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.

Tuesday, October 27, 2015

How Distributors Will Face intense competition from Reliance Jio ?

Reliance Jio's entry into the cable TV and OTT space will lead to heightened competition for TV distributors like MSOs and DTH operators. Since Jio has obtained a cable MSO licence and will have to strike deals with LCOs, the competition will be more direct for MSOs vis-à-vis DTH operators. Despite the changing dynamics of the industry, broadcasters remain the best placed to capitalise on Jio’s launch. Jio's entry is likely to accelerate the conversion of analog cable subscribers to digital, thereby improving the monetisation of broadcasters like ZEE. Jio’s OTT platform, Jio Play, offers another avenue for the broadcasters to earn subscription revenue.

We would like to highlight that if the last 2 phases of digitisation are completed without much delay and monetization happens on time (which is highly unlikely in our view), incremental revenue for ZEE due to Jio would be restricted to the revenue from Jio Play. However, we believe that a delay in implementation of Phase 3 and 4 is very much on the cards and Jio’s entry could hasten the progress of digitisation in India, which is beneficial for broadcasters. Since the incremental subscription revenue from Jio will come at no significant cost, the entire benefit would directly add to ZEE’s bottom-line.

Our channel checks suggest that major broadcasters have already provided sample content for the pilot testing of Jio’s app, Reliance Jio Play. Similar to ZEE’s Ditto TV and STAR India’s Hotstar, Jio Play will enable the viewer to view live as well as dated content. However, content deals with broadcasters are yet to be signed. Broadcasters are known to play hardball with any new distributor especially with a limited subscriber base. In order to get sweetened content deals with broadcasters, Jio will have to garner a sizeable subscriber base within a short period of time. In addition, Jio striking content and carriage deals with broadcasters can be a long and tedious process.

Monday, October 26, 2015

Reliance Jio Snatches Talent from Cable Industry in India

Mukesh Ambani's Telecom 2.0 Venture Reliance Jio Infocomm has snatched the top quality talent from competitors. They have roped in ex-CEOs of two leading Indian cable companies – Hathway Cable & Datacom and DEN Networks. Mr. K Jayaraman, the CEO of Reliance Jio’s MSO business, was the CEO & MD of Hathway. Mr. S N Sharma, former CEO of DEN Networks, is also now a part of Reliance Jio and reports to Mr. Jayaraman. We would like to highlight they worked together at Hathway in the past. Both are well-known in the industry for the excellent equations they share with broadcasters and LCOs. With Mr. Sharma on board, Jio would look to leverage on his strong relations with LCOs in North India, especially Uttar Pradesh. Mr. Sanjay Goyal, former CFO of Siti Cable, has also recently joined Reliance Jio. We believe Mr. Goyal’s expertise in East India operations, would be a key advantage for Jio.

Apart from operations personnel, senior people from marketing, legal and technology have also left Hathway to join Jio. An example is Mr. Amit Shah (Head – Content & VAS), who has experience across the value chain. After working at Hathway for 10 years, Mr. Shah worked at Videocon d2h as Head – Content for two years. In Fig below, we show a list of employees who have left Hathway and joined Jio.

Reliance Jio – Much more than a pipe dream

Apart from the big-bang launch of its wireless 4G telecom operations by the end of CY15, wired access (optical fibre to home – FTTH) is a big play for Reliance Jio. Towards this end, Jio has also obtained an MSO (Multi-System Operator) license, to provide cable TV via fibre-connectivity as a bundled service offering along with high-speed broadband access.

Unlike global TV distribution entities, RIL is starting with an entirely clean slate. The company does not have any legacy in the telecom, cable or broadband businesses. Globally, 30% of MSO cable TV providers’ revenues come from providing broadband access, which is a lowly 10-12% in India as yet; hence MSOs are incrementally looking to bundle broadband to their established user-base. In line with the approach taken by telecom players globally, Jio’s approach to bundling is the opposite of existing Indian cable TV operators’ (MSOs), which look to provide broadband as a value-added service.

