Why should a newly released Hindi film not be available on the streets of New York at $2 against a pirated version

at $4 or an original at $20?1 Harish Dayani, CEO, Moser Baer Entertainment Limited

Moser Baer Entertainment Limited (MBEL), a wholly-owned subsidiary of MBIL, offers home video titles in various Indian languages at unmatched prices and is also engaged in media content creation. MBEL has acquired rights for 10,000 titles in 18 Indian languages and has released close to 3,000 titles in the market as of 2008. The company also offers non-film titles, such as devotional, classical, health, tourism and educational series. MBEL offers its products through carrying and forwarding agents, distributors, owned and franchised outlets and online sales. It acquired copyright licenses for a wide range of movies and sold DVDs/VCDs for rock bottom prices giving the pirates a run for their money. With its low pricing strategy, it gained a considerable market share in the home video market. But with the other major companies like Big Home Video, Sony Entertainment and
1

2 3

Moser Baer India Ltd., corporate profile, http://moserbaer.com/writereaddata/mediaresources/CorporateProfile.pdf Ibid.

This case study was written by Parveen Sultana and Fathima Reshma Taj H. under the direction of Saradhi Kumar Gonela, IBSCDC. It is intended to be used as the basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation. The case was compiled from published sources. 2009, IBSCDC. No part of this publication may be copied, stored, transmitted, reproduced or distributed in any form or medium whatsoever without the permission of the copyright owner.

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Dagar S. Shalini, Moser Baer: Hello movies, http://businesstoday.intoday.in/ index.php?option=com_content&task=view&id=8401&issueid=64, October 30th 2008

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By the end of 2009, Moser Baer India Limited (MBIL) became the worlds second-largest manufacturer of optical storage media like CDs and DVDs with a 20% global market share.2 It is the first company to market the advanced storage formats like Blu-ray discs and High Density (HD) DVDs. MBIL is a multi-technology organisation with presence in Solar Energy, Home Entertainment, PC Peripherals and Consumer Electronics.3 It produces 4 billion discs a year and exports them to 82 countries through its marketing offices in India, US, Europe and Japan. It also has strong tie-ups with major global technology players like Slovenia-based Solar value Proizvodnja and OM&T B.V a specialised Research and Development (R&D) 100% subsidiary in Netherlands.

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Moser Baers Pricing Strategies: Competence-based and Value-driven?

Moser Baers Pricing Strategies: Competence-based and Value-driven?

Phoonk also capturing the market with low pricing strategies, competition in the home entertainment industry is all set to heat-up, benefitting the customers.

Indian Home Entertainment Industry An Overview

The Indian entertainment industry has witnessed a phenomenal growth in the last three decades of the previous century from content development to delivery mechanisms. With sweeping changes in technology and innovation during the 20th century, the art of music, drama, and street plays that ruled the Indian entertainment industry for centuries lost their grip on the Indian audience paving way for films, radio, television and cable network. Prior to Indias independence, the sources of home entertainment were negligible as technological developments were in nascent stages. The only source of home entertainment was radio which entertained the Indian masses for most part of the 20th century. Though Indian radio debuted in 1924, its real operations began only after Indias independence when the All India Radio (AIR) was created as a separate department under the Ministry of Information and Broadcasting (MIB) in 1947. Its primary objectives were National Integration and National Consciousness to overcome the political instability and act as an inlet for the flow of modern ideas, following independence. Broadcasting during the period was strongly believed to harness the benefits of political and national building. It was due to this particular objective, that the government, during 1950s was averse to investing in the television industry. Further, it was felt that the country needed to build sources of self-reliance rather than investing in the medium of entertainment. By September 1959, television broadcast commenced in Delhi as a part of AIRs services. Televisions first expansion began in 1972 when it started its second broadcasting station at Bombay. By 1975, its relay stations expanded to Srinagar, Amritsar, Calcutta, Madras and Lucknow. With the growing complexity of television broadcasting system, Indian government constituted Doordarshan in 1976 as a separate department and a national television network which was to be under the direct control of MIB. For about 17 years since its inception, Doordarshan was the only prime channel that entertained people with its black & white transmission programmes. In 1982, India hosted Asian Games and with that, colour transmission was introduced for the first time for the games coverage. Radio and television provided music and entertainment to people, by regularly upgrading their technology and content. Although, various programmes pertaining to agriculture, poultry, education etc., were broadcasted on radio and television, people mostly preferred listening to film songs and watching movies by staying at home. The success factor behind radio and television during the period was undoubtedly the Indian film industry which entertained people with its movies and songs. While television and film industry were growing at a rapid pace during the late 20th century, the growth of Information Technology (IT) played a major role in integrating the two media by inventing necessary devices to enable households play movies on the TV sets. The first device in this category was the Video Cassette Player (VCP). The ease in operating the VCP and the choices that it provided in the luxury of the living room made the device popular. However, the real boost for home entertainment market was the invention of Compact Disk Read-only Memory (CD-ROM) in 1972. 2

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Moser Baers Pricing Strategies: Competence-based and Value-driven?

