Convergencia en mercados y regulación televisión tradicional vs nuevas formas deprestación

Pay TV Regulation: How Regulation is Shaping Growth in the Multiplay Market

Eulalia MarĂ­n-Sorribes Research Analyst CRT Regulatory Forum Cartagena, Colombia, September 3-4, 2012

Agenda ∂ Executive summary

∂ Latin American context

∂ Regulatory scenario: Argentina, Mexico and Brazil

∂Telco strategies to overcome regulatory hurdles

∂ Pyramid perspective

Sources: Pyramid Research.

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Executive summary ∂ The declining revenue from traditional voice services, the deceleration of data growth and the rising participation of cable companies in the traditional telco space (voice and broadband) are increasingly affecting telcos’ traditional business segments . ∂ Over the past few years, telecom operators have tried to broaden their scope of action by intensifying activities in the media segment and by bundling services together to improve ARPU, increase customer loyalty and reduce churn in their voice and data segments. ∂ The existence of regulatory hurdles in some of its largest economies, such as Mexico and Argentina, and previously also Brazil, originally aimed at reducing market concentration. Restrictions in these markets have traditionally been imposed to curb market power of established telecom operators.

The introduction of these restrictions in some of the largest economies in the region has had mixed results for the pay-TV market.

Sources: Pyramid Research.

3

Agenda ∂ Executive summary

∂ Latin American Context

∂ Regulatory scenario: Argentina, Mexico and Brazil

∂Telco strategies to overcome regulatory hurdles

∂ Pyramid perspective

Sources: Pyramid Research.

4

The declining revenue from traditional voice services and the deceleration of data revenue growth are increasingly affecting telcos’ traditional business segments Fixed service Revenue Evolution in Latin America, 2010-1017 $45 $40 $35 $30 US$ (bn)

$25 $20 $15 $10 $5 $0 2010A

2011A

2012E

2013E

Total Voice Service Revenues Sources: Pyramid Research Fixed Communications Forecast Q1 2012.

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2014E

2015E

Internet Service Revenue

2016E

2017E

Triple play packages limited by Pay-TV barrier imposed by regulators in selected markets ∂ Latin America’s Pay-TV penetration rates are very heterogeneous across the region, with Argentina at the high end at nearly 70% and Brazil at only 24%. ∂ To level the playing field and help smaller operators, many regulators throughout Latin America have imposed regulations that prevent incumbent telecommunications service providers from directly entering the Pay TV market. These rules have impacted players like Telmex in Mexico, Telecom and Telefónica in Argentina and Telefónica/Vivo and Oi in Brazil. ∂ This approach, however, has not met the regulator’s stated objective to increase competition, lower prices and thus increase penetration for services. Failure cases like Brazil are causing some regulators to open up to the idea of allowing incumbents to offer IPTV and triple play services.

Others, such as Mexico’s Cofetel, seem unmoved.

Pay-TV Penetration in Latin America, 2011 Bolivia

4%

Guatemala

7%

Paraguay

9%

Nicaragua

13%

Ecuador

13%

Peru

Regional Average 34% 20%

Honduras

22%

Brazil

24%

El Salvador

26%

Colombia

27%

Panama

30%

Uruguay

39%

Costa Rica

40%

Mexico

41%

Venezuela

42%

Chile

44%

Puerto Rico

53%

Argentina

69% 0%

20%

40%

60%

Household Penetration Sources: Pyramid Research, Media Forecast, Q1 2012.

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80%

Regulatory restrictions limiting growth of IPTV in the region IPTV household penetration in major Latin American markets, 2011 and 2017E 5%

4.62%

4.59%

5% 4% 3.41%

Penetration

4%

3.33%

3% 3% 2% 2%

1.32%

1.10%

0.87%

1% 1%

0.25%

0.04%

0% Colombia

Chile

Mexico 2011

2017

7

Brazil

0.00%

Argentina

Sources: Pyramid Research, Media Forecast, Q1 2012.

Argentina and Mexico’s triple-play markets remain underdeveloped Multiplay subscriptions by country and type of package, 2011 Colombia

Chile

Brazil

Mexico

Argentina

0%

10%

20%

30% Double-Play

40%

50%

Triple-Play

60%

70%

80%

90%

100%

Quadruple-Play Sources: Pyramid Research.

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Restrictions in the top economies drag down growth of triple-play in the region Evolution of bundles in Latin America in terms of subscribers, 2008-2017 80 70

Subscriptions (m)

60 50 40 30 20 10 2008A

2009A

2010A

2011A

Double play

2012E Triple play

2013E

2014E

2015E

2016E

2017E

Quad play Sources: Pyramid Research, Multiplay Forecast, Q1 2012.

