Pricing

India has the potential of becoming an attractive destination for international broadcasters and production houses, despite its low per capita income, as the larger population base makes a viable case for high volume consumption. However, while prices are significantly lower in India than in other parts of the world, access to volumes is restricted by fragmentation in the distribution chain.

At around INR 150, India has one of the lowest ARPUs in the world. In fact, the ARPU for cable television has actually fallen in real terms, growing at sub-inflation rates over the past seven years. An average urban Indian cable connected household receive as many as 100 or more channels for which it pays anywhere between INR 100 to 300 per month, while in certain rural and semi-urban areas, this number could be as low as INR 60 per month. The wide disparity in ARPUs between locations and, often, between various localities within the same city, is not proportionate to the quality of content or service offering by the distributor but has been guided mostly by the relative bargaining power of the cable operator with both the consumer and the broadcaster.

Subscriber declaration by cable distributors to broadcasters in India is extremely low resulting in very inequitable distribution of subscription revenues. According to an independent research, the operator-broadcaster split of subscriber revenue in India has possibly the worst skew in the world. It is estimated that the LCO corners 79 percent of the total subscription revenues of the industry and leaves just about 17 percent for the broadcaster. The residual 4 percent is retained by the MSO who downlinks the broadcasters' signals and transmits them through a combination of fibre and coaxial cable network to consumers' homes via the LCO, who, almost in all cases, owns the coveted 'last mile'. The low levels of declarations are attributed to the lack of transparency at the last mile distribution end of the business, owned by the 30,000 odd LCOs across India.

Distribution of revenues (in percentage)

With a proper regulatory framework if pricing and cable services are aligned, revenues can be further increased with a moderate increase in subscription rates and not only broadcaster’s revenues may go up, but also LCOs and MSOs revues will double.

Simulated revenue flow for a large LCO:

Riding on a strong base and strong economic indicators, C&S connections are expected to grow at a CAGR of 10 percent over the next six years to reach 85 million households. Content will be the key driver and demand for premium content will increase. Though the market is expected to be price sensitive, operators are likely to be able to charge significantly higher fees for premium and value-added content.

Anomalies like regional discrepancies in price will reduce and offerings will be uniformly priced across geographies and classes, which is not currently the case. The same consuming class currently pays the same price for consumer goods across geographies and it is anticipated that televised content would also eventually follow a similar trend.

ARPUs for analog cable are expected to grow moderately, and organic growth in this segment could eventually stagnate since the consumers in both urban and rural areas are likely to shift to digital offerings at a particular price barrier, once such offerings become available.

The digital offerings are likely to be split into:

• Basic: These will be benchmarked at the analog cable prices of INR 125-150 and the offerings will include the current FTA channels and the most popular general entertainment channels and few genre-specific channels like news, children, etc to complete the bouquet.
• Premium: The mass entertainment, film, sports and other channels which have a significant consumer-pull in select consumer segments will be offered as the premium tier. Consumers are expected to pay around INR 500-700 (inclusive of the basic channels mentioned above). The channel's content combined with the operator's ability to bundle them attractively will determine the pace of conversion from analog to digital basic and from digital basic to digital premium subscribers.
• Value-added services: These will include pay-per-view of new films, specific events like a major cricket match, interactive content like gaming, T-commerce etc. Channels may also strive to create a differentiated offering of the same content (e.g. ads-free telecast of cricket matches with a differentiated on ground coverage) at a higher price for this segment, which is the most price inelastic. The ARPUs for this segment could be around INR 900-1000.

Revenues

Out of its total current revenues of INR 139 billion, subscription contributed 53 per cent, i.e. INR 73 billion. That is one-and-a-half times the advertising revenues, which are at INR 49 billion. However, due to the large skew in the 'last mile', the broadcasters' share of pay revenues amount to only around 17 per cent, or INR 12.5 billion. Other revenues, which include international distribution right, amount to INR 14 billion.

In this new phase of growth, the sector is expected to grow at an annual rate of almost 18 percent to reach INR 371 billion by 2010; with subscription revenues forming the lion's share at INR 250 billion. It is also expected that the broadcasters will get a fairer share of the subscription pie. Advertising revenue is expected to grow at a modest rate of 8 percent to reach INR 78 billion in six years.

The total distribution revenues are expected to grow from the current INR 73 billion to around INR 250 billion by 2010, of which the share of declared revenues will improve significantly from INR 19 billion (26 percent) to INR 134 billion (54 percent). It will be driven more by the conversion of existing analog subscribers to addressable digital subscribers, rather than a plain vanilla increase in the declaration percentage, which will increase only from 25 percent to 30 percent in six years according to KPMG report.

The increased addressability will significantly improve both the Pay television revenues to broadcasters and to organised distributors (MSOs, DTH operators, IP-TV operators etc.) which will emerge as a stronger, powerful community, as has been seen in evolved markets like the US.

Broadcasters' pay revenues will grow six-fold, from INR 13 billion to INR 82 billion, while organised distributors, currently at a fledgling INR 3 billion, will command a significant share of the television market with subscriber revenues of around INR 41 billion. The LCO community, though growing at a lower compounded rate, too will benefit from increasing ARPUs, seeing their revenues growing from INR 58 billion currently to INR 126 billion.

Indiabiznews, July 17, 2010