It is set to be a busy year for DirecTV Latin America as the company tries to get back on track in the pay-TV markets of Latin America. The operator filed for Chapter 11 bankruptcy protection in 2003 and is now in the process of looking to grow the business again. The man with the responsibility of leading DirecTV Latin America to a profitable and prosperous future is Bruce Churchill, who was recently appointed president of the company.

In an exclusive interview to Satellite News, Churchill admits to International Editor Mark Holmes that a number of mistakes have been made in the past, but he is confident that the operator has a bright future as it looks to follow the technology roadmap of DirecTV in the U.S.

While DirecTV Latin America was emerging from bankruptcy, the market underwent significant changes. In October 2004, the DirecTV Group announced a series of transactions with News Corp, Grupo Televisa, Globo and Liberty Media, which combined the DirecTV and Sky platforms into one direct-to-home (DTH) platform in each of the major territories served in the region.

The challenges are now about boosting revenues and subscriber numbers in markets such as Brazil. It will be a tough challenge, but one Churchill is relishing. Here, he outlines his blueprint for success for satellite pay-TV in the region.

Satellite News: How many subscribers do you have in Mexico? How are you looking to grow this figure in 2005?

Churchill: In the case of Mexico, we sold our subscriber list to Sky Mexico. We are in the process of migrating subscribers from the DirecTV platform to Sky Mexico, but we cannot force people to migrate. We have to sell them on the concept, which we are doing. We have more than 100,000 subscribers that are in the queue and have agreed to be migrated. We would hope to somewhere in the range of 170,000 subscribers The Sky platform already has more than one million subscribers. I think it is planning to end the year with 1.3 million, which would include the DirecTV subscribers. That is ongoing. In the course of the year, we would close our transaction, where as a result of migrating those subscribers we receive equity in Sky Mexico. That is 15 percent of equity assuming we reach our 170,000 target. In addition to that, DirecTV will be buying News Corp’s stake in Sky Mexico and Televisa and DirecTV will be buying Liberty’s stake as well. When everything shakes out, you will have a platform that is roughly 55 percent owned by Televisa and 45 percent owned by DirecTV. It should all get done in this year.

Satellite News: Which of the three markets you serve–Mexico, Brazil and Pan-Americana (everything else in Latin America, with the key territories being Puerto Rico, Venezuela Argentina, Colombia and Chile) will offer the most opportunities for subscriber growth going forward?

Churchill: It is difficult to say. I think Mexico today is a success story. Brazil is not a success story to date. Certainly, Sky has done better than DirecTV, but as an industry penetration, rates are still relatively low. I see more upside in Brazil, not because Mexico is not attractive. It is just that Mexico has been better at penetrating the potential market as opposed to Brazil. In Brazil, the two platforms combined have something in the order of 1.2 million subscribers. That process will take a little longer to get done. There is a more formal government approval process that is required. As a result it is more difficult to predict how many subscribers will migrate. We hope to have formal government approval by the end of this year, so we are really looking to 2006 as the year when we merge the platforms and go to the races. I think that one has a lot of potential.

Satellite News: What is the focus in terms of new service launches in 2005? How will you look to expand the offer this year?

Churchill: We have to get the consolidation done. As we do that, we have to get back to basics. It is getting the programming line-ups where they need to be, getting the marketing where it needed to be. We haven’t talked about pan-Americana so far, but that is a platform where we have ended up owning 100 percent of so far. Because there was only overlap in two territories, Chile and Colombia, we really have been able to start the process already. We recently launched a new look and feel for the programming. It is more user friendly. It is more mosaic based. We have reorganized the channel line-ups so that all the genres are grouped. We have relaunched the service in Chile.

What you have to remember is for the most part, that most of these businesses were not benefiting from a lot of investment and aggressive management because the market was so bad. The economies were bad. DirecTV Latin America was in bankruptcy until last February. The Sky platform was a second tier consideration in the broader News Corp/DirecTV deal and was something we were always going to get to. It hasn’t had the attention the U.S. business has. I think what we did in 2004 with the U.S. business in terms of laying out the technology roadmap, getting our programming straight, rethinking the marketing, we will be doing here in 2005 and it will really take off in 2006.

Satellite News: Despite the economic factors in previous years, is there a sense that the company has underachieved in the region?

Churchill: I don’t think anybody on the DirecTV side would be happy with the performance of DirecTV Latin America historically. I think you would find with the possible exception of Mexico that people are not happy on the Sky side either. I was not around, but I imagine by looking at what the original projections were for some of these territories and where we are today, I would be pretty confident in saying those objectives have not been achieved.

Satellite News: Can the success in Mexico be translated elsewhere?

