Cable Operator Evaluating a Broadband Franchise
A cable TV operator with 150 homes in a small town wants to become an authorised broadband franchisee of a national ISP. The terms are: one-time franchise fee ₹1,00,000; refundable bank guarantee ₹50,000; equipment (OLT card, switches, routers, splicing kit) ₹3,00,000; committed monthly bandwidth of 100 Mbps at ₹30,000. His own monthly costs would be staff ₹12,000, electricity ₹3,000, rent ₹4,000 and maintenance ₹1,000. He plans to sell 4 Mbps plans at ₹500 a month, starting with 40% of his existing cable homes in the first three months and adding about 15 customers a month after that. Capacity is 200 connections. He has ₹2,50,000 in savings and would borrow the rest at 14% interest. A national operator already sells 30 Mbps at ₹499 in the same town.
1. Calculate monthly fixed cost and break-even subscriber count. Is the plan financially viable on these numbers? Show the arithmetic.
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Monthly fixed cost = bandwidth 30,000 + staff 12,000 + electricity 3,000 + rent 4,000 + maintenance 1,000 = ₹50,000.
Because every cost here is fixed, each subscriber contributes the full ₹500: Break-even = 50,000 ÷ 500 = 100 subscribers.
Capital to be recovered = franchise fee 1,00,000 + equipment 3,00,000 = ₹4,00,000. The ₹50,000 bank guarantee is refundable, so treat it as blocked cash, not a cost. Borrowing ₹1,50,000 at 14% adds about ₹1,750 a month in interest.
Customer ramp: 40% of 150 = 60 by month 3, then +15 a month. So month 4 = 75, month 5 = 90, month 6 = 105 - break-even around month 6. At the 200-connection cap, revenue is ₹1,00,000 and monthly surplus is about ₹50,000 before interest. Recovering ₹4,00,000 at that rate takes roughly 20–22 months from start, allowing for the early loss-making months.
Verdict: the arithmetic works but the margin is thin. Break-even at 100 of a 200 cap leaves only 2× headroom, and the plan depends on hitting the ramp exactly.
2. Identify the three assumptions most likely to break this plan, with the numerical impact of each.
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- Demand at his price. He sells 4 Mbps at ₹500 while a national operator sells 30 Mbps at ₹499. That is not a competitive product; customers may take his service only where the national operator's coverage is poor. If conversion is 20% instead of 40%, he starts at 30 customers, not 60, and break-even slips by roughly four months. If churn is 2% a month at 150 subscribers, that is 3 lost customers a month against 15 additions - painful, and worse at higher churn.
- Bandwidth commitment. 100 Mbps committed for 200 subscribers at 4 Mbps is heavily oversubscribed on paper. If busy-hour demand forces an upgrade to 200 Mbps at, say, ₹52,000, fixed cost becomes ₹72,000 and break-even rises to 144 subscribers - close to the cap. Peak utilisation data is essential before signing.
- Cash and finance. He has ₹2,50,000 against ₹4,00,000 of non-refundable capital plus ₹50,000 blocked as bank guarantee, so he must borrow ₹1,50,000–₹2,00,000. The 14% interest, plus the bank guarantee being called if he exits early, plus the franchise fee being non-refundable, means a failed ramp leaves him with debt and no asset value. A fourth risk is regulatory: he must operate under the ISP's authorisation and cannot resell bandwidth independently.
Each of these shifts break-even upward or delays the ramp; they do not merely add 'risk' in the abstract.
3. Recommend go or no-go, with conditions. What would you advise him to change before signing?
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Recommendation: conditional go, not go on these terms.
The break-even of 100 subscribers against a 200 cap is achievable only if the ramp holds, and the ₹500-for-4 Mbps product is not defensible against 30 Mbps at ₹499. Before signing he should:
- Renegotiate the product: ask the ISP for higher-speed plans (at least 20–30 Mbps) or a lower wholesale bandwidth commitment for the first six months, so fixed cost starts near ₹35,000–₹40,000 and break-even falls to 70–80 subscribers.
- Get busy-hour demand data from the ISP and a written upgrade price, not a verbal estimate.
- Reduce the capital outlay: lease or rent the splicing kit and routers rather than buying, and keep at least three months of fixed cost (₹1,50,000) as working capital after the equipment spend.
- Sign only with a written exit clause on the bank guarantee and clarity on who owns the customer relationship.
- Line up a local differentiator: same-day fault repair, bundled cable TV, community Wi-Fi - service quality, not speed per rupee.
No-go if the ISP refuses higher-speed plans, refuses an upgrade price in writing, or insists on the full franchise fee before any subscriber is connected.