Digitisation finally here, Essel sees revenues up by 40-50%

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In a major cheer for the cable and satellite television industry, the Cabinet Committee of Economic Affairs (CCEA) cleared the ordinance to amend Section 4A of the Cable TV, bringing digitization into TV broadcast. Calling this revolutionizing move, Avnindra Mohan, president (Legal & Regulatory Affairs), Essel Group, says the entire revenue structure and the business model is likely to get a boost.

"In the first year I would expect a substantial hike in the revenue by 40% to 50%," says Mohan. He says the digitization pulls all stops providing 'value-added sevices', which he says will help companies to earn a lot of revenues.

Below is an edited transcript of Avnindra Mohan's interview to CNBC-TV18. Also watch the accompanying video.

Q: What do you expect will be the impact on Wire and Wireless (India)  since you are a big player in this space?

A: The impact is going to be positive because it is a very encouraging development. It was over due and we were waiting for it and now finally it has come. For the entire cable industry, this is a positive development and will change the entire revenue structure and the business model of the cable companies.

Q: In the first year (2012-2013), how much do you think would be the increase in revenues from subscribers? How much do you do think is under declaration?

A: Apart from under declaration, the skewed model is definitely going to transform into a digital subscriber revenue model . Other than the normal subscription, there would be a host of value added services. Since there is no shortage of spectrum, you can deliver as many value added services as you like.

And therefore, apart from the normal paid subscription which in any event at the moment is skewed the cable companies are going to earn a lot of revenue through value added services like movie on demand, internet delivery through broadband etc. I would expect at least in the first year itself substantial hike in the form of 40% to 50% itself.

Q: What is the rollout expected from metros and consequently the December 2014 deadline?

A: As of now we have not heard anything but it seems that these timelines are bit tardy. The task force that has been constituted by the ministry will take care of that. I think a 3-4 month of extension maybe needed because all this involves a lot of implementation work to be done. The orders for set-top box are to be placed and they would take their lead time to deliver set-up box.

TRAI has also to come out with certain regulation pertaining to inter connections and tariff from implementation point of view. Some kind of extension would be there but that can be taken care by the task force as well as by the government because the ordinance enables the government to suitably extent the timelines if required, keeping in view the practical aspect of all these things.

Q: Realistically, when do you expect a full rollout for metros? Do you think March deadline is even possible at this point in time?

A: I think a quarter extension would be preferable from implementation point of view because that will give all the stake holders a comfortable time to properly implement the system and for that matter even the subscribers will not be put to lot of hardships at the last minute kind of rollout in this timelines.

A quarter or three-four months kind of extension is preferable from practical implementation point of view. The consequential 2014 and timeline would also be extended by quarter or so.

Q: Do you expect more investment into the cable infrastructure space now? Could we expect more FDI inflow because of the high capex requirements of the industry now?

A: Yes, absolutely, because at the moment the cable sector is a bit unorganized and in the sense that it is analog. The total revenue structure is also segmented. What will happen with the digitization coming in is that the investment opportunities would come in the form of equity, as well in the form of other instruments which are there. The only thing I would like to highlight at this moment is along with that I have not heard whether this FDI enabling provision is also okayed by the cabinet or not but that 74% of FDI which is contemplated to increase both in cable as well as DTH.

This digitalization ordinance is also important for DTH companies. The consumer will have to decide whether to go in for cable or to go in for DTH. Once that decision is made in any case, customers are going to now be digital customers, whether it is going to a cable customer or a DTH customer that will be decided by the subscriber at the point in time.

All of this requires huge investment so for that matter accompanied by this particular ordinance the government should immediately come out with their revised policy in respect of FDI that is number one. Secondly, the incentives which the government should immediately concentrate on in the form of duty concession are required to be given on SPVs and the rationalization of a multiple tax regime which is there in the industry.

At the moment the industry is surrounded with entertainment tax, service tax, value added tax, so if you total all these taxes in aggregate, it amounts to approximately 50% of the total ARPU. Once such a hugely step is taken of the convergence of the entire analog regime to a digital regime, we need is a push from the government side to start with and for that all these incidental steps which are required to give a boost to this digitizational process that should also come along.

Q: In the event that the government does not give that extension which you are so forcefully arguing, is it likely that at least for the current years P&L in FY11-FY12 you will perhaps have to assume more debt?

A: The 49% of limit is yet to be exhausted. So, the moment the policy indications are there, we are moving towards a more organized regime. The FDI would start coming in the form of equity, so not necessarily the debt part. The extension required is from technical implementation point of view and not from the point of view of the FDI investment regime. It would be a beneficial if the FDI policy is also immediately announced by the government.

Q: Will this end the carriage fees which are currently paid to cable operators and if yes - what would be the impact in this fiscal year?

A: We are creating a kind of digital infrastructure, so the carriage fee per se at the moment in cable industry is in the form of placement fee. It is basically to place the channels. So that placement would go away in the digital regime because in the digital environment the bandwidth is sufficient. Therefore, as far as the placement part is concerned, there is no premium on that. The carriage part is concerned that is boarding a particular network for the purpose of riding that more in order to reach to the consumer, I think that will still remain.

Because if you see the DTH model, the carriage fees is still there since there are lot many channels there. Hence, the channels that are going to be there is still going to be the purgative of the distributor of channel. There would be some kind of reduction in the placement fee but so far as the carriage fees are concerned, a new model is likely to emerge in the form of provision of infrastructure.

Q: What is your estimate of the total investment which WWIL will require for complete digitalization? Have you all worked out any kind of numbers?

A: We have not yet firmed up the investment but the point there is that since in these three years period, the entire country is going to be converted from analogue to digital regime. As far as the entire cable industry sector is concerned, the total investment in the range of Rs 20,000-25,000 crore would be needed. It all depends upon once the roll out start, the prices of set-top box (STB) would start also falling. Hence, it depends upon how the things go in case the first phase is successfully completed. The confidence would grow in both in the investor community as well as in the STB manufacturing community. Hence, all these things would fall in place.

Q: Can you give us an idea of what an investor should be expecting by way of revenue growth?

A: As far as the subscription part is concerned, the growth will be about 4-5 times of the present scenario.

Watch this space for the complete interview