Home entertainment won't be same in India

The rows of VCDs and DVDs neatly stacked in the room make a fitting background as Harish Dayani excitedly chalks out Moser Baer's ambitions.

It has been only a few months since the world's second-largest disc manufacturer entered the Indian entertainment business, but the chief executive officer of the entertainment business is already aiming to expand the home entertainment market to five times its current size.

He's begun with a bang: the company launched VCDs and DVDs at Rs 28 and Rs 34 respectively, when others like T-Series and Ultra were selling titles in the Rs 150-300 range.

Moser Baer is not just taking the battle to T-Series and Ultra, which are predominant in the Hindi film segment. It has also entered markets like Tamil Nadu, Kerala, Karnataka and West Bengal with titles in regional languages.

Being a late entrant, the company has chosen to use a low margin strategy to increase volumes in the home entertainment market. In fact, it aims to make home entertainment VCDs cheaper than movie tickets (upwards of Rs 50), cheaper than pirated discs (Rs 80-100) and even cheaper than renting a VCD (Rs 50 for a new release).

As the company plans to tap an installed base of 13 million households with DVD players and around 40 million homes with VCD players (source: industry estimates for 2006), competitors are reacting. Two months before Moser Baer's January 2007 entry into the entertainment sphere, Ultra dropped its prices from an average Rs 300 to Rs 45.

T-Series, too, recently cut prices to Rs 45 for one movie and Rs 75 for a set of three movies on a single DVD. Both offers were on old titles.

Still, competitors are quick to point several chinks in the Moser Baer strategy. Access to new titles is one of them. While old titles cost Rs 100,000-400,000, new movies cost anywhere between Rs 1 crore (Rs 10 million) and Rs 4 crore (Rs 40 million).

According to industry estimates, the cost of replicating movies on CDs is around Rs 14. Distribution costs amount to another Rs 3 and taxes of Rs 2, bringing the total cost to Rs 19. But Dayani claims that Moser Baer has in-house facilities to replicate CDs for Rs 10.

He says confidently, "Our production cost is only Rs 13, and the resultant margin is enough for us to profit. We will launch new movies, too, at identical rates." That means Moser Baer is claiming a margin of Rs 15 (against the estimated Rs 9) per CD, which is still far below that of rivals' Rs 150 (minimum).

Still, even if it can beat down production costs, the company has no control on movie rights. Do the math: if Moser Baer has to break even on a new movie (where it has paid Rs 4 crore for the rights), it has to sell 2.6 million VCDs.

Industry estimates place the VCD sales of even blockbuster movies at around 300,000-400,000. Competitors, on the other hand, can sell a tenth of that (250,000) at a Rs 200 price point.

To Moser Baer's advantage, competitors have not exploited the full market potential and have instead been fighting a losing battle with video pirates. The organised home entertainment market is estimated to be worth Rs 650 crore (Rs 6.5 billion) while the pirated market is nearly twice the size at Rs 1,000-1,200 crore (Rs 10-12 billion). In countries like the US, a Hollywood movie earns nearly 50 per cent of its revenue from the home entertainment category.

For Bollywood movies, the same is as low as 5-7 per cent, excluding piracy losses. If Moser Baer gets access to new movies and sells them at low prices, the market will surely grow.

The company is also extending itself beyond its comfort zone: it now plans to co-product movies. Moser Baer is already in talks with producer-director Anubhav Sinha, the maker of films like Dus, for an eight-film contract. With this backward integration, Moser Baer hopes to further tighten the screw on piracy.

Typically, a movie is released on video four to six weeks after it opens in movie theatres, by which time video pirates have already made thousands of illegal copies. Moser Baer's plan is to release VCDs of its co-produced films within the first week of their theatre release, working on the understanding that the bulk of theatre collections take place in the opening weekend. It's a plan that is finding champions across the industry.

Says Adlabs Films chairman and managing director Manmohan Shetty, "If the Moser Baer model works, the industry will benefit. In any case, four weeks after release the theatre-value of a film is very low."

Not surprisingly, Moser Baer isn't the first company to venture into co-production of films - competitors like Ultra, Shemaroo and T-Series are old hands in the business. But there is a critical difference - for these companies, film production is a core part of their diversified businesses. For Moser Baer, it is one more way to gain video distribution rights.

But to make the low-margin, high-volume strategy work, distribution will be key. Ernst & Young National Leader, media and entertainment practice, Farokh Balsara agrees. "In the past, pricing of DVDs and VCDs was far too high. At the new prices, if a company builds a robust distribution network, then the home video market will reach its true potential."

Moser Baer claims to have already set up 456 distributors across the country. In a year, the company plans to reach 150,000-175,000 retail outlets across the country. Even kirana stores and pan-beedi shops are being targeted. Dayani believes that grocers will stock latest film CDs the same way they stock prepaid cards of telecom companies.

The company is also setting up its own retail outlets. In a year, the company plans to open 400-500 exclusive stores across India. That's where Moser Baer is going beyond others and attempting to be an end-to-end player, right from producing a film to selling it at the customer's doorstep.

Meanwhile, competitors are watching. Says Hiren Gada, vice-president, Shemaroo Entertainment, "Our existing model is working fine for us. We will wait and watch the others and make changes if necessary. If distribution increases, the same retailers will also stock our latest titles. Because it is titles that sell."

Adds Sushilkumar Agrawal, chief executive officer and managing director, Ultra Group, "If the market grows, everyone will benefit. Titles matter the most. Even today viewers are willing to pay Rs 100 to buy Sholay."

Dayani is confident of cracking the market. As I leave his room, he quickly adds, "We are a country of 1 billion film crazy people. My company will do everything possible to reach out to them."