Reliance’s move for Digicable must be a first step

By Tony Brown

Reliance Communications’ purchase of a majority stake in leading cable operator Digicable has again proved that the Anil Ambani led company is capable of pulling a headline-grabbing deal out of the bag, but what does the acquisition really mean for the company’s ambitions in the Indian broadband market?

After seeing the much-anticipated Broadband Wireless Access (BWA) auctions dominated by Infotel Broadband Services – backed by Reliance Industries (RIL), the company owned by his brother and business rival Mukesh Ambani – Anil Ambani must have realized that the broadband ambitions of Reliance Communications (RCOM) had taken a hit.

Although RCOM had performed well in the country’s 3G auctions, winning spectrum in Delhi, Mumbai, Kolkata, Punjab, Rajasthan and Madhya Pradesh, the firm is expected to use the 3G spectrum mainly for voice rather than broadband services because of the shortage of capacity for voice services.

Infotel Broadband Services landed nationwide spectrum at the BWA auction – from which RCOM withdrew once the bidding got far hotter than it had originally expected – and it looked like the elder of brothers has positioned his firm better in the broadband marketplace.

However, the deal for Digicable – theoretically at least – swings the broadband pendulum back towards RCOM because it potentially gives the operator access to a genuine mass market of fixed-line broadband subscribers at whom it can target triple-play or even quad-play services.

In addition, although RIL’s swoop for Infotel has given it 20MHz of 2.3GHz spectrum in all of the country’s telecom operating circles, the firm’s preference to use TD-LTE rather than WiMAX for its network rollout means that it will not be able to deploy commercial broadband services for around two years.

The deal

Once the deal for Digicable, which has around 8.5 million cable TV subs across India, has been completed, the cable operator will be merged into a new firm, Reliance DigiCom, which will also house RCOM’s BigTV DTH services as well as its nascent IPTV offerings.

RCOM has yet to publicly confirm the details for the Digicable deal but local reports say that the all-stock deal will leave RCOM with a 60% stake in Reliance DigiCom with the remainder of the new firm owned by current Digicable shareholders, including the firm’s founder JS Kohli and UK private equity firm Ashmore.

However, although the deal unquestionably strengthens RCOM’s presence in the pay TV market by combining Digicable’s huge cable subs base with the BigTV DTH platform, the value of the deal in helping RCOM significantly improve its position in the broadband market is harder to ascertain.

Although Digicable’s headline numbers of fast-approaching 9 million cable TV subscribers are impressive at face value, it is the quality of those subscribers and the networks on which they offer services which is of paramount importance to RCOM’s broadband ambitions.

The masterful leadership of JS Kohli has helped Digicable become the largest MSO (multiple system operator) in the Indian market within by October 2009 – little more than two years after it launched services in June 2007 – with the rapid ascent being fuelled by a combination of acquisition deals – the firm had already bought around 70 independent MSOs or local cable operators (LCOs) by the end of 2009 – and franchise agreements LCOs.

However, as with all of the country’s MSOs, the vast majority of Digicable’s subscribers are not owned directly by the firm but are instead controlled via franchise deals with LCOs. This type of deal has been one of the traditional barriers to the growth of cable modem services in India. Although the MSOs are happy to find the capital to fund their own network upgrades in order to offer cable modem services, they are very nervous about funding network upgrades for LCOs that might easily switch their allegiance to another MSO once their current franchise agreement expires.

The execution

RCOM has traditionally been hamstrung in India’s fixed-line broadband market by a lack of last-mile connectivity – principally because of the Department of Telecommunications’ continuing refusal to unbundle the last-mile networks of state-owned BSNL and MTNL – forcing RCOM and other private players to deploy their own last-mile copper networks.
RCOM has already rolled out an Ethernet-based network, which it has connected to around 1 million buildings in 44 cities and which it hopes to extend to 1.5 million buildings by the end of 2010 – although this network is targeted at the corporate rather than the residential market.

As a result, RCOM is faced with two choices if it wants to have significant presence in India’s residential fixed-line broadband market – either roll out very expensive FTTH/HFC/DSL networks or buy operators that already own network infrastructure.

This is where the Digicable deal really comes into play because it potentially gives RCOM a fixed-line connection to a huge residential subscriber base – although RCOM will now have to invest a great deal more capital to bring this link to full fruition.

At present, Digicable’s cable modem business is run through its sister company Broadband Pacenet which has rolled out cable modem services to corporate and residential subscribers in several cities including Mumbai – and the firm does hold a nationwide ISP license.

The task now for RCOM will be two-fold. The first will be to invest in upgrading the last-mile networks of the LCOs which are directly owned by the new Reliance DigiCom in order to allow them to offer cable modem services, which will allow RCOM to seriously attack the fixed-line residential broadband market.

The second will be to work through the huge list of LCO franchisees and figure out which of these has real value in potentially offering cable modem services and then try and strike acquisition deals with those operators with a view to then upgrading networks to offer cable modem services.

The deal to buy Digicable is potentially a game-changing move by RCOM in India’s broadband market but the devil will really be in the detail of the execution as the firm tries to transition Digicable from a plain old MSO to a next-generation triple-play operator.