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PERSPECTIVE

PERSPECTIVE Exclusive Content Cross-Carriage Obligation in Singapore: An innovative intervention that promises to create

Exclusive Content Cross-Carriage Obligation in Singapore:

An innovative intervention that promises to create value for all stakeholders

ManagingDirector,SEA Ruggero Jenna

ManagingDirector,SEARuggero Jenna

Ruggero Jenna

Dominic Arena Partner, Head of TMT Consulting SEA

Partner, Head of TMT Consulting SEA

Cheryl Lim EngagementManager

Cheryl Lim

EngagementManager

The advent of fierce

competition and rights bidding, followed by a controversial regulatory development, namely the MediaDevelopment Authority of Singapore’s (MDA) proposedintroduction of an “exclusive content cross-carriage measure”, has captured the attention of pay TV industry groups and other interested parties worldwide. Well-voiced concerns on both sides of the spectrum regarding the formulation, feasibility and impact of such a regulatory measure have been fiercely debated by stakeholders, with the face-off at one stage threatening to snowball into an international incident.

Singapore’s pay TV industry is experiencing a transformation.

However, contrary to some quite negative arguments put forward publicly to date,

Value Partners’ independent analysis over a 10-year timeframe shows that the MDA measure is not an ill-conceived or hasty retort to a temporary market anomaly which threatens to destroy economic value, but an innovative and well-grounded measure. Its efficacy lies in a simple, yet overlooked, mechanism, enabling exclusive content owners to retain - and enhance - monetisation of their asset. It is this mechanism which sets this measure apart fromany other of similar name adopted around the world and, subject to certain implementation prerequisites as discussed herein, promises to create and preserve economic value for all Singaporean pay TV industry stakeholders.

Introduction of the Measure

In March 2010, the Media Development Authority of Singapore (MDA) announced a Public Interest Obligation requiring pay TV licensees to cross carry each other’s content on a cross-transit basis.

The cross-carriage measure enables a Supplying Qualified Licensee (i.e. purchaser of exclusive content) to provide access to its content on a paid retailer-customer basis to consumers on any pay TV platform via a network transit arrangement. In this way, it differs from other ‘cross-carriage’ measures which may have been implemented in other markets.

From a consumer perspective, Singaporeans will therefore have the convenience and freedom of gaining access to all content available in the Singapore pay TV market, via a single set top box, for which they will still be billed by the owner of that content.

From a pay TV operator’s perspective, the exclusive content owner will continue to be compensated directly at the retail level for consumption of their content, with content being monetised by customers of another operator incurring a network transit charge. The content is therefore effectively decoupled from the platform.

MDA’s proposed regulation follows a series of events, most notably SingTel’s aggressive bidding for exclusive broadcast rights for the Barclays Premier League (EPL) and Starhub-SingTel’s joint bid for FIFA World Cup 2010 broadcast rights – events that resulted in content costs skyrocketing and elicited concerns that the cost might eventually be passed on to consumers. Although, on the surface, some have argued that MDA is overreacting to these events, Value Partners’ analysis reveals MDA’s actions are specifically – and effectively – designed to address the fundamental issues of consumer benefit, viability of the pay TV market and overall industry development. In summary, the rationale for the introduction of the measure lies in three factual arguments:

The Singaporean pay TV market is already in a somewhat ailing state, with low-to-negative industry profitability;

Consumers are suffering inconvenience and higher costs from having to purchase dual subscriptions to enable them to view popular but exclusive content concentrated between pay TV providers and platforms;

The breadth of content and level of innovation in the Singaporean pay TV market was at risk of stagnation due to the oligopoly now in place and high entry barriers for new entrants to reach end consumers.

