Press Release

Switching off the cable guy Story on STAR - Zee distribution alliance and it's impact on cable operators etc.

14 July 2011

Switching off the cable guy

Tamil Nadu chief minister J.Jayalalithaa has put cable television back on the boil. One of her first announcements after being sworn in last month was the revival of the defunct state-owned Arasu Cable TV Corporation to fulfil AIADMK’s election promise of delivering cable television at just Rs 45 per month. Governor S.S. Barnala followed this up with declaring the state government’s intent to “nationalise private television operations”. This effectively means the takeover of Kalanithi Maran-owned Sumangali Cable Vision (SCV), a near-100 per cent ground distribution monopoly aligned to the DMK and the Sun TV group. Jayalalithaa’s last attempt to take over Sumangali in 2006 failed after the governor sent back the Cable Nationalisation Bill saying broadcasting is not a state subject. But her determination to break SCV’s cable monopoly in the state has obviously not diminished. This has brought to the fore the confusing cable wars — the battle for the Rs 20,000-crore subscription revenue between 60,000 local cable operators (LCOs) allied to hundreds of bigger cable networks called multi-system operators (MSOs) and the TV broadcasters; and the decade-old attempt to digitise the system so that it is accountable, monitored and taxed like any other industrThe Unchanging Cable World

To encourage the shift, Trai has proposed that cable networks be treated on par with telecom service providers and be given an income tax holiday till March 2019. It has also recommended that the basic custom duty on digital head-end equipment and set-top boxes be reduced to zero for the next three years to soften the blow of the heavy investments. But for implementation, the law has to be amended suitably — the Cable Television Networks (Regulation) Act 2002, especially Section 4 (A), has to be changed to ensure that all channels are digitally delivered and analogue signals are outlawed. The industry is hoping a new digital addressable system (DAS) will become the law during the monsoon session of Parliament. Trai has even set up a 22-member task force representing the industry’s varied interests to carry through the digitisation regime.Discordant Voices Easier said than done. CAS was mandated by law but never saw the light of day. The consensus, though, seems solid this time, say industry spokespersons. “For the first time, Indian Broadcasters Foundation (IBF) and the MSO alliance are sitting on the same side. We all want a return on investment and the government wants the analogue spectrum vacated for other uses,” points out MSO alliance spokesperson Mansukhani. Significantly, it seems the government has been convinced that it is the biggest loser if the old cable system survives. A rough calculation of evaded entertainment and income tax shows a loss of Rs 3,800 crore every year, says Star India’s Shankar. This is corroborated by the Hong Kong-based consultant Media Partners Asia (MPA) that points out that of the gross Rs 18,000 crore collected on ground as subscription revenue, 17 per cent makes it back to television channels, 4 per cent to MSOs, while the lion’s share — 79 per cent — is cornered by the local cable guy, who pays only a fraction of the taxes due. “But in this round, even the small cable operators are for digitisation. Fear of being wiped out by DTH is ensuring that,” Mansukhani adds. “With digitisation, the Indian industry will finally have the incentive to invest and create,” says James Murdoch, chairman of News Corp, Europe & Asia, echoing the demand of the international media companies. If the industry were to digitise and modernise, “instead of a $15-billion industry, we would be talking about a $120-billion industry,” promised the News Corp scion. But Murdoch and Mansukhani will have to account for the discordant voices. “Even the US does not have mandated digitisation. As much as 20 per cent of cable distribution in the US, including media giant Comcast, is analogue,” points out DigiCable’s Kohli. Under CAS, the consumer had the option of switching to a free-to-air regime and avoiding encrypted, pay channels through the set-top box. Most people opt for 11-13 channels, and under CAS they had the option of going for the free channels. However, in the proposed DAS regime, all channels will be through set-top boxes, thereby limiting choice, Kohli says. The MSO support for digitisation is also seen as a desperate move to make the cable industry more attractive for local investors and foreign equity partners. Though the government has hiked the FDI level for cable networks to 74 per cent to encourage digitisation, it is applicable only for digital networks. The small operators, who make up the bulk of the industry, have a different take. Ravi Singh, vice-president of the Cable Operators and Distributors Association (Coda), a broad alliance of small cable networks, says his association is against any rapid digitisation process. “Each set-top box costs Rs 1,600 and the maximum we recover from the consumer is Rs 1,000. In the metros alone, we are talking of 20 million set-top boxes. Where will the investment come from?” he asks. How soon will the old analogue cable see its sunset? The schedule for Parliament’s monsoon session is out, and the ‘sunset amendment’ in the cable law does not seem to find a place. The wait will obviously be longer than expected. 

