Cable TV

FY-2015: Indian cable industry - long haul work in progress

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BENGALURU: The cable industry in India has made a remarkable amount of progress in implementing DAS in phase I and phase II considering the weak balance sheets that most players carry, but all still have a long way to go before they actually start making profits. However, the promise of addressability, greater transparency and higher average revenue per user (ARPU) is yet to be realized by the cable industry.

Current Status

As on 31 December, 2014, 138 multi system operators (MSOs) have been granted permanent registration (for 10 years) for providing Cable TV services through Digital Addressable Systems (DAS) by the Ministry of Information and Broadcasting (MIB).

DAS roll out in phases III and IV is expected to be more challenging on account of larger geographical spread, poor balance sheets of the cable industry players and low potential for ARPUs from the conventional cable carriage and subscription business. Implementation of phases I and II was challenging, tiered packages have yet to be offered to the viewer and billing is still work in progress as MSOs still face resistance from local cable operators (LCOs) in giving up ownership of customers in some cases.

Cable players in India have started giving broadband services a lot of serious attention in fiscal 2015. A few players such as the medium sized MSO Atria Convergence Technologies Private Limited (ACT) had actually changed strategy since 2012 and started focusing more on broadband services, without losing focus on its MSO operations. Despite being a regional player, ACT is the second largest private wired broadband player in the country with a market share of 3.24 per cent and over 6.11 lakh broadband subscribers as on 31 December, 2104, just after the behemoth Airtel (15 lakh subscribers, 7.95 per cent market share). ACT had 4.25 lakh (includes numbers of Beam Telecom Limited which was merged with ACT on 1 April, 2014) broadband customers as on 31 December, 2013 and hence, its broadband subscriber base has grown by 43.76 per cent in the 12 months until 31 December, 2014. As on April 30, 2015, Atria had a wired broadband subscriber base of 6.8 lakh.

Public sector companies such as BSNL (the largest wired internet services player in India with 69.83 per cent market share, 1.317 crore subscribers) and MTNL (6.02 per cent market share and 11.3 lakh subscribers) are of course bigger players in the wired broadband services than ACT. Among the major MSOs in the country, Indusind Media & Communications Limited is probably the only player whose broadband subscriber base has not grown much until 31 December, 2014, during which the company reported 29,709 internet subscribers (including 3539 narrowband subscribers) as compared to the 28,337 subscribers (including 4750 narrowband subscribers) as on 31 December, 2013.

Internet services has turned into a heavy capex exercise for many MSOs where the last mile is owned by LCOs mainly because an MSO may not be allowed access to the customer for sales and service by the LCO, and/or the quality of the cable may not be at par.

This report takes four MSOs ? Den Networks Limited (Den), Siti Cable Network Limited (Siti), Hathway Cable and Datacom Limited (Hathway) and Ortel Communications Limited (Ortel), financials as a sample size.

Note: 100,00,000 = 100 lakh = 10 million = 1 crore

Let?s look at FY-2015 numbers reported by these companies:

(Please refer to Fig 1 below) The sum total of operating revenue (OR) for these companies in FY-2015 grew 9.94 per cent to Rs 3213.27 crore from Rs 2922.86 crore in the previous year. Den, the company with the highest operating revenue numbers and subscriber base amongst the three, showed the lowest operating revenue growth of just 1.16 per cent to Rs 1129.64 crore in FY-2015 from Rs 1116.69 per cent in FY-2014. Siti showed the highest operating revenue growth at 29.93 per cent in FY-2015 at Rs 905.93 crore from Rs 627.24 crore in FY-2014. The minnow ? Ortel?s operating revenue grew 20.46 per cent to Rs 158.79 crore in FY-2015 from Rs 128.50 crore in the previous fiscal, while that of the second largest player among the four, Hathway grew 4.33 per cent to Rs 1022.91 crore in the current year from Rs 980.43 crore in FY-2014.