Jio’s wired-access roll-out is happening alongside the 4G wireless rampup. However, its impact will probably be more of a 2-year-horizon event given that on-ground lastmile access takes time to build up critical mass.

The benefits of having wired connectivity (in many cases in parallel with wireless) are manifold:
  • Reduced requirement for towers, since optical fibre cables are used for backhaul
  • Reduced load on airwaves as service-delivery shifts to wired channel wherever available
  • Significantly higher bandwidth availability allows rich-content like IP TV

Wednesday, September 02, 2015

DTH has threats from 4G Operators in India

We estimate that globally 46% of content is viewed on a device. So far there has been an assumption that only 4G new entrants with their wireless and wireline data capabilities were best placed to offer such services and differentiate. However, the move by Tata Sky suggests that DTH players in India are making serious efforts to address potential threats from 4G entrants. That said DTH continues to be a one way network allowing 4G players to bundle and have an edge.

Other factors where 4G players may see scope could be pricing as current prices are not mass market. That said demand too is niche today and with more subscriber traction we do see prices coming down. In our view other DTH players will be quick to replicate, most likely Bharti DTH in its attempt to limit 4G entrants’ ability to differentiate. Moreover this could allow Bharti a window to cross sell/bundle its other services as well (could be either fixed line offering /Airtel 4G data cards/hot spot devices). Separately Dish TV may follow suit and possibly complement its recently launched video on demand services.

Fate of MSOs - In our view inability to close gaps with DTH on high end product offerings may see MSOs suffering from subscriber churn. Furthermore Phase1/metro markets are key source of carriage revenues for MSOs and sharp subscriber churn in these markets may adversely impact carriage fees and profitability.

Sunday, August 16, 2015

Hathway Cable Subscription Revenues Down

Hathway has aggressively started promoting prepaid billing structure for all its primary subscribers. The company expects this rollout to be completed over the next quarter so as to cover 100% of its primary subscriber base. The company plans to roll out prepaid billing for secondary customers post completion of primary subscriber rollout. It will improve collections in the coming quarters. The company has deployed over 10k HD boxes in Q1. Going ahead, the management expects steady uptick in ARPU on the back of increase in consumer ARPU as new TV packages are launched across its network, prepaid billing and higher HD subscribers. The management guides Phase I and Phase II ARPUs to increase to Rs110 and Rs100 by F16-end on the back of packaging. The content cost, net off placement, is likely to grow by ~15% YoY in F16e.

Broadband revenues grew 56.3% YoY to Rs650mn. The broadband subscriber base was 0.46 million at the end of Q1, including 0.17 million DOCSIS 3.0 subscribers. Broadband business continues its momentum of upgrading LAN/DOCSIS 2.0 consumers onto DOCSIS 3.0 platform. Incremental consumer ARPU has reached Rs850 levels. The roll-out of DOCSIS 3.0 has led to an increase in broadband ARPUs to Rs577 vs. Rs530 QoQ. The company has started providing for 8% license fees which accounted to Rs52mn in Q1 as per renewed Unified Service License conditions. 

Cable universe is stable at 11.8 million subscribers, b) the paying digital subscriber base grew to 6.6 million, c) standalone net debt grew to Rs10,414mn vs. Rs9,143mn QoQ, d) quarterly EBITDA inclusive of Hathway’s economic interest in subsidiaries/JVs/associate companies would aggregate to ~Rs410mn and e) broadband capex expected to be Rs1,700mn in F16 (including capex of Rs1,000mn for additional 600k home pass)

Monday, July 13, 2015

OTT services Add-on to existing TV packages

DTH space has been benefiting from price discipline and quasi consolidation. Though there are six players, effectively it is only a four-player market. Also the DTH industry has seen lot of price discipline over the last three years, evident by the improvement of industry ARPUs. Company sees ARPU improving by at least 10pc this fiscal