By early 1990s, television industry harnessed sweeping changes by providing entertainment with commercial programmes and reaching millions of viewers with international satellite broadcasting. This period also witnessed proliferation of privately-owned channels like Star TV, Zee TV, ESPN, MTV Asia, Channel V, etc., which provided huge impetus to home entertainment market in India by extending the reach of television beyond geographical borders. Technological changes brought revolutionary changes across all industries making traditional products and processes obsolete. One such product that became obsolete was the audio and video cassette. During 1993, the first version of Digital Versatile Disc (DVD) was developed by Toshiba and Sony as Super Density Discs and Multi Compact Discs, respectively. These discs were superior to CDs in terms of storage space and quality output (a standard CD could hold 700 Megabyte (MB) of data while a DVD had a storage capacity ranging from 4.17 Gigabyte (GB) to as high as 17GB (Exhibit I). In November 1996, worlds first DVD playerSD-3000 DVD was put up for sale in Japan. As the development of DVDs was still in its nascent stage, CD-ROMs were mostly preferred for storage and data transportation.

Source: The CD is dead; long live the DVD!http://www.thehindu.com/thehindu/seta/2002/02/07/stories/ 2002020700090500.htm, February 7th 2002

First Compact Disc Launched in India, http://www.thecolorsofindia.com/interesting-facts/music/first-compact-disc-launchedin-india.html

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Exhibit I Storage Capacity: CD vs DVD

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Until late 1980s, CDs were mostly used for data transportation for personal and organisational requirements as its usage could not gain significant momentum in the initial period. Music was sold in pre-recorded audio cassette and music record players were used for listening to the music. By late 1980s, audio cassettes were losing ground to CDs, but the low storage capacity and quality of CD hampered its growth to a large extent. In 1987, Indias first musical album named Shagufta sung by famous Indian ghazal singer Pankaj Udhas was launched in a CD form by Music India.4

Moser Baers Pricing Strategies: Competence-based and Value-driven?

Exhibit II Sales of Pre-recorded Music in India (19911996)

Sales in Units (in million) Year 1991 1992 1994 1995 1996 Cassettes 155 190 270 321 353 CDs 0.5 Records 0.5 Total 156 $

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180.3 190.8 272.4 325 194.4 254.4 292.9 298 357.4

Although, the usage of CD-ROMs started growing rapidly, cassettes in audio and video segments ruled the Indian home entertainment industry for most part of the 1990s. While sales of audio cassettes grew from 155 million units in 1991 to 353 million units in 1996, sales of music CDs grew from 50,000 units to 4.4 million units during the same period (Exhibit II). According to a report in 1997 by the London-based, International Federation of the Phonographic Industry (IFPI), India was the largest market for audio cassettes in the world. By 1999, analysing the market potential of data storage market, MBIL set up a manufacturing plant of Recordable Compact Disks (CD-Rs) and Recordable Digital Versatile Disks (DVD-R) with a production capacity of 150 million units.

Retail Values (in million) INR 4,100 5,300 7,980 9,564 10,560.5

Compiled by the author from http://www.education.nic.in/cr_piracy_study/cpr4.asp

With the dawn of digital age in 21st century, the complex and bulky cassettes turned into sleek, portable and huge digital data storage devices. DVD players offered flexibility, clarity and eroded the grip of VCRs that were on the forefront of home entertainment industry until the end of 20th century. During 2002, DVD hardware and software, grew at a rate of 200% globally compared to any other consumer durables in the world.5 Sushil Kumar Agrawal, managing director of Ultra Distributors remarked, An indication of the segments growing popularity globally is that it took DVDs merely four years to reach the 20 million mark, while CD players took eight years and VCRs took 12 years.6 The year 2004 was marked as the year of consolidation, realignment and growth in most segments of the entertainment industry in India. Film and television experienced unprecedented growth, along with the emergence of animation and gaming industry. Further, the popularity of film industry led to the increased production and expansion of CD and DVD market. According to a latest report by KPMG and Federation of Indian Chambers of Commerce and Industry (FICCI), the sector grew 15% annually in the last five years to a $11.68 billion (INR 584 billion) industry in 2008, the growth rate is expected to remain subdued at 7.5% in 2009 and 10% in 2010,7 (Exhibit III).
5

Kaushik Neha, Virtual versatility, 2002032100130100.htm, March 21 st 2002 Ibid.

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The Next Five Years are Promising http://www.theindusview.com/vol4Issue4/specialreport.html

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0.8 2.4 4 4.4

http://www.thehindubusinessline.com/catalyst/2002/03/21/stories/

Moser Baers Pricing Strategies: Competence-based and Value-driven?

