The Set-Top Box Imbroglio

Cable TV digitization is expected to lead to better transparency in the broadcast industry, bringing undeclared subscribers into its fold. It would enhance revenues of MSOs, broadcasters, and the government.

Calculations for the next two phases of digitization (Phase-III and Phase-IV), which the broadcast industry foresees extending all the way to fiscal 2018-end, indicate revenue streams of about Rs. 14,800 crore for the stakeholders:

• DTH operators expect to receive Rs. 3300 crore
• MSOs expect to receive Rs. 1500 crore
• Broadcasters estimate to receive Rs. 3900 crore

The successful migration from the analog to the digital cable regime had necessitated heavy investments in set-top-boxes (STBs) by cable and DTH operators. Since the domestic industry was unable to meet the increased demand from distributors, dependence continued on imported STBs thereby making players vulnerable to foreign currency movements.

The distributors, comprising local cable operators (LCOs) and multi-system operators (MSOs), direct-to-home (DTH) service providers, IPTV service providers, and terrestrial TV service provider (Doordarshan), play an important role operating as key intermediaries between content providers (broadcasters) and end consumers (subscribers). While under a digitally addressable cable TV system (DAS), MSOs decrypt signals supplied by broadcasters via satellite and pass them onto LCOs, who act as local retailers offering last-mile connectivity through STBs; in the DTH space, encrypted signals supplied by broadcasters are directly decrypted by end users.

More than 25 million STBs were rolled out in Phase-I and Phase-II markets (except Chennai) by December 2013 with digital subscribers numbering nearly 34 million. While analog signals were discontinued in Mumbai, Delhi, and Kolkata, migration to digital cable remained voluntary in Chennai as Arasu Cable TV awaited the DAS license. Also, Hyderabad and Coimbatore from Phase-II are yet to report complete digitization on account of local issues.

The MSOs were able to retain a higher market share (relative to DTH operators) of nearly 75 percent of the 28 million STBs seeded in Phase-I and Phase-II markets; with close to 14.5 million STBs being seeded by the top three players – Siti Cable Network Limited, Hathway Cable and Datacom Limited, and Den Networks Limited. MSOs were able to tap on to the inherent advantage of digital transmission, i.e., increased channel offering and better picture quality, provided at the existing cable charges, which helped them retain a major portion of their analog subscriber base.

In line with a majority market share retained in Phase-I and Phase-II markets, MSOs reported healthy growth in activation income, contributing to as much as 27 percent of the revenues for Siti Cable and 16 percent for Den Networks in 2012-13. Nonetheless, MSOs saw healthy annuity income from subscription revenues flowing in from 
2014-15 onwards on the back of significant number of STBs seeded in the previous year, which in turn somewhat helped to partially mitigate the slow growth in activation income as deadlines for Phase-III and 
Phase-IV rollouts were deferred.

Over the last 3 years, Den Networks has invested nearly Rs. 1181.7 crore while Siti Cable has invested nearly Rs. 607.5 crore toward installation of STBs. On an average, an STB costs the MSO Rs. 1000-1800 of which Rs. 600-800 was recovered from the subscriber, resulting in a net CapEx of Rs. 800-1000 per STB funded by the MSO. Although there has been a reduction in STB prices gradually, the addressable market for activation remains price sensitive with higher subsidy levels for MSOs expected to continue. For DTH players, however, the investment per STB remains high in line with higher cost of equipment (including the dish) installed at customer premises.

Developments in Phase-III and Phase-IV

With nearly 84 million cable and satellite television households having migrated to digital cable system, another 70 million 
are estimated to follow in Phase-III and Phase-IV. While the rollout of digital cable in the first two phases has necessitated significant investments in infrastructure and STBs over the last 3 years, the monetization of the same has in effect remained slow owing to on-ground implementation challenges. Consequently, the credit profiles of industry players have not shown significant improvements over the last two years on account of weaker OPBITDA/cash generation and significant debt-funded CapEx undertaken in these markets. This said, select players have also raised substantial equity funding exceeding Rs. 2000 crore over the last three years, reiterating the confidence of investors in the digital cable TV business.

