Watching analog signal on my 40-inch LED TV was nothing short of a sin,” laughs Amit Mishra. The 30-year-old Delhi-based media professional bought his new television set two months before the digitisation diktat was executed in his locality, but a week with regular cable was enough to make the Discovery channel buff switch. “With DTH (direct-to-home) I could explore HD (high definition) stuff,” he reasons.
Some 1,600 km south, in Hyderabad, AP Narasimha Rao isn’t particularly concerned about picture and service quality. The 57-year-old professor spends a couple of hours a day watching the news, and when the local cable operator offered him a set-top box, he didn’t bother shopping around. “I had to make a one-time payment and the monthly bill is slightly higher, but other things remain the same,” says Rao. “Small dish antennas have sprung up on some roofs in our locality, but most have stayed with Hathway.”
It is over two years since the Cable TV Networks (Regulation) Act, 1995, was amended to prescribe a nationwide, phased switchover to digital cable services by December 2014. Both, DTH operators and multi-system operators (MSOs) welcomed the move, believing it would create a level playing field as well as provide a never-before opportunity to lure existing cable customers to a higher tariff regime. Analysts and industry experts, meanwhile, looked forward to a revolution in TV viewing habits of Indians (the power to cherrypick channels, better quality images, transparent billing, faster and better customer service) as well as a knock-down, drag-out battle between cable operators and DTH that would be as epic as the cola and detergent wars. Has it turned out that way?
Need of the hour
First, though, here’s a quick guide to digitisation. There are 150 million pay TV users in India but digital penetration levels are dismal compared with other Asian countries (see: Long way to go). While broadcasters such as Zee, Star, Sun TV, comprise one end of the spectrum, the distribution set-up comprising 10 large MSOs, including Hathway, Siti Cable, Den, Digicable, IMCL; 100,000 local cable operators (LCOs); and seven DTH players (Dish TV, Tata Sky, Sun Direct, Airtel Digital, Videocon D2H and Reliance Big TV), make for the other end (see: How they stack up). While cable TV reaches 95 million users in the country, DTH caters to approximately 55 million.
In terms of operations, DTH players buy content from broadcasters and supply directly to the end users. In contrast, under a digitally addressable cable TV system (DAS), MSOs de-encrypt signals supplied by broadcasters via satellite and pass them onto local cable operators (LCOs), who act as local retailers offering last mile connectivity through set-top boxes.
Unlike the 80-100 channels possible under the analog system, digital cable can carry up to 1,000 channels and consumers can — at least in theory — view and pay for only the channels of their choice and the subscription revenue generated by LCOs is shared with MSOs (under analog, this was just 10-20% or Rs 25-30 per subscriber per month.)
But the big reason why the government is actively pushing for digitisation is: plugging revenue loss. Industry estimates say LCOs generate close to Rs 17,400 crore of subscription revenue every year but under-report that by about 80%, resulting in a loss of around Rs 5,000 crore a year in service tax. Not that cable operators were charging a bomb for their services. Average revenue per user (Arpu) for cable services is a pitiful $3-4 (Rs 150-200) in India compared with over $20 in other developing countries such as Malaysia and Thailand. Worse, it’s remained this way for the past two decades, even as the number of channels aired increased from three to over 200. Not surprising that in the Asian continent, India has the second-highest number of pay TV subscribers after Korea. DTH Arpus aren’t any better at around Rs 166. Indeed, one reason DTH operators have been so welcoming of DAS is that cable operators will now bear the same outgo as DTH operators. “Our cost structures will become similar. The cable guy was charging less and paying nothing as taxes. But I had to price my product at a similar level because I was competing with him,” says Harit Nagpal, MD and CEO, Tata Sky, which has 10.4 million subscribers.
Of course, it’s no easy task getting around 100 million subscribers to switch from regular cable to digital, which is why the mandate is to complete it in four phases. Phase 1 was launched last year in the four main metros, while phase 2, which theoretically ended on March 31, covered 38 cities with population of over 1 million. Phase 3 is to continue till end-September, 2014, and cover all other urban areas, while the last phase will cover the rest of the country by December 31, 2014. Which means all of India would have switched to either digital cable or DTH in the next 18 months.
But it’s not turning out that way. The first two phases have had mixed results. Although the government claims 88% of households in the four metros and next 38 cities have been digitised, not everybody agrees. “Delhi and Mumbai were fairly successful; Kolkata only partially successful and Chennai got stuck due to litigation. It’s the same story with the second phase — it has got bogged down at various levels,” points out R Venkatesh, CEO of Dish TV, the country’s leading DTH player. Does that mean there’s no clear frontrunner between DTH and cable after two rounds of digitisation? Not quite.
