Faultline: European pay TV squares up to Euro crisis Jul 26, 2012 – Rethink Research
European pay TV breezed through the first dip of this recession during the global credit crunch of 2007 – 2009, but it was always clear that the Euro crisis would provide a sterner test. Results held up very well even in the hardest hit southern countries during 2011, but as the ill economic winds have become even stronger during 2012, some pay TV operators have felt the drag. This has shown up in the results of infrastructure providers such as Harmonic, which although US based has considerable European exposure. Harmonic’s results, analyzed elsewhere, highlight strong performances in the US and Asia pulled down by a decline in Europe. That could partly be that Harmonic has the wrong clients, because Ericsson at least has reason to be grateful to pay TV for offsetting a decline in sales of telecoms and mobile network equipment.
Ericsson did not split out revenues from its video division that was formerly Tandberg TV, but CEO Hans Vestberg did single out IPTV and video compression equipment covering MPEG-4 and JPEG2000 as strong performers that contributed to a 1% rise in global sales. This meant that although Ericsson’s profits were down 63% in Q2 2012 compared with a year earlier, it was still SEK 1.2bn (€140m), which was sufficient to mollify the markets as shares rose more than 2%.
Alcatel-Lucent, another of Europe’s big three in telecoms and video infrastructure, fared less well with its shared plunging by 18% even before its Q2 results were announced on July 26th, having attempted to take the sting out of the bad results by issuing a warning of an adjusted operating loss of $49 million for the quarter. This was attributed to the impact of the global macro-economic environment on telecoms equipment sales, but Alcatel Lucent like Ericsson can identify IPTV as a bright spot, having been buoyed by several recent contract wins. Most significant of these came this month when Brazilian Telco Oi struck an agreement with Alcatel-Lucent for supply of equipment to its IPTV service being launched on Microsoft’s Mediaroom platform over the second half of 2012. Although a relatively small player in Brazilian pay TV at present with about 350,000 subs split between satellite and cable, Oi has ambitious plans to expand in IPTV on the back of its fiber optic network that has been rolled out in 20 cities including Rio de Janeiro.
Alcatel-Lucent is also making gains in mobile TV, witnessed by its recent win from Portugal Telecom in partnership with mobile network security company AuthenTec to provide the platform for the Telco’s new Meo Go! Service. This brings 60 live TV channels along with VoD to subscribers using Android, Apple iOS and Windows-based smartphones, enabling secure delivery and smooth playback via several content formats.
If Alcatel-Lucent was looking up to Ericsson, Nokia Siemens Networks must be envious of both, being the only one of the big three in Europe to have already shed large numbers of staff after announcing in November 2011 that it would lay off 17,000 of its 74,000 workforce. In this case it is part of a greater malaise that has gripped Nokia for a long time as a result largely of internal indecision and division which prevented innovative products getting out into the street. Contrast this with Apple, which was not particularly quick off the draw with either the smartphone or the tablet. But its timing was perfect, waiting until the technology and pricing was right, and R&D was perfectly co-ordinated with and driven by the late Steve Jobs.
But Nokia has played its part in Apple’s success in a negative sense, having demonstrated a phone with a color touch screen set above a single button over seven years before the iPhone was launched in November 2007. Around the same time at the turn of the Millennium Nokia also had a tablet going in its labs complete with wireless connection and touch screen. Of course at that time fixed and mobile bandwidth were too limited and the devices lacked sufficient power to run appealing applications as well as being too expensive for mass market take up, but the point is Nokia was there because it was outspending everybody else in R&D, and that continued throughout the noughties to the tune of $40 billion over the decade. The main effect of this was to maintain and for a while increase Nokia’s lead in general mobile handsets, peaking at 40.4% of the global market in 2007. Since then even this has eroded despite the continuing high R&D expenditure, and Nokia finally lost its number one spot to Samsung early in 2012, as its share fell from 27% Q1 2011 to 21% in the first quarter of this year.
Nokia made another mistake, at least in timing, by choosing Microsoft’s Windows Phone rather than Android for its flagship Lumia smartphone launched in October 2011. There is nothing wrong with Windows Phone and Lumia is a good product, but it would have sold better had Nokia run with Android, which was more mature and established. Nokia argued the day would come for Windows Phone, but we still expect it to track well behind Android, as well as iPhone, over the next few years. In fact Nokia sold 4 million Lumias in Q2 2012, doubling its Q1 total just after the launch. This still lags far behind Apple’s total of 26 million iPhones, or Samsung’s phenomenal 50 million, and suggests Nokia will be playing catch up in smart phones, but it is at least a respectably solid start.
