Analysis It is over six months since Telefonica tabled its bid to buy 56 per cent of Spain’s pay TV operator Canal+ from the Prisa Group on top of the 22 per cent it already owned and at last it is facing the competition probe we predicted it would at the time.
The other 22 per cent owned by Mediaset, the Italian commercial broadcaster, has meanwhile been swallowed up by Telefonica as well, so successful acquisition of Prisa’s share for €750m would give it total ownership.
We also suggested in May that Sky Europe was a good fit for acquiring Canal+, pointing out that Rupert Murdoch was playing a long game because he did want any additional distractions, or to stir up unnecessary regulatory motions, while engaged in bringing together the three major European subsidiaries as a single Sky group. Such a move would fit with the growing trend towards cross border consolidation of Europe’s converged multiple play field including broadband, pay TV and mobile, with Sky, Liberty Global and Vodafone shaping up as primary contenders, while Deutsche Telekom, Telefonica and possibly BT are also fighting hard from a rather narrower geographical base.
If Vodafone does mount a successful bid to acquire Liberty Global, then it and Sky could be the two leading pan European operators with a strong position in pay TV and content.
But this is some way off and meanwhile Telefonica is still hoping it can fend off the regulatory assault and end up with all of Ca-nal+, which would give it a dominant position in Spanish pay TV (and broadband, and telephony and mobile). The European Commission finally intervened last month with the warning that acquisition would weaken competition in four related areas where Telefonica’s combined share of the market would exceed 80%. The EC singled out retail pay TV distribution under Telefonica’s existing Movistar TV and putative Canal + brands; overall distribution of TV content; wholesale supply of TV channels; and the packaging of communication services. However the final decision is in the gift of Spanish regulator CNMC, which has exercised its option to handle the case, in effect on the European Union’s be-half since it falls under the latter’s jurisdiction.
Such regulatory interventions are inevitably somewhat arbitrary in the current climate of cross border merger and consolidation combined with convergence between pay TV, broadband and mobile. It is only from the perspective of Spain’s own market that Telefonica’s acquisition of Canal+ would distort competition, so it makes sense to leave it to CNMC. Although for some reason the European Commission did not feel the same about Liberty Global and Ziggo in the Netherlands. Even then, with Vodafone now owning rival pay TV operator ONO and pushing ahead in OTT, there is an argument that the two should be left to slug it out, with Orange a distant third.
The two key levers of competition are increasingly the number of broadband subscribers and the amount of premium content anoperator has rights to, particularly exclusive rights. It is in this context that the competitive picture in a given market really should be drawn, with mobile subs also a key consideration, although that tends to be a more volatile number.
Telefonica now has less than 50 per cent of the Spanish fixed broadband market and about a third of mobile subscriptions, with both numbers falling. The competitive consideration therefore revolves around pay TV and content. In pay TV, Telefonica has been soaring while Canal+ has been in decline. Recent CNMC figures re-leased late September show Telefonica’s Movistar TV up 31 per cent in subs over the last year at 1.4 million, overtaking MSO Ono to take second place. Canal+ is still top on 1.66 million subs, but this is down 2.5 per cent over the year, while Ono has also been slipping and stands at about 780,000. The total pay TV base is around 3.9 million, which itself has slipped from a peak of 4.4 million in 2011. Therefore Telefonica with Canal+ under its belt would account for around 78 per cent of Spain’s pay TV market, but this would soon surpass 80 per cent on current projections.
Ono has lost subs every quarter since mid-2011, but has shored up ARPU through a strategy of migrating customers to its hybrid Tivo platform as quickly as possible to boost upselling opportunities. Now under Vodafone’s ownership Ono has hopes of gaining a new crop of premium subscribers over its new fiber network, which reaches 7.2 million homes. This provides the foundation for Ono’s evolving hybrid TV strategy being built on Nagra’s QuickStart platform, including its OpenTV 5 connectware, anyCAST content protection package and MediaLive multiscreen software pre-integrated in a SmarDTV HD set top.
Ironically Vodafone Spain is now populating this OTT service with content from Canal+, so it may end up being a distributor for Telefonica and failing that possibly Sky. However that might suit Telefonica’s strategy of gaining revenue through ownership of content, which is its primary motive for the Canal+ bid.
After all, both traditional pay TV and telecommunications have been declining in Spain during the deep recession, but content has continued to grow, admittedly fuelled by the country’s obsession with football and to a lesser extent movies.
With Canal+, Telefonica would gain the Sunday night La Liga soccer match, the country’s top viewed program, as well as first-run US series rights and output deals with most Hollywood studios. This would add to existing rights for Grand Prix motorcycle racing, Formula One car racing and Spain’s qualifying matches for the 2018 soccer World Cup.
Telefonica did lose out on rights to 2015-2017 Champions League soccer to a combined Free To Air and pay DTT TV bid from Atresmedia and Mediapro Group’s Gol TV and so is likely to bid for the rights to the top Spanish soccer clubs, Real Madrid and Barcelona, when these come up for the period starting 2015-16. It looks then as if Telefonica and Vodafone will be competing in parallel in fibre and content, while it remains to be seen whether Sky joins them. At the European level the battle lines between Vodafone and Sky are already clearly drawn, with the big question there being the fate of Liberty Global.
Copyright © 2014, Faultline
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