Cable Operators

Cover Story: Cable: Act Global, Think Local

8/02/2009 2:00 AM Eastern

Earlier this summer, speaking to a group of economy-weary analysts on a conference call, News Corp. chairman Rupert Murdoch paused to remind those assembled of what they might be missing in the numbers.

“You've got to realize that the growth of cable and satellite and multichannel television is really only beginning in the rest of the world, and we'll be riding those there,” Murdoch said on the call.

These days, Murdoch has lots of company. International markets have long represented a sizable chunk of the overall revenue for large cable programmers -- between 20% and 25% each year. But as the media landscape matures, international growth is becoming increasingly important.

Cover image Aug. 3, 2009Viacom, The Walt Disney Co., Time Warner Inc. and Discovery Communications all have strong international operations and are making moves to bolster them even more. And while each programmer has taken its own unique approach, they pretty much share the same goals — capturing as much revenue as humanly possible, particularly in emerging markets.

While every country is different, U.S.-produced shows or localized versions of popular American programs — like India's Got Talent, the Indian version of America's Got Talent, on the Viacom co-owned Colors network — are growing in popularity. And in some cases, a combination of U.S. and international fare is gaining viewers.

Shows that blend internationally known U.S. acts, like Green Day and R.E.M., with music stars in the respective countries, have proven popular on MTVN International, said programmer president Bob Bakish. Bakish pointed to two such shows — World Stage, which recently aired a Green Day concert live from Tokyo, as well as the “From Athens to Athens” concert in Greece by the Athens, Ga.-formed band R.E.M.; and the European Music Awards, which will be held in Berlin later this year.

In addition to music shows, Bakish added, kids' shows also are extremely popular internationally. In Mexico, for example, Nickelodeon is the No. 1 kids network, partly driven by local shows like a kids' novela called Isa TKM, (Isa, I Love You) as well as U.S.-produced shows like Dora the Explorer and SpongeBob SquarePants.

There couldn't be a better time to look abroad. The U.S. cable advertising market, up 3.8% in 2008, is expected to fall nearly 10% in 2009 and grow by just 2.7% annually over the next five years. The same holds true for traditionally strong international markets like the United Kingdom and Germany — expected to dip 10% and 5% in 2009 and grow at an annual rate of 1.8% and 4%, respectively, over the next five years.

In contrast, emerging markets like Eastern Europe (expected to dip 5% in 2009) and Asia (expected to rise by 10.4% in 2009) are predicted to grow at a 7.3% and 9.7% annual clip between 2009 and 2013, respectively.

Those markets are also growing multichannel-video households at a faster rate, which benefits cable networks. For example, accounting firm PricewaterhouseCoopers estimates Western Europe will grow multichannel homes by 2.9% in the next five years, while Eastern Europe's rate will rise 5.3%, Asia's 6.4% and Latin America's 4.8%.

The volume of programming reflects the spread of digital upgrades by international distributors such as Liberty Global, the largest international cable operator, which is racing to bring multichannel TV to far-flung locales. With more channel capacity to fill, the demand for local international networks is higher than ever.

Indeed, more than 90% of Liberty's 15.4 million subscriber footprint is upgraded to digital, a move that in some places has more than doubled channel capacity. For example, in Eastern Europe — a strong TV market with a pay TV penetration rate between 50% and 60% — analog systems normally have about 40 channels.

“Digital is like supersizing,” said Liberty Global senior vice president of investor relations and corporate communications Rick Westerman. “Now you're adding 80 to 100 channels on top of that 40 channels of video. We are certainly looking to fill our pipes with good thematic content.”

Most of the major cable programmers have dabbled in international networks for years, but those past efforts appear lackluster to the aggressive stance that some of these programmers are now taking.

“I think they are getting more serious about it [international] as the U.S. market slows,” said Pali research media analyst Richard Greenfield.

