22 January 2007

Going Digital: The India Wave
By Niren Shah
Business Standard
(c) 2007 Business Standard Ltd.

Switch it on, and you surfed through a myriad of channels which you hardly ever watched. Switch it off, and you counted all the money that was being paid for the programmes you didn't know existed. And to top it all, the money wasn't really reaching those for whom it was being collected!

At the start of the decade, the Telecom Regulatory Authority of India, decided to introduce a shift towards digitisation of television broadcasting, which would ensure addressability of the end subscribers so that they can be identified, which was lacking in the earlier cable-operator-led regime of broadcasting and distribution of television content.

Time to recognise

The consumer ended up paying for services, which were never used by her, and the broadcasters were largely unable to gain their fair share of the revenues. The Cable Networks (Regulation) Amendment Bill of 2002 marked the shift, which introduced Conditional Access Systems (CAS) for delivery of pay channels in four metros. The intent of the Bill was to have “an addressable system for the cable operators to provide subscribers with a selective choice of content via the pay mode of television”. Pre-CAS, a large number of subscribers were not reported and accounted for, by the local cable operators (LCOs), and only a fraction of the actual subscription revenues reached the multi-system operators (MSOs) and broadcasters. The TDSAT ruling mandated a revenue sharing model in which broadcasters get about 45 per cent of the total subscription revenues, whereas the MSOs get about 30 per cent, and the rest is to be allocated to LCOs.

It was only at the start of 2007, when this Bill was finally enforced in southern parts of Delhi and Mumbai, and throughout Kolkata, while it was already operational in Chennai on an experimental basis. With the implementation of CAS, and more so, because of the confusion among subscribers, Direct-To-Home (DTH) services too are making in-roads with a growing number of subscribers every day across the country. According to Media Partners Asia, a Hong Kong-based independent media research consultancy, by the end of December 2006, there were about 72 million pay-TV homes of which 70 million were cable households and 2 million subscribed to DTH services. Again, this excluded the number of subscribers opting for free-to-air (FTA) DTH services such as DD Direct. The cable and satellite subscription industry is estimated to be worth Rs 8,400 crore by TAM Media Research. This industry is expected to grow at a CAGR of 30 per cent a year until 2012.

Smell the coffee

CAS met a sour response in Chennai when it was introduced in 2003, as that market is largely dominated by FTA channels. The notified areas in the other three metros, south of Delhi and Mumbai as well as Kolkata implemented CAS in January 2007. “For the areas under CAS, the potential number of CAS subscribers is close to 1.8 million homes, and we expect a penetration of more than 100 per cent, as a large number of households have more than one television sets,” claims Jagjeet Singh Kohli, chief executive officer, Wire and Wireless India (WWIL), a company hived off from the erstwhile Zee Telefilms. “About 2.5 million set-top boxes (STBs) will be installed in these areas,” says a confident Kohli. WWIL is one of the leading MSO in the country, apart from Hinduja TMT, Hathway Cable and Sun Cable Vision.

“MSOs have installed about 300,000 STBs in Delhi, Kolkata and Mumbai so far, thus translating into a penetration of about 25 per cent, of the 1.2 million homes in these areas, while there is demand for CAS emerging from other cities too,” says Vivek Couto, executive director and head of research, Media Partners Asia (MPA). Although Kolkata has still to catch up with the CAS fever, Mumbai and Delhi are the major markets where the CAS roll-out would cause a greater impact on the broadcasters, MSOs and DTH service providers, since subscribers in the two cities prefer pay channels to FTA channels unlike Kolkata.

According to a study by TAM Media Research, over 60 per cent of the subscribers in each of the two cities preferred pay channels. The scenario reverses in Kolkata and drastically so in Chennai. About 44 per cent of Kolkata's subscribers prefer pay channels, whereas only 10 per cent of Chennai's subscribers watch pay channels. However, as more areas come under the purview of CAS over the next few years, a large number of previously unreported subscribers will be declared, the revenues from which would be allocated among the broadcasters, MSOs and LCOs according to the TDSAT ruling.

