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The bear and bull case for MultiChoice

Some arguments ignore the data, many are simply missing the point …

Ahead of its unbundling from parent Naspers and separate listing on the JSE, the bear case for MultiChoice is fairly well understood – and perhaps even accepted – by the market. It goes something like this: subscribers are abandoning pay-TV in droves for services such as (and primarily) Netflix. The conjecture is that the business is in decline, or at the very least ex-growth, and will become a prodigious generator of cash, and not much more.

The reality, as always, is a lot more nuanced. DStv’s core business is not collapsing. On September 30, it had 7.2 million active subscribers in South Africa, up from 6.9 million six months prior. The market is still growing, but primarily in the mass- and mid-market segments (DStv Access, Family and Compact).

Of course, Netflix and other so-called ‘over-the-top services’ are chipping away at the top end of the market. It’s a favourite pastime of South Africans these days: to stand around the braai and complain about DStv, while listing the reasons why they’ve cancelled their subscription in favour of Netflix.

But Netflix hasn’t simply supplanted DStv for most people. It is additive. Yes, some have cancelled their DStv subscriptions, but a multiple more have added Netflix over and above their DStv accounts. The worry for MultiChoice is that a host of global research shows that households’ monthly budgets for entertainment are fixed at a percentage of their expenses. Netflix may have replaced DStv for some households, but it likely replaced one night of takeaways for most (the fibre connection won’t be considered part of their entertainment budget). Over time, as Netflix becomes more pervasive in the middle market, DStv may see customers downgrading their packages so their overall monthly spend is still constant.

On Netflix

One way of thinking about it is to consider how big the current addressable market in South Africa (and Africa) is for a service like Netflix. In SA, the addressable market for Netflix is probably no bigger than the number of home fibre connections in the country. These are homes spending around R1 000 a month for a fibre connection plus a streaming service like Netflix (or R2 000 a month if they have DStv as well).

Sure, there will be homes with fibre that don’t have Netflix, but there will be customers who have Netflix without fibre. This seems like an accurate figure, and it is almost certainly less than one million. Over time, as the price of mobile broadband comes down, the market will expand – but the middle market is likely elusive for now (and the mass market for quite some time to come).

The perception in the market bears little resemblance to this reality.

MultiChoice has not actually lost that many subscribers at the high end. One report cites a figure of “roughly” 100 000 (net) Premium customers in the year to June 2017. In the last financial year (to June 2018), it reduced that to just 40 000. The Premium base is likely currently quite stable.

As at end the end of September, it had 1.5 million premium segment customers (not to be confused with the Premium package). This segment includes both DStv Premium (R809 per month) and DStv Compact Plus (R509 per month) customers.

The most valuable customers

Yes, Premium subscribers are DStv’s most valuable customers (they spend the most per month). And they almost all pay the access fee, on which the margins must be incredible. But the content costs to service these customers are likely far higher than the other segments of DStv’s base. Primarily, these customers prefer international content – think all the award-winning international drama series on M-Net, as well as channels like BBC Brit and BBC Earth. One must question the assertion that DStv Premium subscribers are the “most lucrative”. It wouldn’t be difficult to construct a compelling case that the most profitable customers for MultiChoice are those in the mid-market segment (the traditional ‘DStv Compact’ base). And there is growth in this market!

Source: MultiChoice investor presentation

MultiChoice illustrates clearly just how much cheaper it is to produce local content: 40%! (And this route removes the currency risk.) Local content is not just cheaper, it is more desirable for mid-market and mass market audiences. Netflix has announced one local original title, Queen Sono.

There is no way Netflix (or any other streaming service) will be able to outspend DStv on local content, and this will remain a critical differentiator for MultiChoice.

Source: MultiChoice investor presentation

Going dishless

The Showmax and DStv Now streaming services need to be looked at as defensive moves. They are designed to reduce churn among the existing base. Between them, they have about 700 000 active users (10% of the total base). The catalogues of Showmax and Netflix cannot be compared. Showmax has “over 700 titles” (according to the group’s pre-listing statement). Only a handful of these are original, the rest is licensed or owned content. Netflix, by contrast, offered a slate of 700 original titles in 2018 (including 80 non-English original productions and 80 original films). They are not comparable!

