Zee Entertainment Enterprises Rating: Add | ICC rights deal fraught with risks

Sharp increase in the cost of cricket rights could hit bottomline, entertainment advertising; ‘Add’ retained with target price of Rs 260

Zee Entertainment Enterprises Rating: Add | ICC rights deal fraught with risks
Separately, CCI has raised some queries that could potentially delay Sony-Zee merger.

Zee’s move to acquire TV rights for ICC events (2024-27) for $1.4-1.5 bn supports an emerging view that (1) sports broadcasting is less vulnerable to OTT disruption, (2) portfolio approach (entertainment + sports) is critical to safeguard core TV business. Sports broadcasting is generally not profitable and this is unlikely to change in view of steep content inflation and TV-to-OTT shift. So, we do not fully appreciate/understand Zee’s decision to step up investments in sports TV rights (we would have preferred higher investments in OTT). Separately, CCI has raised some queries that could potentially delay Sony-Zee merger.

Zee acquires exclusive TV rights for ICC men’s cricket events (2024-27)
Zee has signed a licensing agreement with Disney Star for the purpose. Recently, Disney Star won TV and digital rights for ICC cricket events (India market for 2024-27). Per media articles, Disney Star won TV and streaming rights for ~$3.1 bn and licensed TV rights to Zee for ~$1.4-1.5 bn (implies broadly similar value for TV/digital rights akin to IPL). We note that $3.1 bn for 2024-27 ICC media rights (4 years; Indian sub-continent) as against $2 bn for 2016-23 (8 years; global media rights) implies 15%+ 8-yr CAGR (in $ terms). In the case of IPL media rights, 5-yr CAGR is 24% in INR terms (Rs 484 bn for 2023-27 versus Rs 163 bn for 2018-22). Such a sharp increase in cost of cricket rights could lead to (1) higher sports loss/weaker profitability for OTT/TV players, and/or (2) pressure on entertainment advertising on TV.

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Deal is fraught with risks

Men’s World Cup 2027 (most valuable ICC property is five years away and its monetisation on TV hinges on pace of TV-to-digital shift over the next five years.
Time zone risk— We note that Men’s T20 World Cup (2024) is in the US and West Indies which might work in favour of streaming platform (Hotstar) over TV .
Risks associated with India’s performance—Spot yields (ad rates) of semi-final/final matches are a function of progress of the Indian cricket team.
Currency risk— ICC contract is in $ terms and actual payout in INR terms could be higher if rupee depreciates.
Viewership split between streaming/TV for key ICC events would be somewhat influenced by difference in production quality and subscription price of Hotstar.
Regulatory risks—Domestic subscription revenue from cricket properties is constrained by TRAI regulations.
We note that IPL’s ad revenue potential is far better than ICC cricket events. We expect Star TV to push for significant increase in ad rates starting next IPL season in its bid to pass on inflation in content cost to advertisers. The ongoing liquidity pressure would weigh on the startup ecosystem (major advertisers).

It remains to be seen if ICC events can maintain their fair share on TV vis-a-vis IPL or the latter will gain disproportionate share.

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