Cable TV

'Digitisation will not spur irrational price war as the Santa Clauses are broke' : Hathway Cable & Datacom MD and CEO K Jayaraman

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Hathway Cable & Datacom has an ambitious investment plan of Rs 10 billion as India opens up to digitisation across the country.

In the first phase, India’s leading multi-system operator (MSO) plans to invest Rs 1.75 billion even as it expects DTH to take away 10-15 per cent of its cable TV subscribers in the two lucrative markets of Delhi and Mumbai.

Sitting on a cash pile of Rs 2 billion, Hathway will not source equity finance at this stage. Though net losses will drag on for a long period in a digital environment, the MSO hopes to regain its old valuations if it manages to successfully implement the early phase of digitisation.

Even as carriage revenue will shrink, Hathway’s endeavour will be to have an Ebitda of 20-25 per cent right from the start of mandated digitisation.

In an interview with Indiantelevision.com’s Sibabrata Das, Hathway Cable & Datacom MD & CEO K Jayaraman talks about how no cable or direct-to-home company is in financial health to launch an irrational price war. He also elaborates on the MSO’s digitisation gameplan.

Excerpts:

DTH companies have made rapid progress in recent years. How is Hathway Cable & Datacom prepared to exploit the first phase of digitisation?

We plan to invest Rs 1.75 billion in the first phase. This will include Rs 200 million towards marketing in Mumbai and Delhi over the next 6-8 months. It is the first time that we are splurging on media campaigns.

Are you comfortably placed on the funding part or you plan to raise fresh capital?

We have a cash pile of Rs 2 billion. We will not source equity finance at this stage. We are comfortably placed and will manage with bank debt and vendor credit.

Will you need funding in the second stage?

We will see when we reach there. We have already digitised around two million homes. We will need to digitise our remaining 6-8 million existing homes (including multiple TVs). Our funding requirement will be Rs 10 billion as we need to subsidise the set-top box (STB) cost and make further investment in infrastructure.

Hathway was selling at Rs 500 a STB to its customers in voluntary digitisation. Will you further subsidise the boxes in a mandated digitisation environment?

We are looking at charging Rs 750-790 a STB (including taxes) as the rupee has depreciated against the dollar.

"LCOs will get a revenue share of 30-35%. They will gain from 2nd TV homes, operational efficiencies and Vas. Distributors will get a 5% rev share. They will also get a 30% share in carriage revenues"

But DTH could go aggressive and there could be a price war situation?

We won’t sell below this even if there is a price war. We do not have the financial resources to further subsidise the boxes.

We, however, feel that no player is in a position to indulge in an irrational price war. Nobody in cable can do so. DTH will fight for market share on the basis of perception and brand. All the Santa Clauses are broke.

Are you expecting a migration to DTH?

We expect DTH to take away 10-15 per cent of our cable TV subscribers in the two lucrative markets of Delhi and Mumbai. But we see a surge in second TV homes. Besides, we will launch three packages – lower, middle and top-end. In all the packages, we will have a price advantage. Also, we will have more channels on offer than DTH because of our bandthwidth superiority.

Will the supply of STBs be impacted due to a sudden rise in demand?

We have ordered 1.3 million digital STBs and signed a letter of intent for another 0.5 million. We estimate our subscriber universe to be 1.5 million in Mumbai and Delhi. About 20 per cent of this will be second TV sets.

We also have a presence in Kolkata through our joint venture company, Gujarat Telelinks Pvt. Ltd (GTPL), which acquired a 51 per cent stake in Kolkata Cable and Broadband Pariseva. We expect to at least seed 400,000 boxes there.

We have already seeded 250,000 STBs on a voluntary basis in Delhi and Mumbai.

Crucial to the whole implementation of digitisation is the appeasement of the local cable operator (LCO). Have you fixed the revenue share terms with them?

The LCOs will get a revenue share of 30-35 per cent. There will be a loss of revenue for them but they will make up to some extent with the second TV homes, where they don’t usually charge anything from the subscriber. Besides, they will gain from operational efficiencies and will discover new homes in a digital environment. Also, there will be a revenue share for them from value-added-services (Vas). So they should reasonably settle with us.

The distributors will get a five per cent revenue share. They will also get a 30 per cent share in carriage revenues. In Mumbai, we are comfortable with the distributors. There may be some issues in Delhi but we will manage to strike a smooth bond with them.

Why haven’t the MSOs sat down together and decided on a common share for the LCOs who control the last mile to the consumer?

That would attract the Competition Commission of India. But in any other form, we will make efforts to drive consensus up. We don’t want any fissure surfacing among the stakeholders. We can’t afford to derail DAS (Digital Addressable System).

Do you expect carriage revenue to shrink considerably?

We expect it to shrink by 30 per cent in the digital environment. This can even go up to 50 per cent. But we will be somewhat compensated by a reduction in content cost.

How?

We will do fixed fee deals with broadcasters and believe content cost in a digital scenario will fall in the region of 35 per cent. We are close to sealing deals with two big broadcasting companies.

Even sports channels should allow us to price reasonably; customers should take it round-the-year. Otherwise, we will offer it on a-la-carte basis to consumers.

Analysts predict that net losses of MSOs will drag on till at least 2016 in a digital environment?

We can’t predict now. But Hathway aims to stay Ebitda positive. We expect our Ebitda to be at least in the 20-25 per cent range. We know it will be difficult at the early stage of digitisation but our endeavour will be towards achieving that range from the start.

Hathway had fixed it IPO price band at 240-265 and the scrip is now quoting at Rs 116 per share. When will the valuation be regained?

We will regain good valuations if we manage to seed the boxes. Investors are bothered about that and not about net profitability at this stage.

Do you expect the second phase to be tougher for you?

For Hathway, the ride in the second phase could be even smoother as we have already got a large population of digital subscribers on a voluntary basis in some of these major cities like Bangalore and Hyderabad. Our digital penetration in some of these cities is as high as 60 per cent. In Gujarat we have seeded 150,000 (out of our

estimated current subscriber universe of 220,000) STBs, in Hyderabad we have 350,000 (out of 800,000) and in Bangalore we have a digital population of 275,000 (out of 400,000).

And in Jaipur, Indore and Bhopal, we have a digital penetration of 40 per cent out of our current subscriber base. In Phase II, we are far ahead.

Will you follow the acquisition route?

We will not pursue acquisitions and will prefer to conserve capital for digitisation. We will not do any more analogue consolidation. It is bad to add analogue weight in the current circumstances. Our focus will be on digitsation.

Post digitisation, we may be interested in acquisition in some of these cities. But it should come at the right price.

Are you looking at launching value-added services?

We will tie up with either Ericsson or Cisco for Video-on Demand (VoD) services. We will decide in March whom to partner with. We have launched HD services and also bundled it with our broadband offering. We hope it will enhance our average revenue per user (ARPU). We have 2000 HD subscribers. Given that we get Star bouquet on HD and spend on marketing, we expect HD to eventually account for 10 per cent of our subscriber base.

Are you bullish on your broadband growth?

Yes, that gives us an advantage over DTH. We are also ahead of the other big MSOs so far as broadband goes. We will be bundling broadband with digital cable to offer better value to the consumers. The broadband homes passed stand at 1.7 million and our actual subscribers are 400,000.

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