Indian markets - Cable and satellite.. Zee Telefilms

As I continue learning about the US cable and satellite industry, it looks like these are amongst the best businesses to be out there. While the content business (TV and movies) is very hit-dependent, the distribution business is subscription based. As such, there is a lot more predictability to the revenues. And I think this has implications for India.

Whether the Indian economy is growing or slowing down, consumers who have experienced cable service would continue to subscribe to a pay-tv provider (cable or satellite), as long as they can afford it. Because the alternative - Doordarshan - is so plain awful. So, as consumer incomes increase and video penetration increases in India, the cable and burgeoning satellite providers should see massive subscriber growth.

India currently has a dominant state network - Doordarshan, that is free off the air. That is the only channel that one can get for free. For the other channels, one needs to subscribe - till now mostly to a cable provider. Cable distribution in India has so far been heavily fragmented, controlled in many cases by criminal elements. The only big cable-tv provider in India is Siti Cable, owned by Zee TV. It is only now that satellite companies are starting to roll out plans for the Indian market.

As the cable distribution business has been fragmented, it has had a few implications: (a) Under-investment in cable network. (b) Bad customer service (c) Local monopolies within cities, implying prices that vary sharply in different zip codes. If there were to be an alternative, it might gain significant market share. Two alternatives are beginning to emerge on the Indian horizon: Satellite distribution, and Reliance Infocomm.

Satellite distribution has an obvious advantage over cable - low capital expenditures. Once a satellite is up in the sky, it can cover the entire country. The other major expenditure involved is in subsidizing the equipment (dish, receiver) in each subscribers home. But these equipment costs also follow Moores law (after all most of the equipment costs lie in silicon chips). And when subscriber additions reach a certain volume, equipment costs fall even more rapidly. Thus, this is a business with a high operating leverage, i.e. high margins for the marginal subscriber. And presuming that satellite distributors would be companies with bigger balance sheets (a satellite's cost of build, launch and insurance is roughly $250 million) and superior management than the local cable provider, customer service is where satellite companies can get a big leg up.

But Reliance Infocomm would have an even more powerful weapon, besides strong balance sheet and superior management, if it were to launch video service in India. That is the bundle. Having one bill for the land-line, mobile, Internet access and video servicess is a powerful motivation for a lot of consumers to switch from one company to other. And normally, the consumers would get a discount if they buy all the services from one company than if they purchased the services separately. But as Reliance doesnt seem ready to launch video service for a couple of years, we would focus back our attention on cable vs satellite companies..

There are a few other factors which we should take into account:
(a) Prasar Bharthi has ruled that their cannot be exclusive agreements between distributors and content providers (Star, Sony etc.). That basically reduces pay-tv distributors to a commodity channel. If viewers can see the same content on cable and satellite, the only reason to prefer one over other would be price, and maybe customer service.

What I need to figure out though is that whether Prasar Bharti has regulated the pricing at which content providers can provide their programming to the distributors. Because if it hasn't, distrbutors might be able to squeeze some savings, if they have a sufficiently large reach. This would imply that the bigger the cable or satellite company is (in terms of number of subscriers), the better it is for it.

(b) India is booming in the urban areas, agricultural incomes are stagnant. As such, incremental subscriber growth is more likely to come from urban areas than rural. Cable is dominant here, indicating satellite would have a rough time penetrating this market.

(c) Hyper-competition: There are many satellite companies that are planning to launch service in India. Only a couple will survive. It is important to identify which. Star can leverage NewsCorp expertise in DirecTV, BSkyB and Sky-Italia. Who are Zee's partners?

Zee seems to be betting on distribution - both cable and satellite - which is great. I think I need to study this company more. But the equity has moved from Rs 140 to Rs 175 in the last 10 days, since I thought about it..