Investing in Digital India

Investing in Digital India
The Dynamics of Mandatory Addressable Digitization

December 6, 2011
Investing in Digital India | I
Contents 1. Executive summary 2. The digital mandate and its impact 3. Prospects for cable operators 4. International experience 5. About Media Partners Asia 4 6 15 20 24
II | Investing in Digital India
List of exhibits
Exhibit 1: The dynamics of digitization: Benefits and challenges Exhibit 2: India digitization plan Exhibit 3: A third of Indias TV homes have digital TV Exhibit 4: Analogy between cable industry and movie exhibition sector Exhibit 5: International markets: Consolidation and digitization lead to industry growth and value Exhibit 6: LCO operating margins are >50% today Exhibit 7: Government of India loses >US$1 bil. pa to underdeclaration Exhibit 8: Projected subscribers in the National Broadband Plan Exhibit 9: Digital cable TV will be affordable Exhibit 10: Sensitivity of MSO to LCO revenue sharing in digital cable Exhibit 11: Channel C&P fees have grown rapidly while subscription fee growth has been modest Exhibit 12: Growth in Zee cable subscription fees has been minimal compared with DTH Exhibit 13: Sub fees boost profits towards content investment Exhibit 14: Valuations for cable/pay-TV companies in global markets Exhibit 15: US cable stocks outperformed after 1996 Exhibit 16: MSO economics in digital cable Exhibit 17: Number of permitted TV channels in India Exhibit 18: FY 2011 C&P revenues for major MSOs in India Exhibit 19: Comparison of reach amongst major MSOs Exhibit 20: Phase I capEx requirements for national MSOs Exhibit 21: Debt to equity ratio for major MSOs Exhibit 22: Comparison of digital subs amongst MSOs Exhibit 23: Broadband subscriber base of major MSOs in India (2011) Exhibit 24: Hathway proforma P&L for cable TV & broadband Exhibit 25: International markets: The regulatory path to digitization Exhibit 26: Digital cable conversion trends, international markets Exhibit 27: Digital cable TV ARPU dynamics, (3-year CAGR, %) Exhibit 28: Multiple product sales in Taiwan cable Exhibit 29: Cable business based on the growth of broadband digital bundles Exhibit 30: Broadband is a key contributor to cable company revenues (FY 2011) Exhibit 31: Cable leads US broadband net additions 5 6 7 7 8 9 9 10 10 11 12 12 12 13 14 15 16 16 17 17 18 18 19 19 20 21 21 22 22 23 23
Investing in Digital India | III
1. Executive summary
Substantial benefits for industry and consumer The government mandate to digitize cable networks across India over four phases should be executed with success due to shifting market dynamics, positive regulatory developments and broad support from all industry stakeholders. Digitization will bring a significant transformation to the TV industry with a positive impact also on the nascent broadband market. The current size of Indias cable sector is already ~US$4.5 bil., yet there is significant scope for future growth considering low levels of digital and broadband penetration. Furthermore, with over 60,000 local cable operators (LCOs) the industry is highly fragmented, limiting ARPU growth and the adoption of new technologies. In conclusion, there are major levers of growth to leverage as the industry consolidates and digitizes. Within the next three years, Media Partners Asia (MPA) analysis indicates major scope for last-mile consolidation by cable multi-system operators (MSOs) as well as M&A amongst MSOs. The rationale for consolidation amongst six direct-to-home (DTH) pay-TV operators will also grow while the digital mandate gives these platforms and DD Direct, the free DTH service, ample opportunity to gain market share in metropolitan areas. All of these groups, along with broadcasters, will be able to participate fully in Indias high-growth consumption story. We highlight key benefits and issues: A boost for the government and the economy. If the current analog cable distribution model remains in place and digital cable penetration remains limited, the potential cumulative value of the tax receipts lost by the government would reach US$11 bil. over the next decade or >US$1 bil. pa. The government therefore has sufficient incentives to push digitization and can also accelerate the process by offering tax incentives to a potential multi-billion-dollar industry. The government should also grant infrastructure status and tax holidays to the cable sector. These, if granted, will provide better financing terms and improve internal accruals for cable companies, to be ploughed back towards investment in digital infrastructure. At the same time, wider and deeper pools of capital could become available from next year onwards if the government raises the cap on foreign direct investment (FDI) in cable TV from 49% to 74%. Digitization of cable networks should also help the government aggressively pursue Indias broadband goals and thereby help to boost economic growth. Potentially, a 10% increase in broadband penetration would increase Indias GDP by ~1.5%. As of Sept. 2011, broadband per capita penetration in India was only 1%. In its National Broadband Plan, the Telecom Regulatory Authority of India (TRAI) clearly sees a pivotal role for cable operators in developing broadband infrastructure, with digital network upgrades paving the way for broadband growth. Consumer choice. Digital cable TV will improve the consumer experience and resolve legacy issues from analog cable services. Consumers will gain: (1) More TV channels; (2) Attractive tiering options with differentiated content across local, regional and niche genres; (3) A better viewing experience; and (4) Improved quality of service. Digital cable TV will also be affordable for the consumer. As per international benchmarks, spending on pay-TV typically accounts for ~5% of GDP per capita. In this context, digital cable TV in India will be affordable given heavy subsidies on STBs (currently subsidized at ~60-70% by MSOs), which will ensure that consumer spends fall within the 5% benchmark. Consumers will also benefit from new competition as digitization in metros ensures that seven DTH satellite platforms (including free service DD Direct) compete for customers with digital cable operators. A cable transformation but not without challenge. About US$8 bil. in investment is required to digitize the entire market. The requirement is about US$300 mil. for Phase I, which we believe can be funded adequately amongst the national MSOs (see Section 4). Phase I represents ~10% of the analog cable universe in India. For cable MSOs, we expect a 6x increase in subscriber revenues though not without at least a 20% churn in cables customer base to DTH. With addressable digital deployment, subscriber declaration levels will increase from 15% currently to 100%, while the retained ARPU will increase by 6x, after assuming a 30% base case revenue share with the LCO. Additional drivers and differentiators will come from bundled broadband and high-definition (HD) services. Broadband will reduce the payback period on overall capital employed towards digitization. Under a bundled digital and broadband business model, the payback period could be reduced by a year to 24 months, as opposed to 36 months under a standalone digital cable TV proposition. The main challenges, apart from managing subscriber churn to DTH operators, are: (1) Carriage and placement (C&P) fees will drop by about 2050%; and (2) Incentivizing revenuesharing agreements have to be struck with LCOs in order to drive digital set-top boxes (STBs) into the home. Cable operators will also be required to gradually transition their business model to a new ecosystem with the consumer as the focal point. The challenge of transitioning from a current B2B business to a B2C franchise is not be underestimated. MSOs will eventually look at exploiting their strength of locality by increasing investment to create channels and content with local relevance (i.e. news, events, infotainment, movies on demand). Overall, mandatory digitization will result in consolidation of the cable industry. Larger operators will be keen to acquire the last mile as valuations for LCOs drop and operators successfully develop skill sets and necessary infrastructure as they transition to a B2C model. DTH opportunity. Phase I digitization in the four key metros presents a potentially good opportunity for DTH operators to grab high-ARPU customers and increase the platforms reach in larger TAM meter markets. MSOs envisage about 1520% churn in cable subs to DTH though some suspect this could grow to 30% in the early stages of Phase I deployment. Subsidized HD offerings will also act as a key differentiator for DTH players as cable has yet to roll out HD services (with the notable exceptions of Hathway and Digicable).
4 | Investing in Digital India
Broadcasters. Digitization will help boost subscription revenues for broadcasters and reduce dependence on advertising. Improved economics will also help broadcasters launch niche channels with a premium focus while C&P fees will fall in certain markets and moderate in others. At the same time, consumer adoption of certain programming tiers and specific channels (over others) will ensure healthy competition, while broadcasters will also be under pressure to produce content with differentiation, premium quality (potentially advertising-free) and with local relevance. Investors. Upon successful implementation of the digital mandate, gradual consolidation of LCOs will become inevitable. This will shift the industry profits and value to centralized distribution platforms and broadcasters. Furthermore, the corporatization of distribution will bring
new scale to the TV business with improved systems to raise transparency. This should result in significant value creation for investors with valuations and multiples of cash flow likely to steadily grow in public and private markets. Indias pay-TV distribution market is on the cusp of a highgrowth value phase similar to North America between 1998 and 2003, Korea during 2003-7, and Taiwan during 2005-10. Valuations for these companies in these markets during the high-growth value stage typically averaged 1216x one year forward EBITDA, versus the current trading average of 9-10x for Indias listed cable/pay-TV entities. We assume similar or higher valuations for companies in India subject to successful execution. Most investors, especially strategic companies, will likely take a wait-and-see approach, potentially making their bets after Phase I is completed.
Exhibit 1 The dynamics of digitization: Benefits and challenges

