On Tuesday, several mainstream news outlets reported that Flipkart is progressing towards buying an unknown stake in Hotstar. While the reports are largely speculative and unsubstantiated, there might be some merit in assessing this grapevine, never mind its far-fetched nature.
First things first, the attractiveness of Hotstar within the Indian Over the top (OTT) marketplace is hardly refutable. It is a fast-growing front runner in the Indian Video-On-Demand (VOD) space. Live sports and key content rights have helped drive robust growth in subscribers to over 75 million in a trice. A heightened risk profile emerging from meaningful reliance on third-party programming might be the only loose end in an otherwise high-quality asset.
So why would Flipkart be interested in Hotstar?
The rumoured investment appears to be broadly in line with recent industry-wide M&A activity. As such, Flipkart-Hotstar comes across more as a play right out of Amazon’s playbook i.e. use video as a pull into the core e-commerce business. However, there are nuances.
First, Amazon did not purchase Prime Video but built out its video business. Amazon’s Video play is centered around its multi-faceted membership programme aimed at creating an extensive eco-system in which Prime Video is just one of the several moving pieces, albeit an important one. In that context, a stake in Hotstar is hardly a parallel. An equity investment in video platform does not really suggest an entire eco-system play but rather a strategic long position in a high-quality asset with a promising growth outlook.
Second, if the objective is to create a membership play akin to Amazon’s Prime Membership where content and e-commerce services are bundled in together, then unless it is a majority stake or an outright acquisition, the investment as such seems like an overkill. The bundled value proposition can be created via partnership agreements. In fact, Hotstar already is one of the Internet partners for Flipkart Plus – Flipkart’s customer loyalty programme which competes with Amazon Prime.
Third, the argument that Hotstar is a fantastic high-growth asset and Flipkart/Walmart want to take a bullish stance and in effect go long Hotstar appears far-fetched.
While it might be logical rationale, it would make more sense if Flipkart were a private equity or an asset management firm notwithstanding the fact that Flipkart can very realistically make a profitable exit from the position via a secondary sale or even a potential Hotstar IPO in future. However, by that logic, tomorrow they could perhaps even buy stocks of Netflix and Amazon because they feel bullish about the underlying business. Flipkart is not an investment firm.
All this leads me to believe that the key reason supporting Flipkart’s Hotstar chase is data. Perhaps buying stake in Hotstar is the only way for Flipkart to get access to consumer data that Hotstar hoards and continues to generate on the mobile device. Recall that about 90 percent of Hotstar’s watch time is on mobile and with 75 million subscribers on board, it is highly conceivable that there are several data points that could be of interest for Flipkart to understand consumer behaviour.
This could potentially bode well for Flipkart’s underlying e-commerce business and subsequently uplift Flipkart’s membership programme. However, there is a caveat -- to what level can Flipkart access Hotstar’s data library via an equity investment is debatable especially when the size of the stake is unknown. However, all this is just one side of the equation. The other side is what makes the proposed transaction even harder to digest in my view.
Why would Hotstar want Flipkart as an investor?
This is where things get blurry really fast. What is it that Walmart-owned Flipkart brings to the transaction other than just capital.
Hotstar is owned by 21st Century Fox which itself is in process of getting taken out by Disney. In that context, would Disney/Fox even want Walmart to gain exposure to their prized Indian OTT asset?
It is not an easy question to answer but it certainly makes the rumored transaction slightly perplexing. In my view, Flipkart ought to bring more than just capital to the table.
First, Hotstar has Fox and Disney behind it both of whom have access to robust American capital markets in addition to fairly deep existing coffers. Consequently, Hotstar appears to be a well-resourced company. In fact, Hotstar recently raised Rs 500+ crore from its parent.
Second, why would Hotstar want to dilute its shareholders? The only plausible explanation I see in this regard is the case of a rich valuation that perhaps Hotstar can fetch. A valuation that exceeds what Hotstar possibly values itself might help it gain traction in future capital raises and more interestingly support the stock prices of Disney/Fox who can possibly argue that the true value of Hotstar is not reflected in their stock price.
Third, the timing is puzzling. With Disney’s acquisition of Fox looming, how does Flipkart fit into the picture? Disney has its own video-streaming platform in the offing which will open up an interesting synergistic relationship with Hotstar anyway. So why does it need an India based e-commerce giant as an investor now?
It is hard to believe that cash injection could be the pivotal reason. Perhaps the only case that makes somewhat of intuitive sense is that Hotstar’s lumpy advertising-driven revenue profile with the injection of some sort of recurring revenue arrangement from Flipkart will perhaps paint an optically positive picture from a monetisation standpoint. Outside of that, the transaction as such appears to have more question marks than an intuitive fit.
Having said that, the dynamic world of media has seen mysterious things and this is yet another interesting development, one worth keeping a close eye on.
( The writer is a former Equity Researcher at Canaccord Genuity, a Media and Markets commentator and currently the Co-Founder and Head of Business at Transfin)
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Updated Date: Sep 19, 2018 15:16:34 IST