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North America and Western Europe are the top markets for triple-play adoption Multiplay subscriptions by region and type of package, 2011

North America Africa & Midle East Asia & Pacific Central & Eastern Europe Western Europe Latin America 0%

10%

20%

Double-Play

30%

40%

Triple-Play

50%

60%

70%

80%

90%

100%

Quadruple-Play Sources: Pyramid Research, Multiplay Forecast, Q1 2012.

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Agenda ∂ Executive summary

∂ Latin American Context

∂ Regulatory scenario: Argentina, Mexico and Brazil

∂ Telco strategies to overcome regulatory hurdles

∂ Pyramid perspective

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Restrictions in Mexico and Argentina markets have traditionally been imposed on telecom operators in order to prevent the market concentration…

- Argentina’s media sector is governed by a controversial audiovisual communication law (Law 26,522) passed in October 2009. The bill set forth a new regulatory framework for the sector with a clear aim to “decentralize and democratize” the market by encouraging more local providers and by limiting the power of controlling groups, such as incumbent telecom operators Telefónica and Telecom Argentina, and media giant Grupo Clarín.

-One of the novelties brought by this law (Section 30) was that it opened the door for telecom cooperatives to enter the media segment by allowing nonprofit organizations to launch pay-TV services and triple-play bundles.

- The Mexican telecom regulator does not specifically forbid telecom operators from launching pay-TV or IPTV services, and a few local players ― Maxcom (2008) and Iusacel (2010) ― have already launched IPTV services in the market. In fact, Mexico was one of the first countries in Latin America to regulate telecom convergence.

- In October 2006, the regulator passed an amendment to the Federal Telecommunications Law that opened the door to operators providing other services not included in their original concessions, such as pay-TV, through compliance with a series of technical and legal requirements regarding number portability, interconnection and interoperability.

- Mexico's leading fixed-line operator, Telmex has requested several times permission to provide pay-TV services nationwide. The authorities have ruled out that the operator had not satisfied all the requirements put forward by the regulator and maintained their prohibition.

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In Brazil the new regulation could help to level up market shares.

- Under the former legislation, only cable companies with 51% of their stock held by Brazilian citizens were allowed to provide pay-TV services in their concession areas (most telcos were controlled by foreign companies).

-The law also prohibited telecom incumbents from providing TV services via cable or IPTV services in their concession areas so many operators looking to launch pay-TV and triple-play services were restricted to VoD or DTH-satellite offerings.

- The many restrictions that Anatel used to impose were in place to protect small pay-TV operators and encourage new players to join the market, generating competition and consequently driving higher penetrations. However, Anatel’s strategy backfired and pay-TV operators decided to focus only on very profitable markets, where their investments were certain to generate high returns. Anatel then overturned its regulation - Anatel recently changed regulation to allow incumbents to offer IPTV and to allow foreign capital companies to have control of Pay-TV operators in the country. Instead of controlling the operators, operator’s focus has now turned to the content.

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The impact of such regulations has ended up with mixed results in Argentina….

Media services market share by operator, Argentina, 2011

∂ In Argentina the pay-TV market is highly concentrated with cable service provider Cablevision accounting for 43.7% of the total pay-TV subscriptions in the country and 98.1% of the total cable-TV subscriptions. ∂DIRECTV is Argentina’s only DTH-satellite TV service provider and the second largest single pay-TV operator in the country with a rapidly growing 19.4% market share.

Others 20.4% Red Intercable 5.0%

∂ Big players cannot launch triple-play bundles as a result of current legal restrictions - Cablevision cannot offer voice services (via IP) and Telecom and Telefonica cannot launch pay-TV – but still dominate the market in their original segments.

Cablevision 43.7%

Telecentro 5.2% DirecTV 19.4% Supercanal 6.4%

Sources: Pyramid Research.

Sources: Pyramid Research, Media Forecast, Q1 2012.

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...Mexico…

Media services market share by operator, Mexico 2011

∂ Despite the ban on Telmex, the Mexican pay-TV market remains highly concentrated and dominated by media conglomerate Grupo Televisa, which controls the pay-TV through via Cablevision, Cablemas and TVI (Cable) and Sky (DTH).

Mexico Maxcom 0.5% Telmex 0.0%

∂ Televisa is also Mexico's leading broadcaster and the world's biggest producer of Spanishlanguage programming for television, controlling top TV channels in Mexico.

Others 12.9%

Dish 15.7%

∂DTH-satellite operator Sky is Mexico’s leading pay-TV services provider with a 33.6% share of the pay-TV subscribers in the market and

Multivision 1.9%

∂Despite the ban on Telmex, the incumbent operator still dominates the fixed and communications market and mobile (via America Movil).

Sources: Pyramid Research.

Cablevision 18.7%

Megacable 16.7% Sky 33.6%

Sources: Pyramid Research, Media Forecast, Q1 2012.

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…and Brazil.