Stakeholders Government Benefits of digitization Recover tax leakages of >US$1 bil. pa and improve tax receipts in the long term from ARPU growth and VAS. Enables cable operators to use digital infrastructure to offer broadband, thereby increasing broadband penetration and boosting economic growth. Better viewing experience. Attractive tiering and a-la-carte options. More channels. New and better services (broadband, HD, ondemand and personalized) and strong QoS. MPA base case assumes a 6x increase in subscription revenues. Bundled broadband will boost revenues and profits as well as provide competitive differentiation. Now equipped to compete against DTH services. Scalability to business from cross-selling other services. Further boost to volume growth. Access to high-ARPU urban consumers. Practical challenges Limited scope to offer financial incentives, as it needs to tackle important impending issues sensitive to the economy. MPA viewpoint Considering the current macroeconomic environment, it is fair to assume limited tax rebates from the government. Government should encourage foreign investors by increasing the cap on FDI in pay-TV from 49% to 74%.
Consumers
Mandatory one-time expense on STB/CPE (although subsidized).
Consumer spend on CATV as a percentage to per capita GDP is lower than the international average of ~5%. Intense competition will further improve affordability. Consumers will have choice of free and pay DTH in addition to digital cable. Rules of the game are favorable to attain profitable growth. However, the key risk lies in the execution. Break-even period in standalone digital service is 36 months; reduced to 24 months when digital cable is bundled with broadband. Expect a sharp drop in profits and valuations if digital challenge is not met and DTH gains significant market share in the metros.
Cable MSOs
Transitioning from a B2B to B2C business. Revenue-share arrangements with LCOs.
Local Cable Operators
Change in marketing from consumer pull to consumer push.
DTH Operators
Broadcasters
Boost to domestic subscription revenues. C&P costs will reduce, boosting profits to be reinvested into producing improved and differentiated content.
Financial Investors
Investment options in larger, more stable and scalable businesses with a clear path to value creation. Access to a high-growth market and better scaled assets with more stable revenue streams.
Increase in competitive intensity may increase SAC. Lack of a two-way return path for broadband. Surge in new channel launches will intensify competition. Broadcasters will need to increase spends on branding and marketing. Will need to produce differentiated content to cater to digital consumer. Risk of dilution as the industry goes through its early gestation period.
Delay in break-even period for operators.
Growth in domestic subscription revenues is important to attain the next leg of profitable growth particularly for incumbents. Broadcasters will also see upside from technologically advanced content (i.e. HD).
Strategic Investors
No controlling stake without higher FDI cap in cable and DTH satellite operators.
Technology Service Providers
Potential US$3 bil. opportunity for technology service providers. The IT sector will also benefit as MSOs develop a B2C model, requiring a host of customer care services.
Outside of a few national MSOs, the market at large is highly fragmented, unorganized and lacks financial muscle. Most seek vendor financing and have a reasonable probability to default.
We expect valuation multiples for both broadcasters and distribution companies to expand, due to strong earnings growth and stability in revenue profile (less dependence on advertising revenues). Indias pay-TV distribution industry is on a cusp of a highgrowth value phase similar to North America and Korea. Valuations for cable/pay-TV operators in these markets during value phases was 12-16x forward EBITDA. Taiwan cable companies that have embraced DTV still trade at >10x in the private market. In due course, consolidation will help address the practical issues faced by vendors.
Source: Media Partners Asia
Investing in Digital India | 5
2. The digital mandate and its impact

In November this year, Indias Union Cabinet approved an Ordinance mandating addressable digitization of cable networks in key metros, starting in June 2012 with a Phase I rollout to ~10 mil. homes in Delhi, Mumbai, Kolkata and Chennai. The government on Nov. 28 2011 tabled the Cable TV Networks (Regulation) Amendment Bill 2011 in Parliament, clearing the path for digitization. The bill, piloted by the Ministry of Information & Broadcasting (MIB), seeks to digitize the entire cable sector by Dec. 31, 2014. The impact on Indias US$7 bil. TV industry could be transformational. In this section, we evaluate the mandate and summarize the impact on key stakeholders. Third time lucky Having tried and failed in 2003 and 2007, the 2011 government mandate to digitize Indias cable networks should be executed with greater success due to a change in market dynamics and positive regulatory developments. Mandatory addressable digital deployment technically implies that each set-top box (STB) must be equipped with a conditional access card or system (CAS) and include billing and subscriber management systems (SMS). This is important because out of the 8 mil. STBs seeded into cable homes thus far, more than 3 mil. are without CAS. The emphasis on addressable deployment, absent in 2003 and in 2007, is important as it: (1) Helps improve transparency and reduce revenue leakage across the value chain; and (2) Provides consumers with improved quality of service through SMS functionality. We highlight key aspects that should make for improved execution: All-inclusive and universal. With the new mandate, there are no particular zones selected for digital deployment all homes fall into the category in specified metros and cities. In addition, all channels (both pay and free-to-air) will be made available via the STB, not just the pay channels as previously planned. Finally, the MIB has fixed analog sunset dates for various cities (see Exhibit 2) with a phase-wise switch-off.
Implementation date No. of cities 30 June 2012 4 31 Mar. 2013 30 Sept. 2014 31 Dec. 2014 38 n/a n/a
Shifting market and structural dynamics. Four years on from 2007, there have been a number of key developments which should help kick-start digital cable deployment: Industry support. Consensus building amongst cable MSOs and broadcasters has grown significantly with broad support towards the implementation of the digital mandate. Moreover, both groups recognize the importance of incentivizing LCOs, while LCOs are slowly recognizing the value of the digital imperative in the context of DTH competition and growth. Broadcasters are also supportive as each of the key groups understands the importance of generating stable subscription revenues with the need to reduce reliance on advertising. The key will be to work closely with operators to market viable channel packages to the consumer. Improved capitalization and scale. MSOs have better access to capital markets than in 2003 and in 2007 with Hathway and DEN both listed. According to MPA analysis and interviews, all major national MSOs are adequately funded for Phase I digital deployment (see Section 3). The cost of digital software and hardware has also fallen since 2007, ensuring STBs plus the CA card cost about US$30 40 per unit in total including duties, compared with US$60 three years ago. A number of the MSOs (i.e. Hathway, DEN) are also ordering digital STBs in larger volumes (i.e. >1 mil. pa), which helps bring costs down to US$30 per unit or lower. The key going forward is MSO execution along with investments in marketing and customer service. At the same time, wider and deeper pools of capital could become available from the next year onwards if the government raises the cap on foreign direct investment (FDI) in cable TV from 49% to 74%. DTH growth. In 2007, consumers had limited exposure to the benefits of digital TV. Digital TV penetration of total TV homes in the country was 7% in 2007, but has since grown to 33% (see Exhibit 3), driven largely by a 30 mil. aggregate net subscriber base across six direct-to-home (DTH) satellite pay-TV platforms, and 1213 mil. homes through the free platform DD Direct from Doordarshan. The growth of DTH has provided consumers not only with choice but also quality through improved viewing experience, more channels and new services such as HDTV, pay-per-view (PPV) and digital video recorders (DVRs). At the same time, DTH operators have worked closely with broadcasters to program and retail attractive packages of channels at competitive prices with tiered and a-la-carte options. DTH operators have benefited through subscriber growth and, more recently, improved ARPUs while broadcasters have gained through subscription revenues as DTH operators spent a combined ~US$350 mil. on pay-TV content in 2010.
Exhibit 2 India digitization plan

Phase Phase I Areas Four metros - Delhi, Mumbai, Kolkata and Chennai Phase II All the cities having a population over 1 mil. Phase III All other urban areas (municipal corporations/municipalities) across the country Phase IV Rest of India Source: MIB
Price regulation. The retail pricing of digital cable TV services will be left to market forces with a floor price established at Rs150 (US$3.3) per month. Previously, there were price caps on channels (i.e. Rs5 per channel), limiting upside for broadcasters and distribution platforms, while there were other regulatory intrusions on retail pricing and revenue sharing across the value chain and STB schemes/promotions. Wholesale pricing on digital cable is likely to be capped at 42% of analog cable rates, following DTH regulations implemented by the Supreme Court in 2011.
Exhibit 3 A third of Indias TV homes have digital TV

60 50 Digital subs (mil.) 40 30 20 10 0 3% 2006 2007 2008 2009 2010 2011 7% DTH Free mil.) DTH Pay (mil.) Digital Cable (mil.) Digital Pen./TVHH (%) 14% 33% 27% 20% 35% 30% 25% 20% 15% 10% 5% 0%
required to digitize the entire analog market. The requirement is about US$300 mil. for Phase I, which we believe can be funded adequately amongst the national MSOs. Yet Phase I represents only ~10% of the analog cable universe in India. At some point, the government will need to step in to facilitate financing through tax incentives and raising FDI limits. Encouraging investment from foreign strategic players will bring in financial support and expertise, and help boost industry consolidation. Granting infrastructure status to cable operators will also be important as it will help companies secure funding and credit at favorable rates. Consolidation and digital to drive growth The current size of Indias cable sector is approximately Rs270 bil. or US$4.5 bil., an already significant size. Yet, there is a significant scope for future growth considering low levels of digital and broadband penetration. There is also scope for increases in cable TV penetration as only 60% of Indias households have TV sets. Furthermore, with over 60,000 LCOs the industry is highly fragmented, limiting ARPU growth and adoption of new technologies. In conclusion, there are major levers of growth to leverage as the industry consolidates and digitizes. Within the next three years, we see significant scope for last-mile consolidation by MSOs (i.e. vertical M&A) and also see some scope for horizontal M&A amongst MSOs as Phase II and Phase III digital deployment get underway. The rationale for consolidation amongst six DTH operators will also grow. Significant scale through consolidation is important as it helps operators to: (1) Reduce the cost of capital expenditure on digital and broadband technologies; (2) Increase bargaining power on content and reduce programming costs as a proportion of total revenues; and (3) Bring new synergies and cost savings to marketing and customer service. Taking a top-down approach, Indias GDP is on a steady upward trend (both on relative and absolute basis), witnessing a J-curve growth across various consumer discretionary sectors. In a domestic context, the analogy can be drawn from a relatively smaller Indian exhibition industry, wherein multiplexes have been able to monetize footfalls in various ways, benefiting key stakeholders (see Exhibit 4.) Benchmarking various parameters to international markets also suggests a profitable and scalable growth in the coming years with plenty of investment opportunities for both financial and strategic investors (see Exhibit 5). This has certainly been the case in the US, Korea, Taiwan and Japan where digitization, broadband growth and FDI have helped drive the overall growth and profitability of the cable industry.
Source: Media Partners Asia
National Broadband Plan. Another key pull towards the digital mandate is the National Broadband Plan, which as per recommendations from the Telecom Regulatory Authority of India (TRAI), prioritizes the role of cable operators in driving broadband growth across India. A key means to achieve this end is digitization, which will help develop two-way cable networks and allow cable operators to offer broadband services bundled with digital cable TV services. Broadband will help improve the payback periods for cable operators offering digital services, as we explore in Section 3. This has also been the norm in international markets (see Section 4). Pricing and financing. For successful on-the-ground execution, the Ordinance gives the right of way to cable operators, subject to certain conditions. However, in the month since the approval of the Ordinance, there has been limited activity on the ground. This is because the industry still awaits clarity on certain critical aspects, particularly: (1) Pricing for the basic tier digital package; and (2) The number of free-to-air channels to be included under the basic tier package as well as key genres for the basic pack. For now, cable operators are modeling and strategizing with sensitivity analysis on parameters of pricing, cross-selling products (cable TV, broadband and HDTV, see Section 3), and funding options. The approved Ordinance also makes it obligatory for every cable operator to maintain a profile of subscribers through SMS in addition to bringing in addressability. This would imply more incremental capital expenditure on digital STBs as well as an upgrade of infrastructure across LCO nodes to create an entire telecom-like ecosystem for customer care services. About Rs400 bil. or US$8 bil. in investment would be
Exhibit 4 Analogy between cable industry and movie exhibition sector

