Vanita Kohli-Khandekar: Parrying the pirates

Moser Baer’s low-cost home video business got off to a great start. Yet it is changing course now, why?.

The logic was impeccable. Since pirates walk away with a bulk of home video sales, why not price the legal stuff at the same level or lower and take the market away from them. In 2007, the Rs 2,136-crore Moser Baer used that logic to get into the home video business with VCDs priced at Rs 28 and DVDs at Rs 34 apiece. These were a fraction of the ruling prices then.

Two years later, Moser Baer is changing its strategy — it has started experimenting with higher prices in several south Indian markets. “There is no one pricing strategy we will follow. Each language is a market for us. The pricing strategy will be based on what is appropriate for that market. While we do want to keep increasing volumes, we also want to improve realisation,” says G Dhananjayan, chief executive, Moser Baer’s film business.

The Moser Baer experiment, and its subsequent change of course, is not just a case study in media economics. It is a comment on the strength and impact of piracy in India which continues to eat away at the legitimate business. Home video sales in the US are generally two-three times of theatrical revenues. In India, at Rs 900-odd crore, home video sales are an abysmal 8-odd per cent of theatrical revenues.

A recent Rand Corporation report draws, for the first time, a clear connection between organised crime, film piracy and terrorism — something that has been talked about in India for long. The report states that film piracy has helped support terror groups. It documents three cases, one of which involves the infamous D-Company.

The Moser Baer experiment also shows that film and music are completely different products when it comes to digital sales and battling piracy. So while an iTunes could help the global music industry, a similar experiment in low-cost options may not work in films.

What happened
Moser Baer is one of the world’s largest manufacturers of optical storage media or CDs as we know them. So, putting films onto DVDs and VCDs was a natural forward integration. In 2006, it brought on board two executives from Saregama — Harish Dayani and Dhananjayan. (Dayani is CEO of Moser Baer’s entertainment business). In many ways, it was the first really large company to enter the then (2007) Rs 600-odd crore home video market, which had till then been dominated by smaller players such as Ultra, Indus or Eagle.

The company spent a lot of time and energy in buying the rights to 10,000 films, about three-fourths of these in languages other than Hindi. The thinking was: Work on wafer-thin margins, maybe 5 per cent or so, but grab the national volumes from the pirates. At that time, the total legitimate market was estimated to be 68 million units. Roughly, the ratio of legal to pirated sales is 1:4, says the company. So, the market that Moser Baer was targeting was over 272 million units.

In the first full year of operation in 2007-2008, it did 80 million units, humungous by any standard. This led to more than doubling of the overall market to 142 million units. (The company refused to share value numbers.) However, in 2008-09, Moser Baer just about managed to do the same volumes even as the market fell to 124 million units. It was evident that volumes would fall further.

Pirates strike back
When they were launched, blank CDs cost Rs 6 and blank DVDs Rs 14. After loading the content, distribution and marketing costs, the CD had to be priced at Rs 30 or more for everyone in the value chain to make money.

By 2008, blank CD and DVD prices fell to Rs 3.50 and Rs 8, respectively. Soon the pirates started loading two or more films at the cost of one. For a company that was targeting the bottom of the pyramid, Moser Baer realised that “there is no bottom to this pyramid as it is growing exponentially at the bottom,” says Dhananjayan.

It seems evident that prices would have got pushed down further, given that pirates don’t pay taxes or royalties. They don’t have the same sort of corporate overheads that Moser Baer has. Why, then, didn’t the company think of this? “Of course, we anticipated a fall in the prices of blank storage devices, but in the region of 20 per cent or so, not to the extent of 50 per cent. That is huge as it reduced the landing cost to the pirates substantially. This helped them reduce the selling prices dramatically,” says Dhananjayan.

Besides, there was the pressure created by the long gap between the theatrical and home video release — anywhere from six months to a few years. While the company had pushed to advance the home video release to six-eight weeks within theatrical release for Hindi films and six-eight months for non-Hindi, the gap was still too huge. The pirates used this to release new films that Moser Baer did not have, at dirt-cheap prices — for Rs 20, you could get a DVD with four brand new films at the same time as the theatrical release.

According to people within the industry, another issue is that the estimates on piracy are at best, estimates. There are several of them, most floated by industry bodies to lobby for stricter rules. Could piracy be overestimated? “We are also in the blank medium and have an idea about the number of discs going into piracy for films — 450 million discs a year is actually a conservative estimate of piracy sales in India,” says Dhananjayan.

In any case, since there was no further surge in volumes, the company couldn’t drop prices further. Many other players who had followed Moser Baer’s lead realised the same thing. “Many of us tested the waters. However, we did not see volumes go up as was needed to sustain the value, which is when it (dropping prices) would have made sense,” says Muslim Kapasi, managing director, Excel Group, which has home video among other businesses, .

By January 2009, Moser Baer decided to change course. It started by experimenting with prices, taking them to Rs 40 (VCD) and Rs 50 (DVD), then Rs 50 and Rs 60 right up to Rs 99. “We wanted to check on price elasticity,” says Dhananjayan.

There was no consumer resistance at the price levels of Rs 60 (for VCDs) and Rs 99 (for DVDs) in Kerala. For instance, if a VCD was priced at (an MRP of) Rs 30, it sold 1.65 lakh units, and at Rs 60 it sold one lakh units. Needless to say, realisations were better at Rs 60.

In Kerala, a state with an official DVD penetration of two million, the most Moser Baer could sell was 1.65 million units, not even 10 per cent of the market. So, it made sense to stick to the “better realisation” logic. Moser Baer is now trying the same thing in Andhra Pradesh and Karnataka.

Beating the pirates
Is there no way to beat home video piracy? Dhananjayan believes the fight is over the policy — regulation and implementation of the law. “Unless and until there is a level playing field with the pirates — no taxes, no royalties — just commercial combating without any criminal backup is futile,” says Kapasi.

Both, however, shy away from mentioning that as long as consumers don’t feel as strongly about piracy as content creators and marketers, the battle will never be won.