Revamp of Pay TV Segment

Significant revamp for Pay TV industry. The Singapore government has significantly revamped the Pay TV industry by requiring Pay TV providers to cross-carry each other's content that is acquired or renewed on an exclusive basis. In short, Pay TV customers will be able to watch all Pay TV content with their preferred operator and need not pay any extra fee for doing so. Instead, the content supplier needs to pay competitors a fee for carrying its content; in return, the competitor must not modify the content in any way, including ads and branding. However, this only applies to any contract signed or renewed from 12 Mar 2010: this means that previously signed content like the much-watched English Premier League (EPL) will continue to be carried exclusively by SingTel's mio TV. 

Good for Pay TV customers. Overall, we view the latest move as positive for Pay TV customers; it may also translate into lower subscription fees due to less aggressive bidding by the service providers, although we are unlikely to see a drastic reduction as having more content to offer still means higher revenue. Furthermore, the ruling may be a boon to new entrants to the Pay TV market as they can offer their content via existing operators' infrastructure without having to fork out their own hefty capital investments. As advocated before, we believe that MobileOne (M1) will be one such key beneficiary; it will also be able to strengthen its triple-play offering. 

Impact slightly mixed for incumbents. But the impact is slightly more mixed for the incumbents, especially SingTel where it had been able to use its strong balance sheet to pay more for exclusive content; with the EPL rights expiring by mid-2012, SingTel may have until then to aggressively expand its fledging mio TV subscriber base from the current 155k users (as of end 2009). For StarHub, the latest move is slightly more positive, as its cable TV system is likely to remain the preferred mode of transmission, given that it has already penetrated some 539k homes (as of end 2009). Less aggressive content bidding is also expected to reduce its content cost, currently at around 70% of revenue. 

Maintain OVERWEIGHT. It is still too early to discern the financial impact as we think that there may still be a lot of logistics that need to be worked out – the devil is in the details. We still like the telcos for their defensive earnings and attractive yields. Maintain our OVERWEIGHT rating.

Second IPTV success story in Asia?

• MDA will require SingTel and StarHub to share the content, excluding EPL for 2010-12 season.

• In the near term, except football world cup rights, not many channels are up for renewal.

• In the long term,(i) incumbent StarHub would lose its content-advantage offset to some extent by lower content cost,(ii) challenger SingTel would benefit in both content line up and cost,(iii) better case for M1 to enter IPTV business, riding on National Broadband Network (NBN) and shared content.

Content-sharing regulations finally. Media Development Authority (MDA) finally announced mandatory content-sharing for agreements signed after 12 March 2010. MDA would go through industry consultation for content-sharing mechanism and pricing. The timing could pertain to upcoming football world cup rights so that SingTel-StarHub do not engage in overbidding again. Many popular channels may not be up for renewal in the next 2-3 years, so we do not see any major impact in the near term. SingTel would continue to be the exclusive carrier for English Premier League for 2010-12 season as content sharing applies to agreements done after 12 March 2010.

Impact over the long-term. Positive for SingTel. Besides EPL, SingTel does not have much attractive content, as StarHub holds majority of the popular channels exclusively. As and when SingTel secures these channels, it should diminish StarHub's content advantage. In fact, SingTel has a good chance to convert its EPL only subscribers to full subscribers by offering them StarHub's pay TV channels. SingTel's existing mobile and broadband subscribers should be easy targets. Upcoming launch of NBN in 2010 would also help SingTel to improve bandwidth hungry video-on-demand (VOD) and interactive programs. Besides, M1 could also enter IPTV market in order to offer a complete triple-play product. We reckon that Singapore could be the second IPTV success story in Asia after Hong Kong.

Cautious on StarHub. We see StarHub as a victim in (i) the pay TV business due to its loss of its virtual content-monopoly – beginning with EPL loss (ii) the broadband business due to NBN and its network leasing agreement with SingTel till 2015. With fixed network leasing cost, an expected decline in broadband ARPU due to NBN would directly impact bottomline. We prefer M1 to StarHub as (i) M1 offers 16% yield (regular 7%) for FY10F compared to StarHub's 9% yield (ii) M1, being a pure cellular player would benefit more from higher tourist arrival in Singapore. We also like SingTel for its attractive 12x FY11F PER compared to its historical average around 13x.

Pay TV providers now required to cross-carry exclusive content

With immediate effect, Pay TV providers which acquire exclusive broadcast rights to any programme, must cross-carry each other's content.

This applies to any contract signed or renewed from March 12. It does not affect existing contracts.

The fierce bidding over rights to broadcast the upcoming World Cup matches raised concerns over the issue of 'exclusive' rights, which has affected consumers in the Pay TV market.

To lock out competitors, Acting Minister for Information, Communications and the Arts Lui Tuck Yew said on Friday said Pay TV operators are willing to fork out substantial amounts for exclusive rights.

This has led consumers to cry foul, especially since they have to subscribe to both SingTel and StarHub – rivals in Singapore's PayTV market – for example, to catch their favourite football teams in action.

This practice of holding on to exclusive content though is rare in international markets.

Mr Lui said: "Content costs now constitute a significant percentage of pay TV operators' revenue, compared to international benchmarks. For example, SCV's content costs to revenue ratio has risen from 40 per cent prior to 2007 to close to 70 per cent today. This is much higher than the average 40 per cent for Pay TV operators in most other countries, including US, UK and Hong Kong.

"Secondly, Singapore suffers from a high degree of content fragmentation compared to other countries. Out of 179 channels today, only seven channels are common to both SCV and SingTel. An international benchmarking exercise using a group of 16 popular channels showed that Singapore was the only country with exclusive arrangements for all 16 channels.

