Customer Demand for Pay-TV Could Offer Rich Pickings for DTH
Economies are growing and the demand for pay-TV services in Latin America is increasing. People have more disposable income and are willing to embrace new pay-TV services. Satellite is likely to be at the forefront of this growth.
Latin America is currently one of satellite’s hot markets, with growth in areas such as DTH, cellular backhaul and even military communications. However, it is the growth in DTH that offers potentially the most benefit.
DirecTV Latin America (DTVLA) remains one of the recent success stories in pay-TV globally. The operator saw its subscribers grow by 30 percent in 2011 and added more than three million subscribers in the region in the same year. Bruce Churchill, CEO, DTVLA, says the company is ready to split into three businesses. “We have our SKY Brazil business. We own around 93 percent of that business. At the end of 2011, that had around 3.8 million subscribers. We have what we call our ‘PanAmericana’ business, which is in Spanish-speaking South America. We own 100 percent of that business, and that has around 4.1 million subscribers,” Churchill says. “The biggest territories here are Argentina and Venezuela. We are a 41 percent shareholder in SKY Mexico, which is the DTH platform in Mexico. Televisa is the majority shareholder there. That business ended 2011 with 4 million subscribers.”
The make-up of DTVLA’s subscribers is changing, and moving away from the top tier of customers who have always been able to afford pay-TV. “If you were to look at our total number of sales, and this would include Mexico, roughly 60 percent of them were in this middle market segment. If you were to look at where we ended up at the end of the year, just under 40 percent of our total base is in those ‘C’ and ‘D’ classes. These were customers that we did not really serve two to three years ago. We are going to get to the point where 50 percent of our overall subscribers are from these ‘C’ and ‘D’ classes very soon,” Churchill says. “Initially, there was resistance from local management level to move more into these segments. We had built up successful businesses with the ‘A’ and ‘B’ classes, and there were concerns about whether moving into other segments would diminish the reputation of our brand. But, we looked at it. What we found was that using our main brands was definitely the way to go, because both were such aspirational brands.”
The targeting of new segments has meant the operator has had to “re-design” its business. “You have to pull programming out of packages, renegotiate rates and break the programmers mindset that they each have to have five channels in the basic package. If you are putting a pay-TV package of 15 channels, not everyone is going to get five,” says Churchill.
The operator’s growth has led to a need for more satellite capacity, and last year it signed a deal with Intelsat for huge amounts of new capacity on the Intelsat 30 and Intelsat 31 satellites, which will be launched in the next two years. It was one of Intelsat’s key deals in 2011. Churchill explains the rationale behind the deal. “We were bumping up against our limits in ‘PanAmericana’ even though our existing satellite had a lot of life left, so we decided to put in place two satellites that give us more capacity. They are more efficiently designed with spot beams, so we get more capacity with the same amount of space segment. It is just better designed for the market overall, he says. “The first one will come on line at the end of 2014. The second, one year later, which will primarily back-up the first. Our expectation is that these satellites will meet our needs for the foreseeable future. In the case of Brazil, we launched a satellite not that long ago. So, we are not bumping up against the same constraints in Brazil that we are in PanAmericana. Mexico is launching another satellite in about 12 months. We launched a satellite two years ago which doubled the capacity available in Mexico.”
New Players Emerging in Brazil
While DirecTV has long been established in the region, and remains a barometer in terms of pay-TV, others are also seeing an opportunity in the DTH space. Many telcos are now eyeing offering these services alongside others to have a more complete package for customers. One such telco is GvT, which launched its DTH services last October and is using Intelsat capacity to bring a DTH service to customers in Brazil. The service already has roughly 130 channels, of which 15 are HD channels. In terms of its demands for satellite capacity, Juan Claros, vice president of operations and engineering, GvT, says, “We are using capacity from Intelsat. We have plans to increase the capacity at the beginning of 2013 once the service has been established. It was not an easy choice choosing a satellite operator. You have to verify the coverage they have and also the power that is arriving here so you can do the project,” he says. “We chose Intelsat because of the coverage they have. They have coverage in all of the cities we operate in. For us, it is very important to work with satellite technology.”
With the way the Brazilian market is developing, Claros believes the operator had no choice but to offer a video service. He adds, “We are supplying Internet and voice services for more than eight years in Brazil. It is very difficult to keep customers, as other service providers can offer video services, so we could not continue working without this. We are also now mixing satellite and IP. We are doing the on-demand service through IP, and we are doing the linear channels through satellite. Thanks to regulation, we cannot supply linear channels via IP, however, in the two to three months, the law is starting to change and we might be able to start supplying these types of services via IP.”
The Brazilian market is seeing a number of players emerge to take on the likes of Sky Brazil, and Via Embratel. In terms of how the operator will look to differentiate its service to others, Claros says, “We are launching some different products that other operators do not have. We have launched services like movies-on-demand which is part of our base offer. We had a big marketing campaign start for the service in December. In all of the cities we are operating in, we have some kind of marketing plan in place. We are present in 118 cities in Brazil, so,we can now supply video services to all of these cities in Brazil. Right now, only around 20 percent of our potential customers have a pay-TV service. There is the potential to go after that 70 percent to 80 percent of the market that do not have these video services.”
Sercomtel is another telco that is looking to gatecrash the DTH market. The operator originally planned to launch services in May, but the launch has been delayed until September. Like GvT, the operator feels almost compelled to launch services in this area. Roberto Coutinho Mendes, CEO, Sercomtel, says, “Brazilian consumers want quadruple-play services. For telecoms companies like Sercomtel, DTH is the fastest and most cost-effective way to implement pay-TV services with our existing fixed line, broadband and mobile telephony services. Brazilian customers are ready to embrace new technologies. I believe that there will be continuous growth in DTH services provided by the telecoms operators.”
