Coverstory pg[2]: Back to Earth

Back to Earth
(Contn.)

Superman II: The return?

When Zee and Star parted ways last year, it was a major victory for Chandra. Along with the merger of the overseas operations, Zee Multimedia Worldwide Ltd (ZMWL), the buyout of ATL, Siticable, and Patco meant that the group's consolidated revenues and profits would swell. Not only that, Chandra could now go full steam ahead with his plans for Net via cable, as he was now a 100 per cent owner of Siticable. Then, the sports and English channels could also be flagged off. And, lest we forget, at $296 million, the deal was a steal for Chandra.

Of course, there was a heavy price to pay as the company's shareholders will testify. The payment to Star TV in terms of stock (worth $143 million), the acquisition of ZMWL, and the private placement with Goldman Sachs (which was required to pay the $153 million cash component of the deal) succeeded in bloating ZTL's net worth, and bringing down the return on equity.

Meantime, don't forget what the loss-making Star TV got from the deal-hard cash to wipe out a part of the losses that it had piled up, and more important, fuel for further investments. And yes, Star was now free to launch a 24-hour Hindi channel as well as a Hindi movie channel. That's exactly what's in the works at the North-West Mumbai headquarters of Star TV. That, and much more. Kaun Banega Crorepati might be the most hyped and most visible prong of the Star onslaught, but Nair insists there's more firepower to come. He beams: ''Star is gunning for the No 1 position in India. And we'll invest as much as Sony or Zee is doing on content.'' Tell Nair that Zee will be investing Rs 260 crore annually on content and, without blinking, he mutters: ''We'll match that.''

That's not all. Star officials point out that alliances are being worked out for the launch of international channels. The History Channel (which is currently part of the Star bouquet in Dubai) is one possibility. And Michael Bloomberg on his recent visit met up with Star TV CEO Peter Mukerjea to examine the feasibility of launching a joint venture business channel. Plus, there's a 24-hour Hindi news channel on the cards. Star executives maintain that money is not an issue, and that Murdoch is willing to pump in whatever it takes to get to the top.

But Zee is quite confident. Chandra himself was out of the country and unavailable for comment, but his top aides spoke to BT. ''It doesn't bother us,'' quips R.K. Singh, 49, CEO, ZTL. ''Competition is inherent, and we are alive to its demands. We will continue to maintain our leadership.'' Chandra's strategy here is two-pronged. The first is to enlarge the advertising pie by flagging off new channels (largely regional) to tap a virgin market. Simultaneously it plans to move away from the free-to-air model by making subscribers pay for viewership.

The two threads of this strategy go hand in hand. The four regional channels-Marathi, Gujarati, Punjabi, and Bengali, all of which come under the Alpha umbrella-the two English channels, and the children's channel, Nickelodeon, have all been put on the subscription platform. These seven channels are beamed direct to the operator (DTO), who in turn relays the channels to the subscribers. Zee is offering this seven-channel bouquet for Rs 12 per month. Currently, the subscription market in India is minuscule at between 5 and 7 per cent of 27-28 million homes, and is expected to increase to 20-25 per cent in 5-7 years. ''But because the base is small, there's a large upside here,'' says Singh.

A deadline of June 30, 2001, has been fixed for taking the flagship channel Zee TV to air as a paid one. But will it work? The initial reaction of subscribers suggests that it will. In 40 days, the channel has succeeded in tying up with 18,000 operators all over the country. ''The demand was for over 20,000 IRDs (integrated receiver decoders, which is the hardware required at the operator's end), but we could not supply those many,'' says Singh, who is confident of trebling revenues via DTO by the end of the year.

In fact, so upbeat is Chandra on the regional channels that he expects to break even by March, 2001, as against the 24-30 months it usually takes. That's largely because of the response they've got so far. The Alpha Marathi channel is the most popular one of its kind, and is, in fact, the third most popular channel in the western region (after Zee and Sony). The Punjabi channel is No 2 to DD's channel, and Alpha Gujarati is among the top 3 in the region.