Media services market share by operator, Brazil,2011

∂ Two players (Net Servicos and Sky/DIRECTV) control the pay-TV market, with leading positions in the cable (89%) and DTH-satellite segments respectively (55%). ∂ Being the only option available to incumbent telcos, DTH-satellite has become the most popular technology for the prevision of pay-TV services.

Others 26%

∂ With recent changes in regulation, telcos are now able to roll out IPTV services, a technology they can combine with their existing DTH offerings – a hybrid pay-TV proposition would allow them reach greater audiences in the country.

Net Servicos 36%

Telefonica 6% Sky / DirecTV 31%

Sources: Pyramid Research.

Oi 1%

Sources: Pyramid Research, Media Forecast, Q1 2012.

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Agenda ∂ Executive summary

∂ Latin American Context

∂ Regulatory scenario: Argentina, Mexico and Brazil

∂ Telco strategies to overcome regulatory hurdles

∂ Pyramid perspective

Sources: Pyramid Research.

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Restrictions force telcos to partner with potential future competitors ∂ Regulatory restrictions on IPTV have forced telecom operators to rely on third parties to provide video services. ∂Commercial alliances allow telcos to positions themselves in the Pay-TV and triple-pay markets and to compete with pure triple-play providers in a quicker and less expensive manner, without having to roll out their own IPTV services. ∂Most incumbent operators in Argentina, Mexico and Brazil have opted for this strategy while they await a more favorable regulatory environment. ∂These alliances do not bring long-term benefits to customers.

Sources: Operators, Pyramid Research.

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Argentine incumbents see VoD as a proxy to IPTV but they now have to compete with a new set of players Main OTT service providers in Argentina Product Service provider Date of commercial release

Netflix

Cablevisión, DIRECTV -LAPTV

Cuevana

América Móvil

September 2011

April 2011

TBC

November 2011

Telefónica's Speedy clients

Open to all clients (Arnet customers have priority)

Open to all customers

Only available to pay-TV clients with Moviecity premium

Open to all customers

Open to all customers

PC and TV via set-top box

PC and TV via set-top box

PC, game consoles, tablets, smartphones

PC

PC

PC

Free

Basic (P19) and premium (39)

Illegal Yes No

Legal no Yes

Telefónica

Telecom Argentina

April 2011

October 2011

Access

Platform

Price

P39.9 (US$ 8.6)

P39 (US$ 8.4)

P39

Legal status Downloads HD

Legal No Yes

Legal No Yes

Legal No Yes

Free to clients with Moviecity premium channels Legal No No

Source: Pyramid Research, service providers

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Standalone OTT providers will need to adapt their business model to succeed in the region “in Latin America, we will get there eventually, but it's going to be longer and harder than [the two years] we initially thought. So we will tend to be more towards developed markets that are more like Canada, UK, and Ireland than strong emerging markets like Latin America.”

- Reed Hastings, Netflix CEO, Q1 2012 Investor presentation “..we are obviously open to other people billing on our behalf, but also in Latin America, we're looking to improve the payment options that we offer to the consumer to solve the problem ourselves.”

- Ellie Mertz, Netflix VP Finance, Q1 2012 Investor presentation

Sources: Netflix, Pyramid Research.

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Agenda ∂ Executive summary

∂ Latin American Context

∂ Regulatory scenario: Argentina, Mexico and Brazil

∂ Telco strategies to overcome regulatory hurdles

∂ Pyramid perspective

Sources: Pyramid Research.

21

Pyramid Perspective ∂Limiting telcos access into the pay-TV segment in some of the largest economies in the region, has not met the regulator’s stated objective to increase competition, lower prices and thus increase penetration for services. ∂Banning incumbent operators from entering into the media segment has not curbed their dominance into other segments of the market (voice and fixed data), where they always had an historical advantage. Other set of reforms are required to foster competition in the fixed communications segments (e.g. local loop unbundling) and content markets. ∂Brazil: Anatel recently changed regulation to allow incumbents to offer IPTV and to allow foreign capital companies to have control of Pay-TV operators in the country. Limitations remain for content distribution, with paid channels required to broadcast a minimum amount of nationally produced content ∂Mexico: After two years of legal battles between Cofetel and Telmex, the incumbent was once again denied the right to add Pay TV to its portfolio. The government continues to be concerned about the significant unbalances that remain in Mexico’s telecoms market. Triple play is allowed to be offered by other non-incumbent operators.

Sources: Pyramid Research.

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Contact Details: Eulalia Marin-Sorribes, Research Analyst, Latin America emsorribes@pyr.com www.pyramidresearch.com PYRAMID RESEARCH UK Tel: +44-20-7560 4471 Fax: +44-20-7560 4485 PYRAMID RESEARCH US Tel.: + 1 617 871 1900 Fax: + 1 617 871 1933