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India’s paid C&S subscribers is 139 mn in 2014: FICCI KPMG report

MUMBAI: The number of TV households in India increased to 168 million in 2014, implying a TV penetration of 61 per cent, according to FICCI-KPMG’s new report on the Indian media and entertainment sector.

The number of cable and satellite (C&S) subscribers increased by 10 million in 2014 to reach 149 million. Excluding DD Direct, the number of paid C&S subscribers is estimated to be 139 million, implying an 82 per cent penetration rate.

The paid C&S subscriber base is expected to grow to 175 million by 2019, representing 90 per cent of TV households.

Buoyed by monetisation due to digitisation, subscription is going to overtake advertisement revenue growth. According to the report, subscription revenue growth at an annualised growth rate of 16 per cent is expected to outpace the annualised advertising revenue growth of 14 per cent. Overall, the television industry in India is estimated at Rs 475 billion in 2014, and is expected to grow at a CAGR of 15.5 per cent to reach Rs 975 billion in 2019.

broadcast industry size 2014

Distribution

With 168 million TV households, India is the world’s second-largest television market after China but remains highly unstructured. Though digitisation of C&S households crossed the 50 per cent mark in 2013, implementation challenges persist in achieving improvement in addressability and increase in monetisation. As a result, there was no real impact from digitisation on the sharing of subscription revenues among the different participants or carriage fees in 2014.

While the rollout of digital set-top boxes (STBs) slowed down in 2014, multi-system operators (MSOs) have focused on improving their business model in Phase I and II cities. Digitisation has changed the role of MSOs from being a B2B service provider to a B2C service provider and it is taking time for MSOs to build internal processes to reflect this change in business model. This, coupled with continuing resistance from LCOs, has resulted in delays in implementation of gross billing and rollout of channel packages in Phase I and II cities.

Subscribers

According to industry participants, higher collection per subscriber for the MSOs and hence broadcasters is possible only after the end-customers start paying for what they watch, instead of paying for the base pack and receiving all channels. On the other hand, direct-to-home (DTH) operators have continued to focus on improving realisations by increasing penetration of HD channels, premium channels, and value-added services.

The Ministry of Information and Broadcasting (MIB) extended the deadlines for Phases III and IV of Digital Addressable System (DAS) implementation to 31 December 2015 and 31 December 2016, respectively. DAS rollout in Phases III and IV is expected to be more challenging on account of the larger geographical spread, funding requirements, and low potential for average revenue per user (ARPU). DTH is expected to take the larger share of analogue subscribers in Phases III and IV than they did in Phases I and II.

The KPMG report expects a delay of 12 months in the rollout of STBs in Phases III and IV each. It expects the rollout in Phase IV to be largely complete by December 2017. The benefits of digitisation in these phases in terms of improved addressability and ARPU are expected to take much longer. At the end of 2019, digital cable and DTH subscribers are expected to be in the ratio of 55:45, with 94 million digital cable subscribers and 76 million DTH subscribers by 2019.

However, global digital TV conversion is expected to be almost complete by 2020. Based on forecasts for 138 countries, global digital TV penetration is likely to reach 98 per cent of television households in 2020, up from 40 per cent in 2010 and 68 per cent in 2014. By 2020, 94 countries are expected to be completely digital compared with only 12 in 2013.

About 124 countries are expected to have more than 90 per cent digital penetration by 2020. Digital cable is expected to become the most popular TV platform in 2014, accounting for 34 per cent of the world’s TV households in 2020. Other dominant digital technologies will be digital terrestrial transmission (DTT) and DTH, followed by IPTV.

Cable is a dominant technology largely in China, India and the USA. In 2013, cable in India accounted for 58 per cent of all TV households, followed by China and the USA at 56 per cent and 51 per cent respectively. Outside of these countries, cable accounted for only 21 per cent of TV households in 2013. As a result, TV digitisation efforts of most governments have been on ATT to DTT switchover rather than on digitisation of cable.

The rollout of digital cable STBs in Phase I and II cities was largely complete by December 2013. 2014 was expected to be the year when gross billing and rollout of channel packages would progress, resulting in more equitable sharing of revenues among the different players in the television value chain. However, this has continued to evade the industry due to several challenges on the ground. While resistance from local cable operators (LCOs) in giving up ownership of customers continues, the MSOs have tried to tackle this challenge by taking a joint go-to-market approach instead of attempting to remove LCOs from the value chain.

Though channel packages have been rolled out in some cities, collection for the MSO from the LCO continues to take place based on a fixed amount per subscriber and not on the basis of the channel package chosen. On a positive note, the larger MSOs appear to have reached an understanding to stop poaching LCOs from each other in Phase I and II areas and focus instead on improving realisations.

Difficult road ahead in Phases III and IV

The ministry of Information and Broadcasting (MIB) extended the deadlines for Phase III and IV of DAS implementation to provide more time for different players in the value chain to resolve contentious issues on the ground, indigenous manufacturing of STBs and registration of MSOs in Phases III and IV for DAS. Given that ~70 million STBs need to be rolled out in Phase III and IV areas compared to ~25 million STBs in Phase I and II areas in 42 cities, the task ahead is enormous.

The deadline extension is expected to provide more time for MSOs and LCOs to work on STB procurement, setting up digital headends where required, fixing agreements with broadcasters, implementing channel packages, and getting the logistics in place for rolling out the STBs. While some in the industry welcomed the move, saying the December 2014 deadline was not practical, a section of the industry was also of the opinion that this would lead to loss of momentum in the digitisation process.

Regional MSOs to lead in Phases III and IV

Phases III and IV mainly comprise smaller towns and villages where the disposable income of the people is much lower than in Phase I and II areas. Current analogue ARPU is in the range of Rs 100–150 and Rs 60–80 in Phases III and IV respectively. In the digital scenario, this is expected to increase to Rs 160–200 and Rs 120–160 in Phases III and IV respectively.

