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MPA’s take on value creation in TV & broadband
Following a blitzkrieg of cable set-top box (STB) deployment, the digitalization process is taking a breather as operators shift focus from deployment to monetization in order to ensure growth with profitability. From a myopic lens, the pace of India’s pay-TV growth story may appear to be in trouble. However, as we track the trajectory of other large-scale developed and emerging pay-TV markets, it’s clear that the process of profitable digitalization typically takes 15-20 years. In this context, for a market characterized by low ARPUs, absence of tiering and fragmented last mile cable distribution, India has done well to attain 48% digital pay-TV penetration in eight years.
As the industry consolidates and regroups, the current phase of India’s pay-TV industry offers significant opportunities for value creation across various business segments. We highlight key opportunities and levers:
Cable: Initial STB seeding by cable operators has improved subscriber declarations. Accordingly, with the transition from analog to digital, net ARPUs to MSOs have grown 10x, to Rs100 per sub per month. However, the current balance sheet position of most MSOs does not justify market expansion. MSOs are therefore compelled to drive operational efficiencies through prepaid services and packages. This helps improve yields from existing digital subscribers. Operators successful in executing such moves will attract refinancing (of existing debt) to expand their consumer offerings with bundled broadband and HD services. Over time, MSOs will also gain more operational control of their networks through majority ownership of joint ventures, and eventually acquire primary points at affordable prices.
At each stage of cable’s evolution (as detailed above) the operating margin for MSOs will grow multifold. The business will remain capital-intensive but as operators grow to become full-service providers, they hold the potential to generate significant returns on capital employed (RoCE).
Cable assets should not just be evaluated on reach and the digital subs base but also on their ability to cross-sell high- value services such as HD and broadband. Also important is their effective economic interest in the last mile business. As the approach for MSOs shifts from width to depth, structurally, cable platforms will remain concentrated in the top 50 cities. This could change dramatically, however, with the entry of deep-pocketed players such as Reliance Jio and the growth of HITS (Headend-in-the- Sky) platforms, which seek to digitalize rural markets. Several international and long-term financial strategics have also been eyeing partnerships with India’s cable and broadband players. This would help expedite capital as well as technical, operational expertise.
DTH: Since its inception, the DTH sector has made cumulative investments of ~Rs275 bil./US$4.5 bil., and has been primarily responsible for driving netration of digital pay-TV. With a base of more than 41 mil. Active subscribers, DTH is poised to benefit from greater economies of scale. In 2014, the DTH industry reported an average EBITDA of Rs38 per sub per month, with margins at 16%. Moreover, two of the leading operators, Dish TV and Airtel Digital, have already started generating positive free cash flow (FCF). Over time, we expect the DTH industry at large to generate meaningful FCF through: (1) EBITDA margin expansion, as operating leverage starts to play out with subscriber acquisitions in Phase III and Phase IV DAS markets; and (2) The composition of incremental revenue becoming driven more by ARPU growth rather than subscriber volumes. Leading players will be able to self-finance future growth as well as consolidate the market, creating significant value in the process.
Broadcasting: India’s US$3.5 bil. broadcast industry remains in a sweet spot. The dual revenue stream of advertising and subscription is expected to benefit from a resurgent economy as well as improved structural dynamics anchored to steady growth in the number of TV households (TVHH) and higher digital pay-TV penetration.
At 60% TVHH penetration, India continues to add ~7 mil. New TV homes each year. In other words, at an average family size of 4.5 members, TV is gaining more than 30 mil. potential viewers each year. Television should therefore continue to offer the highest reach to advertisers, relative to other media. As a result, advertisements should remain the major revenue stream for broadcasters, while an increase in affiliate sales will help stabilize the business and drive profitability.
As of end-2014, total affiliate sales for broadcasters reached US$1.1 bil., according to MPA. Significantly, ~80% of affiliate revenues were derived from digital subscribers (cable DAS + DTH), while India’s digital pay-TV penetration stood at 48% for the same period. Digitalization has therefore improved subscription yields for broadcasters. In 2014, an average broadcaster’s yield from digital subscribers stood at Rs74/US$1.2 per sub per month, against Rs18/US$0.3 per sub per month from analog. There is therefore upside on affiliate sales, as analog subscribers in Phases III and IV convert to digital.
Besides leading to greater addressability, digitalization has also improved channel distribution economics by lowering the cost of distribution and allowing multiple modes on content delivery (SD, HD SVoD, TVE etc). Although cable continues to account for more than 80% of the carriage and placement (C&P) market in India, since the roll-out of DAS in 2012, the cable net distribution income (or NDI, which is essentially subscription income minus C&P costs) for broadcasters has grown by 137%, to US$218 mil.
Going forward, the growth of the broadcasting industry will be driven by: (1) Expansion in advertising through sub-segmentation and identifying new genres; (2) An increase in the addressable subscriber base with more digital homes; (3) Growth in subscription yields. MPA projects total pay-TV channel revenues for broadcasters to grow from US$3.5 bil. in 2014 to US$6.1 bil. by 2019, and to US$7.9 bil. by 2023.
Based on the relative growth for other markets in Asia-Pacific (ex-China), India is expected to contribute more than one-third of the total channel revenue business in the region by 2023. India’s strategic importance in the region cannot be ignored. For major international networks, India already contributes a significant part of their overall APAC business.
Broadband to sow seeds for new digital assets. Finally, significant investments are also being made in India’s fixed and wireless broadband infrastructure. This will help boost internet penetration and improve average broadband download speeds. To address the challenge of last mile connectivity, the Department of Telecom (DoT) is considering joining forces with cable MSOs and local cable operators to help boost broadband penetration in smaller cities and towns. The above proposal, if implemented, can open new avenues for cable broadband.
MSOs have already increased their investments in broadband. As of end-2014, cable broadband subscribers stood at 1 mil., or only 0.3% penetration of total households in the country. However, the entry of new players such as Reliance Jio could dramatically change the fixed broadband landscape. Having recently secured a pan-India MSO license, the company claims to have built the capacity to serve 20 million fiber-to-the-home (FTTH) customers.
Traditional broadcasters are looking to capitalize on the emerging digital opportunity by investing to create long-term assets. For instance, incumbent broadcasters Zee, Star and Sony have started to aggressively invest in delivering branded OTT services. The belief is that online video consumption will complement the existing linear pay-TV business. Eventually, subscription OTT services will take off as bandwidth costs become more affordable and compelling exclusive content is made available for online audiences. Nonetheless, revenue monetization will require more scalability, as online video revenues are projected to account for not more than 10% of total video industry revenues over the next decade.
(As published in the latest issue of MPA’s bi-monthly India research report, Media Route 26 India.)