MUMBAI—In India's cutthroat media sector, the power struggle between cable-TV operators and content providers is growing more fierce.
Indian media companies are churning out a range of popular television programming and boast one of the largest viewing audiences in the world. But making a healthy profit is proving difficult as cable operators who carry that content take a large cut of the revenue.
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Bloomberg NewsMukesh Ambani at the World Economic Forum India Summit 2011 in Mumbai, Nov. 13.
It is one reason why Network18 Group, which operates some of the country's highest-rated channels including, through partnerships, India's version of CNBC, MTV, and CNN, is looking to raise a significant amount of cash. Network18 Media and Investments Ltd., the holding company for the TV and Internet conglomerate, has annual revenue of about $274 million but isn't profitable.
Among potential investors is India's richest person and chairman of Reliance Industries Ltd., Mukesh Ambani, according to people familiar with the matter. Mr. Ambani has been in talks with Network18 founder and controlling shareholder Raghav Bahl, these people say.
The talks may not lead to a tie-up. It also isn't clear what the value of Mr. Ambani's investment would be and whether he is operating on behalf of Reliance Industries or whether he would put his own cash into a deal.
A spokesman for Reliance said neither the company nor Mr. Ambani has any interest in buying a stake in Network18.
In a statement, Network18 said: "Currently the company has not concluded any agreement in connection with any proposed investment."
India is the world's third-largest television market—after China and the U.S.—with about 140 million households, according to a report by KPMG and the Federation of Indian Chambers of Commerce and Industry. Of those viewers, 104 million households subscribe to cable or satellite, also making India the third-largest cable-TV market in the world.
But about 75% of that market is controlled by a host of local cable operators—50,000 and counting, said KPMG. Media companies collect revenue from cable operators on a per-subscriber basis. Network18 and others allege, however, that cable operators are underreporting the number of households they service, lowering media firms' subscription revenue.
Network18's individual entertainment channels generate operating profit, but the company is struggling to break even overall, and is dealing with mounting, high-cost debt that it raised to fuel its expansion in recent years.
Network18 said its operating profit gets wiped out because of the fees it must pay cable operators to have programming carried. Network18 collects about 12% of its total revenue from subscriptions, while the rest comes largely from advertising. In the U.S., cable channels generally collect about half their revenue from subscriptions and half from advertising.
Haresh Chawla, Network18's outgoing chief executive who spent a decade building the firm from a roughly $2.2 million company, said carriage fees keep increasing as more channels enter the fray and compete for scarce capacity on India's aging, analog-cable infrastructure.
"The cable guys have all the leverage—they have been in a sweet spot," said Mr. Chawla, who is leaving the company to pursue other opportunities. A lack of effective regulation, he said, has allowed small-time operators to function as powerful monopolies. "Almost our entire profitability gets wiped out by carriage fees."
In the television industry, "Profitability is more the exception than the rule" because of the amount the channels have to pay to cable operators to get access to households, said Jehil Thakkar, head of media and entertainment at KPMG in India.
"There are more than 700 channels on offer—high by global standards—and the guys who pay the most money get on," he said.
Mr. Chawla said he is hopeful that modernization and digitization of cable's infrastructure will ease pressure on content providers, provide greater transparency on the number of households cable operators actually serve and free up more programming capacity.
The Indian government has mandated that the four-largest metropolitan areas be digitized by next spring and the rest of the country by March 2015.
"Digitization will be a game changer for broadcasters as carriage fees will go down, and channels can invest in content and focus on more niche programming," said Ankit Kedia, media analyst at Centrum Broking Pvt. Ltd., a broking house in Mumbai.
If Mr. Ambani takes a stake in Network18, he would be buying into an operation with some highly rated content. CNBC-TV18 has 56% of viewership among business channels, while Colors, the company's entertainment channel, runs neck and neck with Star Plus in general entertainment. Star Plus is operated by Star India Pvt. Ltd., which is owned by News Corp., publisher of The Wall Street Journal.
KPMG's Mr. Thakkar predicts that consolidation among media companies will happen at some point, driven by companies building out portfolios so they can go national. Currently, much of the Indian media industry is fragmented by region and language.
Indeed, the way to survive India's fast-growing and fiercely competitive media sector, many analysts and deal-makers say, is to scale up. One of the plans Network18 is evaluating is a potential combination with regional broadcaster Eenadu TV, according to people familiar with the matter. Mr. Ambani already controls an investment in Eenadu, according to people familiar with the matter.
Even two of the biggest media companies—Zee Entertainment and Star—earlier this year set up a venture to distribute their channels to cable operators in a bid to have greater influence over the cable companies.
Write to Megha Bahree at megha.bahree@wsj.com
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