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

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.