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DirecTV LatAm’s Prepaid: Effective For Subscriber Growth, But Challenging For ARPU

The following post comes from Kagan, a media research group within S&P Global Market Intelligence. To learn more about this research, please request a call.

Superior technology and a carefully crafted, yet evolving strategy helped DIRECTV Latin America LLC, or DTVLA, become the leader of the Latin America and the Caribbean, or LAC, pay TV market. The DTVLA group increased its direct-to-home subscriber base at a whopping 18% CAGR in the last nine years from 4.7 million in 2007 to 20.2 million by year-end 2016, claiming a 27% share of the region's multichannel market. Through products customized for potential customers in different income brackets, DTVLA was able to grow revenues from $952 million in 2003 to $5.99 billion in 2016. However, a combination of economic challenges and low ARPU products caused a 47% decline in ARPU between 2007 and 2016.

The group

DTVLA is composed of three entities: DIRECTV Panamericana, SKY Brasil, and Sky México. DIRECTV Panamericana and Sky Brasil are controlled by DIRECTV Group Holdings LLC, while Sky Mexico is controlled by Grupo Televisa SAB, which owns 58.7%. DIRECTV Panamericana is the entity that groups the operations in Argentina, Chile, Colombia, Ecuador, Peru, Puerto Rico, Uruguay, Venezuela, and the Caribbean. DTVLA became a subsidiary of AT&T Inc. in 2015 when AT&T bought DIRECTV Group Holdings for an implied enterprise value of $67.1 billion.

A success story

DTVLA entered the LAC market in 1996, introducing the first high-powered, all digital DTH television distribution service. Initially, DTVLA successfully positioned itself as a premium pay TV service aimed at the wealthiest population segments in the region thanks to the introduction of innovative features and clear signal. Then, in 2008, DTVLA changed the game by introducing packages targeted to low-income segments of the population.

One of those packages was a prepaid pay TV service. The product was off to a slow start, but after three years it became successful due to significant improvements to service offerings. DTVLA simplified the customer experience and cultivated commercial relationships to distribute antennas and prepaid recharges. In 2010, the adoption of prepaid DTH services took off and the DTVLA group added more than one million prepaid subscribers for a 659% year-over-year increase in net prepaid additions.

Evolution-of-subscriber-base

The service

The DTVLA prepaid service is structured to provide basic packages at affordable pricing. The customer buys an antenna and a set-top box for a fixed price, which includes a basic multichannel package for one week up to a month. After that period, the customer has to recharge the account to purchase a pay TV package. DTVLA offers two STB types, SD and HD, and three prepaid package: basic, medium, and premium, in most markets.

The most attractive feature of the prepaid service is its flexibility. Low banking penetration, high vulnerable employment, and income volatility among middle-to-low income households characterizes LAC. The prepaid product is especially attractive to households in this income range because, unlike postpaid plans, customers do not require a credit evaluation to acquire the services and the service is not bound by term contracts.

High provider switching cost and good return on investment make prepaid DTH products appealing for multichannel operators, despite lower service ARPUs. Buying a satellite antenna is a significant economic investment for low- and middle-income customers across the region, and rooftop space is usually limited, which tends to discourage subscribers from migrating to a competitor once the antenna is installed. Prepaid DTH ARPUs are relatively low. Kagan estimates that, on average, prepaid ARPUs represent less than 40% those of postpaid. Despite the modest ARPUs, low subscriber acquisition costs allow high profitability. In 2013, DTVLA's internal rate of return for prepaid services was approximately 45%.

DTVLA's prepaid service is available in most Latin American countries where the group operates, however programming and pricing vary by geography.

Princing and ARPU data are available in the full report.

Consolidating its leadership

The prepaid strategy strengthened DTVLA's position in the LAC multichannel segment. The group is the multichannel and DTH market leader in LAC, with subscribers reaching 20.2 million by year-end 2016.

DTVLA's prepaid DTH strategy was particularly successful in Mexico and in its Panamericana division, leading Sky Mexico and DIRECTV Panamericana to triple their subscribers by 2013 compared to year-end 2008. Sky Mexico achieved the highest share of prepaid subscribers with more than 50% of the total base, and more than $300 million in prepaid service revenues in 2016.

Meanwhile, DTVLA was able to maintain an ARPU above $25, one of the highest in the region. The prepaid segment was the biggest contributor to DTVLA subscriber base growth: Kagan estimates that by 2016 more that 30% of DTVLA subscribers were prepaid.

DTVLA revenues grew amid adverse exchange rate environment, with 2016 revenues being almost double those of 2008. Mexican and Brazilian currencies have depreciated more than 40% compared to 2008 rates. Despite those economic challenges, DTVLA was able to generate nearly $6 billion in revenue in 2016.

Evolution-of-total-revenue

Revenue and subscriber data for prepaid and postpaid are available in the full report.

Risks

DTVLA's strategy is not without risks. Consumer income volatility and ARPU erosion can hurt DTVLA's financial performance. Customers in the lower end of the income spectrum are more sensitive to economic swings, which have contributed to Sky Brasil's recent drop in subscribers and revenue. In addition, offering prepaid packages with affordable prices is key to attracting customers, but detrimental for ARPU growth. In Mexico, for example, Sky grew its customer base 252% between 2009 and 2016, while ARPU in U.S. dollars dropped 62% over the same period.

The road ahead

DIRECTV Latin America will have to tune its LAC strategy to face new competitors and avoid price wars. Claro TV Brasil has already launched its prepaid DTH service and other operators are following suit around the region. DTVLA also needs to develop a strategy that prevents price wars, which happened in Mexico, where ARPU has dropped 62% since 2009.

Prepaid ARPUs represent less than 40% that of postpaid
DTVLA is also likely to feel increasing heat from SVOD OTT players. For instance, Netflix Inc. is estimated to have more than three million subscribers in Brazil, and is reportedly trying to circumvent limitations imposed by low banking penetration by offering a prepaid-like payment option using gift cards, a strategy being implemented in several Latin American markets.

AT&T may sell its DTVLA division and refocus on the domestic market, which is likely to add uncertainty to the group's medium-term operations. DTVLA's services are not being promoted as heavily in Latin America compared to the U.S., where AT&T selected DIRECTV as its primary video platform. These mixed signals might presage a sale of DIRECTV Latin American operations.

Global Multichannel is a service of Kagan, a media research group within S&P Global Market Intelligence's TMT offering.

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