ASTRO COO Looks To Ride PVR Growth

Astro All Asia Networks (ASTRO) intends to amass around 2.5 million satellite TV subscribers in Malaysia during the next four to five years. The DTH (direct-to-home) satellite operator, which currently is the only pay-TV provider in Malaysia, already has around 6 million viewers in 1.4 million subscriber households and plans to build that customer base steadily through 2009.

David Butorac, COO of Astro, told Satellite News in an exclusive interview, “We will continue to grow the platform in terms of channel numbers and invest heavily in the growth of programming. By doing so, we anticipate we will grow the platform in terms of penetration.”

The company has told the investment community that it aims to add between 250,000 and 300,000 net subscribers per annum over the next four to five years. That growth would put the company on a pace to achieve its 2.5-million subscriber goal and represent a 45-percent penetration of the Malaysian market.

The operator has been profitable during the last three quarters. In its first-quarter results, it reported after-tax profits of $5.2 million on revenues of $103 million.

Butorac hopes the launch of a new satellite next year will enable it to expand its services to consumers. “The satellite we operate on at the moment is called MEASAT 1, which is Malaysia’s first DTH/communications satellite. We take four Ku-band transponders on that,” he commented. “We currently offer over 50 TV and 16 radio services on those transponders. We have a relatively limited amount of satellite capacity left, but MEASAT 3, the sister spacecraft, goes up in the same orbital slot, early to mid next year. What we will be doing is expanding our channel offering from that point onwards with a mixture of more general entertainment channels but also more premium content, such as Pay-Per- View (PPV) and Near Video-on-Demand (NVOD) services.”

Initial Public Stock Offering

Last year, the operator completed its stock listing on the Kuala Lumpur Stock Exchange. It reportedly was the largest initial public stock offering (IPO) launched in Southeast Asia, raising $526.3 million. IPOs in the pay-TV sector are something of a rarity these days, so the success of the Astro offering indicates a healthy interest in DTH and pay-TV businesses. The company has an exclusive DTH license that will last for another 13 years.

Malaysia has a population of around 18 million people and Astro plays a key role in bringing the benefits of a digital lifestyle to consumers. However, does the fact it is only pay-TV service in Malaysia mean that consumers are potentially losing out due to the lack of competition? Butorac doesn’t think so.

“What we have in Malaysia is a landmark platform that launched digital way in advance of most major markets around the world. It has created a business environment where international and domestic investors gets to see a return, and the Malaysian consumer gets amongst the lowest cost multi-channel subscription services in the region,” he told us. “The Malaysian consumer has benefited from the fact that there has not been the price inflation that always goes hand-in-glove with competition. To be perfectly blunt, the platforms never carry the costs of increased programming charges; they simply pass it along to the consumer.”

The New Competitor

But that situation is changing later this year when MiTV Corp is likely to launch a new pay-TV service in Malaysia. The platform will be based on digital terrestrial technology. However, due to Astro’s dominant position, it is questionable whether the operator will be able to put that much pressure on the incumbent. Chris Sanda, a media equity analyst at DBS Vickers Securities, believes the new pay-TV offering will struggle. In particular, in the area of content, Astro has a sizeable competitive advantage.

The odds seem very much against MiTV making an impact. Astro is already well-penetrated into the market, and it appears to have a major content edge. It will be interesting to see whether MiTV can prosper and make Malaysia a dynamic two-player market in pay-TV.

“One huge issue is content availability. MiTV has said they will have a broad spectrum of international channels etc.,” Sanda told Satellite News. “Astro has exclusivity contracts on Disney, AXN, National Geographic, ESPN, Nickelodeon, Star Sports, TVB 8, Phoenix and Hallmark. Some of these are category-killers and, when you don’t have them, who is going to watch? [Astro] has category -killers in sports, music, education.”

He continues, “They only things they are missing are Discovery, HBO, CNN, BBC and Cinemax. MiTV has spent $10 million on a studio but that doesn’t buy that much. I also think consumers are very savvy. They have been watching TV for a long time, and they know high quality from low quality. You can’t really fool them through underinvesting.”

Claire Chin, a media equity analyst at RHB Research, agrees. “We don’t think MiTV will make significant inroads into Astro,” she told Satellite News. “Astro has tied up many exclusive content deals over the next two to four years. They have around 50 channels. It will not be easy for a newcomer to come in and offer a pay-TV service in Malaysia because Astro is in a strong position in terms of content.”

As well as content advantages, Sanda believes other competitive dynamics are in Astro’s favor. He added, “Astro already has penetrated 50 percent of the Chinese market, 50 percent of the Indian market and 18 percent of the Malay market.”

