Cable Operators Want Last Mile Owners Tag

We met with the Maharashtra Cable Operator’s Federation to discuss various issues impacting the progress of Digital Addressable System (DAS). Key issues were as follows:  Local cable operators (LCOs) emphasised they have made significant investments in in the last mile and they own the last mile and the subscribers. We understand that delay in resolution of the above mentioned issues could see LCOs evaluating possibilities of becoming MSOs by themselves (but could face funding challenges). On similar lines possible that LCOs evaluate providing broadband by themselves (hurt MSO ARPU).

Local cable operators (LCOs) seem unhappy with the revenue share formulae for the basic tier package and recommended that their share should be between 60-80% , else they could consider providing similar services by putting their own head-end for FTA (Free to Air ) channels.

LCOs fear losing control over their subscribers if Multi System operators (MSOs) bill directly. As such subscriber billing should not be done by MSO, instead MSOs should allow LCOs access to subscriber management system (similar to what is done in case of airline ticketing).

On similar lines LCOs proposed that subscriber package activation and de-activation should be controlled by them and not MSOs. LCOs recommended that regional channels must be mandatorily made part of the basic tier package; this will allow LCOs to retain subscribers. They fear regional channels may be kept out to improve ARPU

DTH Players to Join Hand Negotiate with Broadcasters

The top three DTH players (market share >60%) (Dish TV, Tata Sky, and Airtel Digital TV) are planning to form a JV to jointly negotiate content cost and carriage revenue with the broadcasters. At present, net content cost (content cost less carriage revenue) for DTH is ~Rs50/sub/month as against Rs5-10/sub/month
for digital cable and negligible cost for analog cable. Increase in bargaining power coupled with the already high payment for content compared with digital cable would enable DTH service providers to restrict growth in net content cost.

TV’s 1Q margins were impacted by higher content and advertising costs. Transponder and middleware costs are expected to rise due to rupee depreciation. Nonetheless, we expect margins to improve in the
coming quarters on normalisation of advertising expense, operating leverage, and increase in ARPU

DTH Players Pay Higher than Cable Players
The Indian media industry is marked by inequitable sharing of content costs and carriage revenue between DTH and cable. Prior to digitisation (FY12), the DTH industry’s net content cost (content cost
less carriage revenue) was ~Rs50/sub/month whereas it was negligible for analog cable. Even after digitisation, we estimate Hathway’s net content cost in digitised markets (phase I and II) at ~Rs10/sub/month in FY14ii as against Dish TV’s net content cost of Rs47/sub/month. In the medium to long term, we expect  this gap to narrow as cable’s carriage revenue declines and content cost rises

Riding the digitization wave

A revolution is taking place in the delivery of content in India. While content has been historically delivered over cable in analogue form, a government led mandatory digitization is currently being implemented. By Dec’14 (as per government schedule), mandatory digitization would have been rolled out in the entire length and breadth of India. As a result of mandatory digitization

Cable distribution companies have outplayed their DTH rivals in Phase 1 & 2 digitization. Our discussions with industry participants lead us to believe that cable may have captured c3/4th of digital converts from analogue cable. Hathway, as market leader in cable distribution has seeded ~6.0m boxes so far in Phase 1 & 2 which signifies their ability to execute.

The latent need for data consumption of the Indian consumer is evident in mobile data usage and revenues’ rapid growth. We believe that cable operators such as Hathway have an opportunity to sell fixed broadband delivered through cable to their digital subscribers with minimum additional investment. Given ARPUs for
broadband could be significantly more than cable TV, Hathway could be viewed as a call option on fixed broadband growth in India.

The significant under-reporting of cable TV subscribers will reduce significantly and will be close to zero over the next 3-4years. This is a game changer for multi system operators (MSOs) such as Hathway as they
can account for any digital cable box they have seeded and get paid. Customers will end up paying more for content which bodes well for broadcasters as well as distribution companies.

The government will also collect more tax in form of entertainment tax, service tax.

DTH Sector 25% decline in subscriber additions

DTH India has not benefited from the digital addressable system (DAS) as multi-system-operators (MSOs) have kept the prices for set top boxes (STBs) low and there has been no change in subscription revenues despite the deployment of STBs (still operating on analogue tariffs). DTH operators, meanwhile, have hiked STB prices by c40% over the past 12 -18 months and subscription fees by c20%.

The DTH sector may see a decline in subscriber additions, possibly by c25% this year. Things may improve should cable TV players decide to raise their ARPUs. The gross subscriber base for the sector is estimated at 50m, with an active base of 38-40m. Incremental volumes (c70%) continue to come from Phase 3 and 4 markets.

Despite concerns over subscriber net additions, the DTH sector may raise prices further shortly and prices on STBs may be raised by another 10% at least. The price hikes have improved the quality of acquisitions for the sector overall, and the industry is seeing subscribers subscribing to higher-end plans. The focus is on improving balance sheets as well.There is no major industry-wide trend of subscribers moving from
present packages to lower packages.

There is a regulatory push towards ‘knowyour-customer’, the progress of which is slow and may take 5-6 months for cable TV operators to have complete subscriber information in place for the Phase1 markets alone. Cable TV ARPU in several markets is still at INR125-130. It will be tricky for cable TV players to make money from such low-end subscribers and MSOs may have to subsidise them.

The notion that cable TV players will not charge customers for servicing is misplaced. In the analogue regime, there was no hardware involved; however, the DAS regime involves hardware, and subscribers will need to pay for any repairs, reducing the disparity between the two sectors.

TRAI’s ad curbs to trip smaller, news broadcaste​rs

TRAI’s recent regulation of limiting ads per hour to 12 minutes is a landmark in many ways. It will be implemented in a phased manner and full compliance is mandated from October 1, 2013. Even though digitisation has been a success in terms of seeding of boxes, inflow of subscription revenue is in a nascent stage. Hence, broadcasters, especially smaller ones and news broadcasters who continue to remain dependent on ads as the predominant source of revenue, will be hurt the most by this regulation. An indirect impact could be reduction in carriage fees by these broadcasters to MSOs as their profits come under pressure. Similarly, smaller advertisers may not be able to bear the burden of increased ad rates and may be compelled to shift to weaker channels. Overall, we expect TRAI’s regulation to pose risk to near term ad revenues as all broadcasters adjust their ad inventory and hike prices gradually to cushion the impact. However, because of increase in collective action by major broadcasters (ad rate hike, withdrawal from TAM), strong market share and relatively lower ad duration (versus smaller broadcasters), the impact on stronger networks like ZEE and Sun TV is likely to be limited.

As per TRAI, ads on TV channels should be restricted to 12 minutes per hour (10 minutes of ads and 2 minutes of promotions) as they affect the quality of viewing. Broadcasters have agreed to comply with this regulation from October 1, 2013. The entire regulation is expected to be implemented in a staggered manner. Currently, as per Mr. Shailesh Shah, Secretary General, Indian Broadcasting Federation (IBF), per hour ad time works out to just over 11 minutes per hour if a full-day average is taken.

Several finer aspects of the ad regulations will be clear in due course. There is no clarity on what exactly qualifies as promotions. Classification of teleshopping programmes and movie trailers as ads or content is unclear. However, broadly, it is clear that Hindi news broadcasters will be impacted the most as they will have to curtail their ad duration per hour from (19+3) minutes to (10+2) minutes. Though print and digital may benefit from the spillover effect, regulating ad duration on TV also raises the question whether other media like print and radio will also be subjected to ad caps.