Initially TataSky had chosen MPEG2 as their technology for broadcasting, eventhough MPEG4 was predominat at tht time (in 2006?). MPEG4 allows for better compression, that means, for a given quality, the size of an MPEG4 video would take less-storage or less bandwidth for broadcasting. MPEG4 supports various encoding standards and H.264 is popular amonst them.
Older IRDs (Integrated Receiver Decoders ie. STB) had chipsets that can understand and decode only MPEG2 content. However, HD Plus, HD STBs have always been having MPEG4 support and in fact all the high-definition channels are always transmitted in h.264, which is evident when you carefully observe the static portions of the video such as the channel logos. But, all the SD channels transmitted by Tata Sky till 31st July 2013 were pure MPEG-2 channels.
The MPEG-2 Standard-Definition channels will migrate to MPEG-4 channels in phased manner, starting with channels of South Indian languages, in the phase-I, where (almost) all the old Tata Sky SD boxes in Andhra Pradesh, Tamil Nadu, Karnataka and Kerala have been replaced with MPEG-4 boxes.
Why is Tata Sky doing this?
The bandwidth that is currently available to Tata Sky is very limited and the transponders Tata Sky supposed to get by 2013 have been delayed. Majority of Tata Sky's competitors, such as Airtel TV, Dish TV and importantly Sun Direct have more channels than Tata Sky has, especially the South Indian channels, which is the main reason for this switch over to MPEG4, which allows Tata Sky add more South Indian channels to its boquets, which is very important for Tata Sky to gain as many number of customer in South India, during the 2nd and 3rd phases of digitisation, otherwise, who will choose to go with Tata Sky while the competitors are providing more channels (over 50% than what Tata Sky has. Tata Sky is expected to add several Tamil, Telugu, Malayalam and Kannada channels to its boquet - at least 3 channels in each language?
Though this will help the existing customers watch more servies, the main motivation for Tata Sky doing this is not to miss the bus of 2nd and 3rd phase of digitisation and thus lose the market share.
As per the above analysis, Tata Sky replacing the old set top boxes with new MPEG4 ones, costing themselves a 1000 crore, is not for the existing-customer satisfaction. The user experience might improve in only one sense that they get to watch more services. Existing customer need not expect a better video quality, since the bandwidth saved may be used only for adding new channels rather than to improve the picture quality.
Disclaimer: All the above information is only based on analysis; truth is not guaranteed, unless Tata Sky acknowledges the same.