Investing in Digital India - The Dynamics of Mandatory Addressable Digitization December 6, 2011 - Career Catalysts HRC Pvt. Ltd.
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Investing in Digital India
The Dynamics of Mandatory Addressable Digitization
December 6, 2011
Investing in Digital India | IContents 1. Executive summary 4 2. The digital mandate and its impact 6 3. Prospects for cable operators 15 4. International experience 20 5. About Media Partners Asia 24 II | Investing in Digital India
List of exhibits
Exhibit 1: The dynamics of digitization: Benefits and challenges 5
Exhibit 2: India digitization plan 6
Exhibit 3: A third of India’s TV homes have digital TV 7
Exhibit 4: Analogy between cable industry and movie exhibition sector 7
Exhibit 5: International markets: Consolidation and digitization lead to industry growth and value 8
Exhibit 6: LCO operating margins are >50% today 9
Exhibit 7: Government of India loses >US$1 bil. pa to underdeclaration 9
Exhibit 8: Projected subscribers in the National Broadband Plan 10
Exhibit 9: Digital cable TV will be affordable 10
Exhibit 10: Sensitivity of MSO to LCO revenue sharing in digital cable 11
Exhibit 11: Channel C&P fees have grown rapidly while subscription fee growth has been modest 12
Exhibit 12: Growth in Zee cable subscription fees has been minimal compared with DTH 12
Exhibit 13: Sub fees boost profits towards content investment 12
Exhibit 14: Valuations for cable/pay-TV companies in global markets 13
Exhibit 15: US cable stocks outperformed after 1996 14
Exhibit 16: MSO economics in digital cable 15
Exhibit 17: Number of permitted TV channels in India 16
Exhibit 18: FY 2011 C&P revenues for major MSOs in India 16
Exhibit 19: Comparison of reach amongst major MSOs 17
Exhibit 20: Phase I capEx requirements for national MSOs 17
Exhibit 21: Debt to equity ratio for major MSOs 18
Exhibit 22: Comparison of digital subs amongst MSOs 18
Exhibit 23: Broadband subscriber base of major MSOs in India (2011) 19
Exhibit 24: Hathway proforma P&L for cable TV & broadband 19
Exhibit 25: International markets: The regulatory path to digitization 20
Exhibit 26: Digital cable conversion trends, international markets 21
Exhibit 27: Digital cable TV ARPU dynamics, (3-year CAGR, %) 21
Exhibit 28: Multiple product sales in Taiwan cable 22
Exhibit 29: Cable business based on the growth of broadband digital bundles 22
Exhibit 30: Broadband is a key contributor to cable company revenues (FY 2011) 23
Exhibit 31: Cable leads US broadband net additions 23
Investing in Digital India | III1. Executive summary
Substantial benefits for industry and consumer per capita. In this context, digital cable TV in India will be
The government mandate to digitize cable networks across India affordable given heavy subsidies on STBs (currently subsidized
over four phases should be executed with success due to shifting at ~60-70% by MSOs), which will ensure that consumer
market dynamics, positive regulatory developments and broad spends fall within the 5% benchmark. Consumers will also
support from all industry stakeholders. Digitization will bring a benefit from new competition as digitization in metros ensures
significant transformation to the TV industry with a positive impact that seven DTH satellite platforms (including free service DD
also on the nascent broadband market. The current size of India’s Direct) compete for customers with digital cable operators.
cable sector is already ~US$4.5 bil., yet there is significant scope
for future growth considering low levels of digital and broadband §§ A cable transformation but not without challenge. About
penetration. Furthermore, with over 60,000 local cable operators US$8 bil. in investment is required to digitize the entire market.
(LCOs) the industry is highly fragmented, limiting ARPU growth The requirement is about US$300 mil. for Phase I, which we
and the adoption of new technologies. In conclusion, there are believe can be funded adequately amongst the national MSOs
major levers of growth to leverage as the industry consolidates and (see Section 4). Phase I represents ~10% of the analog cable
digitizes. Within the next three years, Media Partners Asia (MPA) universe in India.
analysis indicates major scope for last-mile consolidation by cable
multi-system operators (MSOs) as well as M&A amongst MSOs. For cable MSOs, we expect a 6x increase in subscriber
The rationale for consolidation amongst six direct-to-home revenues though not without at least a 20% churn in cable’s
(DTH) pay-TV operators will also grow while the digital mandate customer base to DTH. With addressable digital deployment,
gives these platforms and DD Direct, the free DTH service, ample subscriber declaration levels will increase from 15% currently
opportunity to gain market share in metropolitan areas. All of to 100%, while the retained ARPU will increase by 6x, after
these groups, along with broadcasters, will be able to participate assuming a 30% base case revenue share with the LCO.
fully in India’s high-growth consumption story. We highlight key Additional drivers and differentiators will come from bundled
benefits and issues: broadband and high-definition (HD) services. Broadband
will reduce the payback period on overall capital employed
§§ A boost for the government and the economy. If the current towards digitization. Under a bundled digital and broadband
analog cable distribution model remains in place and digital business model, the payback period could be reduced by a year
cable penetration remains limited, the potential cumulative to 24 months, as opposed to 36 months under a standalone
value of the tax receipts lost by the government would digital cable TV proposition.
reach US$11 bil. over the next decade or >US$1 bil. pa.
The government therefore has sufficient incentives to push The main challenges, apart from managing subscriber churn to
digitization and can also accelerate the process by offering DTH operators, are: (1) Carriage and placement (C&P) fees
tax incentives to a potential multi-billion-dollar industry. The will drop by about 20–50%; and (2) Incentivizing revenue-
government should also grant infrastructure status and tax sharing agreements have to be struck with LCOs in order
holidays to the cable sector. These, if granted, will provide to drive digital set-top boxes (STBs) into the home. Cable
better financing terms and improve internal accruals for cable operators will also be required to gradually transition their
companies, to be ploughed back towards investment in digital business model to a new ecosystem with the consumer as the
infrastructure. At the same time, wider and deeper pools of focal point. The challenge of transitioning from a current B2B
capital could become available from next year onwards if business to a B2C franchise is not be underestimated. MSOs
the government raises the cap on foreign direct investment will eventually look at exploiting their strength of locality by
(FDI) in cable TV from 49% to 74%. Digitization of cable increasing investment to create channels and content with local
networks should also help the government aggressively pursue relevance (i.e. news, events, infotainment, movies on demand).
