csg international - india cable digitization - key findings report

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Published 6th November 2012

2012 Research Study:Digitalization of the Indian

Cable MarketKey Findings Report

© 2012 CSG Systems International, Inc. The CSG logo is a registered trademark of CSG Systems International, Inc. CSG reserves the right to change any information in this document at any time without prior notice.

Digitalization of the Indian Cable Market - Key Findings Report© 2012 CSG Systems International, Inc. 3

Introducing CSG International

CSG Systems International, Inc. (NASDAQ: CSGS) is a market-leading business support solution and services company serving the majority of the top 100 global communications providers, including leaders in fixed, mobile and next-generation networks such as AT&T, Comcast, DISH Network, France Telecom, MasterCard, Orange, T-Mobile, Telefonica, Time Warner Cable, Vodafone, Vivo and Verizon.

Drawing on over 25 years of experience and expertise in providing customers with world-class licensed and SaaS based products and solutions; CSG has successfully implemented functionally rich and industry proven systems into complex ecosystems such as that of the cable industry.

CSG’s billing, customer care and business optimization platform is the premier system for Cable/DBS Communication Service Providers in North America. This pre-integrated platform is relied upon every day to support more than 60 million subscribers of convergent voice, video and data services and used by more than 40,000 customer service agents.

From managing field technicians and financials to improving customer satisfaction, CSG’s Revenue Management solution portfolio enables our clients to maximize transaction revenues, streamline operations and costs, and support customers with a differentiated experience.

4 Digitalization of the Indian Cable Market - Key Findings Report © 2012 CSG Systems International, Inc.

Introducing Tonse Telecom

Tonse is a recognized leader in India telecommunications intelligence. Well-respected for its research, consulting and advisory services; Tonse Telecom delivers custom technology research, investment advisory services, strategy, independent reports and marketing services.

Based in Bangalore, Tonse Telecom’s passion for technology is driving market intelligence in the broader telecommunications and networking industry including cellular, cable and broadcasting.

The company’s guiding principle is that only with valid market analysis and viable business strategy can technology solutions achieve their true potential and make a difference.

The team at Tonse Telecom consists of reputed senior industry executives, analysts and consultants who provide advisory services regularly and on a project-to-project basis to organizations of all sizes and across various sectors within the telecommunications industry (incorporating cable).

The team ensures their market intelligence and consulting services are not only credible and supported by extensive due diligence, but pave the way for positive change in the broader telecommunications industry.

5Digitalization of the Indian Cable Market - Key Findings Report© 2012 CSG Systems International, Inc.

Introduction

“India represents one of the largest television and media consumer

populations globally.”


OVERVIEW

The Indian cable sector is currently in the midst of a period of significant transition. As a result of legislation introduced via the Cable Television Networks (Regulation) Amendment Act 2011, conversion of the existing analogue cable television networks to digital addressable systems (DAS) was mandated.

This has been implemented as the first step in a staggered process to achieve the government’s national broadband vision for India. Achieving an efficient and productive digital economy, with the capacity for growth and expansion into the future, underpins this decision.

CSG International, a global provider of software and services-based business support systems, recognized there was limited data available on the impact of this digitalization process on the Indian cable market and engaged independent local analysts, Tonse Telecom, to undertake an industry-wide study. As digitalization of the cable market is currently being implemented in geographical phases (full migration is to be achieved by December 2014), this study focused on four key metros: Mumbai, Chennai, Delhi and Kolkata.

The results of this innovative study, which engaged the participation of representatives from all key points in the supply chain, from Head End service providers (MSOs) to consumers, are summarized in this report.

The White Paper provides an in-depth analysis of the primary research and will be available via www.csgi.com in December 2012.

Chart 1: Industry Respondents by Category

Industry Respondents by Category

Chart 2: Consumer Respondents by City


CONTEXT

With a population of approximately 1.21 billion (Census of India, 2011), it is no surprise that subscriber figures in India are staggering. Currently, there are more than 146 million television households, in addition to almost 38 million internet subscribers of which 14.82 million are broadband subscribers and over 908 million are mobile phone subscribers (TRAI, 2012).

This represents one of the largest television and media consumer populations globally.

