January 2012

DIGITISATION – THE ONCE IN A LIFETIME OPPORTUNITY


The GoI has progressed with its much-awaited plans for cable TV digitization. The recently passed ordinance that amends the Cable Television Networks (Regulation) Act, approving the timeline the MIB and suggests for mandatory digitization has been converted into a law recently. It seeks to introduce addressability in the cable TV network, wherein all TV channels will be provided to houses through set-top boxes (STBs). According to the ordinance, the first phase of digitization of analogue TV broadcast, which covers the four metro cities — Delhi, Mumbai, Kolkata and Chennai should be completed by June 2012, while the entire country should be digitized by 31 December 2014, switching off analogue signals completely . The ordinance has also proposed the complete waiver of customs duty on digital head-end equipment and a tax holiday for cable operators that set up a digital addressable distribution network before the sunset date.

WHERE? BY WHEN?
Four metros 30 June 2012
1 million plus towns 31 March 2013
All urban areas 30 September 2014
Rest of India 31 December 2014



The ordinance has put forward a humungous task ahead for the MSOs. It is estimated that the first phase will require 12–15 million STBs; therefore, an MSO with a subscriber base of 2 million will have to achieve a daily setup rate of 8,800 STBs to meet the deadline in the first phase . And these numbers assume the MSO works 7 days a week! This may prove to be a challenge and will have significant cost implications — an estimated IN Rs.30 billion for digitizing metro cities, and around IN Rs.250 billion for digitizing the entire country .

Further, digitization is a once-in-a-lifetime opportunity for MSOs to realize their vision of directly engaging with end customers. The process of transformation will have to be viewed strategically to position an MSO for long-term sustainability. MSOs will need to alter their perception from a largely business-to-business (B2B) focus dealing with a few thousand local cable operators (LCOs), to largely a business-tocustomer (B2C) focus, dealing directly with millions customers. A number of critical decisions on business strategy and operations lie in store for MSOs to capitalize on the digitization growth curve.


IMPACT OF DIGITIZATION ON BUSINESS STRATEGY

Digitization is likely to impact an MSO’s business strategy in various aspects, including revenue and services, funding and taxation, infrastructure, relationships with broadcasters and LCOs and management of STBs. MSOs will have to explore different options in line with market demand, the level of engagement they want to provide to their customers, and corresponding revenue and margin implications. They will need to plan an appropriate growth strategy that is both cohesive and sustainable.


IMPACT OF DIGITIZATION ON BUSINESS STRATEGY

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REVENUES AND SERVICES:

Digitization will allow MSOs to expand their revenue streams by providing more choice to customers in their offerings. Offerings may include different channel packages, HD channels, broadband and value added services (VAS) such as edutainment and video on demand (VOD). Broadband services currently constitute a very small proportion of total revenues of MSOs, but digitization provides a good opportunity to grow this. MSOs will need to gauge how to best price content, in order to maximize revenues, and there will be significant learnings in this area. MSOs can also tap ancillary revenue streams such as placing advertisements on bills and on the Electronic Program Guide (EPG). Another important aspect is that MSOs can offer unicast instead of the multicast capabilities that DTH service providers offer, including true Video On Demand (VOD) eventually.


BROADCASTERS:

MSOs will have to decide how to define carriage and placement charges after digitization and re-negotiate existing deals with broadcasters. Another important question for the MSOs will be the renegotiation of content costs with broadcasters. The share of revenue per channel per subscriber would significantly change based on the strength and audience of the channel. The broadcaster’s ability to push less popular channels will tend to reduce.





LCOS:

An MSO will have to redefine the potential role of LCOs in a digitized world. However, a key question will be of how willing LCOs would be to relinquish their stronghold over end customers and what measures are agreed upon between MSO and LCO to protect LCOs existing income. MSOs will need to partner with LCOs for roll out of STBs, education of consumers and servicing customers. LCOs will also play a role in collections and increasingly ARPUs. MSOs can use digitization as an opportunity to enter new markets, but first, they must protect existing markets from competition. Digitization can also be used as an opportunity to move to a complete pre paid model (like DTH) and reduce collection hassels.


