• Policy framework not entirely supportive of competition or convergence
• Support for convergence likely to be spurred by the telecoms sector

We think India represents greatest medium- and long-term opportunity in the region

In our opinion, the Indian market represents the greatest medium-term and long-term commercial opportunity in the television industry in the Asia-Pacific region. While China shares many of India’s attributes, and exceeds some in the areas of current income levels and television penetration rates, China’s focus on control and restrictions on foreign participation take much of the shine away. Although India, for the moment, maintains a somewhat hostile stance toward foreign ownership, we expect meaningful liberalisation to occur during our forecast horizon.

Openness to foreign culture and use of English supplement other growth factors

We expect that the Indian television market will grow from an estimated commercial revenue level of Rs13 billion (US$0.4 billion) in 1995 to Rs129 billion (US$3.2 billion) in 2005. This translates into a 10-year nominal CAGR of 25% in local currency terms and 18.6% in real terms. There is room within this revenue pie to accommodate significant growth in free TV and pay TV. By 2005, we expect a multi-hued television environment: digital will co-exist with analog while cable and satellite will have marked out their niches as terrestrial continues to take the bulk of revenues.

(A$ Bils)

(A$ Bils)

(A$ Bils)

Real CAGR (%)

Real CAGR (%)

Real CAGR (%)

Television Industry Commercial Revenue

13.35

48.15

129.24

20.7

16.6

18.6

(%)

(%)

(%)

CAGR (%)

CAGR (%)

CAGR (%)

Telephone VOD

0

0

0

NM

NM

NM

India Commercial Revenue

100

100

100

29

22

25

(%)

(%)

(%)

CAGR (%)

CAGR (%)

CAGR (%)

Viewing Fees

0

0

1

NM

18

NM

India Commercial Revenue

100

100

100

29

22

25

Micro & Macro Outlook

Income growth not likely to be as fast as in China

As with China, the underlying demographics of the market are extremely inviting. Measurements of television penetration are not that accurate but penetration is probably around 31% - not as high as in China. While we do not expect the Indian economy to grow as fast as China through to 2005, there will be sufficient growth in at least two of the components of the television industry growth equation - penetration and income - and through it, ad revenue and subscriber revenue. However, we do not believe that income growth will relieve the pricing pressure on some forms of pay TV, such as DTH. Pay TV will still have to be cheap to establish deep penetration. India’s regional language markets, particularly in the north and west, are likely to become sizeable sub-markets on their own sooner than the rest of the country.

Average viewing time is already high but penetration has a long way to rise

In the urban areas, average household television viewing is an estimated 228 minutes per day. Growth in leisure time usually lags economic growth, so we do not expect a significant increase in average viewing time although the value in terms of income-reach of each ad minute should increase with income and consumption. We expect that the level of private consumption will rise at a 13.9% nominal CAGR during 1995-2005. We expect television advertising expenditures to rise from Rs6.0 billion (US$0.2 billion) in 1995 to Rs64.5 billion (US$1.6 billion) in 2005, or a 10-year CAGR of 26.8% (24%).

Competition

Competition swirls mostly in the multichannel market

As choices widen, it is likely that Doordarshan will lose some share, despite an expansion of its offerings. We expect, however, that free TV will still take at least 90% of total ad revenue in 2005. We anticipate that the focus of competition over the next few years will be between cable operators and channel programmers, rather than competing delivery services. The free-for-all development of the cable industry in India, and the weaning of an audience of free-to-air television, has given distributors significant monopolistic powers over their subscriber base and suppliers. The transition from free-to-air satellite television to pay TV has been troublesome. Program-channel producers have experienced substantial difficulty in extracting per-subscriber fees from operators and have had to settle for small fixed fees. Some operators have even asked programmers to pay for access to their subscriber base.