India’s broadband goals and thereby help to boost economic
growth. Potentially, a 10% increase in broadband penetration Overall, mandatory digitization will result in consolidation of
would increase India’s GDP by ~1.5%. As of Sept. 2011, the cable industry. Larger operators will be keen to acquire
broadband per capita penetration in India was only 1%. In its the last mile as valuations for LCOs drop and operators
National Broadband Plan, the Telecom Regulatory Authority successfully develop skill sets and necessary infrastructure as
of India (TRAI) clearly sees a pivotal role for cable operators they transition to a B2C model.
in developing broadband infrastructure, with digital network
upgrades paving the way for broadband growth. §§ DTH opportunity. Phase I digitization in the four key metros
presents a potentially good opportunity for DTH operators
§§ Consumer choice. Digital cable TV will improve the consumer to grab high-ARPU customers and increase the platform’s
experience and resolve legacy issues from analog cable services. reach in larger TAM meter markets. MSOs envisage about
Consumers will gain: (1) More TV channels; (2) Attractive 15–20% churn in cable subs to DTH though some suspect this
tiering options with differentiated content across local, could grow to 30% in the early stages of Phase I deployment.
regional and niche genres; (3) A better viewing experience; and Subsidized HD offerings will also act as a key differentiator for
(4) Improved quality of service. Digital cable TV will also be DTH players as cable has yet to roll out HD services (with the
affordable for the consumer. As per international benchmarks, notable exceptions of Hathway and Digicable).
spending on pay-TV typically accounts for ~5% of GDP
4 | Investing in Digital India§§ Broadcasters. Digitization will help boost subscription new scale to the TV business with improved systems to raise
revenues for broadcasters and reduce dependence on transparency. This should result in significant value creation
advertising. Improved economics will also help broadcasters for investors with valuations and multiples of cash flow likely
launch niche channels with a premium focus while C&P fees to steadily grow in public and private markets.
will fall in certain markets and moderate in others. At the same
time, consumer adoption of certain programming tiers and India’s pay-TV distribution market is on the cusp of a high-
specific channels (over others) will ensure healthy competition, growth value phase similar to North America between 1998
while broadcasters will also be under pressure to produce and 2003, Korea during 2003-7, and Taiwan during 2005-10.
content with differentiation, premium quality (potentially Valuations for these companies in these markets during the
advertising-free) and with local relevance. high-growth value stage typically averaged 12–16x one year
forward EBITDA, versus the current trading average of 9-10x
§§ Investors. Upon successful implementation of the digital for India’s listed cable/pay-TV entities. We assume similar or
mandate, gradual consolidation of LCOs will become higher valuations for companies in India subject to successful
inevitable. This will shift the industry profits and value execution. Most investors, especially strategic companies, will
to centralized distribution platforms and broadcasters. likely take a wait-and-see approach, potentially making their
Furthermore, the corporatization of distribution will bring bets after Phase I is completed.
Exhibit 1
The dynamics of digitization: Benefits and challenges
Stakeholders Benefits of digitization Practical challenges MPA viewpoint
Government §§ Recover tax leakages of >US$1 bil. pa and §§ Limited scope to offer financial incentives, §§ Considering the current macroeconomic environment, it is fair
improve tax receipts in the long term from as it needs to tackle important impending to assume limited tax rebates from the government.
ARPU growth and VAS. issues sensitive to the economy. §§ Government should encourage foreign investors by increasing
§§ Enables cable operators to use digital the cap on FDI in pay-TV from 49% to 74%.
infrastructure to offer broadband, thereby
increasing broadband penetration and
boosting economic growth.
Consumers §§ Better viewing experience. §§ Mandatory one-time expense on STB/CPE §§ Consumer spend on CATV as a percentage to per capita
§§ Attractive tiering and a-la-carte options. (although subsidized). GDP is lower than the international average of ~5%. Intense
§§ More channels. competition will further improve affordability. Consumers will
§§ New and better services (broadband, HD, on- have choice of free and pay DTH in addition to digital cable.
demand and personalized) and strong QoS.
Cable MSOs §§ MPA base case assumes a 6x increase in §§ Transitioning from a B2B to B2C business. §§ Rules of the game are favorable to attain profitable growth.
subscription revenues. §§ Revenue-share arrangements with LCOs. However, the key risk lies in the execution.
§§ Bundled broadband will boost revenues §§ Break-even period in standalone digital service is 36 months;
and profits as well as provide competitive reduced to 24 months when digital cable is bundled with
differentiation. broadband.
Local Cable Operators §§ Now equipped to compete against DTH §§ Change in marketing from consumer pull §§ Expect a sharp drop in profits and valuations if digital challenge
services. to consumer push. is not met and DTH gains significant market share in the metros.
§§ Scalability to business from cross-selling
other services.
DTH Operators §§ Further boost to volume growth. §§ Increase in competitive intensity may §§ Delay in break-even period for operators.
§§ Access to high-ARPU urban consumers. increase SAC.
§§ Lack of a two-way return path for
broadband.
Broadcasters §§ Boost to domestic subscription revenues. §§ Surge in new channel launches will §§ Growth in domestic subscription revenues is important to attain
§§ C&P costs will reduce, boosting profits to intensify competition. the next leg of profitable growth particularly for incumbents.
be reinvested into producing improved and §§ Broadcasters will need to increase spends §§ Broadcasters will also see upside from technologically advanced
differentiated content. on branding and marketing. content (i.e. HD).
§§ Will need to produce differentiated
content to cater to ‘digital’ consumer.
Financial Investors §§ Investment options in larger, more stable §§ Risk of dilution as the industry goes §§ We expect valuation multiples for both broadcasters and
and scalable businesses with a clear path to through its early gestation period. distribution companies to expand, due to strong earnings
value creation. growth and stability in revenue profile (less dependence on
advertising revenues).
Strategic Investors §§ Access to a high-growth market and better §§ No controlling stake without higher FDI §§ India’s pay-TV distribution industry is on a cusp of a high-
scaled assets with more stable revenue cap in cable and DTH satellite operators. growth value phase similar to North America and Korea.
streams. Valuations for cable/pay-TV operators in these markets during
value phases was 12-16x forward EBITDA. Taiwan cable
companies that have embraced DTV still trade at >10x in the
private market.
Technology Service §§ Potential US$3 bil. opportunity for §§ Outside of a few national MSOs, the §§ In due course, consolidation will help address the practical
Providers technology service providers. market at large is highly fragmented, issues faced by vendors.
§§ The IT sector will also benefit as MSOs unorganized and lacks financial muscle.
develop a B2C model, requiring a host of Most seek vendor financing and have a
customer care services. reasonable probability to default.
