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Event update: Media; Tariff Order Amendments - Upsetting the apple cart

Event:

TRAI has released amendments to its Tariff Order (which had gone into effect from March 1, 2019), mainly pertaining to channel/bouquet pricing. Industry participants are expected to finalize new prices by January 2020 end and these would be live for consumers from March 1, 2020.

Key amendments affecting Broadcasters:

• Implied discount cap on bouquet prices: Bouquet prices need to adhere to two key conditions – (1) The sum of a la carte prices of channels part of a bouquet cannot be more than 1.5x the price of that bouquet (implies a 33% discount cap vs no cap earlier), and (2) A la carte prices of each channel in a bouquet cannot exceed 3x the average a la carte price of all channels in that bouquet. In addition, bouquet prices cannot be less than the a la carte price of any constituent channel in such bouquets.
• Channel price cap lowered to Rs12: The maximum price of each a la carte channel that is part of a bouquet is now capped at Rs12 (vs Rs19 earlier).

Other significant amendments:

• Broadcasters cannot give 15% discount to DPOs on bouquets: Broadcasters are not be permitted to give any discount for adoption of bouquets to DPOs (earlier 15% was allowed). However, the cap of 15% discount is permissible to DPOs while forming their own bouquets of pay channels.
• Cap on carriage fees payable by broadcasters: Carriage fee has been capped at ~Rs0.4m per month for SD channels and for HD channels at 2x of SD. (Earlier it was linked to subscriber offtake).
• Network Carriage Fee (NCF) restrictions on channels relaxed: DPOs now have to provide 200 channels as a block to subscribers for Rs130 NCF (vs Rs100 earlier), and mandatory Ministry of Information & Broadcasting channels (e.g. DD Group) are not counted in this block. NCF is also capped at Rs160 (all channels on DPO’s platform have to be provided for this amount) versus earlier rule of Rs20 payment for every incremental 25 channels over and above the 100 provided in the first phase.
• Clarity on 2^nd TV connection NCF payment: NCF for TV connections beyond the first in every pay TV household capped at 40% of declared NCF (Rs130 or Rs160). No such term was present earlier.

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TRAI’s amendments attack the bouquet discounting angle (which is currently 40-60% versus a la carte rates). Given that the new norms effectively cap bouquet discounts at ~33%, this could entail trimming bouquet sizes in terms of number of channels to adhere to twin conditions thus lowering the perceived value of bouquets in the eyes of the subscribers (as we present in Exhibit 2). This could potentially lead to higher adoption of a la carte vs bouquets and is not an ideal outcome as it could be detrimental to subscription revenue and also ad rev (at least in the near-term on the long tail of channels). As a result, prima facie, TRAI’s amendments are negative for broadcasters given the restriction on pricing at will.

However, since DPOs are still allowed to make bouquets, larger broadcasters can keep their driver channels outside of any of their own bouquets, thus pricing them at a premium (to Rs12/month) and collaborating with the DPO to make a genre specific bouquet which cuts across broadcasters, making it a potent one for subscribers. However, we believe this will be their last option as the power scale could tilt in favour of DPOs, in this case.

Nonetheless the Indian Broadcasting Federation would try and get legal relief. We believe it is very difficult (almost impossible) to figure out the exact impact (appears mostly negative) on broadcasters till the time new channel prices are declared and new choices of subscribers settles in. Suffice to say that this would brood a period of uncertainty on subscription revenue, which, in a weak ad environment is not good news. Lastly, we believe in the past 16 years the TV broadcasting industry has gone through multiple disruptive regulatory changes (price freeze, CAS, Digitisation, DAS, New tariff order etc.), however, the industry has been able to find ways to still grow. We currently have an OP on Zee Entertainment and Sun TV Network and Neutral on Dish TV.