Chasing the digitisation rainbow

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A reality check

It was way back in 2003 that the foundation of digitisation was laid in the form of Conditional Access System (CAS). CAS was largely a failure because free-to-air (FTA) channels were allowed to be received without the compulsion of installing set-top boxes (STBs).

Digital Addressable System (DAS) addresses this fallacy. The Ministry of Information & Broadcasting (MIB) and the Telecom Regulatory Authority of India (TRAI) have zealously pursued DAS, with stakeholders ensuring that almost 20 million STBs were seeded across 41 cities in a matter of 15 months. While seeding boxes is work half done, customer acquisition form (CAF) and gross billing are still work in progress. We, at Televisionpost, have tried to study the implications of digitisation for all stakeholders. Our analysis shows that multi-system operators (MSOs) can raise their revenue share (net of broadcaster payout and carriage) to Rs 58 billion (from almost nil currently). Following digitisation, broadcaster subscription revenue would almost triple while local cable operators’ (LCO) income would dwindle to almost half of what they were making in the analogue regime.

Looking at relationship charts, we examine issues like carriage, content costs, activation revenue, subscription income, profitability, debt, funding and acquisition opportunities.

Key findings:

• Cable leads in STB seeding

• DTH’s incremental market share less than 15% • 4 MSOs spend north of Rs 30 bn and rule the market

• Higher capex generally funded through debt—though DEN, Hathway and Siti Cable have raised equity

• Profitability still hinges on carriage fees, but this dependence is likely to fall • Content costs up 30%

• EBITDA growth for MSOs led by activation revenue • Acquisition route to be largely via STBs

• Subscription revenue for major broadcasters swells • Carriage fees drop for news channels

Believing that digitisation will herald a new era for the Indian media space, we are no less excited than you to be party to this expedition as we go on to chronicle this space offering unparalleled analyses and insights. Read on!

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The shifting dynamics of pay-TV economy in the digital age

Forget the older dynamics of the pay-TV economy. Digitisation is going to throw all of that out of the door. Consider how much money the television channels and the broadcast-carriage companies will be making in the new era. That is where the business models are being redrawn. That is where the chase is on. Let us dig into the past for a brief moment. The subscription revenue collected by the cable TV operators from an estimated 90 million (cable only) households (HHs) is in the region of Rs 162 billion.

How does this split across the value chain? Our industry interaction and Televisionpost.com insight point towards rampant under-declaration of subscribers to the extent of 85%. This leaves the local cable operators (LCOs) with a lion’s share of subscription revenues amounting to Rs 138 billion. Multi-system operators (MSOs) take home just Rs 24 billion – and give away almost everything (Rs 23 billion) to broadcasters. They are, thus, kept afloat by carriage fees coughed out by broadcasters.

Pre-Digitisation scenario

No of cable TV HHs (mn) 90

Post Tax ARPU (Rs) 150

Subscription revenue on the Ground (Rs mn) 162,000

Under-declaration (%) 85

Under-declared revenue (Rs mn) - or LCOs revenue 137,700

MSO revenues (Rs mn) 24,300

Broadcaster share (Rs mn) 23,000

Source: TelevisionPost Research

Now turn to the post-digitisation age and notice the estimated revenue for the MSOs and the broadcasters (cable contribution only): Rs 58 billion and Rs 68 billion respectively. Not a bad business for them, right?

How have we arrived at this? We have taken a bird’s eye view of the cable distribution industry assuming that all 90 million households have got digitised and post-tax ARPUs have moved up from Rs 150 to Rs 180 per month. For the time being, we have assumed no organic growth in TV households. We have also excluded carriage revenue (or fee) from our calculations.

Based on these parameters, total revenue collection from cable subscribers climbs to Rs 195 billion, or 20% growth (as we have assumed a higher post-tax ARPU while the subscriber base has remained constant). Going by TRAI’s tariff order of sharing 35% post-tax ARPU with LCOS, their revenue falls by almost 50% to Rs 68 billion, thus taking care of under-declaration.

MSOs’ net revenue (after LCO and broadcaster share) increases to Rs 58 billion. Do note that pre-digitisation, the revenue that the MSO collects is completely

This analysis excludes DTH

HHs...

