(13 March 2007 4:00 pm)

NEW DELHI: Kotak Institutional Equities, among India's top brokerage firms, has said that for the DTH sector, subsidy on STBs would be crucial and warned that late entrants may have to pay higher subsidy and also higher costs due to shortage of transponders on the Ku band.

On the ground of transponders, it predicts the launch of Sun Direct TV ahead of Reliance or Bharti, since Sun has booked transponders on the just launched Insat-4B satellite.

A report from the company's study on the DTH sector says that the subsidy on each STB ought to be around Rs 1,200 to allow faster penetration by DTH players.

"We expect the imminent entry of several new DTH players in the market and potentially impact the level of STB subsidies. However, we also expect that increased distribution and faster execution leading to a steep increase in the annual net additions, compared to the current pace," the report says.

Iterating that most costs on the DTH sector are fairly typical, it says that STB subsidies are the key variable in the financial model and valuation of a DTH company.

It explains that the STB subsidies would depend on the number of operators and the intent of the individual operators regarding market share and pricing, as well as some other factors.

"It is possible," the report looks ahead, "that the late entrants may resort to higher subsidies in order to accelerate their pace of net additions compared to incumbents and try to gain market share.

Incidentally, RN Choubey, Advisor, Telecom Regulatory Authority of India had told indiantelevision.com last week that if the DTH operators really have to penetrate the market deeper than they have, they would have to keep the entry point cost for the customers low.

At the present moment, they are charging steeply for the STBs and offering some opening bonanza, which is in fact keeping the ARPU very low, as the Kotak analysis (reported earlier on indiantelevision.com) notes.

Essentially, therefore, both Kotak and the sector regulator have the same advice for the DTH players: make it less costly to buy a box and enjoy greater and faster penetration.

"For our preliminary modelling we assume a subsidy of Rs 1,200 for a new subscriber and keep this constant for the entire period of our forecast. We amortise this over 48 months," it advices the DTH players. The period of forecast is 10 years, till 2017.

Kotak does not see other costs as a major variable in their valuation for the DTH industry, saying, "Much of the costs are fairly typical and well known."

It also does not see costs as an area of difference across operators. The only cost difference would be in broadcasting unique content, whenever the government allows that, the study suggests.

A DTH operator, provided the government allows this, could add unique content to garner more market share.

Kotak has modelled longer term content costs to be 45 to 50 per cent of revenue before taxes, but including license and spectrum fees, which last could be higher for new entrants.

The study has modelled transponder charge at $ 1 billion to 1.1 billion per transponder, with14 channels on each transponder.

It reiterates that theoretically a transponder could carry larger number of channels but the quality suffers, and in the age of heightened competition, this would affect an individual DTH player, if he tries this.

"We do not see this as a differentiating factor between financially strong players," the report holds.