* After go ahead from the Supreme Court, Trai recently released new tariff order, interconnection regulation and define quality of services that needs to be implemented within 180 days. Premise of final order is largely similar to draft but with few changes.
* Regulations are focused towards transparency, non-discrimination, non-exclusivity of content contracts between the stakeholders in value chain and to make a-la-carte pricing more affordable for consumer. We believe, broadcasters would continue to challenge the order to delay implementation as there would be huge execution challenges and it risks broadcasters’ subscription revenues as well.
* Theoretically, with implementation of this tariff order consumer ARPU has to move up for broadcasters to sustain current subscription revenues or price per channel would go up with consumer subscribing for higher number of pay channels. In our view, channel pricing is likely to be a key challenge for broadcasters apart from execution challenges.
* Distributors are clearly gainers as they are allowed to charge fixed network fees. Carriage revenues for MSO’s to reduce marginally while it would improve for DTH operators
* As per our calculations, tariff order is negative for broadcasters as it would impact the subscription revenue growth and risk to advertisement revenue for non-driver channels. It can be perceived positive only on the assumption that consumer ARPU will increase at healthy rate, which seem optimistic. However, it is difficult to assess the exact impact on the stakeholders as theoretical and actual implementation will be different. Implementation, if happens will be closely watched to assess the impact on stakeholders.
Broadcasters to be responsible for subscription revenues:
As per the order, broadcasters are responsible for pricing the channel on both a-la-carte basis and bouquet. Key provisions for the broadcasters are; 1) no cap on channel pricing while if any channel is part of a bouquet then, it cannot be priced more than Rs19, 2) broadcaster should provide all channels to distributors on a-la-carte basis and 3) MRP of a pay channel has to be uniform for all distributors, 4) there is no limit on number of bouquets that can be offered to distributor, 5) bouquet price has to be not more than or equal to 85% of the sum of a-la-carte prices of channels, 7) FTA and pay channels cannot be bundled in the same bouquet, 8) both SD and HD version of the same channel cannot be part of the same bouquet.
Distributors are the gainers:
Distributors will get fixed network fee of maximum Rs130/month/sub for 100 channels and maximum Rs20 (excl. taxes) for additional 25 channels. Key provisions for distributor are; 1) they will get content sharing fee of minimum 20% of MRP of pay channels or bouquet price, 2) broadcaster can offer maximum discount of 15% on MRP on non-discriminatory basis (aggregating distribution fee and discounts should ~35% of MRP), 3) broadcaster will pay carriage fee of up to 20 paisa/month while it decline with higher reach of the channel and 4) network capacity and distribution fees to be shared in the ratio of 55:45 between the MSO and LCO while the same can change with mutually.
We continue to believe that, if tariff order is implemented in current form, it would be negative for broadcasters as revenue risk is now completely broadcasters (B2C business model) and it will also have face execution challenges as well. In our view, bouquet offering will continue to remain dominant while lower a-la-carte pricing is a positive for consumers. Further, broadcasters would push non-driver channels in the base pack of Rs130, which could increase negotiating power of distributors to ask for higher carriage/placement/marketing fee. Large broadcasters (Z IN, Star India, SUN TV and TV18) are certainly better placed as they have driver channels that have consumer demand and feature in top 5 viewed channels. However, increase in cost to consumer can restrict number of channels that would be subscribed that could impact the reach of non-driver channels and advertisement revenues as well. Consumer ARPU increase is critical for broadcasters to save guard subscription revenues. Fixed network fee and marginal decline in carriage fee augurs well for distributors to improve business economics. Execution challenges, complete revenue responsibility on broadcasters, lack of network capabilities of some MSO’s and legal battle would delay implementation in medium term.
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