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shared with the broadcaster. This is not the case after digitisation. The MSO is left with almost 30% of ‘on ground’ collections, even after sharing with the LCO and broadcaster. MSOs are, thus, the biggest beneficiaries of digitisation as from almost negligible subscription revenue (after payment to broadcasters), they would now reach a sizeable number.

Broadcasters will have more to cheer. Their revenue from cable (excluding DTH) increases threefold to Rs 68 billion - and this gain comes on the back of absolutely no direct capex in digitisation (broadcasters will have to invest in better content but that is out of the scope of this present study).

Post-Digitisation scenario

No of cable TV HHs (mn) 90

Post Tax ARPU (Rs) 180

Subscription revenue on the Ground (Rs mn) 194,400

Under-declaration (%) 0

LCOs revenue @ 35% of on-ground revenue (Rs mn) 68,040

MSO revenues @ 30% of on-ground revenue 58,320

(Net of LCO share & Broadcaster, Rs mn)

Broadcaster share @ 35% of on-ground revenue (Rs mn) 68,040

MSOs seed record number of STBs in shortest time

The festive season of late 2012 will be remembered for the local cable operators knocking at the doors of consumers and installing digital set-top boxes. They achieved a mammoth task in the course of the next 12 months. As India marched into digitisation, a record was being created by these men on the street: nowhere in the world have so many homes been digitised in such short a time.

As per our industry interaction and informal discussions with the government, Phase I and II (metros of Delhi, Mumbai and Kolkata, and 38 other cities) comprises a total universe of 28 million STBs. Cable has been able to deploy 21 million STBs while DTH has taken away the rest seven million. However, in terms of incremental seeding, the DTH market share has been less than 15% in the DAS cities.

The market is dominated by the top four MSOs. Hathway Cable & Datacom, DEN Networks, Siti Cable and IndusInd Media & Communications Ltd (which operates under the InCablenet brand) have seeded a whopping 17.5 million STBs, occupying almost 83% of market share (amongst MSOs).

This analysis excludes DTH

HHs...

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STBs seeded by major MSOs

Out of the 21 mn STBs seeded

by cable in Phases I & II, the

top four MSOs have seeded a

whopping number of 17.5 mn

STBs...

Market share amongst the Top 4 MSOs during Phase I & II

Source: Companies, TelevisionPost Research

Hathway has been the leader

(followed by DEN) in seeding

STBs with a market share of

38% in Phase I & II combined;

Incablenet seems to have lost

out the opportunity …

%

MSOs make hefty investments

As digitisation cruised along, the MSOs pumped in massive capital to fund the STBs. As per our estimates, the top four MSOs spent north of Rs 30 billion in Phase I and II. And they are lining up more hefty investments for the remaining two phases.

The biggest capital expenditure in digitisation is seeding of STBs. The price per STB to the MSO is about Rs 1,600 (if bought in high volumes) and the realisation is Rs 600 per box (post taxes) from the subscriber/LCO. The net capex per STB is almost Rs 1,000. So the strain of organising more funding will continue unless the subscription revenue flow from the LCO to the MSO improves significantly.

HATHWAY CABLE DEN NETWORKS SITI CABLE INCABLE

(MN) 2.5 2 2 1.1 4.2 3 1.2 1.5 6.7 5 3.2 2.6 Phase I Phase II Total 0 10 20 30 40 50 60 70 80 90 100

Phase I Phase II Phase I & II combined

Hathway Cable DEN Networks Siti Cable Incable 32.9 42.4 _38.3 26.3 30.3 28.6 26.3 12.1 18.3 14.5 15.2 14.9

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Capex incurred by MSOs in Phase I & II

Source: TelevisionPost Research 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 Hathway Cable (Consolidated)

Den Networks Siticable

Rs mn

The debt load

Never drill with debt. That is what the MSOs have been trying to do as funding for digitisation has meant more loans. Meanwhile, cash flows have been somewhat choked at the LCO end as the full ‘on ground’ subscription collection has not gone back to the MSO.

Net debt profile of MSOs

The higher capex has been

largely funded through debt.

DEN, Hathway and Siti Cable

have managed to raise

funding through equity as

well...

