(From Balancing Act)
Death of a dream: Africa’s pay TV challenger GTV runs out of financial road
Last Friday Gateway Broadcast Services (GTV’s operating company)
announced today that its Board of Directors has unanimously approved a
plan to liquidate the Company. Its statement blamed “excessive demands
on the business” caused by the global financial crisis that “interrupted
(its) ability to secure funding on an acceptable timescale and have left
us no choice but to cease operations”. Russell Southwood looks at where
it all went wrong.
To understand how GTV came to be launched, it’s necessary to go right
back to the beginning and start with Gateway Communications. Ex-banker
Julian McIntyre and his friend Ghanaian-Briton telecoms manager Peter
Gbedemah launched the company over ten years ago and worked out of a
modest set of offices near Warren Street in London. They were part of a
very small group of people outside the continent who could see its
potential and sought to provide international wholesale services to ISPs
and carriers. Africa wasn’t one of its markets, it was its market.
Among other things, McIntyre bought a banker’s instinct for deal and the
company thrived on a combination of organic growth and acquisition. Some
acquisitions like the company that became its South African subsidiary
were a shining success, whilst others like Datatel in Sierra Leone less
so. There were ups and downs but the company continued to grow.
The turning point came in 2005 when mobile operator Celtel (now Zain)
decided to sell a number of its non-core businesses prior to carrying
out the IPO that led to its trade sale to MTC. In order to make the deal
attractive, Celtel gave a long-term commitment to Gateway Communications
as the buyer that it would use it as its wholesale carrier. In a single
leap the company had gone from being an interesting challenger to being
a significant player: it could now lay claim to around 20-25% of the
market for international voice traffic and this would grow to 30% over
three years.
With the acquisition of Link Africa, the company had an assured stream
of business and a positive cash flow. It had become “bankable” on a much
larger scale. Faced with this happy circumstance, the question then
arose: what can we do next? A number of possibilities were investigated
and a decision was taken to enter the Pay-TV market in Africa that was
announced publicly in February 2007.
Pay-TV in Sub-Saharan Africa was dominated by two large players:
Naspers-owned DStv/Multichoice in Anglophone territories and Vivendi’s
Canal Plus in Francophone territories. Both had invested significantly
in rights and were charging relatively high monthly rates for access to
their services.
The strategy was two-pronged: firstly, to provide users with lower
subscription rates (US$20-35 per month) and secondly, to acquire
compelling content to drive that process. Rupert Murdoch has described
sports rights as the “battering ram” of successful Pay-TV and Africa is
no exception. So in May 2007 GTV announced that it had bought the UK
Premiership rights for 40 Sub-Saharan African countries. These countries
did not include Nigeria and South Africa that were considered
sufficiently large to be sold separately. Although it would not discuss
the cost, Nigeria’s Hi-TV spent US$28 million on getting them for
Nigeria and GTV’s rights cost US$30 million.
Although the Premier League does give some “holiday” on full payment,
this kind of gearing meant that GTV had to maximise its income as
quickly as possible in order to show new investors some kind pattern of
progress towards a cash-positive operation. So it was a sprint from the
start as the company launched in 10 countries (East Africa followed by
Southern Africa) and sought to establish itself as a continental brand.
This sprint for growth was backed by the Swedish group Kinnevik (more of
which later) with a US$40 million investment and Citigroup, Noonday
Global Management and Avenue Investment Management. McIntyre was
supremely confident that GTV would kick down DStv/Multichoice’s front
door, get more subscribers than it outside Nigeria and South Africa and
move on to compete with Canal Plus in Francophone territories. The
Premiership rights almost by themselves would be sufficiently persuasive
to get subscribers to switch from the incumbent and that a deeper
bouquet could be built as things progressed.
In the event, DStv/Multichoice after its initial shock and anger fought
back with a range of tactics including a low-cost bouquet. But if
competition was good for Pay-TV subscribers, it was less good for GTV’s
sprint for growth: the short, sharp campaign which was to have ended in
a victory declaration turned into something more like trench warfare.
The longer GTV was in a territory, the better it established itself and
its impact on the market was that it took more of the new market growth
than its competitor: for example in Uganda, it had 20,000 subscribers.
