BY SIMRAN SABHERWAL
The implementation of the Digital Addressable System (DAS) throughout the country in a phased manner started in 2012 and is now six months away from entering Phase III and Phase IV. We look at some of the challenges that are impacting Direct-to-home (DTH) players and Multi-system operators (MSOs) at the halfway mark
December 2015 – this is the deadline given by the government for shutdown of analog signals and implementation of the rollout of Phase III of the Digital Addressable System or DAS. While Phase I and Phase II saw the seeding of approximately 25 million Set Top Boxes (STBs) across 42 cities, it is estimated that Phase III and Phase IV will see the seeding of approximately 75 million STBs in the rest of the country at an estimated cost of Rs 10,000 to Rs 12,000 crore. It is not just the number of STBs but the large geographical area, infrastructure, funding requirements and the low average revenue per subscriber (ARPUs) that makes Phase III and Phase IV more challenging. Digitization can add significant value to the industry but hurdles – STB procurement, signing agreements, monetization, channel packaging, addressability of subscribers hinder the effective rollout of DAS III. Phases I and II were a herculean task and looking ahead, Phase III and Phase IV will be even more complex and tough as they deal with volumes that are four times larger, more intricate and with more digital head-ends which are far-flung.
Content Pricing and Packaging
Pricing the content at the right price will be an important factor in the roll-out of Phase III. While the current Cost per Subscriber (CPS) may be suitable for the metros and large cities, the same pricing may not work in markets down the line. The current analog rates for Phase III and Phase IV are in the range of Rs 100 to 150 and Rs 60 to 80 respectively. Post-digitization, the rates are expected to go up to Rs 160 to 200 and Rs 120 to 160 in Phase III and Phase IV respectively.
However, these rates are still not comparable to the rates applicable in the larger cities. With broadcasters pushing for the same price in the smaller markets, MSOs believe that the urban prices won’t work in smaller markets and it will become necessary to consider lower pricing. This increases the challenge of monetizing the investment and in turn, extends the payback period.
Channel packaging is another key hurdle where MSOs will need to bundle packages by taking into account pay channel costs demanded and negotiated with the broadcasters and consumers. MSOs have not yet successfully implemented gross billing and packaging, unlike DTH.
While DTH players may have strong balance sheets but to stay relevant, they too would require cheaper channel packages. Experts say that though DTH has a good cash flow situation, it has a longer break-even per subscriber (25-30 months) than cable which can break even in 15-22 months.
Moving from B2B to B2C
Since its inception DTH has been positioned as a B2C player, MSOs on the other hand, have largely been a B2B service provider. Experts say that digitization has seen MSOs evolve from B2B to B2C service providers and they have even built processes internally (such as billing, setting up call centres) to reflect this change. DTH players, meanwhile, have managed to improve their realizations by focussing on value-added services, higher penetration of HD channels and premium channels. MSOs and DTH both are also seeing a change in mindset as they look to hire more people with a telecom background.
Says Ashish Pherwani, Head, Advisory Services, Media and Entertainment, EY, “MSOs are gearing up for Tier III and looking at it as a B2C play. Just as DTH is one market across the country, MSOs will have to move towards being one market across the country, otherwise they will collapse.”
However, Sisir Pillai, Chief Strategy Officer at Digicable Network (India) has an opposing point of view. He says, “We are not B2C. All India Digital Cable Operators Federation (AIDCF) is making representations to Ministry of Information and Broadcasting and the regulator that ours is a B2B and not B2C industry. MSOs have not maintained the last mile. As MSOs we provide a set of services. But, if there is an issue with the box, the first port of call is always the Last Mile Operator (LMO) and very rarely the MSO.”
Rocky relationship
The relationship between MSOs and Local Cable operators (LCOs) is a delicate ropewalk and hanging in the balance is the critical issue of revenue sharing. LCOs have been reluctant to give up their subscribers and MSOs have taken a joint go-to-market approach to allay the fears of LCOs. Roop Sharma, President, Cable Operators Federation of India says that LCOs want digitisation to proceed smoothly and get the benefit of higher ARPUs and value additions, but they fear losing business. Sharma says, “Digitisation is not about having STBs in every household. It means a consumer is able to select his channels and pay accordingly. The system is wrong as the billing is generated by the MSO and not the LCO who knows what package a particular household is using. The system is working in the opposite direction.” Further, the ambiguity in revenue sharing between LCOs and MSOs and MSOs and broadcasters has led to many LCOs demanding their fair share to maintain, upgrade and service their network. According to Pherwani, “You will see some level of discounting on the price, which broadcasters will have to give and they will have to understand that MSOs are making large investments in Phase III and IV markets to get subscribers on board and digitize them. You can’t have Reference Interconnect Offer (RIO) pricing right now for these areas as the ability to collect money from a consumer and more importantly, the ability to collect money from the LCO is very tough. We need to figure out at par market price and get the content price right.” Digicable’s Pillai says, “The most transparent regime would be a MRP attached to every channel/ package of the broadcaster and a revenue sharing limit.” He adds, “A broadcaster in addition to subscription also gets revenue from advertising. This makes it fair sharing of revenue. This will also address the vertical integration issues. If there is a transparent regime then it should be left to the stakeholders – broadcasters, MSOs and LCOs to sit down and agree on pricing and discount. Broadcasters should also offer channel packaging.” With broadcasters looking at moving to RIO, packing will help increase the price organically.
