The Reliance-Spielberg Deal: Anil Ambani's Next Blockbuster?Published: October 02, 2008 in India Knowledge@Wharton
Numerology is in vogue in Bollywood these days. Actors are adding letters to their names. Movie titles, too, have fallen prey. The result: Heyy Babyy, A Love Issshtory and the latest superhit, Singh is Kinng. When you combine the values attached to individual letters, they add up to "lucky" numbers.
A different sort of number is being discussed in the corner office of Reliance Entertainment -- the entertainment and media arm of the Anil Dhirubhai Ambani Group (ADAG) -- though Anil Ambani and his lieutenants must be hoping it proves equally lucky. That is the $500 million the group is proposing to invest in a joint venture with Steven Spielberg, the man who made Jaws and Jurassic Park. The money will enable Spielberg to exit his current contract with Viacom's Paramount Pictures. The new Dreamworks studio will invest $1.5 billion in film production and is expected to roll out 30 movies over four years.
Wharton faculty members and movie industry experts view the Spielberg-Reliance deal as compelling math on many fronts. Spielberg would have found few other investors with a penchant for the movie business willing to invest such a large amount, and Reliance offers a gateway to Indian audiences, they say. For Reliance, Spielberg represents the lowest-risk opportunity to secure its lofty $10 billion revenue target while tapping markets globally.
In the U.S., Spielberg is not commenting on the deal. In India, Reliance Entertainment is being equally circumspect. "No comments," says Amit Khanna, chairman of Reliance Entertainment. "We may be in a position to say something in a couple of weeks."
"Steven Spielberg is regarded as the world's greatest storyteller and a brand in [himself]," says Nelson Gayton, an adjunct professor at Wharton and executive director of the Entertainment Media Management Institute at the UCLA Anderson School of Management. Adds Jehoshua (Josh) Eliashberg, professor of marketing at Wharton, "There are very few names in the movie business on which it seems worthwhile to take risks. Spielberg is one of them." Spielberg delivers effectively in two key areas of the movie business, he notes: "selecting the right stories and telling them in a very appealing manner."
Gayton says the deal makes eminent business sense for Spielberg and Reliance. "We are not talking about dumb money coming into the industry. Reliance has had a long history in the movie business, and they want to turn this into a $10 billion entertainment company. When you are trying to achieve that much growth, you have to think of how you are going to get there from a content perspective and what Steven Spielberg can give you to reach that kind of success."
According to Eliashberg, "a good return on investment" in the movie business would be about 15%, and "Spielberg would be able to deliver that." With the big bets Reliance is making in the movie business, it is taking "minimal risks" by partnering with Spielberg, he says. For a sample of 281 movies produced between 2001 and 2004, the return on investments at a studio ranged from -96.7% to more than 677%, Eliashberg noted in a June 2007 paper published in the journal Management Science which he co-authored with Wharton professors Sam K. Hui and Z. John Zhang.
Reliance is not the first Indian company to foray into Hollywood. Yash Raj Films, one of India's leading studios, has collaborated with Walt Disney to produce a computer-animated feature film called Roadside Romeo, the story of an abandoned dog in Mumbai. It should be in the theaters in the next few weeks.
UTV Motion Pictures has already co-produced films like The Namesake with Hollywood studio Fox Searchlight and Japanese producer Entertainment Farm. UTV and Fox Searchlight also teamed up to produce I Think I Love My Wife. Another co-production -- The Happening -- happened earlier this year in a deal with 20th Century Fox. Now UTV is producing its first independent Hollywood film, The Ex-terminators (with technical help from Michaelson Films). UTV has also signed deals worth $37 million with Overbrook Entertainment and Sony Pictures Entertainment.
In the animation space, of course, there have been several tie-ups. Pritish Nandy Communications has signed a $25 million, five-movie contract with Motion Pixel Corporation. There have been many more such ventures where Indian companies are doing the back-end work.
