The effects of the economic crisis and the maturing of some markets is making life challenging for pay TV operators in central and eastern Europe, but there is still significant opportunity for growth. Stuart Thomson & Graham Pomphrey report.
The pay TV market in central and eastern Europe is beginning to mature. While there remains significant room for growth by comparison with western Europe, the rate of growth achieved by operators in the region is beginning to flatten out, with competing providers being forced to search harder for new subscribers.
There remains a huge amount of variation within the region. While the pay TV industry in Poland enjoys western European levels of penetration, pay TV in a number of markets remains significantly underdeveloped. Levels of ARPU, though generally lower than in western Europe, differ significantly between the various countries in the region.
In Poland, the region’s most advanced pay TV market, a significant opportunity exists for premium services and HD content. Poland is notably strong in HD. TVN-backed DTH operator ‘n’ has been notably successful in capturing higher-end subscribers. Despite the relative maturity of the pay TV market in the country, ‘n’’s chief operating officer Christian Anting believes there is still room for growth. “We still expect subscriber growth over the next few years,” says Anting. He says that about three million Polish households will be affected by the country’s terrestrial switchover, scheduled for 2013, and that about a third of these could be attracted to DTH pay TV. “We think a big part of our growth could come from that,” he says. Another factor that could encourage take-up, he says, is the European Championship football tournament, set to take place in Poland and Ukraine next May.
This event, he says, “traditionally triggers sales of TV screens”. With this in mind ‘n’ has teamed up with TV manufacturer Sony to launch a CI Plus CAM. The CI Plus offering, the nCAM, will support a pre-paid pay TV service. Sony will offer the nCAM as part of a package with the sale of flat-screen TVs in the country. Anting said that Sony was the first TV manufacturer to make such a commitment to CI Plus in Poland, but that deals with other manufacturers would follow. As the likely buyers of the screens will be consumers with significant disposable income, Anting believes that the CI Plus offering could attract a new class of high-end subscribers to the platform in the future. He says that the CI Plus pre-paid offering, which will include access to a package of 12 HD channels and about 50 thematic channels, will attract higher-end customers who could contribute to higher ARPU for the operator going forwards. The offering is ‘n’-branded, unlike ‘n’’s existing pre-paid offering, marketed under the TNK brand. ‘n’ launched an HD version of the TNK service at the end of last year.
The launch of the nCAM is part of a wider drive by ‘n’ to attract new subscribers to its platform ahead of digital switchover. “We are satisfied with how sales of that have developed,” says Anting, who says that the new HD offering should have the longer-term effect of encouraging customers to migrate to the subscription offering. “We will definitely see migration from prepaid into post-paid. That’s one reason we launched TNK HD – because it runs on the same technology platform – the same set-top – as the postpaid offering,” he says. Because the device is a hybrid box that includes a digital-terrestrial tuner, customers will also be assured that they will be able to receive any future services on the terrestrial platform in addition to ‘n’’s service. Anting says that ‘n’’s big advantage over the terrestrial offering itself will be its focus on HD services (it has also begun offering 3D events).
On the post-paid subscription side, another major initiative by ‘n’ is its launch of multi-play offerings in partnership with national telco TP in June. The pair have already collaborated in co-marketing broadband from TP with the TNK service, following their agreement at the end of last year. The next phase will see them launch full combined TV and broadband subscription offerings. According to Anting, the bundling of products with Poland’s leading telecom service provider will reduce churn and encourage customer loyalty.
Anting believes that ‘n’ is well-placed to prosper in the crowded Polish pay TV market. “‘n’ clearly targets the upper segment of the market with premium positioning,” he says, complementing Polsat’s mass-market appeal. While Cyfra Plus also targets high-end consumers, he believes ‘n’ is in a stronger position. ‘n’’s recent growth profile has been impressive – the operator signed up 25,000 new customers in the first quarter. Cyfra Plus has also effectively lost its exclusive grip on Polish Elektralasa premier league football, with matches now also being available on Polsat and (through Eurosport) on ‘n’.
