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Analyst Insights Faultline: Latin America swings to satellite as TV subs explode
Nov 10, 2011 – Rethink Research

Beneath the fog of fluctuating exchange rates and some little local difficulties, the round of Q3 results confirm Latin America’s status as an emerging pay TV powerhouse with big aggregate increases in subscription levels. The other headlines are a continued fairly rapid swing towards satellite across the continent as a whole, and a healthy increase in ARPU (Average Revenue Per User). The trends are very much in line with predictions made in Rethink Technology’s Latin America Report and Forecast published early in 2011, with our seemingly optimistic outlook now appearing conservative in Brazil, the region’s biggest economy by some distance.  
 
Indeed Brazil ended September 2011 with 11.9 million subscribers according to the country’s regulator Anatel, already well ahead of Rethink’s prediction of 11.4 million by the end of the year. This represents phenomenal growth in subs exceeding 30% over the whole year from September 2010, with 780,608 added during Q3 2011. Of these additions 650,000 were satellite, highlighting the massive performance of that sector across the whole region. By contrast cable was generally fairly flat, while IPTV performance is patchy, with growth in some countries such as Venezuela increasing its share of overall Latin American subscriptions from 1% late 2010 to just under 2% by September 2011.  
 
The top four countries, Brazil, Mexico, Argentina and Colombia, between them account for about 83% of the overall Latin American pay TV market. The region is also dominated by relatively few big operators, with just two significant players on the satellite front DirecTV and Dish Networks. The cable side is characterized by large numbers of small local operators in some countries, but with the lion’s share of subscriptions taken by a few big national operators, such as Cablevision in Argentina, which is 60% owned by the country’s Group Clarin media group, Televisa in Mexico, and NetServicos in Brazil. For IPTV, Spanish Telco giant Telefonica is one to watch in several of the countries, even though so far it is only a fairly minor player for pay TV in most cases.  
 
The recent financial fates of the big national cable operators reflects the squeeze imposed by the two big satellite operators, especially DirecTV. In Brazil, cable operator Net Servicos is still the market leader with around 4 million pay TV subscribers in Q3 2011, up from 3.6 million a year ago. The company has not revealed the latest subs numbers, but we can infer them from the 24% year on year growth in overall revenues from BRL 1.381 billion ($787 million) Q3 2010 to BRL 1.715 ($978 million) billion in the third quarter 2011, combined with Net Servicos claim of a healthy increase in sales of high end HD packages. But despite this Net Servicos profits were 67% down at BRL 23.6 million, largely reflecting recent depreciation of the Real against the dollar in which the company’s debt is calibrated. It also reflects the growing heat being felt from DirecTV, for the gain in subs has to be seen against the background of the faster expansion of the satellite sector.  
 
This continues a strong trend that really picked up two years ago at the start of 2010, when satellite had 37.4% of the Brazilian pay TV market and cable 57.9%. By the end of 2010 the respective figures were 45.8% and 51.0%, and by September 2011 DTH had overtaken cable and taken more than half the market, 52.7% against 45.1%. The Rethink Technology forecast predicts this trend continuing with satellite accounting for twice as many subs as cable by the end of 2014.  
 
The strong performance of pay TV, especially satellite, can be explained by several factors, notably the continuing growth of the Brazilian economy despite a few recent wobbles, and the fact it is coming from a lower base than either Mexico or particularly Argentina. Another factor is the all round strength of DirecTV, the world’s biggest pay TV operator, which is advancing in most of Latin America through a combination of marketing muscle, provision of premium content gained via both global and local deals, and in some markets attractive advanced services such as home DVR.  
 
DirecTV Latin America revenues were up 45.8% at $1.356 billion for Q3 2011 compared with a year earlier, while profits rose by a similar ratio from $313 million to $434 million. The latter reflected both cost reductions and an increase in monthly ARPU from $58.20 to $64.63 over that period through price increases, greater penetration of advanced services, and favorable exchange rates in Brazil.  
 
One consequence of this rapid growth is that around mid 2011 Brazil overtook Mexico as the region’s biggest pay TV market in terms of subs. Mexico has been in the lead for some years on account of its higher pay TV penetration, currently 40% of households. This has more than compensated for Brazil’s greater population, 195 million against 113 million for Mexico.  
 
At the start of 2011 Mexico had 9.67 million pay TV subscribers compared with Brazil’s 9.0 million, but by September 2011 Mexico was around 600,000 behind at 11.3 million. Even so Mexico is still growing fast in pay TV and will continue to do so, while mirroring Brazil’s swing towards satellite. June 2011 is the last month for which we have hard data on the comparison between cable and satellite in Mexico, with 5.503 million subs for the former and 5.09 million for the latter. With satellite growing at about four times the rate, it is poised to overtake cable around the end of the year in line with Rethink’s earlier prediction.  
 
This has left Sky Mexico as the main beneficiary, being the country’s biggest satellite operator, gaining 238,000 subscriptions in Q3 2011, heading for around 3.6 million by the year end. Sky Mexico represents DirecTV’s interests in the country just as a minority shareholder in this case with about 41%, the rest being held by multimedia conglomerate Grupo Televisa. In fact Sky Mexico’s overall performance was affected by a dispute between the majority holder Grupo Televisa and companies controlled by Mexican multi-billionaire Carlos Slim, the world’s richest person. This deprived the group as a whole of advertising revenue, although the effect was to peg the rise in that to 2.4% when it would have been greater. As a result the group posted a 6.8% fall in net profits for Q3 at 2.05 billion pesos ($148 million) compared with a year earlier. Revenue rose 8.1% to 15.96 billion pesos (1.18 billion).  
 
