A NEW TWIST ON TV

The broadcast industry has been grappling with major disruption since the beginning of 2020 and has now approached the Bombay High Court under the umbrella of the Indian Broadcasting Foundation (IBF), to challenge the amendments declared by the Telecom Regulatory Authority of India (TRAI) to its barely-a-year-old New Tariff Order (NTO) on January 1, 2020. Not giving any interim relief, the court has called for the next hearing on January 22, 2020.

 THE KEY REASON FOR AMENDMENT

Even after implementation of TRAI’s New Tariff Order last year, the cost for consumers to select channels of their choice had not come down as they were led to select packages rather than a la carte channels, defeating the purpose of NTO. According to media experts, the key reason for this was that broadcasters had bundled their popular channels priced at Rs 19 along with less popular channels (priced very low) and offered them at a steep discount. This led consumers to opt for packages rather than selecting channels on an a la carte basis.

“NTO 2.0 is just a fine-tuned version of NTO. The target is to address the issues we have observed in one year of NTO implementation. NTO 2.0 is in favour of consumer freedom,” TRAI Chairman RS Sharma declared at a press meet. “The top five broadcasters moved some of their FTA channels to pay channels and put them in a bouquet to push their driver channels after NTO. Some also increased the channel price by 200%. This is not fair. We are trying to rectify it,” he added.

As per the recent amendment, broadcasters can include a channel in the pack only if it is not priced more than Rs 12, earlier this limit was Rs 19 and secondly, the bouquet prices need to adhere to two key conditions where the sum of a la carte prices of channels part of a bouquet cannot be more than 1.5x the price of that bouquet; and a la carte prices of each channel in a bouquet cannot exceed 3x the average a la carte price of all channels in that bouquet.

SUBSCRIPTION REVENUES TO BE IMPACTED

The amended NTO is encouraging consumers to opt for a la carte channels, which will lead broadcasters to bring their prices down, eventually affecting their subscription revenues.

“The amendments proposed by the regulator are definitely customer-centric and focus on stemming the spike in cable/DTH bills endured by the customers. We expect that with the new guidelines, end-consumer Average Revenue Per User (ARPUs) will reduce owing to the constraints placed on bouquet discounting (capped at 33%), price-linked bouquet inclusion of channels (likely to prompt downward price revision of flagship channels), and cap on the Network Capacity Fee (NCF). For broadcasters, this could lead to slowdown in the subscription revenue growth as prices are likely to come down,” says Abneesh Roy, Research Analyst - Executive Vice President, Institutional Equities, Edelweiss Securities Limited. “Overall, this is likely to be potentially negative for broadcasters, given that ad revenue growth has been sluggish YTD20 and resumption looks challenging; and a large portion of the growth for broadcasters in FY20 has been driven by subscription revenues. However, in the long run, this would have a positive impact for them, as it reduces the OTT migration risk by lowering the price differential,” he adds.

According to the amendment, broadcasters were required to publish revised MRP of a-la-carte channels and bouquets on their website by January 15, 2020 and Digital Platform Operators (DPOs) are required to publish revised Distributor Retail Price (DRP) of a-la-carte channels and bouquets on their website by January 30, 2020. Consumers will be able to benefit as per the amended provisions with effect from March 1, 2020. However, none of the major broadcasters had issued new prices within the stipulated time. 

“A near 37% drop in the individual price of a channel (from Rs 19 to Rs 12) will hit the broadcasters hard as the cost of content acquisition has also been growing over the past few years. At a time when advertising revenues are already down because of the general economic slowdown, a hit in subscription revenue will not go down well with broadcasters. There could be a fall of at least about 10%. However, while the subscription rate may go down, the number of subscribers might increase due to the various cost efficient options available now, like more no FTA channels available at lesser cost, more GECs available at lesser price and so on,” says Vinita Pachisia, Senior Vice President, Carat.

BROADCASTERS UP IN ARMS

Broadcasters have strongly opposed TRAI’s amendments, which they term ‘arbitrary’. “These amendments attempt to make further disruptive changes in an industry already grappling with the paradigm shift to an MRP-based pricing regime,” said NP Singh, IBF President and CEO, Sony Pictures Networks India at a press conference organised by IBF in Mumbai on January 10 that saw all major broadcasters unite. Singh said broadcasters had collectively spent over Rs 1,000 crore in communicating the changes under NTO to consumers. He also said there was an estimated loss of 12.5 million subscribers. Singh said there was no need for the new amendment and insisted that more time should have been given to the industry to settle down to the NTO of 2019.

THE CASE OF DIGITAL PLATFORM OPERATORS

Uday Shankar, President of Walt Disney Company Asia Pacific, and Chairman of Star India makes the point that if the TRAI is concerned about bringing down prices for consumers, why is it that DPOs are allowed to charge Rs 160 for providing free-to-air channels.

