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TV broadcasting: The distribution dilemma - Views on News from Equitymaster

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TV broadcasting: The distribution dilemma

Nov 15, 2007

'Proper distribution of a channel is as important as the distribution of a FMCG product'. Surprised! Read further. Higher distribution leads to higher channel trials, subsequent acceptance and finally higher revenues for the broadcasters. Concept of carriage fees: The penetration of high-end colour TV sets is very low in India with black and white and low-end colour television sets having a very high penetration level. Thus the channel carrying capacity of most of the television sets is less than hundred. However, more than hundred channels are telecast in India. Besides this, it has been noted that viewers mostly watch only the first 40 channels telecast on their television sets. Hence, it is very important for the broadcaster to make available his channel in the right frequency band to the viewer. The placement of the channel is in the hands of the distributors (local cable operators, Multi System Operators and the DTH operators). Since so many new channels are being launched, it is difficult for the distributors to accommodate all of them. Hence, the broadcasters pay fees known as 'carriage fees' to the local cable operators, (LCO's), Multi System Operators (MSO's) and the DTH operators for ensuring a proper and the most profitable 'distribution' of their channels.

Importance of Distribution for broadcasters: The payment of these carriage fees ensures that the channel is broadcast in the right frequency band and made available to a larger number of viewers. This ensures that the channel is flashed frequently in front of the viewer while flipping and then subsequently makes the channel popular if its programming content is good. High popularity leads to higher advertisement and consequently higher subscription revenues for the broadcaster. However, if the channel is not placed in the right frequency band, then the probability of its content being viewed becomes lower, resulting into languishing TRP's irrespective of the quality of the content. In that case, the broadcaster would have to forego a substantial portion of the advertisement and subscription revenues making its survival difficult. Many broadcasters have a separate distribution team, which negotiates with the local cable operators, Multi System Operators and the DTH operators.

Achieving a high level of distribution is of paramount importance for the new channels being launched. A high level of distribution would ensure higher revenues, helping them to recoup their investments faster. As per news reports, INX Media, the new entrant in the broadcasting space, plans to achieve a cable and satellite household penetration of 30 m (about 42% of the total C&S homes) in the first three months of the launch of its two channels, 9X (Hindi general entertainment) and 9XM (music). The penetration level targeted is very high since none of the recent new channels launched managed to penetrate more than 6-8 m cable and satellite homes in the first two months. This would also help INX Media command higher advertising rates. The INX distribution team has made attractive financial offers to leading cable operators and MSO's for carrying the two channels in the prime band.

The Beneficiaries:

MSO's and Local Cable operators: Carriage fees are collected by the local cable operators not affiliated to an MSO and by MSO's themselves. The launch of new channels has increased the bargaining power of the Multi System Operators and the local cable operators. Carriage fees are a major source of income for the MSO's and the LCO's. During the second quarter, carriage fees for WWIL (the largest MSO in India, present in 43 cities and operating through a set of more than 4000 local franchisee operators) have increased 35% YoY compared to first quarter of this year.

DTH players: The major DTH players are DISH TV, Tata Sky. A DTH company incurs huge technical costs on infrastructure, maintaining billing systems and encryption technologies. DTH players have limited number of transponders and can carry limited number of channels. Hence DTH players are also collecting carriage fees from the broadcasters.

The likely sufferers:

Broadcasters: The broadcasters beaming popular channels have higher bargaining power and pay less carriage fees. However, the new broadcasters and the broadcasters whose channels do not enjoy high viewership ratings would have to pay higher carriage fees.

Digitisation - The change agent
The digitization process (rollout of CAS and DTH services) is likely to alter the scenario completely. The phased pan India roll out of CAS in the next 3-4 years as per the recommendations of TRAI would introduce addressability in the system (viewers would get the choice to choose their channel and not be at the mercy of the distributors). Besides this, the channel carrying capacity of the television sets connected to a set top box would also increase. TRAI also plans to introduce addressability in DTH services and as the number of transponders increase the DTH operators would be able to carry more channels.

Increase in penetration of high-end television sets: Disposable incomes are increasing and the prices of high-end television sets having more channel carrying capacity are also declining in real terms. Thus, the penetration of high-end television sets is expected to increase going forward.

Thus, the digitization process and the increase in the penetration of high-end television sets would reduce the carriage fees burden of the broadcasters in the coming years and we believe it will be the content that will separate the men from the boys.

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