Read: MultiChoice will continue to carry Showmax losses

Once the pure streaming-only (or dishless) service makes its debut later this year, many are expecting this strategy to shift to an offensive one. But MultiChoice cannot – and will not – put its existing base at risk by offering this product. Its primary business is to ensure that it has compelling content. The method of distribution will be increasingly irrelevant.

Sport remains the jewel in the crown. This is an area where Netflix, by definition, cannot compete because it fulfils a different role entirely (there’s a reason why the Netflix library is a catalogue of content that isn’t live). Live action will remain the domain of linear networks, at least for the foreseeable future (again, the method of distribution is actually irrelevant). As long as DStv retains a compelling sports offering (and it has built up a truly world class one), there is no reason for subscribers to go looking for this anywhere else.

Yes, MultiChoice is facing regulatory scrutiny in many markets (South Africa included), but the choice of Calvo Mawela as group CEO was very astute indeed. Mawela was previously CEO of the South African unit and has a strong background in regulatory affairs.

How it performs in South Africa is key: this business generates all the profits and much of the cash. But over the long term, MultiChoice is betting it can continue growing in sub-Saharan Africa (outside of SA). Already, there are 40 million addressable households across its 50 markets. It has a total of 14 million subscribers. By 2022, that number will be 44 million. That’s an awful lot of room to grow. The currently loss-making Rest of Africa business is moving towards break-even, and expects a “return to profitability” in the medium-term.

Source: MultiChoice investor presentation

There is one significant risk, though, that is largely being ignored by the breathless (narrowly-focused) commentary on MultiChoice, as well as pay-TV generally. This is not about Netflix, or DStv Premium subscribers.

In its January letter to shareholders accompanying the Q4 results, Netflix said the following:

“In the US, we earn around 10% of television screen time and less than that of mobile screen time. In other countries, we earn a lower percentage of screen time due to lower penetration of our service. We earn consumer screen time, both mobile and television, away from a very broad set of competitors. We compete with (and lose to) ​Fortnite​ more than HBO. When YouTube went down globally for a few minutes in October, our viewing and signups spiked for that time. Hulu is small compared to YouTube for viewing time, and they are successful in the US, but non-existent in Canada, which creates a comparison point: our penetration in the two countries is pretty similar. There are thousands of competitors in this highly-fragmented market vying to entertain consumers and low barriers to entry for those with great experiences. Our growth is based on how good our experience is, compared to all the other screen time experiences from which consumers choose. Our focus is not on Disney+, Amazon or others, but on how we can improve our experience for our members.”
(Emphasis the author’s)

If you zoom out, it all comes down to attention. And that’s the fundamental risk to MultiChoice in the long-term.

* Hilton Tarrant works at YFM. He can still be contacted at hilton@moneyweb.co.za.

Read: MultiChoice CEO calls for online streaming to be regulated in SA 

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there is a bull case if you believe Naspers underpriced the unbundle price…

On the bear case the probkem is very similar to print media. The overall problem for everybody is that a very big and also the most lucrative / attractive slice of the addressable market have switched out of the old model. The old model is that companies decide what to show us, when they want, and to top it all they stuff 18 minutes of loud advertisements into every hour over and above irritating banner ads around cropped content.

Advertising is dead. There are now more ads on dstv for dstv or show schedules or content providers than from checkers, breweries, banks, etc etc.

Scheduled content is dead. People expect to watch what they want when they want. Thirty year olds laugh at the notion of scheduled content.

The decline in advertising revenue will accelerate the impact of no-growth subscriptions. Should be valued like a utility in a declining industry IMO

Advertising is a very small part of the business.

Hilton :

Did they break it out as a revenue source versus subscriptions?

But yes I agree : going by the proportion of ads nowadays that are ads for DStv shows or for dstv : advertising is a small number 😉

Agree, and Bekker agrees as well, that is why he is chucking this regulatory fraught SA asset now.

The biggest problem that Multichoice faces is how it has tarnished its brand in the SA market by stubbornly pursuing the most revenue-hungry approach.

