While pay-TV providers across CEE have been hit by the financial crisis, most believe there is still plenty of scope for growth, while consolidation and convergence present further opportunities. Stuart Thomson & Graham Pomphrey assess operators’ strategies.
The TV distribution business across central and eastern Europe remains more fragmented than that of western Europe. In terms of infrastructure, TV distribution in CEE has traditionally been via cable or over-the-air analogue TV. Cable remains the primary infrastructure for multichannel TV, although in a number of markets it has faced strong and determined competition from DTH providers. IPTV operators, on the other hand, have generally struggled to make a great amount of headway in the region (exceptions include Croatia and Slovenia). The failure of telcos to make much progress has led a number to look to DTH to extend their base, and DTH has been the fastest growing distribution technology across the region. Players including Romtelecom in Romania (Dolce TV), France Télécom-owned TPSA in Poland, Magyar Telekom in Hungary and Slovak Telekom in Slovakia, and cable operators including RCS & RDS in Romania and SBB in Serbia have turned to satellite to deliver services outside the reach of their terrestrial networks, including internationally.
Growth across the region has remained relatively strong, at least up until the recent economic crisis. DTH subscribers across the region more or less doubled over the two years from 2007-09, while IPTV subscribers trebled (but from a much smaller base).
“We think pay-TV is an interesting sector, both in cable and DTH,” says Robert Knorr, a partner with private-equity group Mid Europa Partners, one of the leading international investors in the region, whose assets include the South-East Europe (SEE) group of companies comprising Serbian cable operator SBB and its DTH subsidiary Total TV, Slovenian cable operator Telemach and Bulgarian DTH provider ITV Partner. Mid Europa’s other assets in the region include Polish cable operator Aster. Knorr says he believes the pay-TV market is a more promising investment opportunity than free-to-air TV, where prospects are less certain.
“In south-eastern Europe there are a number of opportunities and possibilities in terms of consolidation,” says Knorr. Other territories including Hungary and Romania are more complex because of the existence of a large number of players, while the Czech Republic and Slovakia are essentially mature markets. Poland remains interesting as a market where consolidation is a distinct possibility. He says that Mid Europa takes a flexible approach to deciding when is the best time to exit a particular territory, depending on the particular market circumstances.
The SEE group is the market leader in the countries of the former Yugoslavia, where Mid Europa has taken the role of consolidator. Knorr says that this provides synergies both in the realm of procurement of equipment and in the form of relationships with international and – particularly – local content providers, enabling the operator to have content produced specifically to meet its requirements. “If you don’t have local content it’s hard to have a local platform,” he says.
For Knorr, the economic crisis has had relatively little impact in terms of the number of subscribers and ARPU. The major challenge currently facing the company as a result of the downturn is at the macroeconomic level: the decline of the value of the Serbian dinar and the consequent disparity between the value of dinar-denominated revenues and dollar and euro-denominated costs. “We have to look at how to offset that,” he says.
In strategic terms, Mid Europa has sought to build triple- and quad-play offers in the territories in which it operates. After acquiring Poland’s Aster it invested significantly in the operator’s telephony platform to build it into a genuine quad-play provider. “We developed it into a proper service that people actually use – that was the challenge,” says Knorr. In Slovenia, Mid Europa acquired a platform that already offered triple-play and then replicated what it had done in Poland by creating a mobile virtual network operator (MVNO) arm. Sometimes, however, regulatory and political hurdles stand in the way of the multi-play strategy, as Mid Europa-owned SBB found in Serbia, where it was excluded from bidding for a licence to operator an alternative fixed telecom network (the licence was acquired by Telenor). In this case, creating an MVNO could serve as an alternative strategy. According to Knorr, Mid Europa could look to tie-ups with mobile operators (who are also looking to offer video services) in territories where it operates DTH-only platforms.
In many countries, DTH remains the big success story. “In central and eastern Europe, DTH is increasingly popular and as more HDTV channels enter the market, we expect demand for our services to continue growing steadily,” says Ori Onn, chief operating officer of Israel-based satellite operator Spacecom, which provides capacity for a number of the region’s DTH providers. “Spacecom sees prospects for growth to remain positive as communications and entertainment are popular and with sports, news and other forms of entertainment growing, our market will too.”
Despite the economic challenges of the past two years, Onn remains confident about future prospects, despite the multiplicity of providers in countries including Romania. He argues that the region – in particular south-eastern Europe – remains relatively underprovided for. “We believe that there are still areas within central and eastern Europe which are underserved and present growth potential in satellite communications,” says Onn. “Specific areas include the Balkan area and Ukraine. In these markets, the competition on DTH platform is still open and we are working to position ourselves to be important player.”