For now, it seems traditional cable operators have the upper hand. Of the over 16.59 million STBs installed in phase II cities as of May 23, 2013, 11.78 million STBs were installed by MSOs representing 71% of the total market and rest went to DTH players (See: Remote to direct control). However, Sisir Pillai, chief strategy officer with Digicable, the third-largest cable TV network, present in 46 cities and 14 states, is not ready to uncork the bubbly, yet. “Authentic numbers will come only after the billing is complete. All the current numbers are declarations by operators on seeding of boxes,” says Pillai. Concurring with the view are Credit Suisse analysts Jatin Chawla and Akshay Saxena, who state in their report: “While the STBs are in place, addressability issues have not yet been solved, as MSOs do not know the customer behind the STB and collection continues to be monitored by LCOs.”
According to Telecom Regulatory Authority of India (Trai), as on December 2012, there were 54.52 million DTH subscribers, up from 44 million in 2011. That maybe a good achievement from the 4 million subscribers in 2007 but why have DTH players been outpaced by MSOs in the first two phases of digitisation? “In urban areas, MSOs continue to have an inherent advantage. Larger density helps them maintain their base and so they have been able to retain up to 80% of their subscriber base in both the phases,” says Neeraj Jain, partner at Deloitte. Globally, cable tends to be stickier than other technologies and inertia helps too. “If these guys didn’t convert during the past six years when they were being bombarded with marketing campaigns claiming superior digital services, there was no reason for them to convert when the mandate came,” says Azhar of Den.
But even if cable operators have come out ahead so far, there’s been no real benefit for them. Indeed, ask AK Rastogi — one of the pioneers of cable TV in Delhi, who started his LCO in 1992 and is president of industry body All India Aavishkar Dish Antenna Sangh (AIADAS) — and he’s not convinced what’s happened so far is really digitisation. He points out, “Till now, the focus of cable players has been on seeding set top boxes before DTH and other cable operators. Digitisation in its true sense hasn’t been carried out — fulfilling KYC [know your customer] norms, shifting billing responsibility from LCOs to MSOs, proper packaging of channels, providing value-added services such as interactive services, movies on demand, etc.”
But not everybody’s convinced that billing additional TVs will reflect in the MSOs’ accounts. Even after DAS has been implemented, many LCOs offer discounts for the second TV in a household. Bijal Shah, vice-president of research at brokerage firm, IIFL, points out that if MSOs continue to extend a similar discount, LCOs may exploit the loophole by classifying several first TV accounts as the second TV. “After all,” he points out, “the MSOs are not in direct contact with subscribers.” And even if Arpus do increase, a large part of it, says Shah, may go in paying taxes.
Before that, the huge hurdle of revenue sharing between the MSO and LCO has to be crossed. In May 2012, the Trai, which oversees television broadcasting industry as well, suggested a 35:65 formula for sharing subscription revenue between LCOs and MSOs. Four open houses to discuss the subject held in Delhi, Ahmedabad, Hyderabad, and recently in Bhubaneswar turned into noisy, free-for-alls with no agreement. “Broadcasters and MSOs have managed to fool Trai with lobbying. All MSOs do is set up a head-end with a one-time cost and give optical fibre connections to LCOs. The network belongs to the LCO: he builds, operates, services the system and nurtures customers for decades,” says an agitated Roop Sharma, president of the Cable Operators Federation of India (Cofi), the largest local cable operators’ body in India. She adds that the LCO business model will collapse with a mere 35% share of revenue. Cofi has challenged the arrangement in the Supreme Court and the matter is sub judice.
Yet, there are indications that as digitisation progresses and under-reporting declines, margins can expand. Hathway has been billing LCOs an average of Rs 65 per subscriber in the metros as of March 31 2013. By May, the figure was up to Rs 85, states an ICICI Securities report. Another glimpse of this transition is already visible in the consolidated operating profit margin (OPM) for both Hathway and Den. For Hathway it rose from 16.86% in FY12 to 25.90% in FY13. Similarly, for Den it rose from 11.19% in FY12 to 23.54% in FY13. Den’s Azhar indicates that “with 30-40% billing happening currently, already there are indications that ARPUs have moved 10%. We will have the exact numbers only when complete billing will be done by us.”
