Subhash Chandra is betting big on his cable TV business. Wire & Wireless Ltd (WWIL), the demerged entity of Zee Group, plans to invest Rs 7.14 billion over two years. A major chunk of this will be consumed by set-top boxes (Rs 3.28 billion) and customer acquisition (Rs 1.14 billion) as he attempts to hold grip in the distribution business.

When WWIL gets listed sometime in January-February, investors will have a touch and feel of the valuation that cable business will enjoy in the digital era.

Launching the aggressive drive, WWIL CEO Jagjit Singh Kohli says he has ramped up 250,000 customers at an average valuation pegged at Rs 2000 per subscriber. The ambitious target in year five: 9.6 million.

In an interview with Indiantelevision.com's Sibabrata Das, Kohli elaborates on the steps WWIL is taking to emerge as a leading multi-system operator (MSO) with plans to launch Headend-In-The-Sky (HITS) and STBs that have internet and VoIP (Voice over Internet Protocol) capabilities.

Excerpts:

Is WWIL close to roping in a strategic investor?

We are in talks with both strategic as well as financial investors. They have shown interest in our business. We would go with anybody who gives us the maximum valuation.

What is the valuation WWIL is now getting?

The investors are discussing of valuations in the range beyond $600 million. Our expectations are higher. We are likely to get listed by mid-January or early February. The true valuations will come out then.

Are investors valuing the cable TV business based on the number of subscribers or future revenues?

In India, it is too early for a subscriber-based valuation. Investors are using the discounted cash flow method. The valuations are obviously based on our future target of touching 9.6 million subscribers. There are two reasons why we will get valued more: we are doing Headend-In-The-Sky (HITS) and we are using set-top boxes (STBs) designed by Pacenet which will offer multiple usages like internet and VoIP (Voice over Internet Protocol).

MSOs will have to make major investments on STBs. Is it going to comprise as high as 46 per cent of your overall investments?

We are planning to invest Rs 7.14 billion in the business over two years. For STBs, our fund requirement could be Rs 3.28 billion. We are planning to pump in Rs 2.21 billion towards hardware. Another area where we will be aggressive is customer acquisition. We plan to put in Rs 1.14 billion for this.

What is the debt to equity ratio and how are you meeting the initial fund requirement?

The ratio will be firmed up once we know the price WWIL quotes after getting listed in the exchange. That in a way will determine how much debt component we would require to raise. Our initial fund requirement is Rs 5 billion. We have lined up a debt of Rs 2.15 billion. We have already got Rs 500 million from Infrastructure Development Finance Corporation (IDFC).

WWIL is on a drive to acquire customers. What is the price of acquisition?

We are offering to cable operators a valuation of Rs 2000-3000 per subscriber. While WWIL will be a 51 per cent partner, the balance 49 per cent will be with the operators. We have already ramped up 250,000 subscribers in recent months through aggressive acquisitions.

What is the average valuation for acquiring 250,000 subscribers?

The average valuation works out to Rs 2000 per subscriber.

Won't you have to handle too many operators by doing JVs with them?

We are making proposals to networks with decent size. In Mumbai, for instance, 12 local operators are creating a company and entering into a JV with us. We want to reduce the number of JVs. Otherwise, it will be impossible to manage.

In some of our acquisition models, we make MSOs buy out the local cable operators.

We have set a target of ramping up our direct subsciber base to 9.6 million within five years. We expect 7.6 million to receive digital cable. Our aim is to have 4.4 million through our own digital cable service and an additional 3.2 million through our HITS platform. We will have two million through analogue acquisitions. We have expanded operations from 35 to 43 cities. We plan to be in 66 cities in three years.

WWIL has a thin presence in Mumbai. Even in the lucrative market of South Mumbai, which is a Cas notified area, you have a negligible presence. What are you doing to correct this?