Onn points out that Spacecom plans to add further capacity to serve the region, with the Amos 6 satellite scheduled for launch in 2013. With demand for bundled services growing, and operators also looking to use whatever distribution technologies they find to hand to increase their reach, flexibility is key. “DTH operators are taking advantage of these trends in communications to beef up their service offerings, and we are working to enable them to combine satellite with broadband internet, telephony and VOIP, IPTV and mobile services,” says Onn. “Offering more options with our services augments their business and this is something we are happy with because they are complementary to our business. You need to remember that as service offerings grow, transportation methods merge or combine to make communications more effective and all encompassing and this is good news for the Amos constellation, as well as for the entire industry.” Onn says that the business practices of the region are increasingly in line with those of western Europe, although working through local partners and establishing strong personal relationships with customers remains relatively important.
“Pay television turned out to be a good alternative to other entertainment forms, which Poles may have had to give up in times of economic downturn.”
Dominik Libicki, Cyfrowy Polsat
Telenor Satellite Broadcasting’s (TSBc) presence in central and eastern Europe is also growing thanks to the expanding amount of capacity at the 1° West location. TSBc owns and operates three satellites – the soon to be retired Thor III, Thor 5 and Thor 6, which, along with capacity on Intelsat’s 10-02 satellite, broadcasts over 250 channels. In total, 36 transponders are available for coverage over central and eastern Europe, 10 of which have been sold to Intelsat. “One of our key strategies, along with Intelsat, is to make 1° West the leading satellite position in the region,” says Telenor TSBc CEO Cato Halsaa. “We’re well set for future growth with capacity on Thor 5 and 6. As our sales have been better than planned, we’re looking into adding more capacity to the region.” The vast majority of CEE households pointing to Telenor’s satellites have come from UPC Direct, Romanian DTH platform Digi TV (served by Intelsat, which shares frequencies at the 1° West orbital slot with Telenor) and UPC’s Romanian DTH service Focus Sat. These platforms represent a total of some 2.5 million homes. With so much business coming out of Romania, Telenor might be concerned that consolidation is inevitable. Not so says Halsaa: “I don’t know what will happen in the region. In western Europe it is generally thought that you can only have one operator per country. But look at the Nordics where we’re been happily working with two operators – Canal Digital and Viasat. People said consolidation was inevitable in the Nordics but it didn’t happen.” The growth potential in the CEE region is significant, according to Halsaa, with more HD channels in particular likely to launch. “We’re seeing more channels launching in central and eastern Europe and HD has barely started. HD growth will drive the region,” he says.
Intelsat, as well as sharing the 1° West slot with Telenor, is one of the latter’s major customers for additional capacity on the new Thor 6 satellite at the same position. Intelsat recently added Ukrainian entrant MYtv to its base. “1° West has also become a strong neighbourhood for cable distribution,” says Peter Ostapiuk, regional vice-president, North American media solutions at Intelsat. June saw the launch of a four-channel HD service by DigiTV owner RCS & RDS. Rival Romtelecom has also just launched an HD service on its Dolce platform, again in time for the World Cup in South Africa.
Like Romania, Poland is home to a number of DTH services. The country’s leading operator in subscriber numbers is Cyfrowy Polsat, and according to president of the management board Dominik Libicki, the company has managed to survive the economic slowdown with little operational impact. “The number of subscribers to our services grew in line with our expectations,” he says. At the end of November 2009 it reached the three million-subscriber milestone and now services 3.24 million clients. “Pay television turned out to be a good alternative to other entertainment forms, which Poles may have had to give up in times of economic downturn,” says Libicki. “However, in the financial area, the weakening of our currency against the euro and the dollar had a negative impact on certain cost categories, such as an increase in the programming costs, lease of transponders, purchase of set-top boxes. However, looking at our business after excluding the impact of these factors, we can safely say that it has a healthy and stable basis for development.” Polsat’s main challenge, he says, is to transition from a TV provider to an “integrated services provider”, offering high-quality television and telco services at competitive prices.
Libicki says Polsat will be the first DTH operator in Poland to build a multi-play offering within a single contract and with one subscription fee. “The first steps in this direction were made in 2008 by launching mobile services based on the MVNO model. In February this year, we introduced broadband internet access employing wireless technology HSPA plus, which allows data transfer rates of up to 21Mbps,” he says. “At the beginning of June we offered customers an integrated package of services – television, internet and mobile telephony under one subscription, one contract and one invoice.” Later this year it plans to launch home telephony services based on a radio network. “We believe that multi-play services will not only enhance the attractiveness of our offer and will help to increase ARPU of customers choosing the triple-play service, but will also result in a lower churn rate and an increase in the total revenue, as confirmed by the experience of other companies in international markets,” he adds.
