Unpacking Hotstar’s play

Jayadevan PK August 21, 2018

In February 2015, India’s biggest broadcaster Star India, launched Hotstar, a video streaming app for internet users. It now claims to have 100 million monthly active users, mainly acquired by streaming big-ticket sporting events and over 100,000 hours of television programming.

Hotstar’s growing user base should make it the most credible competitor to YouTube in India. The Alphabet Inc-owned video platform which mostly serves user-generated content has over 225 million monthly active users. As YouTube struggles to keep its content safe for brands, companies like Hotstar with highly curated content are set to gain.

One would think that with a lead like that, rights to one of the world’s biggest live sporting event Indian Premier League (IPL), and favourable climes, Hotstar is safely on its way to owning the market. But that’s not a given. In India, to borrow a phrase from Jeff Bezos, it’s still day one for videos and new players are entering the market every few weeks.

There’s Amazon’s Prime Video, companies such as SonyLiv and Voot run by rival television networks and now there’s MX Player from Times Internet. Social networking giant Facebook joined the melee earlier this month by buying rights to stream La Liga. That’s one more contestant in the race to garner ad revenues.

“Facebook will fight for the market. YouTube will fight for the market, all these companies will fight for the market,” said media veteran turned venture investor Haresh Chawla. Increasingly, India’s video Over The Top (OTT) market is starting to look like a crowded bazaar and less like a high-end shopping mall. “It’s open season, which anyone can win going forward,” said Rahul Vengalil, the Founder of What Clicks, a media audit firm.

So what does a company like Hotstar do? Double down on technology. “There’s this myth that the best tech comes out of North America… we are challenging that,” Hotstar’s chief executive officer Ajit Mohan told me at the company’s headquarters in Mumbai. Mohan wants to more than double the size of its technology team, from about a hundred engineers now. The company has listed scores of jobs on LinkedIn and even run outdoor advertising campaigns to hire talent in Bengaluru, India’s tech hub. Netflix, by comparison, has 5,500 employees.

“An assumption propagated by a lot of the tech platforms is that you’re a content company, and you guys should stay there. If we believe those myths, we’ll be relegated to being irrelevant in the new world,” says Ajit Mohan, CEO of Hotstar.

In the six months leading up to the premier league in April-May 2018, Hotstar’s tech team re-engineered all of its backend to deal with traffic surges, rebuilt its mobile apps from scratch, brought down streaming delays from about 55 seconds behind broadcast to 15-20 seconds, and even managed to layer ‘watch and play’ a trivia game on top of the platform.

That might seem like a lot of heavy engineering for a team of Hotstar’s size. But it had to be done. After all, it was India’s biggest sporting event and had cost a pretty penny. Star India bought rights to the Indian Premier League for five years between 2018 and 2022 for Rs 16,348 crore. It managed to earn back somewhere close to Rs 3,000 crore this season. Advertising contributed to about Rs 1,800 crore and the rest of the revenues — about Rs 600 crore each — came from distribution rights and selling streaming rights internationally. Hotstar’s contribution to revenues was Rs 300 crore, as per one estimate although another estimate puts revenues from IPL closer to Rs 450 crore (more on that later). But for Star India to make its money back, it will have to sweat the rest of IPL seasons better. Partly by selling ads on television and partly by growing its revenues from Hotstar.

At its peak during the IPL finals, about 10.3 million users watched the game at the same time and Hotstar managed to hold steady. “It’s just evidence of the kind of technology company that we have become,” said Mohan, a former McKinsey consultant who started at Star India in 2012. But before Hotstar can really go up against rivals like YouTube and Facebook, it has a lot more building to do on the technology front. FactorDaily has had multiple conversations with Mohan in person, on phone, email and text, first of which was in February.

Sporting events bring traffic spikes as interest in the game picks up. This puts pressure on infrastructure which needs to be able to handle peak traffic that tends to go off the charts.

Besides improving its infrastructure, Hotstar wants to go deeper into creating a gaming and social experience for viewers, personalise content for its viewers, and also build out the whole ad tech stack. All three are unique problems. Building a gaming and social layer will be crucial for Hotstar to improve engagement with its content and connect the television experience with the mobile experience for the user. “So we do definitely see a big opportunity in connecting the TV and the mobile in a very meaningful way,” said Mohan. Star India, controlled by Disney after media magnate Rupert Murdoch split his empire and sold one part to it last year, operates 60 television channels and reaches over 700 million viewers.

Personalising content for its viewers is challenging because Hotstar has content across 15 languages and a diverse user base. So unlike a Netflix, where the audience is mostly there for English content, Hotstar has to figure out things like whether a Hindi movie watcher also likes Game of Thrones. “That’s a problem that no streaming platform in the world has cracked at this scale and diversity of languages and categories. If I look at Netflix, it is a more constrained personalization problem to solve for them,” said Mohan.