What differentiates the Reliance deal from the others is, of course, size. Secondly, Spielberg is an international icon. India is moving from the fringes of Hollywood to center-stage. "India is getting more and more recognized and the acceptability of Indian houses globally is on the increase," says Niteen Tulpule, associate director at KPMG, an international accounting and consultancy firm.
A Trophy Acquisition?
Two decades ago, Sony of Japan made history and generated a lot of adverse nationalistic sentiment when it purchased Columbia Pictures for $3.4 billion. That turned out to be a trophy acquisition, more for show than financial success. Does the Reliance deal run a similar risk?
It could. Spielberg is known to be extremely pricey. Recently, both Paramount and Universal Pictures refused to green-light a $130 million trilogy on cartoon hero Tintin. Paramount and Universal were working on a joint Tintin project, each with a 50% stake. According to the International Herald Tribune: "The pending deal with Reliance underscores some realities about Spielberg -- mainly that he has become so expensive that few public companies can afford him. Spielberg's standard deal, on par with other blue-chip talent, is 20% of a movie's gross from the first ticket sold."
"From Spielberg's point of view, money obviously plays a big role," says Tulpule of KPMG. "[But] Spielberg is the best brand around, so there is no question about the brand value. He also brings in industry best practices."
Eliashberg says Spielberg "could very easily approach private equity and financial institutions." But such funding is typically available on a project-by-project basis, while Spielberg's need is financing for a whole slate of movies. "There are very few entities that can put up the kind of money [he] requires." Also, private equity investors typically back studios that can then hire different directors for their movies, according to Eliashberg. "With Spielberg, Reliance is investing directly in a single director with a terrific track record, and very powerful brand equity."
In the entertainment arena, Ambani seems well prepared to take risks. "We haven't branded our E&M (entertainment and media) business 'BIG' for nothing," Reliance Entertainment president Rajesh Sawhney recently told business daily Mint. "Once we connect all the dots, you will see [us] as a leading global player with interests across every single E&M domain." The company is already worth a great deal. Early this year, international financier George Soros was negotiating for a 3% stake in the company; the valuation of the enterprise at that time was around $3.3 billion.
Eliashberg says Hollywood film studios have in recent years preferred bigger budget movies primarily because "they yield a better return on investment." Movie makers have to try much harder to win audiences away from television and the Internet, he adds. "People stay home and entertain themselves; it's easier to bring them to the theater with big budget movies."
By partnering with a big name like Spielberg, Reliance is ensuring that it also gets access to the so-called "aftermarket" of TV and the Internet, says Gayton. "When you look at the U.S. market, the aftermarket is where all the value is; the theatrical market is not growing. If you are going to come here, why not come with that one brand like Steven Spielberg."
Gayton notes that movie ticket prices are much too low in India, and that "the only way" to grow revenues is to go overseas. Also, while the Indian film industry produces more than a thousand movies a year and is growing 17%-20% annually, "it is still a fraction of Hollywood's size." According to Gayton, the Indian film industry's revenue is about $2 billion including box office, overseas and ancillary markets, while Hollywood is an $11 billion industry, although its growth rate is just about 3%-5% a year.
"Getting into entertainment is a brilliant move from Reliance," says Tulpule of KPMG. "This is a highly under-invested and under-corporatized segment in India and has huge potential. Distribution to global Indians is also becoming a big play. Reliance could also be looking at addressing not only the Indian diaspora but also the English-speaking audience."
Gayton, too, argues that Reliance could use the Spielberg partnership to penetrate the Indian market both at home and overseas. "There are 25 million Indians outside India, and part of that is taken up by the aftermarket like the Internet and TV," he says. "Also, when you put aside India and the U.S. market, you have the rest of the world. Spielberg has made movies that have delivered box office returns across the world in billions of dollars."
Spielberg is not Ambani's only Hollywood connection. At Cannes earlier this year, Reliance had announced that it had signed deals to make films with the production firms of Hollywood stars Nicolas Cage (Saturn Productions), Jim Carrey (JC 23 Entertainment), George Clooney (Smokehouse Productions), Tom Hanks (Playtone Productions) and Brad Pitt (Plan B Entertainment), and filmmaker Jay Roach (Everyman Pictures). The total investment: $1 billion.