- 4,000 - 2,000 0 2,000 4,000 6,000 8,000 10,000 12,000 Hathway Cable (Consolidated)

Den Networks Siticable

Rs million

June'12 June'13

DEN Networks, Hathway and Siti Cable have all raised equity to keep their debt-equity ratio at a comfortable zone.

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Equity raised in the past 18 months by MSOs

0 2,000 4,000 6,000 8,000 10,000 12,000

Den Network Hathway Cable Siti Cable

Profitability continues to hinge on carriage

MSOs will continue to depend on carriage revenue to stay profitable till the full impact of digitisation is felt. But this will change dramatically over a period of time and the new roof sheltering them will have to be subscription income. The current profitability of MSOs is driven by carriage revenue. As exhibited in the chart below, if we strip DEN Networks and Hathway Cable of their carriage revenue, their consolidated EBITDA turns negative.

Carriage revenue is the only profitability driver

Source: TelevisionPost Research -3,000 -2,000 -1,000 0 1,000 2,000 3,000 4,000

Den Networks Hathway Cable

Consolidated FY13 EBITDA Consolidated FY13 EBITDA Excluding Carriage

Post digitisation, the dependence on carriage revenue for profitability diminishes to a great extent, as is depicted in our calculation below. We assume the gross ARPU (including taxes at the consumer level) to be Rs 250 per month. From this, we remove service tax (at 12.36%) and entertainment tax (assumed to be an average of 10% of Gross ARPU) to arrive at a net ARPU of Rs 194 per month per subscriber. From this we remove the LCO share (at 35% of net-ARPU, as mandated by TRAI) and broadcaster share (assumed at 35% of net ARPU, as is a global practice)

Rs mn

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and fixed costs (overheads) per subscriber. To this we add Rs 30 as carriage per subscriber per month and arrive at an EBITDA of Rs 58 per subscriber. This is an average number and would vary depending on the area of operation of the MSO (as ARPU could be different) and fixed overhead cost structure.

In the post digitisation scenario, carriage revenue will contribute only 50% to MSO EBITDA. Compare this with the pre-digitisation era in which carriage contributed more than 100% (as depicted in the chart above).

Per subscriber profitability after digitization

Post-Digitisation per subscriber profitability

Gross ARPU (including Taxes), Rs 250

Service Tax (@ 12.36%), Rs 31

Average Entertainment Tax (@ 10% of ARPU), Rs 25

Net ARPU (post Taxes), Rs 194

A. Net ARPU (excluding Taxes) of Subscriber (Rs) 194

B. Total Expenses (B1+B2+B3) (166)

B1. LCO Share @ 35% of Net ARPU (Rs) (68)

B2. Broadcaster Share @ 35% of Net ARPU (Rs) (68)

B3. Fixed cost per subscriber (Rs) (30)

C. Carriage Revenue per Subscriber (Rs) 30

EBITDA = A+B+C (Rs) 58

EBITDA Margin on Net ARPU (%) 30.0

D. Depreciation (STB price of Rs 1,600 depreciated over 8 years, Rs) (17)

EBIT 42

Tax (at 34% of PBT) (14)

E. PAT 27

PAT Margin on Net ARPU (%) 14.1

Carriage contribution to EBITDA (pre and post Digitisation)

Dependence on carriage for

profitability to decrease

significantly post

-digitisation…

0 0.5 1 1.5 2 2.5

Pre -Digitisation Den Networks

Pre -Digitisation Hathway Cable

Post -Digitisation

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Impact of digitisation on carriage fees

As more than 500 active channels sought to be carried on analogue cable networks which could not accommodate more than 70-100 channels, carriage fees came into existence. It will not be wrong to say that in the analogue regime, carriage revenue for MSOs kept them profitable because whatever cash they collected from the ground was almost passed on to the broadcasters.

Our industry interaction and TelevisionPost insight point towards a 30% drop in carriage fee on a per channel basis. Carriage revenue for MSOs, however, has not necessarily fallen because the number of frequencies which they used to sell earlier has almost doubled. We estimate carriage revenue (including placement) to be nearly Rs 20 billion for the last fiscal (FY13).

Content cost goes up

In order to gauge the impact of digitisation, we compare content cost in the first half of calendar year 2013 (this would have impact of both Phase I and Phase II digitisation) over the year-ago period (pre-digitisation era).

