Renewed economic dynamism and multi-platform competition are fueling the consumption of pay-TV and broadband in Asia Pacific. However, this growth depends on investment in content, distribution and new technology, benefiting consumers but coming at a high cost for pay-TV channels and distributors, according to Asia Pacific Pay-TV & Broadband Markets 2011, a new report published by leading industry analysts Media Partners Asia (MPA). The result is margin pressure for pay-TV providers in some key markets, predominantly India, as well as potentially in Japan, Korea and Malaysia. Vivek Couto, executive director of MPA, said: “These trends will prevail over the medium term due to competitive intensity, well meaning but counter-productive regulation and industry fragmentation. Having said that, we already see operating leverage improving in a number of markets. Future growth also hinges on continued improvement in ground-level execution, talent and regulation, especially in India, China and Southeast Asia. Our research shows that the growth of broadband represents more of an opportunity than a threat for pay-TV companies; the key cross-sector competitive dynamic in most markets remains fierce competition from free TV. There is a bright future for pay-TV in Asia Pacific but it belongs to companies willing to invest and innovate, positioning themselves as consumer businesses.” Pay-TV subscriptions in Asia Pacific grew by 9% in 2010 to reach approximately 375 million by the end of the year, according to projections from MPA. With around 8 million households in the region subscribing to multiple pay-TV services, this means 367 million homes were subscribing to pay-TV in Asia Pacific at the end of 2010, almost half (48% penetration) of all TV homes. This number is projected to grow to 57% of TV homes or 486 million subscribers by 2015, and to 62% of TV homes or 570 million subscribers by 2020. DIGITIZATION KEY TO FUTURE PROSPERITY The number of homes subscribing to digital pay-TV services, including multiple subscriptions, reached 148 million in 2010. Digital networks allow pay-TV operators to offer additional programming and high definition (HD) content as well as value- added services such as digital video recorders (DVRs) and video-on-demand (VOD) and interactive TV. As competition increases, these help operators grow revenues and strengthen subscriber loyalty. The number of homes subscribing to digital pay-TV services is expected to reach 362 million by 2015 and 483 million by 2020, driven by digitization of millions of homes in China and India as well as full-scale digital conversion for both free and pay-TV in Japan and Korea. This means that digital penetration of pay-TV homes will grow from 20% in 2010 to 42% by 2015, and 52% by 2020. MPA projections indicate that subscribers with high definition pay-TV reached 12.4 million in 2010, and will rise to 45 million by 2015 and 81 million by 2020. Excluding China and India, HD penetration of digital pay-TV subs across the region reached almost 30% in 2010 and is likely to grow to approximately 60% by 2020, driven by continued growth in Australia, Japan and Korea as well as new growth in Southeast Asia. Revenues for the pay-TV industry in Asia Pacific, representing income from consumer subscriptions as well as advertising, increased by 14% in 2010 to reach US$38 billion. This was driven by healthy growth of ARPU (average revenue per subscriber) in mature markets and increases in subscriber volume in emerging markets, as well as strong local advertising growth. According to MPA, pay-TV advertising in Asia Pacific rebounded from only 4% growth in 2009 to 15% growth in 2010 to reach approximately US$8 billion in net terms (i.e. including ratecard discounts). This represents about 25% of total TV advertising in the region. Subscription revenues meanwhile grew by 14% in 2010 to reach US$30 billion, with consumer spends on pay-TV growing by 4% on average. MPA predicts pay-TV industry revenues in Asia Pacific will grow at a 10% CAGR between 2010 and 2015 and at 8% CAGR between 2010 and 2020, to reach US$60 billion by 2015 and US$78 billion by 2020 respectively. Boosted by digital growth and continued increases in basic pay-TV subscribers, total subscription revenues will climb from US$30 billion in 2010 to reach US$46 billion by 2015, and US$60 billion by 2020. Subscriber volumes will grow substantially, while ARPUs will remain robust in high-value markets such as Australia though competition, and in certain cases regulation, will depress and limit ARPU growth in India, Japan and much of Southeast Asia. Local advertising will remain buoyant however, driven by economic growth and rising penetration, climbing from US$8 billion in 2010 to reach US$13 billion by 2015, and US$18 billion by 2020. In broadband, the growth of mobile and fiber infrastructure is having a major impact. Mobile broadband networks are becoming commonplace in Australia and Southeast Asia; increasingly important in North Asia with the proliferation of smartphones and tablets; and potentially vital in India in the future, with the anticipated growth of 3G and next-generation LTE networks. At the same time, broadband speeds are growing alongside demand in the fixed line segment, due to infrastructure upgrades and attractive pricing from telecom and cable networks. Broadband subscribers in Asia Pacific grew at 26% in 2010 to reach 257 million, and are expected to outnumber pay-TV subscribers by 2015, reaching 538 million and thereafter climbing