Disrupting the disruptors

Letter # 55, 27th August 2021

Let us start with a question: In your opinion, when an industry undergoes seismic changes, do incumbents sense them and respond quickly? Or do things become clear only in hindsight?

In the mid-1800s, Instagram wasn’t yet a rage, but everyone still loved clicking photographs. Cameras were then built using photographic glass plates as supports for negatives and were considered superior to film because they were stable and unlikely to bend or distort. But, there was a problem–cameras were huge and not portable.

That was about to change by 1888. “You press the button; we do the rest” was the slogan with which Kodak’s first fully portable camera was launched. George Eastman’s (Kodak’s founder) guiding principles were simple–mass production at low cost, international distribution, extensive advertising and customer focus. Kodak single-handedly disrupted photography by transforming it from complex activity to a social practice that became part of everyone’s life.

Kodak had a good run until the 1970s, when Japanese film companies (Sony and Fuji) started aggressively pushing into the US market. Kodak lost market share in the run up through 1990s. The sale of analogue camera and films still accounted for 64% of photographic products in 2002, but the world was changing. But by 2005, the consumer film business was disappearing 25% per annum. For 120 years, Kodak had done everything by itself (at one time, it even raised its own cattle and used the bones for making photographic gelatine). In the new digital world, Kodak could no longer do that. By 2011, its stock price fell below USD2 per share and it filed for bankruptcy on 19th Jan 2012.

The funny part is, the first electronic camera was invented by Steve Sasson, an engineer with Eastman Kodak in 1975. But it was filmless photography and Kodak generated majority of its profits from selling films. Management’s reaction was “that’s cute, but don’t tell anyone about it.”

While Japanese companies Fuji (films) and Nikon (digital cameras) were disrupting Kodak, another US company was busy dethroning a Japanese giant, this time, in the field of music. Akio Morita, Sony’s co-founder, had the vision to marry digital technology with media content in early 1980s. But engineers (and not the media division) ran Sony. The idea that consumers can download music and keep listening to it without it resulting in incremental sales for Sony did not sit well with them. Even when they came around, they introduced proprietary files that were incompatible with the fast-growing mp3 market. By the time they were forced into co-operating, Sony had lost its foothold in two crucial product categories–television and portable music devices.

The company that owned the Walkman brand (was synonymous with portable music devices) was nowhere to be found by the time Apple’s iTunes became the industry standard. Sony’s market valuation by 2012 was down 87% from its 2003 highs (when iTunes was introduced) and down 97% from the 2000 highs.

These days, cameras and music are no longer getting disrupted; instead, the movie exhibition business is. Pay per view and OTT services are trying their level best to change the way movies are viewed world-wide.

In India, however, we have a little history. The introduction of colour television and VCR technology in late 1980s marked the beginning of the piracy culture in India. By early 1990s, many entertainment channels were launched and an average India viewer was eager to consume a lot more. However, the country spent a large part of 1990s living borderline on the cusp of illegality with the movie business. Pirated compact disks were sold by the roadside or on peer-to-peer sites (like BitTorrent or Kazaa) without any part of that income accruing to the formal economy of India.

Yes, it was shoddy. Yes, the quality was supremely bad. But it was cheap and it offered instant gratification. Towards the turn of the new millennium, Indian viewers were tired with this system and wanted better.

That’s when the current exhibition chains set up shops. They didn’t just exhibit a movie in high quality, they sold the entire ‘movie-going experience.’ Spend time with your family, enjoy the movie in good seats and air-conditioned halls, shop in the malls after the movie and end the day with dinner in the next-door restaurant. An entire ecosystem emerged–malls with exhibition houses as anchor tenants, restaurants and shopping markets, which became the mainstay with many families in India.

In the year ended March 2020 (a year with marginal covid impact), over 100mn people saw movies at PVR, India’s largest movie exhibition company. An average visitor paid INR204 for a ticket, consumed food & beverage of INR108 and paid INR20 in convenience charges (the convenience to book tickets on internet). For a family of four, that amounts to INR1,325 per movie. That’s a sizeable amount considering India’s current average income, but nevertheless, it establishes the fact that in just over 2 decades, exhibition houses have managed to disrupt the way movies were traditionally watched in India.

The challenge now is at their doors. Since the onset of covid, in the seventeen odd months that the cinemas were shut, production houses and movie watchers have altered their habits. Traditionally, cinemas enjoyed a three-month window of exclusivity before films moved to other formats. Great box office numbers were good for everyone – cinemas, studios and movie stars. But things are different now. Warner Bros released its entire 2021 slate of films, including Godzilla vs Kong, on its HBO Max streaming service the same day as theatrical release. Disney did the same with Black Widow.

Now that multiplexes are about to open, will viewers go to the cinemas to watch a movie? Well, you tell me. Now that Amazon prime and Netflix deliver the same content at a fraction of the cost to your houses, how valuable is the ‘movie watching experience’ for you? A vast majority of the market believes that exhibition houses are here to stay. PVR’s share price is only 35% lower than its pre-covid highs and analysts that cover the stock overwhelmingly rate the company as a Buy (26 Buy and Hold ratings vs. 5 Sell ratings).

Historically, whenever seismic changes have occurred in an industry, the incumbent player believed that the world is unlikely to change beyond a point. The fact that change was imminent became apparent only in hindsight. The fate of exhibition industry lies in the balance; and we shall let time decide.

This letter was originally published here: As Multiplexes Open, Would They Make For Good Investments? (cnbctv18.com)

Disclaimers:
Information in this letter is not intended to be, nor should it be construed as investment, tax or legal advice, or an offer to sell, or a solicitation of any offer to make investments with Buoyant Capital. Prospective investors should rely solely on Disclosure Document filed with SEBI. Any description involving investment examples, statistical analysis or investment strategies are provided for illustration purposes only – and will not apply in all situations and may be changed at the discretion of principal officer. Certain information has been provided and/or based on third-party sources and although believed to be reliable, has not been independently verified; the investment managers make no express warranty as to its completeness or accuracy, nor can it accept responsibility for errors appearing herein.

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