The Digest   March 21, 2019
In this edition of The Digest, from Media Partners Asia:
  1. Disney, already a great company, could develop into an extraordinary one to compete on a global scale
  2. The latest round of consolidation in Korea, involving LG U+, CJ Hello, SKT and T-broad, will provide some relief to a fundamentally challenged cable sector
  3. Australian media group Nine Entertainment is enjoying some investor goodwill after revealing its pro forma performance and outlook after a market-changing merger
  4. HBO’s future has taken a major step forward in Singapore, where the broadcaster has lowered prices and broadened its reach after decades of exclusive pay-TV distribution
  5. A new OTT service from European football federation UEFA adds another dimension to rights deals for the Champions League, one of the world’s most valuable sports properties
  6. Subscription revenues are still expanding across much of APAC according to MPA, although with market differences in growth patterns and the roles played by SVOD and pay-TV
1. DISNEY STARTS ITS NEW JOURNEY
By Vivek Couto
A new dawn. “The pre-eminent global entertainment company,” in chairman & CEO Bob Iger’s words, embarked on a new journey March 20 following the full closing of its US$71 bil. acquisition of 21CF. Bolstered by its acquisition of Fox’s entertainment assets, Disney “is well positioned to lead in an incredibly dynamic and transformative era,” Iger continued.

Now to deliver on that promise. Over the next two quarters, Disney will financially consolidate Fox domestic and international assets to create the world’s biggest entertainment company by revenue. The new Disney is on course to generate US$85-90 bil. across media, theme parks and consumer products in its first full year of consolidation through FYE Sept. 2020.

The company’s core media business across Asia Pacific & Middle East, now under the leadership of chairman Uday Shankar, generated pro forma revenues of ~US$6 bil. in 2018. India contributed 40% to the top-line, with Greater China and Japan together providing another ~35%, according to MPA. Our analysis includes Star India’s large local business as well as theatrical, licensing and branded TV networks across the region from Disney and Fox. We exclude Disney’s consumer products business and theme parks.
 
 
An OTT future. In India, Hotstar has also developed a formidable sports and local entertainment-based OTT with an estimated US$300 mil. in run rate revenues. Now Disney will be looking to develop similar local platforms in Southeast Asia and North Asia, anchored to local content, while maintaining Hotstar’s trajectory at home. Disney may also commence roll-out for its upcoming SVOD offering Disney+ in APAC, staring with Australia and Japan.

Details of Disney’s D2C strategy, led by Kevin Mayer alongside international, will become more apparent after an Investor Day on April 11. Consolidating Fox also gives Disney another 30% in US streaming service Hulu, giving Disney majority ownership with a 60% stake.

Meanwhile, pressure on earnings will likely intensify over the next two to three years, challenging Disney’s strong track record of free cash generation. Disney management had flagged up US$2 bil. in cost synergies over two years when first announcing the planned Fox acquisition back in Dec. 2017.
 
 
2. KOREA: TELCOS COME TO CABLE’S RESCUE
By Vivek Couto
This time it’s different. The next round of cable and telco consolidation is unfolding in Korea. Regulators had previously nixed a potentially transformative deal when SK Telecom (SKT) tried to buy cable leader CJ HelloVision – now CJ Hello – in 2015. This time however, the powers-that-be – the Fair Trade Commission, the Korea Communications Commission and the Ministry of Science & ICT – are set to approve two deals that will deliver much-needed oxygen to a highly employed cable sector ahead of national elections in April 2020.

LG U+, Korea’s third-largest telco, is moving to acquire 50% of CJ Hello for W800 bil. (US$713 mil.), while SKT, the country’s leading mobile carrier, has signed an MOU for a possible share-swap with second-placed MSO, T-broad. If the latest cycle of planned M&A completes, Korea’s three telcos could end up with ~80% of Korea’s 32.9 mil. pay-TV subs (KT with 32%, LG U+ with 25%, SKT with 24%).

