Amended NTO 2.0: TRAI's balancing act

24 Nov 2022 , 10:38 AM

The proposals that limited broadcasters’ bundling flexibility in the earlier NTO 2.0, have been reversed or diluted, while TRAI has ensured that consumer outgo does not jump significantly. TRAI’s deadline for implementation of amended NTO 2.0 is Feb 1^st, 2023. Analysts at IIFL Capital Services do not see delay from further litigations; TV subscription revenue growth for broadcasters and DPOs should resume after remaining flattish for three years, due to NTO 2.0 limbo. The industry may tread cautiously on price hikes as it balances reach (ad revenue) and pricing (subscription) amid rural weakness.

TRAI’s balancing act

Key amendments to NTO 2.0 are:

• Continuation of forbearance on channel MRP
• Dilution of the provision of channels with up to Rs19 MRP to be included in bouquet (versus up to Rs12 MRP in the original NTO 2.0, and up to Rs19 in NTO 1.0)
• Relaxation of maximum discount of bouquet price versus sum of MRPs of its constituents to 45% from 33%.

Analysts at IIFL Capital Services do not foresee a significant hit, though DPOs may have to adjust their systems to the new rules.

No further incremental hit to DPOs

With DPOs having implemented a part of the earlier NTO 2.0 (after an unfavorable verdict in the Kerala High Court), they have already taken hit from network capacity fee (NCF) caps. Amended NTO 2.0 does not address this; however, there would be no incremental hit. On the other hand, DPOs would also benefit from pack price increases and higher incentives from broadcasters (which the amended NTO 2.0 also extends to bouquets versus just ala-carte earlier).

Subscription revenue growth may improve modestly in FY24

Since NTO 2.0 implementation was stuck in courts for most of the past three years, the industry could not take price increases and consequently, TV subscription revenue remained flat. Modest subscription revenue growth, coupled with recovery in ad revenue from the low base in FY23, should ensure improved revenue growth for broadcasters and better profitability in FY24. 
 
Key amendments to NTO 2.0 and their implications

Amended NTO 2.0	Comment
Customer facing rules
If MRP> Rs19, channel cannot be included in bouquet	This is the same as NTO 1.0 and a dilution of Old NTO 2.0 that lowered the MRP threshold to Rs12. Old NTO 2.0 would have forced exclusion of key channels from bouquets, resulting in a shift from bouquet to ala‐carte. This may have resulted in ad/subscription revenue hit based on the pull of the key channels.
Max NCF of Rs130 for first 200 SD channels	This is the same as old NTO 2.0. Most DPOs have already implemented this. So, no incremental negative impact.
Total NCF capped at Rs160	This is the same as old NTO 2.0. Most DPOs have already implemented this. So, no incremental negative impact.
NCF of second (and more) TVs in a HH capped at 40% of NCF of the first TV
Rules governing broadcaster and DPO transactions
Max discount of 45% while pricing bouquet versus sum of ala‐carte prices	This is a dilution from old NTO 2.0 (max discount of 33%) but still worse than NTO 1.0 (where there was no mandatory cap, but a discount of 50‐60% was observed). However, top broadcasters may be able to keep the hit to a minimum.
Broadcaster can offer up to 15% incentives on pay channel MRP to DPO for ala‐carte and bouquets (versus just ala‐carte earlier)	Extension to bouquets is based on a complex formula, which can result in operational challenges. Broadcaster payouts to DPOs unlikely to change materially, since there is flexibility.

Source: TRAI, IIFL Research