Consolidation in the Indian pay TV sector has been on the cards for a while now, although it was unclear who would make the first move or when. RCOM also appears to have side-stepped cross media ownership regulations barring the acquisition of a cable MSO by a DTH operator and vice versa by acquiriing Digicable, and then merging the businesses into a single entity. The finalisation of the deal is still, however, subject to regulatory approval.

The RCOM Digicable deal, we believe, is the right play for both firms for several reasons:

• An an all-stock deal ensures that the cash outflow from RCOM for the deal will be zero, except for merger and other transactional costs. - crucial considering that Reliance's BIG TV platform (as has been the case with all other DTH operators) has incurred heavy losses since launch.
• Access to Digicable's cable broadband infrastructure and its 8.5m subscriber base will help RCOM in a number of ways, such as the access to a stable cash flow from its cable TV operations. For Digicable, the deal comes at an opportune time. A shortage of cash meant the company was unable to expand its digital cable business beyond certain core markets. Being part of RCOM now gives it access to the telco's vast retail distribution structure, significantly larger coffers for network upgrade activities as well as the strong Reliance brand name.
• The formation of a new venture combining the DTH operations, cable, IPTV and retail broadband operations also opens up the possibility of promotion of TV and Broadband packages to new and existing BIG TV customers, giving it an advantage over the other DTH operators in the market.
• Digicable has also applied for a HITS (Headend In The Sky) licence, and access to BIG TV's existing satellite transponder capacity could go a long way to launching a cost-effective service. However, even if the licence is obtained, we expect that RCOM may delay the launch of the HITS service launch till after regulations governing the service and its pricing are made clearer by the government. Competitor WWIL ceased its HITS operations at the end of Q1 2010 citing lack of regulatory clarity.
• The new venture will also be beneficial to RCOM parent Reliance ADAG (R-ADAG), which has indicated its intentions to enter the pay TV channel business. R-ADAG subsidiary Reliance Broadcast Networks is in the process of finalising deals with US broadcaster CBS to introduce its channels in India, and has also applied for over 20 licences for channels in the general entertainment, music and movie genres. Access to a multi-platform distribution network covering large parts of India will clearly be of great value.