Over The Top (OTT) will be an add-on: Not seeing much of threat from entry of OTT players/services as providing content over broadband is not cheap and will be 5x- 10x more expensive versus traditional pay TV services. No doubts these services will have demand but will be restricted to markets with reasonable broadband infrastructure. However the demand is likely to be an add-on service

Costs for High Definition (HD) boxes have come down sharply and the DTH industry is focussing on HD segment (while cable is not). Declining costs allow Videocon d2h to deploy HD boxes at the time of acquiring subscribers with scope to offer HD services at a later stage. The HD base for the company is c10% of the total subscriber base and 30% of net addition for the company in FY15

100 Mn Opportunity 75 new homes are yet to be digitised in Phase III and IV of digitisation. In addition 25m new homes will be added in the next four years. Unlike Phase I which was only 4 metro towns and Phase II which was 38 cities, Phase III is about 38m households spread across 700 urban towns. This scattered nature of Phase III favours DTH

Monday, June 08, 2015

Is Videocon d2h Market Leader ?

Videocon d2h believes it is a leader in terms of incremental sub adds in FY15 – net sub base of ~10.2m (+20% YoY) with est. overall share of ~20% (Dish is the market leader with ~23-25%). Momentum in the overall market growth seems strong – like Dish TV, VDTH expects to sustain the current run-rate in
sub adds in 1H (1.3-1.4m gross adds guidance). It expects 2HFY16 to be better driven by phase-3 digitalization. Encouragingly, churn is stable at ~0.8%

The management spoke of three drivers of an increase in ARPUs – a) price hikes (taken price hikes of 6-7% on avg in Feb, and expects to take another round in Sep which should offset the impact due to higher service tax); b) HD adoption (an impressive ~30% of incremental subs for VDTH; now ~10% of sub base vs. 5% FY14-end); and c) value-added services. Overall it expects ~10% growth in ARPUs in FY16. For Dish TV, our assumption of ~5-6% p.a. increase in ARPUs seems comfortable at this point.

Higher content cost visibility ties in with Dish TV mgmt commentary; they also expect margin leverage (next major negotiation in Sept 16; guide to a modest single-digit increase in content costs).

Wednesday, May 27, 2015

DTH Subscribers Gain Momentum

The DTH companies are expecting windfall additions in subscribers from Phase 3 and Phase 4. Even if the
deadline is extended by a few months, the DTH companies remain confident of seeding boxes on voluntary basis. We estimate that the pace of subscriber addition can accelerate from 10m p.a. to 12m if Phase 3 digitisation is successful. Our checks confirm that gross incremental market share of the top 3 players—Dish TV, Videocon d2h and Tata Sky—is in excess of 75%.

DTH players were happy with the Star RIO (Reference Interconnect Offer) deal. They believe that this has forced cable companies to introduce tiering of content and is a precursor to an increase in consumer ARPU.

We do not think the daily recharge option changes the industry dynamics in a meaningful way. Our checks suggest that there has been no market share shift post the launch of the scheme by one of the DTH players and we might not see competitors launching a ‘me-too’ product.

The industry is in wait-and-see mode over the potential entry of Reliance Jio as a cable MSO. Potential
subsidy on set-top box by the company can be disruptive for the industry.

Monday, May 25, 2015

TRAI Operating Framework for MSOs / LCOs

TRAI released new operating guidelines for MSOs and LCOs. The framework is particularly aimed at increasing transparency among subscribers, LCOs and MSOs. As per the new guidelines LCOs are required to get details of all their subscribers on a customer application form (CAF) which should be submitted to their MSO. LCOs should also provide to its MSO complete details of payment made by each subscriber within the agreed time frame. LCOs cannot transmit TV signals without proper interconnect
agreements with the MSOs.

Revenue sharing formula mutually agreed between LCOs and MSOs should be mentioned in the interconnect agreement along with explicit provisions for settlement of disputes. The guidelines also lay
emphasis on payment collection mechanism, complaint handling system, awareness of various schemes and offerings, STB installation and procurement, registration of MSOs and LCOs with government bodies.