(This story was published in Businessworld Issue Dated 18-07-2011?

MODERNISING CABLE TV
2002:Cable Act 1995 amended to introduce conditional access systems (CAS)2003:Set-top boxes made mandatory for pay channels in the four metros. CAS introduced in Chennai2004:Cable TV/broadcasting services brought under Telecom Regulatory Authority of India (Trai)2006:CAS introduced in one affluent pocket borough in three metros2007:Trai finalises 55-city digital and addressable rollout plan, but drops it after opposition from cable operators and big broadcasters2010:Trai recommends mandatory analogue sunset through gradual digitisation. The government accepts plan with revised timetable2011:I&B ministry circulates Cabinet Note to amend Cable Act to legalise new digital addressible system. Trai sets up a 22-member task force
Sample this: six persons in Nagpur were charged with dacoity and kidnapping after they abducted a cable operator from Samadhan Nagar in the city. The police said competition among cable networks, many supported by underworld goons, was behind the incident. This is not a story from the violent cable wars of the 1990s; the incident took place in June 2011. Nor is it an isolated incident. Big cable MSOs have been driven out of cities too — for example, Rajan Raheja-promoted Hathway  Cable & Datacom from Tamil Nadu. Hathway was among the first MSOs in Tamil Nadu to begin operations in the 1990s. But after SCV launched in 1996, its market share shrank to just 15-20 per cent from 60 per cent earlier. Hathway’s fortunes revived by 2007 when DMK supremo M. Karunanidhi and the Marans — Kalanithi and Dayanidhi — had a fall-out. Karunanidhi launched Kalaignar TV and roped in Hathway to fight off SCV. Within months, Hathway bounced back to a 60-70 per cent share. But this alliance was short-lived as by 2008, Karunanidhi had patched up with the Marans. Hathway claims operations again became rough and it moved out of the state by 2010. Its exit was SCV’s gain and it soon sewed up the complete market. Sun TV and SCV did not respond to the writer’s queries on Hathway. A detailed questionnaire faxed to Kalanithi Maran drew no response either. Violent outbreaks continue to underline cable television’s backward, unchanging status. Cable still accounts for 70 per cent of cable and satellite (C&S) connections in the country and is still the most important bridge for the Rs 35,000-crore broadcasting industry to reach 550 channels to viewers. Despite the more modern and marketing savvy direct-to-home (DTH) operators, cable continues to hold its own as it is 50 per cent cheaper; and delivers a fairly healthy average return per unit (Arpu) of Rs 180, which DTH services struggle to achieve.

