Both the broadcasters and multi-system operators (MSOs) have been rooting for digitization so that the industry could reorganize and deliver better subscription figures.

The digitization of cable and sunset of India's analog television network has finally been pushed by the Cabinet Committee of Economic Affairs (CCEA). The ordinance to completely digitize the cable and satellite television industry in the country by 2014 has been issued. Moving to a digital television regime has been a decade-long crawl. There has been a serious movement in digitization only after the Telecom Regulatory Authority of India (TRAI) released its blueprint in August, 2010.

The cable television industry is estimated to generate Rs. 20,000 crore a year. With under-declaration of subscriber numbers, it is estimated that broadcasters get about 20 percent of the collections. The last-mile operators - cable operators, 55,000 in number - are supposedly the gainers. The poor video quality and low carrying capacity, too has bred a flourishing carriage fees market.

The Broad Objective

Both the broadcasters and multi-system operators (MSOs) have been rooting for digitization so that the industry could reorganize and deliver better subscription figures. Digitization in India is extremely complex, though the term digitization can be used to in various contexts. On the ground level, the industry is still confused about various aspects, and perceptions are at odds with the objectives of the government as well as regulatory authorities. For cash-strapped MSOs, the decision may mean investments. The government is also inclined to bring cable television at par with the telecom sector with FDI at 74 percent (from 49 percent) once it digitizes.

Currently, there are over 200 broadcasters and 600 television channels. Among service providers there is a large roster of 6000 cable MSOs, with 60,000 local cable operators (LCOs), alongside seven satellite television operators and many IPTV providers (apart from the terrestrial services of DD). Pay-TV services, largely cable and satellite services, reach 74 percent or 108 million television households, out of which only 33 million today are digital, mostly attributable to DTH subscribers.

In TRAI's report on the digitization of cable services, Rs. 16,900 crore is estimated as subscriber revenues. Revenues from cable alone account for over Rs. 10,000 crore, and these are based on reported data from local cable operators (LCOs). Digitizing the cable platform will enable releasing spectrum for hundreds of channels, and provide dual/triple play services including broadband and voice.

The Roadmap and the Roadblocks

Digitization of cable services requires a three-pronged process. At the cost of simplification, investments are required for digital equipment of the national head-end and regional head-ends; digital equipment for LCOs; and digital equipment for the consumer (set-top boxes). Digitization at the headends requires tons of equipment such as transmitters, encoders, decoders, modulators, servers, storage, and others. Infrastructure updates could cost well into Rs. 10,000 crore, and set-top boxes (STBs) would double or triple that number.

With an effective requirement of Rs. 40,000 to Rs. 50,000 crore as CaPex, how does the regulatory authority expect efficient implementation within the guided timelines? Even if the partial digitization - that is digital equipment only for MSOs - was made mandatory, the investments would be around Rs. 5000 crore.

Many of the cable MSOs do not have the financial bandwidth to foot the bill. There have been gradual attempts within the industry to consolidate the LCOs, organize the industry, and streamline revenues, but the larger truth is that the sector is largely disorganized, political, and unmanageable especially when it comes to LCO functioning. Regional revenues are not 100 percent accounted for; there have been frequent cases of flouting regulations, and the industry leaders have been warranting digitization to check these issues.

Cable MSOs such as IndusInd (IMCL) of the Hinduja group have plans to go public in the next two years; and some MSOs hope to leverage the FDI benefits for the industry to their advantage. But considering these approvals have come through in May 2011, the industry requires at least another 12-15 months to look for investors.

If TRAI's guidelines are to be perceived for complete digitization, then even 2015 is not a realistic deadline. Cable MSO digital penetration today is at 5 million. They have to sell or push 90 million set-top boxes to their consumers by 2015 for the deadline to hold water. Unless the STB is offered free, one cannot coerce consumers to adopt digital subscriptions in such a short time. Each box roughly costs Rs. 5000. The cable companies do not have the bandwidth or the wherewithal like some of their DTH counterparts to foot the bill for the subsidy, and sadly the government is non¬?committal on it. Under these circumstances, the roadmap is way too ambitious.