On the cable front, Megacable, now the country’s second biggest pay TV operator behind Sky Mexico, typifies this sector with relatively modest growth in the context of the pay TV sector as a whole of 7% year on year to reach 1.864 million subscribers by September 2011, still losing ground. In fact the gain was achieved by increasing the footprint, with penetration rate as a proportion of homes passed falling from 34% to 33%. Profits were similarly flat, up just 0.2% net at 393 million pesos ($28 million) for the July-September period.  
 
However the company hopes its agreement with Telefonica in October 2011 to launch a joint mobile service in Mexico will stimulate subs. It turns Megacable into a quad play operator, with access to Telefonica’s 20.6 million cellular subscribers, many of which are outside its cable footprint. More immediately there is the hope that quad play bundled will increased cable TV penetration within the footprint. Megacable is in charge of marketing, sales and distribution for the new venture, which will operate as a virtual mobile network operator, or MVNO, over Telefonica’s mobile network.  
 
Across in Argentina the dominant cable operator Cablevision is also struggling to gain subscriptions, but there the resemblance with other countries of the region ends. Argentina has not only Latin America’s but the world’s highest pay TV penetration rates of nearly 80%, or around 7 million subscribers. This means the market is saturated and therefore growing only sluggishly now. The high penetration has been achieved largely by extensive cable distribution in the country’s urban areas of Buenos Aires, Cordoba, Santa Fe, San Juan and La Rioja and Mendoza, which account for most of the population and an even higher proportion of pay TV subscribers. Given this background cable TV will remain the dominant pay TV distribution medium even though satellite will make some inroads, with DirecTV the main threat, standing at just over a million subs in September 2011. By comparison Cablevision is now on almost 3.3 million, just slightly up over the year. But Argentina also differs from other countries of the region in the large number of subscribers accounted for by small cable operators often covering just one town or locality. These, of varying sizes, account for about 2.5 million subscribers, with the main trend being consolidation between them, at least over content.  
 
Indeed content is seen as critical in the developing fight for eyeballs between these smaller cable operators, as well as Cablevision, and DirecTV. The latter believes it must pull its finger out on the content front if it is to exceed the growth in market share predicted by analysts such as Rethink Research, which although significant, is modest compared with the other leading markets of the region. Satellite capacity has become rather an inhibitor, leading DirecTV in October 2011 to launch a hybrid receiver and satellite set-top box for Argentinean viewers. The idea is to supply a DTT (Digital Terrestrial) tuner in order to receive terrestrial signals alongside DirecTV’s portfolio of satellite transmissions. The device, now being tested, will integrate up to 15 DTT channels directly into the service’s EPG. At the same time DirecTV Pan Americana serving countries of the region including Argentina but excluding Brazil and Mexico, has already leased extra capacity on board two satellites to be launched by Intelsat in 2014 and 2015.  
 
Colombia, with population of 46 million, is Latin America’s fourth largest pay TV market. Despite lagging behind Brazil, Mexico and Argentina in broadband penetration, it compares much more favorably for pay TV. By September 2011 there were 3.74 million subscribers, up 10.6% from 3.4 million a year earlier, according to the regulator Comisión Nacional de Televisión (CNTV). This is about one third of households, which is a higher penetration rate than Brazil and not far short of Mexico.  
 
On the face of it this position reflects Colombia’s status as the fourth largest economy in Latin America, but this fact masks extreme divisions of wealth with 46% of the population below the poverty line. This in turn is linked to the history of pay TV in Colombia, with EPM Telecommunications (UNE), the country’s second biggest cable operator also offering IPTV, being state owned, having gained market share in the latter by setting artificially low prices.  

UNE has slowly been gaining ground on the market leader, cable operator Telmex Hogar, which like most other big cable operators is almost flat lining with subs at 1.78 million in September 2011, 4.1% up on the 1.71 million a year earlier. Subs at UNE by contrast rose 11% from 881,000 to 998,000, with, as elsewhere, DirecTV also showing some form with subs up 18.3% from 345,000 to 408,000.  
 
The latest crop of results and data from regulators among others confirms that the boom in Latin American pay TV that started in 2009 is continuing and even gathering pace in some of the countries, including Brazil the biggest, which has furthest to rise from a low base. At the same time ARPU is also increasing, making pay TV generally more lucrative in Latin America than many others regions including much of Asia Pacific, and especially both China and India. The downside perhaps is that power is being concentrated among a few big players, such as DirecTV and Dish, along with Telefonica, which are benefiting from the boom on a continent wide basis. The cable market is much flatter, but the big players are still chugging along nicely. In the case of IPTV, much of the growth so far has come in Venezuela and Colombia through government initiatives, but that is going to change with interest in emerging 4G mobile services after completion of relevant spectrum auctions in several countries. This is seen as an opportunity by some cable operators to break out of their footprint by teaming up with mobile operators, as Megacable is doing in Mexico.

Courtesy Rethink Research.



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