Gayton says those deals make sense especially because "Bollywood talent is pretty much booked up" for many years into the future. "In many ways, if you are going to feed this growing industry, you have to look outside of India to Hollywood," he says. He adds that he won't be surprised if Reliance uses Spielberg to make "a new genre of crossover films."
A Bigger Reach
All this is mostly on paper. In a more concrete development -- at the retail end -- Reliance has been buying up movie theatres in several countries. Group company Adlabs has acquired over 250 screens in the U.S. and 50 in Malaysia and Singapore combined. Adlabs, which was acquired by ADAG in 2005 and has interests in film processing, production, exhibition and digital cinema, is likely to be merged with BIG Pictures -- another group company -- soon.
The action on the ground today is in direct-to-home (DTH). Reliance entered the market in August under the banner of BIG TV. Competitors Dish TV (from the Zee group), Tata Sky and the south India-based Sun TV are already taking defensive action. Dish has cut rates to the bone; it has introduced a "Happy Home" package of 125 channels at Rs. 100 (about $2) a month. Tata Sky has bettered that price with Rs. 99. Sun has started services in North India.
According to Arun Kapoor, president of BIG TV, "India has close to 125 million television households. DTH penetration is around 9 million, which means that there is close to 116 million unique homes to capture. We have established a retail presence across 100,000 outlets across 6,500 towns. We have established a customer service mechanism to serve 5 million new customers every year." Incidentally, Bharti Airtel is due to launch its services later this year and the other existing player is public sector warhorse Doordarshan.
There is similar action in many of the entertainment verticals of the group. Among them:
- Big 92.7 FM launched a new brand identity and logo a few months back. It currently operates in 45 cities, reaching a population of 200 million. New programs and expansion are on the cards. In another venture, Big FM has announced a deal with Singapore-based radio operator MediaCorp Radio to launch a FM station -- BIG Bollywood -- in Singapore.
- Zapak is India's leading gaming portal. It has acquired more than 3 million registered users and has recently tied up with Intel and Lenovo for a college-level gaming championship. It has also moved into merchandising, with deals already inked with 20 movies. The latest is the controversial Hari Puttar -- A Comedy of Terrors, which has cleared court challenges from the distributors of the Harry Potter movies.
- BIGadda, a social networking site for youth, is already No 1 in India. ("Adda" means chat in several Indian languages.) It is moving into a "mobileadda" version for cellphones and is targeting 300 million users.
- BIG Broadcasting, the television arm, plans to launch 20 channels soon. In June, it signed up with Asiasat 3S for a C-band transponder.
Apart from these inititatives, there are BIG Motion Pictures (the movie-making arm), BIG Flicks (India's largest video-on-demand and DVD rental service), BIG Animation (the new avatar of AniRights Infomedia acquired by the group in 2007), Jump Games (mobile gaming) and BIG Music.
The menu is vast and there is more that defies classification. A sampler:
- A 50:50 joint venture with London-based Great Wheel Corporation, the IPR holders of the London Eye. Reliance will develop and operate observation platforms in five cities in India. The total investment, excluding land, is estimated at $500 million.
- Talks are rumored to be on to buy a stake in the Subhash Chandra-promoted Essel Group's amusement park in Mumbai -- Esselworld.
- A deal has been signed with the Bachchan family for a joint venture to make movies starring the icons -- Amitabh himself, wife Jaya, son Abhishek and daughter-in-law Aishwarya Rai. All are superstars in their own right, though Jaya has taken a backseat. The project will start with funding of $200-300 million.
"On the surface, it appears that Reliance's strategy is based on leveraging the inevitable convergence that is occurring in the entertainment industry," says Ravi Bapna, associate professor of information systems at the Carlson School of Management and executive director of CITNE at the Hyderabad-based Indian School of Business (ISB). "They have the opportunity to synergize across the different businesses and also leverage their group's infrastructure strength." Adds KPMG's Tulpule: "The world over, people are looking at convergence in a big way. Reliance already has a telecom play and 3G is happening. So it seems to be going the global route [of convergence]."
