The Information and Broadcasting (I&B) Ministry has accepted the recommendations of the Telecom Regulatory Authority of India (TRAI) for implementation of digital addressable cable television systems in India, to transition from the existing analog cable network. Although the I&B Ministry has deferred the timelines proposed by TRAI and pushed the proposed sunset date for analog cable distribution from December 2013 to March 2015, in ICRA's view, the approval of TRAI's other recommendations by the ministry is a significant positive development for the Indian TV distribution.
In addition, other stakeholders in the value chain would also potentially benefit - broadcasters by way of increase in subscription revenues, government via increase in service tax collections, and customers from an enhanced television viewing experience.
In August 2010, TRAI had worked out a framework for implementation of digitization enumerating several measures such as fiscal incentives and right of way, and had given its recommendations to implement digitization of cable systems pan-India by December 2013 in a phased manner. Even as TRAI's proposed timelines were considered to be ambitious, in view of various sensitive issues involved such as eventual displacement of small multi system operators (MSOs) and marginalization of a vast majority of local cable operators (LCOs), besides the enormity of grassroot preparation and investments required for putting in place digital infrastructure, the recommendations were a pointer to the strengthening regulatory push for digitization of cable distribution network in India. The recent approval of TRAI's recommendations by I&B Ministry is expected to reinforce the cable digitization process. Having accorded its approval, the ministry has now sent back its proposal containing revised timelines to TRAI for comments before it could table the same before the Union Cabinet for final approval. The legacy analog cable distribution in India is currently replete with several maladies such as the practice of under-reporting of true subscriber base by LCOs which results in inequitable distribution of value amongst the key participants in the media value chain; near monopoly status of LCOs, and MSOs in various regions depriving the customers of alternatives; lack of standardization on pricing and capacity constraints curtailing the number of channels that could be carried. The onset of digitization would mark a paradigm shift in the cable distribution landscape overcoming the limitations in the analog cable systems. While digitization would structurally shift the balance of power away from LCOs and reduce industry fragmentation (which has already witnessed substantial consolidation over the last two years), the process would involve large investments across distribution platforms including cable, DTH and IPTV.
Already, aggregate investments worth around Rs. 2,000 crore have been incurred by large national MSOs toward acquisition of smaller regional MSOs and LCOs; and investments worth Rs. 13,000 crore have been incurred by DTH players toward customer acquisition. As per ICRA's estimates, to achieve complete digitization by March 2015, additional investments of around Rs. 15,000 crore would be required. While from the industry standpoint, this would imply the need for large fresh capital mobilization; from customers' perspective, this could lead to gradual increase in subscriptions costs over the medium term although in exchange for better service value. Considering the capital intensive nature of the industry, ICRA believes further consolidation would become imperative for the industry players to remain viable given the compelling need to achieve scale. Assuming the Ministry's proposed timeline for transition to digital cable by March 2015 gets final approval, the key risks to the pace of digitization process could be (a) the ability of distribution players to successfully raise incremental funds; (b) customers' response and acceptability of the value proposition offered by digitization; and (c) the level ofcompetitive intensity in the industry which may impair industry profitability.