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PERSPECTIVE Overview of Singapore’s Pay TV market and the key issues Singapore’s pay TV market has,

Overview of Singapore’s Pay TV market and the key issues

Singapore’s pay TV market has, for most of its history, been a monopoly market with a single dominant cable (CATV) operator - Starhub Cable Vision. With the entry of SingTel’s mioTV in July 2007, competition increased in the pay TV sector and pay TV penetration has grown steadily to reach approximately 52% of households, or 659,000. The importance of pay TV in the Singaporean media sector has therefore been rising steadily,

and despite the traditional dominance of free-to-air (FTA), its viewing share fell from 76% in 2001 to 61% in

2007.

As a result of new competition in the pay TV sector in 2007, Singapore saw an initial broadening of content and consumption options. Specifically, SingTel’s offering has introduced 56 channels over and above the 160 linear channels offered by Starhub, and their ‘a-la-carte’ offering, with a strong focus on on-demand movies, differentiated it from Starhub’s more traditional ‘tiered bundle’ business model.

SingTel also inked a number of strategic rights/content agreements in a classic market entry play, as seen in some other markets such as Hong Kong, which has proven highly successful in gaining critical mass market share. These include a deal with Sony Pictures and the high-profile 2009 acquisition of the Barclays Premier League (EPL) – formerly with Starhub – for which it reportedly paid a record S$350m for the exclusive broadcast rights for 3 years.

However, now there are some quantifiable consequences for consumers arising from strategies adopted to underpin market share for the dominant operator and enable the challenger to attain critical mass.

Exclusive content driving the need for dual subscriptions

Whilst on the surface, the entry of a new player on the scene and growth in pay TV subscriptions appears positive for Singapore, a growing phenomenon being masked by the headline growth is that of dual subscription households. Dual subscriptions have become ‘a necessary evil’ in Singapore wherever customers wishing to view specific combinations of content – such as popular linear channels like CNN or HBO (available exclusively on Starhub), along with EPL (available exclusively on SingTel) – are required to double subscribe to gain access to the programmes.

Percentage of pay TV subscribers with dual subscriptions

18.0% 13.5% 10.0% 3.0% 18% of subscribers are incurring the unnecessary cost of having a
18.0%
13.5%
10.0%
3.0%
18% of
subscribers are
incurring the
unnecessary cost
of having a
second set-up
box

EY2008

Source: Value Partners analysis

EY2009

1Q2010

EY2010 (forecast)

Assumptions for forecast:

Pay TV penetration reaches 54% or 689K subs Starhub and Singtel subscriber base reaches 503K and 310K respectively… …implying an overlap of 124K dual subs or 18% of total subscriber base

Pay TV content in Singapore is considered to be highly concentrated, with only 5% of all pay TV channels in Singapore available on both Starhub and SingTel pay TV platforms. This is due to both the prevalence of exclusive carriage agreements (ECAs) between payTV operators and content providers and the lack of content wholesale agreements between the two operators. The implication of this is that pay TV subscriptions have grown faster than actual market penetration, and consumers seeking to view popular content from both

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PERSPECTIVE operators are required to subscribe to both Starhub and SingTel, acquire and maintain a set-top

operators are required to subscribe to both Starhub and SingTel, acquire and maintain a set-top box from each provider and incur any accompanying costs.

Value Partners estimates that dual subscriptions already exceed 15% of the market and by the end of 2010, will surpass 18%, taking into account EPL transfer from StarHub to SingTel but without any regulatory intervention. This means pay TV subscriptions will reach 813,000 (or 62% of households) versus actual market penetration of 689,000 households (54%) – and this gap would continue to widen in the future, with dual subscriptions reaching 25% by 2020. Whilst this indicates a sizeable latent demand for accessing content from both operators, it also implies that a significant number of consumers are incurring the unnecessary cost and inconvenience of maintaining a second set-top box in the home.

There remains room for real growth in the Singaporean pay TV market

Despite the increase in competition in the Singaporean pay TV market, based on a basket of Asia Pacific benchmarks, it is evident that Singapore is below its natural penetration level for payTV based on affordability. In terms of real household penetration, Value Partners believes that there is further growth to be enjoyed in the Singapore pay TV market over the next 10 years, even balancing countervailing factors such as the strength of free-to-air (FTA) offerings and other cultural specificities in this market.

