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TRAI weighs three RIO models for new tariff regime

MUMBAI: The Telecom Regulatory Authority of India (TRAI) has said that the Regulated RIO (reference interconnection offer) model, which will specify price cap for channels according to genres, fix the link between prices of a la carte and bouquet of channels, and provide a framework for discounts offered by broadcasters, is likely to work smoothly keeping in view the present status of various stakeholders and maturity of the sector.

While weighing the three possible RIO models at the wholesale level, TRAI feels that the Regulated RIO model would be non-discriminatory and transparent in nature for all the stakeholders across the value chain. At the wholesale level, signals of TV channels are provided by the broadcasters to the distribution platform operators (DPOs) like cable TV, direct-to-home (DTH) and headend-in-the-sky (HITS).

As part of its consultation process to devise a new tariff regime for digital addressable system (DAS), TRAI has pointed out that there are three plausible RIO-based models at the wholesale level. These three models are as follows—Universal RIO, Flexible RIO and Regulated RIO. TRAI has discussed the pros and cons of the three models and their likely impact on the industry.

Regulated RIO model

Under this model, the broad contours of the RIO have to be notified by the broadcasters. The regulatory framework may specify price cap for channels according to genres, the link between prices of a la carte and bouquet of channels, a framework for discounts offered by broadcasters to ensure non-discrimination, transparency, measures for transparent declaration of the number of subscribers of each channel and bouquet, the manner of providing TV channel signals to DPOs, checks for piracy, etc.

This model envisages opening a window for innovation, price discovery and production of diversified content by not prescribing any price cap for a category of pay channels, subject to certain conditions such as that channels will be provided on a la carte basis only and will not form part of any bouquet either directly or indirectly, at broadcaster or distributor level. Broadcasters would be free to declare their channels under this category.

i. Pros:

a. It ensures a level playing field with non-discrimination and transparency among various stakeholders in the value chain.

b. It provides flexibility to broadcasters to price their channels within the prescribed price caps while controlling risk of exorbitantly high price due to their monopolistic behaviour.

c. It protects the interests of distributors and consumers.

d. It encourages the broadcasters to offer niche channels.

e. It enables price discovery of a category of pay channels based on competitive market principles.

f. Disputes among stakeholders are likely to be reduced further encouraging growth of the sector.

ii. Cons:

a. Some broadcasters may think that prescription of regulatory framework for interconnection offer and price caps would hinder their ingenuity.

b. Each stakeholder has to comply with the regulatory framework. This entails additional cost for regulatory compliance.

iii. Workability:

a. The model is likely to work smoothly keeping in view the present status of various stakeholders and maturity of the sector.

b. It is closer to the existing regulatory framework except that it provides forbearance for certain category of channels and price caps for pre-notified genres. The price cap in this case may not be linked to non-addressable system prices and the level of transparency will be increased.

iv. Challenges:

a. More resources would be required to ensure regulatory compliance.

b. Periodic interventions may be required to re-adjust the various parameters based on market conditions and the development status of the sector.

Universal RIO model

Under Universal RIO model, broadcasters will have complete freedom in deciding the price of each channel. However, broadcasters are mandated to notify the RIO and declare the price of each channel on a la carte basis. The RIO will include other terms and conditions of interconnection also.

Any discount, if proposed, has to be transparently and objectively declared upfront in the RIO. All deals with DPOs will have to be carried out based on terms and conditions declared under RIO.

No mutual agreements are permitted in this model. Broadcasters cannot offer bouquet of channels in this model. The model has inherent potential to enhance customer payout abnormally, but such possibility will be limited as price increase will impact eyeballs. Reduced eyeballs will adversely impact revenue from advertisement, which in turn will balance any abnormal increase in channel price by broadcasters.

Brief snapshot of the Universal RIO model is given below

i. Pros:

a. Broadcasters, being content providers, have complete freedom in pricing their channels.

b. It encourages the launch of niche channels and will increase content variety.

c. The quality of content is likely to increase.

d. It is likely to boost investment at the broadcaster level.

e. It will enable the choice of channels to the DPOs.

ii. Cons:

a. The complete freedom of broadcasters to price channels even after acknowledging that content is monopolistic in nature may be anti-consumer and abnormally increase the ultimate price to customer.

b. It may impact investment at the distribution level.

iii. Workability

a. Broadcasters would control pricing of the content. The success of the model will totally depend on the mature behaviour of the sector, particularly of the broadcasters.

iv. Challenges

a. Broadcasters will be framing the RIO terms and conditions without any regulatory intervention. Hence, possibility of RIO being pro-broadcaster cannot be ruled out.

b. It will bring imbalance in the value chain by giving more powers in the hand of broadcasters at the cost of DPOs and other stakeholders in the value chain.

Flexible RIO model

The Flexible RIO model is very similar to the Universal model. In this model, the broadcaster has the freedom to notify the price of the channel both for a la carte and bouquet. In addition to price formulation flexibility, broadcasters can also enter into mutual agreements on certain issues as indicated in the RIO.

Brief snapshot of the Flexible RIO model is given below

i. Pros:

a. Broadcasters have more flexibility for mutual agreement with each DPO.

ii. Cons:

a. The possibility of discrimination against DPOs may increase as flexibility of mutual agreements can be used against smaller DPOs.

b. Such discrimination may result in differential treatment to consumers served through different DPOs.

c. The disadvantages of the Universal RIO model will be applicable to this model also.

iii. Workability

a. Success of this model will again depend on the maturity of the broadcasters in pricing their content and transparently providing terms and conditions for interconnections.

iv. Challenges:

a. Ensuring level playing field for all DPOs and protection of consumer interests so that content is not priced abnormally high.

b. Ensuring transparency and non-discrimination.