DTH players in Poland have to a large extent focused on HD and premium services (with significant differences between ‘n’ and Cyfra Plus on side, which have targeted higher end subscribers, and Cyfrowy Polsat on the other, which has positioned itself as appealing to the mid-market segment). Fixed-line operators, on the other hand, are looking to on-demand services to differentiate their digital offerings and attract new subscribers or encourage analogue customers to upgrade to digital tiers.
While on-demand services may seem an obvious way for fixed operators with two-way networks to offer something different, smaller players often have their work cut out to persuade content providers to supply content in order to enable them to launch VOD services to increase ARPU and attract subscribers. This can be particularly hard for operators with relatively small subscriber bases. Polish cable operator INEA launched a VOD service in December and has gained “a few thousand customers” according to Janusz Kosi´nski, president of the management board. While the operator currently offers over 350 movies on the platform, Kosi´nski admits adding content “is hard for small and medium operators because of the price of this content”. However, launching additional services is imperative, he says, in order at least to keep ARPU at a steady level. “But we hope these services could also increase it,” he adds.
In terms of on-demand, INEA is also planning to launch a catch-up TV service. And Kosi´nski said it is exploring other value-adds like antivirus programmes, online back-up or additional telephony minutes. Kosi´nski hopes that this type of add-on service will enable the operator to increase RGUs and grow its digital penetration, rather than growing by acquiring smaller networks. “In Poland the consolidation of the industry is happening right now. But there are other options than overtaking smaller operators and competitors’ customers,” he says. “There are our own customers who can buy new services. For example INEA’s subscribers could choose new services thanks to our development last year, as we implemented a mobile internet service and VOD service. The growth will come from convincing the customers to buy new and value added services.” Another key area of development for INEA is the bundling of products with the aim of getting subscribers to take three, or even four services (it recently launched mobile internet). According to Kosi´nski, INEA’s customers are already showing a keen interest in multiple-services. “Customers more and more frequently decide to choose triple-play services for financial and practical reasons – they receive only one bill and one technical support,” he says “Almost 20% of our customers decided to choose triple-play and we wish to increase this segment also with mobile phones and internet.”
“Other operators don’t have the premium content that we have. We still see growth from exclusive premium content such as sports.”
Richard Breskovi´c, T-Hrvatski Telekom
Multi-play is at the heart of Russian cable operator Akado’s strategy. This year the company plans to test DOCSIS 3.0 services in the Moscow market, according to Akado president Denis Lobanov. “By establishing DOCSIS 3.0 technology and upgrading the virtual network topologies we could provide ultra high-speed broadband services – up to 400Mbps – to our customers,” he says. “The DOCSIS 3.0 test zones will roll out in several Moscow districts, and then after getting results it will spread out thoughout the city at the end of the year.” The rollout of DOCSIS 3.0 will also, says Lubanov, enable Akado to develop its HDTV tier (and 3D services) without having an impact on internet services.
In addition to high-speed broadband, Akado is investing in interactivity and in HD services. “We are investing in developing interactive TV services, which are the future of Russian broadcasting. Today the payback might seem small and risky but the interactive TV services have great potential for profitability in future,” says Lubanov. “We are rolling out digital TV using a platform that supports interactive services. Forecasting demand for interactive TV services in Russia in the next three years, we’re implementing it now for the future, developing and maintaining our leading market position.” On the HD side, the company saw a significant boost in viewing from its HD broadcasts of the 2010 Winter Olympics and World Cup.
Lubanov says that the economic downturn has had relatively little impact on the company’s business, with a 19% growth in overall revenues in 2010 to RUB3.66 billion (€90 million) and growth in its EBITDA margin from 25.2% to 34.7%. “Today Akado keeps on developing its services through its successful marketing strategy, strong financial discipline and professional cost management and reduction. I believe we make the most attractive offer for clients focused mainly on the quality of customer care rather than technological superiority,” he says. “Broadband and digital TV services were still in high demand, while internet access has become a basic commodity these days and TV viewing is one of the Russians’ favourite pastimes.”