Adoption of new technology Addressability Choice of content to consumers Growth in pricing Consolidation of Indian exhibition industry through multiplexes Digital cinemas and screening of 3D movies garner 2.0-2.5x of normal multiplex ATPs. Addresses black ticketing and tax leakages. Multiple movies screened, encouraging investments towards new genres of film content. Pricing of exhibition industry has substantially improved. Today, multiplexes represent ~10% of around 11,000 screens (multiplex and single-screen theaters), but account for ~35% of domestic box office collections. Monetize footfalls for advertising revenues and foray into allied entertainment businesses. Consolidation of Indian C&S industry Offering digital and HD STBs with option for DVRs. Addresses leakages in subscription revenues. Encourages launch of new niche channel genres. Can charge premium pricing for offering more channels with differentiated content and improved signal quality. Cable TV + HDTV + Broadband
Cross-selling of services Source: MPA analysis
Exhibit 5 International markets: Consolidation and digitization lead to industry growth and value
Country Year PreYear consolidation 50+ large MSOs 1994 Triggers Year Key events during consolidation US West Inc acquisition of Continental Cablevision AT&T buys TCI in US$48 bil. deal Year Postconsolidation Growth trajectory Digital pen./ cable TV subs 85% Cable broadband market share 55%
USA
1970
DTH launches
1996
2011
1996
1997
The 1998 Telecommunications Act and cable rate deregulation Digital cable launches 2001
Top 5 players: 85 Cable (CATV & BB) % market share of industry revenue total CATV subs grows at 9% CAGR (2005-2010) Average operating margin of 40%
2005 UK 1980s 50+ players
Digital cable passes 30 mil. subs Late DTH gained market 1980s share
2010 1994
AT&T merged its cable business with Comcast, creating world's largest operator with 22 mil. subscdribers Comcast buys NBCU International CableTel acquired Insight Communications 2011 Virgin Media: 95% Cable (CATV & BB) market share of industry revenue total CATV subs grows at 5% CAGR (2005-2010) Average operating margin of 37% 98% 25%
1991
Japan
Pre 1993
686 players
Taiwan
1980s
600+ players
NTL acquired Comcast UK, ComTel, Diamond Cable, and Cable & Wireless 2006- NTL acquired Telewest 07 Global Virgin acquired NTL and rebranded it Virgin Media 1993 Regulation eased, Late Larger MSOs acquired companies allowed to 1990s small cable operators own more than one operator Government's 2000 J:COM and TITUS mandate for complete Communications digitalization by 2010 merge, with Liberty and Microsoft emerging 1998 FDI increased to as major investors 100% in partnership with local conglomerate Sumitomo. 1996 Government's thrust 1996- Larger MSOs acquired - 2000 towards digitization; 2003 local cable operators FDI at 60%. Rights granted to cable companies to offer telephony with TV services 2009 Full scale launch of digital cable 2004 2005 Carlyle acquires kbro
199899
2011
Top 3 players: 65% Cable (CATV & BB) market share of industry revenue total CATV subs grows at 9% CAGR (2005-2010) Average operating margin of 43%
80%
15%
2010
Top 4 players: 80% Cable (CATV & BB) market share of industry revenue total CATV subs grows at 9% CAGR (2005-2010) Average operating margin of 50%
10%
16%
2006 2009 2010 Korea Late 1990s 1,000 players 2000 Government mandate 2001for consolidation 06 creating 108 players
Macquarie buys stake in Taiwan Broadband continued consolidation MBK buys stake in CNS Tsai family buys kbro Want Want consortium buys stake in CNS Various MSOs merge 2010 with regional cable operators
Consolidation continues; top 5 players: 75% market share of total CATV subs
Cable (CATV & BB) industry revenue grows at 10% CAGR (2005-2010) Average operating margin of 42%
30%
20%
2001
Government mandate 2003 for digitization Launch of DTH Cable FDI increased to 49% Full-scale launch of digital cable 2006 2007
2002 2003 2007 Source: Media Partners Asia
Goldman Sachs buys into C&M, largest cable MSO Carlyle group invests in cable Macquarie Group and MBK Partners acquire all of C&M
Impact of digitization on key stakeholders Digitization and consolidation of the pay-TV landscape will have a significant impact on players across the value chain. Below we evaluate some of the quantitative and qualitative impact on key stakeholders: Government. Over the last five years, the DTH sector has brought in addressability and more importantly served the governments objective of reaching consumers in remote, cable-dark areas (i.e. rural areas, small towns). And, while subscription revenues for the DTH sector have grown by 150% CAGR CY 2005-10, it has paid ~30% of these revenues to the government in the form of taxes (service and entertainment taxes and licence fees), excluding the customs duty payable on import of hardware equipment. In the cable market, legacy systems residing in TAM meter markets have carved out a business model depending heavily on carriage and placement (C&P) fees. As a result, cable operators have not been incentivized to invest in digital infrastructure. This means that only 6% of total cable TV homes have been digitized as of Dec. 2011. At the same time, during the past five years, MSOs have benefited from C&P fees and LCOs have profited from underdeclaration in the analog marketplace (as illustrated in Exhibit 6). Furthermore, if the current analog cable distribution model remains in place and digital cable penetration remains limited, the potential cumulative value of the tax receipts lost by the government will reach ~Rs480 bil. or US$11 bil. (over the period FY 2012 to FY 2020), exceeding the Rs400 bil. investment to be borne by the industry to bring in digital-led addressability across India (see Exhibit 7). The government therefore has sufficient incentives to push digitization and can also accelerate the process by offering tax incentives to a potential multi-billion-dollar industry. Exhibit 7 Government of India loses >US$1 bil. pa to underdeclaration
Potential government revenue breakdown Total pay-TV HHs Total industry size Analog cable TV HHs Analog cable ARPU/mo. Analog cable industry size Official subscriber declaration Declared analog subscription revenue Service tax system leakage @10.3% on subscription revenues Declared subs for e-tax payment E-tax system leakage @ Rs16/mo. Income tax system leakage @ 33.99% on assumption of 55% OPM for LCO Total govt. tax evasion due to underdeclaration Source: MPA analysis mil. Rs mil. mil. Rs Rs mil. % of analog subs Rs mil. Rs mil. % Rs mil. Rs mil. Rs mil. 2012 138 297,367 88 179 189,615 15.0 28,442 16,601 40 10,169 30,130 56,900
Exhibit 6 LCO operating margins are >50% today