Our analysis shows that content cost has increased by 30% year-on-year on an average. This is reflected in the subscription revenue for broadcasters, which has seen an increase (we cover this aspect in another section later).

Content cost for MSOs and DTH operators

Rs mn 1HCY2012 1HCY2013 % increase in Content Cost

DEN Networks (1,350) (1,568) 16.1

Hathway Standalone (777) (1,080) 38.9

Siti Cable Consolidated (832) (1,189) 42.9

Dish TV (2,978) (3,883) 30.4

Total (5,937) (7,719) 30.0

Source: Companies, TelevisionPost Research Note: Siti Cable figures are approximations

MSOs expect content cost to increase by 20-25% year-on-year in FY14E. They will eventually move away from fixed fee to cost-per-subscriber (CPS) deals. DTH player Dish TV, on the other hand, is expecting content cost to increase no more than 10% year-on-year this fiscal.

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Spurt in revenue

Revenue is on the upswing but the most visible change is in the activation income. This is a one-time charge collected from consumers for installing STBs.

All distributors (MSOs and

DTH) have seen an uptick in

revenue as is visible from the

exhibit alongside. However,

for MSOs this was led by

activation revenue…

Higher overall revenue has

led to a better EBITDA profile

for all MSOs. Dish TV saw a

decline in EBITDA because of

its lumpy content deal

re-negotiation with Media Pro…

Revenue uptick

Source: Companies, TelevisionPost Research EBITDA profile

Source: Companies, TelevisionPost Research 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000

Den Networks Hathway Standalone

Siticable Consolidated

Dish TV

Rs mn

1QFY13 2QFY13 3QFY13 4QFY13 1QFY14

0 200 400 600 800 1,000 1,200 1,400 1,600 1,800

Dish TV

Rs mn

EBITDA profitability did not

translate into better PAT

because of higher interest

expense (on debt acquired to

seed STBs) and depreciation of

STBs without any meaningful

uptick in subscription

revenues...

PAT trend

Source: Companies, TelevisionPost Research -500 -400 -300 -200 -100 0 100 200 300 400 Rs mn

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Activation revenue drives EBITDA growth

With the seeding of STBs seeing hectic activity, the activation revenue counter for MSOs has been busy.

Activation revenue for MSOs

Source: Companies, TelevisionPost Research Note: DEN and Siti Cable figures are approximations

An MSO realises Rs 600 per

STB seeded and this is booked

upfront in the quarter. With

high no. of STBs seeded, there

has been a spurt in activation

revenue. It has been the key

EBITDA driver (see the next

set of exhibits)...

0 100 200 300 400 500 600 700 800 900 1,000

Den Networks Hathway Standalone Siticable Consolidated

Rs mn

The EBITDA growth for MSOs is led by activation revenue, as of now.

Den Networks - EBITDA excluding activation revenue

Source: Company, TelevisionPost Research Note: DEN figures are approximations

As subscription revenue pick

up takes some time,

activation revenue comes in

handy to drive profitability.

However, investors treat this

income as a one-off…

0 100 200 300 400 500 600 700 800 900

Rs mn

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Hathway Cable (Standalone) - EBITDA excluding activation revenue

Source: Company, TelevisionPost Research 1QFY13 -100 0 100 200 300 400 500 600 700 800 900 1000

2QFY13 3QFY13 4QFY13 1QFY14

Rs mn

Reported EBITDA EBITDA Excluding Activation Revenue

Siti Cable - EBITDA excluding activation revenue

Source: Company, TelevisionPost Research Note: Siti Cable figures are approximations

Siti Cable would have reported

EBITDA losses but for

activation revenue...

How MSOs plan to protect carriage revenues

MSOs are trying to protect their carriage revenues by spreading their footprint and tapping a wider pool of channels. With bandwidth no more a constraint, they can accommodate carriage of more channels. Even as broadcasters get the benefit of reducing their per channel carriage cost, MSOs will have more frequencies to sell. -400 -300 -200 -100 0 100 200 300 400 Rs mn

Reported EBITDA EBITDA Excluding Activation Revenue

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Carriage revenue of MSOs

Source: Companies, TelevisionPost Research Note: Siti Cable and DEN figures are approximations

Carriage revenue has not seen

any drop. This is despite fall in

carriage on a per channel

basis. Reason: MSOs have

started selling higher number

of frequencies...

