India: Digitisation positive for cable TV

Fitch Ratings says that the introduction of mandatory cable television  digitisation in India would improve the business profile of multi-system operators (MSOs) over the medium- to long-term, driven by improved transparency through accurate reporting of subscriber base. This in turn will provide greater comfort to investors to provide capital to this sector.

The greater transparency will also improve broadcasters’ revenues as they may negotiate for a better price. However, the proposed mandatory digitisation, which is presently awaiting parliamentary approval, will require significant capex to develop digital infrastructure. This will involve significant investments in digital set-top boxes, based on the total estimated analogue subscriber base of 68 to 67 million.

It is primarily due to the current industry practice wherein the cost of a set-top box is heavily subsidised by MSOs. Nevertheless, some comfort is drawn from the Telecom Regulatory Authority of India’s recommendation for a phased implementation of digitisation. Also, Fitch expects that MSOs (like Hathway Cable & Datacom Ltd) who have voluntarily started the digitisation process, to better manage the overall execution and financial risks compared with peers, especially during the first phase of digitisation wherein the subscriber base and capex requirements are low.

The agency believes that the expected improvement in business profile of MSOs would outweigh any financial risks stemming from large debt-funded capex in the short-term. Fitch also expects that mandatory digitisation will provide opportunities for consolidation in the cable industry.

Furthermore, it may change the existing subscription revenue sharing mechanism between various stakeholders in the cable industry (broadcasters, MSOs and LCOs), which in Fitch’s opinion should benefit MSOs. However, carriage and placement revenues of MSOs may come under pressure.

In addition, the agency believes that mandatory digitisation would better equip the cable TV distribution industry to compete with the DTH companies at competitive prices. Also, MSOs’ ability to offer additional services, like Internet broadband services, using a common infrastructure will improve their operational leverage and help generate additional cash flows.

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