Year 2005 2006 2007 2008 2009 2010

Size (in $ billion) 7.72 8.9 10.4 11.68 12.56 13.94

Growth (%) 15.28 16.85 12.31 7.53 10.99

Moser Baers Excellence in Optical Storage Products Manufacturing

The cost competitiveness of our R&D ensures that we dont lag behind our competitors.9 Ratul Puri, executive director, Moser Baer

Corporate History

In 1985, Deepak Puri, co-founder of MBIL identified the potential for data storage devices in India and ventured into the data storage industry in India. He purchased all the shares of his Indian unit from the Swiss manufacturer and went public with an Initial Public Offer (IPO) in 1987. Being the first Indian company in this segment, it was facing huge challenges from Japanese and Taiwanese
8

Combating Counterfeiting and Grey Market A Challenge for Indian Corporates, http://www.in.kpmg.com/TL_Files/ Pictures/Counterfeiting%20In%20India(1).pdf, December 22nd 2008, page 7 Chandramouli Balaji, The Innovation Imperative, http://archives.digitaltoday.in/businesstoday/20061022/cover8.html

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MBIL was established in the year 1983 in technical collaboration with Maruzen Corporation, Japan and Moser Baer Sumiswald, Switzerland. The company was wholly engaged in assembling and manufacturing of timekeeping machines of Moser Baer Switzerland.

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Though the year 20072008, proved to be profitable for optical storage media manufacturers like MBIL, demand 2011 15.82 13.49 for CD-R continued to remain flat. But DVD-R maintained 2012 18.22 15.17 a positive growth trend with robust demand from developed as well as developing countries. To optimally utilise its core 2013 21.04 15.48 competencies, MBIL devised a strategic plan by converting Source: The Next Five Years are promising, its capabilities into profitable goals. It slashed the prices of http://www.theindusview.com/vol4Issue4/ its DVDs to below INR 30 to capture the CD market from specialreport.html cheaper pirated CD sellers. MBIL may not have reached its goal yet, but the first step of reducing prices of its CDs and DVDs in itself is a laudable fete.

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Exhibit III entertainment industry was crippled with piracy. Piracy has Performance and been plaguing the film and music industry due to high Projections of Indias Media purchase price, high DVD rentals and low replication costs. & Entertainment Industry

Despite having huge potential and growth, the home

According to a study conducted by US-India Business Council (USIBC), the Indian economy loses approximately $4 billion in revenues and over 800,000 jobs due to piracy in the Indian entertainment industry. It also estimated that 50% of the music and 60% of movies sold are pirated.8 Targeting piracy as the key area of business interest, companies like MBIL developed low-cost manufacturing and distinctive pricing strategies as its business model and offered products at the lowest rate compared to the prices of similar legitimate products in the industry.

Moser Baers Pricing Strategies: Competence-based and Value-driven?

manufacturers in the global market. It diversified its product range of manufacturing magnetic media i.e., floppy diskettes (discs), compact discs and DVDs. Initially MBIL manufactured magnetic media i.e., 5.25-inch floppy diskettes with a limited manufacturing capacity of 60,000 discs per month due to license restrictions given by the Government of India.10 Thereby, the insufficient capacity to handle large orders from international customers hampered its growth. In 1987, it started producing 3.5-inch Micro Floppy Diskettes (MFD). The 1990s also proved to be a challenging time for MBIL because of issues such as technological changes, increased cost of raw materials, limited in-house R&D and engineering capacity. MBIL improved its capabilities by concentrating on R&D. Due to technological changes, magnetic media became obsolete by the end of 1990s. In 1999, MBIL, in order to sustain its business, made a transition into optical storage manufacturing.

(in INR million) Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
of the company

Gross Revenue 1,567 3,513.5 6,785.99 10,855.2 15,792.2 13,528.6 17,319 20,740.3 19,582 22,045

During 2000s, MBIL had a 10% share in the global optical storage market and was able to notch-up an impressive customer profile, including eight top Original 13 Equipment Manufacturers (OEMs). The strategy adopted for optical media project was similar
Compiled by the authors from the Annual Reports
10 11 12

Moser Baer India Limited, http://ibef.org/download/Moser_Baer_India.pdf, page 1 Moser Baer (India), http://www.financialexpress.com/news/moser-baer-india/48815/0, June 9th 2002 Dye coating is the most important process in CD-R replication technique. The coating results in the final disc quality. The dye layer is applied using spin coating which gives additional durability to the CD. Moser Baer (India), op.cit.

