2015-16 was another pivotal year for the Indian broadcast industry. The number of TV households in India increased to 175 million in 2015 - a TV penetration of 62 percent.

In Phase-I and Phase-II cities, MSOs were able to retain 75 percent of incremental market share, while DTH players managed to secure only 25 percent.

Moving forward, of the incremental digital market of 68 million in Phase-III and Phase-IV 
of digitization, MSOs are expected to add 31 million and DTH 37 million subscribers, giving them a share of 45 and 55 percent, respectively.

Despite cable remaining pay-TV's largest platform, its share of pay-TV subscribers is expected to decline to 60 percent in 2025 from 68 percent in 2016, as DTH is likely to attract the majority of new subscribers. At the end of 2020, digital cable subscribers and DTH subscribers are expected to be in the ratio of 53:47.

ICRA

While DTH players have been able to leverage their inherent technology advantage in cable dark areas of Phase-III markets, MSOs continued to gain a favourable market share in such areas, which remained contiguous to Phase-II markets (such as Gurgaon and Noida in NCR and certain parts of Mumbai).

DTH players are expected to take a lead in Phase-IV markets as the catchment area (less than 15,000 households) in these markets remains highly fragmented and, therefore, unprofitable for cable operators to penetrate. In the current fiscal, the revenue growth for MSOs will be driven by activation income. However, over the medium term, monetization of the digital subscriber universe in Phase-III markets offers high subscription revenue growth potential for players.

As per discussions with industry players, cable ARPUs in Phase-III markets have the potential of growing from the existing levels of Rs.10-15 per subscriber per month to more than Rs.50 per subscriber per month.

Profitability metrics of players have remained restricted over FY15 on account of ongoing investments toward digitization of Phase-III and Phase-IV markets, significant investments by MSOs in the broadband business segment, slow monetization and ARPU growth in Phase-I and Phase-II markets, and significant uptick in content costs due to the change in nature of deals with broadcasters. While profitability metrics of players are expected to be cushioned by activation revenues in the current fiscal, benefits of monetization of investments in Phase-III markets as well as growth in ARPUs from Phase-I and Phase-II markets, renegotiated content cost deals with broadcasters (fixed fee arrangements), as well as hike in channel package rates are expected to support the profitability metrics over the medium term.

Over the last few years, market leaders in the cable TV space have adopted an inorganic growth strategy for entering new geographies and increasing their subscriber universe.

Consolidation in the cable TV space is expected to continue as players look at further strengthening their market position in their respective geographies. In line with this, Siti Cable announced its intention of acquiring a majority stake in several localized MSOs (specifically in Western India) in January 2016, backed by fresh equity infusion from the promoter group.

With significant investments already incurred, incremental CapEx requirements of MSOs in the cable business are expected to be lower. Moreover, improvement in profitability metrics is further expected to support the cash flows of players over the medium term. Correspondingly, some improvement in the credit profile of players is anticipated. Courtesy: Progress of Digitization in TV Distribution Industry

Edelweiss

Regional MSOs to come under pressure. In Phase-I and Phase-II cities, MSOs were able to retain ~75 percent of incremental market share, while DTH players managed to garner only ~25 percent. However, in Phase-III markets, regional MSOs will have to incur substantial CapEx to make the cable infrastructure digital-ready. We believe DTH players will enjoy natural advantage over regional MSOs in Phase-III markets and expect them to garner incremental market share of >50 percent. Further, voluntary digitization by national MSOs in Phase-III markets, learnings from Phase-I and Phase-II digitization and parts of Phase-III areas being contiguous with Phase-I and Phase-II markets, put national MSOs in a better position than regional MSOs.

