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MSOs, broadcasters and consumers yet to reap digitisation benefits: ICRA

MUMBAI: With the sunset date for the third phase of mandatory digitisation approaching fast (31 December 2015), there are ground-level challenges and unsolved issues even in the Phase I and II markets.

It is because of these issues and challenges that even after three years since its start, digitisation has not achieved its target of addressability and transparency in billing systems, said ICRA Research Services’ report ‘Indian media and entertainment industry: TV distribution’.

The report added that as the multi-system operators (MSOs) struggle with the last-mile ‘addressability’ hurdles for its digitised customer base, the industry’s ability to deliver customised and value-added content remains restricted.

“As a result, the expected benefits of higher subscription revenues for MSOs and broadcasters are yet to be achieved. The end consumers are also yet to benefit from targeted subscription packages, which were expected to optimise the user experience,” the report states.

Implementation challenges and slow progress in Phase I and II markets have restricted monetisation for MSOs

The report said that addressability continues to remain a concern in Phase I and II markets due to slow progress in consumer application form (CAF) collection. Local cable operators (LCOs) have effectively retained their control over the subscriber base.

Further, disputes over sharing of entertainment tax liability between the LCOs and MSOs have restricted the implementation of gross billing and channel packages for most players in key markets such as Mumbai and Phase II areas.

Additionally, the growth of average revenue per user (ARPU) for MSOs has remained constrained as collections continue largely on per-subscriber basis and not on the basis of channel packages chosen.

The report also said that for DTH players, the key growth drivers in Phase I and II cities have been price hikes, higher penetration of VAS, ability to segment the market by offering channel packages targeting niche requirements and HD channel packages.

Significant decline in carriage fee payouts from broadcasters unlikely in the near term

The report pointed out that while carriage fee payouts by large broadcasters is expected to remain stable, disbanding of channel aggregators has resulted in higher bargaining power of distributors (MSOs and DTH operators) with smaller broadcasters as well as new channels.

Thus, new channel launches and wider audience measurement metrics (through inclusion of Tier II and III markets) will keep carriage revenues buoyant for MSOs in the near term.

However, it added that the rollout of channel packages by MSOs will remain crucial for driving ARPU growth and profitability as content costs will increase.

Thus, the ability of the MSOs and DTH players to command pricing power along the distribution value chain is essential for ARPU growth. However, margins will remain under pressure with increasing content costs in line with the change in the nature of deals with broadcasters, while ARPU growth in these areas will stay moderate.

The report further said that for MSOs to pass on higher content costs to subscribers, introduction of tiered channel packages (customised targeted pricing) would be crucial.

DTH players and regional MSOs to take the lead in implementation of Phases III and IV

DTH is expected to gain in the rural markets (Phases III and IV) primarily on the back of easier reach in the cable-dark areas. Moreover, incremental investments in infrastructure in the rural areas and relatively high operating costs render it commercially unviable for national MSOs to enter such markets.

However, in view of the large growth opportunity that exists in these markets, MSOs have opted for inorganic growth strategies. While several regional/local operators have been acquired by the national MSOs, some have also entered into strategic JVs to ensure healthy presence in Phase III and IV markets.

The report predicts consolidation of fragmented local markets and cable operators with the progress in digitisation.

Incidentally, the rural markets continue to remain cost-sensitive; hence, MSOs and DTH players are also looking to introduce plain vanilla STBs specifically for these markets to encourage subscribers to migrate.

In this direction, Dish TV launched a lower-priced STB under the brand name of Zing, the base pack of which is typically 20 per cent lower than a regular Dish TV STB.

Among other measures, distributors are also evaluating channel packages with a focus on regional content. Media consumption in Phase III and IV markets is driven by regional content and hence such packages are expected to help distributors further expand their subscriber universe in these markets.

Implications for credit metrics

The report suggests that longer than expected timelines in monetisation opportunities, higher content costs for digitised areas, coupled with ongoing investments for Phase III and IV, would keep the return and coverage indicators of MSOs muted in the near term.

“Longer gestation period for investments made in Phase III and IV markets, due to the price sensitive subscriber base and low ARPU growth potential, is expected to keep the return indicators under pressure over the near term,” the report said.

It added that while a significant amount of equity funds supported the investments in Phase I and II markets for major MSOs, investments for entering Phase III and IV areas, broadband penetration as well as offering VAS (such as video on demand) may be largely funded through debt.

“Correspondingly, the borrowing levels are expected to remain high over the next two years, while the profitability generation from digitised areas will stabilise gradually,” the report said.

Silver lining

However, despite execution delays, in the longer term, digitisation is expected to benefit MSOs/ DTH operators and broadcasters with higher subscription revenues, it said.

Industry players are expected to witness sustained growth in subscription revenues and increased penetration of VAS such as HD channels and VoD in a digitised markets. As the industry progresses into the last two phases of digitisation, an uptick in activation revenues is also expected during next 18 months. This, coupled with the scale-up in the broadband business segment as operators continue to make incremental investments towards higher penetration in digitised markets, augurs well for the growth of revenue, the report explained.

Moreover, over the medium term, monetisation of investments from Phase I and II markets is expected to pick up pace as MSOs look at achieving full addressability and implementation of gross billing in these markets.

Additionally, the content costs for MSOs are expected to increase as broadcasters migrate to per-subscriber billing from the legacy of block deals. The effective rollout of channel packages across markets as well as subscription revenue collection based on such packages is imperative to support the operating margins of distributors.

Moreover, the ability of cable operators as well as DTH players to introduce innovative channel packages in Phase III and IV markets with a greater focus on regional content at competitive rates will remain crucial for supporting the margins of players in these markets.

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MSOs’ carriage revenue to stay buoyant