Even the dumbest of South Africans could see that was what they were doing. That has simply built hate for the brand. At the same time, any pay-TV business that now comes out of Naspers is going to have to battle the overarching Naspers reputation of screwing the consumer in persuit of revenue while reducing value to the customer.

All that this really comes down to is there being a lot of dead wood within the entire Naspers group. Most of management has been there for decades and most of the business will be sharply resistant to change. The old “we’ve always done it this way and we know it and it worked” mindset.

So where is the innovation going to come from? How are they going to get around the Naspers brand reputation in SA?

That is the real problem.

This is the most interesting, nuanced, and informative take on Multichoice’s prospects that I have come across so far. Still cannot make up my mind whether it is worth a short-to-medium term punt or not. Probably will depend on the opening dividend yield for me.

What is happening with both Naspers and Tencent is that they are slowly removing value from shareholders by creating new IPOs with parts of the business that shareholders originally benefitted from. So in effect, they are robbing a Peter ( original shareholders in both Nadoers and Tencent) to create more wealth for Paul ( controlling shareholders and hierarchy) as far as I’m concerned, this is robbery pure and simple.

I see this differently. I own Naspers shares. I will get 1 Multichoice share for every Naspers share I own. I expect the Naspers price to remain effectively unchanged after the unbundling and the Multichoice shares to trade somewhere between R100 and R200. I expect to be better off as a result. Don’t feel robbed at all. I have backed Oom Koos for a long time. Never been robbed yet, only enriched.

Consider the investors buying in at listing, they are the ones who are going to get robbed, same as Novus.

I’m okay with the BEE shareholders getting exactly what they deserve.

No. MultiChoice has value less than zero within Naspers. By listing it separately it is creating value for Naspers shareholders.

The only channels keeping the majority of subscribers with DSTV are the Supersport Channels. Their sports coverage is up with the best globally.

Multichoice has a dying business model. No amount of analysis is going to change that.

Unless Multichoice radically changes its core business, they will inevitably go down the tubes.

The only unknown, for me anyway, is the time frame.

People love saying how smart Koos is. Yes, he is very smart, and that’s exactly why he made this move. He knows, long term, Multichoice is as dead as a dead thing.

10Meg line fibre R609 Incl R99 for Netflix and I am happy. No repeats unless my decision and at least can find something we want to watch. Multichoice just cant get the public manipulation right.

There is not enough cash in the world to make Showmax competitive with Netflix. Not gonna happen. The Netflix brand is way too strong already.

Look what they do with Showmax already – basically giving it away for free. That tells you all you need to know.

The only differentiator would be local content. Which Showmax can’t produce fast enough. Would take a LOT more cash to get there. And here’s the kicker, Netflix is already producing localised content in various territories, and SA will be no different.

Then there’s the tech. Netflix is literally light years ahead of Showmax in that department.

Koos is indeed a smart man. He knows what’s up.

Netflix will be half of what it is without Disney who will launch Disney+ soon. HBO unbundling and going solo globally will also be big. This market will saturate. Sports is what will keep multichoice relevant.

The quiet revolution is happening over on youtube. the last part of this article is pertinent. youtube provides vast content, of real value, catering for highly individualised interests, available any time, for free! this is unprecedented in human history, making ongoing learning possible on a scale unknown hitherto.

gaming is indeed the other quiet revolution taking place. When VR finds mass adoption, DSTV and such will be relegated to the annals of history.

One hundred percent.

There are even rumours of Netflix getting into gaming on their platform eventually. Imagine not having to buy a console or PC to play online games.

The most valuable piece of real estate in the world of content right now is that first “page” of Netflix. And that space is reserved for their original content.

A topic that interests me is whether the rights to international sport is a valuable product for MultiChoice. If you go into a pub with SS and an international game is on, there are very few people actually watching the game. When the penny eventually drops, this will have major implications with respect to sponsorship, TV rights, and the future of professional sport in South Africa. There seems to be an element of fatigue with respect to watching live sport (look at attendance for rugby, cricket and soccer).

Whether MultiChoice is growth or ex-growth is perhaps a moot point. The important thing is not to overpay. MultiChoice only needs to grow FCF at <5% from here and it could prove to be a very good investment, as most people expect declining FCF due to competition from other media.

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