Multiplex Business will Continue to Thrive; OTT Platforms will only supplement industry growth

The direct to digital release of Ayushmann Khurrana and Amitabh Bachchan starrer – Gulabo Sitabo due to Covid-19 created some flutters in the multiplex industry, as the stakeholders were worried that this could set a new-trend for more movies in the long-run as well. Basis the news, the PVR and INOX leisure stocks further corrected on May 15th 2020 due to nervousness among the investors.  To be sure, Gulabo Sitabo is not the first instance of a movie releasing directly on Over The Top (OTT) Platforms. Dharma Production’s Drive also released directly on Netflix.

A movie generates revenue from 3 main aspects – music rights, theatrical release and OTT release. It is every producer’s vision to have a successful box office run and then sell the distribution rights to an OTT platform. If a movie is skipping the theatrical release it loses out on the entire revenue that could have been generated from the box office.  However, is there any incentive to release the movie directly on OTT platform? Yes, there is but only for a small budget movie.

For example, a small budget film made with a budget of say around INR 15 Crore will have to spend atleast INR 8-10 Crore for marketing & promotions if the movie is going forward for a theatrical release. The movie will therefore have to record net collections of atleast INR 30 Crore for the producer to make 20% return on Investment. However, if the film does not do well at the box office then it will also have ripple effect on OTT revenue. Therefore, in such a scenario if the producer wants to hedge his/her risks and does not have confidence in the movie’s final cut then he/she may directly try to sell the movie to an OTT platform for INR 30 Crore.

On the other hand, imagine a scenario where a small-budget film like Andhadhun would have directly released on OTT platform. The movie would have fetched maybe around INR 35-40 Crore from an OTT platform. Perhaps an INR 10 crore markup on what platform actually wanted to pay but for the excellent content. Even this would have been profitable for producers with return of more than 25%. But the movie made close to INR 100 Crore domestically. Had it released directly on an OTT platform, it would have led to a higher opportunity cost for producers.

It is very important to note that OTT Platforms do not make any additional revenue from the title/movie even if more users are watching the movie. The platform only makes revenue from the subscription fees, unless of course the platform is charging on pay-per view model.

Economic do not support direct to digital release for movies with budget exceeding INR 50 Crore

A Sanjay Leela Bhansali is made with a budget of over INR 100 Crore. There is no way the movie can skip the theatrical release. The OTT platforms will never buy content at such high costs and moreover the producer will want a significantly higher return when such huge investments are involved. Therefore, for any movie which has a budget of over INR 50 Crore, it is unlikely that the movie will directly release on an OTT platform. Furthermore, movie by 3 Khan’s, Ranveer Singh, Ranbir Kapoor’s etc. always have costly economics. Can they make good return on Investment by releasing it on OTT? Never.

A movie shot through IMAX Camera will never provide same experience on your television

Would you want to watch a Marvel movie on OTT platform during your first viewing? Of course Not! Any Hollywood (or Bollywood?) movie with good amount of VFX will always be preferred to be watched in multiplex.

Viewers have continued to throng multiplexes/theatres even with advent of OTT platforms

Baahubali 2 : The Conclusion released in 2017 recorded gross collection of around 1400 Crore (net collection of ~INR 1100 Crore) at Box Office. Baahubali: The beginning released in 2015 had recorded gross collection of ~INR 520 Crore

Tanhaji: The Unsung Warrior released in 2020, made with a Budget of around INR 150 Crore recorded domestic box office collection of INR 280 Crore at the box office. This was Ajay Devgan’s highest-ever grossing movie.

Even relatively mid-budget films like Uri:The surgical strike, Mission Mangal and Dream Girl released in 2019 recorded net collections of ~INR 250 Crore, ~INR 200 Crore and ~INR 140 Crore respectively. Thereby, providing whooping returns of over 100% to producers.

Despite the advent of OTT platforms, multiplexes have continued to attract strong consumer demand across genres. Also watching movie in a multiplex/single screen enhances the movie-watching experience due to its overall infrastructure. The viewers pay for this superior experience and it is unlikely to change over long-run.

OTT Platforms will look to produce/distribute more original/exclusive content for their platform to attract more subscribers

Netflix, Amazon and Hotstar have been looking to distribute more exclusive content on their platforms in-order to increase their subscribe base and also ensure renewal from current subscribers. Not all “exclusive” content is produced by them, they merely act as a distribution platform. For example, Extraction is produced by Chris Hemsworth and Anthony Russo and Netflix is the exclusive distribution platform. However, Netflix also produces its own movies like The Irishman, with theatrical and platform release on the same date.

Going forward, all OTT Platforms will look to produce its own content – especially mid-budget films and Web series- where they will own its complete rights. Web Series content which are broadcasted in season mode helps the platforms to enhance subscriber stickiness. On the movies side, increasing competition among platforms to acquire distribution rights may make it difficult for them to strike lucrative deals and thereby leading to platforms looking to produce in-house content.

Can Pay-Per View Model by OTTs disrupt the multiplex industry?

There is an increasing debate about ability of Pay-per View Model (user paying fixed amount to watch a movie) on OTT platform to disrupt the business of multiplex industry.  Through this model, the platform gets payment from the user who watches the movie which can help increase their revenue generation and thereby also enhance their ability to pay more to the producers to acquire content. Even without taking into consideration the other benefits of multiplex such as the ambience, sound quality and overall superior experience as compared to home-viewing; the model would also fail on the economics side for new releases.

If a family of 4 watches a movie in multiplex, it spends around INR 600/- for 4 tickets. Now, while watching it on OTT platform the entire family will watch through one user ID and it is unlikely that the platform can charge more than INR 300/= per user ID to watch a movie. Therefore, a movie with potential to earn INR 200 Crore in multiplex may earn only INR 100 Crore due to multiple people watching from single user ID.

Further, the OTT Platforms would need to have subscriber base of atleast 25 million paid subscribers in-order to generate substantial revenue from pay-per view model. As per latest reports, Netflix currently has 2 million subscribers in India.

OTT Platform will act as an enabler for small-budget content driven films and aid industry growth

• Big Budget Movies will never look for direct OTT release except during extraordinary circumstances like the world is witnessing today
• More movies may go for direct OTT release in short-run as producers will look for liquidity
• OTT Platforms is going to be a game changer for small-budget films as content driven films now have an additional platform to monetize their movie; this will also boost the confidence of the producers to invest in low-cost content driven projects
• However in the long run, multiplex business will continue to thrive due to the overall experience it provides to its viewers and as the leading revenue generating channel for its producers

PVR is currently available at 29X earnings as compared to ~65X during February 2020.

Inox Leisure is currently trading at 13X earnings, as compared to 33X during February 2020.

The correction in stock prices of multiplex players due to the prevailing negative sentiment – Covid-19 and direct-to-digital release of few movies – provides a good entry point for long-term investors.

HAPPY INVESTING!