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Showtime:
Profit, At Last
By Chris
Forrester, TBS contributing editor
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| Showtime's
Dubai Media City headquarters |
On May
26,2004, Viacom's Sumner Redstone and Faisal al-Ayyar of Kipco
(Kuwait Investment Projects Co) will perform a ribbon-cutting
ceremony at Showtime's brand-new broadcasting centre at Dubai
Media City. The two major shareholders in Showtime have much
to celebrate. Showtime is, without doubt, the Middle East's
most successful Pay-TV platform. During 2003 examinations by
two investment bankers (Credit Suisse and UBS) have already
valued the company at $750m, some three times its nominal book
value. Showtime is a joint-venture between Kuwait-based Kipco
and entertainment conglomerate Viacom, and is licensed to operate
in twenty-two Mid-East and North African countries. Kipco is
talking to a number of banks about a potential Initial Public
Offering (IPO), and we understand that a recent Board Meeting
in Kuwait looked at a timetable that would lead to a probable
stock exchange listing.
However,
Showtime's eventual IPO valuation is expected to be much more
than $1 billion. The past valuations were carried out on the
basis of historical information based on 2002 and early 2003
trading, and when the Baghdad/Iraq war and commercial anxieties
were at their height. More recent trading has been robust and
all-important Average Revenue Per Unit (ARPU) levels (at $54
amongst the highest in the world) have been maintained despite
fierce local competition from rivals. Subscription numbers are
the highest in the industry locally and stood at 281,000 at
December 31st. Moreover, this current winter's trading has been
buoyant, and a third investment bank will be looking at the
company around March, helped then by more favourable data from
2003, and an expectation that 2004 and 2005 numbers can be met
and possibly surpassed. Indeed, one senior company executive
told us that 2004's end results could be "amazing"
helped by tough anti-churn measures planned for 2004. Showtime
has its own internal projections looking at trading up to 2010.
Showtime
has in the past made no secret of its plans to exploit its healthy
position with a market float. It achieved cash-flow breakeven
last May and is now making positive profits. 2003 was a challenging
year for the company with ample customer nervousness in the
company's core markets of Kuwait, the United Arab Emirates,
and Saudi Arabia. Nevertheless, Showtime is believed to have
fully met its budgeted cash net income for 2003. Kipco's CEO
Faisal Hamad al-Ayyar is on record as saying that Showtime intends
contracting with an investment bank that will lead to a listing
"on an international stock exchange, such as the London
stock exchange." Kipco is a widely diversified business
with major investments in banking and telecommunications. Its
Kuwait-based Wataniya mobile telephone outfit has recently been
awarded one of three mobile licences in Iraq (in a joint venture
with a Kurdish company), and have similar cellular licences
in Tunisia and Algeria. Wataniya has a market capitalisation
of some $3 billion.
Iraq is
seen as a valuable addition to Showtime's portfolio of markets.
However, the first flood of TV-based enthusiasm has been for
free-to-air dishes and receivers, and the market is seen as
needing to go through this stage. Nevertheless, Showtime has
appointed its own dealers in the main cities and Iraqi subscriptions
are starting to come in. One spin-off from the Iraq has been
with valuable contracts with the US armed forces, which have
set up Showtime systems to serve troops. Showtime intends establishing
its own wholly-owned Iraqi dealer/installation operation once
normality and a secure environment exists for staff.
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| Sumner
Redstone, Peter Einstein, and Faisal al-Ayyar in Dubai |
Showtime
is also in the middle of a transition whereby it is relocating
its London managerial staff and playout/operational staff to
a new, purpose-built facility at Dubai's futuristic Media City,
situated a few miles up the coast near Jebel Ali, and directly
across from the entrance to the massive much publicised 'Palm'
housing and hotel project now being built in the Arabian Gulf.
The new building will be occupied in April and May, and officially
opened on May 26 by Sheikh Mohammed al Maktoum, Dubai's Crown
Prince and the power behind Dubai plc. Showtime's belief is
that the new building brings together for the first time the
whole company, and this will help boost growth, possibly at
the expense of their rivals, and consequently represent an attractive
investment opportunity to investors world-wide.
The platform
is now claiming the Number One position in Pay-TV. It is also
admitted that what have been described as "friendly talks"
with rivals have taken place recently. "There is no TV
company, pay or free, that makes as much money as we do,"
one insider told us, "And that's the way we intend to stay."
It is expected that while Showtime's investors might want to
realise some cash from a floatation, the bulk of any monies
raised in an IPO would go into a war-chest for planned future
developments. It is known that Showtime/Kipco is looking at
other opportunities outside its current operating region in
media, and this includes potential mergers, partnerships, or
green-field developments and senior staff firmly believe Showtime
can become a global media player.
