Daybreak - Youtube is Saregama’s superpower—and its kryptonite

Episode Date: December 31, 2024

2024 was a defining year for Saregama, one of India’s oldest music labels. This is a company that has been around for well over a century. For a long time now, it has been associated with the kind of music your parents and grandparents grew up listening to – the classics, evergreen Bollywood numbers, Ghazals, Carnatic music…you get the drift.  But this year, something changed. Saregama made it clear that it was done banking on old melodies alone. It has been on a mission to make fresh hits. And that mission has largely been successful thanks to Youtube. But there is a flip side to this strategy. In the Youtube-Saregama relationship, the former holds all the power. Tune in. Daybreak is produced from the newsroom of The Ken, India’s first subscriber-only business news platform. Subscribe for more exclusive, deeply-reported, and analytical business stories.

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too? It's for a special announcement. For the last few months, I and Sita Ramon Ganesh, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

We want to tell the same. secret sauce stories of India's greatest companies. Stories of how they were born, how they fought to survive, how they build their organizations and culture, how they managed to innovate and thrive over decades, and most importantly, how they're poised today. To do that, Sita and I have been reading books, poring over reports, going through financial statements, digging up archives, and talking to dozens of people. And if that wasn't enough, we also decided to throw in video into.

to the mix. Yes, you heard that right. Intermission has also had to find its footing in the world of multi-camera shoots in professional studios, laborious editing, and extensive post-production. Sita and I are still reeling from the intensity of our first studio recording. Intermission launches on March 23rd. To get an alert, as soon as we release our first episode, please follow Intermission on Spotify and Apple Podcast. or subscribe to the Ken's YouTube channel. You can find all of the links at the ken.com slash I am. With that, back to your episode.

2024 was a defining year for Saragama, one of India's oldest music labels. You see, this is a company that has been around for well over a century. It is still one of the biggest names in the Indian music industry, but there is a flip side to having that sort of legacy. because Saragama is widely recognized today as somewhat of a nostalgia machine. And that's not just because of its popular Karwan line of speakers. For a long time now, it's been associated with the kind of music your parents and grandparents grew up listening to.

The classics, evergreen Bollywood numbers, gazelles, Carnatic music, you get the drift. This year, something changed. Saregama made it clear that it was done banking, on old melodies alone. It's been on a mission to make fresh hits. And that mission has largely been successful thanks to two releases this year. Aaj Gira from the movies 3-2 and Taoba Tauba from the film Bad News. I'm sure you've heard both these songs innumerable times this past year,

either willingly or unwillingly. They took social media by storm. And thanks to that wave of virality, Saragama reported its best-ever performance. just a few months ago, when those two songs alone managed to garner 150 billion views since their release. Now, don't get me wrong. Sure, these songs are catchy. But more than the songs themselves, a big part of Saragama's winning strategy has been YouTube, the platform on which these two songs thrived the most. You see, YouTube commands over 50% of India's music streaming market. And now that

Saragama is vying for a bigger slice of the pie in India's hyper-competitive music industry, YouTube seems to be its weapon of choice. It is betting big on the algorithm that made Tobba Tohba and Achequah viral. And it isn't just Sari Gama. It is a great time to be in the music business. You see, India is a sound-obsessed country. Indians spend three hours a day listening to music on average, which is 18% more than the global average.

And thanks to streaming platforms like YouTube and Spotify making music so accessible, music labels have been cashing in on the country's growing music obsession. Here, Saragama is one among six big players, the biggest of course being T-Series. But off late, Saragama has been quietly gaining ground and the market has noticed. In fact, its stock is up more than 30% this year. But chasing virality comes at a price, especially on YouTube. Sure, the platform can make a song go viral, but it can also bury it without a trace. It is a very risky bet.

But for now, Sarekama is in it to win it. So in this episode, we will dive into the Indian music industry and how in the end, it's platforms like YouTube that are falling all the shots. Welcome to Daybreak, a business podcast. podcast from the Ken. I'm your host Rahil Filippos and I'll be joining my colleagues Nikta Sharma every day of the week to bring you one business story that is worth understanding and worth your time. Today is Wednesday, the 1st of January. YouTube is the undisputed king of music discovery here in India. Anirud Somani, the contributor who wrote the story that this episode is based on, made a pretty

hilarious analogy. He said YouTube is to India's music industry, what WhatsApp is to family group chats. It is omnipresent and indispensable. Now, like I mentioned a little while ago, YouTube commands 50% of the country's music streaming market as per a recent Ficky EY report. So naturally, it has also been a cash cow for music labels like Saregama. Various analysts estimate that Saregama earns nearly one third of its revenue from the platform. And interestingly, the growth it saw this year wasn't because of full-length video. or YouTube music. It was actually because of short-form content published on YouTube shorts.

Now, let's unpack how this relationship works. For starters, the economics of YouTube as of today isn't ideal for labels. You see, the platform keeps 45% of all ad revenue. So the remaining 55% goes to content owners, like Saregama. And the math is similar for ad-free premium subscriptions too. YouTube takes its cut first and whatever is left over is divvied up based on user engagement. So for every hundred rupees a user spends on YouTube premium, only about 55 rupees trickles down to the labels they've listened to. But at the end of the day, the real money still lies with the ad-supported model.

