It was once a whole lot easier. Three years ago, broadcasters would press for more subscribers and rates, multi system operators (MSOs) would ask for an increase from their franchisees and last mile operators would demand a hike in monthly cable fees from customers.

The year 2004 did not put a stop to that, but made this process much more difficult. Blame it on Pradip Baijal for setting the mood even before the year began. The Telecom Regulatory Authority of India (Trai) chairman came out with a recipe which stakeholders in the value chain found unpalatable: a freeze on subscription rates with effect from 26 December 2003.

Not to say that the distribution business did not grow in the year. But it was at a controlled speed, estimated at a 8-10 per cent growth. Ernst & Young is more bullish and puts the size of the subscription revenue market at Rs 100 billion, up 22 per cent from Rs 81.79 billion in 2003. This is expected to inflate to Rs 120 billion in 2005.

The way Ernst & Young has arrived at this figure is complex. But put simply, it has divided the cable and satellite households (C&S) into three categories - top eight cities including the metros, the smaller towns and the rural households (Table 1).

"Higher penetration and more number of cable TV subscribers have contributed to the growth. During the course of the year, new pay channels also have come," says Ernst & Young head of media and entertainment industry practice Farokh Balsara.

Consulting firm KPMG is more conservative, putting the total subscription revenues in 2004 at Rs 79 billion. This is 21.5 per cent up, from Rs 65 billion a year ago. In 2005, subscription income will grow fatter at over Rs 100 billion if new delivery platforms like direct-to-home (DTH) and Internet Protocol Television (IPTV) take off. "The growth is due to a combination of factors. There has been an increase in subscribers. Besides, we have had an annualised impact on rate hike. With new subscribers coming up, the starting monthly fee has gone up. As a result, the average ARPU has gone up," says KPMG national industry director for ICE Rajesh Jain.

The industry estimate, according to sources, is, however, lower at Rs 65 billion. The C&S households grew to 45 million, up from 42 million.

How much have the broadcasters taken home?

Ernst & Young puts it at Rs 10 billion in 2004, climbing up 20 per cent to Rs 12 billion in 2005. Says Balsara, "Broadcasters occupy 10 per cent of the total subscription revenue. We don't see this composition changing this year as well."

Now look at what KPMG has to say. Broadcasters have a combined distribution income of Rs 14 billion, up 16.6 per cent from Rs 12 billion a year ago. This is 18 per cent of the total subscription revenues. And in 2005, broadcasters will enjoy a still higher share, if fuelled by new revenue streams from delivery platforms like IPTV and DTH.

"Broadcasters and MSOs will have an increase in share of total subscription revenues if DTH, IPTV and conditional access system take off. Introduction of addressable systems will mean larger shares for organised players in the value chain," says Jain (Table 2 for MSO and LCO revenue).

The actual figure could be somewhere in between, according to industry estimates. Going by revenue figures in the financial year 2003-04 (companies work on financial year targets), broadcasters are estimated to have earned Rs 11.6 billion with Star India the clear leader at Rs 3.3 billion. Sony's earnings are at Rs 2.85 billion, followed by Zee-Turner's domestic subscription income at Rs 2.17 billion and ESS close to Rs 2 billion. Ten Sports' subscription revenue is pegged at Rs 300 million. The southern Sun network pay channels would make up for most of the balance amount.

In the current fiscal, the broadcast industry predicts a less than 5 per cent growth. This is despite the 7 per cent rate hike Trai has allowed across the value chain with effect from 1 January 2005. The new pay channels and cable TV subscribers should fuel small growth.

Star's distribution revenue will grow faster than the other bouquets. The reason: it has added the two Walt Disney channels in its new bouquet. Star has also managed a marginal increase in subscriber declarations because of the minimum guarantee (MG) deals it has struck with big cable operators in the northern region. Though the MG arrangements came into shape in October, Star will also have a longer time to reap its gains from a rate hike and the distribution of new channels. Star's Fiscal ends in June, unlike the other media companies who have a March-ending period.

Sony-Discovery will have a flat growth as indicated by senior officials in the organisation, despite having the ICC Champions Trophy. The loss of premium movie channel HBO will neutralise whatever small gains it may have made from cricket and the distribution of new channels.

Zee-Turner's growth will come from HBO and the earnings could touch over Rs 2.5 billion this fiscal. Zee's subscription revenue for the first half of the financial year is Rs 1.35 billion, but this includes its direct-to-home (DTH) revenues. Dish TV has accumulated 1.60 lakh DTH subscribers, growing at a snail's pace for over a year. In 2004, Zee-Turner set up a rural team to focus on rural distribution.