But competition
still exists. There are two major rival operations: Orbit (headquartered
in Rome, but with operations in Cyprus and Bahrain), and Arab
Radio & Television (ART) which now trades under the ADD
(Arab Digital Distribution) banner. Orbit is backed by the wealthy
Mawared group of companies owned by Prince Khalid bin Abdullah
of Saudi Arabia. Saudi millionaire Sheikh Saleh Kamel backs
ART/ADD. Neither is profitable, nor has either ever released
hard data on their progress so far. Both have recently deeply
discounted their subscription prices in an effort to win viewers.
Orbit's current top-tier offer in Dubai is Dirhams 120 a month
(about $32) covering their own 28 channels and potentially another
400 free-to-air channels. ART's introductory offers have been
as low as $5 a month, which has led to impressive take-up for
the three-month 'trial' periods during last autumn but equally
massive churn at the end of the day. One source said the net
result was a "fractional" increase in ART's core subscriber
numbers but administering the various in and out surges created
a back-office nightmare. Within the ART 'family' of channels
is Star Select (best considered as a mini-tier) having considerable
appeal to Gulf audiences thanks to its exclusive cricket coverage,
but this attraction tends to diminish in non-Gulf countries.
ART's full-price bouquet (Al Awael World) is priced in the UAE
at around $64, but has few takers. In countries like Egypt all
platforms price their offerings lower. The market sees Orbit
as a well-run operation but quite definitely in the Number 2
position. ART/1st Net lags the field, and unless it achieves
sustainable and long-term growth is seen as a basket case, with
little prospect of breaking through.
The tough
competition created much confusion in an already fragile marketplace.
First, some expatriates left because of the war. They are now
returning. Second, the subscription price-wars left some viewers
re-examining their loyalty, and inevitably some churn between
platforms. However, Showtime says Q3 and Q4 saw that drift reversed.
Local insiders now ask "Where can the competition go?"
They suggest that once a rival's introductory prices hit rock-bottom,
and still cannot hold onto viewer loyalty, then the gap in Showtime's
favour is bound to grow. ART/1st Net has invested huge sums
into product (including paying more than $80m for exclusive
coverage of the last FIFA soccer World Cup competition), its
own studios, and exclusive entertainment but has seen no commensurate
benefit in subscriber growth.
Showtime's
advertising pushes celebrity endorsements and emphasises the
quality aspect of some of the world's best-known entertainment
brands like Nickelodeon, MTV, Paramount, and The Movie Channel.
2004 will see extra channels emerge, but also makes more of
the marriage between box and 'smart' card. This is needed to
avoid so-called grey-market imports of legitimate cards sourced
in low-value countries like Egypt flooding into higher-value
markets like Saudi Arabia, Kuwait, and the Emirates. Showtime
intends re-introducing its 'Smart TV' interactive elements,
with long-form EPG and games as part of the package. They also
intend blocking reception of free-to-air signals for viewers
who continue to use Showtime-provided boxes once their subscription
has lapsed. This is seen as a major churn-buster.
Back in
the autumn of 2003 there was again local talk of consolidation
between platforms. In many respects the working relationship
between ART and Showtime is better than it has been for some
years. They both use the same box, smart card (Irdeto) and satellite
(NileSat). Subscribers to Showtime can add ART channels to their
bouquet for a modest fee, and vice-versa. It's known that there
have been frequent discussions between Showtime and ART at the
most senior levels, and also between Showtime and Orbit. An
investor in ART is Prince Waleed bin Talal, who is also a major
investor in News Corp and was seen as a key player in winning
the Murdoch-backed Star Select bundle away from Orbit and onto
ART/1st Net. At the time there was increasing talk of greater
co-operation between the various rivals, and even a high-level
meeting at the exclusive Sharm el-Sheikh holiday resort on the
Red Sea. But those discussions came to nothing. Perhaps it is
time for another high-level chat, because operators, dealers,
and probably even viewers would welcome a single platform and
faster progress might well be made if customer confusion were
eliminated.
One challenge
to overcome is the huge legacy of Irdeto boxes in the marketplace.
While Orbit made much of its "1m unit box order" they
have not percolated into the market (other than for subscribers,
of course). And Orbit is very much committed to its box. They
also favour Arabsat as a platform, although now also use NileSat
for their premium channels. Showtime's view is that whether
via consolidation of a simple form of co-operation, a single
combined platform would benefit all parties, allowing dual illumination
to both sets of boxes for a period but migrating towards Irdeto
within a short period. The obvious benefits to all 3 players
from lowered staff levels, call centres, and perhaps most importantly,
the elimination of competition in rights negotiations, would
be impressive. But media egos are perhaps the most difficult
obstacle in any negotiations.
There
is, of course, another level of competition: there are more
than 100 free-to-air channels available to viewers - and more
joining every month. The pay-platforms argue that their first-run
offerings, exclusive programming, and usual cluster of thematic
channels have worked for Pay-TV almost everywhere else on the
planet, and why should the Mid-East be any different? TBS
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