"MDA's (Media Development Authority) review has concluded that this situation is unlikely to self-correct in the near future, and steps need to be taken to address this market failure".

So under the new Media Market Conduct Code, there will be a Public Interest Obligation. This means Pay TV providers must cross-carry each other's exclusive content.

For example, if SingTel acquires a new channel exclusively, it must make this channel available to StarHub.

StarHub must carry this programme at the same time SingTel is airing it – and vice versa.

StarHub also cannot make any modifications to the content.

This includes all the advertisements and branding SingTel may have embedded into the programme.

And SingTel will have to pay StarHub to carry its exclusive content.

It will be left to the telcos to work out a cost for this.

For consumers, it means that they can watch an exclusive channel through just one Pay TV retailer.

Consumers, regardless of which Pay TV service provider they belong to, will be charged the rate that has been stipulated by the original content provider. In the case of the example, whatever SingTel charges its customers for the exclusive content, StarHub customers will pay the same rate.

Mr Lui elaborated: "Consumers would no longer require multiple set-top boxes or switch retailers each time the rights of exclusive content changes hands. This will facilitate greater consumer access to pay-TV content, and re-focus competition to other aspects, such as service differentiation and competitive packaging".

For the industry, it means opening up the market to new players.

The rights holder will be able to brand the exclusive content, market it and monetise it as it wishes.

While the law takes immediate effect, the actually sharing of content is likely only to take place from September. For now, MDA will consult industry players, and sort out the details, like how consumers' bills will look like, and whether the review will affect new media platforms.

As for how this will impact the broadcast of World Cup matches in Singapore, it is status quo for now, as SingTel and StarHub have submitted a joint bid and are waiting for FIFA's reply.

Mr Lui said: "Let me just say that I am very happy that World Cup comes around only once every four years. We understand that SingTel and StarHub have recently made a new offer and negotiations with FIFA are still on-going. This is a commercial matter that is best left to the two pay-TV retailers and FIFA to settle.

"I know time is running short; we are well into the second half, we are approaching injury time, but we remain hopeful that the negotiations will reach a sensible outcome."

Meanwhile, Pay TV operators SingTel and StarHub have responded to the government's announcement on content exclusivity.

SingTel said it will review the details and actively engage the MDA through the industry consultation process.

StarHub said it fully supports the government's efforts to ensure fair and reasonable content costs. It also added that it supports the idea of a common set-top box for consumers.

MediaCorp also spoke to Singaporeans for their views.

One person said: "If a particular coverage has got wide appeal, like it is a national event or an international event, I think this should be made readily available, preferably free, if not, (at) a very reasonable rate to the consumers."

Another commented: "If this new initiative comes up, there is no edge by one service provider over another."

Analysts have said consumers will benefit from the move requiring Pay TV operators with exclusive content to allow such programming to be carried by other operators.

Kenneth Liew, senior market analyst, IDC Financial Insights, said: "In terms of pricing, in future bidding, both companies are likely to not bid so much on exclusive content, because at the end of the day, the other party will get to screen it, so they will actually bid at more reasonable prices.

"This is good news for consumers, because the bid price being lower will actually bring down the cost for consumers as well." – CNA/ms

4Q09 results round-up

• No surprises in 4Q09; maintain UNDERWEIGHT. 4Q09 results of all three Singapore telcos were fairly in line, with typical seasonality. Highlights were: 1) rather poor service revenue growth although mobile revenue continued to improve; 2) weaker margins; and 3) continued ARPU and revenue pressure in fixed broadband and corporate data. We retain our UNDERWEIGHT position on the sector as we remain apprehensive about rising content costs, pressure on broadband ARPUs and escalating subsidies. While we leave our DCF-based target price of S$2.07 (WACC: 9.5%) intact, we downgrade M1 from Outperform to NEUTRAL as it has outpaced the market by 9% since our upgrade and our house continues to prefer higher-beta and cyclical stocks. Nevertheless, M1 remains our top Singapore telco pick for its capital-management potential and greatest upside to NGNBN. Avoid StarHub (UNDERPERFORM, TP: S$2.14) and SingTel (UNDERPERFORM, TP: S$3.30). 

• Weak service revenue… Service revenue growth decelerated to +1.3% yoy in 4Q09, the second lowest ever, due partly to competition despite a recovering economy. M1’s mobile revenue was weak from lower voice usage and roaming in postpaid and IDD revenue. StarHub’s fixed broadband and corporate data revenue came under pressure from competition while SingTel’s IDD revenue was lower from lower rates. Mobile revenue grew 5% yoy in 4Q09, driven by growth at SingTel and StarHub from their larger customer bases. 

• …and margins. EBITDA margins slipped from seasonality and iPhone-induced SACs. With M1 and StarHub launching iPhones, industry EBITDA margins fell 2.6% pts qoq to 33.5%, the lowest since we began keeping records in 1Q04. Fixed broadband and corporate data revenue remained weak as competition remained rather heavy in those business verticals.  

• Uninspiring outlook. M1 and StarHub gave fairly lacklustre 2010 guidance but we believe M1 is low-balling expectations. We believe Singapore telcos will benefit from the recovering economy and rising tourist arrivals with the opening of two integrated resorts. M1 should benefit the most as it is a pure mobile operator. SingTel has maintained its muted guidance of low-single-digit growth for revenue and EBITDA for FY3/10 which should easily be achieved with the help of A$ strength and strong growth in its IT and Engineering division from NGNBN rollout. On the downside, we expect competition to stiffen in the residential and corporate broadband markets throughout this year while content costs should remain a medium to long-term issue. We do, however, expect heavy subsidies for devices to persist in line with recent trends.