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Hot Seat

“We are in the business of trading in content, not transponders”

Harit-Nagpal-2Want to know what secret sauce Tata Sky MD & CEO Harit Nagpal uses to make his strategy work? Hear him talk about the need to offer more services to customers. “The industry needs to build a model around ARPU [average revenue per user],” he says.

Nagpal does not believe in halting the flow of money for building Tata Sky as the ultimate direct-to-home (DTH) brand in the country, enjoying the highest ARPU and offering premium value-added services. He is putting in Rs 900 crore ( Rs 9 billion) for upgrading from MPEG-2 to MPEG-4 so that Tata Sky can accommodate more channels and make up for the transponder space crunch.

Nagpal believes that DTH should play a more defining role in shaping up the business model for distribution platform operators.  “Benchmarking DTH cost with cable is wrong. Why should DTH go back to medieval times? Cable needs to embrace the cost structures and transparencies of the DTH model,” he says.

According to him, consolidation among the DTH players in terms of mergers and acquisitions is out of the horizon at this stage.

In an interview with TelevisionPost.com’s Sibabrata Das, the Tata Sky MD & CEO talks about the regressive 20 per cent sectoral cap imposed on the DTH industry, technical interoperability and the issue of licence fee.

Edited Excerpts…

Some DTH operators are trying to develop carriage as a revenue stream. Will Tata Sky take this revenue option seriously?

We are in the business of trading in content, not transponders. Customers want us to provide television channels that they prefer to watch. We are not here to hire transponders and make money by carrying unwanted television channels on our platform and charging the content owners. We charge our customers and pay a part of this money to the content producers.

Harit-Nagpal-2“Bringing down content costs doesn’t necessarily mean that we start charging carriage fees. We should pay the broadcasters back so that they are incentivised to produce good quality content. The industry needs to build a model around this so that consumers are willing to pay more for what they watch, ARPU goes up, and all of us benefit”

When broadcasters are paying carriage fees to multi-system operators (MSO), why shouldn’t they feed the DTH operators?

The cable TV model is wrong and has led to anomalies in the market. We are in the process of changing the non-transparent, analogue cable TV model. Benchmarking DTH cost with cable is wrong. Why should DTH go back to medieval times? Cable needs to embrace the cost structures and transparencies of the DTH model.

Shouldn’t DTH service providers try to bring down content costs so that there is a level playing field?

That necessarily doesn’t mean that we start charging carriage fees. We should pay the broadcasters back so that they are incentivised to produce good quality content. The industry needs to build a model around this so that consumers are willing to pay more for what they watch, ARPU goes up, and all of us benefit.

How has Tata Sky managed to get higher ARPU than its peers?

We have been able to grow our ARPU not by taking prices up but by offering better tiered products tailored around customer needs and offering more services.

Isn’t the crunch in transponder space limiting Tata Sky’s television channel offerings compared to its peers?

Yes, there is a space crunch. But we are making up by investing Rs 900 crore ( Rs 9 billion) in upgrading from MPEG-2 to MPEG-4. This is a one-time investment. So now we are able to add 10 channels every month. For the Kerala market, we have added 19 Malayalam channels. There is no shortage of channels that consumers want. We are not interested in carrying unwanted channels just for carriage. We are also moving more services to high definition (HD) and our HD line-up is second to none.

Harit Nagpal“Benchmarking DTH cost with cable is wrong. Why should DTH go back to medieval times? In cost structures and transparencies, cable needs to move towards the DTH model

 

You were annoyed at ISRO (Indian Space Research Organisation) not providing Tata Sky more transponders and living up to its promises. What is the status now

We are in discussions with them to find a long-term solution. But if you ask whether we are pondering legal action, let me tell you that that route is currently on pause mode.

Why is subscriber growth slowing down for DTH?

There is no slowdown at the net addition level. DTH is adding 4–4.5 million net subscribers annually, same as two years ago. At the gross level, there is a slowdown as DTH operators have become tighter on trade discounts. Earlier, trade margins were high due to hyper competition in the sector leading to addition of what we would call junk subscribers. Now things have quietened down a bit. We are picking up 3 per cent of cable TV subscribers every year.