The high level of content concentration in Singapore, however, will form a natural barrier to real future growth if not addressed; it will prevent the Singaporean pay TV industry from reaching its full potential and consumers from enjoying the benefits.

2009, pay TV penetration rate versus normalized ARPU Pay TV penetration rate (%) 100% South
2009, pay TV penetration rate versus normalized ARPU
Pay TV penetration rate (%)
100%
South Korea
India
Hong Kong
80%
Taiwan
Japan
60%
Malaysia
Singapore
New Zealand
China
40%
20%
Philippines
Thailand
Indonesia
0%
0%
1%
2%
3%
4%
5%
6%
7%
8%
ARPU as % of GDP per capita
Source: Informa, EIU, Value Partners analysis

Rising cost of content threatens to stunt growth

Whilst the walled garden approach was not so significant historically, when the market was a monopoly, in recent years, it has contributed to operators more narrowly focusing competition on exclusive content as the primary source of differentiation, and driving operators to pay more for exclusive rights and channels.

Specifically, Value Partners has found that compared to the benchmarked content cost of 35% of revenues, Singapore’s pay TV operators spend a higher proportion of revenue on content than their peers at 60%, as shown below.

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PERSPECTIVE Content costs as share of pay TV revenues 2009 60% Content costs as share of

Content costs as share of pay TV revenues

2009

60%

Content costs as share of pay TV revenues in Singapore are significantly higher than international
Content costs as share of pay TV revenues in
Singapore are significantly higher than international
benchmark average of 35%
41%
32%
34%
34%

Singapore

UK

New Zealand

US

Source: Value Partners project experience, Value Partners analysis

Australia

The effect of paying significantly more for content is lower operating margins for pay TV operators. Based on our analysis, Singapore’s pay TV operators currently operate below the assessed average benchmark of 21% EBITDA margin or have negative EBITDA margins, as shown in the exhibit below.

EBITDA benchmarks of pay TV operators

Average EBTIDA benchmark 21%
Average EBTIDA
benchmark 21%

35%

24% 24% 15% 12% 13%
24%
24%
15%
12%
13%

DishNetwork

DirecTV US

BSkyB

Foxtel

Sky NZ

Austar

Estimated Singapore pay TV operator business EBITDA (2009-2010)

1 0 %

0 %

 
0 %    
 
 

Both pay TV operators fall below the

   

2 0 0 9

2 0 1 0

average benchmark EBITDA of 21%

2

0 0 9

2

0 1 0

 

-6 0 %

-9 0 %

average benchmark EBITDA of 21% 2 0 0 9 2 0 1 0   -6 0

Source: Value Partners analysis

The high cost of content and poor/negative profitability may be attributed to initial competition, which brings with it the natural desire of the incumbent to defend its market share (i.e. Starhub) and the challenger to significantly increase its market share (ie. SingTel) and could be transient. However, our analysis over a 10- year timeframe indicates that although profitability will improve, EBITDA margins are likely to remain low at a modest 7% without regulatory intervention such as the proposed measure.

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PERSPECTIVE This brings into question the sustainability of the pay TV sector in Singapore over the

This brings into question the sustainability of the pay TV sector in Singapore over the longer term, which risks diluting consumer benefits through a reduction in:

The ability to provide good quality pay TV at reasonable consumer prices; and

Further innovation in the form of new content, channels and business models.