to 681 million by 2020. Regional per capita penetration will climb from 7% in 2010 to 15% by 2015, and 18% by 2020. Fixed networks had an 83% share of the market in 2010, though this will decline to 52% by 2020 due to the growth of mobile. GROWTH DRIVERS & THE ROLE OF INDIA Favorable market and industry dynamics will drive future pay-TV industry growth. Economic growth is a key catalyst, reflected in a number of trends: household growth and urbanization; rising TV penetration; and higher incomes and improved affordability. MPA analysts also highlight a favorable industry landscape due to competition and investment. This is most notable in India, where the rise of direct-to-home (DTH) satellite TV is having a major impact; in Indonesia, where DTH platforms are helping boost pay-TV penetration from a very low base; and in Korea, Japan and Singapore, where IPTV platforms have contributed new growth to saturated marketplaces. At the same time, cable digitization is having a positive impact on industry value chain economics, most notably in North Asia, boosting consumer spend on pay-TV in particular. Significantly, Japan, China and Korea will also complete digital switchover during this decade. Meanwhile, investment in content is at its optimal in markets such as Australia, Japan and Singapore, and growing in markets such as Malaysia and Korea, where pay-TV operators are investing in self-produced content and relevant turnaround channels to retain competitive advantage. However, content investment is poor in the largest markets, China and India. The rise of India is particularly noteworthy as the country will overtake the United States as the world’s largest DTH satellite pay-TV market by the end of 2012, and will surpass China as the largest market for pay-TV advertising after 2017. In general, revenues, costs and capital expenditures are all growing at an alarming rate in India due to various dynamics, including macro growth, competition and digitization. Such is the extent of competition, cost and fragmentation in the Indian marketplace that profit margins remain low, even for market leaders. Margins and value chain economics will improve in the long term however, through digitization of cable networks, rising subscriber scale, improved cost control and strong advertising growth. Pricing power will still be modest however, as ARPU growth will remain under pressure due to competitive and regulatory dynamics. CONSUMER-FOCUSED BRANDS WILL THRIVE Pay-TV and broadband distribution platforms positioned as consumer businesses will continue to prosper, especially as they invest further in product innovation, relevant content and new digital and broadband technologies. Operators that combine optimal networks with unique content assets, that they own or have rights to, are poised to benefit from the growth of fiber infrastructure. Notable examples include operators in Australia, Japan, Korea, Singapore, Malaysia and Taiwan, moving to IP- based platforms over the long term to capitalize on technological change. MPA analysis indicates that the top 70 pay-TV distribution platforms in Asia Pacific generated approximately US$21 billion in sales during 2010, a 14.1% year-on-year growth, while EBITDA grew 23% to top US$6 billion, representing a 28.5% margin. While operating margins remain solid in North Asia, running between 40-60% on average, margins are trending much lower or in negative territory in Southeast Asia and India due to rising costs and investment. For broadcasters and content providers, companies that produce and own most of their own content will typically be able to best monetize and control their product in this decade of broadband proliferation. Large producers of local content in India and Southeast Asia are growing rapidly, while regional genres focused on infotainment and family entertainment are showing significant returns. However, uneven and in some cases declining consumption of movie channels is a key issue for both operators and channel suppliers, in Australia, Hong Kong, Malaysia and Singapore in particular. MPA research indicates that the top 20 pay-TV broadcast groups in Asia Pacific generated US$7 billion in sales during 2010 with EBITDA of US$1.3 billion, a 19% margin. Apart from India’s Sun TV, a virtual monopoly in its key markets, market leaders in India (i.e. Zee, Star) are trending at 20-25% margins due to cost inflation and competition, while in Korea, CJ E&M’s TV business margins are less than 10%. Regional networks from TVB, Discovery and Fox International Channels are trending at more robust margins, due to disciplined costs and revenue optimization across broad portfolios. Leading Asia Pacific Broadband Pay-TV Operators: Ranked by EBITDA COMPANY MARKET FISCAL YEAR- EBITDA (US$ END MIL.) Jupiter Japan Dec-10 1,740 Telecommunications Foxtel Australia Jun-11 445 Sky Perfect JSAT Japan Mar-11 410 Astro All Asia Malaysia Jan-11 250 Networks Tbroad Korea Dec-10 236 Sky Network New Zealand Jun-11 209 Television Ltd Cable & Multimedia Korea Dec-10 207 (C&M) Communications Source: MPA research estimates Leading Asia Pacific Broadcasters: Ranked by EBITDA BROADCAST GROUP KEY MARKETS FISCAL YEAR- EBITDA (US$ END MIL.) Sun TV India Mar-11 335 Zee Entertainment India Mar-11 165 Star India India Jun-11 130 Premier Media Group Australia Jun-11 130 TVB Pay Channels & Greater Dec-10 121 Licensing China, SEA, Int’l Fox International Regional Jun-11 115 Channels Discovery Networks Regional Dec-10 115 Asia Source: MPA research estimates