Do you see DTH pacing up in Phases III and IV of digitisation?

We don’t expect anything drastically different from the two earlier phases. DTH gained 30–40 per cent of the total conversion from analogue to digital and the outcome should be similar here too. There are larger number of homes and towns; it will thus be difficult from an administrative point of view to ensure the blackout of analogue cable with the speed it was carried out in the earlier phases. Hence, we expect the roll-out to take longer.

With consolidation being difficult in the DTH industry and there being too many players, isn’t the sector heading for inherent weaknesses?

Consolidation among the DTH players in terms of mergers and acquisitions is a long and tedious process. Building one common infrastructure between two operators will be almost impossible and so M&As are out of the horizon at this stage.

But there is concentration of market share between four of the six platforms and that is a positive. About 80 per cent of the market is controlled by four players.

Tata Opportunities Fund LP has picked up 5 per cent stake in Tata Sky for Rs 250 crore ( Rs 2.5 billion). Has Star’s 30 per cent stake come down in the process?

We did a rights issue and the shareholders subscribed in the existing proportion. There is no change in the shareholding pattern.

Why is Tata Sky opposing the 20 per cent broadcast sector cap on DTH equity holding?

Even with the enhancement of the FDI limit to 74 per cent and no change in the sectoral cap, no foreign investment has flowed into the DTH industry. Across the world, investment in the DTH industry is done by entities involved in some part of the value chain of the media industry. It is natural for businesses to expand in related areas, and therefore, restriction of either 20 per cent or any control will only arrest the pace of growth of the DTH industry in India. Even within India, it is not surprising that the strategic investors in the DTH industry are from the media and technology space.

Further, there is an absence of a sectoral cap for MSOs, resulting in an uneven playing field. There is no platform which is able to dominate the distribution space. There is hyper competition in the business and customer choice followed by the CCI (Competition Commission of India) will ensure that platforms that wish to succeed commercially do not indulge in monopolistic behaviour. The 20 per cent cap on the DTH industry should be removed.

Harit-Nagpal“Consolidation among the DTH players in terms of mergers and acquisitions is a long and tedious process. Building one common infrastructure between two operators will be almost impossible and so M&As are out of the horizon at this stage. But there is concentration of market share between four of the six platforms and that is a positive. About 80% of the market is controlled by four players”

 

Are you happy with the Telecom Regulatory Authority of India’s (TRAI) suggestion of reducing licence fee rate from 10 per cent to 8 per cent of the AGR (adjusted gross revenue)?

This is a forward-looking initiative, one that is based on TRAI’s present recommendations. The regulator is doing a good thing by suggesting exclusion of Entertainment and Service Tax from AGR. The calculation of AGR should also take into account the multiple litigations and judicial orders relating to deductions made by DTH operators on account of non-licence and pass-through revenue.

Is it possible to have an open architecture-based set-top box (STB) for DTH services that could ensure technical interoperability?

Technical interoperability is possible only by way of a CAM and authorised card from the operator. Even with an open architecture-based STB for DTH, it is not possible to make it work across any operator without a CAM (only card) unless the conditional access software for each type (used across platforms) is ported on such a box to make it work for decoding. However, the possibility of providing technical interoperability by the use of a CAM is not economically viable as of now. The idea is that by inserting a CAM provided by the DTH operator, the STB can be made to receive the services of the DTH operator concerned. However, the cost of a CAM is as high as an STB itself, which makes it an impracticable idea from an economic viewpoint. Any customer would prefer to buy a new STB from a new DTH operator rather than purchasing a CAM that would be inserted into an old STB of their previous DTH operator.

What are your views on migration of existing DTH licences to a new licensing regime?

We agree with TRAI’s approach regarding migration of existing DTH licensees to a new licensing regime and maintain that the transfer fee should be nominal. All new entrants to the DTH business should have to give a one-time entry fee of Rs 10 crore ( Rs 100 million) for the term of the licence. Given the capital-intensive nature of the industry, we recommend that the term of the licence should be for an initial period of 20 years, with an automatic renewal of 20 years, subject to compliance of all terms and conditions by the DTH licensees.