That's why Chandra perhaps isn't too focused on the sports channel these days, especially after losing the World Cup bid to the WSG-Murdoch duo. ''I am not ruling out the sports channel, but it doesn't have to be the only growth driver,'' says Singh. What he means is that if he meets his subscription target of eight million homes in six months, he will end up with the viewership of a sports channel, ''at just a third of the investment.''

Whether the sports channel takes off or not, Chandra has little choice but to try and break even as fast as possible with the Alpha bouquet. That's because the regional channels are devouring Rs 100 crore annually (expenditure on content, transponder time, uplinking and distribution). The English channels need another Rs 25 crore. Chandra can't rely too much on ZTL's cash flows, which are needed for mainline channels' growth.

There lies the rub for the Zee group. Investments have been made, but returns will take their time in coming. Other than the regional channels, the English channels and even Zee News-which has been around in various avatars for four years now-are yet to make money. What's more, most of the other Zee subsidiaries are in their fledgling stages, and breakeven is clearly some time away.

Superman III: Sequels are expensive

E-connect, which has the portal zeenext.com, will need investments of Rs 185 crore over the next two years. But it's the marginally-profitable Siticable that will take up the chunk. In its bid to provide video, voice and data via cable, Siticable will need Rs 2,400 crore to set up a hybrid cable network across 26 cities along with gateways in eight cities. There's also the radio business, into which Rs 100 crore will be sunk. And then there's the education foray-via Zee Interactive Learning Systems-which calls for Rs 500 crore over five years. ''This is a call we have to make-either we make investments and grow, or fall by the wayside,'' says Singh. Seconds Deepak Shourie, 51, CEO, Zee News, and the group's publishing and fm business: ''The investments are long-haul ones. But if you have the resources-in terms of people and finances-which Chandra has, there's no reason why you shouldn't make them.''

But the challenge is daunting. It will be years before any horizontal portal-zeenext has 49 channels-begins making big money. Today, the only source of revenues is advertising, and it will be some time before revenues from b2c and b2b operations begin to kick in. It has tied up with ICICI, and two others-one for travel, and the other for retail shopping-are in the works.

If portals look risky, the resource-heavy cable infrastructure project seems treacherous. Dev Naganand, 50, an ITC veteran who's in charge of the portal and access businesses of Zee, believes the critical issue is the rate at which the Net usage grows. ''If we manage to get three million users, at Rs 1,500 per month, we're talking about revenues of Rs 5,400 crore,'' says Naganand.

But, it's not that simple. By the time the cable project gets going next year, Net access rates would have fallen, and Siticable will have to price itself competitively. And then there are others in the race like Hughes Telecom, Hathway Cable & Network, SpectraNet, incablenet and RPG Netcom. Star, too, is planning a similar network, but will be handicapped without a cable network of its own. Market sources claim Chandra is considering selling a stake in Siticable to Reliance, which has broadband and other new economy dreams of its own. Indeed, that could explain the renewed activity in the Zee stock last fortnight (it was up by 10 per cent, to Rs 528 on July 14).

What could determine the fate of the broadband project-and perhaps that of the entire group-is how Chandra manages to raise the funds. ''Any further dilution in ZTL will be suicidal. The already low return on equity will diminish even more,'' says First Global's Majumder. Naganand claims Siticable will be the vehicle for funding, through a mix of debt and equity: ''The Rs 2,400 crore can be raised on a 1:1 debt equity ratio, which can at the most go up to 1.5:1.'' Of course, the quantum of Siticable's equity put on the block will depend on its valuation. The upside-Siticable reaches five million homes in 43 cities. The downside-profits stood at just Rs 1.1 crore last year.

There's little doubt that for the first time in many years, Chandra is feeling the heat. So far, in his maverick style, with Vice-Chairman Vijay Jindal in tow, the media mogul has propelled the business to the top. But it's the next few months that will test his mettle. Never has the flagship business been under greater threat. And never have the funding compulsions for new businesses been so huge. And it's the men at the helm who are feeling the heat. ''Whilst Chandra will give some leeway to competent people, he doesn't tolerate incompetent ones. He's a no-nonsense person,'' says the Zee insider quoted earlier. You can expect heads to roll.

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