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
India. 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.

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.

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