The new guidelines are positive for consumers and MSOs - With better customer service rules, the gap of customer satisfaction levels between cable and satellite subscribers can potentially narrow. This could
make price increases far more achievable

Higher disclosure requirements for LCOs to MSOs regarding subscribers and payments will lead to less collection leakage and hence better net back for MSOs.

Sunday, May 17, 2015

DTH seeing early sign of tariff pressures

Of late both DTH (DTH players have been taking prices upwards over last 2 years) and Cable TV (efforts
towards packaging) have been focussing ARPU improvement. However in a recent move DTH player Tata Sky launched a INR8 daily recharge voucher allowing subscribers to pay only for the days they watch TV (possibly negative from a sector perspective). While the move may be an attempt by Tata to position itself for DAS Phase3 and 4 markets as it is c60m subscriber opportunity, however characterized by relatively
low ARPUs. Moreover Dish TV runs a parallel brand in these markets and sells skinny bundles of regional channels.

Furthermore Tata Sky has followed the INR 8 daily pack with INR 99 pack for South Indian market. Given this, there is a risk that the DTH space may see some price competition in coming days. Any such move would be negative for the overall pay TV space including Cable TV as last mile owners would likely prefer to be discounted to DTH.

While we view the increase in competitive intensity as negative, it may be early to model pricing decline. That said we highlight that move by competition to subsidize set top boxes in Phase 3 will be significantly negative. Separately recent court ruling setting aside the TRAI mandated inflation linked tariff hike is positive for DTH players (may offset near term pricing pressures).

It is only recently MSOs have started getting their act right on packaging, however lower pricing by DTH players could potentially dilute those efforts. Nevertheless cable TV players particularly Hathway can offset such pricing pressures by ramping up broadband and we see broadband tariffs increasing in the near
to medium term. Nonetheless progress on packaging has been slower than estimated and we now build/adjust for license charges on broadband revenues.

Wednesday, March 04, 2015

Pricing power evident - Dish TV India

Dish TV has announced the implementation of differential pricing for subscribers in four key metro cities – Delhi, Mumbai, Pune and Kolkata. The company has raised the tariffs across all packs for new as well as existing subscribers by Rs10 in all the four key metros. Dish TV plans to replicate the move in DAS Phase II cities, subsequent to the roll-out in the four metro cities

The company has demonstrated pricing power recently by effecting tariff rates hike by 6% (average) in August 2014 and a further 4-8% in February 2015 beginning, across most packs. Introduction of segmented pricing across subscribers in tier 1 and tier 2 cities is yet another way for company to drive ARPU growth. As a reminder, Dish TV delivered an ARPU of Rs177 in 3QFY15 (vs. Rs166 last year) and looks to further drive ARPU through 1) Increasing HD penetration 2) Introduction of intermediary packs, to drive faster upgrade from the base pack 3) Broadcasters push on RIO deals to improve content monetisation from MSOs which in turn will drive industry ARPUs

Dish TV offers the best way to play the digitization theme in India, in our view. The company is at a critical inflection point in terms of turning net profit positive over the next couple of quarters. Also, Zing, the segmented offering for regional markets, is gaining strong traction and setting up the base for the company ahead of Phase 3 & 4 digitisation.

Tuesday, January 27, 2015

Reliance Jio Entry into TV will Disrupt Cable & Dish Market in India

Reliance Jio Infocomm has also applied for a cable MSO license. We believe RJIO has the following connectivity offerings relevant to the space in which HATHWAY operates

RJIO could also launch IPTV services using its cable MSO license once its pipe is present in homes. Last, were RJIO to offer IPTV services, it would compete with HATH’s cable TV offerings. While we acknowledge the risk and build it in our bear case through lower cable subs for HATH, we believe the extent of the challenge will be clearer when the below details are available.

Since seeding is already largely done in Phase I and II markets, RJIO might decide to focus on Phases III and IV, in which case it will not be significantly in HATH’s way. If RJIO launches in IPTV in Phases I and II, it will have to subsidize the boxes completely, in our view, given that subscribers have already paid for the box of either an MSO or a DTH company, and so there is a barrier to exit.