The deadlines for DAS rollout for 
Phase-III and Phase-IV markets had been extended to December 2015 and December 2016 respectively. With nearly 70 million subscribers to cater to in these markets, the extension in deadline allows adequate time for operators to procure STBs and establish the required infrastructure like laying new cables and setting up digital headends to ensure a smooth rollout in these markets.

The rural markets continue to remain cost sensitive; hence, MSOs and DTH players are also introducing plain vanilla STBs specifically for these markets to encourage subscribers to migrate. Amongst other measures, distributors are also evaluating channel packages with focus on regional content. The media consumption in Phase-III and Phase-IV markets is driven by regional content and hence such packages are expected to help distributors further expand their subscriber universe in these markets.

While MSOs and DTH operators focused on ensuring a smooth rollout in Phase-III markets, the shortage of STBs in certain markets of Maharashtra, Madhya Pradesh, and West Bengal proved to be a roadblock. Despite the impetus from the Make in India campaign launched by the government, the indigenous supply of STBs continued to fail to meet the magnum demand triggered by the rollout of digitization across the country, with Phase-III being the largest addressable market with an original estimated analog subscriber base of nearly 39 million.

Moreover, the contiguous nature of Phase-III and Phase-IV markets in certain areas resulted in the simultaneous digitization of certain Phase-IV markets, thereby resulting in incremental demand for STBs. Consequently, industry players remained highly dependent on imported STBs, primarily from China. However, lower production levels in China, triggered by the short supply of chipsets and tuners from European manufacturers, resulted in disruption of supply. Despite placing orders well in advance, the shortage in STBs impacted the progress for Phase-III; the quantum of such shortage is expected to be higher for smaller regional MSOs as compared to national MSOs who were carrying adequate inventory.

STB rollout witnessed healthy uptick over H2 2016-17, notwithstanding the stay orders granted by various High Courts toward discontinuation of analog signals during December 2015-January 2016 as well as re-classification of certain areas to Phase-IV given the low household concentration in such areas.

As per data released by the ministry of information and broadcasting, 40 million STBs had been rolled out in Phase-III markets by various distribution platforms until April 2016 as against an earlier target of 34 million households. Of these, Maharashtra accounted for 31 percent of the total STBs seeded, while cumulatively, the top ten states accounted for 72 percent of the total STBs seeded. Tamil Nadu remained a challenging market since the rollout of Phase-I (in Chennai), nonetheless, the state reported seeding of 
2.9 million STBs in Phase-III as against targeted households of 6.6 million. However, smaller markets of Jammu & Kashmir, Himachal Pradesh, Assam, and Sikkim reported STB seeding exceeding twice the targeted households until March 2016.

Overall, data available from four MSOs and four DTH operators showed incremental seeding of nearly 8.4 million STBs through FY2016 with very low incremental seeding in Phase-I and Phase-II markets. Together, DEN Networks, Hathway (standalone), 
Siti Cable, and Dish TV invested nearly Rs. 2039 crore toward digitization in FY2016.

DTH Leads the Way

In Phase-I and Phase-II of digitization, MSOs distributed pre-activated STBs to LCOs without collecting customer data (which is essential for implementation of tiering and packaging). Hence, they lost out on subscription revenues due to delays in collecting customer data, despite huge investment in STBs. Hence, now, MSOs are not committing any pre-activated STBs to LCOs before collection of customer data, thereby delaying the entire process and leaving enough headroom for DTH players to grab higher market share in the Phase-III market.

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

Data from PhillipCapital shows that out of 35.21 million STBs deployed in Phase-III areas, DTH platforms have deployed 24.2 million STBs, gaining a 60 percent market share while MSOs have deployed only 11 million.

According to a recent FICCI KPMG report, by December 2016, 52 million TV households are to be digitized in Phase-IV areas. A delay of one year in the rollout of STBs in Phase-IV areas is expected, and the rollout will be largely completed by December 2017. DTH is expected to retain its share of at least 60 percent.