However, after nearly two decades of operations, cable has become a dinosaur resistant to change, and a drag on the broadcasting industry.  To bring some accountability, the government has made some weak attempts to introduce the conditional access system (CAS) by mandating that television signals be distributed through set-top boxes only (see ‘Modernising Cable TV’, page 39). In December 2007, a big CAS rollout was decided; but broadcasters and the government backed off. The government did not have the stomach to face the army of small cable operators and public opinion that preferred the cheap Rs 100-for-100-channels regime. Even broadcasters such as Star and Zee preferred to package their popular Hindi entertainment channels with their less-popular channels. This would have been impossible under CAS. While DTH distribution offers modern, digital delivery of nearly 200 channels, cable networks’ outdated analogue pipes carry 65-100 channels. A KPMG media industry report says of cable’s 70 million subscriber homes, just 5 million have gone digital.Broadcasters Gang Up Among the long-standing grouses of television broadcasters against the cable guy is that the latter has been skimming off a large share of subscription revenues. Aroon Purie, who heads the India Today Group, speaking at a Ficci conclave in March this year, lamented the “distorted business model wherein just Rs 2,200 crore or 11 per cent went back to television broadcasters from the Rs 20,000 crore collected by cable operators from subscribers”. Broadcasters say cable networks under-declare the number of subscribers and force contracts for a subscriber base that is less than 20 per cent of the actual figure. They also say that the backward analogue system is used to squeeze out a premium — carriage fees estimated at Rs 1,200 crore annually — for channels to be seen in prime or more visible bands. The crores in lost subscription revenue laid the basis for an unusual alliance. Rivals Star India and Zee Entertainment Enterprises buried their hatchet and announced the merger of their distribution arms. On 26 May, Uday Shankar, CEO of Star India, and Puneet Goenka, managing director of Zee, merged the Star-DEN and Zee-Turner distribution companies. The merged entity, Media Pro will collectively distribute as many as 68 channels. As a package, it has formidable bargaining power.

Flat revenue from television’s main source, advertising, has also spurred this new alliance. KPMG’s estimates, considered optimistic by most, sees a growth of just 14.5 per cent for calendar 2011 for television advertising — from around Rs 10,300 crore the previous year to Rs 11,800 crore. Currently, the two rivals together garner around Rs 1,800 crore in subscription revenue. Once Media Pro flexes its muscles, Zee’s Goenka hopes to double subscription revenue over the next 3-4 years. But the cable networks see this as a monopolistic practice. Says Ashok Mansukhani, director of the Hindujas’ IN Cable Network: “In the metros, the 860 Mhz system can carry 106 channels. In small centres, with 560 Mhz, capacity is as low as 65 channels. The Star-Zee alliance with 68 channels will force cable operators to carry all their channels using the clout of their strong flagship brands. We won’t be able to provide a healthy mix. Where does that leave the poor consumer for choice?” The MSOs are working on forming their own alliance. Jagjit Singh Kohli, managing director of DigiCable, says the common threat of a broadcasters’ alliance will force cable companies to join hands. “Our meetings are going on. It is taking time, but it will happen,” forecasts Kohli.Going Digital? The government is partly to blame for failing to push through a technologically superior system that records who watches which channel. It is like providing a power line without installing an electricity meter. The result: a stagnant cable industry, and a continuing revenue war. Introducing ‘addressability’ — the routing of signals through a set-top box — is also linked to upgrading the old analogue system to a digital one that will deliver superior quality content and make the current shortage of carrying capacity (and carriage fees) a thing of the past. But the biggest deterrent has been the investment involved — an estimated Rs 25,000 crore. Now, after the failed attempts of 2003 and 2007, one more attempt is being made. And this time, the move seems to have broader consensus. Following various interactions with different arms of the broadcasting industry, the Telecom Regulatory Authority of India (Trai) released a blueprint in August last year for gradual digitisation of the cable industry with addressability. The information and broadcasting (I&B) ministry has accepted ‘sunset’ dates — 31 March 2012 for the four metros; 31 March 2013 for cities with a population of over one million; 30 September 2014 for other urban areas with municipalities; and finally 31 December 2014 for the rest of the country.

"Star-Zee alliance (68 channels) will force cable operators to carry all their channels"Ashok Mansukhani, Director, IN Cable Network"The common threat of a broadcasters’ alliance will force the cable companies to come together"Jagjit Singh Kohli, MD, DigiCable"From the Rs 20,000 crore collected, just Rs 2,200 crore goes back to broadcasters" Aroon Purie,Chairman and MD, TV Today Group"I am not against carriage fees. It is the premium I pay to keep my channels on top"Uday Shankar, CEO, Star India"For the same cable network, Star subscriber numbers are double of Zee’s, or vice versa"Puneet Goenka, MD, Zee Entertainment Ent.
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