Music and entertainment company Saregama is basking in the success of Carvaan, a retro-looking portable audio player, which packs in 5000 old Hindi movie songs, and also doubles up as an FM radio. Launched in May this year, the product sold 90,000 units between July and September, and following that unexpected success, Saregama is, conservatively, targeting another 200,000 units in the next six months.

Music revenues for Saregama increased to Rs 73.20 crores for the quarter, up 134% year on year from Rs 31.23 crores during the same quarter last year. The B2B music revenues, including telecom music sales, YouTube, among others, grew 19% year on year. Carvaan is B2C.

Carvaan, whose name (and font) are remarkably similar to Delhi Press’ Caravan magazine, is available in two variants: at Rs 6490 and Rs 6990. On an average, “the impact on our topline of a Carvaan is close Rs 4000,” Vikram Mehra, the company’s Managing Director, said on the earnings conference call. The company manages gross margins of 17% to 18% on Carvaan, and in the last quarter, touched a gross margin of 19%. The company hopes they’ll touch a gross margin of up to 20%. Retailer margins are at around 25%, and one thing that Saregama will contribute to bringing this cost factor down is the increase in volumes. Carvaan is being sold mostly from retail outlets, and the network of outlets, which include Vijay Sales and Croma, has grown from 2600 by the end of July, to over 5000 now. Saregama is targeting 10,000 retail outlets by the end of the year. Carvaan also retails online on Amazon and Saregama.com.

Carvaan is assembled in China, and the company has already ramped up to three vendors from one in the beginning. They’re also looking for suppliers and assemblers in India.

Mini me

“Always remember” Mehra said on the conference call, “that music is always very, very popular, and lower you are going on strata of the society or older age group you go, these are the people who are not being most tech-savvy people, you give them a product that allows him to consume music of their era in the most convenient fashion they are ready to go back and invest in it.”

In mid October, Saregama launched a variant called Carvaan Mini, priced at Rs 2490, designed more as a Bluetooth speaker, with 251 of Saregama’s biggest songs, “selected on the basis of data analytics,” and targeting people who are younger and travel a lot. The difference in the number of songs, and the fact that they are functionally different makes the company believe that the cheaper Mini will not cannibalise on the 1.5 Kg Carvaan. The targeting for Carvaan is different, and the distribution is different too: Carvaan Mini, it is planned, will mostly be sold via telecom outlets.

The primary focus for Saregama will remain the bigger Carvaan, and not the Mini: the two products have similar margins, but in absolute terms, Carvaan is more lucrative.

It’s all about the music

The secret sauce for Saregama is the music. The target market for Carvaan has been an age group older than 35-40: those that can still remember a time before the Internet, and those who are fans of singers like Kishore Kumar, Lata Mangeshkar, Mohammad Rafi and Jagjit Singh. “Those people want to have a more convenient way of listening to music where you do not want to play around apps too much. You turn on the music and music keeps on playing on the background,” Mehra said on the earnings conference call. “This is a captive market for Saregama only because only we own the music of Kishore [Kumar] and [Mohammad] Rafi and Lata [Mangeshkar] and Asha [Bhosle]. Nobody else owns that music. Our competitors own relatively more new music but the new music is consumed more by the younger crowd, which wants to go on apps. So we will continue being on the apps while we will continue making more and more money right now from the physical form factor which is Carvaan”, he said on the earnings conference call.

After having launched Carvaan in the US (priced at $165), the company is launching in the UK in November. Saregama has some retail relationships there, because it retails a product called Music Cards. Versions of the music player with music in Tamil, Bengali, Marathi, Punjabi, Malayalam and Classical music. Carvaan Tamil will be launched in December. There’s an MS Amma’s Carvaan Mini planned, which has only MS Amma music, which will be launched in November. A Bengali version will be launched early next year.

Carvaan has 5000 songs, and while Saregama owns rights to those songs, royalties are due to the producers and artists. The percentage of royalty differs “these are by the contracts, which have been entered with the producers in earlier years but on an average the percentage is about 20%-21%.”

“See new acquisition happens on a different structure so one structure is that you give a minimum guarantee and after this minimum guarantee gets recouped then you start sharing the royalty and typically royalty rates here are about 30%-35%.” “[The] other structure is that the producer is really not interested in future royalty so he comes and strikes a deal for outright sale. So currently this type of structures are available for new movies.”

The gross margin of 19% that Saregama earns from Carvaan is calculated after accounting for costs including “cost of production, warehousing, logistics, basic customs duty and the royalty cost and all the sales cost.” Production remains the biggest cost, with the cost of the hardware.

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Based notes from the Saregama earnings conference call for Q2-FY18