India's pay-TV industry will continue to have an enormous impact on consumption and investment trends in Asia Pacific, according to a new research report called Asia Pacific Pay-TV & Broadband Markets 2011, published by leading industry analysts Media Partners Asia (MPA).
Four trends are noteworthy in particular, according to MPA:
1. India's fast growing, six-player direct-to-home satellite (DTH) sector will overtake the United States next year as the largest in the world with an active subscriber base of close to 42 million versus a projected customer base of 35 million in the USA where two dominant and profitable groups compete in the market.
2. The local cable & satellite advertising market will surpass China by 2017, to lead the Asia Pacific region with US$5.6 billion in net revenues.
3. Three Indian companies - Sun TV, Zee and Star India - dominate the top 10 profit rankings for Asian pay-TV broadcasters but distribution platforms are yet to feature in the operator mix due to limited profitability.
4. Margins across the India pay-TV industry value chain are amongst the lowest of any emerging market due to cost inflation, competitive pressures, regulation and a reliance on legacy analog cable networks. Margin pressure will remain in the medium term but improve in the long-term as operating leverage improves.
Commenting on the findings of the report, MPA executive director Vivek Couto said:
Indiaremains Asia's largest pay-TV market opportunity in which revenue, cost and capital expenditures are growing at an alarming rate due to various dynamics, including macro growth, competition and digitization. Encouragingly, revenue growth is trending at optimum levels due to a strong economy a buoyant advertising market and the rapid growth of DTH. Yet, such is the extent of competition, cost and fragmentation that profit margins remain low, even for market leaders. We expect margins and value chain economics will improve in the long term, through digitization of cable networks, rising subscriber scale, improved cost control and strong advertising growth. Pricing power for pay-TV services will still be modest however, as ARPU growth will remain under pressure due to competitive and regulatory dynamics.
KEY TRENDS & FORECASTS
Approval from the Ministry of Information & Broadcasting to digitize cable networks across India by December 2014 is encouraging. This should help cable operators slowly close the wide gap with DTH in execution, innovation and capitalization. The government is also expected to harmonize FDI levels in pay-TV at 74% inJune 2011. This may also help accelerate capital infusion into cable.
Digital cable subs will reach ~20 million by 2015 and ~35 million by 2020. MSOs will leverage upgraded networks to ramp up broadband growth from a low base (reaching 3 million subs by 2015 and 6.5 million by 2020), focusing on high-speeds at competitive prices. The growth of mobile broadband will be exponential, anchored to 3G and broadband wireless access, reaching 78 million users by 2015 and 126 million users by 2020.
Total pay-TV subscribers are expected to reach 166 million by 2015 and 190 million by 2020. MPA projections measure pay-TV penetration after accounting for households that opt for multiple services (i.e. cable and DTH). On this basis, pay-TV penetration will grow from 79% to 88% between 2010 and 2020. DTH will be the main driver of subscriber growth, digital penetration and HD growth.
The active DTH subscriber base (i.e. paying customers only) will grow from 23 million in 2010 to 64 million by 2015 and 83 million by 2020, implying a 44% share of the overall market by 2020. The main challenges are transponder capacity, high churn, subscriber acquisition costs and limited pricing power but MPA sees four out of six DTH players generating free cash flow after 2015, driven by scale and cost control.
The pay-TV advertising market is expected to grow at an average annual rate of 17% over 2010-2015, driven by the economy, the positive impact of category competition and rate increases implemented by TV networks. Pay-TV subscription revenues will grow at a 12% CAGR over the same period to reach US$8.4 billion by 2015, driven by DTH and digitization of cable networks.
BROADCASTERS & INDUSTRY PROFITS
Pay-TV broadcasters generated US$2.9 billion in sales during 2010, up 18.5% year-on-year, driven largely by advertising growth. Average operating margins remain sub-optimal at less than 15, due to continued cost inflation. Competition is intense, as there are 550 channels in the marketplace despite limited spectrum on dominant analog cable networks. As a result, carriage and placement fees continue to grow for new entrants and, in some cases, existing players. According to MPA analysis, the carriage fee pool topped US$400 million in 2010, while total affiliate fees for channel suppliers on cable (i.e. excluding DTH) reached only US$425 million.
Operating margins remain low for market leaders such as Star and Zee (EBITDA margins trending at 20-25%, versus 30-40% in other emerging Asian markets), due to escalating costs across the value chain. This level of cost inflation is unlikely to moderate over the medium term, but operating leverage may improve as affiliate fees grow from digital cable and DTH.
Broadcasters will continue to benefit through advertising growth, DTH expansion, the slow digitization of the cable pipe, and the expansion of pay-TV audiences. Competition and fragmentation will remain significant pressures, while affiliate fee growth will come gradually rather than overnight. MPA sees total pay-TV channel revenues growing from US$2.9 billion in 2010 to US$6.3 billion by 2015 with advertising remaining dominant.
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