• Higher subscriber accountability since the system eliminates the cable service provider in the distribution chain. Thus there would be no under-reporting of subscribers as is prevalent in the current cable system.
• Premium quality service can be made available through the DTH system. The quality of transmission in the case of DTH system is much better than that of the conventional cable system.
• DTH would be more accessible in remote areas where the cable's excessive length may make the system expensive or technically un-acceptable.
• DTH is good news for smaller channels because the digital technology allows a provider to compress between eight and 10 channels on a single transponder. So most big broadcasters are likely to be left with plenty of unutilized transponder space.

Broadcasting companies evince interest.

Within days of announcing the DTH policy broadcasting companies including the state owned DD announced plans to set up the DTH network. DD is exploring the possibility of forming a joint venture with telecom major MTNL for television broadcasting using KU band DTH platform. The idea is to provide Internet and other convergence services as well. Zee has already announced a tie up with C Sivasakaran's Sterling Infotech. While Zee would bring in its expertise as a broadcaster Sterling would provide the subscriber management system to its DTH customers. Star and Sony also have earmarked investments to the tune of US$500mn in the DTH venture. Star infact had commercially marketed the DTH service way back in 1996-97. However the proposal was eventually shot down by the I&B ministry on the ground that the DTH service to consumer homes could set off an un-controllable cultural invasion. Star had invested a couple of million dollars in the project, which eventually had to be written off.

Internationally DTH has done well in Europe

Europe has been at the forefront of the DTH revolution. With 6.9 million subscribers DTH accounts for 80% of the total satellite television subscriber base. There are two DTH service providers in Europe-BskyB and Canal Plus. BSkyB is the market leader with a subscriber base of nearly 5mn. In North America DTH was launched in 1994. Direct TV was the first entrant followed by Echostar, which launched a service called Dish Network in March 1996. There are nearly 13mn DTH subscribers in this region and the service operators provide valued added services like pay per view, video on demand and Internet on television. In the Asia Pacific region Sky-perfect is the leader with 1.6mn subscribers followed by Foxtel and Austar with a subscriber base of 0.2mn each.

But archaic rules and regulations will act as a dampner.

Even though the law allows DTH to be set up in the country it is difficult to foresee major investments being made due to archaic regulations formulated by the government. The latter has come out with the following recommendations:

• Programs and/or channels distributed through DTH should only be uplinked from India so that they confirm to the programming and advertising codes.
• Broadcasting/cable companies cannot hold more than 20% in the venture.
• Foreign investment in the form of NRI/OCB/FII cannot exceed more than 49%. DTH control should rest with resident Indians.
• Investors would have to shell out Rs100mn up-front and share 10% of their yearly revenues with the government. Coupled with the entry fee the investor would need to furnish bank guarantee of Rs400mn for a 10-year license period.
• A subscriber management system and an open architecture set top box will need to be in place.

The broadcasters unanimously termed the DTH policy as un-realistic and too expensive. Chief among them is the 20% equity restriction for broadcasting/cable companies in the DTH project and the huge costs involved in the form of entry fee and sharing of revenues between the broadcaster and the government. It is not hard to see why the broadcasters are visibly perturbed. Firstly the service provider would have to create an infrastructure which would need investments of over Rs10bn before any the operations can begin. Secondly a 100-channel operator will have to hire around 14-16 KU band transponders pay heavy royalty to the original channel owners set up subscriber management system and incur considerable expenditure on sundry overheads. Coupled with the interest and depreciation cost on the capital outlay of Rs12bn the total recurring cost would be in the region of Rs6-7bn per annum.

Revenue model of a DTH service provider (Rsmn)

India Infoline estimates

We spoke to a few people in the media sector and they were of the opinion that DTH would penetrate around 3mn homes within a span of 3 years. The underlying premise is the higher cost of DTH vis a vis cable. Currently cable operators provide subscribers with 70 odd channels for Rs150/month/subscriber. Compared to this the cost of DTH for the consumer would be in the region of Rs500-600/month after incurring a capital expenditure of between Rs10000-15000 towards set top box and the dish antennae. In Western countries the DTH operator subsidizes part of the equipment cost. Whichever way you look at it the service will be expensive both to the consumer as well the operator.

On the other hand the total revenues assuming a subscriber base of 3mn in 2003 would be in the region of 18bn. Will these revenues be enough? Probably yes if there are only two DTH operators. However given that broadcasting companies cannot hold more than 20% in a single platform it is difficult to envisage two platforms. We expect 5-6 platforms to emerge over the next three years. That would mean a rate war thereby reducing the potential revenues below the said figure of Rs18bn.

Cable TV is still a hot property

While DTH is one option available to viewer and a premium one at that cable is already present in 35 million homes of the country. World over cable has become a hot property because a number of services can be provided through the single cable pipe. Services like high speed Internet, video on demand and Internet telephony are already being made available by the cable operators in the US and Europe to their customers. No wonder some of these players, even today after the Nasdaq debacle are trading at billion dollar valuations despite showing earnings losses. Analysts have in fact assigned strong buys to stocks of publicly traded cable companies.

In India the story is no different. Valuations are high despite the fact that these companies are not providing the same kind of services that are offered by their international counter parts. Foreign investors have reposed faith in Indian cable companies as could be gauged from Star's stake in Hathway for US$75mn and Intel's 3% stake in the cable arm of Hinduja's for US$49.3mn.