STBS:

STBs placed in each subscriber’s home will be a key touch point and differentiation for MSOs. Deciding on the type of STB — such as HD, VAS, broadbandenabled or basic — will be critical for meeting different customer needs. It will also have a bearing on a MSOs’ revenues and the services they will be able to offer to their customers in future. They need to decide on encryption technology and service providers for these STBs keeping in mind the volumes required, timelines and capabilities of the service provider. Various procurement models such as sale or lease need to be explored for deploying these STBs at customer’s homes, depending on the cost and willingness of customers to pay. And of course, the amount which they can be sold at and the subsidy needed.


INFRASTRUCTURE:

An MSO will have to analyze if its IT systems and processes are capable of scaling up and supporting increased volumes. In addition, the decision to outsource or build IT systems will be critical for an MSO. Figure 1 depicts which areas have been outsourced by DTH and/or telecom companies. The plans will have to be formulated in view of long-term cost structures. Unlike in the past, MSOs will now need to implement 24x7 call centers, as well as enable business continuity plas as they need to be available to millions of customers around the clock.


FUNDING AND TAXATION

A MSO will most likely need external funding to digitize its infrastructure. Various funding options include tapping into PE funding, IPOs or other strategic investors. The GoI’s recent decision to increase the FDI cap in the broadcasting and DTH sector —from 49% to 74% — has also opened up avenues for MSOs. Additionally, MSOs will have to liaise with tax regulators for a tax holiday to optimize the payback period for their investments.


IMPACT OF DIGITIZATION ON BUSINESS OPERATIONS

Digitization will impact almost all business operations of MSOs, ranging from STB management to LCO management, customer management, billing and collection and network management. MSOs will need to take strategic decisions to effectively bring about change while handling the challenges associated with execution.


STB MANAGEMENT:

The first step that MSOs will have to take will be to manage activities related to the procurement, deployment and repairs of STBs. They will have to undertake procurement planning to decide how many STBs to purchase and when, along with delivery timelines. They will also need to understand the capacity of their present suppliers in view of a potential surge in volumes. Perhaps MSOs will need to de-risk their supply chain by splitting orders between different suppliers. MSOs are also likely to face challenges in executing procurement plans, including the mapping of desired procurement timelines with the vendor’s capabilities and ensuring timely customs clearance. They will need to plan for storage and distribution and arrange for additional warehousing capacity if required and decide if they need to preactivate STBs. The challenges involved would include ensuring the accurate disbursement and tracking of STBs to LCOs, along with the management of inventory and re-order levels across warehouses and distributors, monitoring the activation of STBs and collection for installed STBs.

They will also need to decide upon the insurance, warranty and maintenance plans. The challenge will be to deploy adequate personnel and resources to monitor the servicing, repair and replacement of STBs, as required, and effectively managing reverse logistics. Such activity will also entail the adoption of efficient supply chain management practices.


LCO MANAGEMENT:

LCO management involves decisions that need to be taken related to interactions with LCOs. MSOs will have to redefine the exact roles/responsibilities of LCOs and what financial offers to roll out to them. Further, they will need to understand how LCOs should be involved in billing (who prints and distributes bills), or collections (physical vs. online collection options), new customer acquisitions (and corresponding commission to LCOs), the installation/activation/deactivation of STBs, handling of complaints (as a first point of call, as feet on the street to resolve a complaint and service charges), and what their share in various revenues should be. MSOs need to ensure that there is no delay in the deployment and activation of STBs supplied, and that the cash collected from customers is reported and deposited in a timely manner. In addition, there needs to be a mechanism to deal with existing annual deals floated by LCOs and inadequacies in the management information system (MIS) for monitoring LCO’s operations. MSOs will need to finalize the documentation required for new deals made with LCOs. They need to identify the training needs of LCOs’ existing manpower to service their customer base and develop the technical capabilities to deal with digitization. The training aspects should center on the sale, installation, activation/ deactivation and billing of STBs. They will also have to ensure that the LCO force is able to up-sell their packages and VAS offerings and defend their offerings from competition.