However, the number of markets where it was making demonstrable progress
was still relatively small in number. Nevertheless it continued to
fundraise and look for ways of increasing its market share. Late in 2008
it announced that it would enter Francophone markets to compete with
Canal Plus. But by this time, the financial costs of running an
operation that had not yet gone into profit were beginning to bear down
on the company.
Its fundraising efforts were taking place in a financial climate that
just got steadily worse. In order to stay upright, it made a decision to
sell the “cash cow” Gateway Communications to Vodacom for US$700
million. However, this was clearly a sign of desperation as things began
to unravel. On the 7th of January 2009, Kinnevik announced that it had
sold its stake $23.6 million, a return 1.8 times the amount invested in
May 2007. How do you sell a stake in a loss-making company and make that
rate of return?
(Kinnevik is owner of the MTG Group which runs Pay TV operations in 24
European countries. On 7 January 2009 it launched Viasat 1, a new
Free-To-Air channel in Ghana. It was also rumoured to have expressed
interest in becoming a shareholder in new South African Pay TV player,
OnDigital
Well reading between some of the fairly clear lines of the different
players, the investment that GTV had obtained from different companies
was underwritten by its ownership of the profitable Gateway
Communications. Once that was sold, investors probably had agreements
that allowed them to claim back their investment. A loss-making bank
like Citigroup would doubtless also want to exit in order to retrieve
whatever funding it could at this stage. Therefore the plan to sell to
Canal Plus can be read as a last desperate throw of the dice before
facing the inevitable.
Why did GTV fail? Not all of the blame can be laid at the door of the
current financial crisis for there are other reasons:
* The “battering ram” of football rights alone was not enough to get
DStv/Multichoice customers to peel off quickly enough. GTV started with
12 channels and DStv/Multichoice had 70 video channels and 40 audio
channels. Customers might want the Premiership matches but other family
members still missed content on its competitor’s bouquets. Indeed, there
was some resentment from customers in countries where GTV had not
launched about their inability to get their favourite games.
* The sprint for growth strategy was not helped by the lead times needed
to deliver set-top boxes. In the early stages, there was a shortage of
boxes and it took three months for them to get from the manufacturer to
the market. Supply problems of this kind were ironed out but there was a
period when there was more demand than supply could meet.
* But these reasons pale into insignificance alongside the biggest
reason of all. Wherever you are globally, Pay-TV is a deep pocket
business. It should not be forgotten that making a success of BSKyB
almost unseated Rupert Murdoch. The extremely expensive core rights that
will make a success of the business have to be repurchased every three
years and thus far they have only ever gone up in value.
So now that GTV is no more what will happen to the UK Premiership
rights? DStv has secured the licence to show the Barclays Premier League
Live Package A and will be showing these
matches on SuperSport from this weekend. SuperSport already held both
Live Package A & B rights for South Africa and Live Package B rights for
the rest of Sub-Saharan Africa and with
this deal has now secured all Premier League live rights for the
remainder of the 2008/2009 season and for the whole of next season. The
Nigerian rights are still held by Hi-TV.
So where does this leave competition in the Pay-TV market? In the
short-term, competition is not in good shape. There are regional players
like TV Cabo in the Lusophone markets and Hi-TV in Nigeria. The latter
claims 195,000 “activations” with some smaller number actually as paying
subscribers. Others like Orange and Wananchi are reliant upon
sub-licensing deals from existing rights holders which will mean that
the existing large players will have considerable influence. The shame
is that GTV’s presence in the market energised individual markets and
attracted investor interest in the broadcast sector. It is to be hoped
that the pioneers get the arrows and later settlers will get some of the
land. But sadly in the short-term, GTV’s passing can only undermine the
slowly building credibility of Africa’s broadcast market.
CALL FOR PAPERS – 2nd AFRICAN BROADCAST, FILM AND CONVERGENCE CONFERENCE
(23-25 NOVEMBER 2009), ABUJA
This is an early call for papers to be presented at the 2nd African
Broadcast, Film and Convergence Conference taking place 23-25 November
2009. If you wish to present a paper at this conference, please send a
short outline of your proposed topic to Russell Southwood, Balancing Act
who is responsible for putting the programme together:
info(a)balancingact-africa.com