LCO economics (per month) Total subs per LCO ARPU Declaration Revenue to LCO Declared revenue Service tax @ 10.3% Entertainment tax @ Rs16 per month Remarks Rs % Rs Rs Rs Rs 1,000 176 15 176,000 26,400 2,719 6,400
Applied only on declared revenue. LCOs pay e-tax on ~40% of their subscriber base, as per our discussions with the industry.
Content cost (or as passed to MSO) SG&A expenses @ 25% Operating income OPM Income tax @ 33.99% Net profits NPM Source: MPA analysis
Rs Rs Rs % Rs Rs %
26,400 44,000 96,481 55 4,919 91,562 52
2013 149 328,742 87 184 191,734 15.5 29,719 16,688 40 10,004 30,288 56,979
2014 158 354,435 85 187 190,167 16.0 30,427 16,453 40 9,763 29,863 56,078
2015 166 378,225 82 190 188,000 16.5 31,020 16,169 40 9,499 29,347 55,015
2016 172 399,095 80 193 185,194 17.0 31,483 15,832 40 9,212 28,736 53,780
2017 178 415,514 77 195 181,246 17.5 31,718 15,401 40 8,923 27,953 52,278
2018 182 430,201 75 197 177,282 18.0 31,911 14,973 40 8,639 27,176 50,789
2019 185 440,653 73 198 172,386 18.5 31,891 14,471 40 8,358 26,265 49,094
2020 188 451,188 70 200 168,511 19.0 32,017 14,059 40 8,089 25,517 47,664
Essentially, the government should move on important recommendations made by TRAI to grant infrastructure status and tax holidays to the cable sector. These, if granted, will provide better financing terms and improve internal accruals for cable companies, to be ploughed back towards investment in digital infrastructure. Furthermore, improved bank financing terms will help boost digital cable deployment in Phase III and Phase IV markets, as national cable MSOs have limited presence in these areas and the financial burden will be assumed by smaller, independent cable operators. Digitization of cable networks should also help the government aggressively pursue Indias broadband goals and thereby help to boost economic growth. According to the World Bank, a 10% increase in broadband penetration increases GDP of a developing country by ~1.5%. As of Sept. 2011, broadband per capita penetration in India was 0.9% (versus 12% for China and 9.2% for Brazil), suggesting a massive potential to improve broadband infrastructure with a positive impact on Indias GDP. In its National Broadband Plan, TRAI clearly sees a pivotal role for cable operators in developing broadband infrastructure, given the fact that there are more last-mile cable subs in India than fixed line connections, and upgrading cable to digital status will pave the way for broadband. TRAIs recommendations target 71 mil. and 154 mil. broadband connections by the end of 2012 and 2014, respectively, with cable having a 4050% market share. Therefore, pushing cable digitization is in the governments interest as it helps boost broadband penetration with modest additional capital expenditure for cable companies. Exhibit 8 Projected subscribers in the National Broadband Plan
Wireline broadband subscribers (mil.) Year 2010 2012 2014 DSL BB 11.0 16.6 22.2 Cable BB 28.0 72.0 Total 11.0 44.6 94.2 Wireless broadband subscribers (mil.) Total 26.5 59.7 Total broadband subscribers (mil.) Total 11.0 71.1 153.9
Consumers. Consumer demand, including the willingness to pay and affordability, will be critical for the success of mandatory addressable digitization. Encouragingly, since 2007, consumer adoption of digital payTV services on DTH has grown at exponential rate. With respect to the digital cable mandate, both government and industry stakeholders will have to work together to create consumer awareness. Digital cable services will invariably give consumers the opportunity to resolve some of the issues they have faced with legacy analog cable systems. Consumers will also have more choice amongst multiple digital networks: digital cable, a free DTH platform (DD Direct) and six pay DTH platforms. Consumers will also have an immediate benefit of choice with more channels, a better viewing experience, attractive tiering options and improved quality of service. In due course, favorable economics to launch niche channels will result in segmentation of genres, bringing more relevant and targeted content to viewers. Despite consumer willingness to pay for the digital STBs (at a modestly subsidized cost) in recent times and the benefit of higher ARPUs, a number of LCOs were unwilling to install STBs into consumer homes as most were unwilling to reveal their actual subscriber base to the MSO. With mandatory digitization, LCOs would be forced to educate and encourage subscribers to install digital STBs or risk losing these customers to DTH. All of this is likely to result in healthy competition between platforms, which should ensure affordable prices for the consumer. As per international benchmarks, spending on pay-TV typically accounts for ~5% of GDP per capita. In this context, digital cable TV in India will be affordable especially considering the heavy subsidy on STBs, currently subsidized at ~60-70% by cable companies (see Exhibit 9). Consumers also have a cheaper option over digital cable and may choose the free DTH service from DD Direct. Doordarshan plans to increase the number of channels offered on its platform to 150 by end of this calendar year and an
Source: TRAI
Exhibit 9 Digital cable TV will be affordable

Average monthly ARPU Annual subscription One-time payment Subsidy on landed cost of STB Total annual payout Assumed exchange rate Total annual payout Per capita GDP 2010 CATV spend as % of per capita GDP Rs Rs Rs % Rs Rs US$ US$ % 200 2,400 1,600 100% 2,400 50 48 1,371 3.5 200 2,400 1,600 90% 2,560 50 51 1,371 3.7 200 2,400 1,600 80% 2,720 50 54 1,371 4.0 200 2,400 1,600 70% 2,880 50 58 1,371 4.2 Sensitivity Analysis 200 200 200 2,400 2,400 2,400 1,600 1,600 1,600 60% 50% 40% 3,040 3,200 3,360 50 50 50 61 64 67 1,371 1,371 1,371 4.4 4.7 4.9 200 2,400 1,600 30% 3,520 50 70 1,371 5.1 200 2,400 1,600 20% 3,680 50 74 1,371 5.4 200 2,400 1,600 10% 3,840 50 77 1,371 5.6 200 2,400 1,600 0% 4,000 50 80 1,371 5.8
Current average subsidy offered by MSOs in India Consumers annual spend on CATV as a proportion of GDP per capita Source: MPA analysis
additional 100 channels are planned in 2012. Meanwhile, in Tamil Nadu, the state government has decided to nationalize cable services by reviving the state-owned cable company Arasu to offer services at highly subsidized rates. Pay-TV operators. The distribution sector at large will benefit from consolidation, while winners will emerge amongst operators with the intent to digitize and the skill to execute, thereby gaining more scale to move up the industry value chain. We highlight key benefits: A new business for cable operators. The impact on cable operators should prove transformational. Traditionally, MSOs have focused on increasing reach through LCO acquisition or JVs, which could be traded in return for higher C&P fees from broadcasters. Digitization will enable operators to transform from a B2B business into a B2C franchise, offering multiple services to the consumers with billing, subscriber management and customer service. MSOs will also be able to leverage their strength of locality to offer new local channels and movies/entertainment ondemand. The biggest risk MSOs face is execution, which is currently difficult to quantify. Successful conversion of analog to digital will enhance the availability of more TV channels, compelling packages and value added services (HD, broadband, DVR and on-demand). This should allow cable operators to boost pricing power and grow ARPUs, especially in terms of generating higher yields from bundled broadband services. However, cable operators will need to make investments to create a new ecosystem including customer payment options, VAS revenue-sharing models and call centers, all of which are currently available in DTH. Analog switch-off also leaves LCOs isolated and exposed if they choose not to digitize. Businesses could collapse Exhibit 10 Sensitivity of MSO to LCO revenue sharing in digital cable
Common Size P&L Monthly subscription revenue Declaration by LCO Subscription revenue to LCO Subscription revenue to MSO C&P revenue to MSO (net of service tax) Content payment to broadcaster Units Rs % Rs Rs Rs Rs Analog 100 15 85 15 15 14 Digital (base case) 130 100 39 91 8 52 LCO share @ 35% 130 100 46 85 8 52 LCO share @ 40% 130 100 52 78 8 52
and valuations will fall to new lows. LCOs are slowly becoming aware of this risk and are therefore likely to allocate more resources towards network upgrades and stronger partnerships with MSOs. In this context, MSOs will grow scale from an increase in the number of paying subscribers, followed by ARPU growth. The growth and stability of subscription revenues is important as C&P fees will fall for MSOs (see Section 4). We expect the industry to eventually move towards a free pricing model as per the new addressable digital regime. Currently, CAS regions have channel pricing capped at Rs5 per month per channel, though this is not applicable in the new digital regime. Channel pricing on digital platforms is fixed at 42% of analog cable rates. By the time the government implements Phase II of the digital mandate, the weightage of digital platforms will be significant. As a result, pricing will be eventually determined by market forces, and cable consumers too will get a-la-carte and tiered choices of channels and content. In the current phase with the capEx borne by MSOs towards investing in STBs and network upgrades, M&A activity will be limited (i.e. MSOs acquiring LCOs). In such a scenario, MSOs will have to rely on secondary points or LCOs to collect subscription revenue for a commission. Revenue-sharing arrangements between MSOs and LCOs is therefore a critical issue which currently lacks clarity. Exhibit 10 suggests the impact of MSO profitability under various revenue-share arrangements with LCOs. Based on our discussions with MSOs, we expect LCOs to retain at least 30% of revenues in Phase I with MSOs at around 35%. Note however that MSOs currently get ~1015% of share of subscriber ARPU. However, in the digital model, MSOs will have to bear the majority of cost (~90% including STBs, as well as billing and call centers).
LCO share @ 45% 130 100 59 72 8 52
Remarks 30% increase in ARPU in digital cable post mandate. Our base case assumes that LCOs will take 30% of digital cable sub fees. Industry discussions suggest C&P revenues will decline by 50%. MSOs such as Hathway make a ~10% margin on C&P net of content cost. We assume 40% share of sub revenue from consumer in a digitized scenario. Assuming a 30% churn of cable subs to DTH will still result in a 2x increase in gross profits for MSOs in our base case scenario.
MSO gross profit Churn to DTH platform MSO gross profit net of churn to DTH MSO gross profit margin Note: Excludes STB rental and cost Source: MPA analysis
Rs % Rs %
17 55%
47 30 33 33%
40 30 28 30%
34 30 23 27%
27 30 19 24%
DTH could capitalize on new opportunity. Within the past six years, DTH operators have grown from a gross subscriber base of less than 500,000 to ~40 mil. as of end-Oct. 2011, primarily gaining growth in cabledark areas. Phase I digitization in four key metros offers a good opportunity for DTH operators to grab highARPU customers and increase reach in larger TAM meter markets. Based on our discussions, MSOs envisage about 1520% churn in cable subscribers to DTH. Some operators suspect this could grow to 30% or more in the early stages of Phase I deployment. Subsidized HD offerings will also act as a key differentiator for DTH players as cable has yet to roll out HD services (with the notable exceptions of Hathway and Digicable). HDTV is expected to be a key value driver in the digitization process. MPA analysis indicates that ~1 mil. pay-TV homes will have HD pay services by Mar. 2012, largely through DTH, only 18 months after launch and in spite of a sluggish economy. ARPUs for HDTV are also attractive at about US$68 per month on average.
Exhibit 11 Channel C&P fees have grown rapidly while subscription fee growth has been modest
(CYE Dec.) 2005 2006 2007 2008 2009 2010 2011 Pay-TV channel sub revenues on cable 341 380 396 408 418 430 445 Cable carriage & placement fees 90 115 135 260 285 303 316 Net cable fees to pay-TV channels 251 265 261 148 133 127 129
Source: MPA analysis
Exhibit 12 Growth in Zee cable subscription fees has been minimal compared with DTH
DTH subscription fees 1,400 1,200 1,000 Rs mil. 800 600 400 200 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 08 08 08 08 09 09 09 09 10 10 10 10 11 11 11 11 12 12 Cable subscription fees International subscription fees
Broadcasters. TV content providers and broadcasters will benefit from subscriber addressability. This will help boost subscription revenues and reduce dependence on weekly TRPlinked (TRP = television rating point) advertisement revenues. Broadcasters can also identify and launch dedicated channels for a specific niche which may have smaller advertising potential but can deliver healthy subscription premiums. At the same time, consumer adoption of certain programming tiers and specific channels (over others) will ensure healthy consumer competition in the content marketplace while broadcasters will also come under pressure to produce content with a high level of differentiation, premium quality (potentially advertising-free) and with local relevance. Digitization will also limit the rising cost of C&P fees. In the past six years, C&P fees paid by channels to cable operators have grown from less than US$100 mil. to over US$300 mil (see Exhibit 11). Savings from C&P as well as profits from higher subscription revenues can be reinvested towards better programming, marketing and technologically advanced content in HD and 3D formats. Pay-TV broadcasters generated only US$425 mil. in subscription fees on cable in 2010, about 11% of the total cable distribution pie. This number is expected to grow significantly in the future as digitization takes shape. Note that broadcasters and content providers derived about US$350 mil. from DTH distribution in 2010. The disparity between collections on cable and DTH is exemplified in the trend of subscription revenues retained by Zee Entertainment, one of Indias leading broadcast groups (see Exhibit 12). Theoretically, a broadcasters share in the digital cable environment will increase to 3040% versus 1015% (in analog). Large broadcast distribution networks (i.e. Media Pro) have come together to encourage digitization, offering discounted rates in return for improved declarations.
Source: Company data
After 2007, an increase in voluntary digitization through DTH encouraged a wave of new channel launches across genres. This resulted in fragmentation of viewership and ad markets across key TV genres. At the same time, the growth in operating profits of incumbent broadcasters remains highly dependent on domestic subscription revenues (see Exhibit 13). In the past 12 years, the growth of DTH subscription revenues for broadcasters has begun to slow due to increasing volumes for DTH platforms and a number of fixed-fee deals. Therefore, the next leg of profitable growth for incumbent broadcasters is dependent on the mandatory addressable digitization of cable networks. Exhibit 13 Sub fees boost profits towards content investment
35% 30% 25% 20% 15% 10% 5% 0%
29.4 24.5 10.9 3.7 FY08 FY09 2.0 FY10 1.3 FY11 27.7 25.7
% Margin
Zees % OPM
Zees % OPM (excluding domestic subscription)
Investors. Broadcasting is the largest media investment theme available to investors due to the presence of large market cap listed entities such as Zee Entertainment (US$2.6 bil. market value as of end-Nov. 2011) and Sun TV (US$2.3 bil. market value). Broadcast business models are leveraged to advertising revenues, which in turn are linked to the short-term rating performance of selected channels and broader macroeconomic trends. Prior to the start of DTH growth back in 2007, a major portion of TV industry value and profitability was leaked on the ground due to last-mile fragmentation. The growth of DTH has breathed some life back into the TV sector though investors have preferred to play the digitization themes mainly through broadcast equities. This is due to long gestation periods and the risk of equity dilution in DTH operators. Upon successful implementation of the digital mandate, gradual consolidation of LCOs becomes inevitable. This will shift the industry profits and value to centralized distribution platforms (MSO/DTH) and broadcasters. Furthermore, the corporatization of distribution will bring new scale to the TV business with improved systems and technologies to raise transparency and accountability. This should result in significant value creation for investors with market valuations and multiples of cash flow that are likely to steadily grow in both public and private markets. This has certainly been the experience for cable operators in key international markets (see Exhibit 14). Most of these operators have undergone a high-growth value phase on the back of digital and broadband. Furthermore, as growth has moderated, both equity investors and M&A-driven investors have tended to favor cable/pay-TV operators in the media space because of the reliance on stable subscription fees and the ability to generate strong cash flows akin to utility companies.
Therefore, in the United States and Korea, cable operators continue to trade at a relatively competitive 68x one year forward EBITDA, versus 1216x during their growth phase. In Taiwan, a healthy debt-syndication market combined with strong M&A activity has meant that cable operators have not had to undertake IPOs, especially when fetching valuations as high as 12x forward EBITDA as recently as 2010. India offers an attractive entry point for various strategic players if FDI is increased to 74%. Meanwhile, the pay-TV market already offers promise for private equity investors. India is already the second-largest digitized market in the world with 48 mil. digital homes, still only ~30% of total TV households in the country. There is also a huge scope of ARPU growth from pay-TV services, HDTV and broadband. As a result, Indias pay-TV distribution market is in a highgrowth value phase similar to North America between 1998 and 2003, Korea between 2003 and 2007, and Taiwan 2005 and 2010. Valuations for operators in these markets during their high-growth value stage typically averaged 1216x one year forward EBITDA versus the current trading average of 9-10x for Indias listed cable/pay-TV entities. We assume similar or higher valuations for companies in India subject to successful execution. Partnerships with domestic companies in India will also be important to bring in the next leg of growth for strategic players in mature overseas markets. At the same time, investors will take a wait-and-see approach, potentially acting only after analyzing the results of digital deployment in Phase I.
Exhibit 14 Valuations for cable/pay-TV companies in global markets