CUSTOMER MANAGEMENT:

Customer management would involve interactions with customers following STB activation. MSOs will need to set up a call-center led service delivery, capable of handling expected volumes, which can be in-house or outsourced, depending on the cost implications. They will need to decide on the languages that the call center would support. They would also need to develop backend capabilities to effectively link call center operations to the CAS system, subscriber management system and various payment gateways.

MSOs could face challenges in ensuring that the service levels offered to customers are within the acceptable parameters in all spheres, including package-change requests, revenue collection, the execution of VAS and the handling of complaints. This will be particularly important during the first three months after activation, when most customer queries will arise and customers need to be educated. Another critical aspect will be the integration of the call center with offline operations, and ensuring that the change in the touch point from the LCO to the MSO does not adversely affect customer experience. Additionally, MSOs will need to ensure KYC compliance within a reasonable time of activation and manage document handling, storage and retrieval efficiently with the help of an adequate MIS. KYC, currently at abysmally low levels will need some reward/penalty model to ensure LCOs provide correct data.


BILLING AND COLLECTION:

Billing and collection would involve various strategic decisions around bill generation, bill printing, bill distribution, collection mechanisms and the updating of collections. MSOs will need to choose between a physical and virtual bill, depending on the associated cost implications. In case of a physical bill, options such as ads on the bills can be explored to offset printing and delivery costs. They also need to decide when to generate bills, where to print bills and if LCOs can handle these aspects. Irrespective of strategy, MSOs would clearly be dealing with large volumes of bill generation and distribution and, thus, will need to ensure timely and accurate bill generation. They will also have to understand if their billing platform has the ability to handle package complexity as well as large volumes of data.

The collection of payments would constitute the next important measure for MSOs, and the options available in this regard would include implementing multiple modes of collection and reducing dependence on LCOs and collection partners, or offering easy long-term packages to cut collection costs. This would involve training all customer-facing personnel and ensuring that the collection data is received in time and customer balances are updated on time when alternative payments/checks are accepted, along with the timely transfer of data from credit card companies, banks and coupons. MSOs will also need to take decisions on the customer’s “my account” page, whether it should be on the EPG, and what information should be shared on the page. Data security is very important in this operation as it would require dealing with customers’ personal information and payment details, and MSOs would need to comply with data privacy laws under India’s Information Technology Act.


NETWORK MANAGEMENT:

Network management includes aspects such as data security, business continuity and load management. Such decisions would involve understanding if IT infrastructure and applications can support increased volumes, and accordingly upgrading IT capabilities (team, hardware, software and network) vis-à-vis expected changes in transactions and volumes. MSOs will need to ensure that their existing reporting capabilities are enough to provide timely and accurate data for management decisions.

They will also need to gauge ways in which to secure private and confidential data, classifying sensitive data and ensuring its secure storage and dissemination. MSOs need to have back-up infrastructure ready in the case of system, location and communication downtime, and build adequate redundancies to ensure that the customer experience does not stop or deteriorate. They need to ensure that they can achieve the target uptime of customers facing IT issues.

In the sum, MSOs will need to evolve from B2B to B2C business, which is a matter of scaling tenfold upwards from their present scenario. Digitization is a unique growth opportunity for cable operators. However, the resources — time, money, management bandwidth and talent — are limited. Further, competition has already been there and done that. MSOs need to tread cautiously and weigh their decisions on the basis of long-term sustainability. The road that cable operators now adopt toward the digitization revolution will separate the winners from the losers. n