The Contest between DTH and Internal Strategies of the Cable Industry

Apart from a few MSOs such as IMCL, Asianet, and Hathway Cable, a firm on-paper roadmap to go digital from the cable MSOs, has not been observed. The larger stakeholders are relying on government mandates to make digitization an industry-wide mantra. Apart from not having the money, many MSOs and LCOs are not fully convinced of the larger benefits of digitization, are unsure of the return on investment from the exercise, and continue to believe in acquiring customers with analog cable. If cable leaders want this venture to succeed, they need to have an industry-wide awareness and marketing to prep the value chain.

Many cable companies argue that they are not fully threatened yet by DTH services and that they can continue to compete well on price. Yes, there is no contest - but to the DTH advantage. DTH has been successful in penetration despite the high monthly costs because of the quality it assures and its digital platform. Why is the cable industry not motivated enough by this?

With the ordinance mandating digitization from 2012 to 2014, the customer will have to move from the analog mode to the digital mode. The customers would have two choices, either to move toward digital cable or to move toward DTH connection. This entire move will be significantly beneficial for the DTH industry because the industry has well-funded players. The industry also has a very good business model in place and a solid distribution network to reach the customer and strong brand names. When the question of choice comes for the customer, there would be a fairly substantial gain accruing to all the DTH players in the industry.

The cable industry has potential for growth. Not all subscribers, but a significant percentage is willing to pay more. An ARPU of `500 per month for good-quality television is not an impossible task. An average family in a metro spends thrice the amount to watch a movie in a multiplex.

For cable digitization in India to succeed, digital efforts have to ramp up besides and despite the government mandates. Stakeholders can argue that this is no mean a feat, but the way the business looks today, MSOs have to reinvent themselves and upgrade without relying 100 percent on the government-driven mandates.

Digitization bodes well for the media and entertainment industry. The media industry is drawing up their investment plans with five-year outlooks - transforming their stations and studios into file-based workflows. Cable companies as well as broadcasters are also transitioning to IP workflows.

The industry is upbeat, and many analysts have predicted high double-digit growth, measuring the growth opportunity, or the size of the digital void. Unfortunately, growth opportunities form a mirage, unless there is strategic implementation within the industry toward specified goals. On a positive side, digitization of cable services is inevitable and the industry is looking at it realistically, while weighing the pros and cons. The next 12 to 15 months will be interesting for the industry. Along with continued consolidation of LCOs, mergers and acquisitions at the MSO level will likely be observed. Hopefully with eased out FDI rules, the industry stands to gain an impetus in the short term, resulting in faster rollouts of digital upgradation.

The telecom carriers that have entered the television space could largely leverage their position by acquisition in the cable industry. DTH services, despite the benefits that they offer, are limited in the scope of penetration. Despite technical advancements worldwide, it has been observed that DTH services penetration is lower in rain-prone areas. Considering India's topography, this is definitely a challenge for the satellite players. However, the way forward will be largely impossible without reasonable regulations and timelines from the government. The cable industry in India may require stringent rules, streamlined roadmaps, and efficient taskforces, apart from a realistic timeline.

Some of the inputs have been sourced from an article by Vidya S Nath, Global Industry Manager, Digital Media, Frost & Sullivan.

Digitization offers the flexibility of choosing bouquets for a customer. It can also offer ala carte billing facility, which is what DTH offers. Broadcasters want digitization to be aggressively promoted. The major cost for multi-system operators (MSOs) is on set-top boxes (STBs) and broadcasters look forward to the government to waive off the customs duty at least for the next two years.

The opportunity for the government is huge as they stand to gain many folds in service tax revenue as rampant under-declaration by local cable operators (LCOs) is the order of the day in analog system. MSOs may hope for increased average revenue per user (ARPU) as greater number of channels can be shown. Revenue leakages from customers tapping out signals can be overcome with digitization.

With effective enforcement of digitization as per the timelines, this industry will rival mobility in terms of revenue contribution, as ARPUs will consolidate. There are too many players currently and sanity will prevail eventually with a consolidation of MSOs. Blatant under-declaration of LCOs will be a thing of the past if digitization is implemented in true spirit. The biggest benefactor will be the government and it should take the initiative.

Asianet has gone ahead with digitization in order to be fully compliant even before the timelines suggested. The company is committed to offer better viewing experience to its customers. There is a digital head-end at Cochin, which is connected across Kerala by a UG backbone. In pursuance of 100 percent digitization, Asianet has converted half of its direct subscribers to digital currently. In fact, Trivandrum city is now 100 percent digital and the company has switched off analog frequency there. This might be the first city in India to achieve such a feat.