Harvesting subscription revenue some time away

MSOs will reap the harvests of digitisation when they start collecting subscription income based on retail billing from the LCOs. The tussle with LCOs continues even now.

Subscription revenue of MSOs

Source: Companies, TelevisionPost Research Note: Siti Cable and DEN figures are approximations

Pure subscription revenue for

MSOs has started looking up.

However, true fruits of

Digitisation are yet to be

plucked. Net revenue

collection in Mumbai & Delhi

stands at Rs 85 per sub and Rs

60 per sub in Kolkata...

Acquisition route to largely be via STBs

MSOs are reluctant to make big-ticket acquisitions based on cash. Instead, they are keen to pick up operators who are unable to fund digitisation. Their contribution in terms of equity would be in terms of providing STBs and other digital infrastructure support.

In the analogue cable regime, this was not the situation. MSOs led the consolidation wave by acquiring controlling stake in large LCOs. A larger subscriber base meant higher bargaining power when it came to carriage revenues. In DAS, MSOs are not showing the same zeal to acquire LCOs and then seed them with STBs.

0 200 400 600 800 800 1,000 1,200 1,400

Rs mn

0 100 200 300 400 500 600 700 800 900

Rs mn

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The reasons are purely financial. As per our calculations (below), to acquire an analogue subscriber (at reasonable valuation of 24 months ARPU) and then digitise would entail a payback period of 5.1 years. But if the MSO only seeds the STB (without acquiring the LCO), the payback period is just two years. Once the STB is seeded, the LCO is largely ‘married’ to the MSO. Shifting the MSO would mean the LCO would have to change all the STBs to comply with the CAS of the new MSO - and subscribers would resist paying again for the boxes.

Just by seeding the STB if the MSO is getting quasi control over the last mile, then there is no need to own it and wait for a payback period of 5.1 years.

Payback period calculation per subscriber

Total Buy-out Pure STB Seeding

Net ARPU (excluding Taxes) of Subscriber (Rs) 180 180

Valuation in terms of months of ARPU (Assumed) 24 0

Valuation (Rs) 4,320 0

Capex on STB (Rs) 1,600 1,600

Total Capex per subscriber (Rs) 5,920 1,600

Activation revenue (on STB) recovered from subscriber (Rs) 800 800

A. Net Capex per subscriber (Rs) 5,120 800

B. Net ARPU (excluding Taxes) of Subscriber (Rs) 180 180

C. Total Expenses (C1+C2+C3) (156) (156)

C1. LCO Share @ 0% of Net ARPU (Rs) 0 0

C2. Broadcaster Share @ 35% of Net ARPU (Rs) (63) (63)

C3. Fixed cost per subscriber (Rs) (30) (30)

D. Carriage Revenue per Subscriber (Rs) 30 30

EBITDA = B+C+D (Rs) 117 54

E. Depreciation (STB depreciated over 8 years, Rs) (17) (17)

EBIT 100 37

Tax (at 34% of PBT) (34) (13)

F. PAT 66 25

G. Operating Cash Flow = F-E (Rs) 83 41

Payback in months = A/G 62 19

No of years for payback 5.1 1.6

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STB depreciated over number of years

Source: TelevesionPost Research

Hathway and DEN have an

aggressive policy of

depreciating STBs over eight

years while the Essel Group is

realistic at five years…

0 1 2 3 4 5 6 7 8 9

Hathway Den Siti Cable Dish TV

No of y

ear

s

No of years

DTH operators rework biz strategy

Concerned about staying healthy, direct-to-home (DTH) companies have taken a somewhat cautious approach towards expansion opportunities in digitisation. They have, perhaps, reworked their business strategy. Shunning away from reckless chasing of customers to gain size in the DAS markets, their focus seems to be on adding quality and sticky subscribers, improving ARPUs and reducing customer acquisition costs. Cleaning up their internal house also means lowering the churn rate and shaving debt.

