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India Ratings: NTO 2.0 negative for broadcasters, neutral for MSOs

The Fitch Group subsidiary says TRAI amendments are customer friendly

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MUMBAI: Credit rating agency India Ratings (Ind-Ra) & Research believes that Telecom Regulatory Authority of India’s (TRAI) amendments to the tariff and interconnection regulation are largely negative for broadcasters and neutral for multiple system operators (MSOs).

The rating agency, a subsidiary of the Fitch Group, said that the amendments (NTO 2.0) have focused on a reduction in the final customer price, resulting in broadcasters bearing the largest burden in the entire value chain.

Ind-Ra in its report said that the revised regulations stipulate a reduction in a-la-carte pricing for channels and a cap on bouquet prices in line with a-la-carte prices would impact broadcasters’ profitability meaningfully.

The regulatory had put a cap on network capacity fees (NCF) & carriage fees and a higher number of pay channels in base NCF, which sound optically negative for MSOs, but would have a marginal impact as they are broadly in line with the current on-the-ground ecosystem, said the report.

Meanwhile, the reintroduction of discount on bouquet prices compared to a-la-carte channel prices is surprising, given that the Madras High Court had earlier ruled against it.

The amendment directs broadcasters and distributors to submit the revised channel prices by 15 January 2020 and 30 January 2020 respectively, with full implementation from 1 March 2020.

Ind-Ra also believes that the regulation has essentially de-risked the business model of distributors (MSOs, local cable operators (LCOs)), as their revenue stream will contain fixed NCF from subscribers and content commission from broadcasters, thereby effectively passing through content costs.

The increase in the total number of channels under the base NCF to 200 from 100 earlier is unlikely to have any major impact, as MSOs anyways offer above 200 channels under the current price regime for NCF of INR130.

The rating agency also added that the exclusion of mandatory channels as per the government from the bouquet of 200 channels may free-up space for additional pay channels, which may further reduce NCF for MSOs.

MSOs earn content fees and distribution fees from broadcasters as a proportion of the content cost. MSOs’ realisations may slightly be impacted as the overall content costs and resultant content & distribution fees have also reduced.

As the continued investment in content remains critical for broadcasters, the revised regulation capping prices of both a-la-carte channel and channel bouquet may curtail broadcasters’ ability to invest in quality content, said the Ind-Ra report.

According to the rating agency, the risk is even higher for the sports genre, where content creation/acquisition costs can be more than in the news genre. Also, the regulation on channel prices discourages bundling weaker channels with strong anchor channels in the same bouquet.

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