Astro’s lineup of executives is a ‘Who’s Who’ in the Asia pay-TV world, Sanda says. Satellite also is the most cost-effective way of selling TV, Sanda adds.

Good Value

Despite the lack of competition so far, Butorac says the Astro service offers great value for the consumer. “Six years ago, Astro had 22 channels, and the average revenue we were getting from each of our customers was about $21. Today we have over 50 channels, and the average revenue we are getting from consumers still is about $21,” he said. “So the consumer in Malaysia is essentially seeing flat prices but an explosion of growth and choice, principally because we are able to create a strong platform for being the sole operator.”

The choice is essential in a market where the dynamics are unique. In essence, there are three separate markets. Around 50 percent of Astro’s customers are of Chinese origin, about 30 percent are Malay, and the remainder are Indian and other races. In terms of catering to different areas of the market, Butorac commented, “It is relatively easy to find Cantonese/Mandarin programming from Hong Kong and other Asia markets. Conversely, there is a limited amount of programming available in Bahasa, as there are only two major Bahasa markets: Malaysia and Indonesia. Around 50 percent of the programming we produce ourselves is Bahasa programming.”

He continued, ” In terms of the southern Indian/Tamil language, there is a lot of content availability from India. We package our key Indian channel ourselves. In the future, we can see ourselves adding additional channels into the Indian market.”

Tai Kin Chiew, a media equity analyst at Mayban Securities, believes attacking the Malay market could be the next line. “The way forward for them right now is to conquer more of the Malay market, which has a lower penetration rate,” he pointed out.

In terms of overall programming costs, Butorac believes the operator has managed these effectively. “Our programming costs run at about 30 percent of revenue at the end of the first quarter,” he said. “We have been able to manage our programming costs down, principally because we have had such accelerated subscriber growth, and revenues are up. We are committed to continue to invest heavily in programming, because that is what drives subscriber numbers.”

Programming is a key element of Astro’s strategy. It has nine studios that produce programming. Net of news programming, it produced about 800 hours of entertainment programming in 2003, and this year that figure is like to go well-over the 1,000-hour mark. It also has eight or nine branded channels.

PVR Service

As well as being an aggressive provider of local content, Astro also expects to launch a PVR service in 2005. “We certainly see that PVR technology does and will change the way people watch television, and we aim to be at the forefront of that technology here in Malaysia, Butorac said. “We expect to launch PVR on our platform by the middle of next year, and we will use that to drive additional premium revenues from PPV and provide a platform that expands the capacity for the viewer to enjoy the whole multichannel experience. In terms of business models, there are some differences in the market place. Our model will be slightly different to others, such as BSkyB, Canal Satellite, EchoStar or DirecTV, where there is more substantial penetration of PVR.”

One of Astro’s other major challenges is to get a grip on piracy, which has been an issue. Regarding the impact smart-card piracy is having on its operations, Butorac commented, “In Malaysia, the trafficking of clone pirate cards is a criminal offense, not a civil offense, so penalties are much tougher. We also get great assistance from the Malaysian government in cracking down on any illegal activities. We are currently using the first version of MediaGuard as our CA system. It is a system that has been compromised. We do see some low level activity in terms of clone cards in our market place.”

In light of that, is Astro considering changing its CA system? “We’ve got 1.5 million boxes deployed in the market place. Any change of the CA system is a fairly major task,” Butorac explained. “One of the reasons why we chose MediaGuard and MediaHighway is that we were operating with a single technology partner. However, since the sale of Canal+ Technologies from Vivendi to Thomson and the subsequent sale of MediaHighway and MediaGuard to NDS and Kudelski, respectively, we now work with separate CA and middleware providers, which is not ideal.”

Analyst Chiew added, “They are still suffering from piracy issues. They will try and come up with a new card or technology to prevent piracy.” Analyst Chin said, “I think they have pretty much achieved their targets in terms of subscribers, but sometimes that does not translate into profits and losses, given there is also a piracy issue. There are clone smart cards being used in the market.”

Future Market Changes

The overall market will change in Malaysia. “We will continue to see growth and new penetration as we continue to offer increasing relevance in terms of our programming and channels. I think the key issue that confronts all television platforms is piracy, and we continue to take steps to eradicate that,” Butorac told us. “The most important thing about multichannel television is not the technology, the most compelling thing is choice, and digital is an enabler for us to offer greater choice. The consumer buys a quality of service. We will continue to grow the quality and variety of that service to continue to grow the penetration.”

–Mark Holmes

(Catherine Chin, Astro, e-mail, [email protected]; Chris Sanda, DBS Vickers Securities, 011 00 65 6398 7966; Claire Chin, RHB Research, 011 00 60 3 9280 2186)