Local cable systems retain significant bargaining power

The balance of power is not likely to shift away from the local operators in the short-term. Ignoring the possibly of shoring up anti-trust regulations in India, the key to effecting such a shift is likely to be the introduction of new competing distribution channels. We believe that current DTH services are too expensive to have a wide and significant impact on the power of cable operators. In our opinion, direct-to-home satellite operators will need to offer an increasing bouquet of channels, with the break-even level rising in proportion, and subsidise a large portion of household hardware costs in order to boost satellite penetration significantly. Both these tasks require deep pockets.

Pay-TV industry will probably remain fragmented for some time

It is also doubtful whether the cable operators can transform themselves into full-service channel producers. While a few cable operators are owned by channel producers, notably Siti Cable which is owned by Zee TV, it is likely that they will continue to rely on other content providers for a complete complement of content. In other words, we expect that the pay-TV industry will gain market share but remain fragmented horizontally, allowing Doordarshan and other terrestrial free-to-air operators to continue to take at least the majority share of industry revenues.

Current Services

Choice has widened considerably in 1998

Services in India have mushroomed in the 1990s following the introduction of STAR TV, which permitted thousands of small cable operators to pop up. Despite the Supreme Courts’ rejection of its monopoly status, state-owned broadcaster Doordarshan still dominates the airwaves. Its three terrestrial channels are supplemented by 14 regional language channels which are delivered by cable and DTH. Doordarshan’s main channel, DD1, reaches approximately 86% of the country’s population. Advertisers believe it takes up the bulk of viewing time. Cable operators are required to rebroadcast the two Doordarshan channels.

Cable/SMATV market is still highly fragmented

The cable and SMATV industry is made of operators that number in the tens of thousands and serve an estimated 20 million households. A half dozen operators have steadily consolidated headends and now control at least 20% of the market. This consolidation process should continue. A very large portion of multichannel households are not connected through a set-top box, so that their selection is limited to the bandwidth built into their television sets - a maximum of 14 VHF channels and, in some domestically-manufactured sets, just six VHF channels. This technology barrier temporarily gives cable operators substantial distribution power over programme providers. While this barrier could be overcome through competition among operators, there has been a de factor carving of the market into franchise areas, each monopolised by one operator.

Now there are a large number of satellite channels beamed at India

Following on the heels of STAR TV are a host of program providers, the most successful of which is Zee TV, which is distributed in the STAR TV bouquet. STAR TV itself offers several channels oriented toward the south Asian audience, covering sports, movies, music and general entertainment. News Corp, the owner of STAR TV, has announced plans for a DTH service, ISkyB. Other significant and successful services include Business India Television (BiTV), Asian Television Network (ATN) and Joint American Indian Network (JAIN TV). A number of the program providers are operated by companies that own cable operations themselves.

Convergence

DTT is unlikely to arrive prior to 2005

While we expect DTT to spread and take root quickly in the region, the regulatory bottlenecks in India may slow its progress there. India is only now taking steps to weaken the monopoly of Doordarshan and set up an independent broadcast authority. We fear that the licensing and allocation of frequencies toward DTT may be mired in bureaucracy for several years - We do not expect DTT to be introduced in India until after 2005. However, should our predictions about red tape not be realised, free DTT could do much to break up the monopolistic power of the cable operators. DTT would probably have substantially lower break-even levels for providers: it would not suffer from the "bouquet" problem, that is, the need to offer a wide range of channels to justify pointing an expensive satellite dish at one spot on the horizon.

Telcos may become a source for competition for cable operators

Another potential source of competition for cable operators could come from the telephone companies. Although local fixed-line telephone service penetration is low by regional standards, approximately 87% of main lines are connected through digital exchanges. Some new connections in urban areas are being laid using broadband networks. Newly licensed private fixed-line operators are permitted to offer any service. For example, Essar Telecom which has a wireline license for Punjab and is finalising plans for a HFC cable trial.

Given the low PC density in India (about one-sixtieth of television sets), we do not expect that Internet service provision will become a significant source of ancillary revenue, relative to voice communications, to either the consolidated cable operators or telecommunication providers within the next three years.