Everybody deserves a lot of credit for the dialogue we are seeing around the country. Believe it or not, this same dialogue was shared in various other countries years ago when they too implemented CAS--and many of the issues indeed remain the same. What should the rates be? Who should pay for the set top boxes? How are they going to pay? What possibilities does the technology offer (interactivity, internet access, shopping, banking) Should open architecture be a demand?

In this light, we at Zintec wanted to offer our view upon the legislation that has been passed in India. Our ideas are certainly not perfect, but, are food for thought when questioning whether the approved legislation is addressing market realities and taking into account the history of the pay television industry in other countries that have deployed conditional access.

1. The 14 July deadline and subsequent 1 September deadline: In principle, setting the deadline was the right thing to do. Without this goal, we would never have seen the level of education going on by the various industry stakeholders to understand CAS. So in that regards, I would say "mission accomplished." All of us are far more aware of what CAS issues entail. However, in terms of meeting the deadline, field trials themselves can last 3-6 months in some areas and sorting out the issues will take time.

In a start-up period under immense "stress" as we have now, things are not stable. Acquiring and installing a huge amount of set-top boxes can be very risky if the system is unstable: imagine a hardware problem, or software problem. After investigation, the cause may very well be the STB placed in the Indian environment not functioning: temperature, lower quality signal than usual, user interface problems are amongst a host of issues which will cause massive telephone calls to the operator from the consumer.

Who would pay for the huge swap out costs in case the box has to be returned for an upgrade? A massive roll-out is certainly very risky and one begs to ask the question: who will be held accountable for such risks? If subscribers have to make bigger financial investments in the subscription and STB, they expect better performance and would not have a great understanding for child diseases. So, as far as 1 September, it would be the job of industry leaders not to frighten the consumer, but inform the consumer that a patient rollout will occur in a phased manner.

2. However, this being the case, we would be wise to reserve the right to amend the existing legislation in the near future. A great deal of discovery about the market realities will only occur after we witness deployment occur. We have a few specific points to touch on: The current problem with the legislation and CAS adoption simply put:

A. Rs. 72 subscription rate for a 30 channel FTA package is simply too little a charge for so much content. There has to be a better incentive for channels to go pay.

B. Financing the set top box appears difficult for operators, regardless of their size.

C. The combination of these two factors makes the barrier for pay channels far too high. They might naturally opt to remain FTA and hedge their bets against what might be considered more lucrative, sustainable advertising revenue. Yes, some will argue that the broadcaster is gaining revenue from licensing fees that were previously not transparent. However, increased licensing revenues are directly related to consumer willingness to purchase a set top box and smart card, and to the speed of deployment of the boxes and cards.

Evidence can be found by looking at markets like Germany and Italy as described below (excerpted from Not Only Conditional Access. Towards a Better Regulatory Approach to Digital TV - By Martin Cave and Campbell Cowie).

Germany. The main entry barrier faced by pay-TV service providers is the large amount of high quality free-to-air programming that is available in Germany. Despite being the largest TV market in Europe, with 32.74 million TV households, the market remains underdeveloped in terms of pay-TV services. The only analogue Pay-TV service is Premiere, which has attracted only 1.4 million subscribers since its launch in 1991. Just 4.3 per cent of the TV households.

In July 1996 Kirch launched the digital DF1 service. Backed by the wealthy Kirch Group, DF1 has secured broadcast rights for highly attractive content, most notably the FIFA World Cup (2002 and 2006) and the output of major Hollywood studios. However, despite the high quality content, DF 1 has, like Premiere, failed to impress in the German market, with less than 40,000 subscribers by the end of 1997.

According to independent researcher Broadband Bananas, over 6 years later, there are an estimated 2.5 million subscribers. Think about where we are now in India; are we honestly more prepared than one of the most industrialized nations in the world to tackle a subscriber base estimated at 40 million?

