Europe’s pay TV numbers reflect diverging economies

Europe’s first-quarter pay TV results reflect the diverging fates of its economies, with strong growth in Germany, more modest gains in other central and north European states, but signs of a slump setting in among the southern nations hardest hit by the Eurozone crisis.

The results confirmed the general rule that pay TV does well out of a minor economic downturn as it is a cheaper source of entertainment than say eating out in restaurants, but as recession deepens people then cancel subscriptions they can no longer afford and turn to Free To Air services.

In Italy, the deepening economic crisis has reversed most of last year’s subscription gains for Sky Italia, with a net loss of 86,000 customers in Q1 2012. This took the total down to 4.94 million, back below the five million it passed for the first time towards the end of 2011. There was a €1 increase in ARPU to €42, probably reflecting the fact that the lost customers were mostly basic subscribers, so that those left spent more on average. The operator’s owner News Corp blamed the losses on the plummeting economy, but argued that on the assumption conditions improved, Italy still had good potential for growth because of its low 19-percent pay TV penetration.

The abrupt downturn in Italian pay TV subscriptions is also reflected in the TV advertising market there, with broadcaster Mediaset reporting year-on-year first-quarter falls in ad sales to €622.7 million from €693.3 million.

In Spain, which is back in recession with unemployment is running at 25 percent and banking sector restructuring underway, the Eurozone’s largest Telco Telefonica is now being affected by the downturn, with first-quarter net profits plunging by over 50 percent year-on-year to €748 million in Q1 2012 compared with €1.62 billion in Q1 2011. That figure was below the bottom end of analyst forecasts. Ironically, this was partly a result of writing down the value of its 10 percent indirect stake in Telecom Italia, so Telefonica has experienced a double hit from both countries. In its home market, its IPTV subs continued to increase slowly but steadily during 2011 to reach 913,000 by the year end. A decline, however, has set in early in 2012.

There is also a pay TV slump in Greece, where the Eurozone crisis really began, with the country’s one significant pay TV operator, Forthnet, experiencing a decline from its 2011 total of 350,000 subscribers.

Elsewhere in Europe, though pay TV markets are still expanding, with particularly strong gains in Germany, the continent’s only major economy still healthy. An additional factor there is that Germans are overcoming their historical reluctance to pay for premium pay TV content, partly through growing dissatisfaction over the quality of programming on free to air services. At present, 63 percent of German households subscribe to pay TV, but mostly paying small amounts for subscriptions, with only 6.1 percent on premium services. Typically the two figures are closer together.

At any rate, German subs are rising fast, with incumbent Telco Deutsche Telekom adding 500,000 customers to its T-Entertain IPTV service customers in the 12 months ending March 31 2012 to reach 1.7 million, a 42 percent gain. Of these 173,000 came on board in Q1 2012, reflecting accelerating growth.

Meanwhile, satellite operator Sky Deutschland has been registering less spectacular but still substantial growth, with subs up by a net 359,000 in 2011 to reach 3.01 million at the year-end, and likely also to post accelerating gains when it reports this week. In fact, Sky Deutschland’s longer term prospects of growth have been boosted by winning rights for the Bundesliga football matches from Deutsche Telekom. As a result Deutsche Telekom's own Bundesliga package "LIGA total!" will cease to exist after the 2013-14 season.

Deutsche Telekom is desperate to avoid a resulting loss of subscribers to Sky, and so will be trying to negotiate carriage rights to the Bundesliga matches, rather as happens in the UK where Virgin Media and BT Vision show Premier League football rights to which are owned by BSkyB. In Germany, Sky has already indicated that it is open to discussions over distribution and sales collaboration, but not for outright sub-licensing deal of Bundesliga rights.

Deutsche Telekom would therefore be able to distribute Sky's Bundesliga package on its IPTV platform in unchanged form, but could not rebrand it within a tailored package as at present under "LIGA total!" Sky’s interest here is simply in getting as much money out of carriage rights as it possibly can, so whether an agreement is reached will depend on Deutsche Telekom being willing to meet Sky’s demands.
As in Spain but in the opposite direction, the German pay TV movement is being reflected in advertising, with broadcaster RTL Group posting a 6.3-percent revenue rise over the first quarter from €1.24 billion to €1.32 billion. This was attributed to strong advertising growth not just in Germany, but also France, where RTL operates.

