If you have not read Peter Thiel’s book, Zero to One, odds are high that you do not understand the subtle nuances of competition and monopoly. While nothing can substitute for a slow and long reading of the book, I am sharing a few quotes from the book to talk about Monopoly.

Quote No. 1: All failed companies are the same: they failed to escape competition 

Tolstoy opens Anna Karenina by observing: “All happy families are alike; each unhappy family is unhappy in its own way.” Business is the opposite. All happy companies are different: each one earns a monopoly by solving a unique problem. All failed companies are the same: they failed to escape competition.

Quote No. 2: If you can’t beat a rival, it may be better to merge

For Shakespeare’s Hamlet, greatness means a willingness to fight for reasons as thin as an eggshell: anyone would fight for things that matter; true heroes take their personal honor so seriously they will fight for things that don’t matter. This twisted logic is part of human nature, but it’s disastrous in business. If you can recognize competition as a destructive force instead of a sign of value, you’re already more sane than most.

In the book, Thiel also narrates the story of Thiel’s Confinity (founded in 1998) and Elon Musk’s X.com (founded in 1999) who were fierce rivals in 1999. In just one year they merged to become Paypal. It helped them not only survive the dot-com crisis but also thrive in the times afterward.

Quote No. 3: A Monopoly owns its market, so it can set its own prices. 

Under perfect competition,  in the long run, no company makes an economic profit. The opposite of perfect competition is monopoly. Whereas a competitive firm must sell at the market price, a monopoly owns its market, so it can set its own prices. Since it has no competition, it produces at the quantity and price combination that maximizes its profits. 

At the outset, if you look at a business like PVR Inox, it seems to tick all the three boxes mentioned in the above quotes.

1. It escaped competition and became a monopoly.
2. When PVR and Inox could not beat each other in the market, they merged and survived the Covid crisis.
3. As PVR Inox owns its market, it decides the price, size, and quantity of popcorn and cold drinks you get there.

In Feb 2023, PVR and Inox got merged. If PVR Inox displayed the characteristics of a monopoly, then the stock market would have acknowledged it. Right? Wrong. Here’s the price chart of PVR INOX after the merger.

At a time when NIFTY has generated 25% returns, and the broader market a lot more, the stock of PVR Inox has barely moved.

The consensus opinion, however, is extremely bullish. Check this out:

Source: https://trendlyne.com/research-reports/stock/1087/PVRINOX/pvr-inox-ltd/

6 active buys. 0 active sells and consensus target price of 1899. That’s 35% more than the CMP.

PVR Inox for me, however, has remained a puzzle that is still unsolved. 

So do not expect this post as a buy or a sell recommendation. Sorry.

Instead, here are a few questions or points that I ask myself. I am laying it down for you.

1. PVR Inox is not just a cinema ticketing business. It is also an F&B business and an advertisement business. To think about the future of PVR Inox you have to develop an understanding of all three businesses.

Source: PVR Q3FY24 presentation

If you put things in perspective, this is what the revenue contribution looks like.

If we ignore the convenience fees, other operating income, and other income, the main drivers are tickets, F&B, and advertisement in that order.

Let’s have a look at them one by one.

Ticket Sale

This a clear function of how many people go to watch cinema in theatres.

Source: Statista

The chart depicts a fall off the cliff during the Covid pandemic and steady growth afterward. Even if you put 2023 footfalls, it shows a healthy growth YoY. But the total footfalls still remain below the pre-pandemic levels.

Source: LiveMint Article

Many other businesses suffered badly during Covid times like hotel, resorts, travel, amusement parks, etc as people stopped going out of home during those times.

However, all of them saw tremendous growth after the pandemic. And they have all surpassed their pre-pandemic levels either in FY23 or in FY24.

It is still a jigsaw puzzle to find out why the same trend is not being witnessed in theatres and multiplexes. 

Let’s now move on to the second important revenue-generating activity.

Foods & Beverages (F&B)

F&B is another category that has been growing steadily for PVR Inox. And their business model is heavily dependent on this as it contributes roughly 30% to the total revenue.

While footfalls still lag the pre-covid levels, F&B income has already surpassed pre-covid levels in FY23

Source: FY23 Annual Report  (note that these numbers are of PVR only, before they merged with Inox)

In fact, if you add the Inox numbers, it will look even better.  In fact, PVR & Inox combined have seen a whopping  22% YoY increase in the F&B revenue for the period ended  9MFY24.

If footfalls yet to reach pre-pandemic levels and F&B showing a very healthy growth from the pre-pandemic levels, the reason can be only one. 

Increase in prices.

Now, the test of a monopoly is what happens to the customer when you raise prices. For example, the iPhone has been raising prices consistently over several years. But here is how the total iPhone sales over the years.

Source: https://www.businessofapps.com/data/apple-statistics/

Let us see what happened when PVR Inox  raised the price of popcorn and cold drinks.

Source: Tweet link

This prompted PVR Inox to react and take an immediate action.