Source: Media Partners Asia
Investing in Digital India | 52. The digital mandate and its impact
In November this year, India’s Union Cabinet approved an §§ Shifting market and structural dynamics. Four years on from
Ordinance mandating addressable digitization of cable networks 2007, there have been a number of key developments which
in key metros, starting in June 2012 with a Phase I rollout to should help kick-start digital cable deployment:
~10 mil. homes in Delhi, Mumbai, Kolkata and Chennai. The
government on Nov. 28 2011 tabled the Cable TV Networks §§ Industry support. Consensus building amongst cable
(Regulation) Amendment Bill 2011 in Parliament, clearing the path MSOs and broadcasters has grown significantly with
for digitization. The bill, piloted by the Ministry of Information & broad support towards the implementation of the digital
Broadcasting (MIB), seeks to digitize the entire cable sector by mandate. Moreover, both groups recognize the importance
Dec. 31, 2014. The impact on India’s US$7 bil. TV industry could of incentivizing LCOs, while LCOs are slowly recognizing
be transformational. In this section, we evaluate the mandate and the value of the digital imperative in the context of DTH
summarize the impact on key stakeholders. competition and growth. Broadcasters are also supportive
as each of the key groups understands the importance of
Third time lucky generating stable subscription revenues with the need to
Having tried and failed in 2003 and 2007, the 2011 government reduce reliance on advertising. The key will be to work
mandate to digitize India’s cable networks should be executed closely with operators to market viable channel packages
with greater success due to a change in market dynamics and to the consumer.
positive regulatory developments. Mandatory addressable digital
deployment technically implies that each set-top box (STB) must §§ Improved capitalization and scale. MSOs have better
be equipped with a conditional access card or system (CAS) access to capital markets than in 2003 and in 2007 with
and include billing and subscriber management systems (SMS). Hathway and DEN both listed. According to MPA analysis
This is important because out of the 8 mil. STBs seeded into and interviews, all major national MSOs are adequately
cable homes thus far, more than 3 mil. are without CAS. The funded for Phase I digital deployment (see Section 3). The
emphasis on addressable deployment, absent in 2003 and in cost of digital software and hardware has also fallen since
2007, is important as it: (1) Helps improve transparency and 2007, ensuring STBs plus the CA card cost about US$30–
reduce revenue leakage across the value chain; and (2) Provides 40 per unit in total including duties, compared with US$60
consumers with improved quality of service through SMS three years ago. A number of the MSOs (i.e. Hathway,
functionality. We highlight key aspects that should make for DEN) are also ordering digital STBs in larger volumes (i.e.
improved execution: >1 mil. pa), which helps bring costs down to US$30 per
unit or lower.
§§ All-inclusive and universal. With the new mandate, there are
no particular zones selected for digital deployment – all homes The key going forward is MSO execution along with
fall into the category in specified metros and cities. In addition, investments in marketing and customer service. At the
all channels (both pay and free-to-air) will be made available same time, wider and deeper pools of capital could become
via the STB, not just the pay channels as previously planned. available from the next year onwards if the government
Finally, the MIB has fixed analog sunset dates for various cities raises the cap on foreign direct investment (FDI) in cable
(see Exhibit 2) with a phase-wise switch-off. TV from 49% to 74%.
Exhibit 2 §§ DTH growth. In 2007, consumers had limited exposure to
India digitization plan the benefits of digital TV. Digital TV penetration of total
TV homes in the country was 7% in 2007, but has since
Phase Areas Implementation date No. of cities
Phase I Four metros - Delhi, Mumbai, Kolkata and 30 June 2012 4 grown to 33% (see Exhibit 3), driven largely by a 30 mil.
Chennai aggregate net subscriber base across six direct-to-home
Phase II All the cities having a population over 31 Mar. 2013 38
1 mil.
(DTH) satellite pay-TV platforms, and 12–13 mil. homes
Phase III All other urban areas (municipal 30 Sept. 2014 n/a through the free platform DD Direct from Doordarshan.
corporations/municipalities) across the
The growth of DTH has provided consumers not only
country
Phase IV Rest of India 31 Dec. 2014 n/a with choice but also quality through improved viewing
Source: MIB experience, more channels and new services such as
HDTV, pay-per-view (PPV) and digital video recorders
§§ Price regulation. The retail pricing of digital cable TV services (DVRs). At the same time, DTH operators have worked
will be left to market forces with a floor price established closely with broadcasters to program and retail attractive
at Rs150 (US$3.3) per month. Previously, there were price packages of channels at competitive prices with tiered and
caps on channels (i.e. Rs5 per channel), limiting upside for a-la-carte options. DTH operators have benefited through
broadcasters and distribution platforms, while there were subscriber growth and, more recently, improved ARPUs
other regulatory intrusions on retail pricing and revenue while broadcasters have gained through subscription
sharing across the value chain and STB schemes/promotions. revenues as DTH operators spent a combined ~US$350
Wholesale pricing on digital cable is likely to be capped at 42% mil. on pay-TV content in 2010.
of analog cable rates, following DTH regulations implemented
by the Supreme Court in 2011.
6 | Investing in Digital IndiaExhibit 3 required to digitize the entire analog market. The requirement
A third of India’s TV homes have digital TV is about US$300 mil. for Phase I, which we believe can be
funded adequately amongst the national MSOs. Yet Phase
60 DTH Free mil.) 33% 35% I represents only ~10% of the analog cable universe in
DTH Pay (mil.) 27% 30% India. At some point, the government will need to step in to
50
Digital Cable (mil.) facilitate financing through tax incentives and raising FDI
25%
Digital subs (mil.)
40 Digital Pen./TVHH (%) 20% limits. Encouraging investment from foreign strategic players
20%
30 14% will bring in financial support and expertise, and help boost
15% industry consolidation. Granting infrastructure status to cable
20
7% 10% operators will also be important as it will help companies
10 3% 5% secure funding and credit at favorable rates.