TRAI's recommendations on implementation of Digital Addressable Cable TV Systems
In August 2010, TRAI had come out with its recommendations giving the roadmap for implementation of digital cable systems in India. Some of the key recommendations are enumerated below:
Migration to a digital addressable cable TV system to be implemented in four phases with sunset date as proposed:
Phase-I. In four metros by March 31, 2012
Phase-II. In all cities having a population of over one million, by March 31, 2013
Phase-III. In all other urban areas (municipal corporations/ municipalities) by November 30, 2014
Phase-IV. In the rest of India by March 31, 2015
Basic custom duty on digital head-end equipment and STBs to be reduced to NIL for three years (from 5 percent currently)
MSOs/LCOs to be eligible for seeking Right of Way on non-exclusive basis for laying optical fibre/cable network
Recently, the I&B Ministry has approved the recommendations given by TRAI, except the one related to the phased implementation roadmap for digitization. As per the Ministry, the timeline proposed by TRAI was optimistic considering (a) the paucity of set-top-boxes (STBs) required to be seeded at customer premises - a tall order in view of the large volumes of around 75 million involved1; (b) inadequate local manufacturing capacity of STBs at present; and (c) investments required to be made by MSOs toward setting-up of other digital infrastructure such as head-ends and related network equipment. Accordingly, the Ministry has revised the timelines for implementation of digital cable systems as given below:
Phase-I. In four metros by December 31, 2011
Phase-II. In all cities having a population of over one million, by December 31, 2012
Phase-III. In all other urban areas (municipal corporations/ municipalities) by December 31, 2013
Phase-IV. In the rest of India by December 31, 2013
ICRA's interaction with industry players suggests that even though the timelines have been pushed back by a period of more than a year, the revised timelines proposed by the Ministry seem realistic and would stimulate the cable digitization drive in India. With this, the digital addressable distribution system in India, which at present is being spearheaded by the seven DTH players, would see a far greater participation from the cable MSOs who are expected to have relatively better revenue and profit growth opportunities.
The distribution side of the value chain remains highly fragmented - though market structure changing rapidly with a thrust on consolidation.
The cable and satellite television market in India had emerged in the 1990s and has since then experienced a strong growth in terms of number of subscribers having grown from mere 400,000 in 1992 to around 90 million today, representing a CAGR of 35 percent for the last 18 years.
The channels seen on TV (pay channels or free to air, FTA, channels) are created by different broadcasters and transmitted from satellite to receiving stations (head-ends) owned by MSOs. The MSOs in turn re-transmit these signals through cables to the LCOs, who have their own last mile cable network to individual homes.
Under-reporting of subscriber base by LCOs leading to inequitable distribution of value.
In the absence of an addressable system, the subscription revenue transaction among the broadcasters, MSOs, and LCOs is currently undertaken either on a fixed-fee basis or on the basis of a negotiated subscriber base. Considering the strong bargaining power enjoyed by LCOs who own the last mile, the distribution of subscription revenue in effect remains heavily skewed in their favour. As per the industry estimates, LCOs declare only around 15 percent of their paid connectivity to MSOs and broadcasters. This not only deprives the MSOs and broadcasters of their fair share of value, but also results in service tax leakage for the government. The lack of trust and transparency in the business models of the industry has also led to frequent disputes between stakeholders and increased litigation incidences.
Non-standard pricing and local monopoly status of LCOs leading to sub-optimal customer service.
In a market survey commissioned by TRAI, it had observed that the average monthly cable bill for a subscriber varied widely from Rs. 149 in Kochi to Rs. 322 in Shillong, even though services being provided did not warrant such variation.This apart, there are instances where the cable charges are increased by LCOs for a locality arbitrarily. These shortcomings are the natural fallout of the local monopoly status enjoyed by most LCOs and small MSOs who are able to avert competition and thus prevent free market forces to keep prices under check.
Capacity constraints in analog cable stifling growth of new channels and introduction of technologically advanced content.
The number of television channels in India has grown at a rapid pace from two in 1992 to 120 in 2003 to around 600 at present. Arrival of a plethora of new channels in the Indian television space in the backdrop of limited bandwidth of the analog cable system, results in allocation of prime frequencies by MSOs to channels offering higher carriage (or placement) fee. Limited capacity, coupled with the absence of an addressable system, has also resulted in limited availability of subscription-driven niche content such as science, golf as well as technologically advanced content like high-definition (HD) channels. This trend is further fed by the inordinate dependence of broadcasters' revenues on advertising(less on subscription) impacting niche content offerings since focus tends to shift on advertisement friendly genres.
Implications of I&B Ministry's approval of TRAI's recommendations on various stakeholders broadcasters.
