Why are Multiplex owners disappointed?

What exactly has driven this sharp fall in multiplex stocks? Lockdown is certainly one reason, but there is a larger threat that these multiplexes see from the rising influence of OTT platforms.

May 28, 2020 11:05 IST India Infoline News Service

If there is one sector that saw no respite since the beginning of the lockdown, it is the multiplexes. For long, these multiplex stocks were considered as the best proxy for the shifting Indian consumption patterns. They represented the intersection between media, technology and consumption. A lot has changed in the last 3 months since the lockdown of multiplexes started; as can be seen from the chart.

Data Source: NSE
Both PVR and INOX lost half their value since the beginning of the year. In fact, if you consider from mid Feb-20 when the correction started, the fall is much steeper. What exactly has driven this sharp fall in multiplexstocks? Lockdown is certainly one reason, but there is a larger threat that these multiplexes see from the rising influence of OTT platforms. Let us look at the lockdown effect first.

Lockdown is creating a problem of idle capacity

The stocks have been under pressure since the lockdown of multiplexes in late February. The reasons are not far to seek. Firstly, both PVR and INOX invested aggressively in expanding screen properties across India and the cost of capital investment is building up. Secondly, the multiplexes have been locked down for nearly 3 months now and it is uncertain how much longer it could continue. Each day the multiplexes are closed, they are racking up fixed costs like salaries, rentals and license fees. Thirdly, even after the multiplexes are allowed to open, there is apprehension that the crowds may take a long time to come back. Social distancing norms may continue and that could impact the attractiveness of these multiplexes as weekend entertainment centres. Lastly, a big slice of the multiplex was the lucrative food and beverage business. That business is likely to be under pressure even after multiplexes are allowed to function.

Bigger challenge comes from OTT

The lockdown does represent the reason why multiplex stocks are under pressure. But there is a much larger issue with OTT (Over the Top) platforms. OTT platforms include the new media platforms like Hotstar, YouTube, Amazon Prime, Netflix and others which bring you high quality content right on your PC, laptop or mobile phone. If you have used any of the OTT platforms you would know why it is gaining ground. It gives a lot of flexibility and allows you to watch movies in tranches. You can view movies, soap operas and serials of your choice, which makes it a better form of narrow-casting. Thirdly, OTT platforms are extremely cost effective. With monthly and annual subscription models, these OTT platforms can give you more bang for the buck.  But what is the real potential of OTT?

OTT could be the big media trend of the decade

Consider some of the numbers put out by ASSOCHAM. The OTT market size is expected to grow to $827 million by the year 2022, which translates into CAGR of 23% for OTT between 2017 and 2022. This growth is expected to be largely driven by the number of smart phones in India growing from 468 million in 2017 to 859 million in 2022.

Data Source: KPMG OTT Report
KPMG projects the online video market to grow at a stupendous rate. The likes of Facebook, YouTube and Snapchat may still dominate the short form videos (SFV) of less than 20 minutes. However, the long form videos (LFV) consisting of movies and serials will be dominated by the OTT platforms like Hotstar, Amazon Prime and Netflix. That is where the multiplexes see a structural challenge.

Why is OTT making the multiplexes unhappy?

When film producers like Shoojit Sarkar and others decided to release seven films directly on OTT platforms like Amazon Prime, the big exhibitors were in for a shock. PVR, INOX, Cinemax and Carnival expressed deep disappointment over the decision to release movies directly on the OTT platform. They had tried to convince these producers to wait till the multiplexes to open again but to no avail. Fortunately, for the multiplexes, mega budget producers like Karan Johar and Rohit Shetty refused to bite the OTT bait and preferred to wait for multiplexes to reopen. For the multiplexes, movie producers directly opting for OTT release hits the most lucrative part of their business; the first week revenue flows. Clearly, multiplex owners are unhappy and the lockdown is only making matters worse as it had a salutary impact on OTT platforms.

Multiplexes should just let new media evolve

Twenty years ago when multiplex experience was first launched in India, the big losers were the single screen theatre owners. That was a part of the media evolution Single screen theatres managed to successfully handle the threat of 24X7 television and video CDs in the 1980s and 1990s. However, the single screens could not match up to the multiplex trend. In India OTT is a trend whose time has come. While the industry will not shift entirely to OTT releases baring small budget films; multiplexes must acknowledge that OTT is one more distribution option available. That would also mean that multiplexes have to be prepared for more rational valuations in the future. But, first they need to get out of the lockdown!

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