0 0%
2006 2007 2008 2009 2010 2011 Consolidation and digital to drive growth
Source: Media Partners Asia The current size of India’s cable sector is approximately Rs270
bil. or US$4.5 bil., an already significant size. Yet, there is a
§§ National Broadband Plan. Another key pull towards the significant scope for future growth considering low levels of digital
digital mandate is the National Broadband Plan, which as per and broadband penetration. There is also scope for increases in
recommendations from the Telecom Regulatory Authority of cable TV penetration as only 60% of India’s households have
India (TRAI), prioritizes the role of cable operators in driving TV sets. Furthermore, with over 60,000 LCOs the industry is
broadband growth across India. A key means to achieve this highly fragmented, limiting ARPU growth and adoption of new
end is digitization, which will help develop two-way cable technologies. In conclusion, there are major levers of growth to
networks and allow cable operators to offer broadband leverage as the industry consolidates and digitizes.
services bundled with digital cable TV services. Broadband
will help improve the payback periods for cable operators Within the next three years, we see significant scope for last-mile
offering digital services, as we explore in Section 3. This has consolidation by MSOs (i.e. vertical M&A) and also see some
also been the norm in international markets (see Section 4). scope for horizontal M&A amongst MSOs as Phase II and Phase III
digital deployment get underway. The rationale for consolidation
§§ Pricing and financing. For successful on-the-ground execution, amongst six DTH operators will also grow. Significant scale
the Ordinance gives the right of way to cable operators, through consolidation is important as it helps operators to: (1)
subject to certain conditions. However, in the month since the Reduce the cost of capital expenditure on digital and broadband
approval of the Ordinance, there has been limited activity on technologies; (2) Increase bargaining power on content and reduce
the ground. This is because the industry still awaits clarity on programming costs as a proportion of total revenues; and (3) Bring
certain critical aspects, particularly: (1) Pricing for the basic tier new synergies and cost savings to marketing and customer service.
digital package; and (2) The number of free-to-air channels to
be included under the basic tier package as well as key genres Taking a top-down approach, India’s GDP is on a steady upward
for the basic pack. For now, cable operators are modeling and trend (both on relative and absolute basis), witnessing a “J-curve”
strategizing with sensitivity analysis on parameters of pricing, growth across various consumer discretionary sectors. In a domestic
cross-selling products (cable TV, broadband and HDTV, see context, the analogy can be drawn from a relatively smaller Indian
Section 3), and funding options. exhibition industry, wherein multiplexes have been able to monetize
footfalls in various ways, benefiting key stakeholders (see Exhibit 4.)
The approved Ordinance also makes it obligatory for every Benchmarking various parameters to international markets also
cable operator to maintain a profile of subscribers through suggests a profitable and scalable growth in the coming years with
SMS in addition to bringing in addressability. This would plenty of investment opportunities for both financial and strategic
imply more incremental capital expenditure on digital STBs investors (see Exhibit 5). This has certainly been the case in the US,
as well as an upgrade of infrastructure across LCO nodes Korea, Taiwan and Japan where digitization, broadband growth
to create an entire telecom-like ecosystem for customer care and FDI have helped drive the overall growth and profitability of
services. About Rs400 bil. or US$8 bil. in investment would be the cable industry.
Exhibit 4
Analogy between cable industry and movie exhibition sector
Consolidation of Indian exhibition industry through multiplexes Consolidation of Indian C&S industry
Adoption of new technology §§ Digital cinemas and screening of 3D movies garner 2.0-2.5x of normal multiplex ATPs. §§ Offering digital and HD STBs with option for DVRs.
Addressability §§ Addresses black ticketing and tax leakages. §§ Addresses leakages in subscription revenues.
Choice of content to consumers §§ Multiple movies screened, encouraging investments towards new genres of film content. §§ Encourages launch of new niche channel genres.
Growth in pricing §§ Pricing of exhibition industry has substantially improved. Today, multiplexes represent §§ Can charge premium pricing for offering more channels
~10% of around 11,000 screens (multiplex and single-screen theaters), but account for with differentiated content and improved signal quality.
~35% of domestic box office collections.
Cross-selling of services §§ Monetize footfalls for advertising revenues and foray into allied entertainment businesses. §§ Cable TV + HDTV + Broadband
Source: MPA analysis
Investing in Digital India | 7Exhibit 5
International markets: Consolidation and digitization lead to industry growth and value
Country Year Pre- Year Triggers Year Key events during Year Post- Growth trajectory Digital pen./ Cable
consolidation consolidation consolidation cable TV subs broadband
market share
USA 1970 50+ large 1994 DTH launches 1996 US West Inc acquisition 2011 Top 5 players: 85 §§ Cable (CATV & BB) 85% 55%
MSOs of Continental % market share of industry revenue
Cablevision total CATV subs grows at 9% CAGR
(2005-2010)
1996 The 1998 AT&T buys TCI in US$48 §§ Average operating
Telecommunications bil. deal margin of 40%
Act and cable rate
deregulation
1997 Digital cable launches 2001 AT&T merged its cable
business with Comcast,
creating world's largest
operator with 22 mil.
subscdribers
2005 Digital cable passes 2010 Comcast buys NBCU
30 mil. subs
UK 1980s 50+ players Late DTH gained market 1994 International CableTel 2011 Virgin Media: 95% §§ Cable (CATV & BB) 98% 25%
1980s share acquired Insight market share of industry revenue
Communications total CATV subs grows at 5% CAGR
(2005-2010)
1991 Rights granted to 1998- NTL acquired Comcast §§ Average operating
cable companies to 99 UK, ComTel, Diamond margin of 37%
offer telephony with Cable, and Cable &
TV services Wireless
2006- NTL acquired Telewest
07 Global
Virgin acquired NTL
and rebranded it Virgin
Media
Japan Pre 686 players 1993 Regulation eased, Late Larger MSOs acquired 2011 Top 3 players: 65% §§ Cable (CATV & BB) 80% 15%
1993 companies allowed to 1990s small cable operators market share of industry revenue
own more than one total CATV subs grows at 9% CAGR
operator (2005-2010)
Government's 2000 J:COM and TITUS §§ Average operating
mandate for complete Communications margin of 43%
digitalization by 2010 merge, with Liberty and
1998 FDI increased to Microsoft emerging
100% as major investors
in partnership with
local conglomerate
Sumitomo.
Taiwan 1980s 600+ players 1996 Government's thrust 1996- Larger MSOs acquired 2010 Top 4 players: 80% §§ Cable (CATV & BB) 10% 16%
- 2000 towards digitization; 2003 local cable operators market share of industry revenue
FDI at 60%. total CATV subs grows at 9% CAGR
(2005-2010)
2009 Full scale launch of 2004 Carlyle acquires kbro §§ Average operating
digital cable margin of 50%
2005 Macquarie buys stake
in Taiwan Broadband–
continued consolidation
2006 MBK buys stake in CNS
2009 Tsai family buys kbro
2010 Want Want consortium
buys stake in CNS
Korea Late 1,000 players 2000 Government mandate 2001- Various MSOs merge 2010 Consolidation §§ Cable (CATV & BB) 30% 20%
1990s for consolidation 06 with regional cable continues; top industry revenue
creating 108 players operators 5 players: 75% grows at 10% CAGR
market share of (2005-2010)
total CATV subs
2001 Government mandate 2003 Goldman Sachs buys §§ Average operating
for digitization into C&M, largest cable margin of 42%
MSO
2002 Launch of DTH 2006 Carlyle group invests
in cable
2003 Cable FDI increased 2007 Macquarie Group and
to 49% MBK Partners acquire all
2007 Full-scale launch of of C&M
digital cable
Source: Media Partners Asia
8 | Investing in Digital IndiaImpact of digitization on key stakeholders Exhibit 6
Digitization and consolidation of the pay-TV landscape will have LCO operating margins are >50% today
a significant impact on players across the value chain. Below we
LCO economics (per month) Remarks
evaluate some of the quantitative and qualitative impact on key
Total subs per LCO 1,000
stakeholders: ARPU Rs 176
Declaration % 15
§§ Government. Over the last five years, the DTH sector has Revenue to LCO Rs 176,000
Declared revenue Rs 26,400
brought in addressability and more importantly served the Service tax @ 10.3% Rs 2,719 Applied only on declared
government’s objective of reaching consumers in remote, revenue.