Entry of Regional MSOs
While MSOs have made large investments in Phase I and Phase II in digital head ends and seeding of STBs, the monetisation of revenues has still not come in. With both broadcasters and LCOs asking for higher share in the revenue, the balance sheet of many MSOs is stretched. In addition, while the large MSOs already have the experience of digitisation, the smaller MSOs have no experience in this front. With huge investments required for Phase III and IV, it is expected MSOs could use intercity fibre from existing head-ends or even share head-ends. Many regional MSOs will have a critical role to play as they have already taken the initiative in seeding digital STBs in their areas. Regional MSOs have their strongholds and the shift to DAS makes their role very important especially in the context of whether they choose to go down the headend in the sky (HITS) route or remain a MSO in their own right.
Customer Servicing
Customer servicing will be key in Phase III and Phase IV. With different languages, personalised billing and collection will be a big challenge. Currently, DTH players have already built national teams to handle this while MSOs are dependent on LCOs as their feet on the ground and the margins of MSOs could decline if LCOs demand a higher revenue share to service the clients. On the other hand, MSOs will also have to look to pick up more business from the LCO else it would affect their profits. Pherwani believes that if the micro-payment systems open up further in the country and people make payments on mobile phones then that will provide a huge boost to cable operators nationwide.
KYC (Know your Customer) is another mandate of digitization. Here too, DTH players have been able to get the KYC documents in place. But, KYC is one of the biggest issues in cable TV. This is because many MSOs don’t know whether their STBs are parked or are being used and at which consumer’s house. Tracking the inventory moves becomes difficult if the LCO gives the pre-activated STB to a different user on the ground.
Consolidation
Looking ahead, consolidation could be the way forward for the industry. If the level of confidence increases and money starts coming in, analysts believe that foreign players could come in and pick up national (or regional) players and create a national bouquet. Alternately, LCOs in Phase III and IV areas could come together to form a cooperative so that they can finance and digitise on their own rather than rely on larger MSOs. HITS consolidation could also happen with one partner being a technology provider. Consolidation could also happen at the State level with operators in the State forming an MSO.
Regulatory push
In order to ensure implementation of DAS, the government needs to take effective measures so that the momentum in digitisation is not lost. According to Salil Kapoor, COO, DishTV, “All the benefits and incentives given to the infrastructure industry should be extended to the DTH sector, including the availability of finance at a concessional rate. The sector should be allowed tax concessions under Section 80-IA of the Income Tax Act. Further, since digitisation process and the deployment of set-top boxes require huge investments, operators should be allowed to offset their accumulated losses and carry forward unabsorbed depreciation under Section 72 A of the Income Tax Act. Government must also consider a cut in customs duty on set-top boxes (STBs) and its components, maybe even bring it to the earlier 5 per cent.”
DTH versus MSOs – Opportunities
If cable pans out the way it should with high quality wires, MSOs could steal a march over DTH players and provide triple play services. DTH currently scores over MSO in terms of billing and collection system; a slightly premium product, higher ARPUs and a fully pre-paid model, which means they don’t have collection issues like MSOs, and can invest in better technology in many places. While both DTH and digital cable will co-exist, the success of each will depend on how their products are marketed, the quantity of uptake in collections and investments they make in technology.
In the long term, if cable plays out the way it should and provides a return path, it will be advantage cable. There is a huge scope for cable operators to take the broadband route and provide voice, telephony, data and TV. Pherwani says, “At this point cable becomes far cooler as a product and more versatile than DTH can ever be. DTH is good for Television viewing but across the world, nowhere is DTH at the level it is in India - 30-33% of the market. DTH tops off at 15-20% worldwide, but DTH has gone ahead in India as our cable infrastructure is poor. If cable infrastructure gets better it could put a stress on DTH’s growth because cable can in an ideal situation provide a lot more services to customers.” It is important to note that cable TV is not pure cable and the fibre wires can be used for internet broadband which can deliver cable plus voice. If cable is two-way then telephony could be added to internet broadband plus voice which could improve the ARPUs from Rs 250 to Rs 1,000 on the back of broadband and voice services. The same infrastructure, with a little tweaking, can deliver content to multiple devices in a household.
The other source of revenue for MSOs is ad-sales. Currently MSOs are grossly underfocussed on ad revenues. Each national MSO has an opportunity of about Rs 100 crore in ad sales revenue. Currently, this is at less than Rs 10 crore and is a big opportunity for MSOs. While DTH has a constraint on the number of channels that can be delivered, MSOs can even pick up niche channels and channels in a particular dialect. Another huge opportunity is the numbers of households to be digitized – over 70 million. Smart packaging will aid in more revenue generation. With major MSOs, including regional, restricted so far to cities and towns, DTH operators entered the rural markets early on and cemented their place there. With MSOs entering the fray, some believe that there could be a reverse churn from DTH to cable.
Feedback: simran.sabherwal@exchange4media.com