German-speaking Austria is experiencing similar favorable economic winds, reflected in a year-on-year increase of 23.9 percent in IPTV subs at Telekom Austria, to reach 204,700 at the end of March. The Telco said that growth had been driven by the growing popularity of its bundled TV and broadband offerings, also reflected in a rise in ARPU.

Over at Europe’s two other major economies, France and the UK, growth is almost flat lining, with no crisis like in the southern countries. But, at the same time, there is stubborn resistance to growth-boosting measures. In both countries, pay TV is still doing modestly well with small gains.

Bucking this sluggish trend was IPTV operator France Telecom’s Orange, whose pay TV subs base increased by 23 percent over the year ending March 31, 2012, to 4.555 million. But, there was a slight drop in ARPU from €19.4 to €17.6, highlighting its inverse relationship with subscriber movements. There is tendency for ARPU to rise when subscribers fall, but to decline when there is a net customer gain. The former has been happening in the U.S, where some operators such as Comcast grew ARPU while shedding customers over the last year. In Latin America on the other hand, operators such as DirecTV have registered huge subscriber gains but with ARPU falling slightly.

This partly reflects the fact that operators can trade ARPU for subs by cutting prices to gain new customers. It also reflects the fact that at times of subs decline less wealthy customers with lower-priced packages tend to peel away first, increasing the ARPU from the remaining rump of higher paying subscribers, as has happened in France in Spain.

In the UK, there has been all round subs growth with the main three pay TV operators, BSkyB, Virgin Media and BT Vision, all gaining. But, there was a change in that the smallest, hybrid IPTV/DTT operator BT Vision, which has previously been squeezed by the big two, registered the highest proportional gain in Q1 2012, with subs up by 4.1 percent at 717,000 over the quarter. Cable company Virgin Media was up 1.4 percent at 3.8 million, while satellite operator BSkyB almost ground to a halt, up just 0.15-percent by 15,000 to just over 10 million.

With the UK sliding back into recession, it is not surprising that overall pay TV growth has slowed, and this has also carried across into TV advertising, with the main player here, Free To Air broadcaster ITV, reporting a 1-percent fall in ad revenues for Q1 2012. At least the UK can look forward to a temporary surge in TV advertising on the back of three major events — the Euro 2012 soccer tournament, the Queen’s diamond jubilee celebrations and the Olympic Games — coming in quick succession during the early and mid summer. ITV expects a substantial boost from these with some estimates suggesting this could be as high as 20 percent over the summer.

Among other European highlights, Belgium Telco Belgacom posted results fairly typical for the heart of Europe, with subs gain of 43,000 over Q1 2012 to reach 1.254 million, but at the same time ARPU decline from €19.4 to €17.6.

In the Netherlands, Telco KPN followed a similar line, gaining 79,000 IPTV subscribers in Q1 2012, taking the total for its Interactive TV service to 652,000. Likewise in the Czech Republic, Telefónica O2 ended the first quarter with 138,100 subscribers to its IPTV service O2 TV, 7-percent more than a year earlier.

Eastern Europe as a whole has posted mixed results, with a general economic downturn dampening a long term growth trend on the back of digitization and increasing pay TV penetration. IPTV will fare particularly well there over the longer term, according to a recent report by Digital TV Research, which forecast a rise in IPTV subs in the region from 3.832 million in 2011 to 5.518 million in 2012, going on to reach 11.209 million by 2017. IPTV pay TV revenues in Eastern Europe are expected to scale $1.275 billion by 2017, compared with $362 million in 2011 and $582 million in 2012.

Pay TV as a whole will be taken by 71 million or 61 percent of the region’s TV homes by 2017, compared with 53 million or 47 percent at the end of 2011, according to the report. Pay TV revenues will rise 35 percent to $7.806 billion over the period, suggesting that the more rapid IPTV growth will be at the expense of other sectors.