As Netflix plans on invading India, Eros stands in its way

Relationships with stars, a vast film library and a first mover advantage have impressed investors and analysts of the company.
Written by Rajiv Rao, Contributing Writer

Today, India presents a mouthwatering proposition for anyone wanting to do business there. It has 280 million internet users, a figure which will grow to 640 million by 2019. This is a huge population to exploit for any company whose business plan hinges on the internet as a primary distribution medium.

Few industries are therefore as excited and anxious about their fortunes in India as the entertainment industry, specifically the various global entertainment juggernauts who now see the net -- not TV or the movie theatre -- as the medium through which they can leverage their products. For proof of this, just take a look at the lineup that was in attendance to fete Indian Prime Minister Narendra Modi's recent visit to the US, amongst them the bosses of News Corp, Sony Entertainment and Time Warner.

So crucial is India today in their plans that none of them would dare miss out on the opportunity to hob-nob with Modi lest one of their competitors seize the advantage of the moment presented to them.

For movie-streaming and new-production-house-on-the-block Netflix, India is the holy grail that will allow it to propel its customer base from the existing 65 million to hundreds of millions of movie-crazy customers. Towards this purpose, the company plans on spending a staggering $6 billion this year alone on content.

However, there remains one obstacle in its plans for world domination: Eros, a little known Indian company globally, but one that has in just a few decades become the number one distributor and producer of local films in India, especially in Hindi cinema, or Bollywood, as it is often called.

Netflix may be the purveyor of goodies from the world's largest money-making machine in entertainment, Hollywood, but Indians wholeheartedly love their local fare. Eros, with 3,000 existing copyrighted movies in its kitty, some of them constituting the most popular movies ever made in India, is betting that this arsenal will give it a massive first-mover-advantage over any company, local or foreign, wanting to dominate the streaming game in India. In a country where people remember where they were when they watched a movie, this is pure gold.

Eros is "exactly where Netflix wants to be in the next three to five years," said the company's executive chairman, Kishore Lulla, whose father started the company in the 1970s. "I'm already there."

Today Eros releases over 70 movies a year, more than any studio in the US. Apparently, around 40 percent of India's box office revenues come from Eros movies.

The reason for Eros suddenly vaulting into the unlikely position of front-runner is apparently thanks to the ambition of a minority investor, London-based Knight Assets. Eros originally had its sights on launching a TV channel. However, when Knight cobbled together a stake of more than 2 percent and then began to implement a full-court press for a digital-heavy strategy, the company decided to change tack.

It may just turn out to be a prescient bet. Cricket and religion are two of three things that India lives and dies for. The third? Films, something that Indians have always been voracious consumers of. The country is easily the largest producer of films in the world at over a 1,000 per year easily outstripping the US at some 200-300 per year. (Of course, US box office revenue at $51 billion easily outstrips that of India's $4.5 billion.)

That 1,000 plus annual film release number includes titles from over 20 disparate film industries other than Hindi cinema. These industries are in different languages, have storied histories going back 70 years and boast superstars rivalling those of Bollywood, or even Hollywood, such as Rajnikant from Tamil cinema. It is a complex and dynamic film terrain.

This may not be that surprising when you consider that India has a storied history and pedigree in the evolution of global film; its first silent feature, Raja Harischchandra, was made as far back as 1916. India's first talkie, Alam Ara, in 1931, came only five years after Warner Brother released its first, Don Juan. (The more famous Jazz Singer came out a year later.)

Could Eros leverage all of this history into cash? It already claims to currently have 26 million users, approximately half of that of Netflix. According to Bloomberg, a basic ad-supported service is free, while a premium category costs 50 rupees (around 80 cents). Subscriptions are at multiples of this number in overseas territories housing non-resident Indians flush with foreign exchange, as well as nostalgia for the motherland, both translating to good business for Indian entertainment.

Macquaire, Eros' investor is betting that the digital service will boost Eros' customer base to a total of 40 million users by 2016 and 133 million in 2020, and that in-app purchases will make up the bulk of their revenues, growing from $198 million this year, along with $28 million in profit, to around $664 million in five years. Bloomberg reports that the markets have vindicated the about-face strategy, sending Eros' stock soaring by close to 60 percent and awarding a market share of about $1.94 billion to the company.

This is the rosier side of the picture for Eros. Unfortunately for them, there are considerable challenges as well. Netflix is one of them. For a company that has deep cash reserves and has risen from a scrappy underdog to perhaps the leading producer of quality, innovative content in the world that are peopled by hi-wattage stars -- wooing top Indian talent and creating ground-breaking shows here should be a cinch, especially considering how far the dollar goes in India.

Netflix, however, isn't the only game in town. Reliance Jio, the telecom business of Reliance Industries, India's second-largest firm by market cap, is gunning for a huge double-play in telecom and entertainment. India's richest guy Mukesh Ambani -- you know, the guy who built the $2 billion house in the heart of south Mumbai right next to a large slum -- is rolling out his own pan-India 4G telecom network by the end of the year. Reliance also recently scarfed up the media empire Network 18, which includes education, entertainment, publishing and news TV channels as well as e-commerce properties. Getting into filmed entertainment is a logical next step.

Then there's Rupert Murdoch's Star network which has already launched its app, Hotstar, earlier this year with a focus on film and cricket, and has already been downloaded some 25 million times at last count. Other sites such as Spuul and BoxTV have already collected cash and customers in this space. Even music streaming sites want to launch incursions on Eros' territory. Streaming music start-up Saavn raised a mammoth $100 million in new funding largely to fuel a foray into video services.

If these weren't enough to inspire serious concern, there's that company you may have heard of called Amazon, already a dominant e-commerce player in India, licking its chops at the prospect of tapping into the entertainment sector. Eros is a minnow against these deep-pocketed players and could easily get stomped upon by the likes of a Netflix or an Amazon or a Star trying to make its mark.

There are other issues. One is the diversity of content one needs to strategise for, especially considering the 20-odd languages and a variety of genres -- not an easy task. Also, India is still wedded to cash for transactions, and although a number of online payment solution providers have begun to emerge, online transactions are still a major concern. Indians are also very fond of pirating content since it's virtually impossible to track over there. A corollary to this is that Indians therefore have no pre-disposition of paying a monthly fee for something they customarily regard as free.

Eros does however have a few major advantages. The film business is very much a club and in this club, relationships go a long way. When Kishore took over from the elder Lulla, Eros had become the number one distributor in the UK for Indian cinema and was a major one in other territories. Getting into film production was a logical next step even though, as Forbes put it, Kishore was wary of the nefarious and shady world of Bollywood film financing.

Lulla began to forge close ties with Bollywood talent and promised to share revenue with them. His company quickly became known for generating hits. For instance, as Forbes reports, in the first nine months of fiscal 2014 ending in December, four out of the top 10 Hindi films are from the Eros stable. This hit-making propensity will undoubtedly keep its stables of loyal talent happy and secure, especially in new ventures.

Lulla also adopted a business model, de-rigeur in the west, but at the time not so much in India, where various rights (TV, international, music, satellite) were pre-flogged to cover most of the cost of financing, mitigating risk. Both these attributes will come in handy as Eros tries to spin-out cost effective original programming.

India is still only at a 30 percent smartphone penetration rate. By the time the rest of the country gets wired, Eros will be betting that it will be much more uniquely positioned than a Netflix or an Amazon or a Reliance to rule the world of digital entertainment.

Editorial standards