THE DELTA PERSPECTIVE

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1 The realities of the Pay-TV and OTT battle in Africa It s not (yet) play time Pranav Modi - Principal, Singapore office Eric Archer - Business Analyst, Johannesburg office January 2018

3 The realities of the Pay-TV and OTT battle in Africa It s not (yet) play time Authors: Pranav Modi - Principal, Singapore office Eric Archer - Business Analyst, Johannesburg office Generalisations are seldom if ever true and are usually utterly inaccurate On that note, let us begin with a few generalisations which have become the focal points of discussion and strategic reviews for Pay- TV and Video providers across developed and developing markets. Video consumption is fast shifting from offline to online, from larger to smaller screens and from linear to on-demand; 3

New direct to consumer OTT business models, enabled by rising internet penetration and faster internet speeds, are giving rise to the cord cutter, cord shaver and cord never segments; Content is

4 New direct to consumer OTT business models, enabled by rising internet penetration and faster internet speeds, are giving rise to the cord cutter, cord shaver and cord never segments; Content is becoming increasingly bifurcated as short-form, pro-am, user generated content rises in popularity and premium international content rises in value; Scale is now critical to compete effectively in the content space where OTTs have a significant advantage over Pay-TV providers OTTs are making an active play in high value content production and bidding for expensive sports rights to deliver exclusive and differentiated content to consumers While such trends are key for all industry players and continue to shape the future of TV, they are at different stages of evolution in different markets and Africa is still in the very early stages of development and here is why. 1. Global consumption trends are not (yet) Africa s reality Media consumption in Africa is still very much linear, offline (DTH/ DTT) and on the TV screen (See Exhibit 1). Global consumption trends are not yet Africa s reality and probably won t be until fixed broadband (FBB) penetration reaches critical mass and/ or LTE and mobile data leapfrog fixed (discussed in more detail under point 2). Unlike in developed markets such as the USA, where consumers are increasingly turning to on-demand service providers such as Amazon and Netflix and terminating Pay-TV services, cord cutting is still not a real threat in most African markets. Pay-TV subscriptions in Africa continue to demonstrate robust growth which is expected to continue for the near foreseeable future (See Exhibit 2). Pay-TV ARPUs though have come under pressure in recent years, but more as a result of the low-end segments hitting the market as opposed to any evidence of cord shaving (See exhibit 3). Exhibit 1: Global consumption trends not yet Africa s reality 4

Exhibit 2: Pay-TV subscriptions continue to demonstrate robust growth Exhibit 3: ARPUs in Africa under pressure as low-end segments hit the market 2.

However, in most African markets FBB penetration is expected to remain at sub 5% levels even by 2022.

5 Exhibit 2: Pay-TV subscriptions continue to demonstrate robust growth Exhibit 3: ARPUs in Africa under pressure as low-end segments hit the market 2. Connectivity expected to remain a key barrier to wide spread OTT adoption Telcos hold the key Fixed broadband is a key enabler for OTT adoption (See Exhibit 4). However, in most African markets FBB penetration is expected to remain at sub 5% levels even by In such a scenario, LTE will need to leapfrog fixed which, in terms of market penetration, seems fairly imminent (See Exhibit 5). One key challenge though will still remain LTE/ Mobile Data pricing. At current pricing levels of ~$2/ GB, even if one were to consume 2 hours of video per day in low quality (average Pay-TV viewership in many African markets is currently in excess of 4-5 hours per day), the monthly mobile bill could rack up close to $36/ month (See Exhibit 6). This, in sub $5 mobile ARPU markets, will be undoubtedly cost prohibitive. 5

with OTT providers the ball seems to be in the court of mobile operators.

6 Telcos will thus hold the key if OTT viewership is to gain critical mass either through significant cuts in mobile data pricing, the launch of affordable unlimited bundles, or zero-rating partnerships with OTT providers the ball seems to be in the court of mobile operators. Exhibit 4: Fixed broadband seems to be a key enabler for OTT adoption Exhibit 5: LTE penetration in Africa likely to leapfrog Fixed 6

Even though short form content is beginning to show signs of initial adoption (particularly on smaller screens), until smartphones/ tablets become more prolific and data becomes more affordable, this

7 Exhibit 6: Data pricing will be a key barrier to widespread OTT viewership 3. Content is king - but more long form and hyper local In Africa, long form content still dominates consumer viewership across device types (see Exhibit 7). Even though short form content is beginning to show signs of initial adoption (particularly on smaller screens), until smartphones/ tablets become more prolific and data becomes more affordable, this space will continue to serve a niche segment of the youth population and not translate into a major revenue driver for industry players. Content preferences also vary significantly compared with more western markets such as the USA. Local content can account for over 90% of viewership for the mass market segments. While global blockbusters are still critical to tap into the premium base, such content alone cannot be the recipe for success for any player operating in Africa. As such, besides traditional Pay-TV operators, most OTT players are also including local content as a core component of their content portfolios (see Exhibit 8). Exhibit 7: Long form content still dominates viewership across device types 7

traditional Pay-TV providers typically lack.

