profitable, hence more lucrative for investors.

“This is the media of significant opportunities; especially when we are at the cusp of a game-changing move like mandatory digitization, which will transform television broadcasting and related sectors from a Rs 35,000 crore industry to a Rs 100,000 crore industry,” Lulla says. However, he feels it would be naive to believe that these recent developments are a signal of “All is well”. “It is a reminder that sustainable economic models will survive testing times and television broadcasting too needs the constant discipline of prudent financial acumen,” he observes.

Ambani’s investment might be the first high ticket investment to come in the TV broadcasting sector from outside the media industry. Leaving aside financial investors and the Tata Sky-Star JV, very few non-media industrial groups have been willing to enter the sector. Lack of profitability is touted as one of the top reasons why the business has failed to attract a significant outside investment. With the most basic of issues in the form of carriage fees taken care of, broadcasters can now focus on investing in better quality content and resources to enlarge the scale.

“All our peers and competitors enjoy a large premium because of the size and scale of their networks on the distribution front. This deal will allow us to actually add bulk to our network and negotiate as one large bouquet in the new digitized environment,” said Haresh Chawla, outgoing CEO, Network18 Group and Viacom18, during a recent investor conference call.
Meanwhile, Ambani’s investment in Network18 promises to ignite the appetite of many other industrial houses who might have been sitting on the fence waiting for a big first move to be made.

Building Volume for scale?
Until now, Star TV has been the leader in adopting technology in India. Last year, the company’s main channels like Star Plus, Star Gold, Star Movies, Star World were all made available on HD. In addition, the company also launched the TV feed of its main channel Star Plus on iPad.

Reliance Industries will hope to repeat the success of Reliance Telecom in its early days when a low cost high volume model drove up Reliance Communications’ subscription figures by the millions. With its low cost tablets coupled with compelling content and ownership of 4G licence, it could quickly create scale which rival broadcasting and distribution companies might find difficult to match in a hurry. India has 140 million cable and satellite (C&S) television households and close to 850 million mobile subscribers. In effect, more than 700 million people have access to either a TV connection or mobile phone or both. A market so large provides immense opportunity for the company to create scale once low cost tabs are seeded in the market. The UK-based Datawind, which launched low cost Akash tablets last year, has seen orders soar to almost 14 lakh units in two weeks since launch indicating the immense demand for low cost technology products. Throw in high quality content into the mix available, anytime, anywhere, and television set manufacturers soon might feel threatened. Reliance’s move into media might make rival companies to work together or with other partners to counter the advantage of scale they might create. Star TV and Zee already have a JV going for the distribution business. Given the seriousness of Reliance’s threat, the companies might also consider a more evolved model of collaboration with each other or others in the business for distribution of their content.

(With inputs from Noor Fathima Warsia and Dipali Banka)

Read more news about (internet advertising India, internet advertising, advertising India, digital advertising India, media advertising India)

For more updates, be socially connected with us on
WhatsApp, Instagram, LinkedIn, Twitter, Facebook & Youtube