STBs seeded April 2012 - June 2013 (15 months)

MSOs seem to have

outperformed DTH operators

in terms of STB seeding in

Phase I &II…As per industry

sources, DTH’s incremental

market share has been less

than 15%...

0 1 2 3 4 5 6

Hathway Cable Den Networks Siti Cable Dish TV (Net addition)

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DTH companies will benefit once digital cable ARPUs rise. They can then lift their ARPUs by initiating more significant price hikes.

Dish TV: Subscription revenue and ARPU

Source: Company, TelevisionPost Research

Subscription revenue growth

for Dish TV (and other DTH)

operators has been led by

ARPU improvement rather

than high subscriber addition…

150 152 154 156 158 160 162 164 166 4,000 4,200 4,400 4,600 4,800 5,000 5,200 5,400

(Rs)

(Rs mn)

Subscription revenue (LHS) ARPU (RHS)

Dish TV: SAC and Churn

Over the past 15 months, DTH

operators have increased prices

of entry level STBs and also

across monthly packages…This

has led to not only lower

subscriber addition but also

helped them bring down SAC

(despite an adverse movement

in currency) and churn (as the

quality of subscriber addition

improved). With DAS, cost of

churning out from DTH to cable

has increased from zero to cost

of STB and this would be

another reason for churn

coming down…

2,145 2,145 2,145 1,996 1,828 1.0 1.0 1.0 0.8 0.6 0 0.2 0.4 0.6 0.8 1 1.2 1,650 1,700 1,750 1,800 1,850 1,900 1,950 2,000 2,050 2,100 2,150 2,200

(%)

(Rs)

SAC (LHS) Churn (RHS)

Some DTH operators are making concerted efforts to drive in carriage revenues, a turf efficiently exploited by cable TV networks in an analogue environment. So far this has been a dry revenue stream and Dish TV, India’s largest DTH player by subscribers, has been able to pocket around Rs 350 million in FY13. In the digital era, the carriage fee tap is going to open for DTH as well.

Subscription revenue for broadcasters swells

Major broadcasters are seeing their subscription revenues expand briskly, offsetting leakages that were evident from under-reporting of subscribers. For Sun TV Network, Zee Entertainment Enterprises Ltd and TV18 Broadcast, the three large listed broadcasters, domestic subscription revenue has been growing

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Subscription revenue for broadcasters

YoY subscription revenue growth for broadcasters

0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000

Sun TV Network Zee Entertainment

Rs mn

-20 -10 0 10 20 30 40 50 (%)

Sun TV Network Zee Entertainment

at a healthy pace over the past 4-5 quarters. Some growth in Zee Entertainment’s subscription revenue can also be attributed to the formation of Media Pro, the joint venture company which distributes the Star, Zee and Turner group of channels, and subsequent better realisation from the analogue areas.

TV18 Broadcast net-subscription revenue

TV18 Broadcast has shown a

remarkable increase in its net

subscription revenue (net of

carriage) because of lower

carriage costs and higher

subscription revenue from

digitisation...

-200 -100 0 100 200 300 400 Rs mn

Impact of digitisation on news broadcasters

Coming from a heavy carriage baggage, news broadcasters were looking at digitisation to correct their business models. The repair work is already on, though the increase in subscription revenue is not meaningful as of now because almost all of them are on a fixed fee deal with the aggregator (only Zee News has seen a growth in subscription revenue as it is distributed by Media Pro).

Carriage cost is on the decline and is clearly visible in the results of the listed news broadcasters. NDTV says that carriage costs have come down by 33% in 1QFY14 and it will be net positive (on subscription revenue minus carriage) this

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S&D cost of News Broadcasters

YoY decline in S&D cost for News Broadcasters

0 50 100 150 200 250 300 350 400

NDTV TV Today Zee News

Rs mn

-50 -40 -30 -20 -10 0 10 20 30 40 50 60 (%) NDTV TV Today

fiscal. TV Today, on the other hand, expects its FY13 carriage cost of Rs 720 million to fall to Rs 580 million in FY14E.

None of the news broadcasters report carriage costs on a quarterly basis. We, thus, study the Selling & Distribution expenses (of which carriage is the biggest component) to conclude that carriage is on the decline for these broadcasters.