8 Exhibit 8: Importance of local content 4. It s not only the OTTs who can play the scale game in Africa When it comes to acquiring and monetising blockbuster content, the media space is all about scale, which leading OTTs have plenty of and traditional Pay-TV providers typically lack. In Africa though, the situation is slightly different players such as MultiChoice are able to spread the cost of expensive sports rights, global blockbusters and local productions over multiple African markets. Their content cost per sub of $75 (based on $870 million of programming and production costs in the 2016 financial year spread over a base of 11.6m subs) is more in line with the likes of Netflix, Amazon and Hulu as opposed to more traditional Pay-TV players such as DirectTV, Sky and Dish whose content costs per sub are closer to the $200-$400 range (See Exhibit 9). Exhibit 9: Traditional Pay-TV providers in Africa also have scale 8

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10 Despite all the above, there is one trend which is fast making its way to Africa which traditional Pay-TV providers need to start watching out for. OTT s producing own exclusive content and acquiring sports rights While leading Pay-TV providers in Africa still hold exclusive rights to premium local and sports content, they need to keep a close eye on developments in the OTT space. For example, ShowMax in Kenya is producing exclusive Kenyan shows to cater to the strong appetite for local content. iroko has cited its large own exclusive catalogue of Nigerian and Ghanaian content, playing a key role in targeting the emerging middle class. Global players such as iflix are latching on to the popularity of Nigeria s Nollywood industry, purchasing up to 1,000 hours of exclusive Nollywood content and already commissioning two local titles. In summary, it s not only the large Pay-TV providers who will have the rights to own exclusive content. Another key development which could soon make its way into Africa and break in to the Premium Pay-TV segments is Sports via OTT platforms. The most well-known examples include Twitter, Amazon, Facebook and YouTube in the USA competing over rights to stream NFL football games, with Facebook also making a significant yet losing bid ($610m for 5 years of streaming rights) for the Indian Premier League (IPL) for Cricket; Hotstar and Iflix streaming the IPL in India and top flight and second division football leagues in Indonesia respectively; DAZN in Europe capturing rugby, football and the NFL; Sportflix in Mexico slated to offer premium third-party sports content from the NFL, NBA, Formula One, NHL, UFC, Golf and Soccer for subscription plans ranging from $19.99 a month to $29.99 a month. More recently, Kwese TV in Africa has announced a video streaming service with access to over 100 channels including sports such as the NBA and Baseball. In conclusion, while the OTT space in Africa is relatively nascent and linear television still dominates, consumption trends are bound to change and the battle between industry players is set to intensify. Telcos will start to march decisively towards content, either through partnerships or own content plays, and this will only increase the pressure on traditional PayTV providers. One significant advantage though for the Pay-TV industry is time on hand, which their more developed market counterparts lack, but the time to act is now! 10

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12 Pranav is a Principal at Delta Partners with significant experience in TMD advisory across Asia, Middle East and Africa serving a variety of clients in the Fixed Line, Mobile, Media and Digital space. Pranav s key areas of expertise include Commercial and Digital (Video, FinTech, ecommerce, Big Data) Strategy, Commercial Due Diligences, New Market Entry and Operational Efficiency. Eric is a Business Analyst in Delta Partners Johannesburg office. He has TMD advisory experience across Africa, Europe, the Middle East and North America with clients focused on Mobile, Digital and Fixed Line. If you would like to contact the author to further discuss this topic, you can to: pm@deltapartnersgroup.com Delta Partners is the leading Advisory and Investment firm specialised in Telecoms, Media and Digital with offices in the Middle East, Africa, Europe, Asia, Latin America and the United States of America. We partner with global and regional telecom providers, digital players, other TMD clients and our investors to help them address their most challenging strategic issues. Our unique combination of Management Consulting, Corporate Finance 1 and Investments 2 creates unparalleled value for our clients, investors and business partners. For more information, please visit and follow us on 1 Delta Partners Corporate Finance Limited and 2 Delta Partners Capital Limited are members of the Delta Partners Group of companies and are authorised and regulated by the DFSA.

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