Aside from developing its multi-play strategy, Polsat is also looking to advanced services, including HD and video-on-demand. However, Libicki says the operator does not have confidence in the push VOD model, adding that he does not know of any examples where this type of service looks likely to make a substantial impact. Instead, the company has opted for a near-VOD project called VOD Home Movie Rental, which it claims to be “fundamentally different” from what other operators offer. “We bought a transponder and devoted 15 satellite channels to rapidly rotating titles, mostly movies, to which the subscriber has access in close intervals – every half hour, every hour,” he explains. The advantage, he says, is its availability to all of Polsat’s subscribers, without the need to purchase a DVR set-top-box. “What’s more, this model enables us to easily take the next step with a minimum amount of outlay – to offer push VOD to those customers who wish to own a hard drive decoder. We haven’t yet taken the final decision, although the number of set-top-boxes allowing recording, pausing and rewinding is growing very fast,” he says.
Polsat also plans further investment in HD services in a country where take-up of HD channels is growing rapidly. One advantage it has over other operators is that it owns an HD set-top production facility, making boxes 20-25% cheaper than other models, according to Libicki. “In Poland, there is still large room for further development of HD technology and we want to invest in it. In April we produced our first HD set-top-boxes and we plan to produce a few hundred thousand models this year,” he says. “We will also enhance our HD programming offer. We plan to expand our VOD library and we are ready to implement new interesting services and technologies expected by our subscribers.”
While DTH has made the running in Poland and Romania in particular, cable remains the dominant platform throughout most of the region. A number of forward-thinking cable operators have made considerable strides in marketing digital and triple-play services, but cable has also suffered from the economic crisis, and the harsher climate has helped push moves towards consolidation. Sergey Boyko, CEO of leading Ukrainian cable operator Volia, admits that the economic crisis has hit Ukraine, with Kyiv, where a large part of the operator’s subscriber base is concentrated, being particularly badly affected. With large numbers of subscribers losing their jobs and moving out of the capital and amid a general deterioration in household incomes, Volia also faced more intense competition from low-cost providers. “Against this backdrop, competition grew stronger, which, as a result, led to a shift in strategy toward consolidation, where weak players will try to merge with strong ones,” says Boyko. “The tendency emerged last year and was reflected in price dumping strategies pursued by some players to build up their subscriber base and increase their value in view of a prospective sale.”
“Even though we are witnessing a convergence of technologies, the competitive advantage stays with those who can offer the best customer service.”
Sergey Boyko, Volia
In anticipation of the impact the downturn would have, Boyko says that Volia took the decision to delay a number of projects. He cites the specific example of HDTV, which the operator had earlier planned to roll out in 2009, but which was delayed for a year. The company took that decision in part on the basis of a marketing survey of subscribers. “We did the most recent one last year, and it gave us yet another reason to put the launch on hold. There was a gap between purchasing power and the cost of content and equipment,” says Boyko.
Apart from its impact on Volia’s own subscriber base, Boyko says that the crisis acted as a catalyst for convergence within the telecom sector between different types of operators, with mobile operators, for example, expanding into fixed-line services. “Integrated services are what all market participants are going to strive to offer over the next five years. We currently provide two or three services and keep track of all changes in the related segments of the telecom industry,” he says. “But even though we are witnessing a convergence of technologies, the competitive advantage stays with those who can offer the best customer service. Our product is primarily infotainment, and it should be convenient and easy. That is why our number one priority is to improve quality standards and service, including customer care and the content of the services.” Volia has attempted to maximise the flexibility of its offer, providing a choice of two basic packages (on top of the so-called ‘social package’ with a basic group of free channels), with six additional themed options on top of that. The operator has completed its own digital switchover in Kyiv, and its digital service is also available in six other cities. Volia plans to try to deepen penetration of digital outside of Kyiv, while tempting existing digital viewers to upgrade to premium services. “In the regional markets, the focus will definitely be on popularising digital TV, which will enable us to expand the list of packages and add more interesting channels,” says Boyko.
Volia also plans to expand its premium tier and to build on the attractiveness of its existing digital packages where possible. “We plan to expand the list of packages by offering new premium packages and HDTV to meet the needs of as many client categories as possible and by adding more channels to existing packages provided that is economically viable, i.e. we will do our best to keep the costs at bay,” says Boyko. The operator is also the only one in Ukraine to offer HD video-on-demand. Volia plans to extend the availability of VOD, which is offered as a premium service, to the internet. DVR services are offered to subscribers via purchasable set-top boxes from Handan and Homecast. “This approach enables us to identify more clearly the individual needs of our customers for such services and to avoid tying up a great deal of working capital in the purchase of such equipment, especially now that the level of demand for such services has changed considerably – like it did in 2009 when demand shrank several times,” says Boyko.
Despite (or in some ways because of) straitened economic circumstances, pay-TV service providers across central and eastern Europe – whether cable, satellite or IPTV-based – are moving forward with strategies based on the twin pillars of consolidation and convergence, attempting to deliver triple or quad-play bundles of services to their customers at attractive rates while moving to achieve greater scale and reach – strategies that in fact are wholly recognisable to operators further west.
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