Later this year, regulators may relax market share caps, currently standing at 33% of all pay-TV subs in Korea, to allow ultimate consolidation. This could mean that either KT or SKT acquires top three MSO, debt-burdened D’Live. SKT is also rumored to be on the prowl to acquire smaller cable networks such as Hyundai HCN and CMB.
 
 
A tough decade for MSOs. Korea’s cable operators have been under pressure since 2010, knocked back by the rampant growth of government-mandated IPTV services as well as the rapid commoditization of fiber-to-the-home broadband, led by Korea Telecom (KT). This climate, combined with slow digitalization efforts by operators, has kept cable Arpus stubbornly low. By the end of 2018, Korea’s cable operators had only converted 70% of their subs to digital networks, assisted by private equity capital as well as new funds from IPOs and debt. At the same time, cord cutting across pay-TV and cable broadband has grown while other sources of income, such as MVNO services, home shopping and local advertising, have been relatively flat.
 
 
Last mile consolidation for video and broadband gatekeepers is an imperative to deliver the necessary scale, operating leverage and synergies to prosper and grow. That said, investors in Korea’s telcos are probably keener that these companies focus on competing with YouTube, which dominates online viewing, rather than buying legacy cable businesses.
 
 
We evaluate the key transactions and potential impact.
  • LG splashes out. LG U+ plans to acquire 50% of leading cable MSO CJ Hello for W800 bil. (US$713 mil.). After debt, the deal values CJ Hello at ~US$2.0 bil., 5.9x what the company should generate in Ebitda this year or US$520 per sub (based on CJ Hello’s pay-TV customer base at year-end 2018). That’s a sweet deal for CJ Hello’s investors but an expensive one for LG, at a more-than 65% premium to CJ Hello’s March 8 trading close (3.2x forward Ebitda). The deal will likely be funded by a combination of cash and debt.

    CJ Hello’s cable systems are relatively well upgraded with more than 2.7 mil. subs (65% of its total pay-TV TV base) adopting digital cable services at end-2018, along with 783,397 high-speed broadband customers and 785,679 MVNO customers. Both businesses will likely be kept separate for two years. LG U+ management expect significant cost savings on content acquisition with greater subscriber scale although it’s uncertain what near-term synergies can be achieved post-acquisition. CJ Hello’s pay-TV Arpu stands at W7,500 (US$6.7) per month, half of LG U+ pay-TV Arpu, offering potential upside, although it is unclear what LG U+ will do to optimize pricing power. One potentially expensive possibility is swapping out CJ Hello’s digital set-top boxes for LG’s IP-based platform. Greater customer scale could also help boost home shopping commissions and local advertising. The transaction also increases LG U+’s share of fixed broadband subs from 19% to 23%.
 
 
  • SK’s strategic MOU. SKT has signed an MOU with Korea’s second-largest MSO by subs, T-broad. The deal is likely to be a share swap between SK Broadband (SKB), SKT’s wholly owned fixed line/IPTV subsidiary, and T-broad, 80% owned by Taekwang Group and family, with only a limited cash component at this stage. The new entity could IPO after three years.

    The potential new combine, comprising 7.8 mil. pay-TV subs, could cross-sell services from SKT, including online video services from an SKT-led merger between domestic leaders Oksusu and Pooq (see The Digest, Jan. 31) as well as various security services from SKT affiliates SK InfoSec and ADT Caps. Material synergies are likely across content acquisition, while the new entity could also fund capex more efficiently to upgrade legacy analog networks for T-broad, which has been the slowest to digitalize among Korea’s major MSOs.
3. AUSTRALIA: NINE GEARS UP FOR DIGITAL FUTURE
By Mike Savage
A market rally. Nine Entertainment, now Australia’s largest listed media company, is enjoying an investor uplift after completing its merger with domestic newspaper major Fairfax in Dec. 2018. Nine’s share price was up 27% year-to-date (to March 18 close) although still -29% off a 52-week high from July, before the planned merger was announced. Nonetheless, investors are encouraged by cost and revenue synergies so far as well as the growth of SVOD offering Stan, and will be looking for continued progress on both fronts.