DPOs now have to provide 200 channels as a block to subscribers for Rs 130 Network Carriage Fee (NCF) (vs Rs 100 earlier), and mandatory Ministry of Information & Broadcasting channels (e.g. DD Group) are not counted in this block. NCF is also capped at Rs 160 (all channels on DPO’s platform have to be provided for this amount) versus earlier rule of Rs 20 for every incremental 25 channels over and above the 100 provided in the first phase. “Since DPOs are still allowed to make bouquets, larger broadcasters can keep their driver channels outside of any of their own bouquets, thus pricing them at a premium and collaborating with the DPO to make a genre specific bouquet which cuts across broadcasters, making it a potent one for subscribers. However, we believe this will be their last option as the power scale could tilt in favour of DPOs, in this case,” says Rohit Dokania, Senior Vice President, Research, IDFC Securities Limited.

 CAPPING OF CARRIAGE FEE

Carriage fee has been capped at Rs 4 lakh per month for SD channels and for HD channels at 2x of SD. Earlier it was linked to subscriber offtake. “This implies that there is a capping in terms of carriage fee being charged and hence broadcasters here are in a win-win situation as the rush for FTA is bound to increase for their smaller channels which are not a part of bouquet,” explains Karan Taurani, VP - Research Analyst (Media & Consumer Discretionary), Elara Capital.

 PLACEMENT CLAUSE BY DPOS

According to the new clause, DPOs have been directed to ensure that all the channels of a particular genre must be placed together and any change in the position of a channel cannot take place without prior approval from TRAI. Reportedly, the move is likely to curb malpractices by many DPOs to strike a ‘placement deal’ with broadcasters, short of which the channel would be placed in other genres. However, according to DPOs, they were using changing of LCN as a last resort when broadcasters delayed payments or defaulted it.

 THE MSOS’ VERSION

According to sources, the All India Digital Cable Federation (AIDCF) has moved the Kerala High Court against TRAI’s interconnection agreements regulations. The local cable operators feel that NTO 2.0 will only benefit broadcasters, while MSOs and LCOs will suffer.

The Maharashtra Cable Operator Foundation (MCOF) President, Arvind Prabhu told exchange4media that they are not fine with NTO 2.0. “The primary reason is that TRAI has curbed our NCF. Earlier it was Rs 150 for 100 channels now they have increased the number of channels to 200. Also, earlier it was an additional Rs 20 for next 25 channels now they are saying that DPOs can’t charge more than Rs 160 per month which will certainly impact our revenue streams. We also oppose the rule that for the second TV set, we should give a 40% discount on NCF. With NTO 1, we started to stabilise after six months-one year of the implementation, now we again will have different rates. The new framework is not possible in the given period,” said Prabhu.

“There are around 1200 small MSOs in the country. In smaller towns, the head end capacity is only 200 channels, therefore how are they going to offer 200 channels plus mandatory channels by MIB? In order to do this, they have to invest in 100 new channels at hardware, it’s an unnecessary burden for them,” he added.   

BENEFIT TO THE CONSUMER

With the new amendments, consumers can watch more channels by paying less fees. Earlier, a consumer paid Rs 130 (excluding taxes) for 100 Free-To-Air (FTA) channels and now after the amendment they can watch 200 FTA SD channels with the same amount. Also, according to TRAI, operators cannot charge more than Rs 160 per month for all channels available on their platform. So now even if a consumer selects 10 paid channels, their total bill will be between Rs 250 to Rs 280 as against Rs 350 to Rs 500 (depending upon the package) in pre-tariff order days.

However, broadcasters claim this is just a number as people will still have to pay for all the premium channels that they want to watch.

The exact impact of the amendment will be ascertained once the new channel prices are declared and new choices of subscribers settle in.

CONCERNS RAISED BY THE IBF

On behalf of the broadcast industry, N P Singh, President of the Indian Broadcasting Foundation (IBF) and MD and CEO, Sony Pictures Networks India expressed the following concerns about TRAI’s amendments to the New Tariff Order and Interconnection Regulations for the broadcast sector:

Reduction of MRP cap from Rs 19 to Rs 12 for channels to be part of a bouquet: Channel pricing is related to the quality and cost of content being offered, which the regulator appears to consistently ignore. In a competitive and free market like broadcast, channel pricing should be determined through open market forces rather than through the arbitrary fixing of caps without any fundamental basis.

 Twin conditions on bouquet pricing: In order to offer wider choice to their consumers through affordable bouquets which is the practice worldwide, the broadcasters will have to either price their premier channels very low, hampering the ability to provide quality content or increase the price of other channels just to fit in the maths, but artificially increase the burden on consumers. Another fallout of the twin condition restrictions is that it limits the number of channels in the bouquet, which in turn reduces the value delivered to consumers.