Going forward, too, while MSOs’ bargaining power has improved, it’s still not enough to tilt the balance completely in their favour as LCOs continue to enjoy monopoly over the last mile (See: Study in contrast). “The LCOs’ control over collection makes us sceptical about the implementation of revenue share on the lines suggested by Trai. Subscription fees are largely paid in cash and are not amenable to monitoring by the MSOs,” says Shah. While these issues are being sorted out, DTH operators could use the opportunity to woo subscribers over to their side. Question is, will they be able to do it?
From the start, DTH in India has been positioned as a premium offering. Helping sustain that image is its first-mover advantage in HD services, which DTH operators introduced in 2009. It’s not only about brand image — Arpu from HD subscribers is double that of SD (standard definition) subscriber Arpu. “The value of a HD subscriber is twice that of a SD subscriber (Rs 357 versus Rs 180 per month) and the payback period is also less by five (19 months, compared with 24 for SD). Therefore, DTH operators providing HD content are likely to be among the winners,” says Vikash Mantri, vice-president, ICICI Securities.
Cable operators, on the other hand, are only just waking up to the potential. “We have recently introduced HD set top boxes, at Rs 4,200. Once we see demand, we will renegotiate with our vendor to halve the price,” says Azhar. That shouldn’t take long — according to industry estimates, about 20-30% of the TVs sold in India last year were HD-enabled flat screens.
But HD is only part of the story. Going forward, DTH may well grab a larger slice of the pie because of the constraints faced by cable operators. The areas to be covered in the next two phases comprise of Tier 3 cities having about 36 million households and 60 million households in towns and villages respectively. The subscriber acquisition cost (SAC) for cable operators here is prohibitive — an IIFL report on Indian media pegs the cost at Rs 3,800 per cable subscriber compared with Rs 2,000 for DTH. The last-mile connectivity doesn’t exist or is highly scattered in these areas, making it expensive and arduous to hook new cable customers; it’s simpler in DTH, where each house has its own dish antenna.
While the prospect in the 3rd and 4th phase looks immense, DTH players are not exactly smacking their lips. “If a cable household is paying Rs 50 per month, I don’t want that guy because he won’t be able to pay my minimum fee,” says Venkatesh of Dish. Also DTH operators face the issue of capacity. As IIFL’s Shah points out, currently DTH can carry only 280 channels compared with 1,000 channels on a digitised cable network. “The only threat we face is that satellite space is controlled strongly by the government. Isro doesn’t have sufficient available capacity and even for foreign satellites, it’s a long, complicated process,” points out Tata Sky’s Nagpal. A March 2013 report by PwC estimates that the DTH industry’s requirement will increase from 73 transponders in 2012 to over 220 in 2017. The increase in number of HD channels — about 130 by 2017 — will add to the demand for C-band and Ku-band transponders. Adding capacity and subscribers will come at a cost. Do DTH and cable operators have the necessary funds to finance the next phase of growth?
Over the years, DTH operators have been increasingly subsidising set-top boxes in a bid to attract customers and stave off rivals. “When we launched DTH in 2003, we priced the set top box at Rs 4,999. We were not subsidising then and in fact, we were making little money. When the second DTH player came, we reduced the price to Rs 3,999, then Rs 2,999 and Rs 1,999 by the time the sixth player entered,” says Jawahar Goel, managing director, Dish TV. Other players, too, have kept their prices at rock bottom; even now, after the increase in tariffs of the past couple of years, there is a subsidy element of Rs 600-700 per box. The depreciating rupee adds to the burden on operators, since set-top boxes are mostly imported. Not surprisingly, operators are deep in debt and losses. Over the past five years, Indian DTH players have accumulated debt of Rs 7,500 crore and losses of Rs 9,000 crore according to ICICI Securities’ Mantri. “This is not sustainable,” he adds.
In the cable business, while the bulk of DAS cost is borne by MSOs, LCOs aren’t exempt from spending money. Rastogi of AIADAS points out even a small LCO with just 500 connections needs to invest at least Rs 3-5 lakh in upgrading wiring, amplifiers, joints etc., to make the network digital friendly. “Those who couldn’t afford this have ceded their customers to neighbouring LCOs and DTH,” he adds. MSOs haven’t had it easy, either. They had to procure set-top boxes in bulk to supply to their LCOs — in the past one year, MSOs are estimated to have seeded 25 million set-top boxes across the country. Each SD box costs at least Rs 1,600 (HD boxes cost more), and most MSOs have been selling to subscribers below cost — Den, for instance, charged Rs 700 for the set-top box, while Hathway offered it for Rs 799. Digicable’s Pillai says the company had trouble finding capital to seed 1 million boxes and so didn’t have adequate stock.