18 16 EV/ 1-Year Forward EBITDA (x) 14 12 10 8 6 4 2 0 1996: US rate deregulation 1995 1996 1997 1998: US digital cable starts to roll out 1998 1999 2000: US broadband cable starts to roll out Taiwan cable FDI at 60% 2006: Korea cable broadband gains traction Upgraded Taiwan cable infrastructure offers broadband 2009: Rollout of Taiwan digital cable commences 2003: Korea cable FDI at 49% 2007: Korea digital cable rollout USA average Taiwan average Korea average
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Note: Based on average public and private market valuations for cable and satellite companies Source: Bloomberg; Thomson; MPA analysis
Exhibit 15 US cable stocks outperformed after 1996

9.0 8.0 7.0 6.0
Large Cap Cable Index Paul Allen purchases Marcus Cable AT&T buys TCI for US$48 bil. AT&T forms alliance with Time Warner
5.0 4.0 3.0 2.0 1.0 0.0

Jan-92 Jul-92 Jan-93 Jul-93 Jan-94 Jul-94 Jan-95 Jul-95 Jan-96 Jul-96 Jan-97 FCC rolls back rates by 10% FCC rolls back rates by 7% Telecom Act passes with rate deregulation
Microsoft invests in Comcast
Paul Allen acquires Charter
Jul-97
Jan-98
Jul-98
Jan-99
Jul-99
Jan-00
Jul-00
Source: Bank Of America
3. Prospects for cable operators

Value-driven growth with challenges The digital mandate will provide a value-driven transformation for cable operators but not without challenges. We expect a 6x increase in subscriber revenues though not without at least a 20% churn in cables customer base to DTH. With addressable digital deployment, subscriber declaration levels will increase from 15% (currently the norm for MSOs in the analog universe) to 100%, while the retained ARPU will increase by 6x after assuming a 30% base case revenue share with the LCO. Additional drivers and differentiators will come from bundled broadband and HD services. The main challenge, apart from managing DTH subscriber churn, is that C&P fees are expected to drop by about 2050% based on our discussions with MSOs. Carriage and placement fees to decline The revenue profile of Indian broadcasters is heavily dependent on advertising (typically 7075% on average). This economic fact and the need to ensure reach is closely linked to the incidence of C&P fees. The current TV distribution landscape is dominated by analog cable which has a 7075% share of the market. Theoretically, an analog cable system has a carrying capacity of 95100 TV channels. However, given the quality and type of cables, modulators and RF amplifiers deployed in the network, the channel-carrying capacity of the analog cable system is limited, in practice, to around only 8085 TV channels. Within this capacity map, the prime band offers the best quality transmission but has a limited carrying capacity of only 30 TV channels. With over 600 channels in the country, broadcasters typically have to pay a fee to the cable operator for carrying their channels on an analog network. And, with increased competition across genres, broadcasters are also required to pay an additional premium in the form of placement fees. Placement fees have become important as the number of channels usually watched at the household level is limited, ranging from 715 from city to city, according to data from a TRAI study. Exhibit 16 MSO economics in digital cable
Common size P&L Monthly subscription revenue Declaration by LCO Subscription revenue to LCO Subscription revenue to MSO C&P revenue to MSO (net of service tax) Content payment to Broadcaster Units Rs % Rs Rs Rs Rs Analog 100 15 85 15 15 14 Digital (Base Case) 130 100 39 91 8 52 LCO share @ 35% 130 100 46 85 8 52 LCO share @ 40% 130 100 52 78 8 52 LCO share @ 45% 130 100 59 72 8 52 Remarks 30% increase in ARPU in digital cable post mandate. Our base case assumes that LCOs will take 30% of digital cable sub fees. Industry discussions suggest C&P revenues will decline by 50%. MSOs such as Hathway make a ~10% margin on C&P net of content cost. We assume 40% share of sub revenue from consumers in a digitized scenario. Assuming a 30% churn of cable subs to DTH will still result in a 2x increase in gross profits for MSOs in our base case scenario. Scope for better payback and margins once broadband is added to the mix (see analysis).
The disparity in supply (excess) and demand of TV channels has resulted in a surge in C&P charges for broadcasters. Business models for MSOs have become highly dependent on C&P income with the overall C&P market growing by 24% CAGR over the past five years. As a result, MSOs have focused on adopting a width strategy (expanding reach), capturing more subscribers particularly in TAM-rich markets, as opposed to pursuing depth (last-mile ownership and digitization), a key characteristic in the development of the cable industry in international markets. This has led to an overreliance on a B2B model as opposed to a B2C model. As the digital mandate becomes implemented, compression technology will expand channel carrying capacity by 10x over analog and offer far superior output quality. As a result, C&P revenues for MSOs are expected to fall with Hathway indicating a drop of about 50% in Phase I while DEN is more cautious with an estimate of 1520%. Nonetheless, we believe MSOs will have various levers to pull to maintain a healthy contribution from C&P. These include: Increase in number of TV channels: Digitization should result in the launch of new channels with an emphasis on demand for distribution in high-ARPU, TAM meter markets. Even after churn to DTH, MSOs will see volume growth in Phase I. This could still be leveraged for C&P fees. Tiering and packaging: Emulating DTH, cable operators will offer channels to customers under various tiering models. A channel not available in the basic tier could therefore potentially see a loss in viewership, which in turn could impact its advertising revenues. MSOs could thus retain more C&P bargaining power with channels in the basic tier. More clarity on this matter is likely to emerge once there is certainty on the minimum number of channels and genres in the basic tier.
MSO gross profit Churn to DTH platform MSO gross profit net of churn to DTH MSO gross profit margin * Excludes STB rental and cost Source: MPA analysis
Rs % Rs %
17
47 30 33
40 30 28 30%
34 30 23 27%
27 30 19 24%
55%
33%
LCO acquisition: Last-mile LCOs who fail to digitize face the risk of losing subscribers to DTH. Valuations for LCOs will drop, making most of them viable M&A targets for larger MSOs keen on acquiring last mile. Such consolidation will also increase an MSOs weightage in TAM meter markets, giving it significant bargaining power with a broadcaster.
Execution and new models New services. As MSOs ramp up customer service infrastructure, consumers will get the choice to select and pay only for a particular package or channel. MSOs will also gradually offer high-end subscribers HD services bundled with broadband. After Phase II, as most MSOs would have completed digitizing their key markets, the focus will move towards content aggregation. We expect VOD, personalized services (i.e. DVR) and basic interactivity to start gaining traction at this point. Furthermore, MSOs will also look at exploiting their strength of locality by investing to create channels with local relevance (i.e. news, events, infotainment). In essence, cable operators will be required to gradually transition their business model to a new ecosystem with the consumer as the focal point. Sourcing STBs. Besides upgrading infrastructure, the immediate priority for MSOs will be to source digital STBs. Amongst national MSOs, Hathway and DEN are the only operators to have placed orders of >1 mil. units. Others have yet to commit to high volumes, which could be an issue as implementation gets underway. Since most STBs are imported, the lead time for delivery ranges between 34 months. The majority of the STBs are sourced from China, which currently has an adequate production capacity. However, the operators will be in a tight spot if orders are not placed before end of this year, considering the trend in rupee depreciation and a big production halt in Feb. due to the Chinese New Year holidays. This will also increase STB costs. Execution and competition. Once sourced, the MSOs need to execute on the seeding of STBs. This will become more challenging as DTH companies are already gearing up to raise more capital (Dish TV, for instance has received FIPB approval to raise US$200 mil.) and offer more competitive pricing schemes. From our interactions with various MSOs, many have preferred to maintain stable ARPUs by offering more channels as they start deploying subsidized digital boxes at consumer premises. As competition stabilizes, MSOs will rely on the attractive tiering of channels and additional services (broadband, HD and VOD) to deliver ARPU growth, though this will require capEx towards developing integrated customer care services.
Exhibit 17 Number of permitted TV channels in India