cable-dark areas (i.e. rural areas, small towns). And, while Entertainment tax @ Rs16 per month Rs 6,400 LCOs pay e-tax on ~40% of
their subscriber base, as per our
subscription revenues for the DTH sector have grown by 150% discussions with the industry.
CAGR CY 2005-10, it has paid ~30% of these revenues to the Content cost (or as passed to MSO) Rs 26,400
government in the form of taxes (service and entertainment SG&A expenses @ 25% Rs 44,000
Operating income Rs 96,481
taxes and licence fees), excluding the customs duty payable on OPM % 55
import of hardware equipment. Income tax @ 33.99% Rs 4,919
Net profits Rs 91,562
In the cable market, legacy systems residing in TAM meter NPM % 52
markets have carved out a business model depending heavily Source: MPA analysis
on carriage and placement (C&P) fees. As a result, cable
operators have not been incentivized to invest in digital
infrastructure. This means that only 6% of total cable TV
homes have been digitized as of Dec. 2011. At the same time,
during the past five years, MSOs have benefited from C&P
fees and LCOs have profited from underdeclaration in the
analog marketplace (as illustrated in Exhibit 6).
Furthermore, if the current analog cable distribution model
remains in place and digital cable penetration remains
limited, the potential cumulative value of the tax receipts
lost by the government will reach ~Rs480 bil. or US$11
bil. (over the period FY 2012 to FY 2020), exceeding the
Rs400 bil. investment to be borne by the industry to bring
in digital-led addressability across India (see Exhibit 7).
The government therefore has sufficient incentives to push
digitization and can also accelerate the process by offering
tax incentives to a potential multi-billion-dollar industry.
Exhibit 7
Government of India loses >US$1 bil. pa to underdeclaration
Potential government revenue breakdown 2012 2013 2014 2015 2016 2017 2018 2019 2020
Total pay-TV HHs mil. 138 149 158 166 172 178 182 185 188
Total industry size Rs mil. 297,367 328,742 354,435 378,225 399,095 415,514 430,201 440,653 451,188
Analog cable TV HHs mil. 88 87 85 82 80 77 75 73 70
Analog cable ARPU/mo. Rs 179 184 187 190 193 195 197 198 200
Analog cable industry size Rs mil. 189,615 191,734 190,167 188,000 185,194 181,246 177,282 172,386 168,511
Official subscriber declaration % of analog subs 15.0 15.5 16.0 16.5 17.0 17.5 18.0 18.5 19.0
Declared analog subscription revenue Rs mil. 28,442 29,719 30,427 31,020 31,483 31,718 31,911 31,891 32,017
Service tax system leakage @10.3% on Rs mil. 16,601 16,688 16,453 16,169 15,832 15,401 14,973 14,471 14,059
subscription revenues
Declared subs for e-tax payment % 40 40 40 40 40 40 40 40 40
E-tax system leakage @ Rs16/mo. Rs mil. 10,169 10,004 9,763 9,499 9,212 8,923 8,639 8,358 8,089
Income tax system leakage @ 33.99% on Rs mil. 30,130 30,288 29,863 29,347 28,736 27,953 27,176 26,265 25,517
assumption of 55% OPM for LCO
Total govt. tax evasion due to Rs mil. 56,900 56,979 56,078 55,015 53,780 52,278 50,789 49,094 47,664
underdeclaration
Source: MPA analysis
Investing in Digital India | 9Essentially, the government should move on important §§ Consumers. Consumer demand, including the willingness
recommendations made by TRAI to grant infrastructure to pay and affordability, will be critical for the success of
status and tax holidays to the cable sector. These, if granted, mandatory addressable digitization.
will provide better financing terms and improve internal
accruals for cable companies, to be ploughed back towards Encouragingly, since 2007, consumer adoption of digital pay-
investment in digital infrastructure. Furthermore, improved TV services on DTH has grown at exponential rate. With
bank financing terms will help boost digital cable deployment respect to the digital cable mandate, both government and
in Phase III and Phase IV markets, as national cable MSOs industry stakeholders will have to work together to create
have limited presence in these areas and the financial burden consumer awareness. Digital cable services will invariably
will be assumed by smaller, independent cable operators. give consumers the opportunity to resolve some of the issues
they have faced with legacy analog cable systems. Consumers
Digitization of cable networks should also help the government will also have more choice amongst multiple digital networks:
aggressively pursue India’s broadband goals and thereby help digital cable, a free DTH platform (DD Direct) and six pay
to boost economic growth. According to the World Bank, a DTH platforms.
10% increase in broadband penetration increases GDP of a
developing country by ~1.5%. As of Sept. 2011, broadband Consumers will also have an immediate benefit of choice
per capita penetration in India was 0.9% (versus 12% for with more channels, a better viewing experience, attractive
China and 9.2% for Brazil), suggesting a massive potential tiering options and improved quality of service. In due course,
to improve broadband infrastructure with a positive impact favorable economics to launch niche channels will result in
on India’s GDP. In its National Broadband Plan, TRAI clearly segmentation of genres, bringing more relevant and targeted
sees a pivotal role for cable operators in developing broadband content to viewers.
infrastructure, given the fact that there are more last-mile cable
subs in India than fixed line connections, and upgrading cable Despite consumer willingness to pay for the digital STBs (at
to digital status will pave the way for broadband. TRAI’s a modestly subsidized cost) in recent times and the benefit of
recommendations target 71 mil. and 154 mil. broadband higher ARPUs, a number of LCOs were unwilling to install
connections by the end of 2012 and 2014, respectively, with STBs into consumer homes as most were unwilling to reveal
cable having a 40–50% market share. Therefore, pushing their actual subscriber base to the MSO. With mandatory
cable digitization is in the government’s interest as it helps digitization, LCOs would be forced to educate and encourage
boost broadband penetration with modest additional capital subscribers to install digital STBs or risk losing these customers
expenditure for cable companies. to DTH.
