Telecom's next big battle - entertainment

In July 2003, a senior executive at a Mumbai-based entertainment company told Ice World that he believed that telecom companies would not quickly leap into the content supply business.

"I am not saying that telecom companies will not jump into the business, but it will not happen in a hurry." Ice World then forecast that it would happen in two years.

We were marginally wrong "� it's about to happen in the next few months. And cable operators and multi-system operators (MSOs "� the intermediary between broadcasters and cable operators) could be wiped out.

Reliance Infocomm, for example, has been experimenting with its broadband solution for the last few months in Jamnagar in Gujarat, where its petrochemical plant is located, and in small pockets in Mumbai.

In the next three months, the Bharti group is planning to offer video on demand as well as gaming services to its digital subscriber line (DSL) subscribers "� to begin with.

Bharti hopes to raise the number of DSL subscribers from 30,000 to at least 1 lakh by the end of the year.

Says Badri Aggarwal, president of infotel at Bharti Televentures: "Value added services will help us in getting additional revenues from our subscribers."

He hopes the average revenue per subscriber after these services are launched will go up from Rs 700-Rs 800 a month to around Rs 1,000.

The state-owned Bharat Sanchar Nigam Ltd (BSNL) is also cashing in on the copper wires it already has laid to homes for its fixed line phones to offer DSL broadband services in a few locations.

For Rs 999 a month, subscribers will be offered two live broadcast channels, apart from high speed internet services.

The Tatas, meanwhile, plan on launching direct-to-home (DTH) services in partnership with the Star group. The vehicle for this will, in all likelihood, be Videsh Sanchar Nigam Ltd, the long distance telephone services company.

The Tata group is also considering setting up a head end in the sky (HITS "� the subscriber, however, will still go through a cable operator, which is not the case with DTH). Tata group executives have in the past confided that the group wants to supply everything that enters a consumer's home "� it already provides voice services and will use the same cables to supply television programmes and other services.

The group wants to be an aggregator and supplier of content, though it has no intentions of being in the media business itself.

To be sure, these telecom companies are only doing what their international brethren have done.

France Telecom, British Telecom, Telefonica of Spain, PCCW Ltd and City Telecom in Hong Kong and Chungwa Telecom in Taiwan all leaped into the content distribution business.

The most exciting of the Indian telecom companies' projects unquestionably is Reliance Infocomm's venture.

According to an informed source, the company's broadband offering has two key components. Unlike many other telecom companies, Reliance is not looking at offering TV and broadband services through DSL lines, a route taken by most international telecom companies.

Instead, Reliance is laying high speed fibre optic cable to the basement of residential buildings all across the country. From this point, individual homes will be connected through an ethernet "� or a special cable (called CAT 5).

The second element to the Reliance strategy is an indigenously developed set top box connected to its high-speed highway.

The multi-purpose box will virtually transform your television set "� it will provide TV channels (with or without CAS), pay TV, video on demand, video conferencing capabilities, high speed internet services and up to 40 gibabytes per second of storage capacity.

With this kind of storage, you can record programmes (cricket matches, for instance) or download matter from the internet. And if you attach a phone to it, you'll get IP and internet telephony services too. The aim, apparently, is to price the set top box at between Rs 4,500 and Rs 6,750.

A company spokesman declined to comment on Reliance Infocomm's plans, but Reliance, it is understood, will use its existing infrastructure at its telecom exchanges.

Reliance will put in servers and other equipment at its telecom equipment centres where channels will be downloaded and content stored for redistribution to homes.

Why has Reliance adopted a different model of distribution? Explains a close Reliance watcher: "The DSL route makes sense for incumbents like BSNL which can leverage its copper wires. Reliance does not have that advantage. So it can chose a more cost effective technology where the price of the set top box is more affordable than that of a DSL set top box. It has also gone in for a technology which is more scaleable."

Reliance Infocomm is also looking at other ways to reduce the cost of broadband services. One answer is to see whether the hard disc of a set top box can be shared among households that do not require large storage space. That would again make the total package cheaper for customers.

The Ambani company has worked closely with Microsoft to jointly create, test and deliver next-generation Internet Protocol (IP)-based television services such as video on demand, on-demand storefronts, interactive programme guides and managed content services.