Already, international markets are starting to have an effect on overall results. For example, in its fiscal third quarter ended in May, News Corp. said Fox International Channels, which houses about 140 services reaching more than 350 million households, increased its earnings contribution to the company by 25% compared to the prior year, driven by advertising and affiliate revenue growth in Latin America and Europe.

In 2008, Viacom saw international revenue (including filmed entertainment) rise 13.5% to $4.25 billion (U.S. revenue was up 7% for the year). International advertising revenue rose 6% in the period, while domestic ad growth was flat.

At Discovery Communications, revenue from international channels grew at twice the rate of its U.S. networks — 12% in 2008 vs. 6% for domestic channels. Since 2004, international revenue has more than doubled from $588 million to $1.2 billion while domestic revenue has increased 31% from $12 billion to $2.1 billion.

And though that revenue probably will never reach the level of the U.S. — stateside cable ad revenue was $21.4 billion in 2008, according to PWC; it was $15.5 billion for the rest of the world — it is growing at a faster clip.

Each network has honed a strategy that fits its content. MTVNI's Bakish said that his company approaches emerging countries in several different ways — through the licensing of individual programs to broadcasters or other channels; through joint ventures with existing programmers in a country; or by launching owned-and-operated networks. Which approach it takes depends on the individual situation. For example, in Greece, MTVNI has basically licensed MTV's programming to a local broadcaster.

Bakish said MTVN International took the opposite tack in Poland, converting a broadcast licensing arrangement into an owned-and-operated network, MTV Poland.

“I like the Eastern European media markets; I think they are solid economies, [with] good growth potential,” Bakish said. “Converting that to an O&O made sense. I think a lot of what you're doing in international is trying to optimize your configuration, take advantage of the unique characteristics of the market, optimize your investment so you're putting at least 100% owned dollars in places where there is a potential payoff and sometimes to manage risk where there may be some other things going on, or from a regulatory perspective you can't control.”

In India, where it saw a strong potential for a joint-venture channel, it launched Colors, a 50-50 arrangement with Indian news network TV 18, in July 2008.

“It [Colors] has been successful by any business plan,” Bakish said. “It is a solid top-three network and we are regularly No. 1. This comes from Star TV [owned by Fox] leading for a decade.”

The launch of Colors also marked another milestone for MTV, an aggressive push toward locally-produced content. Bakish calls MTVN International's approach “glocal,” a mix of global and local programming.

“People are interested in U.S. programming, both as a cultural thing and from a pure production-value standpoint.” Bakish said. “If you look at the success around Colors, it is overwhelmingly, I would say totally, driven by local production.”

Local production is a major focus of Walt Disney-owned ESPN International, which has recently spent hundreds of millions of dollars to acquire rights to soccer matches from England's Barclays Premier League and the Scottish Premier League. ESPN International plans to launch its U.K. version on Aug. 3.

The bulk of ESPN's international presence is still U.S. and North American sports dubbed into local languages — ESPN Classic is a popular channel in France and Italy, for example. But the company has been acquiring international rights to sports on an ongoing and growing basis for the past several years.

ESPN International executive vice president and managing director Russell Wolff said the sports juggernaut has partnered to purchase rights for the Brazilian soccer championships, local polo in Argentina, started a 50-50 joint venture with Star Sports (called ESPN Star Sports) for International Cricket Council events and has rights for India cricket.

Moreover, ESPN has made three acquisitions in the past three years — U.K.-based North American Sports Network (NASN), Indian Web site Cricinfo.com; U.K.-based rugby site scrum.com and French-based Formula 1 auto racing site racinglive.com.

”Over the past five or six years we have shifted our mindset more to be a global company built on locally relevant networks, as opposed to pan-regional networks,” Wolff said. He said ESPN's international strategy is based, in part on next-level localization, where ESPN makes a local channel more relevant either by buying more localized rights or launching more localized shows

At the other side of the Disney spectrum — kids network Disney Channel — the international business is split into three quadrants, according to Disney Channel International president Rich Ross: affiliate fees “the bedrock of the business;” advertising and content sales.