700 600 500 400 300 200 100 0 2006 2007 2008 2009 2010 2011* 266 192 425 506 604 626
* As of Jan. 2011 Source: MIB
Exhibit 18 FY 2011 C&P revenues for major MSOs in India

90 80 70 60 50 40 30 20 10 0 81 74 60 48 40
US$ mil.
3 Hathway Digicable* DEN InCable WWIL Ortel
* Digicable C&P guidance for FY 2012 Source: MPA analysis
Operator readiness Hathway. Out of its total reach of 8.7 mil. homes, Hathway has ~1.8 mil. subscribers covered in the Phase I areas for mandatory digitization. The company has already seeded digital boxes in 800,000 homes in Phase I areas and will therefore need to incur capEx on the remaining 1 mil. In Phase I, Hathway is ahead of the pack, having digitized ~40% of its universe in Mumbai and ~25% in Delhi. It is also the first cable operator in the country to roll out HD services, offering nine HD channels currently. The companys average cost per STB stands at Rs1,400 or ~US$30, which is also the lowest amongst all the large MSOs with the competitive cost driven by higher volumes. The company will incur a capEx of Rs1 bil. on STBs with an additional Rs550 mil. on digital head-ends and broadband infrastructure. Significantly, Hathway has a staggered cash outflow as it seeks vendor credit for STBs, paying 30% of the amount upfront with the balance paid out over 36 months in equal installments. With a debt to equity of 0.3x and a high promoter holding (67%), the company has enough head room to raise further capital. If executed well, Hathway will have a relatively shorter gestation period in digitizing its current subscriber universe, as more than 80% of its subscribers fall under Phase I and II of the digital mandate. DEN has a claimed reach of 11 mil. homes, almost evenly spread across all four phases of digitization. The company has a dominant market share in Delhi, Uttar Pradesh and Gujarat. About 2.7 mil. of DENs subscribers are present in metros Mumbai, Delhi and Kolkata. However, it offers digital cable to a mere ~0.3 mil. homes in those metros (~0.7 mil. across the total universe). With an average cost of ~Rs1,550 per STB, DEN will have to incur capEx of over Rs3.5 bil. in Phase II. Unlike Hathway, DEN makes 100% upfront payment to its STB vendors, though the company is considering an option to seek vendor credit for the period ranging from 35 years. DEN currently has 17 digital head-ends and is adequately placed. The company has a comfortable debt to equity stand of 0.2x with a net cash of Rs95 mil. It also has sanctioned loans of Rs2 bil., which are not drawn yet. Exhibit 19 Comparison of reach amongst major MSOs
Homes (mil.) Hathway DEN InCable Digicable You Broadband & Cable Current reach 8.7 11 8.5 8.5 1.8 Phase I 1.8 2.7 2.5 2.5 0.8 Phase II 5.5 2.7 4.0 4.5 1.0 Phase III 1.4 2.7 1.0 1.5 Phase IV 2.9 1.0 Source: MPA analysis based on company interviews Ortel 0.5 0.002 0.005 0.4 0.04
InCable reaches 8.5 mil. homes, with ~30% of its subscribers residing in Phase I. The company has 0.5 mil. digital subscribers primarily in regions covered under Phases I and II. The company plans to roll out its HD services by the early part of Q1 2012. For Phase I, InCable will need to digitize over 2 mil. homes; this will require significant capEx considering the companys current landed cost of STB is ~Rs1,800 per subscriber. The company claims its current debt to equity is at ~0.3x, leaving enough headroom to raise debt. It is also backed by the Hinduja Group which owns a 92.1% stake in the company. With 30% operating margins, InCable has the highest profit margins amongst all major MSOs. Digicable has a reach of 8.5 mil. homes, out of which about 700,000 are digital subscribers predominantly in Phase I and II areas. For Phase I, the company has a reach of 2.5 mil. homes with digital penetration at 500,000. In the metros, Digicable has a dominant presence in Kolkata. The company has recently rolled out its HD services (though in selected parts of Andheri) offering six HD channels. Outside of the metros, it has strong presence in Punjab and parts of central India in Rajasthan, Madhya Pradesh and Chhattisgarh. These are TAM-rich markets in which the company targets a C&P income of ~Rs3.7 bil. for the current financial year (FYE Mar. 2012). At an STB cost of Rs1,500 per unit, Digicable will need to incur capital expenditure of Rs3 bil. for Phase I. At a consolidated level, the company claims a debt to equity of 0.1x, however it is the only MSO to report an EBITDA loss. The company targets EBITDA break-even by the last quarter of the current fiscal year. WWIL has a pan-India reach of 10 mil. homes, and is particularly dominant in North and East India. However, only 3% of its total universe is digitized. The company depends heavily on carriage fees which accounted for ~65% of the total revenues in FYE Mar. 2011. It plans to seed 1 mil. STBs in Phase I. With a debt to equity of 0.8x, it is adequately placed for Phase I, though to digitize its reach in subsequent phases will require additional equity infusion.
Exhibit 20 Phase I capEx requirements for national MSOs

90 80 70 60 50 40 30 20 10 0
US$ mil.
InCable
DEN
Digicable
Hathway
WWIL
You Broadband & Cable
Source: MPA analysis based on company interviews
Exhibit 21 Debt to equity ratio for major MSOs