The lower paying potential from Phase III and IV subscribers increases the challenge of monetising the investment, which will extend the payback periods. The MSOs made significant investments in digital headends and STB rollout in Phases I and II but monetisation has not kicked in fully for the MSOs while broadcasters continue to ask for higher revenue share, resulting in stretched balance sheets for the larger MSOs.

The smaller MSOs, on the other hand, do not have prior experience of digitising Phases I and II and have even lower access to capital. To reduce the capex required for Phases III and IV, most MSOs are likely to use inter-city fibre from their existing headends in Phase I and II cities and even opt for sharing headends from other MSOs. To improve the subscriber economics in Phases III and IV, MSOs are also unlikely to provide subsidies on STBs and customers are expected to bear the cost of STBs.

Even though there is push from the government to roll out domestically manufactured STBs in Phases III and IV, according to industry discussions, this may be difficult to achieve because of several reasons:

  1. Domestic STB manufacturing facilities may not be able to scale up in such a short period of time;
  2. The foreign STB manufacturers provide vendor financing, which is critical for MSOs;
  3. The quality of imported STBs is superior in most cases; and iv) There are no incentives from the government to use domestically manufactured STBs.

However, irrespective of the deadline postponement and other challenges on the ground, some regional MSOs have taken the lead in rolling out digital STBs in Phase III and IV areas. Some of these are Gujarat Telelink Pvt Ltd (GTPL) in Gujarat and West Bengal, Asianet Satellite Communications Ltd and Kerala Communicators Cable Ltd (KCCL) in Kerala, Manthan Broadband Services Pvt Ltd in West Bengal, Fastway Transmission Pvt Ltd in Punjab and Ortel Communications Ltd in Orissa.

Another emerging trend is that the LCOs in Phase III and IV areas are uniting to form cooperatives so that they can combine their finances and digitise on their own, without being backed by an MSO.

DTH operators keen to grab the large opportunity during Phases III and IV

The battle for subscribers in Phases III and IV is expected to be more keenly fought between MSOs and DTH operators. While the DTH operators managed to gain only 20–30 per cent of the subscribers converting from analogue to digital in Phases I and II, they are in a much better position in Phases III and IV due to the inherent technology advantage of DTH in sparsely populated areas and also due to their balance sheets being healthier than those of MSOs, especially the smaller regional MSOs. However, they may have to re-work their channel packages in these areas to be more relevant and affordable for Phase III and IV subscribers.

Dish TV has already taken an innovative route by launching a sub-brand Zing to take on digital cable in Phases III and IV. Zing specifically caters to the different linguistic needs of subscribers and offers regional specific channels as part of all available packs, while the other channels can be added as per the customer’s choice. Zing has been launched in West Bengal, Tripura, Odisha, Maharashtra, Telangana, and Andhra Pradesh. Zing’s package prices are cheaper than those of digital cable for the base packages (Rs 99/month for Zing vs Rs 220/month for digital cable) and mid-level packages (Rs 249/month for Zing vs Rs 270/month for digital cable).

Besides content, even the advertising and other marketing activities will be in the regional languages, while customer support services will be at the local level through trade partners, similar to the cable TV model.

HITS could play a key role in Phases III and IV

Headend-in-the-sky (HITS) could play a key role in achieving the goal of 100 per cent digitisation as the existing digital cable and DTH models may not be enough for digitising Phases III and IV. Unlike traditional cable, HITS uses a virtual headend from one single location that broadcasts signals through transponders to multiple last-mile operators (LMOs). In the HITS model, while encryptions, SMS, billing, etc., are handled centrally by the HITS operator, the LMO focuses on customer acquisition and customer service. Unlike DTH, HITS provides LMOs the ability to customise the feed for local tastes by inserting local language channels at the last mile and is also less susceptible to rain fade compared to DTH.

On the flipside, HITS also faces some of the disadvantages of traditional cable such as managing the LMO-MSO relationship and the large revenue share that will be retained by the LMOs. There are currently two HITS licensees—(1) Jain HITS of Jain TV Group (2) IndusInd Media & Communications Ltd of Hinduja Group.

While subscriber addition for DTH operators was muted in 2014, they had a healthy revenue growth due to sustained increase in ARPU. According to industry discussions, DTH operators have seen an ARPU increase of around 12–15 per cent in 2014. While some of the ARPU increase was driven by DTH operators’ ability to continue to push price hikes (there was a price increase in April 2014 of ~8 to 9 per cent), the more promising trend is that DTH operators are able to increase collections from customers by providing additional services such as HD channels, premium channels and other value-added services.

While digital cable operators are still grappling with getting their business model right, DTH operators have focused on increasing monetisation by providing additional value to their subscribers either through innovative services or STBs, such as those with unlimited recording and 4K.

The share of HD and 4K TV sales is expected to further increase over the next five years, reaching 80 per cent by 2019. While HD adoption will continue to a key growth driver for DTH ARPU over the next few years, adoption of 4K STBs is expected to pick up in India, though lack of 4K content can be a hindrance.

Live sports action is expected to be one of the enablers of HD adoption, with the ICC Cricket World Cup likely to be a key trigger in 2015. All the major DTH operators—Tata Sky, Dish TV, Videocon d2h, and Airtel Digital—have launched TV Everywhere apps on mobiles and tablets through which subscribers can watch live TV, catch-up TV, and video-on-demand (VoD) for an additional monthly fee.

While there are several players along the media value chain who have launched online platforms for on-demand content to capture the surging viewer base, DTH operators have a key advantage in monetising these viewers through their TV Everywhere apps, given their already existing payment relationships with subscribers.