Consolidation is an inevitable theme in pay-TV distribution, spurred by the need for ongoing investment in new services to sustain revenue growth while holding onto subs.

Now, India’s industry is approaching an important milestone as attention turns to tie-ups between some of the country’s biggest pay-TV services, echoing large-scale deal-making in Europe and North America.

Pay-TV distribution is primed for a major shake-up in India.

The scope of likely partnerships and acquisitions is shifting up a gear, as new and established platforms vie for consumer access and scale.

The industry is abuzz with rumors of tie-ups between some of the country’s biggest cable and DTH platforms, as well as possible swoops and partnerships by deep-pocketed and increasingly disruptive telcos.

In recent years, market forces have taken second place for Indian pay-TV operators, following a costly government-mandated rollout for digital TV instead.

Now, strategic concerns are returning to the fore.

Cable is well placed to prosper as India’s largest TV platform, with last mile access to over 100 million homes.

Most cable owners, however, are financially exhausted. The biggest MSOs are sitting on deeply leveraged balance sheets, after prodigious spending to seed 40 million set-top boxes since the government’s digital TV push began in earnest.

These days however, digitalization targets are becoming harder to police, as the focus shifts towards cable networks in smaller cities and towns.

That’s providing some respite, as MSOs work out how to tackle the next looming challenge: broadband disruption, characterized by a multi-billion dollar foray by the biggest disruptor of all, Reliance Industries.

A formal debut for Reliance’s Jio-branded suite of low-cost broadband services, including an impressive collection of linear and on-demand TV, now looks to be weeks away, after a soft-launch earlier in the year.

“Jio has been a big catalyst,” says Mihir Shah, VP of India for industry analysts Media Partners Asia, publisher of Media Business Asia.

“It has forced even the larger telcos and the cable guys to get their act right,” he adds.

Jio has introduced a timeline that didn’t exist before, Shah notes. This has been the spur for encouraging momentum on packaging and revenue collection among bigger MSOs over the past 12 months, which has started to push up Arpu.

DIGITAL DIVIDENDS

Uncertainty on new pricing rules has stalled significant cable growth however, allowing nascent platforms such as OTT to gain a foothold in urban markets.

Regulation, which now needs to take into account the future of impact of online video, is getting trickier than ever.

All this creates the conditions and some urgency for further consolidation in a still challenging cable sector where two MSOs, Hathway and Siti, are best positioned to take the lead.

Hathway was a forerunner in digital cable, even before the government set out its digitalization timetable, thanks to the MSO’s sizable footprint in India’s biggest cities.

As a result, Hathway is unique among India’s larger cable operators in nearing completion for its network upgrades.

Now the company is starting to reap the benefits, including India’s largest cable broadband base, delivering Arpus almost four times bigger than digital TV.

Nonetheless, this advantage is a double-edged sword. Hathway’s affluent subscribers will be first in line to try out OTT as a substitute for the cable operator’s own value-added services, or even for pay-TV itself.

Greater scale can help Hathway compete, perhaps via closer relationships via existing partners and sister companies such as GTPL and Asianet to strengthen its footprint in the West and South.

At the same time, Hathway is also seen as a potential partner or acquisition target, heralding a bigger wave of consolidation to come.

In the long run, a bigger network could make Hathway – currently linked to Reliance – even more attractive to telco suitors.

Fixed broadband operators lacking last mile access can use cable connectivity to patch in the final link to the home, to secure their own investments in high-speed fiber.

This phase of industry transformation has tentatively started with Vodafone’s take-over of You Broadband in April, a prelude to deeper commitments to cable.

More deals should follow, as India’s telcos look to differentiate data and broadband subscriptions with value-added services and entertainment.

WARY INVESTORS

Cable’s other emerging leader, meanwhile, is less likely to sell. Siti is an integral part of Subhash Chandra’s Essel Group, which also includes India’s largest commercial DTH platform, DishTV, as well as broadcast major Zee, the group’s cash cow.

This strategic backing gives Siti a big advantage over other MSOs, who are contending with more pressing financial concerns.

Siti’s promoters injected an additional US$100 million into the business last September, mainly to pay down debt, resulting in a stock market buoyancy notably absent in its rivals.

At the same time, with market caps low, cable entrepreneurs are reluctant to further dilute their stakes. This limits the options to raise capital when their newly digitalized networks need more investment to deliver broadband and on-demand services.

This also makes Siti, a former laggard made-good, a potential consolidator. The network had been exploring a possible tie-up with Den, another large-scale MSO, although talks are believed to have stalled over an agreed valuation.

Consolidation within India’s commercial DTH sector meanwhile, a perennial topic of speculation, could take longer to play out.

Smaller cities and towns, as well as rural areas, still offer plenty of volume growth for India’s leading DTH operators.

OTT disruption should be further down the line too, as both content and infrastructure needs to adapt for audiences living outside major cities.

One DTH operator however, Tata Sky, is more exposed than most, with a large share of subscribers in India’s biggest urban centres.

That could nudge Tata Sky into a merger with one of its rivals.

Either way, traditional channels for fund raising are narrowing down, making closer partnerships and M&A more likely.

“Investor interest in pay-TV is peaking out,” Shah tells Media Business Asia.

“If you want to raise money, raise it now. If you want to reduce your debt, reduce it now. As more and more disruption happens, the cost of capital is going up.”