Singapore Pay TV industry EBITDA forecast (without Measure) 40% 30% 20% EBITDAranges based on international
Singapore Pay TV industry EBITDA forecast (without Measure)
40%
30%
20%
EBITDAranges based on
international benchmarks
10%
7%
7%
7%
7%
7%
7%
(12%-35%)
3%
0%
0%
-
3%
-
6%
-
10%
-10%
-20%
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Source: Value Partners analysis

Decoupling the Media/Pay TV value chain for the benefit of the industry

The essence of the MDA measure is that content is effectively decoupled from the pay TV viewing platform choice of consumers. At the time the MDA introduced the proposed cross-carriage measure in March 2010, it cited a number of social, industrial and economic benefit reasons for its intervention, including:

Reduction in content concentration - based on the fact that only 7 of over 180 channels today are available on both Starhub and SingTel Pay TV platforms;

Improvement of consumer convenience and programme access - by removing the need for dual set- top boxes to access popular content, and enabling consumers to gain access to pay TV on the platform available at their premises;

Refocusing competition away from exclusive content - to other areas such as customer service, packaging and value added services; and

Reducing barriers to entry for new pay TV players.

MDA also reiterated its commitment to not intervene in the prerogative of pay TV operators or content providers to continue to enter into exclusive arrangements, to protect the rights of intellectual property owners and to avoid unreasonable losses to any stakeholder group, whilst achieving the aforementioned objectives.

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PERSPECTIVE Content Provider (Rights Owner) Advertisers  Bid & pay for ECA + other content Pay

Content

Provider(Rights

Owner)

Advertisers

Bid & pay for ECA + other content

Pay to advertise based on viewership 
Pay to advertise
based on viewership

Distribute content through RQL

as a “pipe”

PayTV

Operator(SQL)

PayTV Operator (SQL)

PayTV

Customers

(SQLCustomer)

PayTV

Operator(RQL)

Distribute SQL

content

PayTV

Customers

(RQLCustomer)

PayTV Customers (SQLCustomer) PayTV Operator (RQL) Distribute SQL content  PayTV Customers (RQLCustomer)

Broadcast ECA + other bundled content

Pay for content at ‘retail (bundle) price’

Pay for content at ‘retail (bundle) price’

With the effect of the measure being a decoupling of the media/pay TV value chain, with content being untied from the platform, the end user relationship is being opened up. Customers will be able to purchase and view almost any content on any platform and will become direct customers of exclusive content providers (SQL), whilst retaining their platform relationship with their current provider (RQL). This is shown in the exhibit below.

Today

Post-measure

Singapore pay TV operators

Own end- user consumption
Own end-
user
consumption
Rights Content Content ownership & Technology Distribution production aggregation management
Rights
Content
Content
ownership &
Technology
Distribution
production
aggregation
management

SQL

Rights Content Content ownership & production aggregation management
Rights
Content
Content
ownership &
production
aggregation
management
SQL end- user relationship Own end- user consumption
SQL end-
user
relationship
Own end-
user
consumption
SQL end- user relationship Own end- user consumption RQL Content Content Technology Distribution production

RQL

Content Content Technology Distribution production aggregation
Content
Content
Technology
Distribution
production
aggregation

This decoupling of retail relationship and carriage infrastructure has been applied in several infrastructure- intensive industries. For example, in power and utilities, the power producers and retailers are often independent of the electricity grid operator. The grid operator charges a fee for transmitting electricity from source to end user. Although the infrastructure operators and retailers in Singapore’s pay TV industry are not yet independent from each other, the measure serves to simulate such an environment. The concept of decoupling and a generic reference model is illustrated below.

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Producer 1 Content, goods, services Retailer 1 Retailer 2 Consumer Producer 2 Retailer 3
Producer 1
Content, goods, services
Retailer 1
Retailer 2
Consumer
Producer 2
Retailer 3

Producers

“Pipe”

Retailers

Consumers

Can sell to any

Key role is to

Can buy from many

Can buy from any

retailers

distribute products to

producers

retailer and even

Can set up own retail

consumers

Typically small part of

directly from

network

Typical compensation

overall value chain

producers

Use pipe to distribute

for the service “utility-

Compete on

Perceived to be

products to

line” (cost-plus, etc)

- customer service

cheaper for the

consumers

Often used in national

- portfolio of offers

“bundle” of products

Compete on

monopoly (i.e.

