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“We could see bandwidth costs become 10% of what they are today over the next three years.” - Views on News from Equitymaster
 
 
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  • Sep 5, 2000

    “We could see bandwidth costs become 10% of what they are today over the next three years.”

    A graduate in engineering from IIT, Mumbai and a post graduate in management from IIM, Bangalore, Mr. Praveen Shrikhande started his career with ICICI. After a two year stint with ICICI, Mr. Shrikhande joined the Hathway group. He has worked with other Hathway group companies such as Exide and Johnson Tiles. He has been with Hathway Cable and Datacom since the past two and a half years.

    In an interview to equitymaster he spoke of the evolution of the cable industry, the changing dynamics of the industry and Hathway Cable & Datacom’s future plans.

    EQM Could you give us an overview of the Hathway Investments…

    Mr. Shrikhande Hathway Investments is owned by the Rajan Raheja group. It has investments in several ventures in media. It is the publisher of ‘Outlook’ and ‘Intelligent Investor’ magazines. It also has investments in cable television, Hathway Cable and Datacom and another cable company Asianet Satellite & Communications Pvt. Ltd. which operates cable networks in Kerala.

    Hathway Cable and Datacom has a cable network in seven major metros, Mumbai, Pune, Delhi, Bangalore, Chennai, Hyderabad and Ahmedabad. All put together, we have around two million subscribers, spread over these cities.

    EQM Could you just run us through the evolution of the Multi–System Operator (MSO) in India?

    Mr. Shrikhande Cable started in India with the local cable operator (LCO) putting up a dish antenna on the roof of a building and laying cables within that building and then across buildings. That was fine as long as the number of channels were restricted to four or five. As the number of channels kept on increasing the size of the head end which is the number of dishes and the number of channels that would be broadcast from the headend went up. So today when there are about 75 channels that we broadcast, we needed to install 11–12 satellite dishes in the control room. So the size of investments in the control room has gone up (the cost works out to around Rs 10 m) and that led to larger players coming in and consolidating the business. The LCO became a franchisee taking the input signal from the MSO and connecting the cable from the point where he took the signal from the MSO to his subscriber’s homes.

    EQM But the last mile connectivity still remains with the LCO?

    Mr. Shrikhande Yes.

    EQM Cable companies have been talking about valuations ranging from $ 1.5 bn to $ 2.5 bn based on the number of subscribers. But isn’t it a fact that they don’t have many direct subscribers?

    Mr. Shrikhande We have not been talking about valuations. But yes, you are right about the fact that cable companies have very few direct subscribers.

    EQM But do you envisage this model where the last mile connectivity continues to remain with LCO to change in the future?

    Mr. Shrikhande I don’t see that happening in the foreseeable future at least over the next two to three years. It would basically depend on whether the LCO’s are willing to sell out to the MSO’s or they want to continue as a franchisee.

    EQM What prevents an LCO from changing his MSO? Say for example, your local cable operator could walk over to Siticable. After all, the last mile connectivity remains with him?

    Mr. Shrikhande The fact is that subscribers get used to a particular line up of channels, which includes some exclusive channels. Say for instance we provide a Hindi movie channel ‘CCC’. Each of the MSOs have some value added content. We also provide an interactive music channel called ITV.

    Then it’s a question of territory. This business by its very nature leads to territorial aggregation. Once a territory gets aggregated its very difficult for somebody at the centre of the territory to get a signal because how will the cable reach him. It’s not impossible but it’s not practical.

    EQM The whole industry has so far operated on a model, which in a way is unique to India. The broadcaster gets Rs 7–8 per home per month, you have understatement of subscribers by cable operators and you have an advertisement to subscription ratio quite skewed in favour of advertisements not subscriptions, the way it happens the world over. Do you anticipate this change in the coming years and how?

    Mr. Shrikhande It will gradually change in the coming years. We’ve seen subscription revenues going up slowly over the last few years. And it’s not that the broadcaster doesn’t know the cable TV subscriber universe, its not that the MSO doesn’t know that there is under–declaration by the local cable operators. It is known. The number of subscribers that is paid for by the cable operators is a negotiated figure, it has nothing to do with reality. The negotiation is between the broadcaster and the MSO and the MSO and the LCO.

    Typically, the MSO’s declare their subscriber base back to back i.e. whatever the LCO declares to the MSO, the latter declares to the broadcaster. But it’s not that every broadcaster gets the same declaration. A sports channel such as ESPN would get a better subscriber declaration than a niche channel such as Discovery.

    In India people have not been willing to pay higher subscription charges but because the subscription charges have been so low, cable TV penetration has been phenomenal. Because of this, the advertising reach has also gone up which has benefited broadcasters. Otherwise if cable TV like elsewhere got charged at $ 10 –$ 20 per month as it is in Singapore for example, cable TV penetration would never have been what it is. So the big budget FMCG advertisers would never have come to cable TV. In India cable TV commands almost the same ad rates as terrestrial channels which would never have happened without lower subscription rates.

    EQM For an MSO, what would be the sources of revenue and how much would each source contribute?

    Mr. Shrikhande There is subscription revenue from cable operators and direct subscribers wherever its there. The second source is the revenue accruing from advertising on cable, which is quite a substantial amount. Sometimes when new channels are introduced they pay a so called ‘carriage fees’ to the MSO.

    I also anticipate major revenues in the future to come from value added services such as Internet services or interactive television or voice over Internet Protocol. The additional services would not only generate new revenue streams but I anticipate them to far surpass the three sources of revenues I spoke of earlier. So that is the way going forward.

    EQM Could you run us through the economics of the value–added services. A 2 Mbps line from VSNL along with upgrading of the cables reaching the customers home would cost around Rs 5 m to Rs 6 m. Add the other infrastructural costs and the total cost for providing the internet facility could work out to Rs 10 m. Even if a third of the connections are activated and you charge them around Rs 1,500 per month, you could theoretically break even. Is that sort of a scenario you are looking at?

    Mr. Shrikhande We would be charging our customers around Rs 1000 per month. As far as the breakeven point is concerned it would depend on bandwidth costs in the future. We could see bandwidth costs become 10% of what they are today over the next three years. A 2 Mbps line in the USA costs 5% of what it costs in India.

    Now if bandwidth costs drop 80%, naturally prices will also go down. We could end up charging lower than what we are charging today. At that time the costs of bandwidth will not be the determinant of margins or profitability. At that point in time the strong players will need to have a strong content story, a large reach and economies of scale.

    EQM Any favourite readings…

    Mr. Shrikhande My favourite books are 'Surely you are joking, Mr. Feynman' and 'Startup' by Jerry Kaplan.

     

     

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