We evaluate the levers for Nine’s future upside and its challenges:
  • Profit growth. Nine’s management foresee profit growth, projecting pro forma Ebitda to scale from A$385 mil. (US$296 mil.) in FYE June 2018 to ~A$425 mil. (~US$315 mil.) in FY19, This includes the acquired Fairfax assets, and represent 10% Y/Y growth from a pro-forma 2018. In comparison, Ebitda for free-to-air rival Seven is projected to reach A$270 mil. (US$200 mil.) for FYE June 2019. Nine’s management expect the company’s positive momentum to continue this year and next, as Stan starts making money and other digital businesses generate more cash while TV margins remain stable. “We are positioned to benefit into the future,” said Nine CEO Hugh Marks, speaking on the group’s recent earnings call, “with the growth in our business coming from premium and addressable advertising, and subscription and transactional revenues.”
 
 
  • Key business units. Nine’s revenue and profits are still anchored to free-to-air TV, which serves as a foundation for growth areas such as online video and digital advertising. Nine’s broadcasting division – comprising radio through a 54.5% investment in Macquarie Media as well as free-to-air TV – remains central as a source of income (52% of revenue and 70% of Ebitda for 1H FY19) as well as content and IP. Nine’s digital and publishing arm contributed around 30% of revenue and 23% of Ebitda for 1H FY19. This division, which excludes Stan as well as classifieds business Domain, is made up of three business units: Metro Media for newspapers; 9Now for broadcaster catch-up and livestreaming services; 9 Digital Publishing for other online verticals. Domain (60%-owned by Nine) and Stan (now fully owned) are reported separately.
  • Television. The company is re-engineering its mainstay TV business to ratchet up profits. According to group CEO Hugh Marks, Nine’s TV business “is operating in a market that is softer than we anticipated, but we've been consistently making the right decisions to maintain the profitability of the business, exiting higher-cost commitments for better-yielding outcomes. We're improving our ratings while reducing our costs.” The cost base for Nine’s free-to-air business has declined by 18% with Ebitda up by 34% over the past three years, although Ebitda was down in 1H FY19. Investors expect more, however. Metro TV advertising (covering Australia’s five biggest cities) was weaker than expected in 1H FY19, compressing Nine’s TV revenue and Ebitda, and could deteriorate further. Nonetheless, rights for Australian Open tennis, secured last year, helped Nine off to a strong start in 2019 with a January revenue share of nearly 45% as well as a 5% increase in primetime audience.
  • Stan. Nine’s SVOD platform Stan (which had been jointly owned by Nine and Fairfax) posted a higher loss in the Dec. half of 2018 but management are targeting breakeven in the June 2019 quarter and profits through FY 2020. The company reported ~1.5 mil. active subs at end-2018 (we estimate ~70% are pay) and an expected A$185 mil. (US$137 mil.) year-end revenue run rate. That’s supported by an average A$2 (US$1.5) monthly price increase across Stan’s three tiers (basic tier unchanged at A$10 per month, standard tier up from A$12 to A$14 per month, premium tier up from A$14 to A$17 per month). “Stan's actually a bigger business than we anticipated,” Marks said. “We've been able to increase our content commitments, obviously, including things like the Disney deal and increase our subscriber growth and that’s really driving that turnaround into profitability. We do have costs to anticipate and we've put through a price increase as a result, starting Feb. 1, but we're getting the operating leverage starting to come through in that business.”

    Stan, which is slowly ramping up local productions, currently enjoys a broad funnel of US content from Showtime, MGM, Sony, Disney and Starz. These provide key market exclusives and an extensive library but the future could become more challenging as: (1) Starting Q1 2020, Disney likely launches and aggressively promotes its own service Disney+, making its Stan deal a one-year affair; (2) CBS, which bought distressed free-to-air player Ten in late 2017, may also keep Showtime for its own OTT services as that deal comes up for renewal over the next two years; (3) Amazon, which has yet to fully focus on Australia, accelerates distribution and content partnerships as its execution steps up over the next year. At the same time, the latest price increases also bring Stan’s pricing roughly on par with Netflix, a move that could dampen Stan’s future subscriber growth.
 
