Optimism Rises For DTH In Latin America

By | October 6, 2003 | Feature

By Stephen A. Blum

Cautious optimism has returned to the Latin American direct-to-home (DTH) sector. A year ago, the outlook for the two regional satellite television platforms was cloudy. Political and economic volatility, in combination with corporate uncertainty, created a confusing array of scenarios for DirecTV Latin America (DLA), a subsidiary of Hughes Electronics [NYSE: GMH], and Sky Latin America, owned by News Corp [NYSE: NWS].

Last year, total subscriber growth was all but flat, with trends pointing toward gradual decline. It was easy to envision steep drops in subscriber totals for the region.

However, there also was good reason to think conditions would improve. Argentina had hopes of working itself out of its financial hole, while Brazil was ready to elect a new president who seemed likely to bring in fresh economic policies and renewed growth. Although Mexico’s economy was sluggish, it was weathering the storm. Of the four major DTH markets in Latin America, only Venezuela seemed decisively trapped by negative events.

When these likely outcomes were factored into a cautiously optimistic subscriber forecast, the result was a modest 7 percent growth in Latin American DTH subscribers for 2003, bringing the predicted total to 3.4 million.

Now, Latin America is in much better shape economically and politically than it was a year ago. And with the mid-year total topping 3.2 million subscribers, the combined DLA- Sky totals are on track to hit 3.4 million by the end of December.

Subscriber growth has not been evenly split between the two platforms, however. As of the end of June 2003, Sky grew to more than 1.7 million subscribers, while DLA slipped below 1.5 million.

DLA’s subscriber base is declining gradually. It dropped nearly 11 percent from June 2002, largely because of its significant exposure in strife-torn Venezuela, and the general uncertainty and apprehension caused by its March decision to reorganize under U.S. bankruptcy laws. The pending merger between Hughes and News Corp added to DLA’s strategic and operational difficulties.

Rising Subscriber Numbers

On the other hand, Sky boosted its subscriber figures by 12 percent from June 2002 to June 2003. Its local partners in Brazil and Mexico were performing well. In addition, Sky’s programming was proving to be popular, and there never was any doubt that its corporate ownership and control was locked in for the long haul. While Hughes managers were vague and tentative about DLA’s future, New Corp’s leadership was confident and firmly in command, even to the point of predicting one million subscribers each in Brazil and Mexico by the end of 2003.

News Corp likely will miss that aggressive target, but not by much. If current trends continue, Sky’s subscriber counts in both Brazil and Mexico should top 1 million in the first half of 2004. That’s without taking into account the impending merger between News Corp and Hughes. Although Hughes only owns about 75 percent of DLA, its Venezuelan and Argentine co-investors should make a good fit with News Corp’s partners in Brazil and Mexico.

It’s tempting to conclude that regional subscriber growth will accelerate further once DLA’s problems are fixed, but history suggests otherwise. Typically, the life cycle of a DTH platform follows a traditional “S” curve pattern, where subscriber levels grow rapidly on a percentage basis for a few years, before settling into a long period of steady, if unexciting, growth.

Setting aside the traumas of 2002, Latin American DTH growth has followed a predictable pattern. Over the course of the next five years, steady, single-digit subscriber increases are the likeliest outcome. This “cautiously optimistic” case does not take into account the possibility, perhaps the probability, that smaller but more affluent markets such as Chile or Puerto Rico will experience growth spurts. But even then, annual growth would not rise above 7 or 8 percent.

Upcoming Shocks

Future financial and political shocks in Latin America’s big markets cannot be ruled out, either. As 2002 has shown, however, the consequences need not be fatal or long lasting. News Corp’s management team steered Sky well during that troubled year, and recovered fully in 2003.

The News Corp management team now is poised to take over DLA. Assuming the merger is at least tolerated by regulators in the region, combining the two platforms into one will require many years. Managing the consumer electronics sales and installation side of the business always has been problematic in Latin America, and refitting and re-pointing a million and a half homes will take some time. But business models and programming line-ups can be changed quickly, so expect to see a rapid makeover of DLA’s content and consumer selling proposition once News Corp’s team is in place.

Another possible change in the competitive landscape is the appearance of homegrown contenders. Latin America is the only place in the world where pan-regional satellite television operators have acquired significant numbers of subscribers and dominated the DTH market. The small, struggling markets of Africa and the Middle East aside, single- nation systems are the rule, with exceptions made for limited cross-border service in homogeneous sub-regions such as Scandinavia.

The Tecsat-operated service in Brazil and the TdH DTH system in Argentina have struggled to survive but could do better in the future, given sufficient competitive resources such as exclusive, country-specific programming. It’s possible that regulators would require News Corp to hand over some programming as a condition of approving the merger. Latin American cable operators also are surging, and currently serve more than 15 percent of the region’s television households. In thinly populated areas of South and Central America, a moderately sized DTH platform could be an inexpensive way for a cable operator to extend its reach.

Seizing Opportunities

Caution and optimism go hand in hand in Latin America. Although the region’s worst years are well behind it, future disruptions on the same scale as 2002 cannot be ruled out. News Corp hedged its bets with flexible financial assumptions, strong local partners and in-house programming, while DLA chose a more rigid path. A diverse range of resources and options are helping Sky to seize market opportunities. The circumstances in Latin America certainly include formidable obstacles but also the promise of better days ahead. Instinctively believing in the region’s potential and taking action to tap it are helping News Corp to win the day.

Stephen A. Blum is a consultant specializing in DBS market research and analysis, and business development. He is president of Tellus Venture Associates and can be reached by e-mail at steveblum@tellusventure.com.

Latin American DTH Subscriber Growth Outlook
(Millions of Subscribers)
Year:
2003
2004
2005
2006
2007
2008
Subscribers:
3.4
3.7
3.9
4.1
4.3
4.5
Source: Tellus Venture Associates, all rights reserved


Latin American DTH Subscriber Growth Trends
Year
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Percent
385%
1%
44%
68%
20%
1%
7%
8%
7%
6%
5%
4%
Source: Tellus Venture Associates, all rights reserved
Live chat by BoldChat