In what appears to be a clear sign that the largely unorganised domestic cable industry is upping the ante in its battle for survival against the onslaught of direct-to-home (DTH) players, two cable distribution companies, also referred to as multi-system operators (MSOs), are going public. The Raheja and Newscorp-owned Hathway Cable is looking to raise around Rs 570 crore, while the Sameer Manchanda and Raghav Bahl-owned Den Networks is raising Rs 390 - ?410 crore by issuing two crore shares in the price band of Rs 195-205. In fact, the only listed cable operator, the Zee group-owned Wire & Wireless India is also coming out with a Rs 450 crore rights issue.

The urgency shown by cable operators is understandable. In the last five years, DTH players like Tata Sky and Dish TV have turned the heat on the cable TV providers. Besides, the cable TV players in a bid to increase their own revenues are increasingly looking at digitisation of their networks and buying out smaller MSOs and local cable operators to bring about transparency in their subscriber base. However, according to analysts, increasing competition will lead to very few cable TV players managing to stay afloat.

What’s at stake

The domestic television distribution market is basically split into three categories: cable television, DTH and terrestrial television. According to the latest Ficci-KPMG report, of the 119 million television households in 2008, 70 million were analog cable subscribers and two million were digital cable subscribers. The nascent DTH segment accounted for 10 million subscribers. More importantly, the number of households which has terrestrial television (access only to Doordarshan), has decreased to 37 million by end of 2008 and is projected to further fall to 23 million by 2013.

Currently, there are approximately 1,000 MSOs in India, including 10 major players. Of these 10 players, five – Den, Hathway, InCable, Wire and Wireless (India), and Digicable – have emerged as national operators. Besides, there are approximately 50,000 local cable operators (LCOs) in the country.

Smaller inde- pendent MSOs will be left with no option but to align with any of the structured MSOs to effectively compete with DTH servicesSameer Manchanda, Chairman and founder, Den Networks

The MSOs receive broadcasters’ signals and transmit those signals to local operators for a fee, which is typically based on the number of subscribers receiving the signals through each LCO. As LCOs provide the “last mile” link to subscribers, most LCOs, typically, operate networks as a single monopoly with around 1,000 to 2,000 subscribers. However, the lack of a proper subscriber management system has resulted in massive under-reporting of numbers by LCOs – the bane of the cable TV industry. Currently, of the 72 million cable homes, subscription revenues come from only 15-18 per cent homes due to under-declaration of subscriber numbers. According to research major, Media Partners Asia, local cable operators got to keep 80 per cent of the Rs 15,500 crore in revenues generated from cable TV distribution last year, while broadcasters and MSOs just received 14 per cent and 6 per cent of the revenues!

The anomaly in under-reporting is also due to the fact that a majority of cable TV households are analog subscribers. Cable television signals can be transmitted in either analog or digital form. Analog is a signal sent as a continuous stream of information, while digital signals are sent in discrete packets that are less susceptible to both noise and loss during data transfer.

***

Prime time

By 2013, 149 million households will own TV sets, of which 85 per cent will be cable & satellite subscribers

Source: KPMG Analysis (Ficci-KPMG Report 2009)

***

More importantly, digitisation also enables encryption of content, which prevents unauthorised viewing of content by persons who are not subscribers to digital cable and makes it much more difficult for LCOs to under-report the number of subscribers a MSO has. Hence, most of the national-level MSOs are looking at increased digitisation and buying out smaller multi-system operators and local operators. “Since digital cable services are almost a norm today and can be offered only by structured MSOs, which currently control 35-40 per cent of total cable & satellite (C&S) households, we expect significant consolidation at a very brisk pace. We will soon see structured MSO controlling 70-75 per cent of total C&S homes. Smaller independent MSOs will be left with no option but to align with any of the structured MSOs to effectively compete with DTH services,” points out Sameer Manchanda, chairman and founder of Den Networks.

The company is looking at acquiring majority stakes in established MSOs to consolidate its position in states where it already has a presence and expand into other states as well.

Where Den stands

Established in 2007, Den Networks is a relatively a new player with limited operational history. The operator provides cable television services in states such as Delhi, UP, Rajasthan, Maharashtra, Gujarat, Karnataka, Haryana, Madhya Pradesh and Kerala. “We believe that operating in these states provides us with the opportunity to expand our business significantly, particularly in UP, Rajasthan and Madhya Pradesh, which are among the Indian states with the lowest degree of cable television penetration,” says Manchanda.

However, the company has scaled up its operations primarily through acquisitions. In the first nine months since its inception, DEN acquired a majority interest in the businesses of 22 MSOs across the country. Since March 31, 2008, it has acquired a majority interest in another 40 additional MSOs. Currently, the company has 10 million analog cable TV subscribers and has managed to garner 0.3 million digital cable subscribers following the launch of Digitelly in February 2008.

***

Digital sweep

Over the next four years, the number of digital cable TV households will increase seven times, while DTH subscribers are expected to touch 28 million by 2013

Source: KPMG Interviews, KPMG Analysis (Ficci KPMG Report 2009)

***

More importantly, Den has an equal joint venture with Star India, which has the exclusive rights to distribute 23 television channels, including the entire Star and Disney group of channels to providers of various television distribution platforms, such as cable TV, DTH and IPTV, in India, Bhutan and Nepal. As a result, Den has two main revenue streams, revenue from the venture and the cable distribution system. Of the Rs 712 crore of revenues reported in FY09, almost Rs 360 crore came from the JV and the rest from the cable business, which consists of subscription revenues and carriage fees. The company, however, did not give the breakup of its subscription and
carriage fees.