Exhibit 8 All of this is likely to result in healthy competition between
Projected subscribers in the National Broadband Plan platforms, which should ensure affordable prices for the
consumer. As per international benchmarks, spending on
Wireline broadband Wireless Total broadband
subscribers (mil.) broadband subscribers (mil.)
pay-TV typically accounts for ~5% of GDP per capita. In this
subscribers (mil.) context, digital cable TV in India will be affordable especially
Year DSL BB Cable BB Total Total Total considering the heavy subsidy on STBs, currently subsidized at
2010 11.0 - 11.0 - 11.0
2012 16.6 28.0 44.6 26.5 71.1 ~60-70% by cable companies (see Exhibit 9).
2014 22.2 72.0 94.2 59.7 153.9
Source: TRAI Consumers also have a cheaper option over digital cable
and may choose the free DTH service from DD Direct.
Doordarshan plans to increase the number of channels offered
on its platform to 150 by end of this calendar year and an
Exhibit 9
Digital cable TV will be affordable
Sensitivity Analysis
Average monthly ARPU Rs 200 200 200 200 200 200 200 200 200 200 200
Annual subscription Rs 2,400 2,400 2,400 2,400 2,400 2,400 2,400 2,400 2,400 2,400 2,400
One-time payment Rs 1,600 1,600 1,600 1,600 1,600 1,600 1,600 1,600 1,600 1,600 1,600
Subsidy on landed cost of STB % 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
Total annual payout Rs 2,400 2,560 2,720 2,880 3,040 3,200 3,360 3,520 3,680 3,840 4,000
Assumed exchange rate Rs 50 50 50 50 50 50 50 50 50 50 50
Total annual payout US$ 48 51 54 58 61 64 67 70 74 77 80
Per capita GDP 2010 US$ 1,371 1,371 1,371 1,371 1,371 1,371 1,371 1,371 1,371 1,371 1,371
CATV spend as % of per capita GDP % 3.5 3.7 4.0 4.2 4.4 4.7 4.9 5.1 5.4 5.6 5.8
Current average subsidy offered by MSOs in India
Consumers’ annual spend on CATV as a proportion of GDP per capita
Source: MPA analysis
10 | Investing in Digital Indiaadditional 100 channels are planned in 2012. Meanwhile, in and valuations will fall to new lows. LCOs are slowly
Tamil Nadu, the state government has decided to nationalize becoming aware of this risk and are therefore likely to
cable services by reviving the state-owned cable company allocate more resources towards network upgrades and
Arasu to offer services at highly subsidized rates. stronger partnerships with MSOs. In this context, MSOs
will grow scale from an increase in the number of paying
§§ Pay-TV operators. The distribution sector at large will benefit subscribers, followed by ARPU growth. The growth and
from consolidation, while winners will emerge amongst stability of subscription revenues is important as C&P fees
operators with the intent to digitize and the skill to execute, will fall for MSOs (see Section 4).
thereby gaining more scale to move up the industry value
chain. We highlight key benefits: We expect the industry to eventually move towards a free
pricing model as per the new addressable digital regime.
§§ A new business for cable operators. The impact on cable Currently, CAS regions have channel pricing capped at Rs5
operators should prove transformational. Traditionally, per month per channel, though this is not applicable in the
MSOs have focused on increasing reach through LCO new digital regime. Channel pricing on digital platforms
acquisition or JVs, which could be traded in return for is fixed at 42% of analog cable rates. By the time the
higher C&P fees from broadcasters. Digitization will government implements Phase II of the digital mandate,
enable operators to transform from a B2B business into a the weightage of digital platforms will be significant. As
B2C franchise, offering multiple services to the consumers a result, pricing will be eventually determined by market
with billing, subscriber management and customer service. forces, and cable consumers too will get a-la-carte and
MSOs will also be able to leverage their strength of locality tiered choices of channels and content.
to offer new local channels and movies/entertainment on-
demand. In the current phase with the capEx borne by MSOs
towards investing in STBs and network upgrades, M&A
The biggest risk MSOs face is execution, which is currently activity will be limited (i.e. MSOs acquiring LCOs). In such
difficult to quantify. Successful conversion of analog to a scenario, MSOs will have to rely on secondary points or
digital will enhance the availability of more TV channels, LCOs to collect subscription revenue for a commission.
compelling packages and value added services (HD, Revenue-sharing arrangements between MSOs and LCOs
broadband, DVR and on-demand). This should allow is therefore a critical issue which currently lacks clarity.
cable operators to boost pricing power and grow ARPUs, Exhibit 10 suggests the impact of MSO profitability under
especially in terms of generating higher yields from various revenue-share arrangements with LCOs. Based on
bundled broadband services. However, cable operators our discussions with MSOs, we expect LCOs to retain at
will need to make investments to create a new ecosystem least 30% of revenues in Phase I with MSOs at around
including customer payment options, VAS revenue-sharing 35%. Note however that MSOs currently get ~10–15%
models and call centers, all of which are currently available of share of subscriber ARPU. However, in the digital
in DTH. model, MSOs will have to bear the majority of cost (~90%
including STBs, as well as billing and call centers).
Analog switch-off also leaves LCOs isolated and exposed
if they choose not to digitize. Businesses could collapse
Exhibit 10
Sensitivity of MSO to LCO revenue sharing in digital cable
Common Size P&L Units Analog Digital LCO share LCO share LCO share Remarks
(base case) @ 35% @ 40% @ 45%
Monthly subscription revenue Rs 100 130 130 130 130 §§ 30% increase in ARPU in digital cable post mandate.
Declaration by LCO % 15 100 100 100 100
Subscription revenue to LCO Rs 85 39 46 52 59 §§ Our base case assumes that LCOs will take 30% of digital cable
sub fees.
Subscription revenue to MSO Rs 15 91 85 78 72
C&P revenue to MSO (net of service tax) Rs 15 8 8 8 8 §§ Industry discussions suggest C&P revenues will decline by 50%.
Content payment to broadcaster Rs 14 52 52 52 52 §§ MSOs such as Hathway make a ~10% margin on C&P net
of content cost. We assume 40% share of sub revenue from
consumer in a digitized scenario.
MSO gross profit Rs 17 47 40 34 27
Churn to DTH platform % - 30 30 30 30 §§ Assuming a 30% churn of cable subs to DTH will still result in a
2x increase in gross profits for MSOs in our base case scenario.