Cable Subscription Numbers

Most MSOs? revenue model is subscription, carriage plus advertising charges for cable services and broadband. Set- top-box (STB) seeding is a one time periodic revenue (maybe once every five years?) for the companies that could later erode the profits ? considering the depreciation and the interest cost on the STB subsidy that many MSOs offer to subscribers.

In its FY-2014 annual report, Den said it serves an estimated 1.3 crore households of which over 64 lakh had opted for digital subscription as on 31 March, 2014. The company has a digital subscriber base of 70 lakh (53.85 per cent of total number of 1.3 crore subscribers) as on 31 March, 2015, of which 51 lakh are in phases I and II of DAS, and Den continues to bill about 80 per cent of these subscribers.

On the other hand, Siti has reported 1.05 crore subscribers and a digital subscriber base of 53.8 lakh (51.24 per cent of total subscribers) for FY-2015, a conversion of 13.8 lakh subscribers to digital over a 12 month period, from the 40 lakh digital subscribers it had reported at the end of FY-2014. As a matter of fact, in Q4-2015, the company deployed 5.3 lakh STBs, and a big portion of its seeding had taken place then.

Hathway has a subscriber base of 1.18 crore of which 85 lakh (72 per cent of total subscribers) are digital and 65 lakh are paying subscribers. This makes it the biggest player in the country in terms of digital subscribers.

Ortel reported a subscriber base of 4.72 lakh in FY-2015 as compared to 4.61 lakh in FY-2014. The company reports 1.07 lakh (22.73 per cent of total subscribers) digital subscribers as on 31 March, 2015.

Ortel CEO and President Bibhu Prasad Rath said, ?Ortel Communications? direct-to-consumer offering with full control over the ?last mile? network has enabled us to emerge as a dominant regional player in the cable TV and broadband business. With increasing penetration in our core and emerging markets along with the inorganic LCO buy out strategy, we believe we are well-positioned to achieve our immediate target of approximately 1 million RGUs by the end of FY-2017.?

Subscription income for all the four mentioned companies has grown, with Siti showing the highest jump at 56.41 per cent ? from Rs 339.5 crore in FY-2014 to Rs 531 crore in FY-2015. (Please refer to figure 2 below) Ortel?s subscription revenue grew the least 4.36 per cent - from Rs 75.7 crore in the previous year to Rs 79 crore in FY-2015.

Siti Cable executive director and CEO V D Wadhwa said, ?Our focus on monetization of existing business in phase I and II cities in FY-2015, led to a strong subscription revenue growth of 57 per cent y-o-y and operating EBITDA margin expansion. Siti Cable is engaged in proactive seeding and well placed to benefit from the ongoing digitization process.?

Internet Services

As mentioned above, offering internet service is a part of many of the major MSOs? business and revenue expansion strategy. Internet services, and more so broadband services of all the four companies mentioned in this report have in general shown higher revenue growth than their cable services revenues.

Den commenced its broadband services in Q1-2015 and has garnered 23,000 subscribers since then. Den CEO Pradeep Parameswaram said, ?We are laying the foundations of building a powerful consumer franchisee in broadband, cable television and television shopping. Significant investments are being made to bring disruptive consumer offerings to the market. We are augmenting out historical strengths in cable operations with high quality talent in all functions.?

Siti Cable?s broadband revenue in FY-2015 grew 53.3 per cent to Rs 26.5 crore from Rs 17 crore in FY-2015. The company reported a broadband subscriber base of 70,100 in FY-2015 as compared to 54,000 in FY-2014.

?We are looking to expand our broadband presence on Docsis technology in our endeavour to diversify our revenue stream and provide the consumer with a compelling experience,? added Wadhwa.

Hathway?s broadband revenue jumped 47 per cent to Rs 247.5 crore in FY-2015. With the addition of Delhi and Central Mumbai to Docsis 3.0 and upgradation of Surat Network, Hathway is the only MSO to offer high speed 50 mbps broadband services in Delhi, Mumbai, Pune, Bangalore, Hyderabad and Surat.