Source: PVR Tweet

You are a real monopoly providing value to your customer if the customer happily accepts the price rise. That’s not the case with PVR Inox. We have enough frustrated customers who do not agree with the price ranges of the F&B products. 

So, the growth in F&B is surely there in the last few years. I have my doubts over its sustainability.  

Now comes the third and the last important piece of the puzzle.

Advertisement Revenue

Multiplexes like PVR Inox not only make money through ticket sales and F&B income but also through Advertisement income.

PVR Inox has an average ad slot of 35 minutes per screen per show. Yes, you read it right. 35 minutes.

This does impact the experience of an average movie-goer.  And recently this is what PVR had to do to arrest the problem.

Source: Moneycontrol

While the company claims that the new product by the company is not for everyone as it has been launched across seven luxury properties of the multiplex chain in Delhi, Mumbai, Bengaluru, I won’t be surprised if it soon spreads to other properties of the company as well.

In short, when footfalls are still not pre-pandemic levels, and when there is a clear dissatisfaction in consumers’ mind in relation to F&B prices and long ads, the future of the business is not as clear as one would think.

2. Monopoly is not just about creating value but also capturing some of the value.

I will again go back to what Thiel writes in his book:

“What valuable company is nobody building? This question is harder than it looks, because your company could create a lot of value without becoming very valuable itself. Creating value isn’t enough—you also need to capture some of the value you create.”

PVR Inox in my view, at the current juncture, is probably creating some value for moviegoers but without becoming valuable itself. This slide from their latest presentation says it all.

They have been able to grow revenues, but that  is not enough yet to serve the huge debt on the Balance Sheet.

When we have established that there is huge uncertainty related to the sustainability of revenues in the long run, 1608 Cr of gross debt as of Dec 2023 doesn’t provide any comfort. As we can see from the above table, operating profit is completely wiped off by finance costs.

3. A strong business model has fewer pivots and more growth in core offerings.

Post the merger of PVR and Inox, one would have expected PVR Inox to grow from strength to strength. However, in their case, there is a new strategy every few months for dealing with unsatisfied customers. A few pivots announced in less than 12 months of the merger:

1. There is unlimited refill for popcorn and Pepsi under a large combo available which if one buys they can fill up as many times as they want. More details here.
2. Four to five items in every PVR Inox cinema are available at flat Rs 99 from Monday to Thursday.
3. Launches enhanced passport cinema subscription service nationwide. More details here.
4. Flash Sale: They run an offer of “Cinema Lovers’ Day” and make cinema tickets available for INR 99 on Fridays.
5. Reducing Ad time:  Cutting down the length of the ads from 35 minutes to 10 minutes. More details here.

4. An industry is ripe for disruption when a monopolist is not being able to dominate the market as much as you think it would.

A brokerage report at the time of the merger has this excerpt:

“PVR-INOX now controls 18% screen share (43% share in multiplex screens in India) and 30% box-office share (over 50% share of multiplex box office). The merged entity commands the highest multiplex market share in all key regions of India. PVR-INOX would become the fifth-largest listed multiplex chain globally by screen count with the highest number of admissions per screen (around 127,000 admissions/screen in 2019).”

When you only focus on the numbers and the narrative of the excerpt from the brokerage report you tend to assume the dominance and monopoly of PVR Inox. However, if you have come so far in the blog post, you would have understood that it is not that simple.

This makes me wonder if theatres/cinemas are ripe for disruption like the stock broking industry in 2010.

From where will disruption come and how much time will it take?

I have no idea.

Some say OTT can disrupt the market.

But let’s look at this data point: Netflix has 6.5 million paid subscribers as of October 2023. On the other hand, Indian theatres had 940+ million footfalls. 

At the time of this post, Netflix caters to less than 1% of the market of theatres. 

You may argue that there are other OTT apps like Amazon Prime, Jio Cinema, Disney Hotstar, and a few others. As per this Nov 2023 report, India has 481 million OTT users and 102 million active paid subscriptions. However, my guess (I could not verify this) is that this would also include paid subscribers of a parallel stream of OTT platforms known for streaming erotic web series. Notable contenders in this category include Ullu App, HotX VIP, and Prime Play. Ullu App for example has recently filed DRHP for an SME IPO and revealed that it has around 2.6 Million paid subscribers. That’s almost 1/3rd of Netflix subscribers in the country.

So, I am not sure how the OTT platform will do from here. It is too early for me to make a judgement. I would definitely  keep a close watch here. However, I also see that an average cinema goer is not looking at theatres only as a means to watch a cinema. He/she is also looking for it as a source of entertainment. An experience to go out with family and escape from the daily routine of life.  

However, just as I started with Peter Thiel I would like to end with the favourite question Thiel asks often when he interviews anyone. 

 What important truth do very few people agree with you on?

If you would have asked me this question today, my answer would be this:

PVR Inox is not as strong a business as it looks from the outside. At least, not today. Maybe, in the future, it may become stronger. I don’t know. And I am in no hurry. There are simpler and easier opportunities available in the market today for me.

Happy Investing!

SEBI Disclosure: No holdings on that of writing and no recommendations to buy or sell the stock.

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