 
  • 9Now. Nine’s catch-up and livestreaming service 9Now grew its share of Australia’s A$61 mil. (US$45 mil.) BVOD (broadcaster video-on-demand) market to 47.5% in 1H FYE June 2019. This was supported by the popularity of shows such as Love Island, which saw 44% of its total audience watching on VOD, reflecting ongoing shifts in video consumption. Nine is also seeking to better monetize viewing on 9Now, introducing new targeted advertising capabilities in Aug. 2018 and live ad insertion in Jan. 2019. Nine management expect 9Now to generate A$60 mil. (US$44 mil.) in revenues and A$30 mil. (US$22 mil.) Ebitda by FYE June 2019, anticipating Australia’s total BVOD market to expand by 25%+ for at least three more years.
4. HBO PIVOTS IN SINGAPORE
By Mike Savage
A new proposition. Sometimes the future of media is only a contract renewal away. HBO has swiftly rebooted its offering in Singapore with a cheaper and more accessible service, after two decades of exclusive pay-TV distribution with StarHub came to an end in January.

The move has catapulted HBO into media’s new competitive landscape, a terrain shaped by increased consumer choice and waning pricing power for legacy media alongside endemic piracy where broadcasters must learn new skills to survive.

It also puts HBO, one of pay-TV’s most powerful brands, in the same arena as SVOD’s global frontrunner, Netflix. Price, content and technology will determine who gets the spoils. While Netflix has established an online lead in the US, both contenders are nearer the starting line in less-developed ecosystems in Asia, competing alongside other global, regional and local hopefuls.

The next step in the Lion City is persuading more Singaporeans to pay for HBO’s films and TV shows, through its own efforts as well with multiple partners. That includes going direct-to-consumer – a first for HBO in Asia – as well as expanding distribution with other platforms, tying up with Singtel, Singapore’s other pay-TV and telco major, in addition to StarHub. Soon after, HBO inked a deal with Toggle, the OTT platform run by Singapore’s free-to-air incumbent Mediacorp. “They’ve got big distribution, their app is widely distributed, they’ve got big-screen presence and they’ve got significant marketing presence,” says HBO Asia CEO, Jonathan Spink. Free-to-air partnerships in other markets should follow, helping raise HBO’s visibility as well as bringing the service within reach of more consumers.
 
 
HBO is also likely to test D2C in a few other Asian markets, although the focus for now will be evolving the partnership model. “In certain territories, there’s no doubt it will be available through the app store directly,” Spink says. “That will roll out and is rolling out but we are still principally working with partners and operators. That’s where we see the future of the business, but the flexibility does help counter the piracy argument.”

Ongoing transformation. In the meantime, HBO Go should benefit from a more substantial content offering, having resolved longstanding obstacles around rights last year. In Singapore, HBO’s revamp also aligns with the local debut of Asian movie channel Red, while bringing on board Cinemax, which had not been bundled with HBO’s other channels on StarHub. At the same time, the broadcaster continues to step up investment in Asian content, which has bolstered its appeal, with around five to six series currently in production.

This could become increasingly pivotal for HBO’s near-term growth in Asia. Over the medium term, much depends on new parent, AT&T, marshalling both additional content, initially from Warner Bros and Turner, as well as CRM know-how, especially in managing churn, to keep HBO’s seat at media’s top table.
5. UEFA GETS SERIOUS ON OTT
By Srivathsan AR
Livestreaming capabilities. A bigger commitment to OTT looks set to strengthen UEFA’s hand in rights deals for the Champions League, one of the world’s most coveted club football tournaments. European football’s governing body has confirmed the launch of a new app, provisionally called UEFA TV, offering livestreaming and a rich library, including exclusive access to players, coaches and archive content. It’s a significant improvement on UEFA’s current online offering, which is free but relatively threadbare, while lacking livestreaming.