Companies such as Media Networks Latin America (MNLA), a Telefonica company, and TuVes HD, based out of Santiago, Chile, are looking to derive revenues from the DTH market by using a wholesale model. Sercomtel is one of MNLA’s customers.
MNLA is one of the biggest buyers of satellite capacity in the region. Werner Schuler, CEO, MNLA, says, “We see a great opportunity for further development of DTH services in the region. The regional market is growing 20 percent at an annual average and it is expected to reach 60 million pay-TV users in 2015, which is twice the rate achieved in 2008. We believe that 60 percent of this growth will be due to the expansion of DTH services. The coming months will be of growth and development of pay-TV in the region. The challenges of expanding the coverage and market entry of the emerging social sectors make DTH the best alternative to capture new opportunities, especially in the territories that are not covered by physical networks and/or low population density.”
Both MNLA and TuVes Digital are targeting growth in some of the region’s other markets. Schuler adds, “We found greater potential growth in Colombia, Ecuador and Peru, but we see growth and development opportunities throughout the region.”
MNLA will also continue working with its customers as they look to differentiate their pay-TV services. “We plan to launch new channels of differential content for operators working with us. For example, we are introducing Go Digital, which is a service for small operators to facilitate the digitization of pay-TV services,” Schuler says.
TuVes HD wants to help bring DTH services to countries like Chile, Paraguay, Bolivia and Peru. Konrad Burchardt, CEO, TuVes HD, says even when you take Brazil out of the equation, there is potential market of around 120 million homes in the region that could access DTH services. The company has an interesting business model, as principally it is a wholesale operator. It has all the channels, and works with companies to develop services in each country. Burchardt says, “TuVes provides the service and our partner distributors commercialize with our brand or their own brand (white label service). For instance, in the case of Bolivia we have a white label customer Entel Bolivia. We provide the service with the license and our customer provides the brand, commercializing the service bundled with other products. In Peru, we operate our license and distribute through a retail company that has more than 85 stores across the country. This model is more like a franchise type. Today we operate in Chile, Paraguay, Bolivia and Peru with our own licenses, and we are in the process of obtaining licenses in other countries in the region. We can operate both roles in terms of franchising and being a wholesale operator.”
The company also hopes to tie up a number of other deals with companies looking to offer DTH services. Burchardt says, “The key challenge for us during the next 12 months will be to get new wholesale customers. The market is very active emerging new business models and potential customers every month, but the business cycle in the wholesale market is long. Currently, we are negotiating with around eight new potential customers.”
Burchardt admits that competing with DTVLA is challenging. “The growth of DTH is spreading across the region, but to compete with DirecTV and other big players is not easy so you do need to have more cash flow and use your business model,” he adds. “Pay-TV is starting to really grow in the region. Mexico is starting to improve. DTH is growing very fast in some of the other countries. Three years ago, DTH virtually had no presence in Chile at all, but now it is growing rapidly and outpacing cable. In Brazil, DTH now leads the way. TV penetration can still be very low in parts of the region, so this will impact growth. You have huge Spanish speaking communities that want the same content, so there is a huge opportunity.”
Burchardt, like Churchill, believes it is the new middle classes that will ensure success for DTH going forward. He adds, “Consumers in Latin America prefer TV for their entertainment, rather than new smart devices. People want to have pay-TV in these segments as a priority. In the past, it was expensive because of the cost for the set-top box, but now it is becoming more and more affordable. Cable operators have been reaching a roof in penetration in most of the high segments of urban population. They are limited to grow because it is not profitable to expand their network into new market segments, generating a huge opportunity for DTH. The way to provide these services is not through cable. The way to reach them is through DTH.”
Market on the Rise
All operators, whether new or established, will look to bring more HD channels to the region, fueling the demands for capacity. Churchill says of DTVLA’s plans here, “In Brazil, we offer 39 HD channels, we are the market leader. In other parts of Latin America, there are many fewer channels. HD is at a much earlier stage of development. We have been very pleasantly surprised by the take-up of HD in Brazil. We ended the year with 800,000 subscribers in Brazil. In PanAmericana there are not as many channels, and the take-up is slower. The same could be said for Mexico. We still believe it is an important part of the business.”
Mendes says that when Sercomtel launches its service, it will have HD packages available to consumers. Claros says if broadcasters bring more HD content to the region, companies like GvT will look to bring that content to consumers. “Every year, people are putting more satellites into orbit. So, the opportunity is there to buy more bandwidth, and thus for us to have more HD channels if we receive them from suppliers. We want to increase the number of HD channels. Most of the channels that are available in the market in HD, we are supplying. The numbers of HD channels will grow, but we don’t know what the level of growth will be here,” Claros adds.
It is also an important part of what TuVes HD is looking to do. Burchardt says, “Today, we have around six HD channels, but we are planning to grow more. We are providing HD PVRs. However, it is important to consider that we are a start-up company.”
Whether it is big country markets like Mexico and Brazil, or emerging markets like Chile, Colombia or Venezuela, there is little doubt that the prospects for DTH services are better than ever. DTVLA’s success may grab headlines, but there are many other operators, including telcos, looking for a slice of the action. Many executives have commented on a new dynamic middle class emerging in the region, and it is these customers, rather than the top tier customers that are fuelling the growth. While it remains to be seen whether the markets can cope with this influx of new players, the DTH boom shows no sign of abating. With big sporting events on the horizon, the eyes of the world will soon be on Brazil and the region. It seems that the region has at last emerged from the shadows, and the growth in pay-TV services shows no sign of slowing, which is good news for the satellite industry.