1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 1.6 Current Debt to Equity (x)
0.8 0.3 Ortel WWIL Hathway 0.3 InCable
0.2 DEN
0.08 Digicable
You Broadband & Cable reaches 1.8 mil. homes. Its key markets include Mumbai, Bangalore and Vizag. With a presence in TAM-rich markets and with a little more than 10% of its universe digitized, the business model is geared towards C&P revenues. Like other operators, the priority for the company is to digitize its analog universe. This will require about Rs500 mil. in capital expenditure for Phase I. The companys strong presence in broadband is a positive, boosting last-mile connectivity and profitability while also giving it significant exposure to a B2C business. The company has already outsourced all its customer care services to Wipro. For FYE March 2011, the company reported operating profits of ~Rs275 mil. (cable TV and broadband combined). However, higher depreciation due to incurred capital expenditure (particularly on broadband) has resulted in company reporting net losses. The current consolidated debt on books stands at ~Rs250 mil. and the company is considering raising funds both at parent or subsidiary level. Ortel is a regional MSO with a reach of 450,000 homes. The company is amongst few in the industry to adopt a depth-overwidth strategy to grow its business. This means it is a lastmile MSO. As a result, unlike most MSOs, Ortel has the least dependence on C&P income, which only contributed 15% to the companys FY 2011 revenues. More than 90% of Ortels subscribers are based in Orissa. The company has recently expanded into adjoining states of Andhra Pradesh, West Bengal and Chhattisgarh. Currently ~16% of Ortels total universe is digitized, while closer to 90% of companys total subscriber base falls under Phase III of the digital mandate. At an average landed cost of Rs2,000 per STB, Ortel will need to incur a gross capital expenditure of ~Rs760 mil. Compared to its peers, Ortel has the highest debt to equity at 1.6x. This will reduce as the company intends to raise funds through the equity route. Its current promoter holding stands at 63.5%.
Cable broadband The digitization of last-mile cable TV infrastructure provides a strong foundation for broadband growth. There are 90 mil. cable TV subscribers in India, almost three times as high as the number of fixed line connections in the country, which numbered about 35 mil. as of June 2011. For the same period, broadband subscribers totaled 12.4 mil. according to TRAI, with cable operators having only ~0.8 mil. subs. With a massive base of over 850 mil. customers, mobile networks clearly offer an opportunity for India to drive future broadband growth especially when next-generation networks are deployed with Broadband Wireless Access (BWA) after 2014. In the current context, cable networks have a clear opportunity to use proven DOCSIS 2.0 and DOCSIS 3.0 technologies to drive broadband subscriber growth with robust download speeds. We highlight key issues: Higher speeds, higher ARPUs. Hathway and You Broadband & Cable have made a decent start in the marketplace (see Exhibit 23), investing in two-way infrastructure networks with 750 MHz capability and beyond, establishing retail brands (as internet service providers) and, more importantly, understanding the consumer mindset. While a majority of cable subscribers are offered speeds ranging from 256 kbps to 4 Mbps, many MSOs have recently started to offer higher speeds of 8-12 Mbps. ARPUs range between Rs300600 per month (US$6 12). Benchmark of international markets. Broadband has emerged a key driver of yields, ARPUs and profits for cable companies, most notably in the United States, Europe, Korea, Taiwan and Japan. In the United States, cable operators have about 55% broadband market share while the average for North Asia is about 20-30%. Cable operators in mobiledominated broadband markets (i.e. Indonesia, Philippines) lead the premium high-speed segment with about 1015% market share. Scope for growth with robust technology. Indias national MSOs have a good opportunity to grow broadband market share over the next 35 years due to competitive pricing and packaging, advanced speeds and the start of aggressive bundling with digital pay-TV and HD services. Furthermore, even as the competitive threat of BWA or possibly largescale FTTx networks become a reality after the next three years, cable operators can continue to leverage efficient network management to increase speeds and reliability at a very competitive cost. For instance, by 2015, DOCSIS 3.0 modems which deliver speeds of 100 Mbps will cost as
Exhibit 22 Comparison of digital subs amongst MSOs

Subs (000) Current digital subscribers Phase I Phase II Phase III Phase IV Hathway 1,800 800 1,000 DEN 700 300 400 InCable 500 300 200 Digicable 700 500 200 You Telecom 200 120 80 Ortel 70 2 68 -
much as DOCSIS 2.0 does today (~US$30), while network upgrades will cost about US$100 per subscriber. Improved payback period. Overall, mandatory digitization will result in consolidation of the cable industry. Larger operators will be keen to acquire the last mile as valuations for LCOs drop and operators successfully develop skill sets and necessary infrastructure as they transition to a B2C model. A blended service of pay-TV and broadband differentiates cable operators from DTH operators, who do not have two-way return path capability. It also reduces the payback period on overall capital employed by the cable operator; in a bundled digital and broadband business model, the payback period could be reduced by a year to 24 months as opposed to 36 months with a standalone digital cable TV proposition.
Exhibit 24 Hathway proforma P&L for cable TV & broadband

Per month (Rs) Hathway Revenues - Broadband - Cable (gross) - Placement (gross) Service Tax - BB - Cable - Placement Net revenue per subscriber Cost - Bandwidth / content cost - Commission cost Gross profit Gross margin (%) - Employee cost - Marketing cost - Admin & other cost Operating profit Operating profit margin (%) CapEx - Modem / STB - Other hardware Advance from customer Net capEx Payback period (in months) Secondary point under digital Cable BB Cable + BB 226 330 556 330 330 205 205 21 21 23 34 57 0 34 34 21 21 2 2 203 296 499 74 55 74 37 16 16 16 25 13% 1,400 125 600 925 36.4 30 53 213 72 53 9 56 95 32% 1,100 1,500 500 2,100 22.2 103 108 287 58 70 25 72 120 24% 2,500 1,625 1,100 3,025 25.2
Exhibit 23 Broadband subscriber base of major MSOs in India (2011)

400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 Hathway 60,000 You Digicable Broadband & Cable 55,000 InCable 50,000 2,500 Ortel DEN 392,000 330,000
Note: In secondary points, e-tax is liable for the LCO Source: MPA analysis
4. International experience
A clear regulatory framework for digitization and growth Encouragingly, both the MIB and TRAI are providing a significant push towards digitization, consolidation and consumer choice and competition. The regulatory framework is slowly becoming clearer with the mandate and timetable for digitization; recommendations to increase foreign investment across all distribution platforms; and the promotion of cable as a platform for broadband convergence. This is the norm in international markets with clear and enforced digital plans typically driving digitization to a significant level (i.e. China, Japan), while deregulation of FDI norms as well as pricing mechanisms have helped boost consolidation, digitization and the growth of broadband (USA, Japan, Korea and Taiwan). We highlight key themes: 100% DTV penetration in Japan. Digitization of Japans TV networks completed in July 2011. With respect to cable digitization, a key driver has been strategic and financial capital investment into the industry as the government increased FDI in cable to 100% in 1998. This provided momentum for the entry of Microsoft, Liberty Global and Time Warner into cable distribution, in partnership with local players such as Sumitomo Corp. The result proved critical during the first phase of broadband growth in Japan after 2001, and the acceleration of digital TV transition after 2003. Economic boost. Higher capital allocation in the cable industry has also helped grow employment and economic output. Investment and digitization in the United States cable industry helped create more than 1 mil. jobs and generate in excess of US$100 bil. pa in employment compensation and income. In Korea, the impact on IT industries has been transformational; in Taiwan, more than US$4 bil. of equity and debt transactions were realized in the cable TV industry within three years; in China, homegrown STB manufacturers have proliferated and expanded overseas. Drivers of execution and deployment In key markets such as the United States, Japan and Korea, where there was no government mandate to digitize cable networks, the timescale to reaching the first milestone (i.e. 20% digital penetration of total digital cable subs, which in India would imply about 20 mil. homes) has been approximately 35 years because of an intensely competitive dynamic (from both DTH and IPTV), prioritizing the need for upgrades across the cable industry, as well as a coherent national policy. In the United States, cable operators experienced several glitches in technology and execution, as well as high digital subscriber churn after the initial rollout of digital cable services. The situation started stabilizing and improving after 2001 with the bundling of broadband services as well as the availability of more premium and differentiated content, and thereafter HD channels, DVRs and cable telephony. In India, aside from the government mandate, key drivers of digitization over the next 35 years will include: (1) The availability of more pay channels, anchored to local and regional content; (2) Channels focused on niche categories and communities of interest; (3) Aggressive bundling with broadband and, where relevant, telephony to offer multi-play services; (4) Premium, advertisingfree channels; (5) More HD channels penetrating an already sizable base of HD-ready TV sets in India; (6) On-demand and DVR services; and (7) Interactive and transactional services. In the long term, as broadband download speeds increase along with mobile capacity, the need for consumers to access video content over multiple devices will grow, along with the availability of over-the-top broadband media services and mobile content. Such services will become important as digital cable subscribers reach a large critical mass in India after 2014, paving the way for the development of transactional services from basic ticketing to e-commerce and interactive applications, from education and games, to targeted advertising.
Exhibit 25 International markets: The regulatory path to digitization

Korea 1994: Dual licensing of cable system operators (SOs) and rebroadcast cable operators (ROs), creating 900 systems 2000: Government mandate for SOs and ROs, dividing Korea into 108 SOs operating in 77 franchise areas 2001: Legalization of DTH satellite services 2003: FDI cap in pay-TV raised to 49% (unlimited for multiple investors in cable) 2005: Deregulation of rates for cable TV as capital accelerates with the entry of new investors; DTV schedule announced by govt 2007: Legalization of IPTV 2009: Four MSOs have 60% market share of last-mile cable subs 2011: Five MSOs have 75% share of cable TV market >65% of homes have digital TV Source: MPA analysis Japan 1980s: Licensing of retransmission cable systems, creating thousands of operators 1994: Licensing of multichannel cable operators, focused on pay-TV services, creating 200 systems 1995: Licensing of multisystem cable operators to consolidate cable sector 1998: Awarding of broadband licenses to cable operators Deregulation of FDI in cable to 100% 2000: Acceleration of capital in cable led by Liberty, Microsoft, and Time Warner China 1993: First phase licensing of cable systems, creating 3,000 networks 1999: Second phase licensing and consolidation of cable systems, reducing the number of systems to 1,300 2000: Licensing framework of MSOs to operate as monopolies in franchise areas 2003: Government announces digital schedule to 2015 with city-by-city timetable 2006: Rate deregulation, anchored to digitization plans by cable operators Govt announces favorable terms for bank loans, subsidies for digital cable operators 2011: China passes 157 mil. digital cable subs Taiwan 1987: First phase licensing of cable systems 1999: Second phase licensing of cable systems FDI cap raised to 60% 2000/1: Carlyle, News Corp. invest in cable MSOs 2004: IPTV legalized 2006: Macquarie, MBK invest in cable
2004: Cable digitization launches 2011: Three MSOs have 65% share of cable TV market 100% digital penetration
2010: Taiwan cable Digital TV momentum accelerates 2011: Four MSOs have 80% share of the cable TV market
Exhibit 26 Digital cable conversion trends, international markets