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Net Profit 441.1 1,385 2,213 2,372.7 3,238.5 607.2 46.66 1,097.9 -789.1 -1,508.7

Exhibit IV Moser Baers Gross Revenue and Net Profit (20002009)

MBIL made a smooth transition to the optical media in 1999 when floppies were gradually becoming obsolete. During the same period, the company had set up a 150 million unit capacity plant to manufacture CD-Rs and DVD-Rs. Although the company was a late entrant in the field of optical storage media, it was successful in competing in the world markets through quality CDs conforming to stringent international quality standards and cost-effectiveness. In 20002001, the companys exports accounted for more than 80% of its sales and the companys floppy discs and CD-R production capacity increased to 130 million and 650 million discs per annum respectively.11 Due to its robust performance and increased sales in key European markets in addition to new business acquisitions, the companys revenue increased by 124% (Exhibit IV). It became the fourth largest, low cost producer of CD-Rs in the world due to its low manpower costs, usage of property dye coating12 process, capital cost advantages and strong R&D capabilities.

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Moser Baers Pricing Strategies: Competence-based and Value-driven?

to diskette business on the global platform in terms of size, technology, quality, product flexibility and process integration.14 In 2003, after the success of CD-Rs, MBIL entered into the production of CD-Rewriters (RW) and DVD-RW. The company sold its products with a brand name Moser Baer Pro in India (Exhibit V). This range uses the Protection Plus technology developed by MBIL to ensure extra protection and long shelf life.15 It came up with new range of Gold and Platinum CD-Rs with enhanced durability and resistance to both environmental and human hazards like temperature changes and scratches. It evolved as the market leader with more than 40% market share in India. It concentrated on manufacturing and distribution of its products to wholesalers, thereby ignoring retail selling.

Exhibit V Moser Baers Products

Product Moserbaer Pro CD-R Description

Moserbaer Pro CD-RW Moserbaer Pro DVD

Moserbaer Pro Mini CD-R

Magnetic Data Storage Media

Source: Moser Baer India Ltd, http://www.ibef.org/download/Moser_Baer_India.pdf

14 15 16 17

Moser Baer India, http://www.moserbaer.com/overview_history.asp Moser Baer India Rewriting the Future, http://www.ibef.org/download/Moser_Baer_India.pdf, page 2 Moser Baer India Ltd, op.cit., page 4 Ibid.

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During the same year, MBIL entered into a strategic long-term sourcing deal worth $100 million per annum with Imation Corp., one of the largest players in the optical media storage industry in the world.16 In addition to sourcing media, it also entered into a strategic joint venture to carry R&D as well as market optical storage media products in emerging markets like Africa, the Middle East and South America and also in new markets.17 MBIL capitalised on its mass manufacturing, engineering and development capabilities to emerge as one of the worlds most profitable players in the removable optical storage media industry.

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First and only 52x CD-Rs to be launched in India with high thermal sensitivity and capability to maintain data integrity without degradation in any way

These CDs can be written over and over while maintaining high durability and are designed for writing at speed of 4x-10x

These DVDs can hold up to 4.7 gigabytes of data and can be written at speeds up to 8x for DVD-Recordables and 2.4x for DVD Rewritables These provide better portability, while maintaining superior recording and playback characteristics and compatibility These include compact cassettes, micro-floppy disks and digital audio tapes

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Moser Baers Pricing Strategies: Competence-based and Value-driven?

Moser Baer was able to attain its leading position with the help of reliable suppliers of raw materials such as polycarbonate plastics, aluminium and acrylic. With its core competency in manufacturing, the company expanded its sales from about $22 million in 1998 to more than $355 million in 2003.20 In May 2006, MBIL signed a Memorandum of Understanding with Institute of TechnologyDelhi and Banaras Hindu University (BHU) to jointly work in the area of fundamental and applied R&D for optical storage media and photovoltaic technology. By 2008, it had a production capacity of 3 billion units in the optical storage media.21 In November 2006, to complement its existing business of optical media, MBIL introduced a range of Universal Serial Bus (USB) Flash drives. Bhaskar Sharma, executive vice president, MBIL opined that the launch complements our existing optical media business and we will leverage our strong branding and marketing network to emerge as the top player with a significant market share in this segment also.22 During the same month, the Ministry of Science and Technology (MST) approved MBILs in-house R&D centre. The efforts of R&D centre helped the company to become the first company in the world to ship out the HD DVD-R format and extend the technology leadership in the Blu-ray media. This format provided MBIL a significant competitive advantage over industry peers.
18

Blu-ray disc is the advanced optical disc format for storing high definition films, games, photographs and other digital content. Bakshi Moumita and Thiagarajan Krishnan, Drives will thrive, http://www.thehindubusinessline.com/ew/2005/05/30/stories/ 2005053000070100.htm, May 30 th 2005 Luthra Shashank, et al., When to make India a manufacturing base, The McKinsey Quarterly, September 2005 Storage Media Overview, http://www.moserbaer.in/ Moser Baer Launches USB Flash drives, http://www.moserbaer.com/mediaroom.asp?id=33&mth=&year=2006&sec= , November 2006