This can be hard and companies have to work hard to get this right. For instance, ShareChat, a local language social networking app. It not only has a team looking at Malayalam content but it has split the team into three parts where each team has developed an understanding of a certain region in Kerala.

And lastly, the ad tech stack is also a large piece of Hotstar’s technology play. It currently sells most ads directly. This works fine to a large extent, as long as you are dealing with the top 200 advertisers in the country.

“In India which is growing and (at) 6-8% a year, yeah, a lot of growth will come from the small and medium enterprises. And I think we can do a much better job of serving them,” said Mohan.

As evident in the experience of platforms such as Google and Facebook, Indian SMBs are major contributors to advertising revenues. Facebook, for instance, made $280 million from SMBs in 2017. For Hotstar to go there, it will have to spend heavily on building AdServe, its self-service advertising platform. That means a whole set of tools that help marketers right from audience planning to campaign reporting and deeper demographics (a viewer graph of sorts, if you will). It will also have to give marketers the ability to advertise against a wider inventory. Right now, it allows only ads against selected sporting events.

Varun Narang, head of product, design, and engineering at Hotstar.

Key to operating in a country like India where there are many spots that don’t have data access is the ability to control the user experience. “We want to be able to seamlessly degrade the service when we hit dark spots,” said Varun Narang, head of product, design, and engineering at Hotstar. In action, it could be simple things like making the stream play only audio in an area where there’s poor data connectivity rather than stopping the stream altogether to buffer content. Narang says his top priorities are: taking more and more control of the company’s tech stack, keeping up with new technologies like augmented reality and virtual reality to use at Hotstar, using machine learning, and improving the gaming and social experience on Hotstar.

Market Dynamics

The Indian market is likely to evolve very differently from what has happened in the west, says Chawla. In the US, Netflix won over the cord cutters with cheaper plans and eventually by building a deeper content catalogue than television networks. It plans to spend close to $8 billion on producing content in 2018.

“That worked in the US because cable prices are very high,” says Chawla. Moreover, Americans spend more on media and entertainment. Per capita spend on leisure including media, entertainment and sports is $75 a year in India, notes Amit Khanna, former chairman of Reliance Entertainment and a media industry veteran. In comparison, Americans spend about $2,000 and the Chinese spend about $500.

According to Grand View Research, by 2025, advertising will contribute to $1.2 billion in revenue; subscription will contribute to $1.1 billion in revenues and transactional revenues will be about $ 700 million in the Indian OTT market. KPMG estimates that India’s digital video advertising market is about Rs 1,400 crore (about $200 million) and will be closer to Rs 7,400 crore by 2021.

One of Hotstar’s challenges is to retain and convert the new users acquired during big sporting events. The sooner it figures out their likes and dislikes, the better it can convert them.

In India, cable television is cheap — a basic DTH connection can come for as little as Rs 200 a month. Moreover, with the launch of Reliance Jio’s Giga Fiber, a fibre to home network, the market dynamics are going to change yet again. “The building blocks are very different compared to the west,” says Chawla. By this logic, video streaming players will have to be priced reasonably and also probably follow a hybrid model where some revenues are met by subscriptions (or even one-off purchases around events) — with the rest met by advertising. Early signs of this reflect in Hotstar’s financials.

As per a valuation report by corporate finance advisory Duff & Phelps ahead of a fundraiser, Hotstar had 7 lakh paying subscribers as of mid-July (its subscriptions start at about Rs 83 a month). Its revenue for the year ended March 2018 was Rs 571 crore. The June quarter was a blockbuster thanks to the IPL: it clocked Rs 569 crore in revenues report and the report notes about Rs 459 crore in receivables mainly on account of the cricket event. Still, the company posted a loss of Rs 43.6 crore for the quarter (Rs 389 crore for the financial year gone by).

Aside: According to company filings, in July, Hotstar raised Rs 549 crore from Star US. Disney, which acquired most assets of 21st Century Fox, which in turn owns Star India, has plans to launch a streaming service of its own. Could Hotstar be it?

Mohan, in recent interviews, has said that Hotstar is not building a niche subscription product but is building for the mainstream Indian audience. This would mean increasing its focus on regional content supported by an advertising-led model and perhaps taking its subscription model global with its Disney catalogue. Part of users acquired through its free content will have to be cleverly converted into paying users. “Their premium content is still elitist and it won’t go the distance outside cities,” says Vengalil, the media audit executive.

Companies that create an ecosystem comprising of linear television programming, sports, nonlinear programming, and add a layer of original content to it will likely win, predicts Chawla. “The Indian market will evolve very differently and it doesn’t have to be winner take all. There will be many.”