The Morgan report reasons that broadcasters have gained through increasing pay revenues in the last 3-4 years. As the revenues come without much attendant costs, the "pay revenues" have helped profitability of channels significantly. As per Table 1, the pace of pay revenues has been increasing since the past years.

A case referred to in the report was Zee. The report estimates that the company would have close to Rs1.6 billion from the domestic pay market in FY03. These revenues would be the key driver of profits in years that advertising revenues of the network are weak. The report also adds that for Star TV, pay revenues form about one third of total revenues.

Broadcasters: pay revenues increase likely to propel fall in channel rates
The report envisages that the broadcasters have to bring down their channel rates with the advent of CAS; that is, if one goes by their promise of bringing down rates if declaration levels improve.

As is shown in Table 6, the net impact on channels should be marginally positive only. In the above calculations, the report has assumed a 60 per cent box adoption which might be slightly on the higher side. However, one must note that this assumption compares with a declaration rate of 30 per cent currently (which is higher than an all India rate of between 15-20 per cent).

The Morgan report has taken higher rates into account, as the analysts believe that the addressable market for broadcasters is lower than the total reported homes in the country. There are a huge number of cable homes in rural areas, which will be tapped only over a period of 5 years.

Given that the first phase of rollout is in metro areas, the Morgan reports believe that the concerns there are overblown. Since metros are controlled by MSOs and since declarations are the lowest from metros, the impact on pay revenues should actually be positive. The negative impact, if any, would likely be with very high pay connectivity channels, i.e. channels belonging to Star Plus.

Broadcasters: impact on advertisement revenues unclear
The impact on advertising revenues is not very clear at this point in time. There are two extreme schools of thoughts. The first viewpoint is that the channels would have to become free-to-air to get ad revenues after CAS gets implemented. The second viewpoint is that there would be no impact on ad revenues, as the opportunity to the advertiser would continue to lie with the successful channels only.

Morgan's analysts believe that the actual truth would be somewhere in between. On an overall medium term basis, they believe that CAS would lead to a well regulated, better managed cable industry with few revenue leakages in the system. This can only be positive for all market participants in the medium term. The uncertainty is on how would the ad revenues behave till the time rollout of boxes takes place fully.

Again, since the first phase of rollout is in metros, which are relatively affluent, the box adoption should remain reasonably high. Thus the initial impact on ad revenues should remain minimal.

In the longer term, the report assumes that there could be hybrid strategies being adopted by various networks. This could include keeping some channels as pay and making some channels FTA.

Will Bundling Continue Post CAS?
Currently, the channels are sold in bundled form to the customer. The report believes that the advent of CAS would not mean that bundling would go away. The existing bundles would continue to offer bundled entertainment solutions to customers in order to maximize pay revenues for marginal channels.

Broadcasters/Distributors - three main bouquets have arisen
The report points out that Star, Zee-Turner and Sony (One Alliance) form the three main broadcasters in the market.

Structure of the pay bouquets - six main clusters
As far as the structure of the pay bouquets is concerned, the report says that there are six primary pay bouquets existing in the cable TV market-Zee-Turner, Star package, Sony (One Alliance), ESPN-Star Sports, Modi Entertainment Network (MEN) and Sun TV Network (regional). Additionally, there are certain standalone pay and Free-To-Air (FTA) channels. Overall, the total number of channels that a consumer gets in the city is in the range of 75-85. Table 2 below shows the mapping of the channels by segment.

Subscription rates have been rising steadily
The report claims that the problem of low disclosure for the broadcasters has led them to a strategy where they try to offset under-declaration losses with greater rates.

Subscription rate hikes have been a regular feature once a year and at times twice a year for the bouquet. From the initial Rs2/month pay rates for Star Movies in October 1994, the pay TV rates have seen substantial rise.
Table 3 shows how the rates of the five bouquets have changed over the past one year. Table 4 shows how the rates will increase in 2003.

Zee-Turner Bouquet's strength is its breadth
The report feels that the Zee-Turner bouquet has a lot of breadth despite the fact that Star Plus is clearly the most popular channel. Additionally, Sony's MAX, with the cricketing rights, is likely to draw large viewership during World Cup in February and March 2003 and the flagship Sony channel has usurped the No. 2 position from Zee TV. However, the report claims that the Zee-Turner bouquet provides the strongest value for the customer. Despite the current drop in popularity of the flagship channel Zee TV, the analysts believe that the drivers for the Zee-Turner bouquet are much more sustainable than the Star bouquet or One Alliance (Sony).

The report claims that it has checked its hypothesis with several cable operators. Nearly all of them felt that, ratings notwithstanding, the popularity of the Zee bouquet is certainly comparable to the Star and Sony bouquets. The operators opine that Zee TV has bottomed out and that they have definitely noticed an increase in Zee TV's visibility. Additionally, these operators feel that there is a demand for other channels in the bouquet like Zee Cinema, Zee News and Alpha.

Also see
MSOs biggest gainers - JP Morgan CAS report
Encryption at MSOs/ICOs likely - JP Morgan CAS report
Mixed impact on industry constituents - JP Morgan CAS report
Zee bouquet has better breadth - JP Morgan CAS report