Says a broadband industry analyst who has closely followed the Reliance broadband model: "Realising that PC penetration is low, Reliance is virtually converting the TV set into a PC monitor with the set top box being the hard disc or the central processing unit of a PC and the remote being the key pad of a computer and offering customers as much broadband capacity as they want."

All this, of course, is a huge threat to cable operators, MSOs and perhaps even broadcasters. Says Roop Sharma, president of the Cable Operators Federation of India: "We will all be wiped out. Fifteen lakh people will lose their jobs and the investment of Rs 25,000 crore that we made will all go down the drain if the big telcom companies get into TV channel distribution. The government is not ready to listen to us "� it is changing the rules for one or two telcos."

Some acknowledge the threat but put on a brave face. Says cable industry expert Jagjit Singh Kohli, chairman of Broadband Pacenet Ltd, which offers CAS and ISP services in Mumbai: "The Reliance threat to the cable industry is real. It has used pathbreaking technology which has worked in a lab. We don't know whether it will succeed outside the lab."

If cable operators are scared, it's also because the government has asked the Telecom Regulatory Authority of India (TRAI) to regulate the broadcasting industry. And they fear that in its eagerness to push convergence, TRAI will ignore small cable operators.

With reason. Says a senior TRAI official: "Whether you like it or not, convergence is inevitable. Ultimately the carriage of TV, internet and telephony will happen through the same pipe. The days of vertical services will be over."

MSOs too are worried. Says E Jayaraman, managing director and CEO of Hathway Cable and Datacom: "Any one who does not take Reliance seriously is foolish. The cable industry will need to completely change and overhaul itself to survive. There will be a threat from broadband as well as DTH."

MSOs say that that in order to survive they will have to fundamentally alter their business or go under. Many MSOs fear that telecom companies will muscle their way into their turf by bundling services like telephony, internet and TV channels.

Says K V Seshasayee, president, Hinduja TMT, which runs the In Cable network in Mumbai: "I think Reliance will need to co-opt MSOs or cable operators for the last mile. But there is another possibility. If a company has Rs 4,000 crore to spend without worrying about returns or commercial viability, it can implement whatever it wants."

What is more, many broadcasters fear that it is a matter of time before telecom companies like Reliance Infocomm also enter the broadcasting business.

Executives at broadcasting companies privately say that the entry of Reliance could pose a serious challenge to broadcasting companies.

Says a senior executive at a broadcasting company: "Thanks to Reliance's size, it can dominate and negotiate the content cost. Since it can drive penetration, it will demand its price. Reliance has scale of operation and execution skills."

Adds another executive: "With control of distribution, it is a matter of time before Reliance gets into broadcasting and delivers content. That is the business model followed by many of the broadcasters who want ownership of the customer by keeping control of both distribution and content. So they will come into conflict."

Zee TV's newly appointed president Sunil Khanna, however, puts things in perspective: "In the near future many distribution platforms (read: broadband, DTH) will be available to broadcasters. As long as these "platforms" do not arm-twist broadcasters, we see no problems. However, that will be one issue that the new regulator must address."

The Indian Broadcasting Foundation (IBF), the association of channel owners, may write to TRAI at a later stage asking it to look into issues such these, he says.

Will cable operators and MSOs be able to ride the coming telecom company onslaught? UT Starcom, which supplies equipment to companies which use DSL to offer TV programmes, estimates that not more than 10 per cent of subscribers will switch from cable operators to telecom companies in the first few years, though about 25 per cent of them will after five years.

Argues Ruchir Godura, country manager of UT Starcom in India: "The cable business will surely survive, upgrade and expand. Cable operators have certain key advantages "� a depreciated investment which makes it possible for them to offer services cheap, a large customer base and clout to bargain with broadcasters. They will offer the first tier of services which are priced low and for which there will always be a large market. The telcos will offer more premium services."

Many MSOs have already realised the need for change. The Hindujas, for instance, are already doing trials, using IP-TV. They are also looking at offering set top boxes free to customers to reduce entry costs.

Hathway is investing in going digital to implement the conditional access system. So if telcom companies are offering value added services and digital quality, cable operators won't exactly be sitting quiet.

Still, India's cable operators will quite clearly no longer enjoy a monopoly in distributing content. And with the government trying to bring in a semblance of order in both broadcasting and distribution and the big telecom boys entering the world of entertainment, a fundamental restructuring of the entertainment industry is inevitable.