DTH to race ahead in Phase-III, Phase-IV digitization. In Phase-I and Phase-II cities, while the cable companies retained ~75 percent of incremental market share, the DTH companies garnered the balance ~25 percent. However, DTH operators will have a natural advantage over the cable operators in Phase-III and Phase-IV markets. DTH players are set to outdo the regional MSOs owing to the inherent hurdles faced by the latter of laying out digital cable and funding issues. The regional MSOs will have to incur substantial CapEx to make their cable infrastructure digital-ready. Besides, most MSOs do not have meaningful presence in Phase-IV markets. Sparsely populated regions in Phase-III and Phase-IV markets will also favor the DTH companies. Overall, in Phase-III markets, we expect DTH companies to garner incremental market 
share upwards of ~50 percent. In Phase-IV markets, we expect DTH players to corner substantial incremental market share of ~70-80 percent. HITS, an alternative to DTH and digital cable, can emerge as a potential dark horse in Phase-III and Phase-IV digitization. Currently, Hinduja Ventures have launched HITS operations in India. In 
Phase-III areas, which have 32 million TV households, 18 million subscribers are already digitized 
(9 million each split between DTH 
and digital companies). We believe DTH players will gain market share upwards of ~50 percent in the balance 14 million TV households. In Phase-IV markets, 54 million TV households will have to be digitized before the December 31, 2016 deadline. We believe ~70-80 percent of Phase-IV markets will be up for grabs for the DTH industry as economics of cable companies does not work in these sparsely populated markets.

MSOs' dogging funding issues to further aid DTH players. During Phase-I and Phase-II digitization, the national MSOs and DTH companies invested heavily in infrastructure (including STBs) for providing digital signals. The national MSOs resorted to debt to meet their funding requirements. Going ahead, these MSOs will face funds crunch due to piling up of debt. These entities will also find it difficult to opt for equity dilution due to their stretched balance sheets. The DTH companies, on the other hand, are better placed than the national MSOs. Dish TV finances its CapEx requirements through internal accruals. Videocon d2h recently raised money by listing on the NASDAQ. Airtel DTH and Tata Sky are supported by strong parents. Overall, this lends credence to our thesis that DTH players are better placed than the MSOs (especially regional) in Phase-III digitization. Courtesy: Phase III Digitisation: Sifting the Chaff by Edelweiss, India Equity Research

CRISIL Ratings

The next two phases of digitization of television (TV) distribution, which 
we foresee extending all the way to fiscal 2018-end, should be the best so far for all the stakeholders.

Analysis shows stakeholders would benefit by '14,800 crore. Of this, direct-to-home (DTH) operators are expected to garner as much as '3300 crore:

  • Multi-system operators (MSOs) are expected to receive '1500 crore;
  • Broadcasters are estimated to receive '3900 crore
  • Incremental tax revenues of '6100 crore are estimated to accrue to the government, thanks to increased disclosure of revenues by local cable operators (LCOs) and increase in overall subscription base. Of this, around 80 percent will accrue to the central government through license fee and service tax, and the rest to state governments through entertainment tax.

Given their already-stretched balance sheets and high capital expenditure (CapEx) requirement in these phases, MSOs will be able to garner only 45 percent of the incremental digital market in the next two phases of digitization. The balance will go to DTH service providers.

DTH's upper hand in cable-dark and sparsely populated regions will aid its market growth. And while incremental revenues will be on similar lines for both, profit share will be significantly more for DTH firms as they have complete access to subscription revenues unlike MSOs, who share a large part of their revenues with LCOs. While MSOs will continue to benefit from carriage revenues from broadcasters, they are unlikely to receive incremental carriage revenues after digitization.

The only catch for the DTH operators is that they need to invest around '13,700 crore over the implementation period. For MSOs, CapEx need is around '8300 crore. The CapEx requirements will be insignificant after the digitization phase. LCOs, who had hitherto been disclosing only an estimated 20 percent of their analog subscription base, are the only stakeholders who will lose in this phase of digitization.

The increase in overall market share and higher profits, combined with promoter backing to part-fund the CapEx, will benefit the credit profile of DTH operators. On the other hand, MSOs will have to increase their revenue share with LCOs to nearly 60 percent to prevent deterioration in their credit profile. Furthermore, while easing of foreign direct investment (FDI) norms will support fund-raising plans for both DTH and MSOs, the ability of MSOs to attract FDI funding will remain contingent on improving their revenue share with LCOs.