Sri Lanka's current penetration of satellite and cable channels is less than one percent of the three million households on the island that have a television.
Though highly under-penetrated, local firm Frontier Research says the sector is poised for growth as telco giants like Dialog Telekom – Sri Lanka's largest mobile phone operator, get into the business.
Dialog, the local unit of Telekom Malaysia, said recently it hoped to buy up satellite pay television operator Communiqu Broadband Networks and CBNSat for 523.8 million rupees.
The telecom giant also recently acquired a stake in Asset Media for 325 million rupees, which comes with a free to air and pay television licence and its own broadcasting studio.
"Sri Lankan media trends are nearing those of the rest of the region and it is down to one word – convergence," Imran Furkan, Analyst with Frontier Research, told LBO in an interview.
"In the past, cable and satellite television were delivered via traditional cables and direct to home transmission. Now they are delivered using new mobile platforms."
Digital convergence, also known as quadruple play, allows telecom operators to offer cable television, broadband, fixed line and mobile telephone services.
Regulatory hurdles though, could stifle expected potential, though Frontier Research did not disclose expected penetration rates over the coming years.
"Growth will also depend on how regulators look at technology. In Sri Lanka we still look at Pay Television as a luxury, unlike in India where it is a utility item and therefore costs less," Furkan said.
Start up units for satellite television broadcasts is charged a 60 percent duty for the equipment, which ups the cost of initial installation.
Other restrictive regulations include the requirement to get an operating licence from a state owned broadcasting company Rupavahini. "How can a competitor be a regulator?" Furkan adds.
Satellite pay TV operator CBNSat was shut down by the government for about six months this year over alleged licence issues, but was cleared for operation recently by local courts.
But CBNSat dominated the market within one year of starting operations in 2005, with 20,000 customers to the averages of about 8000 customers by other cable operators at the time.
"Our regulations were built up in the 1980s, when the state had a monopoly on broadcast. Regulations have not kept pace with rapid technological and competitor growth. Growth would be phenomenal if regulatory constraints were lifted."
Satellite television however, will have to be a mass market product, Furkan says, because of the high costs of technology to distribute it, at the moment.
But rising incomes over the last few years and lowering start up costs, Frontier Research says, could lead to increasing affordability of pay television in Sri Lanka.
Average household incomes in Sri Lanka reached just over 20,000 rupees a month last year, up 36 percent from 2002, while average income in urban areas was up to 31,239 rupees, up 39 percent over the same period.
Consumers, as in completely deregulated markets like the Unites State and Australia also show greater willingness to pay for improved content, the findings show.
Even in semi-regulated markets like Malaysia, average revenues per user is 21.2 dollars at penetration levels of 30 percent, expected to go up to 41 percent by 2015.
"Firstly, consumers can expect wider choice with new players coming in. Secondly, affordability as scales expands than with traditional satellite broadcasters because telecom providers have the infrastructure in place and there is no real capital investment except for upgrades," Furkan said.