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Sector update: Media - Assessing impact of tariff order on various stakeholders…

We spoke to multiple stakeholders across the TV Broadcast value chain (Broadcasters, LCOs, LCO associations, MSOs, DTH and consumers amongst others) to assess the implementation status and impact of the TRAI tariff order (TTO). Following are the key takeaways:

• Ad revenue to be hit in the near-term due to impact on channels’ reach: ‘Reach’ of channels has been impacted across both pay and free-to-air channels because of delayed response from the consumer in subscribing to channels (either a-la-carte or packages.) This will have a negative impact on ad revenue at least for the next two quarters (Q4FY19E and Q1FY20E) as advertisers are being cautious during the implementation stage.
• Near-term impact on subscription revenue to be covered over H2FY20E: Subscription revenue will also be hit because of the aforementioned reason over the ensuing two quarters. However, Broadcasters remain confident that from a full year FY20E perspective there will not be any change in the earlier provided guidance and the TTO is positive from a medium-term perspective.
• TTO adoption ~50% in Mumbai: As per TRAI, as on 12 February 2019, 65% of cable subscribers and 35% of DTH subscribers have exercised their choice. However, our channel checks suggests that even in a city like Mumbai, the adoption of the TTO is up to ~50% and it is far lower in Tier II-III cities.
• Cord-cutting trends accelerating in mega-metro markets: In mega metros such as Mumbai & Delhi, anecdotal evidence suggests that there is acceleration in cord cutting as these subscribers have a fixed Broadband connection at home and are already meeting their content needs through Netflix, Hotstar etc. Another anecdotal takeaway is that some consumers are cutting down on their existing ‘mega’ packs and just opting for sports bouquets.
• Consumer level ARPUs up ~20% post TTO implementation: Channel checks in Mumbai suggest that at an aggregate level, consumer ARPU has gone up to Rs 360-370 p.m. from Rs 300-320 p.m. (~20% hike). We believe that there could be a similar increase across other cities and maybe even a higher increase in smaller towns and rural areas because the ARPU is generally lower in such areas.
• Down-trading evident amongst some subscribers due to higher ARPU impact: Some consumers are choosing to cut down severely on number of channels to ensure that their monthly payout remains intact (and in some cases even cut down on this amount).

Our view

We believe that the TV Broadcast industry will be in a major flux over the next 5-6 months till the TTO implementation settles down. Amongst consumers also there is confusion around various iterations of the TTO including choosing a-la-carte/packages to the recently announced ‘best fit plan’. There is also a possibility of Broadcasters going back to entering into content deals with distribution platforms (versus the consumer choice induced content payouts as per the TTO) especially to give effect to the ‘best fit plan’. The timing of the implementation is also right ahead of national elections and hence another extension in the implementation deadline (currently 31 March 2019) cannot be ruled out.

We expect earnings across broadcasters and distribution players (MSO, DTH) to be impacted over Q4FY19E and Q1FY20E; however, believe it will be transitory in nature as the water finds it level. We will update our projections towards the end of this quarter. As of now we do not believe that there is a need to relook our rating of Outperformer on both the broadcasters namely Zee Entertainment and Sun TV Network. We also maintain our Neutral stance on all three distributors (Hathway, Den and Dish TV) and a rating re-look will be dependent on more clarity on Reliance Jio’s future plans for Hathway and Den and the ability of Essel group to de-lever their loan against shares for Dish TV (through strategic stake sale in Zee Entertainment).​