FICCI-KPMG-Report-13-FRAMES

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20 The power of a billion: Realizing the Indian dream © 2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Phase II expectations: Miles to cover Most stakeholders believe that Phase II of digitisation will be implemented successfully, at least across the key cities. Our discussions indicate that on an overall basis, approximately 40 percent of C&S households in Phase II cities were already digitised by the end of 2012. Select cities like Ludhiana, Ahmedabad and Amritsar have seen nearly complete voluntary digitisation, while others appear to be on track for a timely roll-out. Industry stakeholders have also gained experience around implementation challenges observed during Phase I, and this may help mitigate similar challenges during successive phases. At the same time, Phase II presents some challenges which were not present, or only weakly felt in Phase I. There may be a delay of approximately 9 to 12 months for complete digitisation across Phase II cities The deadline for Phase II of digitisation across 38 cities ends on March 31, 2013. With an estimated 16 to 17 million C&S households in Phase II, approximately 10 12 million subscribers are required to be digitised during Phase II. this phase is expected to be more challenging with respect to logistics requirements and financial commitments required on behalf of the MSOs. This may lead to a delay of 9 to 12 months for successful implementation across cities. Three issues appear to be key: Logistic preparedness Phase II, which includes 38 cities spread across 15 states, is expected to be a greater logistical challenge as compared to Phase I across four metros. No large MSO appears to have a geographic presence across all 38 cities. Hathway Cable and Datacom is present across 25 13 Phase II cities, and is reported to hold a dominant position in 11 of these. Den networks, Digicable, Siti Cable, and Incable are present in 19 14 , 13 15 , 18, and 16 16 cities respectively, out of these 38 cities. Digitisation across Phase II cities is likely to be tackled in a phased manner by large national MSOs. The initial focus area would be in cities where the MSO has a presence, and currently offers digital services (voluntary digitisation) i.e. in cities where the MSO already has a digital head end. The next area of focus is expected to be in cities where the MSO has a presence in analogue cable (i.e. already has an analogue head end), and thus has relationships with distributors and LCOs. The last area of focus would be cities which are attractive from a C&S perspective, and which the MSO may wish to enter. Our discussions indicate that most large national MSOs are likely to focus on approximately 20 to 25 cities out of a total of 38. The balance cities may need to be digitised by smaller, regional MSOs, which have not had the benefit of learning from Phase 1. Therefore, there remains a risk that these balance cities may not undergo complete digitisation even after a 9 to 12 month delay post the stipulated deadline. 12. Industry discussions, KPMG in India Analysis 13. Business Standard, 27 November, 2012 14. Company reports 15. Business Standard, 16 February, 2013 16. Afaqs, 12 November, 2012 “ 25 out of 38 cities will get digitised relatively easily as large national MSOs have a strong presence there, and consumers have sufficient purchasing power in these cities. Success in the other 13 cities would depend upon whether the ecosystem is helpful enough in terms of providing incentives / benefits to the small entrepreneurs who are willing to invest in digitisation of these cities. Scan the QR code to hear more from Ashok - Ashok Mansukhani Director, IndusInd Media & Communications Limited and President, MSO Alliance “ We are ready. Though there are voices in the market that Phase 2 may get delayed, it may get delayed for another 3 months. We always prepare ourselves in advance; we know that Phase 2 will come. We have witnessed a tripling of our order book from last year’s levels. We have already enlarged our production capacity to satisfy customers’ requirements for speedy delivery. “ - Martin Jiang Country Manager – India, Sichuan Changhong Network Technologies Co. Ltd. Funding availability Phase II includes significant investment in digital head-ends and other back-end infrastructure apart from STB costs. Funding may prove to be a challenge because: • While Phase II consists of 38 cities, large national MSOs are present only in 15-20 Phase 2 cities. They appear to have plans to expand their presence to 20-25 cities, but the balance cities may need to be serviced by small regional MSOs, who may have funding challenges • Even for large MSOs, revenue benefits from Phase 1 have not started flowing in. At the same time, revenue share to broadcasters has increased, while carriage fee has been lowered. Hence, these MSOs need to raise funds for Phase II. While FDI limit has been raised to 74 percent, the benefits of digitisation are yet to be reflected in the numbers of MSOs, and this may have deterred investors. Hence, even large MSOs may face a challenge in funding “
The power of a billion: Realizing the Indian dream 21 “ Even large MSOs are facing problems in obtaining funding from banks. The government should consider granting infrastructure status to cable, and encourage banks to lend to the sector on a priority basis. “ - Ravi Mansukhani Managing Director, IndusInd Media & Communications Political considerations Industry stakeholders believe that the government appears to be firm in its resolve to see through DAS implementation in Phase II cities. However, experience from Phase I indicates that concurrence in state and central government policies may be a key driver to successful digitisation. Phase III and IV Digitisation is being tackled in a phased manner, with most players continuing to focus on Phase I and Phase II cities. Ground-level challenges have led to inadvertent delays in completion of the process in these cities. However, overall indications remain positive and industry believes that DAS will achieve significant success across all phases, albeit with some delays. for rollout for an MSO. On the other hand, penetration of digital platforms in C&S households in Phase III and IV cities is already estimated to be higher than 45 17 percent on account of penetration of DTH services in these areas. HITS: Cable’s answer to DTH in Phase III & IV? Head-end-in-Sky (HITS) is a platform for providing digital signal throughout the country via satellite. LCOs would be required to install a reception dish at their premises with a capital expenditure of under INR 1 million. HITS players then act as service providers for the LCO by providing the back-end infrastructure, while the LCO needs to fund the set top box subsidy provided to the consumer. LCOs may find it unviable to operate independently, and in such a scenario aligning with a HITS provider is expected to be more profitable for the LCOs as they retain a higher share of customer-end net ARPU. While some players like NSTPL (Noida Software Technology Park Limited) have declared HITS plans, discussions indicate that they are yet to see significant traction, with current industry focus limited to Phase I and II. Essel Group had tested the technology in India in 2008; however there was no digitisation mandate around this period, and therefore, the business did not gain the expected traction. Now, with DAS implementation imminent across India over the next 3-4 years, HITS may have an opportunity to emerge as cable’s answer to DTH for digitisation in Phase III and IV cities, as well as for Phase II cities where large MSOs may not have a presence. Sunset date for analogue cable Phase I II III Geographies covered Discussions indicate that larger MSOs are more likely to focus on consolidating their position in Phase I and II in the near future. Phase III and IV will require significant upgrade of back-end infrastructure apart from STB installation. A large number of Phase III and IV, as well as some phase II cities are characterized by low population density and spread out clusters, which may not justify a business case 17. KPMG in India analysis Delhi, Mumbai, Kolkata, Chennai All cities with population > 10 L All urban areas (municipal areas) Parliamentary approval 30-Jun-12 31-Mar-13 30-Sep-14 Industry estimates for achieving significant levels of digitisation Mar-13 Mar-14 Dec-15 IV Rest of India 31-Dec-14 Dec-16 Source: KPMG in India analysis “ HITS will be the answer to LCO’s continuing to remain in business by providing quality service to consumers by aligning to a neutral service provider while he still continues to own the subscriber. “ “ - Tony D’silva President, Hinduja Ventures Limited “ The challenge with HITS is that broadcasters don’t have comfort around clear demarcation of areas. - Uday Shankar CEO, Star India © 2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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FICCI 2013 143 “ The Amendments t
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Acknowledgement We acknowledge the
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FICCI-KPMG-Report-13-FRAMES

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