Restricting incentives only to a la carte: A few months back, at the request of the regulator, major broadcasters including Sony, Star, Zee, Viacom introduced promotional schemes and offered their premier channels at an MRP of Rs 12 for a limited period. But the results showed no uptick in the a la carte offering in spite of the price reduction, clearly highlighting the consumer’s preference for bouquets. In fact, IBF members suffered revenue losses in this whole exercise.

Additionally, the on-ground experience of this consumer offer has indicated that the desired intention of consumers getting the benefit of such an offer has not materialised in a majority of cases, but may have got absorbed as additional margin in the distribution chain. So, it begs the question whether the new changes being recommended will not again end up with the same outcome, given the challenges of on-ground execution. 

Impact of NCF: In the current NTO, if a consumer is paying, say Rs 275 per month as his/her bill, about 60% of it goes to the distribution platforms, 15% towards taxes, and only about 25% comes to the broadcasters. This, when it’s the broadcasters who are creating the content, investing in talent and capability, and taking all the risks related to content development. Why then is the focus only on the broadcaster’s component of revenues, which is only 25% of the consumer bill?

NTO 2.0 - THE PROPOSED AMENDMENTS

FROM THE TRAI POINT OF VIEW

According to TRAI, NTO 2.0 is just ‘fine-tuning of the first order and targeted at helping consumers’. TRAI is not against channel bouquets. The entire exercise of NTO 2.0 is to ease the customer’s pain.

 Challenges that New Tariff Order faced after implementation

• The intended benefit for consumers to enable the freedom of choice could not be achieved completely due to misuse of available flexibility by a group of service providers
• After the implementation of NTO, some broadcasters enhanced their channel prices drastically, which in a large number of cases were more than 100%. Such a price increase is anti-consumer and forces regulatory interventions
• There were instances, where huge carriage fee was demanded by large Distribution Platform Operators (DPOs). In addition, as the DPOs could change the channel number every year, they were demanding huge placement charges from some broadcasters
• Regional broadcasters and small channels were facing serious threat of removal of their channels from the platform owing to their lower penetration

 Benefits of NTO so far:

• Harmonising business processes
• Reduced disputes among stakeholders
• Brought clarity in channel pricing by displaying the price of every channel on electronic programme guide to consumers
• Enabled transparent subscriber reporting
• Better tax compliance due to transparency
• The explicit revenue stream of Network Capacity Fee (NCF) and the MRP-based pay channel prices have ensured that the revenues are distributed proportionately among the broadcasters, DPOs and LCOs
• NCF facilitates adequate returns to DPOs, thereby facilitating upgradation of their networks, giving better services to consumers and ensuring business certainty
• The broadcasters also benefited by getting full freedom and flexibility to decide the price of their television channels

BROADCASTERSPEAK

“If at all a tweak was required, a tweak would have been achieved by giving more flexibility in discounting, and that is the irony in this new tariff order; that by further reducing the discounting options, the regulator is setting the consumer up for having to pay more first.”

Uday Shankar
President, The Walt Disney Company APAC
& Chairman of Star and Disney India

“They (TRAI) decide to cap your channel price, they cap your discount, they control the number of bouquets you can have. It’s like tying your feet and asking you to swim, it doesn’t work like that. This, while the industry is giving employment and growth… it cannot happen the way the regulator is pushing the industry. It is not good for the country or the broadcast industry.”

Aroon Purie
Founder, India Today Group

“The recent amendment proposes far-reaching changes in the pricing mechanism, which although are made with an intent to benefit the consumer at large, at the execution level this may not agree with that. The concern with the new changes and regulations is that there are constraints which come under the basic degree of operations. From the pricing of channels, to how we package our products to the discount structure we operate in.”

Punit Goenka
Managing Director and CEO, Zee Entertainment Enterprises Ltd. 

“A progressive policy framework must be impartial to all the stakeholders in the ecosystem. The new amendment will impact the equilibrium between the stakeholders in the media industry. The future of this sector is in jeopardy with such micro-regulations.”

Megha Tata
Managing Director, Discovery - South Asia

“The objective of NTO 1 was first - to give choice to consumers, second - to bring transparency and third - to reduce litigation. While only the first two have happened, it’s too early to talk about the third. The other objective of NTO was transparency and that has also been brought in. The question, therefore, is - what is the fundamental need to  change again?”

Sudhanshu Vats
Group CEO & MD, Viacom18 and Vice-President, IBF

WHAT ANALYSTS SAY

NTO 2.0: SOME POINTS AND IMPACT AREAS

By Abneesh Roy
Research Analyst & EVP – Institutional Equities, Edelweiss Securities Limited

The sum of the a-la-carte rates of the pay channels (MRP) forming part of a bouquet shall in no case exceed 1.5 times the rate of the bouquet of which such pay channels are a part.

