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.

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