Valuation of Indian Cable Companies

Valuations of International Cable companies

Siticable has the highest market share

Siticable has the highest market share with nearly 5.4mn subscribers under its belt. The company owns 73 head ends in 43 cities. The satellite television signals are re-distributed to about 10,000 Access Cable Operators (ACO's) which feed the broadcast to the households through cable linked to the Siticable control room. IndusInd Media belonging to the Hinduja group comes a close second with nearly 4.5mn subscribers. Rajan Raheja controlled Hathaway Cable Network, RPG Netcom and Sun's Sumangali are other major cable service operators in the country. These large Multi Service Cable Operators (MSO's) control 15mn of the 35mn cable television house holds. So the cable system in India is well entrenched and now needs to be upgraded for making it viable to provide a whole host of value added services.

However there is rampant under-reporting of subscriber base by ACO's

Unlike the US India does not have well regulated cable laws. In the US for example the government has given licenses for a maximum of two or three cable companies per state. This is akin to the cellular licensing policy where the government has given licenses to two or three cellular operators per circle. The cable companies have a subscriber management system in the form of a set top box to monitor subscription revenues. Hence there is no question of under-reporting of subscriber numbers.

In India the cable laws are not in place. Even though the MSO controls nearly 60% of the total cable households the effective control is much lower because of rampant under reporting by the ACO. ACO's act as franchisee or collecting agents for the MSO's. In all there are around 25,000 ACO's through which the larger MSO's distribute their signals. According to the revenue model these ACO's have to pay something like Rs20-25 per household to the MSO. However in reality MSO's receive only 20% of the payments from cable operators. In such a structure the ACO retains 85% of the total subscription that is collected, whilst the MSO gets only 5% and the channel broadcaster retains the rest. Had there not been any under reporting the revenues would have accrued in the ratio of 10:20:80 to the ACO, MSO and broadcaster respectively. At the same time there is no respite on the cost front. It is because of this under reporting that MSO's like Siticable have not performed to their true potential.

Improving cable addressibility should solve the problem

The only way therefore for the MSO's to improve their revenues and profitability is to solve the under-reporting issue. That would mean either buying out the ACO's or forging an alliance with them for sharing revenues. According to some of the industry officials MSO's would have to shell out Rs75bn for buying out the 25,000 odd ACO's that have complete control over 15mn households. This is definitely no small amount and it will make the balance sheets of MSO's very heavy indeed. Forging an alliance is therefore a cheaper alternative.

The cable laws also need to be amended to align themselves with those prevailing in Western countries. The Cable Network Association of India has put forth its demand to the Information and Broadcasting minister that cable TV should be available to a subscriber on a conditional access system so that the consumer has to pay only for the channels that he wants. While the operator would not have to pay for the pay channels that the consumer does not want the consumer too would not have to pay more than he should. A conditional access system would entail investments by either the MSO or the consumer in the set top box (just like the set top box in the DTH system) which will improve subscriber addressibility. Once the set top box is installed you would not have a situation where the consumer gets 60-70 channels for Rs150/month at an absurd cost of Rs2/channel. As in any other business as the volumes increase so would the prices drop. In this case the broadcasters would pass the benefit of additional volumes to the consumer. For example ESPN, which charges Rs7/month/subscriber gets revenues from around 7mn homes when actually it reaches 30mn homes. If the channel were to reach 100% of the households it would be in a position to lower its subscription rates. This is a win win situation for the consumer, the MSO, the channel broadcaster and also the government.

Will the ACO's budge?

They will have to say the industry officials. Firstly the smaller cable companies are financially not strong enough to upgrade the cable network for providing cable, Internet and other value added services through the cable pipe. The cable network in the present form cannot provide these services. The entire last mile needs to be overhauled to the more sophisticated Hybrid Fiber Co-axial (HFC) network. Siticable for example plans to spend Rs30bn over the next three years for providing Internet and value added services on a modular basis over 26 cities in the country. IndusInd is planning a similar foray in nine cities for an investment outlay of Rs8bn. It is pertinent to note that the capital expenditure for MSO would be much higher than ACO because it also includes connecting all the head ends through a ring structure by means of an optical fiber cable network. Nevertheless the capital expenditure requirements for ACO's would be beyond their budget. Secondly once Internet video on demand and Internet telephony becomes available through the broad band cable pipe the smaller cable operators could gain immensely by sharing these revenues with the MSO. The potential revenues for the cable companies could be in the region of between Rs100-150bn and this will grow once higher number of services is accommodated through the pipe. Hence the smaller cable operators will have to become part of the system and share revenues with the MSO or else shut shop.

So is it cable or DTH that will finally rule the roost?

On the face of it the cable system is well entrenched in India and is poised for a leap into another plane. We believe that the DTH system could have made a significant breakthrough only if it had developed before the cable system. For example in the Europe, DTH developed before cable and therefore controls nearly 80% of the total satellite television subscriber base. However the situation is exactly the opposite in the US because here the cable system developed before DTH. There is no gainsaying that DTH will take some business away from the cable operators. But as we discussed earlier DTH would be premium product catering to the up-market viewers, as it would be prohibitively expensive for both the operators and the consumers. At the same time cable operators with their upgraded network can themselves provide quality services at a much lower cost through the pipe. The DTH system in its present format is therefore not likely to give the cable operators sleepless nights.