19

20 21 22

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The year 2005 witnessed migration of data storage from CD-RWs to DVD-RWs. Considering the growth potential in this segment, MBIL started scouting for opportunities in Blu-ray18/HD-DVDs segment in order to develop advanced high capacity storage format. The company faced severe competition from Taiwanese manufacturers such as Ritek Corp., CMC Magnetics Corp. and Prodisc Systems in the optical media business. It was also facing challenges in terms of alternate secondary storage devices such as pen drives. To retain its position and to counter the global slowdown in the optical storage media business, MBIL diversified and transformed itself into a multi-technology firm. In 2005, it forayed into Solar Energy Photovoltaic optics business. In 2006, it entered the home entertainment segment and in 2007 into IT peripherals & consumer electronics segment. During this period, MBIL had increased its global market share from 10% to 17.5%.19

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On the marketing front, the company further expanded its market reach and moved into high growth Indian market for branded storage products. In 2004, to stay relevant and to adapt itself to the changing technologies, MBIL tied up with Hewlett-Packard (HP) to manufacture optical media, using the latters Light Scribe technology which enables labels to be written on the disc surface with the same drive that reads and burns information on it. In addition, it also worked with National Aeronautics and Space Administration (NASA) for developing discs for use in space shuttle thus extending its reach from mass market consumer to corporate data storage applications.

Moser Baers Pricing Strategies: Competence-based and Value-driven?

In home video market, MBIL carefully evaluated and acquired the content at the right price levels. The home video market doubled to INR 8.63 billion in 2008 and is expected to increase to INR 16.06 billion in 2013, thereby showing a growth of 13.2% CAGR.30 With considerable growth opportunities in the Indian entertainment industry, there are new revenue generation streams like animation, gaming, merchandise, etc., creating new business opportunities. However, this segment has been facing a stiff competition with existing players and pirates. With the entry of high capacity DVDs in the entertainment segment, the pirates have stepped up their activities and MBIL is the leading company which is intensely trying to curb piracy.

23 24

Moser Baer India Limited, op.cit., page 1

25

Moser Baer Entertainment & SONY BMG Music join hands, http://www.cinefundas.com/2008/07/20/moser-baerentertainment-sony-bmg-music-join-hands, December 28th 2009 Gupta Sovid, Moser Baer, http://www.valuenotes.com/fairwealth/fairwealth_MoserBaer_01Jun09.pdf, May 25th 2009 Das Sibabrata and Pinto Ashwin, Indiantelevision.coms interview with Moser Baer (entertainment business) CEO Harish Dayani, http://www.indiantelevision.com/interviews/y2k7/executive/harish_dayani_interview.php, June 11th 2007 Gupta Shubhra, Movies in my grocery list, http://www.thehindubusinessline.com/life/2009/08/21/stories/ 2009082150120400.htm, April 21st 2009 Mitra Ashish, Popularising Home Video, http://www.screenindia.com/news/popularising-home-video/312644/,May 23rd 2008 Overview, http://moserbaer.com/writereaddata/pdfs/MB_Annual_Report_2009.pdf, page 38

26 27

28

29

30

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Pan indicates presence across nation. Pan-India presence means the company is operating in all the regions of the market and that the company has operations in all the major languages of India.

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MBIL is the first pan-India24 company to offer home videos in 18 popular regional languages.25 The use of existing technology and brand name of optical media benefited the entertainment unit. Home entertainment business of the company ensures 75% capacity utilisation of its storage device manufacturing segment.26 The company makes 10 million discs a day enjoying the economies of scale.27 The core competency of the company rests in manufacturing larger quantities of DVDs than any other company in the country.28 In addition to this, it also uses best label printing technology and customised packaging solutions. While the Indian home video market grew at a staggering rate of 15% per annum in 20072008, MBIL pegged its market share between 50%60% indicating its commanding presence in India. 29

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Moser Baers business model was predominantly OEM-centric. As a result, 80% of its revenues were from sales to OEMs in the global markets.23 Being OEM-centric, it concentrated on majorly two functions innovation and quality manufacturing with its strong R&D base. In an effort to diversify into related businesses, MBIL forayed into entertainment industry via home video market through the launch of content distribution in December 2006. The companys entry into entertainment business, proved advantageous for the production and distribution network of already established business of the company.

Moser Baers Pricing Strategies: Competence-based and Value-driven?

