Middle East pay-TV is at another crossroads. In March both Showtime and Arab Radio & Television (ART) re-launched their digital bouquets, while Orbit is about to switch from its so-called MPEG1.5 system to MPEG2-DVB transmission. Chris Forrester reports.

All three platforms are promising N-VOD services, tele-shopping, advanced EPGs and the like in the near future. ART, in its new Arab Digital Distribution guise, says its re- launch allows it to target the untapped middle ground.

Jeddah-based pay-TV platform ART is actively seeking new investors and has appointed New York-based investment bankers Lehman Bros to assist in the process ahead of a potential Initial Public Offering (IPO).

According to John Tydeman, president of ART’s distribution division his Arab Digital Distribution (ADD), ART’s main shareholder Sheikh Saleh Kamel is looking to create a broader base to the investor structure and at the right time the shareholders would like to float the company. “But the first step, which I can tell you has been well-received, is to widen the investor structure. The next step would be for the platform side of the business to be placed on the market,” says Tydeman. Saudi billionaire Prince Al Waleed bin Talal is ART’s other key investor.

“Sheikh Saleh’s idea has been to try and form alliances with key broadcasters, like [Beirut-based] LBC. We have an investment there but he has created a channel just for us [WOW]. Who knows what might happen following on from this. The [Egyptian Radio & Television Union] ERTU, a public sector broadcaster, is the same. Our shareholders are exploring these options and there are a number of potential investors looking at us at the moment. It also seems to me that one’s peer business groups are expressing their support and confidence in the shape of the business. Neither Sheikh Saleh or Prince Al Waleed needs partners, but as businessmen they want others to say ‘this is good, and can I be part of it’.”

Tydeman’s role is seen as crucial in the process, and it is no coincidence that his ADD division has been completely overhauled over the past year, culminating in a wholesale re-launch in March with new channels added, and a fresh pricing structure.

Tydeman explains his strategy, “In the past there was just one [ART] pot, which contained channels, buying, selling, programme-making, everything. So we have changed that, becoming instead more like a traditional pay-TV operator. We have put the channels into a channel company, selling their channels into a platform company that also offers third- party channels. What you end up with is the platform company, ADD, offering five different bouquets, and you can measure and monitor each of those bouquets.

“This is a simple explanation, but I can say with confidence that at least one of the bouquets will be breaking even within a couple of months, but with this sort of structure and with us negotiating and buying [channels] at an economic transfer cost from ART, the same way I would buy in a third party channel, the platform could be breaking even by the middle of 2002, assuming the piracy problem is resolved.”

As to numbers, he says ART had 60,000 full price DTH subscribers in the Middle East at the end of last year. “By the end of this year, I would like to be well over 100,000. But we have been late in getting things happening. If you take the beginning of the year we had Ramadan and Hajj together, we are in the middle of a major card swap-out and then we are in the middle of launching a new bouquet with all the teething problems that means. So instead of us starting on January 1, which was our intention, we were not really working at full steam until now, but I still see 100,000 as being achievable, in pure DTH.”

If Tydeman achieves this objective then his ART masters should be well pleased because so far they have had to suffer legendary losses ever since the initial five-channel bouquet was launched in 1994. Although to keep things in perspective it is also fair to say that Showtime and Orbit have also made significant investments in their platforms, and even the most popular free-to-air channels – like Middle East Broadcasting/MBC – are also still losing money.

However, back in the mid 1990s ART’s role was to take care of Arabic language programming in a loose duopoly with Showtime, which took care of ‘western’ programming. The relationship, under the ‘1st Net’ logo, was an informal one but sharing encryption and even joint marketing and distribution. Subscribers to one platform could pick and choose channels from the other on an a la carte basis. But other than their common encryption system (Irdeto) those days now seem over for good.

Tydeman has a unique insight into pay-TV generally and the Middle East in particular, given that during his career he has enjoyed senior positions at Zee TV, Showtime (he ran Showtime in its early days) and now ADD. Tydeman was also closely involved in the early days of Sky Television and SES/Astra.

Recently, Interspace posed the question that Middle East pay-television may be suffering much the same problems as in Germany, where a proliferation of free-to-air channels dampen enthusiasm for subscription TV. Tydeman agrees that the 40-odd free-to-air local channels have not helped pay-TV’s proposition.