IPTV has not been a big presence even in developed markets and accounts for a very small presence in India. Hence, the acceptability will depend to a large extent on the quality of any offering from RJIO and on the possible bundling offers RJIO announces

Monday, January 26, 2015

Cost push for MSO’s is DTH’s gain

Star and Zee are hard-negotiating content deals with MSOs. Star has shifted to the RIO model, which has increased the cost significantly for the MSOs. Dish TV on the other hand has content cost fixed for at least the next 20 months (management guiding for 5-6% annual inflation). Star and Zee content-cost deal expires in Sep 2016, India Cast in Mar 2017 and Sony in Mar 2018. Cost pass-through for cable gives DTH players headroom to raise prices. Dish plans to implement differential pricing for different regions. While this may not be a water-tight plan, it still allays our concern that ARPU increases will only be region specific and hence may benefit urban DTH player more

Despite 416k net subscriber addition, Dish is still gaining 28% incremental market share. It seems that the DTH subscriber additions have been strong during the quarter and are probably gaining market share.

Separately, Dish TV  has sealed content-cost deals with all of the leading broadcasters for 2-3.5 years. The agreements with Zee and Star Plus are due for renewal in Sep 2016, India Cast in Mar 2017 and Sony in Mar 2018. Fifty percent of the agreement for content cost with the broadcasters is fixed, while the remaining is on CPS. Management has guided for higher single-digit growth in content cost over the agreement period.

Zing is positioned for local language consumption and has achieved impressive success since its launch across all regions. Zing now accounts for 17-18% of the company’s incremental subscriber additions and 18-35% of incremental market share in the states where it was launched.

Monday, January 19, 2015

Reliance Jio to Power Your TV with OFC / Wireless Technologies

Reliance Jio Media, a subsidiary of Reliance Jio Infocomm has applied for Pan India multi-system operator (MSO) license that will enable the company to broadcast TV channels to local cable TV operators as well as households. We view RJio's entry in to TV distribution business as incrementally negative for Hathway and Dish TV as it increases competition. RJio’s entry may also limit the ability of MSOs to increase ARPU meaningfully in the near to medium term. RJio owns Network 18 which gives it access to some content such as news.

We believe RJio is likely to use all three mediums – Fiber, Cable TV, and wireless – to offer high speed broadband and pay TV services to households. Also, the company may look to acquire small MSOs and LCOs to increase its foothold in the cable TV distribution business especially in the phase 3 and phase 4 areas where 90-100m households are likely to be digitized over the next 3years. In the phase 1 and phase 2
cities, the company may put emphasis on fiber to home network as affordability is high in the cities of Phase 1 and Phase 2.

Friday, January 16, 2015

Hathway Packaging Star Channels like DTH

Post the move by market leader Star TV to offer channels a-la-carte and at wholesale rates, Hathway has responded by coming out with five packages in its key digital markets (we note that it is only via packaging that cable operators can improve ARPUs and pass on the increase in content costs to subscribers, and it is only via packaging Multi System Operators (MSOs) that it can use the multiple incentives offered by Star TV). The company is following up with aggressive marketing (ads across mediums likely to spread over a couple of months).

There is strong case for cable TV operators to hike tariffs, particularly after the move by Star TV to offer content at wholesale rates. Key reasons which support tariff hike include,
Churn - local cable TV operators could see churn in case they fail to match content at par with Direct-to-Home (DTH) operators.

Increase in content costs - The move by Star TV has resulted in increased costs for cable TV players. We have seen in other sectors, such as telecom, that an increase in input costs has resulted in increase in voice tariffs. We understand only Hathway has started the packaging initiative as of now. That said, if Hathway sees a robust sign-up by existing subscribers, others are likely to follow suit (in addition, we expect other big broadcasters to replicate the move by Star TV once big MSOs implement packaging).