MSO gross profit net of churn to DTH Rs - 33 28 23 19
MSO gross profit margin % 55% 33% 30% 27% 24%
Note: Excludes STB rental and cost
Source: MPA analysis
Investing in Digital India | 11§§ DTH could capitalize on new opportunity. Within Exhibit 11
the past six years, DTH operators have grown from a Channel C&P fees have grown rapidly while subscription fee
gross subscriber base of less than 500,000 to ~40 mil. growth has been modest
as of end-Oct. 2011, primarily gaining growth in cable-
(CYE Dec.) Pay-TV channel sub Cable carriage & Net cable fees to
dark areas. Phase I digitization in four key metros offers revenues on cable placement fees pay-TV channels
a good opportunity for DTH operators to grab high- 2005 341 90 251
ARPU customers and increase reach in larger TAM 2006 380 115 265
meter markets. Based on our discussions, MSOs envisage 2007 396 135 261
2008 408 260 148
about 15–20% churn in cable subscribers to DTH. Some
2009 418 285 133
operators suspect this could grow to 30% or more in the 2010 430 303 127
early stages of Phase I deployment. 2011 445 316 129
Source: MPA analysis
Subsidized HD offerings will also act as a key differentiator
for DTH players as cable has yet to roll out HD services Exhibit 12
(with the notable exceptions of Hathway and Digicable). Growth in Zee cable subscription fees has been minimal
HDTV is expected to be a key value driver in the compared with DTH
digitization process. MPA analysis indicates that ~1 mil. DTH subscription fees
pay-TV homes will have HD pay services by Mar. 2012, Cable subscription fees
1,400
largely through DTH, only 18 months after launch and International subscription fees
1,200
in spite of a sluggish economy. ARPUs for HDTV are also
attractive at about US$6–8 per month on average. 1,000
800
Rs mil.
§§ Broadcasters. TV content providers and broadcasters will 600
benefit from subscriber addressability. This will help boost 400
subscription revenues and reduce dependence on weekly TRP-
200
linked (TRP = television rating point) advertisement revenues.
0
Broadcasters can also identify and launch dedicated channels Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
for a specific niche which may have smaller advertising 08 08 08 08 09 09 09 09 10 10 10 10 11 11 11 11 12 12
potential but can deliver healthy subscription premiums. At Source: Company data
the same time, consumer adoption of certain programming
tiers and specific channels (over others) will ensure healthy After 2007, an increase in voluntary digitization through DTH
consumer competition in the content marketplace while encouraged a wave of new channel launches across genres. This
broadcasters will also come under pressure to produce resulted in fragmentation of viewership and ad markets across key
content with a high level of differentiation, premium quality TV genres. At the same time, the growth in operating profits of
(potentially advertising-free) and with local relevance. incumbent broadcasters remains highly dependent on domestic
subscription revenues (see Exhibit 13). In the past 1–2 years,
Digitization will also limit the rising cost of C&P fees. In the the growth of DTH subscription revenues for broadcasters has
past six years, C&P fees paid by channels to cable operators begun to slow due to increasing volumes for DTH platforms and
have grown from less than US$100 mil. to over US$300 mil a number of fixed-fee deals. Therefore, the next leg of profitable
(see Exhibit 11). Savings from C&P as well as profits from growth for incumbent broadcasters is dependent on the mandatory
higher subscription revenues can be reinvested towards better addressable digitization of cable networks.
programming, marketing and technologically advanced
content in HD and 3D formats. Exhibit 13
Sub fees boost profits towards content investment
Pay-TV broadcasters generated only US$425 mil. in
subscription fees on cable in 2010, about 11% of the total 35%
cable distribution pie. This number is expected to grow 30% 29.4
significantly in the future as digitization takes shape. Note 25% 27.7 25.7
24.5
% Margin
that broadcasters and content providers derived about 20%
US$350 mil. from DTH distribution in 2010. The disparity 15%
10.9
between collections on cable and DTH is exemplified in the 10%
trend of subscription revenues retained by Zee Entertainment, 5% 3.7
2.0
one of India’s leading broadcast groups (see Exhibit 12). 0% 1.3
FY08 FY09 FY10 FY11
Theoretically, a broadcaster’s share in the digital cable
Zee’s % OPM Zee’s % OPM (excluding domestic subscription)
environment will increase to 30–40% versus 10–15% (in
analog). Large broadcast distribution networks (i.e. Media Source: Company data
Pro) have come together to encourage digitization, offering
discounted rates in return for improved declarations.
12 | Investing in Digital India§§ Investors. Broadcasting is the largest media investment theme Therefore, in the United States and Korea, cable operators
available to investors due to the presence of large market cap continue to trade at a relatively competitive 6–8x one year
listed entities such as Zee Entertainment (US$2.6 bil. market forward EBITDA, versus 12–16x during their growth phase.
value as of end-Nov. 2011) and Sun TV (US$2.3 bil. market In Taiwan, a healthy debt-syndication market combined with
value). Broadcast business models are leveraged to advertising strong M&A activity has meant that cable operators have not
revenues, which in turn are linked to the short-term rating had to undertake IPOs, especially when fetching valuations as
performance of selected channels and broader macroeconomic high as 12x forward EBITDA as recently as 2010.
trends. Prior to the start of DTH growth back in 2007, a major
portion of TV industry value and profitability was leaked on India offers an attractive entry point for various strategic
the ground due to last-mile fragmentation. The growth of players if FDI is increased to 74%. Meanwhile, the pay-TV
DTH has breathed some life back into the TV sector though market already offers promise for private equity investors.
investors have preferred to play the digitization themes mainly India is already the second-largest digitized market in the
through broadcast equities. This is due to long gestation world with 48 mil. digital homes, still only ~30% of total TV
periods and the risk of equity dilution in DTH operators. households in the country. There is also a huge scope of ARPU
growth from pay-TV services, HDTV and broadband.
Upon successful implementation of the digital mandate,
gradual consolidation of LCOs becomes inevitable. This will As a result, India’s pay-TV distribution market is in a high-
shift the industry profits and value to centralized distribution growth value phase similar to North America between 1998
platforms (MSO/DTH) and broadcasters. Furthermore, and 2003, Korea between 2003 and 2007, and Taiwan 2005
the corporatization of distribution will bring new scale to and 2010. Valuations for operators in these markets during
the TV business with improved systems and technologies to their high-growth value stage typically averaged 12–16x one
raise transparency and accountability. This should result in year forward EBITDA versus the current trading average of
significant value creation for investors with market valuations 9-10x for India’s listed cable/pay-TV entities. We assume
and multiples of cash flow that are likely to steadily grow in similar or higher valuations for companies in India subject to
both public and private markets. successful execution. Partnerships with domestic companies
in India will also be important to bring in the next leg of
This has certainly been the experience for cable operators growth for strategic players in mature overseas markets. At
in key international markets (see Exhibit 14). Most of these the same time, investors will take a wait-and-see approach,
operators have undergone a high-growth value phase on the potentially acting only after analyzing the results of digital
back of digital and broadband. Furthermore, as growth has deployment in Phase I.
moderated, both equity investors and M&A-driven investors
have tended to favor cable/pay-TV operators in the media
space because of the reliance on stable subscription fees and the
ability to generate strong cash flows akin to utility companies.
