Carriage fees: How it will impact MSOs and broadcasters

One of the important recommendations from TRAI, which has not been terribly controversial, have been its new rules with respect to carriage fees that multi-system operators (MSOs) will be able to charge as well as the revenues sharing between the MSOs and the last mile cable operators.

In an interview to CNBC-TV18, Vikash Mantri, telecom analyst of ICICI Securities discusses the impact of those recommendations on the various broadcasters and MSO companies. Below is the edited transcript of his interview on CNBC-TV18. Also watch the accompanying videos. Q: Is this terribly negative for broadcasters in as much as carriage fees now become legitimate? A: I think it is fine to have carriage fee, which is legitimate. Carriage fee is a phenomenon that is there in most of the markets globally also. There is nothing wrong with it. If a broadcaster wants the channel to be carried, he pays the carriage fee at his own will and wish. The fact that we will now have 500 channels as the capacity from the 30-40 channels in the analog will ensure that carriage fee significantly goes down. Given that it will be uniform and non-discriminatory in nature, I don’t think there is any problem. We expect carriage fees to significantly reduce going forward just because of the capacity that has increased in the system. Q: It would still mean an extra expense from this week onwards, wouldn’t it, something which they did not have to pay or were they paying it anyway? A: They were paying it anyways. The fact that there was a significant carriage fees being paid already in the industry has been a key concern. We have been talking about anywhere between Rs 1,600-2,000 crore as being carriage fee paid by the broadcaster earlier under the analog mode. This will definitely only go down going forward. This has been a problem of the broadcasting industry where they have been competing with each other to just pay higher carriage fee to be present in the right frequencies. Now given there is capacity, there is no need for them to compete. But if the broadcasters continue to compete and pay more carriage fee, that’s a problem of the broadcasters which they need to solve themselves. Q: Where does this leave Sun TV? One always thought that they didn’t pay, but were paid. A: Clearly, there is a clause called ‘Must Provide’ which is now supported with a ‘Must Carry’ clause. So, in case a MSO invokes a ‘Must Provide’ clause then there is no reason he can charge carriage fee which has come out in the new regulation. So, clearly if the MSOs were to ask for Sun TV channels, which they would given they are hugely popular, there will be no incidence of payments for Sun TV in terms of carriage fee and which will also be true for most popular channels. Q: One thing is increase of channel capacity of big MSOs by 500 channels by 2013, what is the impact in terms of operating costs for a lot of these MSOs? Do you think now that the government will move on something like FDI in the cable space simply because there be a need of funds going forward? A: I think there will be need of funds required for the cable industry in terms of subsidising the set-top boxes. That might be a reason used to maybe increase the FDI. There is no reason to cap FDI at current limits and they should very much liberalise this. In terms of capex required to increase capacity at the head end level from current to 500, it is not really much of capex. So, it’s more to do with the subsidies, to be borne on the set-top boxes. Q: Who do you think is best placed to actually monetise digitisation the most? Is it Hathway? Is it WWIL, DEN Networks? Where would you place your bets in terms of maximum returns? A: I think Hathway is best placed among all these operators purely because it’s been in the game for long and has also diversified into broadband where many of its subscribers are also into broadband, whereas DEN Networks is a bit late in the game. However, going forward everything would depend on execution and who can deliver better in terms of subscriber acquisition, Aa the same time, making the right kind of packages which will help it in getting the right margins per se. So, it’s more do with execution. But, as of now, Hathway is best placed among the MSOs as per me. _PAGEBREAK_  Q: Is there any opposition at all which is coming in from the broadcasters or is everything going to go as per schedule now going forward? A: I think there has been some noise on the carriage fee legitimised by the News Broadcasters Association. I believe there could have been better ways to manage carriage fee by including it in the revenue share for the MSOs, but still the factor is that it has been left largely to the market forces. And given TRAI has this time been allowed most of the things to be market force determined, I think it is a positive situation for everybody. Carriage fee legitimised has been taken negatively by the news broadcasters. But I think will also appreciate the various positives that are there in regulation. And carriage fee as a devil will significantly reduce or get marginalised in the next few years. They would be similar to the DTH industry which hardly collects any carriage fee. So, I don’t see a reason why carriage fee should reduce as much as what the DTH industry is collecting today, given capacities would be higher in the cable industry as compared to DTH going forward. Q: How are you looking at the various broadcasting companies? Do you have a positive view? Do you expect that all these targets of 200 channels by July 2012 and 500 by Jan 2013 will be met and there will be a substantial improvement in the under declarations which broadcasters have been complaining? Would you be bullish on any of the broadcasting stocks for these reasons? A: I would be bullish on the news broadcasting space clearly because they end up paying the maximum carriage fee as a proportion to the revenues. They will see this portion reducing going forward. In terms of 200 channels and 500 channels, I don’t think that’s a difficult thing for the industry to manage. They will be able to do it. We have been told that one of the bigger MSOs has already put in 500 channels capacity and things are literally developing fast on this space. In terms of deadlines, I think they can shift by a few months, but we will see given that there is an ample opportunity or choice of DTH available, we hope that the government stays put on the deadline, it is for the MSOs and the DTH operators whoever can execute better to move toward digitalisation. It will definitely mean better declaration levels for everybody in the value chain. Q: So, do you expect a further improvement in the stream of incomes for broadcasters because under-declaration will be thing of the past? A: Definitely so. Subscription revenues will see significantly positive uptick going forward. Things will improve and also the carriage fees will reduce. We are positive on the fact that subscription revenues will take an uptick. But we are positive only on the phase I and phase II of digitisation as of now. It will be very difficult to go beyond that in terms of digitisation, given networks are not established in the smaller rural market per se. Q: How worried would you be about the fundamentals or the financials of something like a Hathway and a WWIL, considering that they are going to be pumping in a lot of money with regards to phase I, phase II of digitisation? Hence, how worried would you be about the bottom-line considering that possibly debt costs are going to go up? They already suffer from high interest costs. Something like a WWIL already has a lot of pressure coming in on the bottom-line because of interest costs. How do you think the P&L would pan out going forward? A: While some of the players have cash in their books, naturally this kind of a development will require huge investment both in terms of set top box subsidy and also in terms of acquiring primary points in many cases. So, most of them will have to raise capital. We expect them to be able to do it. This will be a function of who is able to deliver in the next few months in terms of better execution. We have seen a similar story evolve in the DTH industry, while in the growth phase Dish TV was incurring losses, but investors did appreciate the fact that it would have to invest this capital and the valuations were adjusted to that fact clearly. So, I think if execution is strong on the MSOs front and they are able to deliver on the subscribers ARPUs and the declaration levels, I think capital will not be a significant problem. But the key thing is to deliver and execute which I would clearly say the MSOs have significantly disappointed in the past.