MSOs biggest gainers - JP Morgan CAS report

MUMBAI: JP Morgan India's report on the Indian cable industry titled: "CAS: The Medicine for a chronic ailment" believes that the full implementation of the CAS (conditional access systems) would happen over a period of six to seven years. However, the report anticipates a minimal impact of the Bill on the industry within the first six months of the implementation process. 

The report states CAS would be a disruptive force for the cable industry. However, it adds that the television industry, suffering from chronic under-declarations, poor infrastructure and fragmentation, would benefit from the post-CAS scenario. It sees MSOs as the biggest gainers in the post-CAS era followed by the broadcasters and consumers. It is the local cable operators LCOs that have the most to lose from the CAS dispensation, the report states.

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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