Exhibit 14
Valuations for cable/pay-TV companies in global markets
18 USA average
Taiwan average
16 Korea average
14
EV/ 1-Year Forward EBITDA (x)
2003: Korea cable
FDI at 49%
12
2007: Korea
10 digital cable
rollout
8
6 2000: US broadband 2006: Korea cable 2009: Rollout
cable starts to roll out broadband gains traction of Taiwan
digital cable
4 Upgraded Taiwan
1998: US Taiwan cable FDI at 60% commences
digital cable cable infrastructure
2 1996: US rate starts to roll out offers broadband
deregulation
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Note: Based on average public and private market valuations for cable and satellite companies
Source: Bloomberg; Thomson; MPA analysis
Investing in Digital India | 13Exhibit 15
US cable stocks outperformed after 1996
9.0
8.0
AT&T forms
7.0 alliance with
Time Warner
6.0 Paul Allen
purchases
Large Cap Cable Index
Marcus Cable
5.0
AT&T buys TCI
for US$48 bil.
4.0
3.0
FCC rolls back
2.0
rates by 10%
Microsoft Paul Allen
invests in acquires
1.0 FCC rolls back Telecom Act passes
Comcast Charter
rates by 7% with rate deregulation
0.0
Jan-92 Jul-92 Jan-93 Jul-93 Jan-94 Jul-94 Jan-95 Jul-95 Jan-96 Jul-96 Jan-97 Jul-97 Jan-98 Jul-98 Jan-99 Jul-99 Jan-00 Jul-00
Source: Bank Of America
14 | Investing in Digital India3. Prospects for cable operators
Value-driven growth with challenges The disparity in supply (excess) and demand of TV channels has
The digital mandate will provide a value-driven transformation resulted in a surge in C&P charges for broadcasters.
for cable operators but not without challenges. We expect a 6x
increase in subscriber revenues though not without at least a 20% Business models for MSOs have become highly dependent on
churn in cable’s customer base to DTH. With addressable digital C&P income with the overall C&P market growing by 24%
deployment, subscriber declaration levels will increase from 15% CAGR over the past five years. As a result, MSOs have focused
(currently the norm for MSOs in the analog universe) to 100%, on adopting a width strategy (expanding reach), capturing
while the retained ARPU will increase by 6x after assuming a more subscribers particularly in TAM-rich markets, as opposed
30% base case revenue share with the LCO. Additional drivers to pursuing depth (last-mile ownership and digitization), a
and differentiators will come from bundled broadband and key characteristic in the development of the cable industry in
HD services. The main challenge, apart from managing DTH international markets. This has led to an overreliance on a B2B
subscriber churn, is that C&P fees are expected to drop by about model as opposed to a B2C model.
20–50% based on our discussions with MSOs.
As the digital mandate becomes implemented, compression
Carriage and placement fees to decline technology will expand channel carrying capacity by 10x over
The revenue profile of Indian broadcasters is heavily dependent analog and offer far superior output quality. As a result, C&P
on advertising (typically 70–75% on average). This economic fact revenues for MSOs are expected to fall with Hathway indicating
and the need to ensure reach is closely linked to the incidence of a drop of about 50% in Phase I while DEN is more cautious with
C&P fees. an estimate of 15–20%.
The current TV distribution landscape is dominated by analog Nonetheless, we believe MSOs will have various levers to pull to
cable which has a 70–75% share of the market. Theoretically, an maintain a healthy contribution from C&P. These include:
analog cable system has a carrying capacity of 95–100 TV channels.
However, given the quality and type of cables, modulators and RF §§ Increase in number of TV channels: Digitization should result
amplifiers deployed in the network, the channel-carrying capacity in the launch of new channels with an emphasis on demand for
of the analog cable system is limited, in practice, to around only distribution in high-ARPU, TAM meter markets. Even after
80–85 TV channels. Within this capacity map, the prime band churn to DTH, MSOs will see volume growth in Phase I. This
offers the best quality transmission but has a limited carrying could still be leveraged for C&P fees.
capacity of only 30 TV channels.
§§ Tiering and packaging: Emulating DTH, cable operators will
With over 600 channels in the country, broadcasters typically have offer channels to customers under various tiering models.
to pay a fee to the cable operator for carrying their channels on an A channel not available in the basic tier could therefore
analog network. And, with increased competition across genres, potentially see a loss in viewership, which in turn could impact
broadcasters are also required to pay an additional premium in its advertising revenues. MSOs could thus retain more C&P
the form of placement fees. Placement fees have become important bargaining power with channels in the basic tier. More clarity
as the number of channels usually watched at the household level on this matter is likely to emerge once there is certainty on the
is limited, ranging from 7–15 from city to city, according to data minimum number of channels and genres in the basic tier.
from a TRAI study.
Exhibit 16
MSO economics in digital cable
Common size P&L Units Analog Digital LCO share LCO share LCO share Remarks
(Base Case) @ 35% @ 40% @ 45%
Monthly subscription revenue Rs 100 130 130 130 130 §§ 30% increase in ARPU in digital cable post mandate.
Declaration by LCO % 15 100 100 100 100
Subscription revenue to LCO Rs 85 39 46 52 59 §§ Our base case assumes that LCOs will take 30% of digital cable
sub fees.
Subscription revenue to MSO Rs 15 91 85 78 72
C&P revenue to MSO (net of service tax) Rs 15 8 8 8 8 §§ Industry discussions suggest C&P revenues will decline by 50%.
Content payment to Broadcaster Rs 14 52 52 52 52 §§ MSOs such as Hathway make a ~10% margin on C&P net
of content cost. We assume 40% share of sub revenue from
consumers in a digitized scenario.
MSO gross profit Rs 17 47 40 34 27
Churn to DTH platform % 30 30 30 30 §§ Assuming a 30% churn of cable subs to DTH will still result in a
2x increase in gross profits for MSOs in our base case scenario.
MSO gross profit net of churn to DTH Rs 33 28 23 19
MSO gross profit margin % 55% 33% 30% 27% 24% §§ Scope for better payback and margins once broadband is added
to the mix (see analysis).
* Excludes STB rental and cost
Source: MPA analysis
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