Such an extensive web of operations has plusses and minuses. There are enormous synergies. Every new vertical can be subsidized by the others until it manages to stand on its own feet. When Sawhney finishes connecting the dots, he expects Reliance Entertainment to have become a $10 billion enterprise. The timeframe: five years.
On the other side is the inevitable fact that large organizations stifle creativity. And entertainment is an area where, if you are not creative, you perish. PricewaterhouseCoopers (PwC) highlights this idea in its ninth Global Entertainment & Media Outlook, released in July. E&M companies face a collaboration imperative, says the report.
Elaborating on this, Marcel Fenez, PwC managing partner, global E&M practice, says: "We are seeing a new business model for E&M companies. No single company will be able to successfully go it alone over the next five years. The challenges are too significant and the demand for innovation too complete."
"The key barrier to growth is going to be access to superlative content on a continuing basis," says Bapna of ISB. "They (Reliance) have to innovate and foster community and user-generated content."
Perhaps Anil Ambani is even now planning alliances. One area in which he has a limited presence is print. The Ambanis did own a newspaper -- the Observer of Business & Politics -- in the days when the group was undivided. That is defunct. But adding print to the current lineup might conflict with crossholding regulations, which are being worked out now.
In the meantime, there is no dearth of growth opportunities. PwC expects a great deal of action in India. By 2012, the overall Asia-Pacific E&M market will reach $508 billion, at an 8.8% compounded annual growth rate (CAGR). India will be the fastest growing territory in Asia-Pacific with a projected CAGR of 18.5%.
Regulatory and Other Issues
Given the global financial crisis, it may not be so easy to get funds for this rapid growth, however. Listed Indian media companies have not done too well on the bourses. (Reliance Entertainment is unlisted, though group company Adlabs is.)
According to an analysis by Mint, while the Bombay Stock Exchange Sensitive Index (Sensex) dropped 33% between January 8 and September 22, a basket of 19 major listed E&M companies fell 55%. The top losers include Wire & Wireless India Ltd. (the Zee Group's cable TV distribution company, which dropped 78%), Pyramid Saimira Theatre Ltd (which runs a national chain of theatres and has recently forayed into China, 77%) and Adlabs Films Ltd. (76%).
The other hurdle could be regulatory. Some recent moves have been positive. In mid-September, the government allowed international news magazines to publish local editions including local content. Until now, they were allowed only to print such editions (with no local content), though they were permitted to carry Indian advertising. There is currently a ceiling of 26% for foreign holding in publishing joint ventures. This is likely to be raised to 49% soon. Some tie-ups are already in place; Fortune has a deal with the Kolkata (formerly Calcutta)-based ABP Ltd., while Forbes is going with the Delhi-headquartered Network 18.
Other moves could turn out to be somewhat negative. In India, while there are barriers on foreign participation, media crossholdings have begun to attract the attention of the authorities only now. In September, the Telecom Regulatory Authority of India (TRAI) set the ball rolling with a discussion paper on the subject. "The objective of this paper is to provide for competition, diversity and plurality of players, news and views," says TRAI chairman Nripendra Misra.
According to the paper the issues under consideration include the following:
- Cross media ownership across different segments of media such as print, television, and radio (horizontal integration).
- Crossholding restrictions to prevent consolidation including "vertical integration" within a media segment such as television or radio.
- Market share in the city, state, or country within each media segment.
- Cross control/ownership across telecom and media segments.
"The media has a very important role in any democratic country," explains the paper. "All leading democratic countries in the world have media ownership restrictions. Most of these countries have recently, during the past two years, reviewed the media ownership rules. India has certain restrictions regarding ownership in FM radio, TV (DTH, IPTV, Mobile TV) and HITS (Headend in the sky). There is a need to take a holistic view and rationalize media ownership restrictions for the future growth of the broadcasting sector."
Media empire builders like Ambani will likely need to stay tuned for future developments in the regulatory arena.