Wednesday, September 26, 2012

Digitization to drive ARPU and profitability

Dish TV observes that while the government is supportive of the digitization of TV industry, the pace of execution is slow. There has been a strong push toward digitization with advertisements from the government, broadcasters, DTH operators and MSOs. However, local cable operators who risk losing revenue have not been aggressive deploying set top boxes. Dish TV continues to gain subscribers of voluntary basis and believes the benefit of digitization is yet to kick in. The company believes the government will not black out cable-TV from 1 November as it may lead to viewer backlash but that it will keep pushing for digitization.

According to Dish TV, more than 70% of its subscriber base is in rural markets, where there is little or no analog cable infrastructure. The quality of cable in these markets is poor and it will require significant investment for digital cable operators to compete in these markets. The company said it is tough to operate in rural markets and sees little risk of an increase in competition and churn to cable.

Dish TV operates on a prepaid model. So, if the customer does not have the required balance, service is deactivated temporarily and the company loses revenue for the period. Dish TV believes that while the customer is willing to pay, there are delays in recharging the balance. The company expects these delays to reduce if mobile payments become popular, which could also help to improve ARPU.

Sunday, September 16, 2012

FDI limit increased to 74% in DTH and Digital cable

The increase in FDI limit is positive for the MSOs and DTH players such as Hathway, Den Networks, WWIL, Hinduja Ventures and Dish TV. The timing is very appropriate - because of the ongoing mandatory digitisation drive, all cable (and DTH) companies will need to invest huge sums of money and FDI could be a possible route now. While the existing 49% limit itself was not fully utilized by any of the companies, the new rules will allow foreign entities to take majority shareholding in the cable/DTH companies and thus evince interest from large strategic investors.

Phase II to be more exciting than Phase I: India’s MSOs are small in size and scale (compared to their global peers) and the industry is too complex (with just ~20% declaration and profitability pegged to carriage revenues). We feel that strategic investors would wait to see some execution of mandatory digitisation before betting on the Indian cable sector. Thus, Phase I (the four Metros) might not see many large investments by foreign entities. Phase 2 (38 Indian towns with population greater than 1 mn) would require large investments and teething problems of Phase 1 Digitisation would have been addressed. Hence, we believe that Phase II could see exciting participation from foreign entities.

We believe that the best candidates for foreign equity infusion could be Den Networks and Incable (listed via Hinduja Ventures) on the cable side and Tata Sky and Videocon D2H in the DTH segment. Hathway Cable already has a foreign strategic investor (Providence) who would not shy from increasing its stake (if the promoters are willing to dilute theirs) to fund Phase II digitisation.

Will this unleash a wave of Consolidation? We believe that this would trigger a wave of consolidation amongst the smaller MSOs (subscriber size less than 1 mn); as any strategic investor would want to invest in a business that provides scale. We believe that the cable sector would now also attract a lot of interest from Private Equity players. Consolidation amongst the large 5 MSOs would probably be difficult; however, they would buyout/merge smaller MSOs once flushed with funds.