Lubanov says that Akado aims to offer as much choice as possible to customers, presenting them with optional packages and pay-per-view services and allowing them to choose between analogue and digital reception. “To keep our leading position and create marketable products and services Akado focuses on meeting customer requirements. We transmit in both analogue and digital. But we try to enlighten and educate our audience about the advantages of digital TV and HDTV,” he says. “We developed a special programme for testing digital TV services and free viewing of digital channels for all our subscribers to motivate people to switch from analogue to digital TV broadcasting.” In order to support this, Akado offers a 13-strong package of HD channels, including National Geographic HD, Mezzo Live HD and Fashion TV HD as well as film and sports channels. Lubanov believes Akado is well-placed to hold its leading position in Moscow (where he says it has a 52% share in the digital TV market).
While DTH players are strong in Poland and Romania, and cable (in various shapes and sizes) is ubiquitous through much of the region, IPTV remains relatively underdeveloped with the exception of a few key markets. One of these is Croatia, where Deutsche Telekom-backed T-Hrvatski Telekom is the leading IPTV player on the market. Despite the company’s existing high penetration, Richard Breskovi´c, director of proposition management and strategy fixed department at T-Hrvatski Telekom, believes there is room for growth both in broadband and pay TV.
Exclusive content rights are the key to maintaining the appeal of the TV service in Croatia, according to Breskovi´c. “MAXtv offers premium content and we still see growth from exclusive premium content such as sports,” he says, citing examples including the Spanish football league and Formula 1 motor-racing, where the content is distributed exclusively via T-Hrvatski Telekom’s platform. The operator’s current plans include the re-launch of its HD package with the addition of new content, and further differentiation will come from T-Hrvatski Telekom’s emphasis on interactivity, taking advantage of the capabilities of the Microsoft-based TV platform and its own network investment to deliver, for example, multiple streams to users’ homes. The operator has less room for manoeuvre when it comes to bundling
internet and TV services. “We are regulated on the broadband and voice side and bundling has been a challenge,” says Breskovi´c. However, T-Hrvatski Telekom has managed to market dual and triple-play services, despite these restrictions. “The regulations are a challenge but we have managed to adapt,” he says.
Breskovi´c also believes that the digitization of the Croatian terrestrial network could also encourage new subscribers to sign up to MAXtv (particularly in view of terrestrial reception problems in Istria and the Dalmatian coast, with interference from Italy affecting the country’s B and C multiplexes). The MAXtv set-tops for satellite reception are hybrid with DVB-T tuners to ensure that customers can receive any future services to be launched in the terrestrial network as well as T-Hrvatski Telekom’s own services.
In order to further maximize its reach in a relatively small market, T-Hrvatski Telekom has launched a version of MAXtv via satellite, with the prime goal to provide TV service to the customers that already take services from the operator but are unable to access the IPTV service. “We want to reach customers in rural areas of Croatia and provide a service that’s got premium content. These are loyal customers for other services,” says Breskovi´c. For similar reasons, T-Hrvatski Telekom provides a separate, somewhat more stripped down IPTV service via its Iskon subsidiary. “The Iskon feature set is quite substantially different,” he says. “Iskon is one of the oldest internet providers in Croatia, with quite a loyal subscriber base.” The Iskon TV service was launched to provide a complete portfolio of services to this base, in order to secure its loyalty to the brand and prevent Iskon customers from being tempted by alternative TV offerings.
A second goal of the MAXtv satellite platform, however, is to build a business that could be exported to markets outside Croatia. “The Croatian market is not the only one where we can exploit our platform,” says Breskovi´c. The plan would be to build a ‘white label’ offering where T-Hrvatski Telekom could provide the technical infrastructure (including encryption) that could then be used by content partners to reach adjacent markets in the region.