MPA estimates that UEFA TV could add a 10-15% premium to Champions League media rights in Asia Pacific during next year’s negotiations for the 2021/22 to 2023/24 cycle, as an add-on for existing distribution partners while opening the door to new ones. In addition, UEFA TV could augment Champions League sponsorship deals as it builds reach and accumulates more usage data over different seasons.

UEFA TV will debut outside Europe and North America later this year with live women’s and youth matches as well as archive and behind-the-scenes footage. By next year, UEFA TV could be livestreaming Euro 2020, Europe’s biggest country-based tournament, in smaller and under-represented markets where the federation hasn’t been able to seal a media rights deal.

A low-key start. It’s a modest beginning but still the most ambitious foray by a football federation into OTT yet. Other major sports have followed a similar path, notably Formula One and the Olympics Federation over the last two years, although with limited monetization until now, especially in Asia Pacific.

If deemed successful, UEFA TV may also become the partner of choice for smaller European leagues that struggle to sell their rights in international markets. Options open up if UEFA TV becomes the official distribution vehicle for countries such as Belgium and the Netherlands, creating a substantial pool of live content while contributing to incremental monetization on a revenue share basis. With some luck, La Liga and other top leagues may even join the bandwagon.

Other football leagues have been testing the waters, but have shied away from a major D2C investment so far. England’s Premier League (EPL) abandoned its plans to test-launch a service in Singapore from the 2019/20 season, which would have been the EPL’s first D2C offering anywhere in the world. Nonetheless, the EPL will likely start rolling something out over the next three to four years. Spain’s La Liga, which had mulled its own D2C service in 2018, opted in Jan. 2019 to stream matches from its second division worldwide on YouTube instead.


THREE NEW OPTIONS FOR MONETIZATION

Online value. The Champions League’s media value seems to be saturating in Europe, making it increasingly important for UEFA to maintain and build fanbases elsewhere. UEFA executives believe that a standardized digital platform such as UEFA TV will deliver a superior streaming experience as well as accelerate turnaround of highlights for rights owners and fans alike. This will be augmented by archive rights that only UEFA owns. Every fan has a favorite memory of their team but there are hardly any legal options to watch matches that are more than three years old.

As Champions League rights come up for renewal, MPA has identified three ways UEFA can place a premium on digital rights:
  1. Make digital rights non-exclusive in markets where the value of the traditional bundle has maxed out. Rising demand for digital rights, combined with a broader rights allocation, could attract more potential partners, helping boost overall valuations.
  2. Leverage UEFA TV as a ready-made digital destination for pay-TV operators who do not intend to run their own sports streaming platform. This would again create a wider gamut of buyers in bigger markets.
  3. Implement a D2C-only play in markets where UEFA is unable to sell the rights at its expected valuation.
Partnerships with broadcasters will remain vital to sustain overall valuations, making the first two options real possibilities by cultivating more demand for UEFA's rights. A D2C-only offering is probably far-fetched at this stage, given the partnerships needed to deliver strong monetization as well as on-ground challenges in areas such as billing, customer support and marketing. That said, UEFA could try out this option in a test market, making D2C a possible factor in the next round of negotiations.


INHERENT GROWTH CHALLENGES IN APAC

Unfortunate timing. UEFA runs one of the world’s most valuable sporting properties, with many of the world’s best and best-known footballers playing in its leagues. Worldwide media rights for the Champions League and sibling tournament the Europa League, which are sold as a bundle, topped US$2.5 bil. for the 2017/18 season, 70% of the global media value for the EPL. In Asia Pacific however, UEFA’s media rights were just 30% of what the EPL fetched, reflecting the need to play Champions League games on mid-week evenings in Europe – night-time in Asia. UEFA tried to address this during the current 2018/19 season by staging more than 20 group-stage Champions League matches earlier in the evening. Nonetheless, kick-off for all 29 knock-out matches is still 4:00am in Hong Kong and Singapore.
 