Moser Baers Foray into the Home Video Market

India is considered as the worlds largest producer and consumer of films with the production of 1132 feature films in comparison to 520 Hollywood films in 2007.31 The Indian film industry and home video market are highly fragmented and are rampant with piracy. According to a research study, India has over 26 million DVD/VCD users and had witnessed a growth rate of over 25% during 2008.32 Despite this huge potential, the home video market accounted for only 7% of the INR 79 billion film industry, which is a poor share when compared to other developed countries like US, which derives 40% revenues from home video sales.33 According to Pricewaterhouse Coopers (PwC) the domestic home video market will grow at a CAGR of 31% to INR 2,500 crore by 2011.34 Being the largest producer and consumer, the Indian home video market has failed to capture its potential on a wider scale. To grab this opportunity in this segment, MBIL set up a separate entertainment business division in December 2006 with the launch of a new initiative in content distribution MBEL. It released video content on DVD and CD formats using its proprietary and patented technology with enhanced quality and reduced cost. With this, the company planned to take comparative advantage with regard to quality and price parity and offer unprecedented value to its customers. MBEL adopted an aggressive pricing strategy thereby taking piracy head-on by forward integration, ensuring better margin protection. MBEL launched its VCDs and DVDs at INR 28 and INR 34 respectively at an early stage in order to penetrate into Indian home video markets. During this period, the cost of a regular VCD was in the price range of INR 160INR 200, the cost of a regular DVD was in the range of INR 300INR 400 and the movie rentals were about INR 50INR 100 per DVD (Exhibit VI).

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Company Eros Entertainment Excel Home Video

Exhibit VI Comparison of CD/DVD Prices in the Home Video Market (2007)

Prices (in INR) VCD 28 66 99 149 DVD 34 149 399 499

Moser Baer Entertainment Ltd. Shemaroo Video Pvt. Ltd.

31

Thakur Atul, India Dominates world of films, http://timesofindia.indiatimes.com/india/India-dominates-world-of-films/ articleshow/4827912.cms, July 28th 2009 The Home Video Market, http://theviewspaper.net/the_home_video_market/, January 30 th 2008 Fernando Rajiv, THE CASE :Cracking the home video market, http://www.financialexpress.com/news/cracking-the-homevideo-market/194917/0, March 24 th 2007 The Home Video Market, op.cit.

32 33

34

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Sony Pictures 69 399 The price war in DVD/VCD industry Compiled by the author started when other companies like T-Series Ltd., Ultra Video Ltd., etc., lowered their prices to survive the competition. Industry players such as Shemaroo Video Pvt. Ltd., Eros Entertainment, Excel Home Video and Sony Pictures also reduced the prices, but they were higher in comparison to MBELs prices.

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According to the industry estimates, the cost of replicating movies on a CD is around INR 14. Distribution and tax costs amount to another INR 3 and INR 2 respectively, bringing the total cost to INR 19. But Harish Dayani (Dayani), CEO of MBEL, claims that Moser Baer has in-house facilities to replicate CDs for Rs 10.35 He states, Our production cost is only Rs 13, and the resultant margin is enough for us to profit. We will launch new movies, too, at identical rates. That means MBEL is claiming a margin of INR 15 (against the estimated industry standard of INR 9) per CD, which is still far below that of rivals INR 150 (minimum).The cost per DVD of a typical DVD manufacturer is tabulated in Exhibit VII.

Exhibit VII Estimated Cost of Each Moser Baer DVD (in INR)

Raw material costs

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Particulars

Cost per DVD 2.00 0.35 2.00 0.25 1.00 0.15 0.25

Lighting, water and power Salaries and wages Insurance

Depreciation

Other administration expenditure

Office rent, repairs and maintenance

35 36

The Home Video Market, op.cit.

Multi-tier distribution channel is the distribution channel in which the product is sold through many channels ultimately to reach its customers. Overview, op. cit., page 15 Pinto Ashwin, DVD market on the cusp of change, http://www.indiantelevision.com/special/y2k7/dvd_feature.php, September 22 nd 2007 Ibid. Jaitly Tarun, et al., Reinventing the Future: Moser Baer Ltd,http://www.scribd.com/doc/16245450/Initiating-CoverageMoser-Baer, November 18th 2008, page10

37 38

39 40

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6.00 In order to expand its presence, MBEL Copyright costs acquired copyrights/exclusive license for Printing and packaging costs 1.00 around 10,000 movie titles in almost all the Advertisement cost 1.00 major Indian languages like Hindi, Telugu, 1.00 Tamil, Kannada, Malayalam, Bhojpuri, etc., in Showroom shelf expenses 2007. On the distribution front, MBEL had a Dealers commission 0.50 strong well- organised, multi-tiered distribution 0.50 channel36 that made its titles available in over Other distribution costs 200,000 outlets across the country.37 Though Taxes 2.00 a late entrant, with its pricing strategies Moser Source: According to authors estimates based on Industry Baer made a dent in film video markets. It reports adopted a low-margin strategy in the home entertainment market. It fixed the price of its CDs and DVDs less than movie tickets (more than INR 50), cheaper than a pirated disc (which is available at INR 80INR 100) and even lower than a rented disc (rent for a new release is INR 50).38 The company also launched a single VCD of songs in all the major Indian languages, at prices starting from INR 20.39 It offered home video titles in film and non-film categories. It emerged as a leader in this segment in a span of 6 months consolidating its pan-India presence and nationwide-spread distribution reach coupled with aggressive marketing.40

Moser Baers Pricing Strategies: Competence-based and Value-driven?

