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20 months cash cost breakeven-the dangers of DishTVs strategy

ANANDH SUNDAR 
on 10 December 2011

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Now, none of us would like to be classed as 'average', and I'm the first one to admit that there are quite a few pitfalls in that. Still, for the purpose of analyzing aggregate data, that would serve fine. To further appreciate the rest of the this post, read the DishTV presentation (http://www.dishtv.in/Library/Images/DishTVInvestorPresentationOct.2011.pdf) and my brief primer that follows:

1. As one knows, DTH companies spend heavily to get the customer to buy their set top box

2. DishTV defines subscriber acquisition cost as, set top box subsidy+commission to dealer who sells/installs it + 80% of marketing spend! Now, one may argue that 80% of marketing spend is nothing but arbitrary overheads allocation. Even if that maybe, the fact is the spend would be taken with that outcome in mind, so if the company expects 80% to earn sales, so be it. SAC is between Rs 2100-2300 at present.

3. ARPU(average revenue per user) is internally split by DTV into amount attributable to service charges+FTA channels(presently Rs 100) and the balance for pay channels. ARPU around Rs 150 levels, expected to touch Rs 160 due to more HDTV etc. 

Now, all busineses have marketing costs and I daresay if FMCG/ITES sector calculated their Customer Acquisition Cost as conservatively as imputing 80% of marketing spend, then those figures would seem high as well. But going with what we have, the trend I noticed is even at improved ARPUs, the breakeven period at gross ARPUs of Rs 152(net Rs 114 after content costs) will be 20months to recover the subscriber costs of Rs 2232.

 

Of course, DishTV expects their ARPUs to grow exponentially due to HDTV revenues. But this graph(should not be much different for other plays) shows that DishTV is playing a numbers game to retain their 30% market share.  

But the danger in that, is DishTV themselves introduced a device card to make any STB of other operators, compatible to receive signals from DishTV. While DishTV packages this as Dish Freedom(http://www.dishtv.in/dish-freedom.aspx), this equivalent of mobile number portability for STBs may unleash an industry war, with players deciding to compete on content. After all, if DishTV can attack the installed base of other players, so can they. But like how MNP failed for mobile phones, DIshTV can only hope that subscribers will stick to the incumbent. But if the competitor comes and offers this device for free to hook DishTV subscribers, then it is a whole different ball game.

So what does the market think about this? Dish TV has gained 42% in the past one year, spurred no doubt by growing ARPUs and dominance. And its market cap of nearly 6500 crores(versus debt of just 1200 crores odd) for a 13million STB base, speaks of an implied valuation of Rs 5000 per STB, which is nearly twice the acquisition cost! Can this eyeballs game continue for ever? As CAs, MBAs and other professionals maybe we should think about the prudence of this approach for our clients.




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