Nokia is hoping TV will help boost Lucia sales, having already launched Nokia TV on the device in Finland, enabling users to browse or search through catch-up TV services from local broadcasters and then stream a chosen show directly to the phone, without any registration.
Meanwhile it is not just infrastructure and device vendors that are relying on TV and video to allay declines elsewhere, but also Telcos. In these cases it is usually the broadband/IPTV double act that is acting as a counterweight to voice revenue slump, with overall results depending on the balance between the two. At Dutch incumbent KPN a weak domestic market for wireline and mobile was partly offset by stronger performances by the Belgian and especially German subsidiaries.
But IPTV was the star performer, with subs soaring 78% over the last year to reach 741,000 at the end of Q2 2012 from 416,000 Q1 2011, and 652,000 just three months earlier. The key factor here perhaps is a net gain of 228,000 pay TV subs for KPN over the last year, as its DTT platform, Digitenne continued to lose subscribers, falling to 771,000 compared with 868,000 a year earlier.
KPN’s subs gain was at the expense of Dutch pay TV leader, MSO Ziggo, whose total TV customer base including analog slipped from 2.886 million at the end of Q1 to 2.853 million by June 30th. But like some other European cable operators, Ziggo seems to have given up throwing good money after bad attempting to fight subs decline and instead focused on increasing ARPU, which rose 9.9% over the year, from €13.49 in 2011 to €14.83 for 2012.
German MSOs are an exception to the law of declining cable TV subs, as the whole pay TV sector is still growing healthily with plenty of pickings for all. This is because Germans have overcome their historic reluctance to put their hands in their pockets to pay for TV, driven partly by lowering public opinion of free to air content in the country. All the leading German operators have yet to declare Q2 results, but satellite company Sky Deutschland has indicated it will post an operating profit, which represents progress after posting a loss of $96 million for Q1 2012.
The operator has yet to turn in a full year profit, having invested heavily in content to gain market share in the expanding German market, in particular splashing out $2.5 billion for German rights to the 2013 to 2017 seasons of the country’s Bundesliga football league. Sky Deutschland is predicting 2013 will be its first whole year without loss before interest, taxes, depreciation and amortization.
Over in the UK, Virgin Media has just posted results, highlighting the trend for slight subs decline and rising ARPU among European MSOs. The company lost 15,000 net subs during Q2 2012, but saw ARPU rise 3.1% to £48.82 in Q2 over Q1.
The two main stories for Virgin Media are passing the million mark for number of customers with the TiVo web connected set top box, and raising prices by an average of 5% from April 1. The latter was a calculated gamble firstly that the resulting increased ARPU would more than offset any churn by disgruntled customers, and secondly that the price rises would be emulated by Virgin Media’s grateful pay TV competitors, BSkyB, and BT Vision. The gamble seems to have paid off since the subs loss is quite small, while BT and Sky have both raised their prices, in the latter’s case by 18%.
Another interesting question is whether BT’s aggressive roll out of fiber is causing broadband churn, since it erodes Virgin Media’s previous lead in headline broadband speeds. The answer seems to be not yet, but it has prevented Virgin Media milking its high speed broadband to gain subs, since its broadband market share has remained flat over the last year, while BT is on the up at the super broadband level, defined as headline speeds over 30 Mbps. BT added 150,000 BT subscribers to its Infinity fiber based broadband service during Q2 2012, taking the total to over 700,000, after rises of 131,000 in Q1 2012 and 95,000 Q4 2011.
As a footnote to this results review, we note that Pace, the UK based world number one set top vendor, has revealed that last year’s hard disk supply shortages caused by the Japanese tsunami and more particularly the later October floods in Thailand, cost the company a total of $76.8 million. But this accounts for less than half of the company’s revenue decline to $1,006.5 million for the first six months of 2012 compared with a year earlier, with the rest resulting from squeezed margins on low volume products. Like most of its rivals, Pace is seeking the economically higher ground of media servers, software and services, but it remains to be seen whether it will emerge in as strong a market position after this transition. The good news is that its rivals are also finding life difficult at the moment.
Faultline: European pay TV squares up to Euro crisis