Additionally, with the largest global movie production system, coupled with a highly diverse, multi-lingual ethnic population, India represents a rich cultural tapestry exhibiting a high disposition to communications consumption.

Currently, consumers are serviced by the cable and Direct to Home (DTH) providers. The cable sector has been long established and currently services almost 93 million subscribers, whilst the DTH sector is a relatively recent entrant into the market but has rapidly captured approximately 44.5 million subscribers.

The cable supply market is comprised of approximately 200 broadcasters, over 200 aggregators, more than 6,000 Multi System Operators (MSOs) and independent operators, approximately 60,000 Local Cable Operators (LCOs) and DTH/Satellite companies.

The Indian cable industry value chain consists of a rich broadcast/content aggregation community that delivers television programming content to the MSO who then delivers it over fiber to the LCOs. LCOs are responsible for facilitating the feeds into homes via HFC or fiber. The DTH industry feeds are from similar content channels, carrying information into homes via satellite.

According to the Ministry of Information and Broadcasting, the industry has experienced phenomenal growth since 1995, expanding from 20 pay TV channels in 1995 to more than 800 channels in 2012. However, inherent inefficiencies of the current cable system are unable to sustain such continued growth. This, combined with the evolution of digital technologies during this same period, are drivers to upgrade and improve India’s digital economy; hence the mandate to digitize.

Chart 3: Indian Cable Subscriber Base (2008-2012, Mil)


The cable industry currently has an inefficient distribution system. Specifically, systemic revenue leakage (arising from a lack of cable security and an inability to define and monitor users) combined with unsustainable business models is undermining supply chain efficiency and profitability. These are in addition to the inherent capacity limitations of the cable structure which restrict growth and development. The combination of these limitations resulted in a flawed revenue model that lacked the ability to evolve with, and capitalize on, the continued development and introduction of new content, which ultimately leads to subscription revenue growth.

As stipulated by the statutory body, migration to digital is being phased in geographically with four key metros currently in the first phase of the conversion: Mumbai, Delhi, Kolkata and Chennai.

Phase 2 will encompass a wider range of urban areas, major cities and tier-2 towns (as detailed in the White Paper), while Phase 3 will complete the semi-urban migration. Phase 4 will see rural India integrated into the digital process, with the objective to complete the migration nationally from analog to digital set for 31st December 2014.

According to the Ministry of Information and Broadcasting, the status of phase 1 digitalization was completed 100% in Mumbai, 95% in Delhi, 83% in Kolkata and 62% in Chennai (as at 1st November 2012). It is believed that the actual numbers may be slightly lower due to variety of reasons including ratio of multi-device homes, earlier generation of non-addressable STBs that might have been considered in the count and differing estimates of actual STBs deployed by various cable operators.


KEY FINDINGS

“Revenue levels post-digitalization may go up 5-8 times, however ARPU is likely

to be marginal in the short-term.”


SUMMARY

The study commissioned by CSG International, and undertaken by Tonse Telecom, sought direct feedback from key stakeholders in the cable supply chain in addition to a secondary market analysis; leading to projections on the impact of the digitalization process on a variety of stakeholders.

The survey research was conducted over a 5-week period commencing September 2012. Sample participants from the four key metros currently undertaking the migration to digitalization were selected randomly.

The study engaged 45 senior executives and 182 consumers in the interview process.

Discussions with business participants aimed to explore and gain insight into the perceptions of the value chain element. A structured questionnaire format was utilized with consumer participants to identify the public perceptions of the digitalization process and their customer service experience.

KEY FIGURES

• Projected Pay TV households to equal 169 million by 2015

• Cable subscriber ARPU projected to grow by approximately 25 – 30% by 2015 to achieve an average annual revenue per subscriber of Rs. 2400

• Annual cable services revenue projected to reach $4.7 billion by 2015

• Industry investment in cable digitalization from 2012 to 2015 to exceed $2.4 billion

• Digital cable subscriber base up from 18.62 (2012) to approx 61 million (2015)

• Cumulative cable services revenue will touch $16.5 billion by 2015

Digitalization Completion StatusNB. According to an announcement by the Ministry of Information

and Broadcasting on 1st November 2012


RESULTS

THE MULTI SYSTEM OPERATORS (MSOs)

MSOs are recognized as the greatest beneficiaries of the digitalization process, as the new system will enable accurate recording and monitoring of subscribers and an elimination of the revenue leakage inherent within the previous cable infrastructure.

