MUMBAI:Merrill Lynch's India Media and Entertainment Industry report on the media sector post the conditional access (CAS) legislation, produced in conjunction with DSP Merrill Lynch Limited (an affiliate of Merrill Lynch & Co., Inc), states that CAS presents a sustainable and long term upside for broadcasters.
The report states that the implementation of the first phase of CAS over 15 months could increase broadcasters' revenues by over 31 per cent. However, it adds that unrealistic deadlines and a high price for the FTA tier set by the government could affect the above mentioned estimates. The report also foresees richer business models for MSOs resulting from the CAS, as they would acquire virtual control over the last mile through control over STBs.
The report expects the level of piracy/ under-disclosure of pay subscribers to decline from 75-80 per cent to 25-30 per cent with proper implementation of CAS, led mainly by improved control of MSOs over the last mile.
Impact on broadcasters: 
The report claims that broadcasters will be the key beneficiaries of CAS, if implemented in a realistic time frame. This is notwithstanding the fact that markets have been concerned about the government's compulsory addressability plan hurting broadcasters' pay revenues. The report claims that CAS presents a sustainable and long term upside for broadcasters enabling them to earn their due share of the US$1billion cable pie via pay revenues.
The report adds that the current 'faith' based direct-to-operator (DTO) pay system might look attractive/ easy to tap in the near term, but it represents only a tactical upside for broadcasters, given the current state of fluid relationships across the distribution value chain and the problem of underdisclosure.
The report mentions that the implementation of phase I of CAS over 15 months (FY04) could increase broadcasters' revenues by 31 per cent in a base case scenario even after factoring in:
(a) 30 per cent piracy/ subscribers loss 
(b) 20 per cent discount to bouquet price and 
(c) 11 per cent fall in ad revenues owing to reduced connectivity to the cost conscious (lower affordability) class of viewers.
However, the report feels that the real risk lies in :
(a) the government setting an unrealistic (~6 months) CAS implementation schedule, 
(b) government fixing a high price (e.g.~Rs150/month) for the FTA tier, 
(c) unwillingness of last mile operators to offer CAS can hurt viewership, 
(d) piracy
The analytical report also foresees richer business models for MSOs resulting from the CAS, as they would acquire virtual control over the last mile through control over STBs. ML analysts see Zee (Siticable) and Hinduja TMT as the key beneficiaries. ML's bullish stance on CAS is based on four assumptions:
1. The Big four NOT to go free-to-air (FTA): ML analysts believe that given their respective compulsions to remain pay, the frontline channels of the big four pay bouquets viz. STAR, ESPN-SS, Zee and Sony will remain in pay mode post-CAS. 
2. Majority of consumers will buy STBs - given that much of the compelling content will be in the pay mode and the price of an analogue STB will not be prohibitive (say, lower than for e.g. the price of a consumer durable such as mixer-grinder). However, price of the FTA tier and financing of the STB (especially if it is a digital box) will be the key driving STB penetration.
3. ML analysts also believe the government will set a realistic timeline for CAS implementation: Considering the size & complexity of the CAS system, the report states that the government needs to set a realistic (>12 months) implementation timeline. The report adds that the discussions with the I&B ministry has given an impression that the government will set a realistic implementation timeline in consultation with multi systems operators (MSOs), broadcasters and equipment suppliers. ML analysts feel that the government can ill afford the risk of consumers' ire resulting from having to see blank TV screens caused by lack of STB supply.
4. Box supplies/ financing to fall in line. ML analysts believe that the sheer size of the business opportunity, estimated at Rs10 billion for phase I of CAS, will induce equipment manufacturers, MSOs and financiers to offer an attractive package to consumers to buy set-top boxes.
Key Risks To Broadcasters' Pay Revenues On CAS Adoption
The report states that the key risks to broadcasters' pay revenues owing to adoption of CAS are:
(a) Specification of an unrealistic (6 months) implementation schedule for CAS by the government owing to lobbying by vested interests. The latter may wish to mandate a shorter deadline, within which time frame CAS cannot possibly be implemented. This move may, as a consequence, likely force pay channels to turn free-to-air in order to safeguard their connectivity (ad revenues). 
(b) Government fixing a high price (say Rs 150/ month /home) for the base tier that can create two problems - to make the overall package (incl. pay channel rent & EMI for STB) expensive and to leave less incentive for the ACOs to market pay channels to earn additional revenues. 
(c) Unwillingness of last mile operators to upgrade network/ offer CAS, which could hurt viewership. 
(d) Predatory moves by any one of the top three broadcasters viz.who might take their frontline Hindi general entertainment channel into the FTA mode to capture a higher share of ad revenues. 
(e) Piracy: Piracy is inherent to any CAS. The key point that the report has raised is: what is the piracy/ under-disclosure of pay subs in the current DTO system v/s in CAS. ML analysts expect the level of piracy/ under-disclosure of pay subs to decline from 75-80 per cent to 25-30 per cent with implementation of CAS, led mainly by improved control of MSOs over the last mile.
Further, ML analysts believe that the broadcasters who have a presence in the cable business, such as Zee & Star, will have an upper hand whilst tackling piracy problems.
Impact On MSOs
The ML report also foresees richer business models for MSOs as a result of CAS, as they would acquire valuable direct control over the last mile without much of capex. The ML analysts predict that Zee's cable arm - Siticable, which is India's largest MSO, Hinduja TMT and Hathway (Star holds 26 per cent equity) to be among the key beneficiaries. The report also states that Zee (Siticable) and HTMT could offer investors a play on the MSO business upside.
Key Uncertain Issues As Yet 
* CAS implementation timeline
* Technology of CAS - the kind of STB & funding
See related story:

Merrill Lynch gives Zee buy status post-CAS