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Sunset in the morning caselet: Tata Sky


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Sunset in the morning caselet: Tata Sky

  1. 1. SUNSET IN THE MORNING<br />In 1930 scientific and technical revolution was started in Britain. However, it took huge time to start technical revolution in term of Direct broadcasting satellite service. In 1989 the first commercial DBS service Sky Televisionplc was launched.<br />The first brick of DBS or what you call today as Direct to Home service (DTH) was cemented in 2004 in India. However, it took two years to build the surface and begin operations. In 2006 Tata sky was launched successfully. <br />Tata sky, an 80: 20 joint venture between a salt to software conglomerate Tata group and global media Baron Rupert Murdoch’s Star India, is the second largest service provider in India after dish TV. Tata sky started well with 1.5 million subscribers in 16 months since its launch which resulted in large cost savings. Tata sky entered the market with initially Rs. 4000 per connection however, they soon realized that a price reduction or a price war is very much important and an effective way to gain market share.<br />Well, analysts are not too optimistic about the costs involved. According to a Mumbai-based media, “DTH companies are losing heavily on each new connection. Tata Sky is losing Rs 5,000 and its recovery period is around 50 months.” <br />However, even with large revenue generation, Tata sky, a Tata Group's flagship unlisted company is yet to turn profitable. The Tata Sky is not to create wealth but it is also gives a negative impact if your balance sheet starts bleeding. Tata sky is making a huge loss. In FY08 the loss stood at Rs 864 Crore for Tata Sky, in FY07 it was another Rs 815 Crore and in FY06 the loss was at Rs 53 Crore.<br />However, with entry of new players like Airtel digital TV, Reliance ADAG’s BIG TV & Sun TV the subsidy will go up even further and the loss for acquiring new customers will rise by at least 30 per cent. The problem might get even more complicated as existing players might have to upgrade their old boxes to the new technology in order to guard against the churn of customers. The financial burden of Tata sky will go up drastically as they will have to offer more value-added services at possibly lower price-points than at present.<br />It is expected that Tata Sky will hit 2.5 million subscriber bench mark by the end of this financial year. Apart from the subsidy on new set top boxes, there are other costs, including the cost of content, taxes, advertising and marketing expenses, which will further the losses for Tata sky this year. <br />So if there's someone who would want to steer clear of the color red at the moment, it is Tata Sky, but unfortunately it is expecting embarrassing red blots to the tune of Rs 1100 Crore for FY 2008-09. However, experts in this industry opine that one of the major reasons for these humongous losses can easily be attributed to the subsidy that Tata sky have to give on selling individual set-top boxes. The challenge for existing players and new aspirants in the segment is to primarily set up the requisite infrastructure, which is both time consuming, and also calls for heavy investments. <br />The burden of taxation on DTH players (Tata sky) is very high," referring to the huge 56% tax those DTH subscribers have to pay as consumer tax. These include sales tax, VAT, excise duty, et al, over and above the 3% CST. Not to forget the 10% license fee and corporate tax that the government charges. <br />There's good news in the offing too. The government has expressed its keenness to roll out the second phase of CAS (Conditional Access System), and soon. When this happens, DTH companies can make maximum hay, as witnessed in the previous round of CAS implementation. But, there's a caveat to these happy times though. CAS implementation in India has always been a contentious issue and implementing the 2nd phase will be no cakewalk. <br />Besides, players like Reliance and Airtel are keenly waiting in the wings for this second round of CAS. Given enhanced competition, the fight for subscriber attention will be supreme and players would have to shell out big money on promotions, further underlining the red on their balance sheets. TRAI also suggests that broadcasters charge 50% less from Tata sky in comparison to cable in non-CAS areas. If implemented, Tata sky is likely to become more cost competitive vis-à-vis analog viewing. Until then, the color will remain red, and not out of choice.<br />QUESTIONS FOR DISCUSSIONS<br />Q1. Is it an intelligent approach of Tata Sky to continue spending, despite of such huge loses?<br />Q2. Do you think that Tata sky will loose Red ink in future from its balance sheets?<br />Q3. Can you make out what strategy Tata sky is following currently?<br />