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It adds that CAS would enable the cable industry to become more
organized, healthy and much less fragmented. The change would come
about as increasing numbers of subscribers would be connected directly
through set-top boxes, thus increasing transparency in the system.
CAS would be a paradigm shift: MSO still to be the biggest gainer
CAS would be a disruptive force for the cable industry despite
the fact that CAS and its implementation details are not currently
specified. The report estimates that CAS would come into force one
year after the passage of the Bill (which was last month).
The report estimates that the cable industry would be rid of its
major ailments such as under-declarations, poor infrastructure,
cash dealings, and the presence of unsavoury elements would get
sorted out if CAS is implemented well.
In the long term, CAS would benefit broadcasters and MSOs the most
as transparency in the system improves. The impact of CAS in the
near term remains uncertain for broadcasters and has to be thrashed
out on a case-by-case basis.
It anticipates that the MSOs would bag the last mile access, something
that they have been lacking so far. The report expects MSO valuations
to rise significantly. A prime case would be Zee (through Siticable)
which stands to gain considerably.
MSOs (not LCOs) more to blame for lower declarations
Elaborating on the ground realities as they exist currently,
the report makes a valid point about the general perception that
the local cable operators (LCO or last mile operator or franchisee
operator) are the biggest culprits of low disclosure in the country
and do not report actual numbers. The report states that the truth
is different as the LCOs affiliated to MSOs are the only ones who
can get away with lower declarations. The report quotes industry
sources and states that the standalone LCOs are paying at higher
than industry levels of declarations.
In all fora, the larger broadcasters and MSOs complain about low
declaration from the local cable operators who have last mile access.
Contrary to popular belief, the report claims that the MSOs are
the biggest under-declarers.
The report states that studies reveal that the LCOs are usually
very small players who are aligned to an MSO, either directly or
through a franchisee. Though the LCOs have last mile access, their
bargaining power is limited. The report claims that a MSO can (and
actually does) muscle their way to get high declarations from the
LCOs. While earlier a franchisee could migrate to a rival MSO in
case of pressure on higher declarations, an informal non poaching
arrangement between MSOs has put an end to this practice. In case
the declaration is inadequate, they can shut out a LCO from the
signals and he would then have to face pressure from subscribers.
The report mentions that MSOs are uniquely positioned in the cable
industry. Since MSOs are situated in big towns, their bargaining
power with the broadcasters is high as large cities are also from
where data for programme ratings is collected (known as TRP cities).
The report claims that the channels thereby settle at much lower
level of declarations from MSOs in return for uninterrupted telecast,
which drive ad revenues.
However, it is not all hunky dory for the MSOs. In the bid to build
bigger subscriber numbers, MSOs have historically competed to get
franchisees. This has led to lower level of declarations from franchisees
to MSOs.
Local Cable Operators (LCOs): unregulated proliferation
The report mentions that the unregulated nature of the cable
industry has led to a proliferation of LCOs. It adds that the total
number of estimated LCOs varies widely. The official number is around
17,000, which is the number of operators listed in the post offices.
However, some estimates point to numbers ahead of 40,000. Morgan's
analysts estimate this number to be around 28,000, as of 2001 year-end.
MSO: different business models in place
The report mentions that some of the big players decided to take
control over customers after the initial proliferation of the cable
operators. The desire to achieve this control was driven by the
need to ensure carriage in 1994, a time when most TV sets had only
8 channels in the country.
This resulted in the springing up of lots of multi-system operators
(MSO) though business models differ from player to player. The report
gives the following examples: Siticable forms JVs with local cable
operators and shares the investment in the headend as well the revenues.
INCable directly appoints distributors who carry the INCable signal
to the consumer and have a revenue sharing agreement. Hathway forms
co-operatives between cable operators and invests in the headend
and the co-operative firms. Some other MSOs like RPG Netcom and
Asianet use public utilities to string cable.
The report estimates that the top six MSOs in the country control
around 50 per cent of the country's subscriber base, directly or
indirectly, depending on the business model.
Independent Cable Operators (ICO)
In some of the cities and bigger towns, the Morgan analysts have
noted the appearance of ICOs. These players would be different from
the MSO, as they would be having only one head end and would own
the last mile. Some examples of these would be 7 Star Network in
Mumbai. The total number of subscribers with these ICOs as a percentage
of the country's total subscribers would be around 10-15 per cent.
Anatomy of the pay market
The report estimates that the total size of the pay revenue
market stands at Rs 76.8 billion ($1.6 billion) currently with the
payment by cable subscribers at about Rs160/home/month for the country.
The total number of cable households in India is estimated to be
between 38-45 million. JP Morgan analysts believe that the correct
number is likely to be somewhere in between, around 42 million.
Of this, about 14 per cent or Rs10.6 billion accrues to the broadcasters
on an overall basis. ESPN-Star Sports, which has the largest penetration,
claims a reach of around 6.5-7 million homes.
And growing fairly rapidly
The growth in cable homes has been exceeding total TV home growth.
This has been primarily driven by the fact that cable programming
is much superior in content to what is available on terrestrial
channels (which is what a consumer gets if not connected through
cable).
Lack of regulation has led to a complex structure
The report envisages that the consumer might get the feed from the
MSO, the independent cable operator or the local cable operator.
What complicates things further is the fact that there may be multi-level
franchising taking place between MSOs and LCOs. Overall, the number
of tiers that exists between the broadcaster and the consumer can
range anywhere within one to five and at times even more.
The flowchart below shows the structure of the Indian cable and
satellite television.
Chart 1: Structure of Indian C& S
Television
Source: JPMorgan.
And poor infrastructure
The report laments the fact that the lack of regulation has
led to a complex structure but the biggest victim has been infrastructure.
There is hardly any underground wiring in the country and a large
part of cable system (especially in smaller towns) is of low quality.
The cable industry is known for its cash dealings and attendant
undesirable elements that such cash dealings usually attract.
Fragmentation in the industry has also resulted in multiplicity
of infrastructure (number of headends etc), which makes it difficult
to get optimum returns from the business without making it expensive
to the consumer. Additionally, poor infrastructure also means that
it gets difficult to introduce value-added services over cable systems.
Given the rampant underdeclarations, the cable business has found
it difficult to attract capital from organized sources.
MSO: Winner All the Way
The biggest winners of the CAS implementation would be MSOs. The
Morgan report believes that the most likely scenario would be MSOs
taking control over the box in consumers' homes. This would solve
the longstanding problem of scattered 'last mile' control. While
there would be short-term gains on the profit and loss of MSOs,
they would not be very significant. In the longer term, however,
the analysts expect slow demise of the MSO-LCO model and emergence
of a pure MSO model. This would improve both revenues and valuations
for MSOs
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