We have linked up optic fibre and have commissioned a digital headend a few days back at Worli. We will be in the Cas notified area of south Mumbai and several operators from rival MSOs are joining us. We have acquired control over 5 Star which operates in Andheri, a western suburb of Mumbai. We have also poached a few operators from Incablenet in Andheri East and others from rival MSOs are joining us.

How are you expanding your footprint in Delhi?

In Delhi, we have acquired a 51 per cent stake in Satellite Channels. We have also signed up with Spectranet and Sanjay Cable Network. All these MSOs were disqualified for Cas as they were found not ready by the Telecom Regulatory Authority of India (Trai) for making the switchover to addressable system by 31 December. As for Kolkata, we are very much a dominant player after buying out Indian Cable Net (formerly RPG Netcom), a leading MSO, in May 2005.

What is the price of the STBs?

While the cost of the basic box is Rs 2000, the one with internet is Rs 2500 and internet plus VoIP Rs 3000. Customers can enjoy interactive games and online share trading through this. We are looking at a monthly fee of Rs 70 for internet and Rs 75-100 for movie-on-demand. Subscribers will have to pay Rs 1499 as deposit and Rs 45 as monthly rent. We haven't, though, arrived at the final pricing. We plan to introduce the internet-enabled boxes after two months and those with VoIP sometime in April.

Who are your STB vendors?

We have Korean and Chinese vendors who will be supplying us the boxes. We have also ordered 200000 STBs from Bharat Electronics Limited (BEL).

Earlier, in 2003 when Cas was to be introduced, Pacenet had ordered STBs from TVS Electronics. Why haven't you included them in the list?

We are also considering them. But at this stage it makes more business sense to import the boxes.

Were you doing some tests with BSNL for VoIP?

We were testing out whether our technology would work on BSNL's network. The tests were successful.

Is WWIL serious on launching a HITS platform or is it a mere hype?

We are going to do HITS and have expressed our intent to broadcasters. This will provide us a national footprint and hasten the pace for digitisation in the country. We can tap cable operators even in places where WWIL has no presence. We have booked four transponders on Thaicom satellite with effect from 1 January, with the option of taking three more. We plan to launch HITS before the end of February.

Do you see ARPUs (average revenue per user) falling in a Cas regime?

For one year, it may come down. Let us not forget that cable TV rates have been suppressed for artificial reasons for too long. But by deploying STBs, this scenario is going to change. We may start off with an ARPU of Rs 250 per month, but like in case of cinema theatres with the launch of multiplexes, this will go up. By year five, we may be looking at ARPUs in the region of Rs 400.

Hathway Cable & Datacom has come out with bouquet packages along with the a la carte choices. Will you offer something similar?

We will be introducing a combo package where consumers who buy STBs on outright purchase and take annual subscription will be offered an attractive subsidy. This scheme will make available 100 TV channels. We will be offering under this at least 20 pay channels. We will be subsiding the boxes.

Unlike DTH, broadcasters will have to make their pay channels available on an a la carte basis at a maximum rate of Rs 5 on cable networks in Cas areas. Will this mean that they will do content deals where they give their bouquets to MSOs at lower cost than to DTH service providers? Otherwise, MSOs can create bouquets picking and choosing the best channels and dumping the weaker ones in the bouquet.

Yes. If broadcasters don't do that, they will always be faced with the dilemma that the MSOs can pick and choose the stronger channels in their bouquet while ignoring the rest. The other reason why we should get better costs than DTH is because we have to share the revenue with the distributors and local cable operators across the value chain.

How does cable compare with telecom operators in triple play service?

Indian cable systems are ready to do telephony. They have pipes already laid including ethernet. The cable architecture throughout the country is in a position to provide triple play. All that is required is the box and IP can provide the return path for voice, data and interactive services.

The public sector telcos, on the other hand, require strong compression technologies and ADSL2+ signals are good only for distances up to 1.5 km. The private sector telcos do not have a system suitable for large scale deployment and will require a high capital cost of $300 per line, even if we take the fact that their network is ready for IPTV (which is not the case). IPTV could have happened in markets where ARPUs are high. But India is not a high ARPU market.