Deal focus: GPs change channel on content streaming

Disney+ Hotstar, Amazon Prime, and Netflix are said to represent up to 90% of India’s over-the-top (OTT) video streaming space. They charge about USD 11, USD 7, and USD 29 a year for a basic service, respectively. Clearly, it hasn’t been easy to get people to pay. Subscribers total 40m, 20m, and 6m.

Eventually, discretionary spending capacity will come more in line with the OTTs’ mass-market dreams. However, such is the oligarchy’s monopoly on mindshare, the extent to which private equity can participate in this process is uncertain.

So, investors are changing the channel. Audio content streaming has emerged as a potentially faster and more economically rewarding route to the top of the OTT pack in terms of user numbers. Music streaming and diversified media companies abound, but there are no serious incumbents specialising in the digital delivery of podcasts, talk shows, and audiobooks.

“Market sizes are tricky to establish, especially if there’s no content library in this format, but you can have a very interesting outcome here. It’s a consumer internet business with high gross margin and low competitive intensity. So, it’s a unique opportunity,” said Prateek Jain, a principal at The Fundamentum Group.

“I would not peg it any different than an OTT platform in India, which have north of 25m paid subscribers. In the next 5-6 years, I would put audio categories at about 50m subscribers. This format is still warming up.”

Fundamentum’s bet on this space is Kuku FM, which has aimed to differentiate itself by focusing on local languages and local culture. It has expanded from an early focus on self-help and self-learning content to a more diversified offering of fiction and non-fiction series. Revenue is said to have grown 3x in the past year.

Fundamentum recently co-led a USD 24m Series C round for the company alongside the International Finance Corporation. Vertex Ventures Southeast Asia & India also participated. It follows a staged Series B that closed at just over USD 40m in September last year. Between the two rounds, the paid subscriber base expanded from 1.6m to 2.7m.

Part of the audio thesis is in pricing, both in terms of content production and subscription fees. Shows are cheaper to produce, in part because there are no sets and no stars. Kuku costs listeners about USD 7 a month, on par with Amazon Prime at the cheaper end of the video OTT spectrum but arguably more curated in terms of catering to local interests un-serviced by mainstream media.

The company’s closest competitor, Pocket FM, pursues a freemium model, with subscriptions starting at about USD 5 a year. Pocket has a stronger focus on English and overseas markets. It claims to have more than 80m users although how many are paying is unclear.

“There is so much free content available, to be able to monetize users, you have to have something that they’re not able to get anywhere else,” Jain said.

“The thing with content is, once people like it, they want more and more. Today we are mostly aspirational books and a bit of romantic stories, but there is so much more around religion, education, parenting, mystery, thrillers, so many genres and languages.”

The plan is to continue to add languages – there are currently nine – ramp up name recognition through internet advertising, and build out the data analytics function, including a recommendation engine. The aim it to accumulate up to 30m subscribers in the next 3-4 years. By Jain’s estimate of the growth of the segment, this would represent an approximately 50% market share.

The target is to be profitable by the end of next year. Thereafter, an IPO is considered a feasible exit in light of the proxy precedent provided traditional listed media companies such as Saregama, Hungama, and Tips Industries.

“Audio as a category is interesting because you build a consumer brand. In India, consumer brands are really the darlings of the IPO market because everyone has used the products, and they know them,” Jain added.

“This is such a high gross margin, high ROC [return on capital] business, it’s a unique case. The content is manufactured and distributed by the same platform, which owns the content.”

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• Topics
• South Asia
• Media
• Expansion
• Technology
• India
• TMT
• The Fundamentum Partnership
• IFC
• Vertex Ventures
• Growth capital