Wednesday, January 13, 2016

Digitization in Phase 3 will be slow and gradual

Recent stay orders by four state high courts have postponed digitisation by couple of months, however we believe the impact will be broad based in slowing the overall process and completion may take c6 months. As per the broadcasting ministry Phase 3 digitization is estimated to cover c38m TV households across 630 districts and 7709 urban centres. After Phase 3 we estimate total digitized households to increase to c35% to c90 m TV households. Delay is particularly negative for Direct to Home (DTH) players (including Dish TV) as it limits their ability to benefit from subscriber growth. Delay allows smaller cable operators to get in more time to retain existing subscribers.

Broadcasters to benefit most from Phase 3 as sector subscription revenues rise by c45% to USD3; however monetization will be gradual over 9-12 months. Theoretically entire subscription revenues should be flowing to EBITDA, however due to rising competitive intensity and the need to invest in Over the Top (OTT) offerings, we see subscription EBITDA at no more than c60%. With expansion in mobile data users by 2x to
250m over the next 12 months, entry of global giants like Netflix in the OTT space, OTT investments by traditional broadcasters should see an increase

Thursday, January 07, 2016

Netflix a Damp Squib in India

Netflix is a successful OTT in US as: (1) cable TV ARPU is USD60 per month versus Netflix’s ARPU of USD20-24; (2) higher broadband penetration (~80%) with good speed; and (3) original content is dished out by Netflix. In India, Netflix currently lacks these advantages. Hence, we do not expect Netflix to have any major impact on Indian DTH/cable TV players over medium term. Netflix has a long way to go before tasting success in India.

In India, Netflix’s subscription rates are INR500, INR650 and INR800 for basic, standard and premium packs, respectively, which are 2-3x the prevailing cable TV/DTH rates. Besides, broadband will entail additional costs. Internationally, Netflix has done well riding attractive pricing which is almost half the cable TV/DTH rates, and original content. The company currently does not enjoy these benefits in India. To attract subscribers, it is offering free services in its first month of operations. Plans are also afoot to facilitate streaming via laptops, TV, smart phones and tablets. However, we believe in India where subscribers pay ~INR250-450 per month for cable TV (includes sports channels), Netflix’s rates are on the higher side. Broadband speed will also be a challenge. Netflix requires minimum speed of 512kbps and recommends 3mbps speed for SD content and 5mbps for HD videos, which further limits its expansion plans.  

Netflix is currently beaming international movies and TV shows in India including its original productions such as House of Cards and Orange Is the New Black. The company is currently not offering local content. Sports content, the main driver of the OTT platform, is also not offered. With India being a country with diverse culture it consumes content in 8 different languages. Currently, Netflix is beaming only English content which will attract only niche audience.  

Wednesday, December 23, 2015

Phase 3 digitization: Slow but steady process

Our recent discussions with the industry participants indicate that Phase 3 digitization (with a deadline of Dec-15) is progressing at a slow but steady pace. Based on our checks we do not expect a sudden surge in conversion of the estimated 35-40 mn analog Phase 3 households onto the digital platform around Dec-15 deadline and hence do not expect digitization to be any immediate near-term catalyst for Dish/Zee. We have
modelled a gradual conversion of analog subs into digital ones and expect most benefits to accrue in FY17.

1) Broadcasters have started advertising on the Phase 3 timeline; 2) MSOs are increasingly focusing on signing up with broadcasters on phase 3 digitization; 3) DTH/MSOs have some inventory of set-top
boxes to sign potential analog consumers and 4) The government is taking regular updates from the stakeholders on the progress of digitization.

In our view, unless we see a “door to door” campaign towards digitization and until analog signals have been disconnected we see risks to timeline slippage for practical implementation of digitization. We remain
uncertain as to whether analog signals could be blacked out post the 31st Dec-15 deadline as we are still unsure of the extent of political support for the implementation (as state governments/local solicitations may come from different parties compared with the central government).

Sunday, November 01, 2015

Sun gains, neutral for Zee - New ratings data

The Broadcast Audience Research Council (BARC) has released its maiden all-India viewership ratings for Indian broadcasters, which includes data from rural India. Earlier, the ratings data was based only on urban TV households. According to the new data release, Zee Entertainment has significantly improved its position in the Hindi GEC space but it ceded viewership share to competitors in the regional markets.

Sun TV further consolidated its hold on Tamil Nadu, the largest southern market for television advertising, and it moved up in ranking in the Kannada market. Sun TV retained its competitive positions in Telugu and Malayalam. Note that this is a big overhaul of the rating system and for the first time rural markets have been
given ~50% weightage. Industry would wait for a few more readings before these data are taken as firm trends. Similarly, advertisers would take time to understand viewership patterns in their target markets before modifying media plans based on the new data. Prima facie, these data are positive for Sun TV and neutral for Zee Entertainment.

For the first time in India, rural data on such a wide scale with 50% weightage in viewership rating survey have been included. Earlier, urban households had disproportionate influence on ratings. In this maiden rating, pecking orders of several genres have seen material changes. We would like to wait for a few more readings before taking the new pecking order as sustainable. Note that, the trend revealed in BARC’s first release for urban viewership did not change materially later.

Wednesday, October 28, 2015

Reliance Jio's Plans to tackle MSOs / LCOs in India

Reliance Jio cannot get last-mile connectivity unless it ties up with LCOs in some areas. Jio will have to offer
lucrative deals to the fickle-minded LCOs in order to entice them to switch loyalties from cable MSOs.
We note that the balance sheet strength of Reliance Industries is far superior than all cable MSOs, including national MSOs like Hathway, DEN Networks and Siti Cable. Hence, offering a better price
to the LCOs/acquiring them outright should not be an issue for Jio.

Options available to Jio for rollout are as Under
The Indian cable TV industry is extremely fragmented. There are ~6,000 MSOs and ~60,000 LCOs in
. Apart from the Rs1,600 cost of a set-top box, MSOs will have to incur additional capex towards
setting up digital-ready infrastructure like installation of digital headends and laying cables. Apart from bank loans, larger MSOs utilise vendor financing in the first two phases of digitisation. Slow monetisation from Phase 1 and 2 can act as a deterrent for MSOs, especially the smaller ones, to risk their balance sheets further and seed boxes rapidly. Banks are usually reluctant to issue loans to smaller MSOs due to their poor balance sheets. Given this scenario, we believe there is a high likelihood of smaller MSOs/LCOs wanting to sell off if they are offered a good deal by Jio.

The benefit of acquiring LCOs for Jio would be twofold:
  • Acquisition of LCOs would help Jio circumvent the process of dealing with them on a daily basis
  • Jio would not need to share subscription revenues with the LCOs. We agree that LCOs cannot be completely eliminated from the equation due to their strong customer connect and on-ground technical expertise. Jio can look to employ LCOs or provide a commission to them for their services.
But in the analog era, the exact subscriber base under a particular LCO cannot be known due to under-declaration of subscribers. Hence, a per-subscriber valuation metric can lead to incorrect valuations.

A solution to tackle the above issues would be to acquire MSOs. Rather than acquiring many smaller
MSOs, the easier solution for Jio would be to acquire a large MSO. We believe Jio would like to retain entire control and, unlike MSOs, not follow the JV model. Historically, primarily due to funding constraints, MSOs have entered into JVs. Discord between MSOs and their JV partners is common and Jio would want to avoid this hassle.