- attractive pricing by

consumer buys

- price

electricity

negotiating favourable

Has limited visibility

- Quality

transmission, railway,

wholesale price from

on overall value chain

- Innovation /

NGNBN)

producers (through

efficiencies

Compete on efficiency/reliability (often regulated)

market power, exclusive distribution networks etc.)

Examples of industries in which the decouplingmodel has been applied:

Powerand utilities

Telecommunications

(MVNOs)

Transportation

(railway)

Enabling continued monetisation of exclusive content preserves value

Despite the decoupling, the subtlety of MDA’s proposed measure – which enables pay TV operators (SQLs) to

fully extract economic value from their exclusive content at the retail level (as opposed to a wholesale cross-

carriage model) – makes

it unlike any other measures benchmarked globally.

Coupled with the forecast growth in viewership as a direct result of the measure, content owners will potentially be in a position to grow revenues from exclusive rights beyond what was available to them prior to the measure. This is only evident when analysing the impact of the measure over a period such as 10 years, as has been done by Value Partners.

This is a salient point, which to date has not been highlighted by various parties commenting on the impact of the measure on stakeholders and the market, possibly because it may be different to what some stakeholders may initially assume by using measures in other markets as a frame of reference, and also the true impacts and opportunities created may not be immediately obvious when focusing on ‘day one’.

Decoupling the Media/Pay TV value chain for the benefit of the industry

With the introduction of the measure, Singapore’s pay TV market is likely to positively evolve in a number of ways, namely:

Increased viewership/content consumption through increased access to content independent of platform;

Reduced customer barriers to switching pay TV platform operators and access to desired content, regardless of specific platform unavailability;

Reduced entry barriers for new entrants such as IPTV players on NGNBN, since previously difficult to obtain exclusive content will now be available via cross-carriage arrangements;

Possible emergence of new “virtual” pay TV operators, similar to MVNOs, who only need to make limited infrastructure investments but focus on content add-ons to other value added services;

Accelerated direct-to-consumer efforts from major content providers, like ESPN and BBC, who have previously reached consumers via pay TV operators and focused their direct-to-consumer efforts on the internet/online; and

Increased number of pay TV channels and content available in Singapore.

The net effect would not only be increased competition but also increased choice and value for the consumer. These, in turn, will drive Singapore’s pay TV penetration to reach its potential more quickly, reaching higher ARPU levels and overall higher industry growth and sustainability.

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PERSPECTIVE Long-term quantitative benefits of the measure are clear Specifically, over the coming 10 years –

Long-term quantitative benefits of the measure are clear

Specifically, over the coming 10 years – being the period of our analysis – Value Partners estimates that pay TV household penetration will reach 67%-70% by 2020 with the measure, compared to 64% without the measure. We further believe ARPU levels will reach S$71-S$76 by 2020 with the measure compared to S$65 without the measure, representing a 25-29% increase in overall annual market revenues by 2020.

Pay TV household penetration forecast

120% Pay TV penetration ranges based on international benchmarks (58%-97%) 100% 80% 60% 52% 56%
120%
Pay TV penetration
ranges based on
international benchmarks
(58%-97%)
100%
80%
60%
52% 56% 60% 63% 64% 65% 66% 67% 68% 69% 70%
64%
63%
52% 54% 56% 57% 58% 59% 60% 61% 62%
40%
20%
0%
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: Value Partners analysis

Pay TV Market ARPU forecast

120

100

80

60

40

20

ARPU ranges based on international benchmarks (SGD33-104) 72 71 69 68 67 65 63 61
ARPU ranges based on international
benchmarks (SGD33-104)
72
71
69
68
67
65
63
61
61
58
65
54
64
64
63
63
62
62
61
61
58
54

