2010 World Cup rights secured

Injury time goal

Maintain UNDERWEIGHT. We maintain our UNDERWEIGHT position on the sector following confirmation that SingTel and StarHub have secured the 2010 football World Cup broadcast rights. If the media is correct on the cost of the rights, we doubt that SingTel and StarHub will be able to recover their costs, especially given the short time to secure advertisers as well as the high costs of subscription, which may deter takeup. This news reinforces our negative view on the sector. We remain concerned about the rise in content costs, pressure on broadband ARPUs and escalating subsidies. Our top pick remains M1 (TRADING BUY) for its capital-management potential and benefits from a levelling playing field thanks to NGNBN.

The news

StarHub and SingTel have announced that they have both won the rights to the 2010 football World Cup. Instead of a joint bid, FIFA has awarded both parties individual non-exclusive broadcast rights. This means that both will pay FIFA separate sums rather than a lump sum. The rights would enable them to offer all 64 matches on their own networks. Subscribers who sign up before 1 Jun will be charged S$66 (early bird discounts) while those who sign up after 1 Jun must pay S$88. Businesses such as pubs and restaurants reportedly have to pay S$2,888-4,888 to show the tournament on their premises. While no details of the winning prices have been announced, it is believed that both operators have to fork out a total of S$21m for the rights, about 50% less than FIFA’s initial demand.

Comments

Not a surprise. We were not surprised by this development as the press had already speculated on this outcome. The main sticking point had been cost, which is thought to have fallen to S$21m from the S$40m that FIFA originally demanded.

Can they break even? With only 30 days to the tournament, we believe their opportunities to exploit any advertising revenue will be limited. Instead, telcos will have to rely more on subscription fees and to a smaller extent, mobile data from news and goal highlights to cover costs. Indeed, SingTel’s chief of content and media services, Edward Ying, said, “The objective is to break even. Whether we break even depends on subscriptions.”

The S$66 charge for early birds and S$88 for normal subscriptions are nowhere near the S$127 that we think StarHub and SingTel would need to charge their subscribers, in our scenario analysis, excluding any income from advertising and business subscriptions. This assumes that a generous 60% of households would sign up, above the “less than 50% of subscribers” that StarHub had said had signed up for its sports package. (An informal poll in our Singapore office indicated that six colleagues would sign up while seven would give it a miss.)

Moreover, even those prices may deter take-up as subscribers are now charged about 4.4x higher for early birds and 3.5x for normal vs. the 2006 World Cup rights. On top of that, the charges in Singapore will be among the highest in the region as Indonesia and Thailand intend to offer all 64 matches for free. The rights cost S$28.70 in Malaysia and S$52 in Hong Kong.

Small negative for both operators. As with StarHub’s experience in 2002 and 2006, we believe the high cost of rights will prevent both operators from achieving their breakeven objective. Therefore, we are negative on the news. While it may have secured goodwill for their customers, it comes at a cost to the operators’ bottom lines.

Valuation and recommendation

Maintain UNDERWEIGHT. We remain apprehensive over the rise in content costs in the short to medium term, pressure on broadband ARPUs, and escalating subsidies. Our top pick remains M1 (Trading Buy) as it has the most capacity for capital management, the biggest upside from NGNBN and should be the main beneficiary of content-carry regulations.

Minimal World Cup Boost

Full 64-match broadcast. Both SingTel and StarHub have managed to secure the broadcast rights for all 64 matches of the month-long 2010 World Cup event in South Africa; this was done via two separate non-exclusive contracts after their earlier joint bids were repeatedly rejected by FIFA. SingTel will broadcast all 64 matches on its mio TV and mobile, with complimentary viewing on the Internet. Likewise, StarHub will also broadcast all the matches live across all three of its platforms – cable TV, Internet and mobile.

Pricing may be the sticking point for home viewers. The two telcos did not reveal how much they paid for the rights, but we believe that it is probably several times higher than the US$5m that StarHub reportedly paid for the 2006 World Cup event. Looking at the current packages, which cost (pre-GST) a minimum of S$66 before 31 May and S$88 thereafter, we note these are around four times more expensive than the packages of S$15 and S$25 that StarHub charged in 2006. A reason for the higher pricing could be due to the likely smaller advertising revenue given that the telcos only managed to secure the rights with a month or so to go before the event kicks off. We also note that the packages are higher than our back-of-the-envelope calculation of around S$40.

Likely good response from businesses. A dip in the takeup from home viewers could see, conversely, a better response from the business segment, as F&B establishments are likely to use the “live” telecasts to attract viewers who will not be subscribing for the event. As the pricing for businesses ranges from S$2888 (for the first TV set under 50 inches) to S$4888 (for the first TV set above 50 inches), a business customer is worth at least 44 to 55 home customers. Assuming that the telcos paid a total of S$20m for the rights and that the average subscription price is S$70/subscriber, the telcos would probably need to sell 280k packages to break even – we think that this is achievable.

Maintain OVERWEIGHT. In any case, we expect to see higher content costs for both SingTel and StarHub in the third quarter, which may depress margins; but we have already worked this into our estimates. Instead, we continue to like the telcos for their defensive earnings and high dividend yields, especially in the increasingly volatile market. Maintain OVERWEIGHT.