Government is planning to digitize the whole cable industry till 2014. It'll probably be done till 2016 considering various hindrances.
The basic flow with which cable TV works is:
Broadcaster----> Multi-System Operator (MSO) ----> Local Cable Operator (LCO) ----> Consumers
Pre-digitization:
LCO report to MSO the number of subscribers. General trend found that LCO only report 15-20% of actual subscriber base. So if 100 consumers belonging to a LCO watch CNBC, LCO report the number to be only 15-20. LCO pay fees of only 20 consumers to MSO & pocket that of remaining 80 consumers.
Post-digitization:
Each consumer will view channels through Set-top-box (STB). It'll act as a unique IP for each consumer. So MSO will get accurate report of how many consumers actually view the channels. So role of LCO will now turn into only collection agents for MSO. So now MSO will get fees for actual 100 consumers. This will benefit distributors who were losing on revenues due to under-reporting by LCO.
Nature of Media industry:
Fixed costs form a very large part of total costs. So when revenue increases, profits rise disproportionately. (Economies of scale)
Currently subscription revenues form only 30% of broadcasters revenue while 70% comprises of advertising revenues. With digitization.. this ratio will change to 50-50%.
FMCG sector forms 40% of advertisement volume. With this sector booming, volume will go up. Also advertising rates have been flat. Rate increase will add as a trigger.
Distribution expenses are higher than subscription revenues, so they are making operational losses. Also the carriage fees will reduce due to digitization as carrying capacity will increase due. (Currently TV18 paid 350 cr as carriage fees as opposed to 300 received as subscription revenues)
Before DAS |
|
ARPU (Monthly) |
Rs. 160 |
ARPU (Annual) |
Rs. 2000 |
Number of households |
12 crore |
Subscription Base |
Rs. 24000 crore |
Revenues earned by all broadcasters combined |
Rs 3600 crore |
Carriage fees paid |
Rs 1800 crore |
Net revenue |
Rs 1800 crore |
After DAS |
|
Estimated net revenue |
Rs. 9500 crore |
Thats a 5 times jump without taking into account the increase in ARPU or subscriber base. ARPU may not increase due to fierce competition, but subscriber base will indeed increase.
TV18
Now lets focus on TV18.
Recently made a complex deal. It acquired Eenadu TV (E TV) from Reliance. It financed this deal using rights issue. And Reliance will fund the rights issue.. WTF !!!! Hell of a financial engineering !!!
Lets concentrate on the outcome of the deal.
Bouquet of 49 channels. Formed a JV with Viacom named IndiaCast for distribution of all 49 channels.
Current debt of 700 odd crores & interest outgo of 85 cr.
TV18 planning to bring debt down by 400 cr using proceeds from rights issue. This will add around 48-50 cr to bottomline.
RJ is invested !!
Valuations:
Can't evaluate it on traditional basis of ROE and P/E. It is a bet that government will complete digitization in next 3-4 yrs and meanwhile revenues will start flowing in & will add directly to bottomline as they are incurring very less incremental costs.
Concerns:
Very complex group structure.
Government delaying digitization- This will probably not happen looking at way 4 metros were digitized.
Too much in news- Everyone recommending on Samvat that this sector will produce multibaggers is a bit of concern.