Zee Telefilms chairman Subhash Chandra is on a roll. The resurgence of flagship Hindi entertainment channel Zee TV has come after years of slippage since Kaun Banega Crorepati catapulted Star plus into leadership position.

But this is not just about Zee TV‘s prime time assault on Star Plus; it is also about how Chandra has streamlined his media empire to give it the right focus, resources and value. His announcement on 29 March: Zee Telefilms will be de-merged into four separate entities. While cable business will come under Wire and Wireless India Ltd (WWIL), Dish TV will handle the DTH operations. News and regional channels are being consolidated in Zee News Ltd. Under the umbrella of Zee Telefilms will be the newly launched Zee Sports.

The “sum total of the parts” concept ignited the scrip which, once hovering around Rs 130-150 in mid-2005, has breached the 200-mark and closed today at Rs 222.

In the second of a four-part series, Indiantelevision.com takes an in-depth look into the de-merged DTH business of Zee Telefilms.

The battle for supremacy between News Corp chairman Rupert Murdoch and Subhash Chandra will be extended to the DTH arena this year. The commercial launch of Tata Sky, a 80:20 joint venture between Tata Group and Star (now expected to happen only some time in August-September), will see a hell of a scramble for subscribers with focus on pricing, quality of service, value-added services and marketing.

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Chandra‘s gameplan is to build a sizeable early lead before the fight for share in the market takes shape. Having launched Dish TV over two years back, he has already snapped up 1.15 million DTH subscribers. And he expects to mop up an additional one million by the end of this fiscal.

Even before Tata Sky can settle down and get its products out of the door, Chandra is in a hurry to launch an array of value-added services. Movie-on-demand is already available and soon to launch is gaming and interactivity. The idea is to fill up the product portfolio as quickly as possible.

Working on the content side, he has recently stitched a deal with SET-Discovery to offer a bouquet of 12 channels on his platform. Star‘s channels should also come on board, perhaps closer to launch of Tata Sky. Armed with full content, Dish TV will be able to aggressively target more urban and upscale subscribers in the course of the year.

The DTH operations has already consumed a net expense of Rs 3.8 billion. A further investment of Rs 2.5 billion has been lined up over a two-year period, mainly to subsidise the set-top boxes (STBs). “But we are sitting on a dynamic model and if Tata Sky and us are aggressively competing on pricing, there is a possibility of the subsidy amount further increasing. It is a factor of what strategies we adopt to develop our subscriber base,” says Essel Group CEO of corporate strategy Rajiv Garg.

Placing his bets on both cable and DTH, Chandra ensured that he started operations much before Murdoch could jump over the regulatory hurdles. The strategy was in place: mobilise the cable dark and rural subscribers, offer them a basic bandwidth of channels, tie up content as they come, drive in volumes and command clout.

The start was slow. Then came the “dish-har-chhat-par” (a dish on every rooftop) pricing scheme of Rs 3,990 (almost halving the hardware prices and subscription fees for a year) last April and the market in specific territories just opened up.

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Targeting DD Direct‘s customers, Dish TV also announced a “Dish Freedom Package” plan in January. This offers viewers 40 channels in digital quality without charging any monthly subscription fee, but they had to make a one-time investment of Rs 2,690 in a digi box. Clearly, the strategy was to get into a different segment of customers and slowly entice them to upgrade to the other packages.

Dish TV‘s subscriber base grew and by the end of FY06 it touched close to one million. Almost 70 per cent of the consumers came from the cable dry and smaller towns, but it suited Chandra to an extent by giving him a headstart over Murdoch. As he also has presence in cable TV, his muscle in the distribution business has grown.

A fallout of this model, though: low ARPUs (average revenue per user). While revenue from DTH operations stood at Rs 818 million for FY06, net loss was at Rs 790 million on the back of subsidies and marketing expenses. The ARPU by the end of the year was hovering around Rs 190.

The task this year will, thus, be to drive up the ARPUs to at least Rs 250. The content tie up with Sony and later Star will help achieve this. After the deal with SET-Discovery, Dish TV has increased the price of its basic tier by Rs 38. “By providing the first year subscription for free, Dish TV‘s financials don‘t reflect the paying capacity of the subscribers. But if consumers decide to continue with the service after this period, the incremental subscription revenues from the DTH venture would be sizeable. The problem will arise if they decide to drop out at the time of renewal,” says an analyst.