Italy: As in Germany, the rich variety of free-to-air service has restricted the growth of pay services in Italy. Since 1991, Telepiu has secured only 870,000 subscribers. In January 1996, Telepiu launched its digital service, a 16 channel Italian and English language service, for distribution via satellite. Despite the fact that Telepiu had signed exclusive deals for coverage of Serie A and Serie B soccer leagues (signed in September 1996), some of the most attractive football in the world, the service was considered a failure. By May 1997, the service had attracted only 84,000 subscribers. Over 6 years later, Broadband Bananas reports this subscriber base to be only 1.5 million, and a mix of analogue and digital.

Zintec proposed changes to the legislation: Given the 1-Sept date, what we are proposing is a serious change to the existing regulation.

1. Reduce the no. of required FTA channels to 20. 30 FTA channels is far too many even by comparison with other countries.

2. Of these 20 channels, on 14-July, 10 should be offered analogue only. The remaining 10 channels should offered via the set top box only. Like Operator Canal+ in Holland, these channels should preferably be digital and scrambled as well, but would be free of charge and in that sense would still be digital "free to air".

This is to prevent the grey import of STB's that are only FTA not having any CAS support and to stimulate the purchase of the smartcard with the box. This would create the consumer incentive to invest in the set top box and smart card, and also in effect allow the country to go digital from the start, skipping the analogue to digital transformation which is currently taking place in other markets.

3. This opens up the retail distribution model for the sale of the set top box, analogous to the way televisions are sold in the market, where consumer financing is offered. Furthermore, if the consumer must pay for the box, he/she should be given some range of choice in manufacturer the CAS operator has agreed to support.

4. If these steps are taken successfully, operators could offer a variety of pay (premium) packages for increased subscription charges and purchase of a smart card.

We are not claiming this is a perfect solution. But the model we currently have seems to indicate we are headed for penetration numbers similar to other markets (excluding the United States) for digital pay television — some five per cent of the Pay TV subscriber base receives their content via CAS in most markets.

We believe India can do better. What people must realise beyond anything is that the driving force behind CAS will be content. We must see the consistent emergence of vibrant pay television content encouraging consumers to pay for their desired programming. We must face the stark reality that CAS is not a short-term bet; it is a long-run bet on improving operator services and consumer choice through a value-for-money approach.

The current legislation seems to undermine the very reasons for deploying CAS: to offer richer content to the consumer and protect the investments made in developing premium content, while maintaining reasonable pricing effects on industry stakeholders. Are we deploying CAS for the sake of satisfying legislation, or for the sake of creating a better industry in the long-run?

A Look at the UK: According to the Independent Television Commission, as of Q3, 2002, 39 per cent of TV households in the UK were pay, and about 14 per cent cable, and 25 per cent satellite. Astoundingly, 39.5 per cent of the total households in the UK were digital. Of the 3.44M cable subscribers, 2.07 are receiving digital service (almost 60%). I refer to the objectives laid out by Oftel in governing CAS (Office of Telecommunication in the UK when the UK had entered the same CAS debate) circa 1996:

"Oftel's overall aim is to secure the best deal for the consumer in terms of quality, choice and value for money. In this context Oftel has five key objectives:

1. to ensure that control of conditional access technology is not used to distort, restrict or prevent competition in television and other content services . This is of particular relevance where a conditional access service provider is providing conditional access services to competitors (or would-be competitors) of an associated programming supply business.

2. to ensure that control of conditional access technology does not lead to consumer choice being artificially constrained, whether in relation to consumer equipment, the range of services available via that equipment or the packaging of those services.

3. to facilitate, so far as possible, consumers being able to access services on more than one delivery mechanism, or switch between delivery mechanisms, without having to incur unnecessary additional expense.

4. to facilitate consumer choice by ensuring ease of access to comprehensive information about the range of services available and ease of selection of those services.

5. to ensure that control of proprietary conditional access technology is not exploited anti-competitively e.g. by excessive pricing for the use of that technology.

This dialogue is about putting in place the framework in which effective competition and innovation can flourish; consumers can take advantage of the full range of possibilities for new products and services; and the UK economy can reap the benefits of a thriving communications sector - an area where it is already among the world leaders. Oftel's first consultation paper on the topic appeared in 1996. A final guideline version appeared over three years later in April-1999.

