TRAI’s ad curbs to trip smaller, news broadcaste​rs

TRAI’s recent regulation of limiting ads per hour to 12 minutes is a landmark in many ways. It will be implemented in a phased manner and full compliance is mandated from October 1, 2013. Even though digitisation has been a success in terms of seeding of boxes, inflow of subscription revenue is in a nascent stage. Hence, broadcasters, especially smaller ones and news broadcasters who continue to remain dependent on ads as the predominant source of revenue, will be hurt the most by this regulation. An indirect impact could be reduction in carriage fees by these broadcasters to MSOs as their profits come under pressure. Similarly, smaller advertisers may not be able to bear the burden of increased ad rates and may be compelled to shift to weaker channels. Overall, we expect TRAI’s regulation to pose risk to near term ad revenues as all broadcasters adjust their ad inventory and hike prices gradually to cushion the impact. However, because of increase in collective action by major broadcasters (ad rate hike, withdrawal from TAM), strong market share and relatively lower ad duration (versus smaller broadcasters), the impact on stronger networks like ZEE and Sun TV is likely to be limited.

As per TRAI, ads on TV channels should be restricted to 12 minutes per hour (10 minutes of ads and 2 minutes of promotions) as they affect the quality of viewing. Broadcasters have agreed to comply with this regulation from October 1, 2013. The entire regulation is expected to be implemented in a staggered manner. Currently, as per Mr. Shailesh Shah, Secretary General, Indian Broadcasting Federation (IBF), per hour ad time works out to just over 11 minutes per hour if a full-day average is taken.

Several finer aspects of the ad regulations will be clear in due course. There is no clarity on what exactly qualifies as promotions. Classification of teleshopping programmes and movie trailers as ads or content is unclear. However, broadly, it is clear that Hindi news broadcasters will be impacted the most as they will have to curtail their ad duration per hour from (19+3) minutes to (10+2) minutes. Though print and digital may benefit from the spillover effect, regulating ad duration on TV also raises the question whether other media like print and radio will also be subjected to ad caps.

DEN Digital subscribers Reach 5 Mn

DEN Networks Total digital subscribers are 5mn. The company added 2mn subscribers in Phase 1 and 3mn in Phase 2. DEN added 1.07mn subscribers in Q4FY13. Phase 3 seeding in a major way will start from Q3FY14. Management expects good traction in view of Phase 3 and 4. Also, adjoining cities of Phase 3 and 4 are being targeted even now.

TRAI’s regulation to rent out STB will help increase consumer base in Phase 3 and 4. This will also increase affordability at the bottom of the pyramid. However, it still needs to be seen how the process is implemented. Also, cash flow for cable players will become better in this.

DEN is planning to enter the broadband market by investing USD50mn from fund raising proceeds. It will be targeting Tier I and II cities initially, and based on the success in these markets, it is planning further expansion.

DEN is looking to digitise 6mn subscribers. Hence, till end of Phase 3, investment requirement will be INR6bn. Also, in FY14, investment in broadband will be INR1.5bn and other capex requirement will be INR500mn.

Hathway Digital & Broadband Subscriber Reach 7 Mn

Total digital subscribers are currently ~6.2mn for Hathway. The company added ~2.4mn subscribers in phase 1, ~3.3mn in Phase 2 and ~0.5mn in Phase 3 (adjoining parts of Phase 1 and 2, but officially part of phase 3). Of the 6.2mn subscribers, ~0.6mn are primary while the balance are secondary subscribers. Hathway seeded ~3mn boxes in FY13. Hathway’s subscription revenue increased by INR170mn YoY in FY13. The number was similar at the consolidated level as consolidated numbers include only nine month numbers of GTPL. Subscription revenues will start kicking in from next quarter, which would aid profits. Hathway has entered several new cities in some states where it has strong presence. The company has also strengthened its position in cities like Faridabad, Allahabad, Bengaluru, etc. Phase 3 seeding in a major way will start from Q4FY14. The company is looking to increase its presence in West Bengal, Maharashtra and Andhra Pradesh during Phase 3. Over 1mn boxes of inventory. Hathway’s broadband subscriber base remains at ~0.416mn. Its broadband ARPU is INR300. Mumbai, Pune, Bengaluru and Hyderabad are important cities where the company is looking to improve its technology, which will help increase ARPUs.

TRAI's standard tariff order not a game changer

TRAI has issued a tariff order, prescribing standard tariffs for set-top boxes (STB) for digital cable and DTH subscribers. This specifies security deposit of `400-800 (refundable after three years) and monthly rent of `33-56 for cable TV subscribers for three years. For DTH subscribers, deposit and monthly rent is set at `500-1000 and `43-71, respectively. Besides, MSOs and DTH operators can offer additional tariff plans. They currently charge ~`2000 (non-refundable) for STB activation and no monthly rent. Current value of rent under standard tariffs is equivalent to these realizations. However, we find standard tariffs unattractive due to: (1) Lower upfront collections; (2) risk of default on rent, as subscriber churn rates in DTH are ~10% p.a; and (3) no protection from any increase in STB costs and INR depreciation Impact of the tariff order on DTH companies would depend on actual uptake of STB under the standard tariffs. We expect limited uptake due to likelihood of: (1) Lower promotion of standard plans; (2) customer resistance to monthly rents; and (3) unavailability of additional features under standard plans (recording facility, HD). They currently charge `800-1000 to end users (no rent); its realization is `500-800 after LCO commissions. These tariffs leave limited arbitrage vis-à-vis standard tariff plan.

TRAI Draft Cable Tariff Order not Draconian

The regulator has released a draft tariff order instructing standard tariff packages for set top boxes (STB) for DTH and cable subscribers. The authority has asked for comments from all stakeholders by 26th April. According to the order, all cable and DTH operators would need to offer 4 set top box schemes to consumers (details on Pages 3-5). The cable and DTH operators are free to offer other schemes in addition to the ones prescribed by TRAI.

TRAI believes that post digitalization, STBs provided by various cable and DTH providers would be incompatible with each other making migration between networks difficult for subscribers. Thus in the interests of the consumer, provision for commercial interoperability of STB has to be provided and the tariff order proposes to address that concern.

Our channel checks show that Siti cable has been offering a similar package but it is not finding many takers for this scheme.

We believe that on the ground implementation of the rental scheme of STBs is filled with challenges. The primary concern of the cable and DTH providers would be the difficulty associated with collecting
the boxes from subscribers in case of default of payment or movement of the customer itself.