Growth strategy

Den is investing the IPO proceeds for the development of cable television infrastructure and services, cable broadband infrastructure and services, and acquisition of content and broadcasting rights. According to Manchanda, the investments in suitable hardware and software will give Den the ability to further integrate its business and enable it to broaden the scope and quality of services and increase its market presence.

The company will invest Rs 210 crore in the ongoing digital rollout in all the markets that are currently serviced through analog infrastructure and introducing them in markets where Den intends to expand in the future. “We don’t believe in going city-wise, we decide state-wise. That gives us also the advantage of putting local/regional channels on the network,” says Anuj Gandhi, chief executive officer of Den.

***

In the red

The company has been incuring losses

in Rs cr	FY08	FY09E
Income	719.3	86.9
Expenditure	708.5	106.1
PBT	-15.2	-21
Tax	2	0.6
PAT	-17.2	-21.5

Source: Company

***

Besides, digital cable networks have a significantly higher capacity to carry channels than analog networks. “Our analog subscribers receive up to approximately 100 channels, while our digital subscribers currently receive up to 180 channels,” says Manchanda. Digitisation has some commercial advantages as well, feels the management. “We believe our digital service offerings reduce the likelihood of our subscribers switching to another digital platform such as DTH satellite television, thereby strengthening our relationships with LCOs,” points out Manchanda.

Further, digital cable allows operators to provide subscribers with value-added services such as an electronic programme guide, video-on-demand, pay-per view and interactive-TV services, which provide multiple monetisation opportunities for the distributor.

In an effort to boost revenues from value-added services, the company is investing Rs 10 crore to increase the content rights for films, music and programmes. “We have the rights to telecast more than 4,000 films and are committed to expanding our film library. We intend to offer dedicated movie channels on our digital cable service and charge an additional subscription fee for those film channels,” says Manchanda.

The company is also looking to cash in on its digital network by investing in the launch and expansion of broadband services in Kanpur, Delhi, NCR and Bangalore. “We intend to build a multi-service internet delivery platform that can deliver video and data to our subscribers over the existing last mile coaxial cable into the subscriber’s home,” says Manchanda. The company, which has an all-India ISP licence, is investing Rs 25 crore towards the development of broadband infrastructure and services.

Cost and competition

Den operates in a highly fragmented and competitive cable distribution business where it not only faces a very dynamic market place but ever-changing technology and regulatory environment. For any cable distribution company, the establishment of digital services platform, set-top boxes (STB) and hybrid fibre coaxial (HFC) network accounts for 50-60 per cent of the capex. “We have already set up our digital services infrastructure and platform. In our own limited operating history of about two years, the cost of STBs has come down by 40 per cent due to increased volumes and economies of scale,” says Manchanda. But the fact remains that the entertainment and media industry and ISP businesses are characterised by rapid technological changes and the introduction of new products and services. Future technological changes will require Den to expand financial resources which, given its size, Den may not be able to do.

However, the management believes that world over, the cable distribution technology has stabilised over the years and emergence of global standards has ensured effective competition both in terms of cost and superior services. “Even though different cable distribution technologies like DTH, HITS, IPTV have emerged, cable remains by far the more robust distribution platform, thanks to superior consumer value proposition, as is evident in the mature markets like the US where it still has more than two-thirds market share,” says Manchanda, who feels Den’s strongest competitors are Hathway Datacom, Digicable, InCable and WWIL. Though the number of DTH households are expected to increased to 28 million by 2013, the cost of customer acquisition is the costliest at around Rs 2,800-3,200 per subscriber. In fact, Jawahar Goel, managing director of Dish TV, had commented that to attain growth levels that the industry expects, it would have to collectively spend Rs 500-600 crore annually on marketing and customer education. This, Manchanda believes, will only “help expand the market for us”. However, Nikhil Vora of IDFC SSKI, feels incremental pressure will come from the well-capitalised DTH industry backed by large corporates (Reliance, Tata and Bharti). “Thus while the DTH industry has reached a subscriber base of 13 million, lack of adequate funding has kept the digital cable industry penetration at 2.7 million subscribers,” adds Vora.

Valuations

When it comes to valuations, most bankers point out that the subscriber base is the biggest asset for cable operators. “Much like the telecom market, this (cable distribution) business is more dependent on the number of subscribers and realisations per subscriber. There is not much significant difference in technology between players. What is important is what is different in their other offerings,” says a leading banker.

Given the fact that the company operates in a space that lacks clarity in terms of actual reportage of the number of subscribers and that the company has established different agreements with different LCOs, the whole realisation process is quite murky, say analysts. “Zee-owned Wire & Wireless, which has been in the cable business since the 1990s, is talking of 10 million subscribers as on date, how is that a two-year-old debutant is claiming 10.3 million subscribers?” remarks an analyst with a foreign brokerage firm.

But despite such concerns, Den has managed to raise Rs 100 crore through a pre-IPO placement with the Mauritius-based EMSAF Fund, which has picked up 3.92 per cent stake at Rs 190 a share. According to market sources, the IPO is likely to be priced around the same deal value. Post-IPO, the holding of Manchanda and associates will drop to 53.15 per cent, while Bahl’s holding will fall from the current 9.8 per cent to 7.1 per cent. In fact, co-promoter Bahl was quoted as saying that, “we are a private equity investor in Den and that investment has happened through the TV18 balance sheet via our private equity vehicle. If the IPO happens at the price at which Den is expecting, then the amount of cash that would be equivalent to the stake we hold will be in the region of Rs 150-200 crore. We invested less than Rs 20 crore in that company. So this is a handsome profit that TV18 would be sitting on.”

So while the promoters look well-placed to cash in on the IPO, there is nothing left on the table for retail investors.