The challenge for MBEL was to make its low margins work its high-volume strategy with its distribution network as a key tool. The company tapped small towns and villages after its initial success in urban areas. It spent INR 25 crore in the first year of its operations with the distribution effort from outlets to vendors on hand carts and cycle carts (akin to ice-cream carts) with massive brand building campaign.45 The brand building campaign helped the company to differentiate itself from others while attempting to be an end-to-end player from producing a film to selling it at the customers doorstep. MBELs core competency vested in improving technology in existing segment and adopting Fast Moving Consumer Goods (FMCG) model46 for distribution segment to drive volumes. Instead of consumers going to a nearby outlet, we are experimenting with the outlet going closer to the consumer. We have piloted this concept successfully in some areas and propose to expand the specially-designed cycle carts in operation from 150 to 1,000, primarily to cover smaller towns, stated G. Dhananjayan, COO, Entertainment Business of Moser Baer India.47 The biggest challenge for the company was to create a niche in the home entertainment industry where piracy was rampant.
41

42 43

Overview, op.cit., page 32

Seshan Govindkrishna, Spinning new strategies, http://www.business-standard.com/india/storypage.php?autono=281358, April 17th 2007 Shahid Aliyah, Piracy in Indias entertainment industry causes huge losses to economy, http://www.livemint.com/2008/03/ 31121923/Piracy-in-India8217s-entert.html, March 31 st 2008 Moser Baer -Hello Movies, op.cit. FMCG model where the customers get attracted towards a particular product enabling to puchase it whichever store he/she visits Pitalwalla A. Yassir & John Reji, Moser Baer takes films to doorsteps in small towns, http://www.mydigitalfc.com/ companies/moser-baer-takes-films-doorsteps-small-towns-462, April 9th 2009

44

45 46

47

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Business to Business (B2B) is the exchange of products, services, etc., between the two companies rather than business and customers.

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Despite competition, piracy remains a major challenge for the players in this segment. The time gap between the theatre release and the CD/DVD release in the market was long (6 months) which was causing a havoc on the revenues of the Indian film industry. Piracy used to begin in theatre on the first day of the movie release. Hand-held video cameras are used to record the movie off the screen, which is then copied onto blank CDs and DVDs for illegal circulation. Piracy is rampant even after the original CDs of the movie are released in the market. Duplication from the original CD takes place at an exorbitant rate. The other types of piracy include optical disc piracy and Internet piracy. As of 2007, the organised home entertainment market was estimated to be worth INR 650 crore while the pirated market was nearly twice the size at INR 1,000 croreINR 1,200 crore.43 According to Ernst & Young India, almost INR 16,000 crore is lost due to piracy.44

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MBIL was regarded as Business to Business (B2B)41 company and was recognised as one of the most sought after IT savvy companies before its entry into the entertainment division. In order to have its distinct identity and instant recall value, it adopted the pull and awareness marketing strategy through its Hello Happiness campaign to reach out to its customers and communicate the value proposition offered. As a mark of assurance, the company offered a certified quality money back guarantee in case of any manufacturing defect and promised to replace the disc absolutely free.42

Moser Baers Pricing Strategies: Competence-based and Value-driven?

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100 FY07

The success of this strategy was demonsrated by films like the 15-year old Bollywood superhit Baazigar, which sold 150,000 copies on the first day of its release in 2007 and Jab We Met for INR 36 crore ($9 million) in disc sales in 3 months, while Jodhaa Akbar notched up INR 76 crore ($19 million).49 With this, MBEL achieved break even sales in less than 12 months of its operation by notching up revenues of INR 160 crore ($40 million) in the entertainment segment. 50 Out of the total revenue generated by MBIL, nearly 6% of revenue came from entertainment business in 2009 (Exhibit VIII).

Exhibit VIII Revenue Generation of Moser Baer India from Various Business Segments (20072010)
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 7.8 7.5

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25.4 5.9 68.7 84.7 FY08 FY09E Optical Media Entertainment Distribution

To meet that end, MBEL decided to increase its scope of video distribution rights by making MBEL a 100% wholly-owned subsidiary and venturing into film production which complemented its home video segment. In addition to the distribution strategy it adopted new technologies such as Bluray as a tool to drive volumes in its new business. As a part of expansion plan the company also planned to invest INR 120 crore in film production and acquired home video rights for old blockbuster movies across different languages.48

43.1

4.9

52

In addition to physical distribution model, Moser Baer launched online sales model also as a part of its marketing strategies. It believes that every product has its importance and is helpful in capturing market share. It believes that the sales of old movies are small in number, but people would browse and pick them up when they come to take a copy of a new movie.51 Moser Baer also intends to apply this model in its overseas markets.

