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Consolidation & cooperation, the way forward

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India?s cable TV industry is about to enter into a pivotal year, probably the most important in its 20-year old year history. As it does so, it needs to take a leaf out of the US cable industry playbook, a 60-year old franchise that?s been through rate regulation, digitalization, broadband and now, as it stares down the barrel at Netflix and Google, comes together to embrace consolidation and co-operation.

At a recent investor day, industry godfather and arch value creator, John Malone, chairman of Liberty Media, urged cable MSOs to unite and create a national internet streaming platform as well as cooperate to drive technical moves, new content plays and more homogeneity in product innovation. 

?The history of the cable business is replete with the industry solving its balkanization and scale problem through joint efforts,? said Malone.  ?That can be done again. I see no reason why a vehicle, whether it's Xfinity [from Comcast] or the equivalent, can't be syndicated. Whether Hulu could be bought and syndicated. Or whether you've got some entrepreneur who?s going to come in and start something that the industry at large could get behind and give it the ability to purchase content on a ubiquitous basis.?

It?s a critical movement for cable operators in particular. High levels of receivables and low levels of liquidity amongst MSOs is not encouraging for investors and promoters and sends out poor signals for Phase III and IV of digitalization

Taking a leaf out of Dr Malone?s book and in the spirit of consolidation and co-operation, here are the key moves India?s cable TV operators must drive across the value chain in 2014 and beyond:

Billing and monetization

MSOs are coming together and slowly working with LCOs to implement gross billing but it needs to be accelerated in Q1 2014. While close to 21 million households in Phase I and Phase II have been seeded with cable STBs, monetization and ROI has been painfully slow, making the Rs 50 billion plus invested in capital expenditure appear to be an extremely expensive cost of capital. Without the comfort of carriage and placement fees, MSOs need at least Rs 100 per sub per month to breakeven on the digital cable business line ? in general, the industry is well short of that at present.

Den, Hathway and SitiCable appear to be making the right moves but each of the national MSOs need to join together with LCOs to drive billing to consumers and ensure pass through of revenues across the value chain. It?s a critical movement for cable operators in particular. High levels of receivables and low levels of liquidity amongst MSOs is not encouraging for investors and promoters and sends out poor signals for Phase III and IV of digitalization.

Product, technology and the B2C ecosystem

More MSOs must come together to ensure that there is homogeneity and innovation across product and technology. Scale through alliances ensures better economies to invest in STBs, CAS, middleware and more advanced functionality. Hathway and DEN appear to be the best positioned to do this with a combined base of 13 million gross digital subs. This is a good start but to seriously challenge DTH and lower capital costs and drive improved product functionality, more MSOs need to come to the table.

Negotiating capital costs and driving a product roadmap for the next 30 million households will start becoming easier with consolidation. Phase I and Phase II did not require much consolidation and as a result, 90 per cent of STBs seeded came from the top five MSOs. However, Phase III and IV require alliances, consolidation and cooperation as the markets are fragmented and sub scale. 

It?s also important to note that the first big chunks of cable digitalization in the US, Taiwan and Korea occurred as cable operators banded together to drive down costs, improve functionality and better the consumer experience. To be sure, multiple vendors were used for STBs but across CAS, middleware, compression and billing, often technology solutions were sourced from single vendors.

Furthermore, the main cable TV players in India must band together to offer an innovative, simple, and functional product set with consistent, strong user interfaces. Digitalization means that all operators will reclaim analogue bandwidth and with superior capacity, this should just mean more channels but more HD channels and broadband.

Billing systems and the creation of a robust B2C cable TV ecosystem is also important but doing this together rather than apart is important for large and small cable TV MSOs across India. The situation that the US finds itself in today ? ?Snow white and the seven dwarfs? (Malone?s acerbic reference to the product evolution and functionality at Comcast and its fellow cable MSOs) ? is where India is heading at present with only a few MSOs driving digitalization and B2C decision making.

Broadband and network evolution

Cable TV broadband remains in its infancy. In spite of the spectre / threat of 4G broadband after 2014-15, cable still has headroom to grow through DOCSIS 2.0 and 3.0 technologies. Hathway has recently deployed DOCSIS 3.0 across selected markets; a strong broadband product with or without a bundle is critical for cable operators? value creation story as it helps generate margins. New license fees are a concern but broadband with scale still offers plenty of returns.

Longer-term, larger cable TV operators also need to start transitioning networks to (internet Protocol) IP and ensure cloud-based delivery of services and content to all devices. This will help drive TVE (TV everywhere)-type offerings in the future and ensure cable has a competitive advantage over DTH ? the same issue is playing out in the US.

Content

Locality is always the cable operators? last preserve and locality anchored to local content is a strong competitive advantage. While some regional MSOs have developed local content,the national ones have yet to get into the game though both Hathway and Den may have plans to do so in the future, in what may become an important differentiator over time.

Depth over width

The cable TV story has thus far been mostly about width and will remain so for some time as operators focus on digitalizing their entire footprint before acquiring more of the last mile. However, the long-term game has to be about acquiring and consolidating the last mile where feasible and at the right valuation as well as potential consolidation and M&A amongst other national MSOs. 

This provides a level playing field and competitive advantage to programming and technological discussions and allows cable operators to start inheriting some telecom-type muscle and work on ramping up real talent into its ecosystem.

Note that there is limited value creation across aggregators over the long?term in the history of global media; most of are usually displaced and made obsolete over time due to changes in consumption, delivery and technology. Ownership of assets, especially in the cable TV business, is crucial and in cable TV, the last mile and network remains everything along with consolidation and scale.

Just ask Dr Malone.  

(Vivek Couto is Media PartnersAsia executive director and co-founder. The views expressed in the above article are the author's personal views)

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