Other future strategic priorities for T-Hrvatski Telekom include the build-out of a fibre infrastructure (progress towards which has been slowed down somewhat by regulatory restrictions), which would, among other things, enable it more easily to deliver multiple simultaneous video streams to each household. Breskovi´c also believes that there will be some consolidation to reduce fragmentation in the TV distribution market, with smaller players that may lack watertight rights to redistribute content being squeezed out.
Consolidation within individual territories has long been anticipated, but is only now beginning to happen in Romania (where Romtelecom has acquired rivals Boom TV and Akta) and has yet to occur in Poland. However mergers and acquisitions across national boundaries have also occurred. Liberty Global, with operations in five countries attracting a total of 4.1 million subscribers, has long been the premier pan-regional distributor in central and eastern Europe. Its strength in the region is likely to increase with the acquisition of Polish cable operator Aster from investment group Mid Europa Partners (itself a significant international player through its ownership of the SBB/Total TV and Telemach operations in the western Balkans and Invitel and Fibernet in Hungary). Once it passes regulatory hurdles, the Aster deal will be worth ?600 million, representing one of the biggest CEE equity exits of the past 12 months.
Poland is one the most developed, and therefore competitive pay TV markets in central and eastern Europe, and the deal indicates that Liberty Global, which already operates under the UPC brand in Poland wants to take it on. For Mid Europa Partners partner Robert Knorr, the decision to sell Aster was down to normal investment cycles, rather than a response to pay TV market conditions. “On the contrary, we are solely committed to the region and are actively looking for investments including in the pay TV space,” he says. “We get into investments and stay with them for three-to-five years. Aster we were hitting the fifth year and it was the right time to exit.”
Mid Europa itself is continuing to build a noticeable presence in the former Yugoslavian countries, where it operates under the SBB cable brand in Serbia (which in turn operates the Total TV DTH platform) and Telemach in Slovenia. Most recently, Mid Europa acquired three regional players in Bosnia, BH cable Net, Elob and KT Global, which it will combine with Telemach and SBB into a new Telemach-branded entity. It also has a presence in the Hungarian pay TV market where its fixed line telco Invitel recently acquired cable and pay TV operator Fibernet.
According to Knorr, the economic crisis, which he said had a much greater affect on some markets than others, has in fact led to a slowing down of mergers and acquisitions in the region. Growth for Mid Europa has in any case tended to be organic rather than through major acquisitions: “The last 12 months have been more dynamic than the year before, but aside from Aster the rest of our deals have been about add-on acquisitions and boosting our existing presence to expand our footprint in the region.”
From an investment point of view, there are some markets best avoided in the short- to mid-term, says Knorr pointing to Romania as a particularly difficult market to crack. “It has lots of operators and an incumbent that is very active in the market. Competition is very high,” he explains. Hungary is tough too. “There are some markets that seem easier than others,” says Knorr. In the next 18 months he predicts that some existing investors will decide to abandon some territories. “It will either provoke consolidation, which will create a more stable situation in those markets, or may prompt new investors to that market to attempt to drive different business models,” he says.
Investing in DTH operators has proved riskier than for cable. According to Knorr, CEE DTH operators have in general been hit harder by recent economic conditions: “We have been doing very well with DTH but there have been some sad stories. Some people started DTH platforms, invested heavily in them and when the crisis hit they were left over-exposed. They were paying a lot of money for quality content but their ARPU or subscriber base went down. We would not shy away from looking at DTH but it’s a riskier business model than cable.” Knorr says that consumers are starting to show a preference for taking multiple services from operators, which means bundling DTH with fixed line services is a safer bet than offering TV services alone. “You are better off entering commercial agreements with people who own fixed line services with whom you can offer DTH as a video service to prevent them from putting video over their network,” he says.
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9th April 2020