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

C ou n t erf ac t u al ( wit h ou t M eas ur e)

C ou n t erf ac t u al ( wit h ou t M eas ur e)

P ercen t

F ac t u al ( wi t h M eas ru e)

F ac t u al ( wi t h M eas ru e)

S GD

C ou n t erf ac t u al ( wit h ou t M eas ur e)

C ou n t erf ac t u al ( wit h ou t M eas ur e)

F ac t u al ( wi t h M eas ru e)

F ac t u al ( wi t h M eas ru e)

e) C ou n t erf ac t u al ( wit h ou t M

Pay TV operators are not only likely to gain in revenues; the overall profitability of the industry is likely to improve to a level that will allow its future sustainability. We estimate that EBITDA margins can improve to 18% by 2020 – in line with international benchmarks, albeit at the lower end of the range.

Singapore pay TV operators EBITDA forecast 40% Counterfactual (without Measure) Factual (with Measrue) 30% 20%
Singapore pay TV operators EBITDA forecast
40%
Counterfactual (without Measure)
Factual (with Measrue)
30%
20%
13%
12%
11%
10%
EBITDA ranges based on
international benchmarks (12%-35%)
9%
8%
10%
5%
1%
7%
7%
7%
7%
7%
7%
0%
3%
-3%
-6%
0%
-3%
-10%
-6%
-10%
-10%
-20%
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Source: Value Partners analysis

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PERSPECTIVE Specifically, Starhub and SingTel (and any other new entrant) would be able to continue to

Specifically, Starhub and SingTel (and any other new entrant) would be able to continue to compete equally, since:

The majority of households are able to freely choose between operators, given that almost all homes (99%) are fixed line and most (94%) cable ready;

The measure does not reduce content’s value as a competitive lever, so operators can still use this as a component for bundling; and

Operators’hubbing strategies are still intact, since both are still free to offer their pay TV service with their other offerings.

Content owners will benefit from the measure through monetisation of the combination of an increase in market size and addressable viewers made possible by the measure. Specifically, content providers are expected to enjoy a neutral-to-marginally-positive impact from the measure through the net effect of:

Gain in additional revenues from increased subscriptions from pay TV operator customers monetised through viewership-based contracts;

Gain in additional revenues from increased advertising and sponsorship; and

Loss of some strategic rights premium due to non-exclusivity of content but potential for underpinning of economic value through the ability to calculate incremental revenues from wider viewership forecasts.

Although content costs as a percentage of pay TV revenues is likely to decrease to levels in line with international benchmarks as a result of the measure, absolute content cost will still grow at 4% CAGR, driven by overall industry growth. This further indicates that content providers will still enjoy healthy revenue growth, although this will vary across different categories of content providers, with premium sports content providers retaining the biggest share. This also means that Singapore is likely to remain an attractive market for content providers.

Pay TV content cost forecast Counterfactual (without Measure) Factual (with Measrue) Content cost (SGD Mn)
Pay TV content cost forecast
Counterfactual (without Measure)
Factual (with Measrue)
Content cost (SGD Mn)
Percentage
410
400
100%
420
389
378
368
355
347
370
339
329
310
320
80%
281
Contentcost
266
increases at
270
4% CAGR
60%
60%
220
59%
57%
60%
56%
55%
53%
53%
53%
53%
53%
53%
60%
170
58%
56%
54%
52%
120
50%
49%
48%
47%
46%
40%
45%
70
Contentcost as % of pay TV revenues
based on international benchmarks
20
(32%-47%)
20%
-30
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Source: Value Partners analysis

For consumers, the overall impact of the measure will be positive as consumers have access to more content and pay less in dual subscriptions. Although consumers collectively spend more, we expect individual consumers to enjoy savings of around 2-8% over the 10-year period.

We expect advertisers to experience a minimal impact, since pricing for advertisements is based on viewership and advertisers are not expected to pay more to reach the same number of viewers.