Disney Channel has 99 international networks, most of which are ad-free. But Ross said that advertising sales are becoming more and more important, especially as Disney XD — the former Jetix animation block — is sold throughout the world.

“We are taking a more aggressive stance [in local content] in the last number of years because what is important to us is not only making stuff that connects with the audience, but stuff that is ownable and ownable IP [intellectual property],” Ross said. “We have set up creative hubs in cities ranging from Milan to London to Sidney to Tokyo to Buenos Aires and coming up with formats that we produce locally and export.”

Even media behemoths like Time Warner Inc., which has ridden the wave of CNN International, the premier international news channel, and international versions of its U.S. staples like Cartoon Network, TNT and Home Box Office, is getting in on the localization act.

At the Sanford Bernstein Strategic Decisions conference in May, Time Warner chairman and CEO Jeff Bewkes said localization efforts were underway. “It would be very advantageous if we could own and operate some local production or local networks to strengthen and put next to CNN and HBO and TNT and Cartoon Network, particularly, [those] kind of networks,” Bewkes said at the May conference, adding that key growth markets include Eastern Europe, South America and India as well as established areas in developed countries

Earlier this year, Time Warner spent $241.5 million for a one-third interest in Central European Media Enterprises, a central European broadcaster with networks in seven countries (Bulgaria, Croatia, Czech Republic, Romania, Slovakia, Slovenia and Ukraine), reaching about 97 million people.

“Time Warner was smart to buy there,” Miller Tabak media analyst David Joyce said of the CME deal. “It's the same theme — getting more households onto the cable plant. That's where the opportunity is. There is a large population of the globe that still has a long-term growth prospect.”

 

MULTICHANNEL ADVERTISING
The multichannel (cable, satellite and other pay TV) advertising market is expected to soar internationally over the next five years, per PricewaterhouseCoopers. Estimated ad-revenue growth from 2009-2013:
($ in millions)

Region 2009 2010 2011 2012 2013 % CAGR*
* Compound Annual Growth Rate
SOURCE: PricewaterhouseCoopers
Western Europe $5,908 $6,079 $6,475 $6,980 $7,457 3.8%
Cent./East. Europe $980 $1,025 $1,114 $1,300 $1,462 7.3%
Asia/Pacific $6,844 $7,513 $8,242 $9,110 $10,157 8.5%
Latin America $1,153 $1,225 $1,413 $1,548 $1,756 9.8%

TOP GROWTH COUNTRIES
PricewaterhouseCoopers estimates that the international advertising market will grow at a faster rate than the U.S. over the next five years. Some of the countries where the accounting giant expects multichannel ad revenue to grow the fastest:

Country 2009-2103 CAGR*
* Compound Annual Growth Rate
SOURCE: PricewaterhouseCoopers
Indonesia 19.1%
Vietnam 17.4%
New Zealand 16.6%
Czech Republic 14.9%
Brazil 13.5%
Venezuela 13.4%
Malaysia 13.1%
China 12.9%
Russia 12.6%
Mexico 12.4%
Poland 9.8%
India 6.1%

MULTICHANNEL GROWTH
One of the main drivers of multichannel advertising is the number of homes hooked up to cable, satellite or other pay TV service. PricewaterhouseCoopers estimates for growth in the number of multichannel homes internationally:
(millions, except for percentages)

Region 2009 2010 2011 2012 2013 % CAGR*
* Compound Annual Growth Rate
SOURCE: PricewaterhouseCoopers
W. Europe 85.87 86.93 90.05 94.75 98.68 2.9%
Cent./East. Europe 34.87 35.90 37.80 40.50 43.67 6.0%
Asia/Pacific 312.47 331.24 352.97 327.09 403.64 6.4%
Latin America 24.23 24.89 26.08 27.95 30.05 4.8%
September