Sure, paid music subscriptions are growing fast, but the penetration today is still laughably low. The same report found that it is still at around 4% in a market of over 1 billion people. And now that other audio-OTT platforms like Spotify and Gio-Savan are inching towards paywalls, YouTube's dominance could possibly only get stronger. Now, with YouTube shorts, things are a little different. Remember, Sarigama gets about 80% of its views from here. And currently, Shorts operates on a fixed-fee revenue model. Now, what that means is that content owners get a lump sum payment from YouTube.

So take a label like Tips Music, for example. It was estimated to have received one to one and a half crore rupees as an annual deal from YouTube. But this arrangement could change down the line. You see, shorts could shift to a model that shares ad revenue with labels like Sari Gama. And that could unlock massive new income streams for the label. But of course, there is a flip side to the label. this because it would mean growing even more reliant on YouTube, which in turn would mean losing leverage in that relationship.

For now, YouTube is Saregama's biggest ally, but it could just as easily become its toughest negotiator. More on that in the next segment. Before we begin the next segment of this episode, here's a little bit of a clarification. They Ken reached out to both Saregama and YouTube while working on the story, but neither company responded to our questions. Well, with that out of the week, let's get back to the Saragama YouTube relationship.

You see, the biggest problem with this kind of arrangement is that the platform ends up wielding a tremendous amount of power over content partners. It has the power to unilaterally tweak algorithms or revenue models or even terms of contract. Say, YouTube decides tomorrow that shots creators deserve a larger slice of the pie or that music labels should get less. Saragama will have no choice but to play along. Right now, Saragama seems unperturbed.

It seems more than willing to take that risk. An analyst fear that the company is putting all its eggs in one basket. In fact, even its efforts to diversify have ended up making it even more reliant on YouTube. Let me explain how that works. You see, the company's fastest growing vertical is its video production business. It makes regional films under the Yudley banner, while digital series and snackable content are published via pocket. pocket-aices dice media and channels like filter copy.

It even dabbles in television, producing serials for networks like Sun TV. But most experts are pretty skeptical about this approach. You see, post-pandemic, Saragama shifted from small-budget films designed for digital platforms to producing regional movies for theatrical releases. This was a really bold move, but it also shifted the risk profile. It also went ahead and acquired Pocket Aces for about three. $375 crore rupees in November last year. It was supposed to take its content game to the next level

because now it would have the capability to create shows for streaming giants like Netflix and Amazon. The problem here is that streamers are currently slashing original content budgets. Just last month, we reported on how OTT platforms have cut both the number of new titles releases and funding for mid-budget shows. Now, what this means is that Sariq's. Saragama's video ambitions are more reliant on YouTube than ever before. And that just isn't sitting well with investors.

It's making them question Saragama's judgment. Anirut spoke to Amit Manthri, the co-founder of investment firm 2.2 Capital. He said that the video segment just isn't as good as the music licensing business. That's because of music's fat margins and high entry barrier. Meanwhile, in contrast, video is far more competitive. It is a lower margin game with fewer barriers to entry. So, is the video business even worth it for Sari Gama? Well, management seems to be hedging its bets.

Investments in non-music ventures are currently capped at about 18% of total capital. And that is a clear sign that the company isn't willing to double down on videos just yet. So music is clearly still at the top of the content pyramid. Its repeatability makes it a licensing gold mine with better margins and monetization opportunities. But that still doesn't mean it's a cakewalk for a music label, not even a century-old label like Saragama. Saragama may have really had its moment this year. But there is another music label that has managed to make an indelible mark over the last two years, despite having a much smaller music catalogue.

I'm talking about Tips Music. You see, since its demurger back in 2022, TIP's stock has soared 300%. Saragama's meanwhile has stayed more or less flat during the same period. And the reason for that is that Tips has had a sharper, more focused business, free from the unpredictability of Bollywood's box office roulette. Since it shed the dead weight of its film business, investors see Tips now as a pure play music entity. They've recognized the value of its catalogue. It's lean, focused and profitable.

Today, Tips owns only around one-fifth a number of songs compared to Saregama's collection. And yet, it commands a higher market gap. And the reason for that is efficiency. Saregama's management remains bullish. They forecast a revenue growth rate of 25 to 36 percent and plans to double profits before tax in the next three, three and a half years. A key part of that strategy is monetizing both free and paid. listeners. On YouTube, Saragama earns around 0.10 per stream from free users via ads. But paid subscribers generate up to 5x revenue per listener according to a few estimates. In fact, Vikram Mehra,

Saragama's managing director, sees the company's future in subscriptions. During an investor call earlier this year, he said that a shift to paid models could more than double industry revenues. But in reality, it doesn't seem like users in India. will become more willing to pay for stream music as early as the next six months. You see, Spotify and GeoSavan, the two biggest streaming players, are still largely free. Spotify has made moves to push users towards paid plans. It's done things like disable rewind and add-to-que features for free accounts. But those are gentle nudges, not hard paywalls.

And until this changes, the dream of a subscription-first industry feels quite distant. For now, Saragama is sticking to its risky duet with YouTube. It's generating enough cash to be able to pay the bills, but the streaming platform holds all the cards. One small change in the algorithm or a tiny tweak in its revenue sharing terms, and Saragama will really have to face it. Daybreak is produced from the Newsroom of the Ken, India's first subscriber-focused business news platform. What you're listening to is just a small sample of our subscribers. on-offering.

A full subscription unlocks daily long-form feature stories, newsletters and podcast extras. Head to the ken.com and click on the red subscribe button on the top of the website. Today's episode was hosted by Rahil Filippos and edited by Rajiv Sien.