TRAI has sought stakeholders’ views as to which price models discussed in the consultation paper would be suitable at the wholesale level in the broadcasting sector. They can also suggest a modified or alternate model with detailed justifications.

Outside the RIO, there are two more plausible models at the wholesale level. They are the Price Forbearance and the Cost-based model.

Price Forbearance model

This model envisages minimal regulatory intervention for price fixation at the wholesale level for B2B transactions. There is minimal regulatory reporting requirements, but it ensures that content is provided in a transparent and non-discriminatory manner.

Broadcasters have complete freedom to price and market their TV channels as per their business requirements. They are free to come up with innovative offers and marketing strategies for creating a competitive environment. The retail price to the subscriber will be declared by the DPOs.

Pros:

a. Freedom of pricing content will boost broadcasters’ interest and bring in variety and quality of content including niche channels for education, health, etc.

b. Foreign direct investment may increase for broadcasters.

c. More popular content may attract more advertisements that may result in reduction in subscription charges from subscribers.

ii. Cons:

a. This model may lead to monopolistic control of TV channels by large broadcasters.

b. Monopolistic price control may result in litigations due to enormously high pricing of content.

c. More bundling of TV channels may be encouraged by broadcasters.

d. Consumers’ choice may be limited.

e. Growth of the sector in general may get adversely impacted due to limited flexibility to new entrants.

f. Due to uncertainty of business at the distribution level, investment may reduce.

iii. Workability:

a. This model is feasible in an ideal, matured and pluralistic market that is largely governed by ethical and transparent business practices.

b. Success of such model will be difficult keeping in view present status of sector due to vertically integrated entities, non-transparency and discrimination in providing channels uniformly across DPOs.

iv. Challenges:

a. Maintaining a level playing field among stakeholders.

b. Adequately controlling market dominance of few broadcasters.

c. Controlling abnormal price increase for consumers due to price forbearance at the broadcaster level.

d. Choice to consumers may continue to be elusive.

Cost-based model

Under this, the price of a channel would be regulated on the basis of actual input costs incurred on creating content. The average unit outflow of a channel will be determined considering the total cost of content production, revenue from advertisements and the number of total subscribers to that channel.

Broadcasters can then fix the price of the channel and bouquets by adding their profit margins. The details of calculation would be made available to regulatory authorities, who may vet the reasonableness and fairness to arrive at the price of the channel.

Brief snapshot of the cost based model is given below

Pros:

a. It is a scientific method for price calculation and regulation.

b. This would be transparent.

c. It provides a reasonable rate of return on investments.

ii. Cons:

a. Media content is a creative product for which production cost may vary significantly across time, location, genres, channels, etc.

b. There is a possibility of huge variation in content production cost within a given genre. Hence, vetting the price of an individual channel would pose a huge regulatory burden.

c. The methodology condones inefficiencies and allows payment in lieu of that also.

d. It discourages further investment at registered broadcaster level.

e. It goes against the pricing principles where pricing of a product at different stages of its lifecycle may be based on different criteria to maximise overall gain.

iii. Workability:

a. Channel price calculation will be a very complicated exercise, particularly when a channel is composed of different programmes which may vary significantly on their production cost.

b. There are different streams for revenue generation such as advertisement, customer subscriptions, over-the-top and other modes of services. The customers likely to use such services are not known before notifying channel rates. So, there will be a challenge to derive the channel price without having information in advance.

c. The method of determination may be very complicated and may vary with each addition or alteration of programmes in a channel. This may be impossible to administer.

iv. Challenges:

a. Implementation and workability will be a big challenge.

b. Reasonableness of data used for cost calculation will always be a point of dispute, which will be difficult to resolve.

Rationale for a comprehensive tariff structure for DAS

TRAI’s decision to frame a comprehensive tariff structure for DAS stems from the growing dispute between broadcasters and the DPOs.

On the one hand, broadcasters feel that the present regulatory framework does not support innovation in content production, and due to such a restrictive approach, content quality has been degrading. In support of their argument, they indicate limited availability of niche channels. According to them, the current business model is not conducive to growth. They are critical of the price cap prescribed by TRAI in 2004.

On the other hand, the DPOs are of the opinion that the present business model does not ensure non-discrimination and fair play.

According to TRAI, the DPOs indicate that the large gap between RIO and mutually agreed price compels them to sign and pay for all channels of a particular broadcaster irrespective of subscriber’s choice. They say that the price of the pay channels is increasing but revenue realisation from the ground remains low.

Small and medium MSOs insist that mutual interconnection agreements are not meeting the intent of non-discrimination. Quite a few MSOs are of the view that presently there is no systematic method to know whether broadcasters are providing TV signals to them on a non-discriminatory basis.

There are a number of disputes regarding interconnection agreements between broadcasters and DPOs and also between DPOs and local cable operators. Such disputes are detrimental to the growth of TV broadcasting sector as a whole.

Customers are of the opinion that though digitisation has increased the number of channels and improved quality of service (QoS), the choice of channels and accordingly control in their hand to budget their expenses is still missing. Even now, in real sense, subscribers are indirectly forced to choose large bouquets only. Wherever a la carte channels are being provided, the cost of such channels is exorbitantly high and it indirectly forces them to accept large bouquets.

In such a scenario, TRAI feels there is a need to holistically re-examine the existing business model of the digital addressable TV broadcasting sector and accordingly transform existing regulatory framework including tariff orders.

This, the TRAI feels, should address the concerns of various stakeholders in the value chain, enhance the growth of the sector and protect the interests of the consumers.

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