Challenges ahead

While it is pretty commendable how the Government, TRAI and stakeholders across the industry have seeded STBs, few pressing issues still remain.

Clarity on local taxes: Entertainment tax is a state subject and there is little clarity on who this liability falls on. In Delhi, the law is clear that it is the prerogative of the MSOs while in Maharashtra the LCOs want to collect entertainment tax on behalf of the state government and deposit the same with it (they have filed a case in the Bombay High Court stating that they ‘own’ the customer and hence it should be their right).

LCOs still defiant: While LCOs have been largely on board for seeding STBs, they are still resisting submission of Customer Acquisition Forms (CAF), implementing packages and undertaking gross billing. CAF forms in the metros (excluding Chennai where DAS has not been implemented yet as there is a Court case against it in the Madras High Court) have been filled to the extent of 95% (including Kolkata). The pick-up is just about 50% (on an average) in the rest of the 38 cities falling under Phase II and, hence, TRAI has delayed the last day for CAF submission to 15 November 2013. Only Delhi has implemented gross billing whereas Mumbai is expected to undertake the same from the month of October. The real benefits of digitisation would be visible when the consumer has the right to choose channels of his/her choice and the MSO starts directly billing the subscriber.

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ARPUs need to move up: Early indications show that ARPUS are increasing, particularly in pockets where they were miserably suppressed. They will have to further rise to make the business profitable. Margins for MSOs will shrink in future as content costs climb and carriage revenues drop. Higher ARPUs will then come to the rescue. DTH companies will also stand to gain from this.

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Annexure

Journey from CAS to DAS

The year 2003. The date 14 January. The Indian government announces a policy making it mandatory for the cable operators to transmit every pay channel through an addressable system or CAS, the aim being to give consumers choice to pay for the channels that they want to watch.

The Ministry of Information and Broadcasting (MIB) specifies the first cities as the Municipal Council of Greater Mumbai area, the National Capital Territory of Delhi and the Chennai Metropolitan area. The time given is six months.

Then follows resistance from various groups of the broadcast industry and legal battles. The government decides to retreat. Citing public interest and wider consultation, the MIB issues a notification withdrawing CAS (Conditional Access System) in Delhi, Mumbai and Kolkata while leaving out Chennai where it gets implemented in a restricted manner.

Time comes for the multi-system operators (MSOs) to move the court. In late 2006, a Delhi High Court order forces the government to bring back CAS in parts of Delhi, Mumbai and Kolkata from 1 January 2007.

The government, however, does not extend CAS to other cities, despite the Telecom Regulatory Authority of India’s (TRAI) recommendation that it should be rolled out countrywide. The government’s contention is that it has not taken a final view and was consulting various stakeholders.

2012: CAS becomes DAS or Digital Addressable System

In October 2011, the Union Cabinet approves the Ordinance on Digitisation setting December 2014 as the sunset data for analogue cable across India. The Ordinance receives Parliament nod and India’s journey to digitisation begins.

TRAI issues a detailed tariff order for Digital Addressable System (and subsequent amendments), addressing contentious issues and prescribing revenue sharing formula and the constituents of various packages for consumers.

According to the tariff order, the Basic Service Tier (BST) has to be priced at a maximum of Rs 100 (plus taxes) per month. BST is to have at least 100 free-to-air (FTA) channels, including five channels of each genre. TRAI said consumers could subscribe to pay channels without taking the BST, and MSOs could fix a minimum monthly pay subscription not exceeding Rs 150 per month.

Carriage fees need to be uniform and non-discriminatory across all channels. Placement fees, however, are barred.

Trai also introduces the concept of ‘must carry’ (earlier only ‘must provide’ was there) wherein an MSO has to carry a particular channel provided the broadcaster pays the designated carriage charge.

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TRAI asks local cable operators (LCOs) and MSOs to negotiate revenue share amongst themselves. In case of a breakdown, the revenue share is to be fixed at 35% for pay packages.

On the wholesale price, the interim Supreme Court order of a maximum of 42% of non-CAS rates for all digital platforms (DTH, IPTV, HITS and now DAS) remained unchanged. TRAI also mandated linking retail a la carte rates with wholesale rates and the implied price of the retail level bouquet in which they are present.

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