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PERSPECTIVE Finally, in concert with determining the potential for market growth and new entrants, Value Partners

Finally, in concert with determining the potential for market growth and new entrants, Value Partners also made an assessment of the potential growth in the number of channels in the Singaporean pay TV market over the next 10 years, as a direct result of the measure. Based on this, we believe that the number of channels in the Singaporean pay TV market could grow from 187 in 2010 to 269 in 2020, representing absolute growth of 82 channels, or 44%.

Decoupling the Media/Pay TV value chain for the benefit of the industry

While the measure appears to be conceptually sound and well conceived, its ultimate success in achieving the benefits outlined above in practice over the coming 10 years will depend on actual implementation. Fundamentally, MDA needs to ensure that the measure remains true to its intentions, is fair to all players and does not impede stakeholders’ ability to deliver their content/services to all subscribers.

In particular, there are implementation challenges we have assessed as being the most linked to the realisation of benefits. Those that must be carefully considered can be grouped into Commercial, Operational and Technical, and Scope Limitation considerations, as follows:

Commercial considerations, including the extent to which SQLs are obliged to bundle/unbundle their content (both basic and exclusive); cross-carriage fee model, both the form (e.g., Interim proxy-based Average Channel Cost, TSLRIC-based cost-plus, Retail-Minus, revenue share), the actual quantum and whether it should be symmetric/asymmetric across operators with different platform technologies; billing and customer support, specifically with regard to increasing the number of billing relationships for consumers and the complexity of customer support interactions.

Operational and technical considerations, including handling of on-demand and live content; cases where customer content contracts are shorter than their platform subscription contract; copyright protection of supplied content once transmitted over the receiving network; sharing of customer information across pay TV operators for resolution of billing and customer care issues.

Scope limitation considerations, including limiting the scope of the measure to specific content genres enabling market power to be exerted; embedding a review date in the measure, where issues such as content concentration and programme access will once again be assessed; enabling content owners to continue to restrict ECA content, but only for a limited period following which they would have to make it available.

Implementation principles underpinning success of the measure

In Value Partners’ view, the above considerations could be effectively addressed by upholding the following principles during implementation of the measure:

1. Ensuring that transit fees between operators are broadly symmetric and represent incremental cost recovery, so that operators are not over or undercompensated and relatively lower cost platforms are not exploited unfairly, particularly by new entrants. Value Partners believes that MDA would benefit from being prescriptive and transparent in setting the transit fee, instead of allowing it to be determined by market forces.

2. Preserving competitive dynamics, especially with regards to operators’ ability to extract value from their content and bundled offers. We believe that operators should be allowed to continue to offer content in its bundled form and offer content a-la-carte only if they choose to do so.

3. Mandating that the relationship between operator and subscriber remains intact regardless of platform. We believe that, to ensure equity and minimal interference to market dynamics, contractual obligations for set-top boxes and content should be separate, meaning that the onus is on the customer to ensure they have the appropriate infrastructure to access the content they have purchased.

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PERSPECTIVE Gaining a competitive advantage in times of change In conducting our analysis on the impacts

Gaining a competitive advantage in times of change

In conducting our analysis on the impacts of the proposed MDA measure, several insightful revelations came to light regarding how different pay TV industry stakeholders could potentially position themselves to gain a competitive advantage from the change, as the measure is likely to alter the market landscape in a number of ways. This is summarised below:

Due to differences in business models, market share, content/rights and platform (ie. CATV, xDSL IPTV, NGNBN), the MDA measure will have differing impacts on pay TV operators in Singapore, creating asymmetric opportunities for stakeholders.

Implementation of the measure will require pay TV operators (ie. variously in the SQL and RQL roles) and content providers to reassess their strategy both at the retail level and in sourcing & distributing content. Specifically, changes will evidently be required in retail content pricing & bundle structure, advertising on exclusive channels (to be seen when viewing on competitor’s platform as RQL), as well as exclusive content sourcing/bundling and contractual mechanisms (eg. viewership based compensation).