Churchill: We think it can, otherwise we would not be making this investment. Clearly, the advantage of consolidating the platforms will have a big impact. We have seen in other parts of the world, such as the United Kingdom or Italy, that once you have a single platform or a single proposition that you can market to consumers in a clear and simple way, DTH becomes a much more viable competitor to cable. In my mind, when you have two DTH platforms in a market, you are not actually splitting the same pie, you are splitting a smaller pie because you always have people on the side who have either been confused as to what is happening in the market place or sitting around waiting for the next best offer from a DTH company. When it is a unified offer, people understand it, you can really market and demonstrate the advantages of satellite and you are just a much more effective competitor. I think that will have a big impact on our position in all of these markets. You are seeing in a macro-economic sense, a much more friendly environment in many of these countries, particularly Brazil and Argentina.

Satellite News: With News Corp-owned platforms known for their innovation within interactive services, will DirecTV Latin America be taking a more aggressive approach towards interactive services in the region? Do you think the consumer will embrace interactive services the way they have been in the U.K.?

Churchill: Absolutely. One of the cornerstones of our strategy is to get DirecTV Latin America on the same technology roadmap as DirecTV U.S. It is probably a little surprising to find out that was not always the case. It presents a few challenges as the Sky platforms have a different broadcasting technology but I think we will be able to get there.

The core concept is that we will just exactly follow what the United States does and take advantage of the economies of scale that the U.S. business creates. For example, the last set of set-top boxes (STBs) that DirecTV Latin America bought were almost twice as expensive as the boxes the United States gets today. So, we are just going to go to that STB that DirecTV U.S. uses. As a result it will have all the functionality that the U.S. business is building into it to be competitive in the U.S. market and we will just follow right through in Latin America.

Satellite News: Considering the company previously filed for Chapter 11, what makes you sure the platforms are destined for success in these markets?

Churchill: The advantage of coming out of bankruptcy is that we were able to do a lot of things that perhaps should have been done some time ago. For example, most if not all of the programming contracts are in local currency, which has a big impact on the performance of the company because obviously your revenues are in local currency. As these currencies are not necessarily strong against the U.S. dollar and your costs are in dollars, which creates problems. We are trying to put as much of our costs in local currency. That means either providing local programming contracts and moving a lot of the functions out of the U.S. and into the region, which is now largely done. The only large dollar exposure we have is the satellite segment, which is not insignificant. We also have a small overhead for broadcast operations and administration. It is much smaller than before. So, I think we have taken those steps where even if some of these economies hit a bumpy period, we will be able to ride through a little better than we have in the past.

Satellite News: How are you looking to boost Average Revenue Per User (ARPUs)?

Churchill: I do not think our business plan will lead to huge increases in ARPU. We are already a premium priced product, particularly against cable. We are not counting on huge increase in ARPU. We have a premium product with a premium subscriber base. There is an opportunity for us to have some more premium services, when we have higher penetration rates in some of these markets. I am not just talking about premium channels. I am talking about DVRs (Digital Video Recorders), more PPV (Pay-Per-View) channels and that kind of things. PPV has been around for a while. We have not aggressively marketed it for a while, and on the DVR side, there is a DVR available in Brazil, but that has not been widely adopted. It is a virtually untapped market.

Satellite News: When will you look to ramp up your DVR plans?

Churchill: We probably will not be aggressive on this until next year. It depends on where we are with some of this consolidation. In Latin America, the model would not be one of giving them away, or selling them in a heavily subsidized way. I think initially it would be viewed as a premium product that we would sell, largely at cost to the consumers and taking it from there. We certainly would not be doing anything particularly aggressive this year.

Satellite News: In terms of overall revenues, what percentage does programming costs account for?

Churchill: They account for about 40 percent of overall revenues. It depends on what territory you are talking about. We don’t have quite the economies of scale that DirecTV U.S. has. I think that the reason why Sky was a more successful platform in Mexico and Brazil is that it had better local programming. The advantage of consolidating the platforms is that we are now partners with the key local programmers in those markets, Televisa in Mexico and Globo in Brazil. We will try to beef up our local programming effort. We have added local channels in a few of the territories. We start to free up satellite capacity once we have migrated our subscribers from Brazil and Mexico off our satellite onto the Sky satellite, we will be looking to add more local programming in some of the other territories.

Satellite News: What are the major capital expenditures challenges facing the company?

Churchill: They are not huge. If anything, we have an excess of infrastructure by combining two platforms so the biggest expense is the migration costs, which is a little above $100 million that would be borne by the platforms. Once you get through that migration, some of which will start to occur this year, some of which may occur next year, there are no huge capital costs associated with the Latin America business because we lease our satellites from Panamsat, a lot of the development work will be done out of the U.S. and we will just benefit from that. We have broadcast centers in Miami and California. We will look to consolidate those. If anything, we are OK on the infrastructure side.

Satellite News: What are the major challenges for the company for the next 12 to 24 months?

Churchill: The migration issue is obviously a pretty big one. I think from there it is about reinventing a business and putting together a compelling product for the consumer, marketing it and executing it in a way that can stand out in the market. There are a lot of challenges on the ground in these countries in providing the quality of service that is integral to the DTH proposition. It is harder than maybe in the United Kingdom and the United States. Here the phones do not always work, the roads are not always paved, etc.

(Robert Marsocci, DirecTV, 310-964-4656)