“The Mid-East has a chance, especially if a number of the quality [free] channels become encrypted. If they don’t then it will be an uphill battle. But remember a number of free channels here are national channels, and we know how good they are! In Germany the situation is totally different with the free channels as good as anything that’s on pay-TV.

“In the Middle East you have three or four very good general entertainment channels, and I believe at least two of them will encrypt. Al Jazeera, the news station, will probably stay free, but nobody buys pay-TV just for a news channel. So you come down to the question: what drives pay-TV in the Arab world? My answer is the same that drives pay-TV anywhere else, which is movies and sport. You have to have movies, and that’s difficult in our market where the audience quite likes Hollywood movies but they are not in the local language, and sport. Visit any bar, or coffee house, anywhere in the Middle East when there’s an important soccer game on and the places are packed out.

“There is no doubt that sport is important, so important that they will go out, and pay for coffee to sit and watch a match, just to have access to a TV set. So the same model that works everywhere else will work here. The biggest obstacle is that there are three pay-TV propositions here, and this is confusing for the consumer with choices from us, Showtime and Orbit. The way we are trying to do this is to position ourselves in the market, quite differently, from the other two bouquets,” says Tydeman.

His theory, sketched out by him and reproduced on these pages, implies a past matrix with two polarised services skewing towards their base language, ART appealing to Arab viewers, Showtime targeting English speakers, and Orbit straddling that market with its all-embracing Arab and English-language channels. Star Select, largely made up of Star and BSkyB re-transmissions skews towards expat English and Asian viewers. The valuable mass market “middle ground” was being ignored, says Tydeman.

Now, bolstered by the issuing of next-generation Irdeto cards, he is talking of remarkable progress having been achieved over the past month or so. “Our approach to structuring was to put a lot of channels into the basic bundle at the lowest price we could manage, and then to have paths to sport, movies and top entertainment. The model assumes that most people will take the worst possible scenario. So we assumed only 20 to 40 per cent would buy the top-cost option, and 60% the low-cost bundle. Now, it is far too early to say with accuracy what is happening because the bundles have only been available for a month, but the indications are the opposite. If this is even indicative of where we are going then this is superb, and potentially takes a huge burden off [our] shoulders.”

But the “German syndrome” is still a worry. “In one sense you cannot say whether pay-TV will work in the Middle East because no one has yet offered an attractive-enough proposition at a price which is compatible with the lifestyle and living standards enjoyed by the local population. In the past I have tried to tell Showtime that what is needed, in an Arabic bouquet, is some Western programmes. You need Cartoon Network, and a CNN, and a Style or Fashion-type channel, and you need some international sport. You don’t need dozens of other Western channels because they won’t be watched. They are just niche.”

Which segued nicely into the whole question of local co-operation, and perhaps even merger between two or more platforms. Tydeman, like Showtime’s Peter Einstein and Orbit’s former president Alex Zilo, agrees that closer co-operation between the various Middle East pay-TV platforms would be welcome.

“As far as today’s situation is concerned there has been much sensible discussion and the situation that has been achieved is good,” says Tydeman. “There is a strong desire between the people using the same technology, that is Showtime and ourselves, to have technological, back office and subscriber management systems that are common to both. There is much more uncertainty over moving forward to what Peter Einstein has called sensible dialogue on greater levels of co-operation.”

It seems that ART’s new-found economic realism, especially with fresh cash in its pocket, may delay any possible link-up. “The reality is that levels of discussion towards that have taken place, and at the moment that sort of collaboration depends on two events. Either the parties are so close to going under, like Sky and BSB in the UK ten years ago when they had to get together, or else that the players see no other solution than to come together.

“But there are plenty of markets that have competing systems, like in Australia, France, Italy and Spain, although I admit they don’t have three competing systems! In some sense our three systems are not directly competing with one another. To move towards a common platco you have to get people to move away from the history, the egos…And besides, it might not even be the most sensible outcome for our market.

“The one thing I can say is that my shareholders have shown a high degree of flexibility and business common sense which is as enlightening as the best Western model. They want a viable business and whilst there may be an element of unprofitability on this or that channel as a loss-leader, and one can afford to do it, then so be it.”

GRAPH: Before: Middle East – Old Pattern

GRAPH: After: Middle East – New Pattern