Ortel?s broadband revenue increased five per cent to Rs 28.9 crore in FY-2015 from Rs 27.5 crore in FY-2014. The company?s broadband subscribers increased 7.52 per cent in FY-2015 to 58,519 from 54,427 in the previous year.

?We anticipate further improvement in margins going forward as a result of deeper penetration in the Cable business along with our continued focus on the high-margin Broadband segment,? said Ortel?s Rath.

EBIDTA

The financials of three of the four sample players showed an increase in operating profits (simple EBIDTA including other income). (Please refer to Fig 3 below) Den EBIDTA dropped to half at Rs 180.23 crore in FY-2015 from the Rs 360.41 crore in FY-2014. With an increase of 94.17 per cent, Siti?s FY-2015 EBIDTA almost doubled to Rs 168.43 crore from Rs 86.74 crore in FY-2014. Hathway?s EBIDTA in FY-2015 increased 16.13 per cent to Rs 560.9 crore from Rs 483 crore in the previous year. Ortel?s EBIDTA increasd 44.6 per cent to Rs 59.05 crore from Rs 40.84 crore in the previous fiscal.

Profit/Loss

(Please refer to figure 4 below) Two of the three large players in this sample ? Siti Cable and Hatway have reported higher loss in FY-2015, while Den?s results have turned to the red in FY-2015 from the black in FY-2014. Ortel, which was listed a few months ago on the bourses, is the only one among the four that has reported a small profit of Rs 5.90 crore (3.62 per cent margin) in the current year as compared to a loss of Rs 13.79 crore in the previous year.

?We have seen the positive results on subscription revenues and collections in Q4 of the current year. The profitability has been impacted because of the new business initiatives of the company including broadband, TV Shop and football as we build Den for future,? said Den?s Parameswaran.

Last year, Den became the owner of the Hero Indian Super League?s Delhi Team ? Delhi Dynamos FC. With the introduction of Delhi Dynamos FC, the company aims to become the default destination for entertainment, information and interactivity for the Indian family.

End Points

As the value chain shifts to addressable systems and tiering, growth in cable TV ARPUs will be driven by customized channel packs, premium content channels, HD channels and other value added services. It will not be easy going because cable industry players have to contend with DTH players who have strong balance sheets and are backed by deep pockets ? be it Airtel, Tata Sky, Videocon d2h, Sun Direct or Reliance.

The cable industry players need to sort out the ambiguity about revenue shares between the MSOs and LCOs and between the MSOs and broadcasters. The one positive is that larger MSOs appeared to have stopped poaching LCOs from each other, at least in phases I and II areas. ?It?s not because the industry has turned goodie-goodie all of a sudden. Generally, it is just not worth the cost to pay to an LCO to switch loyalties in a phase I and II areas, or any area where digitsation has happened in a major way,? reveals an MSO on condition on anonymity. That attitude has to change for the common good of the industry.

An industry source cites instances of LCOs still trying to fudge numbers despite deployment of STBs, with the LCOs claiming that a customer has relocated without returning the STB, or fudging with the number of STBs received. On the other hand, some LCOs need help in developing a robust last mile infrastructure.

The cable industry has to leverage whatever advantages it has - this could be providing local information and relevant local news, local advertisements, etc., on MSOs? own channels and services.

A key differentiator could be the service quality and the personal connect that many operators have developed with consumers. Industry players need to change the impression they create right from ground up. This includes approach to customers for bill collection, to how each individual is perceived by anyone and everyone in the value chain, and more so banks and financers. Big as well as multiple middle sized players have already brought in a degree of professionalism across many levels and hence have relatively easier access to funding.

Long term common purpose unity is what the cable industry needs desperately. Each player has to mature, has to understand and accept that one cannot do without the other. The road is still long and arduous.

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