Ind-Ra-Mumbai-26 October 2018: India Ratings and Research (Ind-Ra) believes that Reliance Industries Limited’s (RIL; IND AAA/Stable) acquisition of majority stakes in two multiple system operators (MSOs) – Hathway Cable & Datacom Ltd (Hathway;IND A-/RWP) and DEN Networks Ltd – is a win-win situation for all three players while impacting broadcasters and direct-to-home (DTH) players negatively. RIL will also acquire a minority stake in GTPL Hathway Limited (IND A-/RWP).
Advantages for Both RJio and MSOs: The acquisition will give RIL direct access to MSOs’ vast broadband infrastructure and large pool of pay cable TV subscribers. RIL can use this last mile connectivity to accelerate Reliance Jio Infocomm Limited’s (RJio; IND AAA/Stable) foray into the fibre-to-the-home market. On the other hand, the deal will resolve four big challenges facing MSOs, namely high leverage, large capex requirements for broadband roll-out, lack of a wide spectrum of content and competition threat from RJio.
RJio – Challenge of Last-mile Connectivity Addressed: Ind-Ra believes that the key rationale for RJio for the deal is to shorten the time horizon for its fibre-to-the-home foray as either competing or partnering with the highly fragmented local cable operators (LCOs) universe would be a time-consuming process. The deal gives RJio direct access to around 6.5 million broadband households (home-pass), which represents about 36% of India’s total fixed broadband subscriber base of about 18 million. More importantly, RJio will also get access to close to 12.5 million cable TV subscribers (nearly 7% of total TV households), who may not have broadband connectivity yet.
RJio’s aggressive marketing could lead to an expansion in the broadband market, somewhat similar to the one that took place in the wireless mobile data market. Ind-Ra believes that RJio’s target to reach 50 million household over the next three to four years looks achievable through the acquired subscribers of MSOs, higher penetration in existing markets and possible aggressive tariffs for other geographies. The subscriber base of 50 million household, at the current monthly broadband tariff of INR500-600 per household, represents a INR300 billion-360 billion market for RJio.
Consolidation in Key Broadband Markets:Through the acquisition, RJio will be able to get access to Hathway and Den Network’s subscriber base. Hathway has a major presence in Maharashtra, Karnataka and Madhya Pradesh and GTPL Hathway has a strong presence in Gujarat and West Bengal. Furthermore, Den Networks has a significant presence in northern India. The acquisition enables RJio to gain a significant foothold across western, central and northern India.
MSOs – Response from LCOs Remains Critical: Both Hathway and Den Networks are heavily reliant on LCOs for the last-mile connectivity for their cable TV businesses. While RJio’s parentage would address the leverage, capex and content availability situation for them, response from their widely fragmented LCO partners remains to be seen. Ind-Ra believes that LCOs may cooperate with MSOs provided there is no impact on their earnings and any fresh subscribers acquired remain associated with LCOs. Nevertheless, the rapid rise of on-the-top platform in India is already implying that content providers may start interacting with end-consumers directly in the long-term, thereby making the presence of MSOs and LCOs redundant.
Broadcasters and DTH Players – Collateral Damage: Ind-Ra believes that this consolidation in the MSO space is negative for broadcasters as their bargaining power to command higher subscription revenue may be impacted. The DTH players had adopted a barbell strategy and were active in the market where LCOs could not physically lay their cables or where pay TV subscribers were willing to pay premium. While RJio’s strategy to enter into the pay cable TV market is yet not clear, it is highly likely that R-Jio would offer bundled plan to include both the broadband and pay cable TV markets, which would negatively impact DTH players.
|Select Issuer Ratings|
|Asianet Satellite Communications Ltd||IND A/Stable|
|Hathway Cable & Datacom Ltd||IND A-9BHAGAT/RWP|
|Hathway Digital Private Limited||IND A-/RWP|
|GTPL Hathway Limited||IND A-/RWP|
|GTPL Broadband Private Limited||IND A-/RWP|
|Indian Cable Net Company Ltd||IND A-/Stable|