Cable cos expect major hike in subscriber revs

10 May,2012

By A Correspondent

 

TRAI’s argument that carriage fees paid by TV channels to cable MSOs are necessary to fund their digitisation appears to be falling apart scarcely a week after it was made. Instead, large cable distributors have themselves said that one factor alone – a huge six-eight times hike in subscription revenues alone as declarations spiral with addressability – would significantly buttress their already profitable balance sheets.

 

With additional revenues from broadband and VAS, industry estimates also say that a bundled digital and broadband + VAS business model will result in the payback period being reduced by a year to 24 months, as opposed to 36 months under a standalone digital cable TV proposition. This comes even as industry reports –including one released five months ago– have been pointing out that all major national MSOs are already adequately funded for Phase I digital deployment (mandatory only in the four metros from July 1).

 

Given that the government is also shortly planning to hike FDI for MSOs from 49 per cent to 74 per cent, industry analysts have questioned why TRAI assumed MSOs and cable distributors needed money in the form of mandatory carriage fees by TV channels – an annual recurrence – to fund their upgradation, which is only a one-time investment. This is especially inexplicable, as TRAI’s own April 30 Explanatory Memorandum to the DAS Regulations states: “In the addressable systems, due to transparency in ascertaining the number of subscribers, the subscription revenue is expected to go up. Therefore, the dependence of MSOs on the carriage fee, as a source of revenue, is likely to be reduced.”

 

It has been well known that the cable distributors are the profitable, cash rich last mile, with even many smaller operators who under-declare subscribers/taxes, expanding into other activities like real estate, auto agencies, ancillary services, and so on — while most broadcasters have turned sick due to a killer combo of low ad rates, gross subscriber under-declaration and huge carriage/placement fees.

 

The national MSOs, are, in fact, almost all profitable, with even newer ones like Den Networks having posted a 20.7 per cent yoy revenue growth in Q3 of the fiscal just ended, including a 6.6 per cent rise in its net profit. That is why the added bonanza of TV channels having to now mandatorily pay MSOs carriage fees caused MSO share prices to jump after the TRAI tariff order was announced– even as listed broadcaster scrips sank.

 

Shares of Hathway Cable and Datacom had closed on May 2 at Rs185.40, 19.23 per cent above its previous BSE close, missing the upper circuit by a small margin, Den Networks also touched an intraday high of Rs116.90, before closing at Rs110.80, 2.12 per cent above its previous close.

 

Earlier, a Media Partners Asia (MPA) report (Investing in Digital India) of December 2011 had projected a six times increase in subscriber revenues for MSOs, albeit with a 20 per cent subscriber churn to DTH – but MSOs themselves reacted very positively over the TRAI tariff order.

 

Hathway Cable & Datacom MD & CEO K Jayaraman told a business daily last week, that his company expects revenue to go up by 250 per cent post-digitisation. “We have 9 million homes and, at the least, we expect to double the subscriber base as 80 to 90 per cent of the carriage revenue will go to MSO. Broadly, after taking churn and loss in the carriage fee, we expect revenue to go up by 250 per cent “, he said. The company’s CFO, G Subramaniam, said during the same interview, that while carriage fees would reduce, the subscription revenue would rise from 10-15 per cent of the revenue mix currently. “This increase is likely to be six-eight times, and will make up for the loss of carriage fee”, he added. Both said that digitisation would help them grow their broadband business – already significant, given that as per Mr Jayaraman,

Hathway already had 4 lakh broadband subscribers and a Rs 150-crore topline, which he expected would double in the next couple of years.

 

Mr Jayaraman also outlined the many sources for his company’s digitisation upgrade: IPO funds and a mix of internal accruals, debt and vendor finance. He said: “The capex will be Rs1,000 crore. Of this, Rs300 crore will be spent in Phase-I and the rest in Phase-II. Phase-I is to be financed from initial public offer proceeds. A mix of internal accruals, debt and vendor finance will be deployed in Phase-II. The funding plan for the second phase is yet to be finalised,” he added.

 

The MPA report – which was released five months ago – also states clearly: “According to MPA analysis and interviews, all major national MSOs are adequately funded for Phase I digital deployment. The cost of digital software and hardware has also fallen since 2007, ensuring set top boxes plus the CA card will cost about $30-40 per unit in total including duties, compared with $60 three years ago”, and adds that a number of the MSOs (like Hathway, DEN) are also ordering digital STBs in larger volumes like 1 million per annum, by which costs are lowered to at least $30 per unit.

 

For instance, this report also gave company-wise details on the impressive progress they had already made on digitisation, and outlined their excellent financial situation to achieve the same. For instance, it said that Hathway had a debt to equity of 0.3x and a high promoter holding (67 per cent), hence “the company has enough head room to raise further capital”. While it said that DEN had a “comfortable debt to equity stand of 0.2x with a net cash of Rs9.5crore”, it also had sanctioned loans of Rs200 crore, which had not been drawn at the time of the report’s release. Even regional MSOs like Ortel, which might have a comparatively higher debt to equity at 1.6x as per the report, appeared comfortable placed to take care of their digitisation upgrade.

 

Source: The Economic Times
Copyright © 2012, Bennett, Coleman & Co. Ltd. All Rights Reserved

 

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