Broadcasters. Since digitization would bring about full addressability, it would eliminate the menace of under-reporting of subscriber base by LCOs. This will aid increase in subscription revenues for broadcasters. Further, the increased capacity of digital distribution channel is likely to spur greater investments by broadcasters toward niche, targeted and HD content and lead to diversification of their revenue streams. The carriage costs paid by broadcasters to distributors, which currently remain high in view of the limited bandwidth of analog cable, may decrease post digitization. However, the extent of correction would hinge on the growth in the number of channels going forward - a high growth is likely to maintain high carriage costs for broadcasters.
MSOs. Many of the large MSOs till now have remained heavily focused on inorganic growth (mainlythrough joint ventures with smaller MSOs) in a bid to acquire control over the last mile which is a key competitive advantage. With the threshold subscriber base having been secured, the industry appears set to pursue digitization next. Having indirectly acquired end-customers, the MSOs now face the challenge with respect to customer retention. For a secondary point acquisition, the industry players face the risk of losing the acquired LCO to another MSO; and for a primary point acquisition, there is the risk of losing the end-customer to alternate technology platforms like DTH and IPTV. Thus, it has become imperative for cable distribution companies (MSOs) to pursue digitization aggressively which could increase acquisition costs for competitors and switching costs for customers. The ministry's approval of TRAI's recommendations is expected to catalyse the MSOs' digitization thrust. With the necessary investments in digitization, MSOs get a direct access to the customer end, paving the way for better quality service and transparency in subscriber base. The direct access to customers effectively shifts the bargaining power from LCOs to MSOs. MSOs also benefit from this consolidation eventually leading to a greater bargaining power with broadcasters. The MSO alliance is discussing the possibility of (a) having a two-year lock-in for all LCOs to minimize churn in the industry and curtail the bargaining power of LCOs, and (b) allow MSOs to do the billing function (on the digital side), a function which is currently in the hands of the LCOs. The above measures would be significant in terms of potentially shifting the balance of power with the MSOs.
However, in ICRA's opinion, some of the key risks for MSOs would be as follows:
The ability to raise timely additional capital for pursuing digitization (purchase of STBs, head-ends and related network equipment): To completely effect switchover from analog to digital cable, the cable distribution players are estimated to require funding in the region of Rs. 15,000 Crore. In the past, the cable industry has been unable to attract the magnitude of funds as has been attracted by the DTH industry which has already expended close to Rs. 13,000 Crore toward capital expenditure, advertisement expenses, and funding of financial losses. Availability of funds in the DTH space (and direct access, without depending on intermediaries for last mile access) has been one of the key reasons why growth in subscriber base on DTH platform has outpaced the cable TV platform digitization. Once capital constraints for players in the digital cable space could get addressed, this segment is likely to narrow the gap with DTH in terms of the number of incremental subscriber additions.
The ability to protect themselves from the onslaught of alternate technology platforms, particularly DTH. The DTH industry7 has seen a strong surge in its subscriber base which has grown from around 3.5 million subscribers in CY2007 to 10 million subscribers in CY2008 to close to 30 million subscribers currently. Currently, the DTH industry is adding around 2 million subscribers per quarter. However, a large proportion of DTH subscriber base belongs to cable-dark areas (areas with limited or no cable access), which implies that DTH has significantly expanded the market and as such the perceived pace of market share loss for cable distribution companies is relatively lower. However, the strong brand awareness created by DTH players is increasingly expanding their footprint such that customer migration from cable to DTH is gathering momentum. Courtsey: ICRA Rating Services.
With HD viewing gathering momentum and IP migration in the broadcasting industry underway, studios and post-production facilities are making significant investment in increasing the scalability of their digital media equipment and services portfolio. The test and measurement instruments segment is piggy-backing on this and seeing increased spending by broadcasters, studios, production facilities, MSOs, and cable TV operators.