Dish TV is also banking on value-added services (VAS) to realise more from subscribers. Says Garg, “Beginning 1 September, VAS will be accounted for separately from the ARPUs. We expect VAS to average Rs 40 per subscriber. Since this will be for a stretch of seven months, the average during the fiscal will work out to Rs 22-23,” says Garg.

Dish TV‘s revenue projections look healthy. For FY07, the target is fixed at Rs 3.2 billion on a subscriber base of 2.4 million and an ARPU of Rs 250. And in FY08, the turnover is expected to touch Rs 8 billion as subscribers rise to 3.15 million and ARPU to Rs 310.

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An analyst at a trading firm is optimistic about Dish TV‘s growth. “Even after the launch of Tata Sky, the DTH market is large enough to provide space for growth to the two service providers,” he says.

Dish TV, however, will continue to be in a net loss situation this fiscal. According to a report on Zee by a brokering firm, Dish TV‘s net loss will be Rs 368.4 million while subscribers are expected to grow to 2.07 million and revenue to Rs 3.29 billion on an ARPU of Rs 250. But the picture changes completely in FY08 and the operations become profitable, says the firm.

The situation, though, is completely fluid and a lot will depend on how Tata Sky prices its services. DTH takeoff will also have to factor in the responses from the cable TV industry and the entry of other DTH operators like Anil Ambani‘s Reliance with its Blue magic offering and Kalanithi Maran‘s Sun Group with Sun Direct.

So far, Chandra has been clever not to alienate the cable TV operators but play safe on both the platforms. Tata Sky, on the other hand, has drawn hostility from the operators with its MDU (multi-dwelling unit) technology in high-rise residential buildings.

Prices could plummet if competition intensifies, putting profitability under threat. Tata Sky, in fact, has indicated a monthly subscription price of Rs 250 for all the Hindi channels and an upper-end fee of Rs 550, according to a dealer. It is also expected to subsidise heavily the hardware costs. “The pricing is very tentative at this stage and executives from Tata Sky will have a meeting with the dealers closer to date of launch,” he adds. Tata Sky CEO Vikram Kaushik was not available for comment.

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For an infant business venture, DTH operators may not worry about profitability at such an early stage. Their main concern will be to allow the market to expand, acquire customers, keep them locked over a longer period, and then make them pay more for various services. Volumes is what all of them will be hunting for.

Dish TV‘s pricing strategy so far has reflected this line of thinking. It has promoted the DTH service packages with a lock-in period bundled along with the initial subscription. Says Garg, “The bulk of the subscription selling has been on the business of this bundle which includes a subsidy element. Subscription revenue, thus, starts typically one year after the creation of the subscriber relationship. So you would see these one million subscribers in FY06 gradually come into the subscription fold during this year.”

Chandra, meanwhile, is sprucing up the distribution network. Dish TV recently tied up with HCL Infosystems for a five-year partnership to utilise the IT major‘s distribution and service support across the country. While Dish TV will immediately double its distribution reach with this tie-up, the alliance will enable HCL Infosystems to offer digital entertainment services as part of its digital lifestyle portfolio.

Dish TV has also addressed another problem: how to increase offerings by accommodating more channels per transponder. It has recently tied up with Scopus Video Networks, a provider of digital video networking products. Having taken seven transponders on NSS-6, Dish TV can pack up to 150 channels using this compression technology.

“Scopus‘ product line will help us achieve very high satellite utilisation and bring down costs on a per channel basis. We plan to implement this better compression technology within a month. We will be able to increase our capacity to 150 channels,” says Essel Group director of technology Amitabh Kumar.

For pursuing plans of offering 200 channels, Dish TV has booked more transponders on NSS. Even when DD Direct Plus, Doordarshan‘s free DTH service, migrates from NSS-6 to Insat 4B, Dish TV will face no space crunch. “We can bunch all the DD channels into one transponder. We have also requested for more transponders on NSS-6 which will be available during the course of the year for us,” says Kumar. Dish TV currently offers 110 channels in addition to the 33 channels of DD Direct Plus which are also available to its consumers.

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So ahead of the skirmish, Chandra has strengthened his armoury. Sure enough, the war for DTH subscribers is about to begin and escalate.