Shortening business cycles and the DTH Industry

The amazing facet of reducing business cycles is clearly reflected by the Indian experience in the DTH space where an industry which has a very low penetration has been besotted by the entry of a large number of players which has increased customer acquisition cost substantially and also induced severe price pressure on the industry।

The industry largely had one serious player till about three to four years back with Dish TV being the only player. However as is the case in an industry that is starting to take off Dish TV despite being an early entrant had to induce customers to move to DTH from the traditional cable networks. Given the widespread piracy levels and low costs of Rs 100-150 per month for cable TV access it was a difficult task. Also given the fact that the initial growth was slow the cost of set top boxes was also higher and this was required to be subsidized to the customer. Subsequently we saw other players with Tata Sky coming in as a big player and the government’s doordarshan also making an entry. With the entry of Tata Sky and high decibel promotions and entry level inducements along with the governmental mandate that most major cities will need to move towards Pay TV the move towards Digitization took off. However soon after a number of other players with deep pockets like SUN TV, Bharati, Videocon, Reliance ADAG’s BIG TV etc have made an entry into the market. With each new entrant entering the fray the penetration of the DTH platform has definitely gone up; however this has come at a steep cost to the payback period of DTH operators as subscriber revenues have come under pressure. The newer players have also benefitted due to the cost of hardware coming down and as a result they are able to offer lower subscription packages. The competitive environment has been further enhanced by the revival of the stock markets and easy equity funding that some of the players have been able to get from Private Equity players at steep valuations. SUN DTH has sold around 25% stake for more than Rs 750 crores and similarly DISH TV and Tata Sky have been able to raise equity funding.

The usage of equity funding for operational expenditure in the past has been seen in a very significant manner in the Indian Media industry in the last boom cycle. In the case of the Broadcasting i.e. Television media industry the entire segment was dominated by three large players ex of Doordarshan, which were the Zee Network, Star group and Sony TV. This was in the pre boom era where raising equity funding at high valuations was not really possible and as such operational expenditure was matched with operational income. However in the boom years of 2003-07 we saw a large number of new players entering the fray with various groups coming into various formats. Currently in India we have more than 7-8 general news channels (only Hindi and English) and more than 10-12 channels in general entertainment and a large number of business news channels. This was possible mainly due to easy equity funding at abnormally high valuations where channels on the drawing books got valuations of over USD 100 million plus and existing TV networks hiving off their various channels in different genres and raising funds through a network approach as is done in the SPV route undertaken mostly by infrastructure companies. This was despite the fact that most of the new channels were not making any money and infact losing huge amount on money on a consistent basis. These new channels raised the bar of programming by bringing in more and more expensive shows, reality shows etc. which squeezed the profitability further. The impact of this was felt on the existing established players also who also saw their profits coming under pressure. As a result the stock prices seen by the media sector in the first TMT (Technology, Media and Telecom) boom of late 1999-2000 was never seen in the last boom. Infact the stock price of the market leader Zee TV did not even go upto 40% of its earlier peak. Similarly in the current boom in the markets that we have seen over the last 12 months, media stocks have been underperformers in general due to the absence of free cash flows in a majority of companies in this industry.

Now looking at the broadcasting industry in India in some detail, total number of households with TV sets is estimated at around 130 million and total Cable and Satellite homes are around 60% of this at around 80 million. DTH is in around 12 million homes today and growing at a rate of 40% pa. Over the next five years the total C&S homes are estimated to go to around 50 million. Currently Doordarshans free DTH has a market share of around 40% in total DTH homes. Besides the subsidy on the set up of the connection, establishment of the brand and the concept has also required huge spends on advertisement with estimated marketing spends of over Rs 100 crores for the larger players. An average subscriber is estimated to cost the operators Rs 3000 on an average.

The huge competition has also meant that operational income is at unviable levels today and new entrants keep the subscription levels low to gain market share and given the fact that new entrants have been entering every few months the average levels remain subdued. The total losses of DTH operators till dates are estimated at around Rs 7000 crores. Dish TV had a loss of Rs 480 crores on a turnover of Rs 750 odd crores last year.

Besides this cable is still around and India being a price conscious market lot of people have not moved away from cable and also given the higher bandwidth offering in cable is also better for some services. Most markets globally have seen that having more than 2-3 players keeps the profitability down and leads to suppressed profitability. Also average monthly subscription rates in India are among the lowest in the world and 5-10% of that in developed markets and 20-25% of developing markets.

On an overall basis given the growth rate of the DTH market and the increasing number of players and the continued high customer acquisition costs my view is that this industry will remain continuously under price competition for the next 3-4 years at least before any sort of consolidation takes place and the number of players reduce. In the near term there is infact a higher probability that some new players might come in looking at the abnormal valuations being paid by private equity investors to new DTH operators.

As such this is a typical industry where easy money and fast fragmentation has led to the industry becoming unprofitable at a nascent stage.