Cable wars

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.”

If those examples are from opposite ends of the spectrum, consider Tejesvi Puri. He has two TVs in his Gurgaon flat and the total monthly cable bill from Digicable ranges from ₹300 to ₹350. “₹500 is the limit I have set mentally. If the bill jumps that, I will move to DTH,” says Puri. And no, he won’t mind forgoing the ₹2,000 he’s already paid Digicable for the set-top boxes.

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.

Long way to go

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 ₹25-30 per subscriber per month.)

How they stack up

Though relatively nascent, direct-to-home has as many players as the traditional cable TV segment

But the big reason why the government is actively pushing for digitisation is: plugging revenue loss. Industry estimates say LCOs generate close to ₹17,400 crore of subscription revenue every year but under-report that by about 80%, resulting in a loss of around ₹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 (₹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 ₹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.

Now leading

Meet Mohammad Ghulam Azhar, whose voice rings with satisfaction. “For every one set top box seeded by DTH in the first two phases, we have seeded 10 boxes. Every time an LCO went with a set-top box, the customer didn’t think twice and continued with cable,” says the COO of Den Cable Network, India’s largest MSO with 11 million subscribers across 150 cities. Den claims that even as its customer base went up from 10.7 million customers to 11 million, the number of digital subscribers have catapulted from around 3 lakh to 6 million, thus reducing the number of analogue customers to 5 million. Meanwhile, rival Hathway, owned by the Rajan Raheja group which also owns Outlook Publishing, managed to seed 2.5 million set top boxes in the first phase and 3.7 million set-top boxes in the second phase as on May 30, 2013. Hathway, whose top management was unavailable for comments, has been on a voluntary digitisation spree for the past six years. Beginning from 0.28 million STBs in FY07, it has reached 6.2 million STBs today. Before digitisation, that is, as on March 2012, it had 6.7 million analogue and 2.1 million digital subscribers.

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.”

From remote to direct control

DTH operators, on their part, are content with the progress. “Overall, DTH got 25% share in the first phase and we got 28% of that. We are more than happy with that,” says Venkatesh. Venugopal Dhoot, chairman, Videocon Group, points out that digitisation has worked well for Videocon D2H. “We have 8.5 million subscribers today against 5.4 million in March 2012. We have been ahead in acquiring subscribers during digitisation” says Dhoot. Tata Sky, too, claims that it is adding 8 lakh to 1 million new users each month. “We have got 1.5 million boxes sitting in our warehouses. There will be pockets where LCOs may not be ready. We can cover those areas as well,” points out Nagpal. Down south, though, the ambition is more restrained. Mahesh Kumar, CEO, Sun Direct, the largest DTH player in south India with 50% market share says, “Our challenge is to retain incremental market share. While south has always been our stronghold and makes economic sense at the current juncture, we will only target markets where we can repeat the south success story over the next nine to 12 months.”

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.

The other reason was price. DAS could have been the perfect opportunity for DTH players to acquire new customers by playing the price card. Instead, operators did the exact opposite. In the past two years, there have been three tariff increases (ranging from 15% to 25%, depending on the package). “We absorb service tax, entertainment tax, give subsidies on equipment. So far, we have been charitable but we need to keep pace with increasing costs,” says Salil Kapur, COO, Dish TV. The company has always been the first to hike prices and has been followed by other players on each occasion. But Sun Direct’s Kumar is confident that the arbitrage between cable and DTH is narrowing. “Cable Arpu has to go up tremendously if they have to generate a reasonable return on investment. We have had two price corrections over the past 18 months to bring prices more in line with the market, resulting in an increase in Arpu,” he adds. 

Hollow victory?

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.”

Until operations switch to the new regime, Arpus aren’t likely to climb, either — and this was a major promise of DAS for both DTH and the cable industry. Den’s Azhar agrees that the true picture will emerge only after MSOs start billing customers directly, which he expects to happen in two months’ time. “In the digital environment, the LCO will start monetising the second and third TV [in a household], which is incremental money,” he says. Around 20% of the total 20 million TV owners in the 38 cities own multiple TV sets. 

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. 

But some MSOs, though, have already cut deals with their LCOs — where Den has negotiated for 30-35% revenue share and hopes to take it up to 65%, Digicable has worked out a 50:50 arrangement that will come into effect once the MSO takes over billing. Another big MSO, IMCL, on the other hand, has challenged in the apex court another aspect of revenue sharing — the wholesale price of broadcasters at a ceiling of 42%. “At present, the sharing ratio is expected to settle down at an average of one-third each for the broadcaster, MSO and LCO, which may actually be made to work when billing issues settle down,” predicts Ashok Mansukhani, director, IMCL, which owns InCable.