Hathway CEO K Jayaraman & ESPN Managing Director RC Venkateish: At loggerheads

For ESPN Star Sports (ESS), it can turn out to be a bad year as it struggles to protect its subscriber base. Already the two sports channels are off Hathway and Asianet, two big MSO networks promoted by Rajan Raheja, and RPG in Kolkata over commercial agreements. Hathway is asking for an almost 70 per cent reduction in cash outgo, even as ESS has a much weaker cricket content in 2005. ESS's contracts with other cable networks are also coming up for renewal at this crucial period. Its subscription revenue this fiscal could come down to Rs 1.8 billion according to estimates, and could further fall depending on how long Hathway is prepared to fight against it and how well it manages to sew up other distribution deals.

Ten Sports, of course, will be the worst hit on the distribution front. Sources say Ten Sports has practically stopped collecting from cable operators since July and is without a proper distribution team. After moving out of Modi Entertainment Network (MEN), Ten Sports is waiting to hop on to a distribution platform and is in talks with Zee-Turner, ESS and Sony. Though blessed with better cricket content for the next two years, its distribution system is in a terrible mess.

The distribution network of television content had a serious problem at hand in 2004. The challenge for broadcasters was to design new strategies as they realised the business needed new economics; the old models wouldn't work.

So what were the broadcasters up to in 2004?

Broadcasters' answer to beat a flat growth line in the year was to add channels into the distribution bouquet. Star launched two channels Utsav and One while adding Hungama TV and the Disney channels into the bouquet later in the year. Sony added Nik and MTV while losing HBO from 1 January 2005. Zee-Turner brought in Pogo and in the New Year HBO and VH1. The new bouquet of Pogo, HBO, VH1, Zee Business News and TV18 Group's new Hindi business channel will be priced at Rs 40 with a Rs 15 distribution margin to cable operators.

MGs also became a new trend, but is seen more as a short term tactic to push growth. Star got an increase in subscriber declarations in places where it struck such deals. Sony had MG arrangements in Bangalore and Gujarat. Incidentally, Star and Sony switched off service to Siticable, a wholly owned subsidiary of Zee Telefilms, for almost six months due to non payment of dues. But MGs are not sustainable in a market situation where rate hikes in monthly cable fees are not possible. Zee-Turner, however, stayed away from this game.

Broadcasters also had to pay steep carriage fees to find space on cable networks. Perhaps, this is the first year when pay channels from strong distribution bouquets were also asked to secure their positions. The problem is going to increase this year as more and more channels crowd the market. Cable operators are already operating at full capacity. So the slots are precious until cable networks upgrade their systems. Hathway Cable & Datacom and InCablenet have, in fact, launched digital cable service in a small way.

The year also saw broadcasters interacting more with local cable operators on the ground as a drive to improve recovery. In some towns of Uttar Pradesh, for instance, Star and Sony united for this purpose. Collections from cable operators generally improved in the market as in Sony's case where it was driven by the two cricket tournaments (Holland Cup and Champions Trophy) it had on its Max channel.

Though broadcasters are launching new channels, 2005 will be perhaps the toughest year for getting them properly distributed on the cable networks. Even Disney is unable to get carriage of any sort after three weeks of launch. Zee-Turner, selling its old bouquet along with its new bundle led by HBO, is yet to get a deal in place with Asianet. We will see more such friction in the distribution chain as the year progresses.

No fresh investments, MSOs focus on recoveries

During the year, MSOs put their energy behind improving collections rather than expansion of territories. The truce among the MSOs (brought about by the exigencies of survival rather than being a united force) allowed them the leeway to put pressure on their local operators to clean up the payment process. Carriage fees also saw a surge as channels jostled for space on overloaded networks. Besides, the Trai rate freeze relieved them to some extent of an alarming payout increase to broadcasters.

Some of the MSOs have jumped aggressively into broadband play, realising it can become a strong future revenue stream. With cash flow getting affected by Trai's rate regulation, cable, however, remained starved of investments.

Last mile cable operators faced no fresh threat from conditional access system and continued to take away a chunk of the subscription revenue.

In 2005, MSOs will be saddled with increased payouts to broadcasters while finding it difficult to pass on the cost to their subscribers. Broadcasters are enlarging their distribution bouquet through the launch of new channels. Cable networks will find it difficult, for instance, to resist channels like Walt Disney.

The biggest challenge for cable networks in the New Year is to expand channel capacity. The only way they can do that is to get digital cable TV up and running. They could face competition from direct-to-home (DTH) service providers and telecom operators like Reliance Infocomm who are planning a triple play entry.

This is going to be the year the broadcasters and MSOs will have to learn to live under a rate regulated regime and plan their growth in subscription business. How well they do that may have a profound effect on how the future shapes up. As 2005 begins, there is hope that new opportunities in television content delivery and distribution will emerge.