Sunday, 12 March 2017

Is Pay TV Still A Reliable Cash Cow?

For the past 6 weeks, I have been blogging about the mobile services segment of telcos. It is time to move on to the next segment -- Pay TV. I will analyse Pay TV using Starhub's results, as Singtel has more business segments and operates in many countries.

The figure below shows the no. of Pay TV subscriptions in FY2015 and FY2016. Starhub is kind enough to disclose its market penetration rate in its financial results, which allows me to work out the total size of the Pay TV market in Singapore.

Fig. 1: Pay TV Subscriptions

As shown in the figure above, Starhub's Pay TV subscriptions has been on a gradual decline, dropping by 8.6% from 1Q2015 to 4Q2016. In contrast, the overall market for Pay TV has grown significantly by 20.5% over the same period. In particular, the growth picked up speed in 1Q2016. What happened in 1Q2016? The answer is Netflix. Netflix entered the Singapore market in Jan 2016, offering viewers an alternative way of watching videos over the internet instead of subscribing to Starhub's or Singtel's Pay TV.

How does Netflix's pricing compare with Starhub's Pay TV pricing? Starhub has a basic subscription of $26.75 per month for a few groups of channels. If you wish to watch sports, you will need to add another $21.40 for the sports channel. In contrast, Netflix is available at $10.98 per month for the basic plan. Nowadays, you can even watch sports on M1's fibre broadband or even Mediacorp's Toggle channel. You no longer need to subscribe to Starhub's or Singtel's Pay TV to watch videos or sports.

What is the cost structure of the traditional Pay TV segment? Firstly, there is a cable network infrastructure to deliver video to customers' set-top boxes. This is a fixed capex cost which does not vary with the number of subscribers. Thus, the less subscribers Starhub has, the less customers to spread out the fixed infrastructure cost. Fortunately, since the cable TV segment has been in operation for many years already, the infrastructure cost should have been mostly depreciated. In fact, Starhub mentioned in its financial results that some assets have been fully depreciated, although it did not mention which infrastructure it referred to.

The second cost for Pay TV providers is programming cost, or cost for the TV content they are distributing. For regular channels, this is likely to be a variable cost that varies according to the number of subscribers for that channel. However, there could also be premium content such as sporting events that charges a fixed cost for the broadcasting rights (see How the costs of sports broadcast rights have shot up in Singapore). Again, fixed cost is bad news for Pay TV providers facing declining subscription rates.

It is not only subscribers who can move away from a Pay TV provider. Content owners also can. Starhub and Singtel have been competing for the broadcasting rights for sporting events and the rights are awarded to the highest bidder. Prior to IMDA introducing cross-carrier rules in 2011, subscribers had to switch between different Pay TV providers to watch their favourite sporting events, which were exclusive to the winning bidder. Thus, there is no reason why content owners that are currently providing content to Pay TV providers could not switch to over-the-top (OTT) providers such as Netflix, which will further erode the reason to subscribe to Starhub's or Singtel's Pay TV.

Having said the above, Starhub is also not idling. It has introduced Starhub Go, which allows subscribers to watch videos for $9.90 per month on-the-go, like Netflix. Not only that, subscribers who are also Starhub's mobile services customers do not need to pay mobile data charges while streaming video on 4G. This is an advantage over OTT providers, whose customers incur mobile data charges while streaming video.

Starhub is also riding on the popularity of Netflix by offering Netflix as one of its channels on fibre TV (but not available on cable TV, because it requires an internet connection). I understand that there is minimal overlap between the content on Netflix and Starhub so far, but that could change in the future.

Starhub has also invested 9.05% in mm2 Asia for $18 mil in Mar 2016 to acquire locally made video content to better compete with OTT providers. This investment also has the advantage of ensuring mm2 Asia's content do not end up in rivals' Pay TV networks. Perhaps we might see Starhub continuing to invest in other media companies in the region. However, if that is the case, there will be less cashflow for dividends. This creates a difficult balacing act for Starhub. If Starhub invests in media companies, it can better safeguard its Pay TV business, but at the expense of dividends to shareholders. However, if it allocates more cashflow to dividends, it is less able to safeguard its Pay TV business from further competition.

Thus, from the cashflow perspectives, there is reduced cashflow as subscribers move away from traditional Pay TV providers like Starhub and Singtel. Not only that, there is less cashflow available for distribution to shareholders should Starhub continues to make investments in media companies.

In conclusion, the Pay TV segment is facing challenges and is no longer the reliable cash cow that it used to be.

P.S. I am vested in M1 and Singtel.


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