It will also enable the MSOs to expand their operations to deliver digital services directly to the customer, moving from a purely ‘wholesale’ position in the supply chain to encompass the provision of retail services.

The MSOs surveyed indicated that they were keen to embrace the opportunity to invest in STBs and Head End infrastructure, however adopting the customer service and administrative responsibilities previously undertaken by the LCOs was recognized as a significant challenge.

The digitalization process offers the opportunity for approximately 80% of Head End infrastructure suppliers to upgrade their rudimentary equipment and engage more competitively in the marketplace.

With only 20% of Head End suppliers currently deploying high-end full capability systems, digitalization presents an opportunity for others to enhance their capabilities and secure a greater market share.

The MSOs acknowledged that one significant challenge in this transition is customer retention. As the digitalization process will mandate timely and accurate generation of accounts, the provision of billing services and flexible payment options will become critical to maintaining the subscriber base.

The MSOs also acknowledged the sophistication of the DTH model and recognized that a rapid streamlining of their business model to improve quality and efficiency in customer relations is an absolute necessity to maintain their customer base.


THE LOCAL CABLE OPERATORS (LCOs)

The LCOs recognized that their respective business models will undergo considerable change in the post digitalization process.

Where their ability to institute variable channel pricing and mark up the costs of STB supply to consumers enabled them to generate inflated revenues, the greater efficiencies and transparency of the digital supply model will remove those revenue-enhancing options completely.

The LCOs surveyed indicated a high perception of risk regarding the viability of their business model, interpreting the level of reporting transparency demanded by the digitalization process as an unfair regulatory mechanism.

There is a reserved anticipation of a potential upswing from broadband services; however a perceived insecurity permeated the responses from the LCOs.

It is anticipated that the digitalization process will result in either the attrition or consolidation of many LCOs, with a broad expectation that the LCOs will either merge to acquire an MSO, be acquired by an MSO or close operations completely. There is little expectation that the supply chain will remain viable in its current construct after the digitalization process is completed nationally.

Anecdotal evidence confirms estimates of a potential subscriber base loss from the cable market to the DTH market during the transition process, with projections of up to 10% subscriber loss.

This seepage from the market is anticipated to extend for up to two quarters as the MSOs and LCOs experience operational instability as they adjust to accommodate a digital framework. It is anticipated, however, that once the supply chain has stabilized, ARPU generation could potentially increase by up to 30% assuming the introduction of efficient operating systems.

THE INDUSTRY

Whilst acknowledging for the crucial groundwork performed by the LCOs in establishing the cable industry in India and voicing discontent regarding the established arrangements that have been in place to date, the Cable Operators Federation of India (COFI) is an advocate for digitalization.

It is however, critical of the rapid and demanding digitalization timeframe enforced by the statutory body and has assessed the STBs as inferior in quality.

The COFI advised that it is striving to protect the rights of its members, ensure fair revenue share ratios, create a transparent process, seed better quality STBs and ensure a clean process of transition.

The MSO Alliance for Digitalization is also supportive of the digitalization movement, although it recognizes that the MSOs need to acquire the skills to not only deliver the services efficiently, but to develop a greater appreciation of their customers ie to focus on their marketing and customer service


development.THE CONSUMER

Contrary to the perception of MSOs, an overwhelming number of consumers (97%) were aware of the digitalization process, expressing their support of the change from analog.

However, only 30% expected to pay more for the new technology and its associated benefits ie more channels and higher quality viewing.

The study indicated that there were a number of low-end cable consumers, particularly in Chennai, who objected to the mandatory STB deployment to digital and the potential for higher subscription fees.

Responses in relation to customer service were overwhelmingly positive, with 92% of survey participants indicating satisfaction with their customer service experience to date.

Other notable findings included:

• Average monthly subscription charges across the surveyed metros were in the range of Rs. 160 to Rs. 240. Notably, some of the surveyed individuals had started using digital cable but had not been informed they would be billed. The LCOs commented that they will issue bills only after revenue share models were clear

• End-user STB costs vary from Rs. 700 to Rs. 1,300 depending on the MSO / LCO and in some cases varies from street to street – even within the same service area. The LCOs admitted that they charge a delta to new tenants who have moved into the area and potentially carry a risk of quick churn out which they would like to off-set

• The average number of channels available to Digital Cable subscribers are approximately 300. Almost all respondents indicated they viewed less than 12 channels on a regular basis

• Only 7% of the survey sample believed the digital experience would not superior to analog.