Markets Year of launch No. of years to 20% pen./total CATV No. of years to 50% pen./total CATV No. of years to 100% pen./total CATV 2011 digital CATV/total CATV 2016 digital CATV/total CATV Source: Media Partners Asia Australia 2004 1 2 4 100% 100% China 2003 5 8 Forecast by 2015 57% 100% HK 2001 1 1 3 100% 100% Japan 2003 3 6 Forecast by 2012 80% 100% Korea 2005 5 8 Forecast by 2018 30% 78% Singapore 2004 2 3 5 100% 100% Taiwan 2009 5 8 Forecast by 2020 10% 23% USA 1998 3 6 Forecast by 2013 85% 100%
Product, packaging and broadband Product innovation, attractive tiering of content and the bundling of broadband services are key drivers of the cable TV business proposition, creating a significant pull for consumers. In most international markets where cable TV has market leadership, cable operators with rational shareholders have approached digital deployment with economic rationale, offering useful benchmarks for India. Key features of new networks and products include: (1) Upgraded digital head-ends, as well as software and IT to deliver MPEG4 digital signals and compression, allowing for more digital channels; (2) All STBs are MPEG-4 equipped, ensuring that all STBs are HD-ready; (3) A wide range of new content including HD and SD channels; integrated or external hard drive-enabled DVRs with mobile functionality (most notably in Taiwan); and (4) Aggressive bundling of broadband and telephony. We highlight a number of key strategies: Product upselling. Upselling across various programming tiers and bundled services is a key driver of the cable value proposition. This helps boost ARPUs, compared with the analog service, and also provides healthy growth in digital ARPUs, as Exhibit 27 suggests. In Taiwan, we highlight the case of Taiwan Broadband Communications (TBC), which leads the market in product innovation, upselling and yields. TBCs strategy is built on upselling with a focus on driving subscribers across all of its program tiers, including its basic pack (US$8 per month) and premium tiers bundled with the basic pack priced at US$12, US$15 and US$18 per month. DVR services cost a competitive US$2 per month. TBC is also focused on ramping up value from second-STB homes with more revenues per outlet as it looks to increase second-box penetration. The company has also been firstto-market with a DVR service containing an external hard disk and a DVR service with mobile functionality. More than 90% of net new digital subscribers at TBC opt for its DVR services, and all its subscribers are HD-capable, as TBC along with other Taiwan cable MSOs have been able to use MPEG-4 transmission across the network.
Exhibit 27 Digital cable TV ARPU dynamics, (3-year CAGR, %)

7% 6% 5% 4% 3% 2% 1% 0% Singapore USA Taiwan Australia Korea Japan
Source: MPA analysis
Multiple products. Once the cable network is upgraded and digitized, the ability to offer new services such as high-speed internet and telephony makes for a compelling proposition. In Taiwan, the growth of broadband has fueled the uptake of multiple products in the cable market, as Exhibit 28 suggests. As Taiwans major cable MSOs have completed upgrades to 750 MHz and invested in DOCSIS 2.0 and DOCSIS 3.0-ready systems, the cable industry has increased its share of the broadband market from less than 10% in 2004 to approaching 20% today. Broadly, the gain is attributable to competitive pricing and increased download speeds (peaking at 30 Mbps) and product bundling with digital cable services. This trend has also been evident in Korea though cable companies have begun to face significant competition from telco fiber networks with commodity pricing, which is limiting future upside. In the United States, cable companies lead the broadband market with 55% share, staying ahead of telco competition due to investment in DOCSIS 3.0 network upgrades, enabling robust download speeds. Cable MSOs have rolled out DOCSIS 3.0 in more competitive, urban markets where telcos have deployed fiber; while in less-urban areas, cable has been competing with legacy DSL networks with average speeds of around 4 Mbps. The growth of broadband has also driven significant changes in revenue composition with more than 30% of Comcast Cables revenues now coming from broadband and telephony. The same trend is evident in markets such as Japan, Taiwan and Korea as well as emerging markets such as Indonesia (see Exhibit 30).
Overall, in markets such as the US and Taiwan, telecom and cable players have maintained a healthy broadband pricing environment, differentiating their offerings through technology and speeds. Moreover, in most markets, demand for higher broadband speed has grown rapidly with consumer adoption of video streaming. Profitability. Broadband is a key driver of profits for the cable industry and helps reduce payback periods for investment in digital cable TV. EBITDA margins for US cable companies such as Comcast and Time Warner Cable are ~90% on average, while the benchmark for markets such as Taiwan are in the range of 7080%. Typical broadband operating margins for Indian MSOs on secondary subscriber points (i.e. where they do not own the last mile) are around 3040% and are almost double with primary subscriber points (where they do own the last mile) with a significant upside for IRRs.
Exhibit 28 Multiple product sales in Taiwan cable

2007 83.6% 16.4% Subscriber base 2008 2009 82.0% 78.8% 18.0% 21.2% 2010 76.5% 23.5% 2007 80.8% 19.2% New sales 2008 2009 80.2% 36.3% 19.8% 63.7% 2010 34.2% 65.8%
Single product More than one product Source: Company data
Exhibit 29 Cable business based on the growth of broadband digital bundles

Operator Comcast Time Warner Cable Charter Communications Virgin Cablevision CJ C&M kbro CNS i-Cable Taiwan Broadband StarHub SkyCable First Media Market US US US UK US Korea Korea Taiwan Taiwan Hong Kong Taiwan Singapore Philippines Indonesia CATV subs (mil.) 22.2 12.0 4.3 3.8 3.2 3.1 2.3 1.3 1.2 1.1 0.7 0.5 0.5 0.2 DTV pen / CATV subs (%) 100% 77% 79% 100% 100% 32% 42% 12% 5% 100% 11% 100% 42% 71% BB Pen / CATV subs (%) 81% 85% 84% 109% 91% 25% 23% 23% 22% 20% 22% 79% 10% 80% 2010 EBITDA margin 43% 36% 37% 39% 34% 38% 53% 50% 52% 1% 62% 22% 25% 46%
Source: Company data (Q3 2011)
Exhibit 30 Broadband is a key contributor to cable company revenues (FY 2011)

Comcast Cable (USA) Telephony, 1% Taiwan Broadband Communications Others, 11%
Telephony, 9%
Others, 12%
Broadband, 23%
Cable TV, 56%
Broadband, 16%
Cable TV, 73%
J:COM (Japan)
First Media (Indonesia) Others, 6% Telephony, 11%
Others, 17% Telephony, 14% Cable TV, 44% Cable TV, 33% Broadband, 50% Broadband, 25%
Exhibit 31 Cable leads US broadband net additions

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2006
Source: Industry data
2007
2008
2009
2010 Telecom share
2011 Cable share
5. About Media Partners Asia

Media Partners Asia Ltd. (MPA) is a leading independent provider of information services. MPA offers various audiences and clients with multiple services, including research, consulting, publishing, online and conferences. The company covers all major media and telecoms sectors, including: advertising; broadcasting; broadband; cable and satellite TV; digital TV; filmed entertainment; IPTV; mobile; online; outdoor; pay-TV; and print media. MPA publications and research reports receive widespread coverage in global media and are utilized by numerous industry related groups. To learn more about MPA and its capabilities, visit www.media-partners-asia.com To gain more insight into the industries MPA covers, visit www.mediaresearchasia.com and www.asiamediajournal.com For further details, please contact Lavina Bhojwani at lavina@media-partners-asia.com

Investing in Digital India - The Dynamics of Mandatory Address Able Digitization

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The Dynamics of Mandatory Addressable Digitization

Investing in Digital India | I

II | Investing in Digital India

Investing in Digital India | III

4 | Investing in Digital India

Exhibit 1 The dynamics of digitization: Benefits and challenges

Mandatory one-time expense on STB/CPE (although subsidized).

Transitioning from a B2B to B2C business. Revenue-share arrangements with LCOs.

Local Cable Operators

Change in marketing from consumer pull to consumer push.

Delay in break-even period for operators.

Technology Service Providers

Source: Media Partners Asia

Investing in Digital India | 5

2. The digital mandate and its impact

Exhibit 2 India digitization plan

6 | Investing in Digital India

Exhibit 3 A third of Indias TV homes have digital TV

Source: Media Partners Asia

Exhibit 4 Analogy between cable industry and movie exhibition sector

Cross-selling of services Source: MPA analysis

Investing in Digital India | 7

2005 UK 1980s 50+ players

2002 2003 2007 Source: Media Partners Asia

8 | Investing in Digital India

Exhibit 6 LCO operating margins are >50% today

26,400 44,000 96,481 55 4,919 91,562 52

Investing in Digital India | 9

Exhibit 9 Digital cable TV will be affordable

10 | Investing in Digital India

LCO share @ 45% 130 100 59 72 8 52

Investing in Digital India | 11

Source: MPA analysis

Source: Company data

Zees % OPM (excluding domestic subscription)

12 | Investing in Digital India

Exhibit 14 Valuations for cable/pay-TV companies in global markets

Investing in Digital India | 13

Exhibit 15 US cable stocks outperformed after 1996

5.0 4.0 3.0 2.0 1.0 0.0

Microsoft invests in Comcast

Paul Allen acquires Charter

Source: Bank Of America

14 | Investing in Digital India

3. Prospects for cable operators

Investing in Digital India | 15

Exhibit 17 Number of permitted TV channels in India

* As of Jan. 2011 Source: MIB

Exhibit 18 FY 2011 C&P revenues for major MSOs in India

3 Hathway Digicable* DEN InCable WWIL Ortel

* Digicable C&P guidance for FY 2012 Source: MPA analysis

16 | Investing in Digital India

Exhibit 20 Phase I capEx requirements for national MSOs

You Broadband & Cable

Source: MPA analysis based on company interviews

Investing in Digital India | 17

Exhibit 21 Debt to equity ratio for major MSOs

0.8 0.3 Ortel WWIL Hathway 0.3 InCable

Source: MPA analysis based on company interviews

Exhibit 22 Comparison of digital subs amongst MSOs

Source: MPA analysis based on company interviews