For content providers and market entrants– particularly direct-to-consumer content aggregators and/or virtual operators – new opportunities are being created, with strategic elements of the business model needing to be evaluated, such as retail content/bundle pricing and structure, distribution platform exploitation and associated value-added services, increasing in importance.

For existing operators who are also exclusive content owners opportunities are also evident, such as the potential for them to look beyond their existing platforms for distribution, under a hybrid distribution/ exploitation model.

Conclusion

Overall, Value Partners believes that over the next 10 years, as assessed in our quantitative analysis, MDA’s proposed cross-carriage measure will have a net positive impact on the Singapore pay TV industry and participating stakeholders, and will not be value destructive nor cause unreasonable loss to any key stakeholder group of pay TV operators, content owners, consumers or advertisers.

Coupled with the fact that Singaporean pay TV household penetration is below benchmarked levels, the design of the measure will bring about increased viewership, a broader basis for competition, reduction in content concentration and improvements in program access for consumers. At the same time, it will enable stakeholders to monetise their assets fairly. Therefore, the Singapore pay TV industry has the potential for continued sustainable growth and innovation.

As the pay TV industry experiences stronger growth and broader-based competition, pay TV operators will in turn enjoy healthier financial results that ensure the long-term viability of the industry. Consumers will avoid unnecessary costs and enjoy wider content availability, and at the same time, content providers will preserve and likely grow their revenue streams as a result of the increased viewership, potential for direct-to-consumer business models, and growth of the industry overall.

Finally, it is our view that the measure is also a regulatory innovation that, once implemented and proven in Singapore, could potentially set a new model for media regulators around the world who are grappling with how to deliver similar consumer and industry benefits whilst at the same time, preserving economic value and upholding free market principles.

PERSPECTIVE

PERSPECTIVE About Value Partners As one of the largest TMT practices worldwide, Value Partners works across

About Value Partners

As one of the largest TMT practices worldwide, Value Partners works across all sectors of the telecommunications and the digital marketplace, with a particular expertise in public and commercial broadcasting, satellite and pay TV, publishing, digital media, sport, fixed and mobile voice and broadband, licence bids, network infrastructure and equipment. Over the last 15 years, we have delivered real benefits for our clients, building on our deep industry insights into the key issues for these sectors. Our TMT practice draws on over 200 professionals worldwide. We assist 13 of the top 20 telecoms operators in Europe, Asia, Middle East and Latin America, and we work with the leading blue chip media companies internationally, including 30 of the leading Pay-TV and Free To Air broadcasters in more than 20 markets. Additionally, we serve 100% of the largest Private Equity firms with an interest in telecom and media. This means we can help our clients to adapt their business models in an increasingly complex business environment, to maximise impact and returns from digital media.

Founded in 1993, Value Partners is a global management consulting firm that works with multinational corporations and high-potential entrepreneurial businesses to identify and pursue value enhancement initiatives across innovation, international expansion, and operational effectiveness. It comprises two sister companies: Value Partners Management Consulting and Value Team IT Consulting & Solutions.

With 14 offices across Europe, Asia, South America and MENA, Value Partners’ expertise spans corporate strategy, due diligence and financial business planning, cost transformation and organisational development, commercial planning, technology decisions, and change management. Its 3,300 professionals, from 25 nations, combine a methodological approach and analytical framework with a hands-on attitude and practical industry experience developed in an executive capacity within their sectors of focus: media, telecoms and IT, luxury goods, financial services, energy, manufacturing and hi-tech.

For more information on the issues raised in this note please contact ruggero.jenna@valuepartners.com, dominic.arena@valuepartners.com, cheryl.lim@valuepartners.com or one of our offices below.

Find all the contacts details on www.valuepartners.com

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