Zee's plan to gun for growth on its own holds perils as well as promise

Has Zee Entertainment Enterprises decided to be a lone ranger?

On January 22 this year, Culver Max Entertainment (Sony) pulled out, at the last minute, of a merger that Sony and Zee had been working on for more than two years. Soon after began the legal 

name calling.

On February 13 came Zee’s third quarter earnings call, where managing director and CEO Punit Goenka talked of cost cutting, frugality and optimisation. Historically, Zee has delivered gross profit margins between 25 and 30 per cent. These started falling in 2023 and reached just over 10 per cent in the third quarter of 2023-24 (FY24). Rising content costs, investment into its streaming app Zee5, a soft ad environment, and the distractions and expense of the merger led to the drop.

Ever since the breakup, there have been more than a dozen announcements from the Rs 8,088 crore (revenues in FY23) company. It has committed to prune its workforce by 15 per cent, cut costs at its Bengaluru-based Technology and Innovation centre to half of the Rs 600 crore spent last year, reorganised certain business, and so on. Goenka, who has taken a 20 per cent salary cut, seems determined to get to 18-20 per cent in Ebitda, or earnings before interest, taxes, depreciation and amortisation by FY26, from 14 per cent in FY23. An Ebitda of 18-20 per cent should amount to Rs 2,000 crore.

Much of this action probably helped the share price rise a bit in the stock market rally last week. Most analysts do not doubt that Goenka, who has run the company since 2006 and built it into a cash spewing machine, will meet his target on margins. 

“Zee and Sony are individually profitable and business will go on,” says Kunal Dasgupta, founder of iTap Entertainment and Gaming, and former CEO of Sony. Zee has more than 90 channels (50 of them in India) in Hindi, Marathi, Telugu, and other languages. It has a 17 per cent share of television viewership. Last year, its studios produced hit movies such as Gadar 2 and distributed others such as 12th Fail.

Margins, then, are not Zee’s big problem. It is that “there seems to be an absence of viable partners. The cost-cutting is a sign of the lack of more convincing routes for growth,” says Daoud Jackson, senior analyst, media and entertainment at UK-based Omdia.

Dasgupta says: “Zee (and Sony) are playing in a dwindling market that will dwindle further. I don’t see anything happening unless there is some brilliant content from these guys, something no user-generated platform can match. Zee doesn’t need a partner. It needs growth through innovation.” 

That captures where Zee currently is and where it is headed.

Beyond Ebitda

Television, which has traditionally been half of the total media and entertainment revenue pie in India, shrunk by 1.8 per cent in 2023 over 2022, going by the FICCI-EY annual report. It now stands at Rs 69,600 crore. Of this, 43 per cent, or Rs 29,700 crore, comes from advertising. The rest is distribution revenues that go, largely, to DTH and cable firms. A small portion comes to broadcast firms. For most large broadcasters, like Zee, advertising brings in 50 per cent or more of the topline.

In 2023, national television advertising fell 6.5 per cent and the Hindi market, the largest part of the TV ad pie, remained soft. Zee has been particularly hit because it pulled out Zee Anmol, its free-to-air (and therefore ad-supported) channel from DD Freedish in the summer of 2022. The state-owned free DTH platform, which reaches an estimated 50 million homes, is the largest distributor of TV in the Hindi heartland, where Zee has traditionally had 10 per cent or more viewership share. This has now fallen to 6 per cent.

Analysts are waiting for a big move on the free-to-air market, either by going back on DD Freedish or by doing a big deal with YouTube, the largest video platform. The 10 per cent uptick in subscription revenue is heartening, but it comes from a pressured pay TV ecosystem. Pay TV homes have fallen from 165 million in 2020 to an estimated 90 million currently.

That is why the cost cutting at the tech and content end worries analysts. “What will suffer is Zee5. If the hours of original programming on linear (Zee TV and its other channels) fall from 4 hours a day to 3.5 hours, there is no issue. But Zee5 needs constant investment, it is the future,” says one industry insider.

The perils of being a lone ranger

“Zee continues to have strong business fundamentals. I have chalked out a firm and structured plan to bring back our margins to industry-beating levels and drive growth for the future,” said Goenka in February's earnings call.

Zee’s decision to take on the future all by itself raises two red flags.

The first is that the rationale for the merger and for scale remains. Its competition is not old and known rivals such as Star India or Viacom18, but the Rs 28,040 crore (gross ad revenues in FY23) Google India and the Rs 18,308 crore Meta. 

These firms have decimated publishing, television, and film markets across the world with their offer of cheap and largely free video. These could be from a T-Series or TVF on Google’s YouTube or cat and dog reels on Meta’s Instagram. Their dominant share of the online audience has meant that three-fourths of all digital advertising and a bulk of all growth in it goes to them. It leaves very little for traditional media firms that do well with audience numbers online. 

That is why scale and partners­hips are critical. Reliance-owned Viacom18 and Disney Star got together earlier this year. PVR and Inox just finished their merger. Warner Brothers-Discovery merged in 2022. Almost every major media deal in recent years has been trigge­red by the rising clout of the tech media majors.

Zee was among the earliest companies to realise this and look for a partner. But, and this is the second red flag, in the new scenario Goenka’s focus now shifts from readying the firm for the future to the immediate operations. He has pared down top management and is now pretty hands-on in the nitty-gritty of Zee’s operations. This granular approach works for the new board he reports to. 

But what does it mean for the future of one of India’s largest media firms? 

“A lot of people see management as the strength of Zee, so it creates a tension in terms of what Zee can do with partners. In this regard, going it alone and focusing on EBITDA, at least for a period of time, makes sense,” says Jackson.