Cofi’s Sharma, however, questions the potential painted by MSOs to their investors. “Multi system operators have been approaching investors with unrealistic claims about their subscriber numbers and revenues. The investors call me to check and I give them a real picture. Then they step back from investing,” she says. While Sharma’s rants may seem partly justified, there is no doubt that sooner or later consolidation could be an impending reality.
Buy or be bought
It’s quite likely that the nascent DTH sector will see a shakeout. “India can’t sustain six DTH players, 10 MSOs and thousands of cable operators,” says Varun Gupta, director, KPMG. Most operators declined to comment on the possibility of a consolidation, although there is rumour about Reliance and Sun discussing such a possibility. Videocon’s Dhoot says he is open to acquiring other players. “I see tremendous scope and sense for consolidation. In a merger, the costs more or less remain the same but profitability goes up four times.”
Of course, there are practical difficulties in merging digitised networks: set top boxes and control systems are largely non-interoperable. And not all small operators are willing to give up control — and share revenue. Instead, says Cofi’s Sharma, many would like to become MSOs in their own right. She alleges that the government intentionally delayed issuing new cable regulations, leaving new operators little time to seek licences. “Several LCOs, distributors and independent cable operators wanted to upgrade themselves but with the regulations coming in only in April [the deadline was 31 October 2012 for first phase], they were left with no time.”
Will Winner take all?
Even as DTH and cable players are looking to cover more ground, the other stakeholder in this television business – namely the broadcasters — is in an enviable situation of making money from both. The customer, though, isn’t as lucky — he will get improved picture quality and service, but still won’t get freedom of choice and will pay more.
Until now, a broadcaster’s business model was primarily advertising-driven. For instance, in FY12, advertising accounted for 52% of Zee TV’s revenues and subscription, 31% (16% from cable and 15% from DTH). For Sun TV, advertising brought in 54% of revenue, cable accounted for 9% and DTH, 19%. Those ratios are likely to change.
So, will DAS mean an end to carriage fees? The short answer: no. The tradition is likely to continue as Trai is not exactly open to the idea of scrapping the fees. In fact, it has put out a consultation paper on the same to arrive at a mutually agreeable fee structure between broadcasters and distributors.
However, a softening in carriage fee contribution to revenues is getting visible. The share of carriage fees for Den fell from 55% of revenue in FY12 to 47% in FY13, but Azhar expects the same to be offset by an increase in subscription revenues. Pillai of Digicable, too, does not foresee a drastic drop in fees. He explains, “With an expenditure of Rs 400-Rs 500 crore a year, broadcasters can’t survive on subscriptions revenues. A MSO can make packs in such a way that some channels won’t be taken. Hence, broadcasters will keep paying carriage fees in order to protect their advertising revenues.” Besides, as more and more channels get launched and digitisation enters small towns and villages, broadcasters will be keen to grab a slice of new households to boost their ratings.
Though there have been instances of broadcasters acting tough, they have finally relented. In April 2013, IndiaCast, the global distributor for Viacom 18 (Colors, MTV and Comedy Central) refused to pay a higher carriage fee to Hathway and Gujarat Telelink. The MSOs promptly stopped airing its channels in 10-12 cities. The matter’s now been resolved but it’s a pointer to how things may move in the future.
The customer, on the other hand, doesn’t appear to be as lucky. Although billing is still to shift to the MSOs, they’ve already launched various packages to reach out to different customer groups. Most operators, including Den and Hathway, have four packages, with prices ranging from Rs 100 to Rs 275 a month; Rs 20 entertainment tax and 12.5% VAT is added over the base price, which was not the case earlier.
MSOs now hope to make money by excluding popular channels from the entry-level packages. None of the operators offers channels a la carte — although they are supposed to — and instead push add-on channel packages to drive up the monthly bill. The end result: the customer pays more than earlier, still doesn’t get only the channels he wants to see and knows further tariff hikes aren’t far away.
Ask Rastogi who will win the battle between cable and DTH and his lament begins: “They are all the same. DTH, MSOs, broadcasters. One owns the other; a third has a joint venture with another. They are all linked and will all make money. In the end, the customer will pay more and the local cable operator will earn less.”
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