The big broadband battle: Zee and Jio aim for a slice of each other's pie

Both the companies are headed in the same direction; they want to offer fixed broadband to their subscribers in addition to TV services, which will increase their average revenue per user multifold

On one side is Reliance Jio, a telecom player that wants to be counted in the media convergence space. On the other is Subhash Chandra’s Essel group, a media empire with interest in broadcasting, distribution, print, and the latest — over-the-top services and fixed-line broadband. Both have ambitions that can only result in an epic clash of the titans.

On Tuesday, the promoters of Zee Entertainment Enterprises, the flagship company in the Essel group, announced that it will sell half its stake (around 20.8 per cent) to a strategic investor and divest in its step down subsidiaries. At current market cap, the stake is valued at Rs 88.4 billion. This cash and a new partner will help Essel in two ways: one, allay concerns that it might not have the financial power to challenge Reliance; and two, by roping in a global strategic partner, it would be able to get cutting-edge technology in the convergence world, where Jio is miles ahead.

Analysts had been concerned about the huge investment set aside by Zee to produce 500-600 hours of over-the-top (OTT) content in the next 18 months as the corpus is much more than its guidance indicated. Their worry was that the heavy spending on OTT would limit its cash flow generation for the next few years.

Zee’s announcement comes just a few weeks after Jio took on Essel in the content distribution arena by acquiring a majority stake in two digital cable companies — Den Networks and Hathway Cable and Datacom — which in one sweep will provide them entry into 20 million subscriber homes, or 23 per cent of the market, pushing Essel’s SITI Cable to the second spot in the cable distribution market. With 11.7 million subscribers, SITI Cable has 13.4 per cent of the market.

What makes the future interesting is that both the companies are headed in the same direction; they both want to offer fixed broadband to their subscribers in addition to TV services, which will increase their average revenue per user multifold.

It is the OTT space, however, where the battle will be more intense. Currently, there are 250 million active monthly OTT users and analysts estimate this number to more than double in the next five years, making it an attractive advertising medium as well as a source for subscription revenues. The usage per subscriber is expected to more than double from the current 60 minutes per day in the next four to five years.

Zee5, an entertainment channel, has taken this market by surprise by grabbing over 41 million monthly active subscribers, same as Jio TV Live. It is now behind only Youtube and Hotstar. Based on AppAnnie data, which measures downloads, it was second among OTT apps on Playstore in August, ahead of JioTV, which stands third.

A few factors are lined up in favour of Zee. It has an edge over others because of its vast content library which it is expanding further by buying more movie content. According to Kotak Institutional Equities, it has set aside Rs 22-25 billion in FY2017-18 for buying movie rights. The gap between Jio and Zee is already stark in this area; Jio did not acquire any digital movie rights of the top 25 films between June 2018 and June 2019, while Zee acquired six of them.

Jio, however, has its own inherent strengths. It has a captive subscriber base of 250 million 4G customers, who are offered OTT channel membership almost free. The company hopes to rope in another 50 million fibre-to-home households, who would also likely use OTT channels. Given the scale of its operations, it has the wherewithal to make large investments. Analysts say that Zee currently would be hard pressed to match Jio’s financial power.

Jio is also aware that it does not have Zee’s strength in content and is quietly working to plug that gap. It has bought stakes into well-known content companies with large libraries — 5 per cent in Eros International and 25 per cent in Balaji Telefilms. It has also entered the films space with Jio Movies( Zee has its own movie production set up ) and has recently increased its stake to 51 per cent stake in Viacom 18, which gives it control over Colors TV.

The stakes in content companies will help Jio to create an integrated OTT bouquet offering for consumers as well, with Voot (Viacom 18), Eros Now and ALT Balaji. Together these platforms have over 100 million active customers.

For Zee to match Jio in the OTT game could be tough. Analysts say Zee5 would be better placed to face external risks like prolonged irrational competition if it gets into joint venture partnerships with companies having complementary strengths, like Flipkart, Airtel, Chinese internet players or AT&T-TWC. Zee’s move to find a strategic partner is seen as a step in that direction.

The acquisition of cable companies, meanwhile, will help Jio to achieve their objective of offering fibre-to-home services in 50 million homes, which was looking too ambitious as the right of way to put fibre in the last mile is a cumbersome and an expensive proposition. Now, it can enter over 350 cities without undertaking the task of laying fibre.

Currently, Hathway and Den together have only one million fixed broadband subscribers. The rest only use it for TV services. But Jio has an opportunity to invest in upgrading the back end from cable to fibre so that it can woo the remaining 19 million too by offering them high-speed broadband. This will help Jio more than triple the average revenue per user, as subscribers who used cable to only watch TV will now be broadband users as well.

Essel, on the other hand, has digital cable operations in 580 locations, but only 250,000 broadband subscribers. To upgrade its network it would have to put in huge investments.

Essel believes that its dual strategy of betting on cable and fixed broadband distribution as well as direct-to-home gives them an edge over rival Jio, which is only in the former. A senior executive of Dish TV, the largest DTH operator in the country from the Essel stable, says: “DTH will cater to the Indian market which pays Rs 200 to Rs 250 ARPU a month. Fixed broadband will be for premium customers, with ARPU’s of Rs 800 to Rs 1,000 a month. For Jio to reach 50 million households, they have to take their fibre network to an addressable market of 200-250 million households, which means majority of the households. And that cannot be cheap.” However, when two giants clash the outcome is hard to predict. As a senior Jio executive says: “DTH is just an intermediate technology which will not exist very long.”