FY10E

Solar PV

Source: Moser Baer India ltd., http://www.businessstandard.com/pdf/moserbaerq4fy08.pdf, 2008, page 3

In December 2008, MBEL signed an exclusive home video licensing agreement with UTV motion pictures. Dayani, commented that, Moser Baers entertainment business is working towards the consolidation of the home video space in India. Our strategy is based on the twin pillars of affordable
48

Ravikumar R.,Ten films in Moser Baers production kitty for 2009", http://www.thehindubusinessline.com/2009/03/10/ stories/2009031051161500.htm, March 10 th 2009 Ibid. Moser Baer, http://www.superbrandsindia.com/images/superbrands_book_2008/Moser%20Baer.pdf, page 2 Bhandari Rohini, We dont believe in the me too model Moser Baer Entertainment CEO Harish Dayani, http:// www.businessofcinema.com/news.php?newsid=7606, March 28th 2008

49 50 51

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Moser Baers Pricing Strategies: Competence-based and Value-driven?

Exhibit IX Moser Baer Super DVD Prices

Films Gujarati Bengali Hindi Other languages

INR per DVD

Over the years, MBEL has been a consistent performer in generation of revenues and margins. Given the current prices, http://www.deccanherald.com/ price points, the companys management expects to break content/19617/moser-baer-cuts-supereven in less than 18 months of hitting the market for each dvd.html, September 18th 2009 movie title. The company expects to drive its business on volumes and expects to have its own rights on at least 50% of the movies released in India.
Source: Moser Baer Cuts super DVD

52

Ahuja Jyotika and Sundaraman Shruti, Moser Baer and UTV forge strategic alliance for home video distribution of UTV movies, http://www.utvmotionpictures.com/press-releases/utv-press-release-36.pdf, December 16th 2008 Moser Baer takes films to doorsteps in small towns, op.cit. Sekhri Arhun, Interview with Harish Dayani of Moser Baer, http://www.indianentertainment.info/2009/06/27/interviewwith-harish-dayani-of-moserbaer.html, June 27 th 2009 Moser Baer takes films to doorsteps in small towns, op.cit. Toshiba sues Moser Baer, 7 other firms for DVD patent violation, http://www.domain-b.com/companies/companies_t/ Toshiba/20090519_toshiba.html, May 19 th 2009 Moser Baer takes films to doorsteps in small towns, op.cit. Moser Baer Cuts super DVD prices, http://www.deccanherald.com/content/19617/moser-baer-cuts-super-dvd.html , September 18 th 2009

53 54

55 56

57 58

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22 25 27 30

In 2009, the company created a brand called Super DVD a product with three films on one disc that helped to expand volumes and give customers a legitimate and good quality product.56 MBEL was the first in the market to deliver this new format Super DVDs for INR 45.57 In order to counter piracy, MBEL pegged down the price of its Super DVDs between INR 22INR 30 to counter four to five pirated movies for around the same price58 (Exhibit IX).

The Road Ahead for Moser Baer

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prices to curb piracy and everywhere distribution to drive mass consumption. UTV has emerged in recent times as one of the leading studios in the country and its home video titles add luster to our product line. This development further reinforces our position as the dominant player in the home video space in India.52 The legitimate market for home videos in India grew from INR 643 crore in 2006 to INR 984 crore in 2009.53 But most of these revenues were eaten up by the pirates as they released the illegal DVDs within 3 days of the theatre release by offering them at prices as low as INR 30 accounting for about INR 2,000 crore loss per year of the legitimate revenues.54 In order to curb piracy, MBEL was trying to come up with fresh content on new releases. For this, it worked with film producers to allow the movies to be released in home video format soon after the release in cinemas. This brought down the time gap between theatrical release and home video release which had halved from a year to 6 months. It was also trying to reduce it further to 100 days for regional films. For Hindi movies, the company managed to reduce the period from 8 weeks after the release in theatres to between 46 weeks and for the regional films it planned to bring down the period to 100 days.55

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Every home video company is trying to reduce pirates sale with their business strategies. Since MBEL has been the first to make this move in this stream by reducing its prices, the other companies have also followed suit. As the companies are trying to grab maximum share of home video market from pirates and create a number one slot in the market for themselves, how far will MBEL be successful in its strategy? To what extent will it further reduce price? Can the price reduction strategy help MBEL to capture the market share for a longer time? Can it compete with pirated DVDs, which are offered at rock bottom prices as they do not pay license fee?

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There is intense competition in the home video market with the entrance of Big Home Video as it has struck three major deals with the Hollywood Studios Universal, Paramount and Warner Brothers making it a major content owner of 60% Hollywood movies. As Big Home Video is backed by Reliance Big brand, which has various businesses in entertainment space, it helps Big Home video in acquiring new movie rights and capturing the home video market. At one end where old players like Bombino Video Pvt. Lt., Indus Video Pvt. Ltd. and Ultra Video Pvt. Ltd., etc., are quitting the market due to huge losses from pirates who constitute nearly 90% of the market, on the other end there is emergence of new players with new business models to curb piracy and establish themselves in the space created by the old players.