The path to digitisation has plenty of roadblocks which is affecting the revenues and profits of companies in the broadcast media
The television media is looking forward to digitisation, which is said to be beneficial for—both channels and broadcasters. It is expected to increased revenues for television channels and broadcasters, many of which are struggling financially. But, there is ample evidence to point out that the transition is not going to be easy.
About a week ago, the ministry of information and broadcasting said that it will start with the digitisation drive from April 2012, beginning with the four metros. The ambitious process is supposed to digitise all cable and analog households in the country by December 2014. The conversion is something many experts claim to be the cure-all, in this case, helping broadcasters and channels to earn revenues and save themselves, and provide a “high-end” experience to viewers, who are still stuck with an ordinary viewing.
According to the FICCI KPMG report, India has 146 million householdsthat have television sets; and cable and satellite makes up 80% of the segment. The biggest beneficiaries from the digitisation drive may be the Direct-to-Home (DTH) service providers and Multi System Operators (MSOs).
But we see that despite a considerable rise in the number of DTH subscribers, the channels, broadcasters and DTH service providers have not made money. This brings us to the question, why?
The answer may lie in the convoluted tariff structure and huge inefficiencies of the system. The core problem is that channels are too dependent on advertising, customers are not paying enough for their entertainment, a substantial part of what they are paying is not reaching the TV channels and there is huge oversupply of channels, many funded by slush money and controlled by politicians. This oversupply is draining everybody’s resources—pushing costs higher and dragging down everybody’s profits (or increasing their losses).
The revenues of television business are hugely dependent on advertising. They hardly make much money from subscription. Currently, the average revenue per user (ARPU) is Rs160 per month, across all platforms, according to the FICCI report. This is much lower than what other countries pay. To reach Indian homes, they are dependent on cable operators and DTH providers who extract their pound of flesh. Hernan Lopez, president and chief executive of Fox International Channels, recently said in an interview: “Indian broadcasters generate $2.6 billion a year in advertising. But they only net out $700 million in subscription fees, after accounting for the $400 million they have to pay back in carriage fees.”
Carriage fee is the fee that the broadcasters pay the cable operators and DTH operators to ensure that their channels are carried into your homes. The system of carriage fee is mystifying, and suffers from lack of transparency. The analog cable operators have enormous clout in this area, and they can raise carriage fees, and every year, channels seal deals with these cable operators at increasingly high rates. And there is good deal of revenue leakage from the system. This means, that the channels often lose out on the revenues they earn, as the cable operators do not report their total earnings. Many cable operators are opposed to digitisation because they think it will lead to their loss. It is not that DTH operators are making money either with their carriage fee system. In a recent meet, Harit Nagpal, MD & CEO, Tata Sky, pointed out, “Of every Rs100, the DTH operator has to shell out 32%-35% as taxes and the broadcaster takes about 35%. So, what am I left with? DTH operators in India have shelled out Rs20,000 crore so far towards digitisation.”
The FICCI KPMG report says, “Broadcasters as well as MSOs expect a decline in carriage fee after the implementation of the first phase of digitization. However, there is a lack of consensus on the movement of carriage fee in the medium term. While broadcasters expect a decline over the next two to three years, some MSOs expect carriage payments to claw back to current levels.”
The biggest problem faced by the sector—and what nobody wants to talk about—is of oversupply that is forcing fragmentation. More than 600 channels are on air and government has approved more channels, which are yet to be launched. While many television channels find it difficult to manage their finances and get money for continuing their operations, channels (especially in the regional segment) funded by slush money supplied by some powerful entities get ahead. The money flows in without interruption and unregulated; while other channels struggle to raise money through painful and legitimate means and the channels with dubious means of funding further fragment the sector, and eat away at the revenues. This seamy side of the TV business escapes the fund mangers and analysts. The industry professionals cannot talk about it.
Following the global financial turmoil and inflationary pressure, many corporates have cut down on advertising costs. While the number of channels going up, advertising rates have remained flat and even shown a decline. The 2011 FICCI report had estimated that advertising will grow at 15% CAGR. But the 2012 report says that the growth has been close to 12%. Since 2009, rates have remained flat.
To combat all this, broadcasters have tried to tap into the premium payable segment, i.e., viewers who pay for what they watch via DTH platforms. But it continues to be a very niche segment, because DTH services are costlier than regular cable. Cable operators provide more channels at the same cost while DTH and high definition channels (HD) will also cost more. Convincing the viewer is to pay more will require across-the-board changes.
The FICCI KPMG report estimates that the total cost of digitisation, over four stages, would cost Rs20,000-Rs25,000 crore— excluding investments for DTH additions during the phase. While large cable operators may be able to raise the required cash, small operators and MSOs may not be able to do so. Judging the present scenario, 2014 does not seem to be a realistic deadline for complete digitisation. Information and broadcasting minister, Ambika Soni has assured that the prices of set-top boxes (which are offered at the cheapest rates by China) will come down and that the Telecom Regulatory Authority of India (TRAI) will impose a tariff capping for subscribing to channels so that viewers do not get access to the whole bouquet of channels. But it will take more than that. Digitisation may improve subscription base, but without a thorough reform in the revenue structure of the industry (which seems impossible given the endless supply of channels), it seems unlikely that Mr Nagpal’s and his friends’ problems will go away.
(courtesy: Money Life)