It takes more than two months’ data to set a new trend but there are signs in the very latest figures from the regulator Anatel that Brazil’s recent phenomenal growth in pay TV is slowing down significantly. If this turns out to be more than a blip then we will have to revise downwards slightly our previous forecasts running up to 2017, although the bigger picture is still one of a strong and fast expanding pay TV market with substantially higher ARPU than the other three BRIC countries, or for that matter any other significant developing market.
The background is that the current era of rampant pay TV growth in Brazil began as the brakes imposed by the global credit crunch eased in that country towards the end of 2009. At that time Brazil, with its large population comprising almost 60 million households, had very low pay TV penetration of just 12% but at the same time a fast growing economy driving an expanding middle class. This set the stage for rapid pay TV growth, with Brazil overtaking the somewhat more heavily penetrated Mexico in 2011 to become the region’s biggest pay TV market and moving further ahead since.
So taking our base as 7.1 million subs at the end of 2009 after a period of slow and erratic growth, the market leapt into life, passing 9.8 million at the end 2010, 12.7 million a year later and then 16.2 million by December 2012. This last figure was actually slightly ahead of what seemed like bullish projections we made in our report based on the 2011 figures and maintained an annual growth rate of around 28%. This equates to increasing linear growth year on year as represented by the number of net additions. Clearly this rate could not continue for much longer, but with pay TV penetration still only 27% at the end of 2012, compared with over 60% in neighboring Argentina, it seemed reasonable to project only a slight tapering off in 2013 with the country very much on track to pass the 20 million mark in the second half of 2014 and close in on 30 million by the end of 2017.
But now we have the very latest data from Anatel to absorb into our projections and narrative. Total net additions were 2.3 million in 2010, 2.98 million 2011 and 3.45 million 2012. This rate of growth was maintained in January 2013 with 312,000 additions, but then slumped to 144,000 in February before picking up slightly to 173,000 in March, the latest that has been counted. It will be very interesting to watch the next few months, which we will do and report back with a more definitive assessment around August, but if the last two months represent a new average, we rate subs growth to come in just below 2 million for 2013, only about 70% of what we had anticipated. We would be looking at sub totals of 18 million at the end of 2013, and about 25 million at the end of 2017.
We suspect that the recent figures will turn out to be somewhat bucking the current trend, perhaps providing early warnings of a more sustained tailing off in growth by 2015. It looks like the growth dip this year could be a slightly delayed reaction to the recent dramatic, but almost certainly temporary slowdown in Brazil’s economy. In 2010 Brazilian GDP rose 7.5% but slowed to 2.7% in 2011 before almost fizzling out at 0.9% in 2012, largely because of a sharp decline in agricultural exports linked to the continuing global economic malaise.
But now exports are soaring again leading the country’s Ministry of Finance to predict that growth will be back up at 4% this year, a figure that would be the envy of almost every European country and well ahead of the 2.5% consensus projection for the rebounding US economy. According to the Brazilian Central bank, recovery from the slowdown will be led by agriculture, with production increasing 6% in 2013 after retracting by 2.3% in 2012. At any rate restoration of a healthy annual growth should feed through into pay TV.
There is another salient factor to consider, which is the growing pains that have afflicted pay TV, reflected in a surge in customer complaints about the leading services over the last two years. This prompted Anatel to develop its pay TV quality benchmark as a yardstick for quarterly analysis of pay TV quality, with the first one published in March 2013. This revealed that of the major services only Net Servicos had reached the benchmark, along with Telefonica’s relatively fledgling Vivo service.
Satellite operator Sky Brasil, 93% owned by world leading DTH group DirecTV and 7% by Organiza”es Globo, Latin America’s biggest mass media group, has yet to make the grade. But the quality issues seem to have had little impact on subs growth, given that Sky Brasil continues to forge ahead to reach 5.04 million subs at the end of 2012 and push on to 5.26 million at the end of Q1 2013. Unlike the market as a whole, Sky Brasil seems to have had no blip and remains on course to reach 10 million in 2017. However its hopes of being ranked the country’s number one by overtaking Net Servicos sometime this year have been thwarted by Net’s merger with Claro TV under the ultimate control of Mexican Telco and media group America Movil, owned by Carlos Slim who has topped the Forbes rich list three years in a row. In fact the merger, confirmed April 2013, also brings Brazilian mobile phone company Claro into a single converged company with Net and Embratel.