“The most notable opportunities that have been identified by this study

are in the areas of content creation, talent development, production and

distribution infrastructure, broadcast infrastructure and service delivery.”

DISCUSSION


DISCUSSION

As digitalization is projected to eliminate the revenue leakages and inefficiencies inherent in the cable system, the most notable commercial opportunities that have been identified by this study are in the areas of:

• Content creation• Talent development• Production and distribution infrastructure• Broadcast infrastructure • Service delivery.

Analysis of the market has indicated that such a large demand base, with an effective value chain, should attract further investment to the industry.

Digitalization of this sector has the potential to engage strategic investors or partners, which in turn will drive the sector to a new level of global competitiveness.

Foreign investment will seed best business practices, thereby stimulating ancillary services and support businesses; and creating employment opportunities within the sector.

This, however, is contingent upon maintaining an investor-friendly policy regime. Fair regulation, instilling market-driven (opposed to government-driven) price mechanisms, ensuring equitable licensing and transparent policy will create a long-term sustainable market for the cable industry in India which has the potential to fuel another vital economic artery for India ie. broadband.

The Indian cellular industry, despite being a global icon of telecommunications privatization and developing a consumer base of approximately 900 million subscribers in only a 17 year operational period, is suffering from instability arising from over-regulation, lack of spectrum (airwaves) and government controlled spectrum pricing mechanisms.

The study revealed that the cellular and cable sectors have not explored potential synergies in service provision.

The establishment of an alignment between the cellular and cable sectors would have offered the potential for the cellular industry to outsource Wi-Fi provision through cable broadband, reducing demands for cellular spectrum and enabling the institution of a cellular traffic carriage fee for cable operators.

This lack of communication between the cellular and cable sectors has been noted in the study, with recommendations for the exploration of new business


Chart 4: Digitalization Expenses per Year Chart 5: Cable Sector Revenues Per Year

models, incorporating shared infrastructure and a managed services mode of supplier engagement as potential innovations for each sector (particularly in light of projected increases to data traffic arising from the forthcoming introduction of 3G and 4G in India).

Promoting interactivity between these sectors could create a synergy that has the potential to enhance the sector further and stimulate the economy. There are currently a number of structural challenges at play which are not supportive of external investment. These are listed below and are discussed in more depth in the White Paper:

• The heavily fragmented value chain which offers little opportunity to improve economies of scale• Outdated equipment• Opaque ownership structures• Lack of skilled technicians and lack of structured training for up-skilling• Absence of an industry standards compliance body• Absence of regulatory guidelines• Little government support or protection of the industry.

Furthermore, research inputs and data were utilized to develop forecasts on what the industry is likely to spend over the next few years directly as a result of the digitalization and what the cable industry can expect to generate in terms of revenue:


“The migration to digital is not without its challenges, both

structural and service-oriented.”

CONCLUSIONS


CONCLUSIONS

The digitalization process is recognized as a structural necessity to further the capacity of the Indian telecommunications sector (encompassing cable), with most stakeholders embracing the opportunities it has the potential to create.

The migration to digital cable is, however, not without its challenges both structural and service-oriented. In order to capitalize on the enhanced revenue opportunities, vendors along the supply chain will need to be prepared to invest in the upgrade of their equipment, the appropriate training of their staff and the modification of their business practices in order to retain and grow existing subscribers.

The digitalization process offers the opportunity for innovative business models to enter the market and seize the opportunity for growth, with a particular emphasis on models that promote interactivity between the cable and broadband sectors.

The need for a policy regime that supports the industry has been highlighted by the business community as of critical importance.

Please refer to the White Paper for further conclusions and recommendations in relation to:

• Government support• Domestic manufacturing• Training and up-skilling• Industry standards.

To download a copy of the White Paper please visit www.csgi.com

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For further information relating to this report, please contact:

Renée HarperHead of Marketing – Asia PacificCSG International

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csg international - india cable digitization - key findings report

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