• This implies a discount cap of 33%. If we look at the base packs of the leading broadcasters, except ZEEL and Colors, others’ bouquets are at a discount greater than 33% (Star - 35% and SPNI - 54%)
• This could lead to either a few tail channels getting dropped from fat bouquets or increase in the MRPs of the bouquets.
• However, given the rise in the end-consumer ARPUs in the new regime, likelihood of reduction in channels is higher
• While this improves the channel selection for consumers as tail channels would get dropped, price-wise there could be only marginal impact for the consumers.

 The a-la-carte rates of each pay channel (MRP), forming part of a bouquet, shall in no case exceed three times the average rate of a pay channel of the bouquet of which such pay channel is a part.

• This could lead to price revision of the flagship channels which were earlier priced at max MRP of Rs 19 and offered along with tail channels in the bouquets
• For instance, the MRP of ZEEL’s base pack is Rs 58.50 offering 24 channels, which translates to an average rate of Rs 2.43 per channel with a threshold of Rs 7.30
• Hence, according to the above regulation, the a-la-carte price offered for ZEE TV or &TV cannot be more than Rs 7.30
• We would want to have more clarity on this guideline as one channel can be part of the many bouquets offered by the broadcaster and DPO
• This could bring some relief for customers who have opted for a-la-carte offering as under this regulation, the a-la-carte pricing is likely to get revised

 TRAI decided that only those channels with MRP of Rs 12 or less will be permitted to be part of a bouquet offered by a broadcaster.

• This could lead to price revision of the flagship channels of broadcasters as most of them have an a-la-carte price of Rs 19 (to Rs 12)
• We could see significant a-la-carte price revision for flagship channels and channel revision for the bouquets offered by broadcasters.

 TRAI has examined various provisions in detail and accordingly mandated provision of 200 channels in maximum NCF of Rs 130 excluding taxes per month. In addition, it has also been decided that channels declared mandatory by Ministry of Information and Broadcasting will not be counted in number of channels in the NCF. DPOs have also been mandated that they will not charge more than Rs 160 per month to provide all channels available on their platform.

• This will be a big relief for customers who were earlier charged Rs 130 for 100 channels along with another Rs 20 (as incremental NCF) for every 25 channels over and above the first 100 channels.
• For distributors, the authority has placed a cap of Rs 160 on the NCF charged, which limits their role even more in the entire value chain.

 TRAI has decided that in case of multi-TV homes where more than one TV connection is working in a home in the name of one person, it will charge maximum 40% of declared NCF for second and additional TV connections. It has also permitted DPOs to offer discounts on long term subscriptions, i.e., for 6 months or more.

 A cap of Rs 4 lakh per month has been prescribed on carriage fee payable by a broadcaster to a DPO in a month for carrying a channel in the country.

Ashish Pherwani
Partner and M&E Leader, EY India
“Depending on the strength of each channel, there could be an impact either on reach or subscription revenues if further price caps are implemented.”

Rohit Dokania
Senior VP, Research, IDFC Securities Limited
“In their bid to keep bouquet prices intact at earlier price levels, broadcasters would have to slash down the number of tail channels to increase the average channel price of each bouquet so as to safeguard the price proposition of driver channels to some extent (as prices would fall from Rs 19 to Rs 12 to be part of bouquets). However, this could be perceived as lower value proposition by consumers compared to what they were enjoying earlier as number of channels gets drastically reduced from 24 channels to 11 for the same price.” 

Karan Taurani
VP - Research Analyst, (Media & Consumer Discretionary),  Elara Capital
As per expectations, NTO 2.0 which has now officially been released will lead to

1. Lower ARPUs for TV which has shot up by almost 60% at an average post NTO 1.0
2. Lower ARPU would mean a lower share of revenue for the broadcasters (who were getting almost 50% share post NTO 1.0) - expecting the share to remain similar, but the absolute distribution revenue to move down substantially
3. Enhanced movement towards selective viewing as few consumers may move towards a la carte due to price correction
4. Size of bouquet will come down in terms of channels from about 8-10 channels to 3-4 channels which will lead to a big management problem for distributors
5. Expect some of the key channels like Zee Anmol which were FTA pre-NTO and then became pay and lost viewership/ad revenue to again consider the FTA route
6. Ad spends will see a negative impact for sure due to transition phase just like it did during NTO 1.0 - this will have a negative impact on TV ad growth in H1FY20. However it won’t be just as subdued as last time as this has only few changes
7. Niche channels of broadcasters will face big problems due to capping on the FTA front; expect niche genre channels to move directly to OTT/digital in that case