They engaged in a scientific dialogue for over three years, and today, there are still issues in the UK where regulators have had to step into the debate. We believe we must follow this spirit in India as well. We are barely one year into a detailed debate over the issues. We are not suggesting that the same model in the UK would work in India; in fact, it likely will not. But we need more time to come out with the appropriate business model.

As far as pricing is concerned, again, we draw from Oftel. Conditional access operators must ensure that charges to third parties for conditional access are set on a fair, reasonable and non-discriminatory basis. When considering what is meant by the phrase ‘fair, reasonable and non-discriminatory basis’, Oftel will apply the following general principles.

- The overall pricing framework should be such that on average the conditional access operator should be able to recover its costs and make a return on its investment which is appropriate to the level of risk and uncertainty at the time of investment

- Prices for particular categories of services (or groups of services) should fall between the incremental cost of providing that service and the stand-alone cost of providing that service on its own.

- Comparable users are charged comparable prices for comparable services; vertically integrated suppliers of conditional access must not supply to their own downstream businesses any more favourably than to those of third parties.

Oftel’s guidelines ensure that conditional access operators may set prices to make a return on their investment that is on average neither inadequate nor excessive, properly accounting for risk and uncertainty present at the time of investment.

A further set of issues concern how the pricing framework will adapt to changing circumstances and information. One of the big problems in setting prices at this stage of the development of the market is the extent of volume risk. The significance of these risks has two main implications. First that the regulatory framework should give conditional access providers and those purchasing conditional access services sufficient flexibility to put in place arrangements for managing and sharing risk.

The second implication is that the framework needs to be able to adapt to change over time. Each set of negotiations or renegotiations could take place in the light of new information. In this circumstance there is a danger that a single rate card approach would be insufficiently flexible. At the very least it would need to be subject to frequent revision. This would in turn raise the issue of winners and losers from such revisions – which might in turn require there to be different versions of the rate card in force at any one time.

We would be remiss if we did not mention piracy. What is most important is how we deal with piracy. No system in the world is perfect, but CAS vendors are as weary as anyone of piracy issues, and provisions such as fingerprinting and the ability to download upgraded software certainly help combat it. But more importantly, there must be a framework for addressing piracy, punishing theft and insuring that regulators and industry stakeholders tackle piracy with a fierce passion.

Furthermore, we would say this is another golden opportunity for the government to jumpstart the hardware sector by providing local manufacturing incentives.

Zintec would like the Indian government to continue to create incentives for local technology development, so that the huge investments of Pay TV have a positive result in the build up of a skilled labour force and the "Made in India" brand. It should be India's position not only to provide cost effective solutions to the internal market, but also to the rest of the world, thus becoming the most prominent competitor in the set top box domain to China. Use the natural advantages of India:

- good general software engineering capabilities and known throughout the world for this

- no language barriers (English is widely spoken and read and is a national language)

- good improvement on quality standards

- low cost labour force

- already possesses a market economy with a relatively high amount of freedom in comparison with China

From this perspective, we conclude that somewhere in this debate, we have lost sight of the ideals and true spirit of CAS; it seems that we are allowing the deadline of 1 September to dictate the legislation when it should be the legislation, market dynamics, market realities, and stakeholder interest dictating the deadline. The reduction of import duties on set top boxes are an example of this. We would like to point out that for us, professionally, there is no difference; in fact, we are already importing our solutions into India and the duty reduction will only increase Zintec's revenue streams.

However, personally, as individuals established in India for nearly four years and seeing endlessly dismal reports about India having no chance against China in the hardware sector, we would characterize it as a huge disappointment if we miss the boat on this opportunity to inject serious growth into the local manufacturing industry. We recommend a step back; we have come so far, and waited so long.

The costs of rushing into this far outweigh the costs of delaying deployment. Once you begin deployment, prepare to live through very high switching barriers. Taking a little more time to ensure that we have the right model in place that will benefit the Indian economy at large while protecting and nurturing stakeholder interests would be prudent. And we can do it.

Yogesh Maurya is the co-founder, director and COO Zintec Software, Hyderabad, a subsidiary of Holland-based Zintec Holding BV. The company is engaged in the design, development and distribution of digital set top boxes.

(The views expressed here are those of the author. www.indiantelevision.com need not necessarily subscribe to them).