 
While paying fans can already catch Champions League games online in most major APAC markets, some of UEFA’s local partners also teamed up with social media majors earlier this year to show select live games for free. The tie-ups will help boost reach and in part address commercial and operational challenges in sports streaming. Dazn’s football portal Goal tied up with Twitter to broadcast four Champions League games in Thailand, the Philippines, Cambodia and Laos, with highlights also available on Twitter in Malaysia, Brunei and Singapore. In Australia meanwhile, Optus arranged to livestream six Europa League matches on Twitter and four Champions League matches on YouTube. These deals follow a pact by Indonesian platform FMA to share near-live highlights on Twitter for all Champions League games in the current season.
6. APAC SPOTLIGHT: VIDEO SUBSCRIPTION TRENDS
By Aravind Venugopal
 
 
SVOD services (albeit mainly Netflix outside China) have been picking up the baton for video subscription growth across much of APAC in a variety of different ways. We highlight some key trends below:
  1. Subscription revenue generally up. Over the past three years, SVOD services have helped boost the overall subscription pie across much of APAC, especially in China and India, where pay-TV Arpus are relatively small, as well as Japan, where pay-TV is sizable but penetration is low. However, SVOD remains in its infancy in many markets, making recent developments an unreliable indicator for the future. Outside China, Netflix looks set to remain the dominant driver of online video subscription revenue across much of APAC for the foreseeable future, reflecting a still small industry largely serving a relatively well-off niche. Pay-TV losses and SVOD gains over 2015-18 have been relatively modest in Hong Kong and Malaysia for example. However, these trends have been far more pronounced in Australia, indicating that here, SVOD has largely served as a substitute for pay-TV so far. Meanwhile, in Singapore and Thailand, total subscription revenues have receded over the last three years, highlighting how piracy’s formidable grip can add to existing industry challenges. Consumers are prioritizing broadband over SVOD and pay-TV, leading to a new value equation for video subscription. Notably, Amazon Prime Video – tied to a wider bundle of digital services – has high levels of scalability in India and Japan.
  2. Online video ecosystems need to diversify. While China leads the way in paid online video (largely due to the absence of a commercially-oriented incumbent pay-TV industry), SVOD competition is starting to diversify in some other large markets, led by Japan followed by India and Korea. In many other markets however, Netflix will continue to deliver the lion’s share of SVOD revenue growth for a while. This trend has been underscored by regional SVOD contenders such as Hooq and Iflix shifting to freemium models, joining Viu which has been open to advertising from launch (and has started to meaningfully scale in this regard). At the same time, Netflix has been experimenting with a cheaper mobile-only tier, including in Malaysia, which could open up another growth front for the market leader. However, as China has shown, a healthy AVOD market can be a precursor to a dynamic SVOD sector by encouraging new viewing habits and local content production. India, buoyed by dynamic broadband growth, has started on this journey, Hotstar in particular as it seeks to bolster its SVOD tier having nurtured a vibrant AVOD business with sports and local IP.
  3. Subsidies can help sustain pay-TV, for a while. Pay-TV, in full retreat in certain markets, has continued to grow alongside SVOD in others, providing a buffer for pay-TV operators to manage the migration to OTT. That said, pay-TV revenue growth is mostly prevalent in markets where pay-TV has historically operated as a utility service, such as China, or where pay-TV is increasingly offered as part of a broadband bundle, such as Indonesia and Vietnam. Nonetheless, affordable pay-TV continues to win over new customers in India and the Philippines, primarily through DTH, while the sector remains resilient in Japan and Korea, largely through telcos that have been buying cable and DTH assets and driving IPTV growth. In all markets however, the battlefield is now broadband, either as a complement or replacement for existing services, contested by incumbents and new entrants alike.
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