STAR Plus leads the charts but it's ZEE that rakes in the moolah

In FY13, Zee Entertainment net profits and operating margins were nearly twice that of Star India

STAR Plus has ruled television ratings in the general entertainment channel (GEC) space for three years with some of the top-rated serials like Diya Aur Baati Hum and Pyaar Ka Dard Hai Meetha Meetha Pyaara. And a close look at the charts suggests STAR India’s primary GEC is in no hurry to vacate the numero-uno spot. However, even as STAR India has chosen the growth-and-innovation strategy to maintain its leadership in ratings, rival ZEE Entertainment network, despite a much smaller revenue, has focused on higher margins and posted a higher net profit.

For the year ended March 2013, ZEE Entertainment Enterprises Ltd (Zeel) reported a net profit of Rs 640.5 crore and a core operating margin of 38.2 per cent on a standalone basis. These were nearly double the Rs 349.3-crore net profit and 14.8 per cent operating margin posted by STAR India for the same period, data from the Registrar of Companies (RoC) show. Operating margins exclude other income for both companies.

STAR India, which houses the group’s Hindi and English entertainment channels, also has the telecast rights for international cricket matches of the Board of Control for Cricket in India (BCCI). The group has three other companies that own Bengali and Marathi channels, the South Indian business, and other sports properties. Industry estimates peg the STAR group’s consolidated operating margin at 25-30 per cent, compared with Zeel’s 30 per cent last financial year. Zeel’s consolidated numbers include the figures for its sports channel, Ten Sports, and other non-media subsidiaries.

ZEE also beats STAR in terms of shareholder returns — by a wide margin. In 2012-13, Zeel reported a 20 per cent return on equity (RoE), compared with STAR’S 11.9 per cent. Among peers, only Discovery Communications India comes close with an RoE of 18.6 per cent.

Experts attribute ZEE’s dominance on these counts to a difference in growth strategies of the two companies. “ZEE is very conscious about margins and return on capital. It stays away from high-cost properties like marquee sports events and celebrity-driven reality shows. STAR, on the other hand, is greatly focused on growth and does not shy away from shows like Satyamev Jayate that generate high revenue but also are expensive,” says Abneesh Roy, associate director (Institutional Equities – Research), Edelweiss Securities. By comparison, Zee’s top reality show Dance India Dance is not celebrity-driven, so it entails a much smaller cost.

“ZEE’s international revenue, too, is higher than those of STAR, Multi Screen Media (owner of Sony Entertainment Television) and Viacom18 (Colors). This reflects in the bottom line, as international business does not have very high incremental costs,” adds Roy.

STAR India’s 2012-13 margins were also affected by the cost related to the acquisitions of broadcasting rights for BCCI-conducted international matches. The network acquired the exclusive media rights for the matches played by the Indian team in the country from 2012 to 2018. For this, it has to pay Rs 4,603 crore over the period. “Sports take a while to bring in returns, given the huge upfront payment for the rights. Big profits for STAR will accrue this financial year or next year,” says a senior executive with a rival firm who does not wish to be named.

A senior executive who has worked with the STAR group says STAR India does not operate with the goal to maximise margins. It seeks to balance margins with its strategy of investment in innovation & marketing and industry-leading topline growth. “The focus is to create compelling content and it does not mind investing back into the business for long-term strategies. They are the market leaders in sports and general entertainment; that comes at a cost,” he says.

Zeel, on the other hand, has been able to sustain its operating margins in the range of 35-40 per cent for nearly five years. And, it seems happy to stay at the number-two spot in the GEC space. For a couple of years, the group’s flagship channel, ZEE TV, has been a consistent second in viewership ratings. It managed to trump STAR Plus on a few occasions in 2013, but it has yet to do so this year.

According to experts, ZEE may not be able to maintain its current level of margins in 2014-15, considering investments in starting its new GEC ‘Zindagi’ and a couple of other channels that it will launch this year.

While the ZEE group has a bouquet strength across genres, it is struggling to maintain market share in the bread-and-butter GEC space because of increasing competition. The combined viewership share of STAR Plus and Life OK, at 41 per cent, is more than twice Zee TV’s 16-17 per cent. ZEE’s share is also less than the combined viewership of MSM’s SET and Sab TV. In this context, Zeel needs a successful second GEC to help it gain market share and ringfence its money spinner Zee TV.

Analysts say Zeel might now have to go the STAR India way and invest in strengthening its presence in the GEC space, if it wants to sustain and improve its advertising revenue. This could involve taking some hit on margins, at least in the short to medium term. As digitisation progresses and subscription revenues become substantial, content will become the key differentiator and networks will sacrifice margins to invest in content.