Media: Mandatory Addressable Digitization, finally: Part 2:: Kotak Sec,

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


Media
India
Mandatory Addressable Digitization, finally: Part 2. The government has cleared
the ordinance approving Mandatory Addressable Digitization in India. We continue to
foresee the transformation of organized C&S TV as a result: (1) increased channel
capacity, (2) consumer choice of channels but most important, (3) transparency of
subscriber ARPUs resulting in improved financial returns. We highlight upside for
(1) C&S broadcasters (Zee, Sun, TV18: improved subscription revenues, reduced
placement fees) and (2) C&S distributors (Dish TV, Hathway, DEN: growth in paying
subscriber base, higher ARPUs, consolidation). The 3-year timeline is aggressive (given
>100 mn subscriber converting to digital) and likely to be revised, in our view.


What is the Mandatory-Addressable-Digitization (MAD)-ness all about?
Exhibit 1 presents the current state of the C&S distribution market in India, which shows that
analog cable is the dominant platform in India. From the consumer point of view, the simple
change from analog to digital (Digitization) would imply that a set-top- box (STB) would be
required to watch the C&S TV channels. However, digital TV is significantly superior to analog in
terms of (1) bandwidth efficiency (ability to carry ~1,000 channels versus 100 channels in analog)
and (2) picture quality (consistent across channels versus ~40 good-quality channels in analog).
The shift to digital from analog would be Mandatory as per the sunset dates (Exhibit 2) proposed
by MIB (analog signals of C&S TV channels will be switched off).
However, the key factor behind all the MAD-ness is Addressability (as opposed to un-addressable
digitization currently being voluntary implemented). The key issue as regards organized C&S TV in
India has been under-declaration of subscribers by unorganized local cable operators (LCOs) in the
analog cable system; this has resulted in (1) low MSO and C&S broadcaster share in subscriber
ARPU (Exhibit 3) and (2) low subscriber ARPUs (Exhibit 4). The subscriber base will become
transparent in Addressable Digitization; this would likely result in more equitable revenue sharing
between LCOs, MSOs and broadcasters in the C&S TV value chain.
Positive for C&S broadcasters: higher subscription revenue, reduced placement fees
Exhibit 6 presents our assumed breakdown of C&S TV subscriber base in Mandatory Addressable
Digitization scenario in India in FY2015E (versus current assumptions). Exhibit 7 presents the
increase in broadcaster share of consumer ARPU in case of digital cable, largely equivalent to DTH.
Exhibit 8 presents the potential upside to Zee’s domestic subscription revenues in FY2015E in
Mandatory Addressable Digitization scenario (versus current assumptions). We highlight 44%
higher domestic subscription revenues given value derived from digital subscriber is 2-3X analog;
incremental revenues will directly flow to EBITDA/FCF given modest incremental cost. However,
the positives need to be weighed against micro issues with Zee (sharp decline in Zee TV ratings)
and Sun (complex operational, political and legal issues).
Positive for C&S distributors: Subscriber growth and likely higher ARPUs for Dish TV
We revisit our assumed breakdown of C&S TV subscriber base in a Mandatory Addressable
Digitization scenario in India in FY2015E (versus current assumptions) in Exhibit 6; large MSOs
concede in our discussions that 20-40% churn in cable subscriber base is possible (25% higher
DTH subscriber base). Cable ARPUs may increase, assuming LCOs would wish to maintain prior
revenue/profitability levels and MSOs improved returns on investment (Exhibit 9). Most important,
DTH may break into urban markets given subscriber shift to HD services (not available on cable).
Exhibit 10 presents the sensitivity of Dish TV valuation to various key operating variables. However,
the positives need to be weighed against rise in competitive intensity (land-grab), likely resulting in
higher subscriber acquisition cost (~Rs3,000 from ~Rs2,000 currently).