As a result Anatel now scores Net and Claro TV as a single entity, even though the former is a cable service and the latter DTH, referring to it for now as Net/Embratel. On this basis the group is still clearly number one, with subs at the end of 2012 on 8.49 million, having put on 1.49 million. This actually outstripped DirecTV’s subs growth over the year (by 1.24 million to reach 5.04 million by December 2012), although most of this was accounted for by Claro TV, which is growing even faster than DirecTV in percentage terms. We reckon that at the end of 2012 Claro TV had 3.3 million subs and Net Servicos 5.1 million so that DirecTV had almost closed the gap, even though it looks destined to remain as the country’s number two overall.
DTH has also served the country’s third largest pay TV operator Oi TV well, although from a low base, coming up from 353,000 subs at the end of 2011 to 757,000 a year later and 840,000 by the end of Q3 2013. However Oi now has a second string with its IPTV service launched in 2012 based on Microsoft Mediaroom with Alcatel-Lucent as the integrator. This combination had already been chosen by Oi’s shareholder Portugal Telecom and is enabling the service to be integrated with Xbox consoles. It is running only over fiber, currently in Rio de Janeiro and Belo Horizonte, which contains growth but takes care of quality issues associated with the copper Telco infrastructure in the country.
Meanwhile the country’s number four pay TV operator Telefonica has the dubious distinction of being one of the few DTH providers to be actually losing subs, shedding 21,295 in February 2013 to 564,857, according to Anatel. This is partly because Telefonica is realigning its Latin American pay TV around IPTV with its Vivo TV Fibra served by its Global Video Platform (GVP) run by Ericsson and again based on Mediaroom. Like Oi, Telefonica is expanding IPTV on the back of its fiber roll out, which now reached about 1.2 million homes. Yet with modest ambitions to have 70,000 FTTH customers in Greater Sao Paolo and other major conurbations by 2015 and with Oi being only a little more bullish, it is hard to see where some of the IPTV gains predicted by some other analysts are going to come from. We now see 2 million being the likely IPTV subs total by the end of 2017, rather than the 4 million suggested in some reports.
Brazil started very late in IPTV because it was only in September 2011 that Telcos were allowed to offer pay TV, when the controversial bill called PL 116 (formerly PL 29) was finally passed. The two major points of controversy were proposals for a programming quota, forcing international content producers to include three and a half hours of local content per week in their offerings, and for only operators majority-owned in Brazil to be allowed to produce their own content for broadcast. The latter affected Telefonica, which being Spanish owned had to make various acquisitions and control transfers to meet these new stipulations. It took a while for operators to get their act together so it is only really in 2013 that IPTV is starting to roll in Brazil.
Pay OTT is harder to predict, because on the one hand services such as Netflix will be accessed over Telefonica and Oi’s broadband fiber, but at the same time there will be growing video distribution over emerging 4G infrastructures. It rather depends on the pricing models ‘ it could well be that several million Brazilians who are not regular pay TV subscribers will be accessing OTT content casually on a pay per view basis by 2017.
Another interesting question concerns the future of Brazil’s remarkably high ARPU, which has meant the country matches the much larger Chinese market for revenues and profitability. Inevitably this is coming under some pressure, but the willingness by Brazilians to pay what it takes to access what they regard as premium content at good quality is still there despite the high incidence of complaints. The country’s ARPU, the third highest in the world after Australia and the US in 2009, used to be cited as a reason for its low pay TV penetration, but that does not hold water now after the rapid growth over the last three years. Even so ARPU is slipping as penetration grows and stands at around $42 at the moment.
A final footnote to Brazil’s pay TV story concerns MMDS (Multichannel Multipoint Distribution Service), which has been a peculiarity of Latin America and Brazil in particular, for broadcasting at microwave frequencies. It was originally adopted in the 1990s as a way of delivering pay TV to moderately remote regions beyond the reach of cable TV. Recently however satellite has emerged as an alternative better placed to deliver wide ranging content, while a dispute between Brazil’s MMDS and 3G operators over allocation of spectrum has bogged the services down and prevented their expansion in recent years.
There were 313,000 MMDS customers left in 2010 but its decline has continued since, coming down to just 100,000 by April 2013. By 2017 it will be gone as the spectrum is re-allocated to 4G. Telefonica for example confirmed it was shutting down its ‘Vivo TV’ branded MMDS service and handing the channel bandwidth over to LTE mobile services.