A pick in the pie

Broadcasters and MSOs are clearly going to be the major gainers from the CAS roll-out. “WWIL has gained about 150,000 subscribers in the three cities by the first week of January, and claims that the roll-out of CAS will help it increase its revenues by about Rs 2-3 crore a month,” says MPA’s Couto. “With the roll-out of CAS, we're set to gain a larger share of the subscription revenue pie - 30 per cent as compared to 5 per cent pre-CAS, and our EBITDA margins are going to improve from a negligible amount earlier to range between 25 to 30 per cent post-CAS,” says Kohli of WWIL.

“Again, the price for each pay channel is set at Rs 5 a month, which is not going to remain the same forever,” adds Kohli, hinting at the upside potential of the business. Apart from the subscription revenues, CAS enables users to have interactivity available on digital cable, which would help increase the average revenue per user (ARPU) for the MSOs and LCOs. By 2015, about 30 million homes are expected to be governed by the CAS regime. This suggests the enormous potential waiting to be unleashed in stages for this industry over the next few years.

The DTH service providers, like Tata Sky and Dish TV, are going to be another set of gainers. (Tata Sky is not listed, while shareholders of Zee will also receive shares in Dish TV, which will get listed in a month or two.)

Tata Sky, which added about 3,000 customers a day a few months ago, adds about 7,000 customers a day now, whereas Dish TV adds about 6,000-8,000 customers every day, according to research conducted by MPA. “By the second week of January, Dish TV has about 2 million subscribers in its kitty, whereas Tata Sky has about 400,000 subscribers across the country,” says Couto. “We expect the number of DTH subscribers to reach over 15 million by year 2011,” he adds. This translates into a CAGR of almost 50 per cent a year for DTH subscriptions.

Leaving aside the initial investments made by consumers for DTH installation, and considering an ARPU of Rs 250 a month, the industry segment is already accounting for over Rs 900 crore a year, and expanding exponentially. Moreover, companies like Dish TV are making additional investments in their infrastructure to provide a host of value-added services, which in turn will add to the ARPU. Both Dish TV and Tata Sky have started offering interactivity during the viewing experience of news, sporting events and other gaming services to their users.

The TDSAT ruling leaves a 25 per cent share of the revenues for LCOs. A large number of LCOs have signed up with MSOs to partner with them, in turn making the MSOs into last mile operators (LMOs). Analysts predict this change-over as CAS is rolled out nationwide, suggesting that either the LCOs would organise and gain scale to become LMOs, or they will be completely eliminated from the value chain, as MSOs become LMOs. Already with DTH, the LCO is being eliminated, and the viewer is in a direct contract with the DTH service provider, which in turn deals with the broadcasters.

Stealing the show

Sitting at the top of the hierarchy are the broadcasters - the pay channels, who get 45 per cent of the share of revenues from the subscribers. Pre-CAS, hardly about 5 per cent of the total revenue collected made its way to the broadcaster, claim people from the industry. At that time, the industry was led by revenues earned from advertising, and subscriptions had a very small share in the pie, due to the under-declaration of the actual number of subscribers by LCOs. “With the digitisation of broadcasting and distribution of content over television, the industry will be able to tackle the addressability issue efficiently. This will result into a 100 per cent declaration as compared to a meagre 5-6 per cent declaration of the number of subscribers. At the first stage of implementation of CAS, we anticipate subscription revenues to increase by about five to six times,” says Atul Das, senior vice president-finance, Zee Network and Essel Group.

At present, the ratio of advertising revenues to subscription revenues is about 70:30 in favour of advertising on an average for broadcasters. As more locations are enveloped by CAS, and DTH services gain a significant consumer base, revenues from subscription for broadcasting companies are set to take up a significant proportion. “However, for the ratio to shift a bit more in favour of subscription revenues, it will take at least another three to five years”, analysts say. According to Couto, the ratio may well turn out to be 59:41 in favour of subscriptions over time.

Flying high

The markets have well anticipated the change about to take place in the financials of the leading broadcaster, and have responded accordingly. The stock prices of the leading broadcasters such as Zee Entertainment, NDTV, TV Today, TV 18 and Sun TV have been on a steady ascent over the past two months. The scenario is not different for MSOs like Hinduja TMT. The new kids on the block-Zee News and WWIL are doing well on the sd in the range of Rs 3,400 crore to Rs 4,800 crore by analysts will soon be listed. Among the listed broadcasters, companies like Hinduja TMT, Sun TV, TV 18 and NDTV have had a great run. However For new investors in media, waiting may be a good strategy.