4 Key Issues Shaping the Indian DTH Industry

While we believe that the TV industry is still undergoing structural changes and it could be some time before a relatively stable state is achieved, we identify four key issues that will shape the industry in the next 1-2 years.

Digital subs uptake: We expect slower pace in the next 6-8 months, but see a material pickup in activity in 2H2014, closer to Phase 3/4 deadlines

Tariffs: We expect price hikes in 2014 to continue for digital subs, but expect Phase 3 and 4 launches at lower price points

Content: We see further market fragmentation with new/niche channels. Consensus is not factoring in material content cost increases. We think that this should continue in 2014 as subscribers become more addressable and market segmentation improves. While this would lead to further fragmentation of the market, we think larger broadcasters (such as Zee, Sun TV) should benefit from this given their existing infrastructure, know-how and content library, which will lead to a relatively lower cost of rolling out new channels (faster payback periods) vs. a new entrant.

Regulations: We expect the final outcome of the ad-cap regulation in early 2014, while regulations on media aggregators may come in 2H14. Consensus estimates are currently not factoring any material negative impact, in our view. We think that bigger broadcasters, should be able to better offset the decline in inventory by price hikes given their higher viewership share and reach vs. smaller/news broadcasters.
Indeed, few broadcasters (have indicated ad-rate hikes in the medium term to offset decline in inventory

We note that Phase 1 and 2 of digitization are not yet complete, with court-stays in few cities. An analysis of Census of India’s (2011) data indicates that over 90% of India’s population and c.75% of subscribers to be digitized fall under the regions under Phases 3 and 4 of digitization.

Hathway - Robust subscription, carriage fees; surge in content cost

Hathway’s net realisation per subscriber in Mumbai and Delhi remained unchanged QoQ at INR85 (inclusive of service tax). Subscription revenue jumped ~32% QoQ in Q2FY14 largely due to higher income from Kolkata and Phase 2 cities. Though content costs surged a massive ~75% YoY in  Q2FY14, further increase in H2FY14 will be limited in existing cities as most content deals have been inked.

Currently, Hathway’s total digital subscriber base stands at ~7.7mn, while at Q2FY14 end it was ~7.6mn. The consolidated entity seeded ~0.4mn boxes in Q2FY14. With ~0.8mn boxes in inventory, the company is looking to aggressively seed boxes in Phase 3 cities in H2FY14.

Hathway is one of the best placed MSOs to capitalise on the huge digitisation opportunity.  Compared to DEN, Hathway has a sizeable primary subscriber base, well-entrenched broadband operations and has seeded the highest boxes amongst MSOs. However, commencement of gross billing in Mumbai and Delhi is a key monitorable.

DTH players explore boosting carriage fees revenues

DTH operators ( Dish TV, Airtel and Videocon) are evaluating possibilities of forming joint venture to reduce their content costs and demand higher carriage fee from broadcasters. The news-flow is not
surprising as it more or less in-line with thoughts shared by the Dish TV management during the 2Q FY14 earnings call. With the regulator already raising questions about media aggregators and the market power enjoyed by them, it will tough for three big DTH players to come together.

While we don’t see a case for content costs to come down but we do agree that future increase in content costs could be lower if DTH players come together and some savings are very much possible. Second, DTH players can benefit from incremental carriage revenues as it will be easier for new/small broadcasters to negotiate with a DTH JV representing 3 players and addressing 26m subscribers versus negotiating with 200 small MSOs to get the same reach.

Only a full-fledged merger can allow DTH players to have economies of scale and mere formation of JV for negotiating content costs may not be enough. A fully merged entity can save on transponder /distribution costs and content costs. However that is not what is being explored today but with DTH industry facing growth issues, consolidation seems to be the next logical step for the DTH space in our view. Cable TV space (MSOs) is fragmented in B&C towns, markets where DTH is strong. It may be a matter of time and cable operators may attempt to consolidate in these markets over the next 2-3 years and such a move can hurt DTH.

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