Yet, there are indications that as digitisation progresses and under-reporting declines, margins can expand. Hathway has been billing LCOs an average of ₹65 per subscriber in the metros as of March 31 2013. By May, the figure was up to ₹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?

Advantage DTH?

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 (₹357 versus ₹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. 

Given its higher cost and the need for HD-ready television sets, off-take of HD services has been slow, but already about 5% of all DTH subscribers have made the switch. Globally, HD services account for over 40% of overall subscriber base. All DTH players now offer HD video recording set-top boxes at prices ranging from ₹2,890 (Dish TV) to ₹6,000 (Tata Sky, Videocon, Airtel). 

Cable operators, on the other hand, are only just waking up to the potential. “We have recently introduced HD set top boxes, at ₹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 ₹3,800 per cable subscriber compared with ₹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. 

Not surprisingly, MSOs don’t openly admit that phase 3 and 4 may well belong to DTH. Digicable’s Pillai admits that reaching the 70-million odd users in the next two phases is a challenge, requiring “immense capital”. Kumar of Sun Direct is already sensing a kill. “We expect acquisitions to really shoot up in the third and fourth phases where over 70% of the homes are going digital. These markets look for a strong regional flavor in their entertainment and are very value conscious.” However, Pillai does not expect DTH to make a clean sweep. “If that were so, DTH should have already taken these markets. These are cable markets. They are unhappy with cable quality but want only cable,” he asserts. Den’s Azhar believes phase 3 and 4 will be more of the same. He says, “If DTH couldn’t wean away brand-conscious subscribers from cable in the earlier two phases, there is no reason for us to believe that in the remaining phases, subscribers will behave any differently.”

While the prospect in the 3^rd and 4^th phase looks immense, DTH players are not exactly smacking their lips. “If a cable household is paying ₹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?

Money matters

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 ₹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 ₹3,999, then ₹2,999 and ₹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 ₹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 ₹7,500 crore and losses of ₹9,000 crore according to ICICI Securities’ Mantri. “This is not sustainable,” he adds.

Going forward, it is likely that tariffs and hardware prices will see further hikes. Meanwhile, DTH players are raising funds in other ways. Tata Sky and Videocon, for instance, are planning IPOs of ₹2,000 crore and ₹700 crore, respectively. Dish TV, too, has approval for raising up to $200 million and its promoters have already pledged more than half of their 64% holding to fund the venture. “The company should be able to fund six million additional subscribers from its current cash balance (₹360 crore) and expected internal accruals,” says Shah of IIFL.

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 ₹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 ₹1,600 (HD boxes cost more), and most MSOs have been selling to subscribers below cost  — Den, for instance, charged ₹700 for the set-top box, while Hathway offered it for ₹799. Digicable’s Pillai says the company had trouble finding capital to seed 1 million boxes and so didn’t have adequate stock. 

Meanwhile, Den has tied up its funding: the company recently got ₹600 crore from a private equity arm of Goldman Sachs, which Azhar believes is “good enough to fund the coming phases”. At IMCL, Mansukhani says the company has taken sufficient debt to fund digitisation for the next three years. “We have still not taken private equity funding or gone public; both options remain for further fund requirement,” he adds. 

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.”

While DTH players might be discussing consolidation behind closed doors, it is already a reality in the cable segment. In FY07, seven major MSOs had 25% market share, which is now up to 75% in FY11. Companies such as Den are old hands at inorganic growth — it gained its current size (11 million subscribers) by taking over 80 local cable operators across India in the past five years. The funding it has obtained from Goldman Sachs could continue to fuel its acquisitions drive. “The money we have raised is essentially to drive further consolidation,” confirms Azhar. “We realise that digitisation is a scale business. And phase 3 and 4 will offer many opportunities for consolidation.” 

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. 

Since analog can’t carry more than 80 channels, broadcasters pay operators carriage fee for a berth in the choked network (there are more than 500 channels aired in India currently). Over this, they pay a “placement fee” to ensure preferential placing in the channel line-up. Currently, carriage fee accounts for more than 50% of MSOs’ revenue and the broadcasting industry’s carriage costs (₹2,300 crore a year) exceeds its subscription revenue from cable (₹2,200 crore).

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 ₹ 400-₹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. 

While Hathway officials declined to comment, Gaurav Gandhi, COO, IndiaCast, says, “We have 35 channels; Hathway can’t do without them. Similarly, Hathway is a large network and we can’t do without it. You will see many such standoffs as the market matures.” But analysts do expect rationalisation in carriage fees over the next couple of years. As per Credit Suisse estimates, the annual carriage fees will come down by 15% from ₹2,000 crore to around ₹1,700 crore by CY16. 

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 ₹100 to ₹275 a month; ₹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.”