Showtime: Profit, At Last

 By Chris Forrester, TBS contributing editor

Showtime's Dubai Media City headquarters

On May 26,2004, Viacom's Sumner Redstone and Faisal al-Ayyar of Kipco (Kuwait Investment Projects Co) will perform a ribbon-cutting ceremony at Showtime's brand-new broadcasting centre at Dubai Media City. The two major shareholders in Showtime have much to celebrate. Showtime is, without doubt, the Middle East's most successful Pay-TV platform. During 2003 examinations by two investment bankers (Credit Suisse and UBS) have already valued the company at $750m, some three times its nominal book value. Showtime is a joint-venture between Kuwait-based Kipco and entertainment conglomerate Viacom, and is licensed to operate in twenty-two Mid-East and North African countries. Kipco is talking to a number of banks about a potential Initial Public Offering (IPO), and we understand that a recent Board Meeting in Kuwait looked at a timetable that would lead to a probable stock exchange listing.

However, Showtime's eventual IPO valuation is expected to be much more than $1 billion. The past valuations were carried out on the basis of historical information based on 2002 and early 2003 trading, and when the Baghdad/Iraq war and commercial anxieties were at their height. More recent trading has been robust and all-important Average Revenue Per Unit (ARPU) levels (at $54 amongst the highest in the world) have been maintained despite fierce local competition from rivals. Subscription numbers are the highest in the industry locally and stood at 281,000 at December 31st. Moreover, this current winter's trading has been buoyant, and a third investment bank will be looking at the company around March, helped then by more favourable data from 2003, and an expectation that 2004 and 2005 numbers can be met and possibly surpassed. Indeed, one senior company executive told us that 2004's end results could be "amazing" helped by tough anti-churn measures planned for 2004. Showtime has its own internal projections looking at trading up to 2010.

Showtime has in the past made no secret of its plans to exploit its healthy position with a market float. It achieved cash-flow breakeven last May and is now making positive profits. 2003 was a challenging year for the company with ample customer nervousness in the company's core markets of Kuwait, the United Arab Emirates, and Saudi Arabia. Nevertheless, Showtime is believed to have fully met its budgeted cash net income for 2003. Kipco's CEO Faisal Hamad al-Ayyar is on record as saying that Showtime intends contracting with an investment bank that will lead to a listing "on an international stock exchange, such as the London stock exchange." Kipco is a widely diversified business with major investments in banking and telecommunications. Its Kuwait-based Wataniya mobile telephone outfit has recently been awarded one of three mobile licences in Iraq (in a joint venture with a Kurdish company), and have similar cellular licences in Tunisia and Algeria. Wataniya has a market capitalisation of some $3 billion.

Iraq is seen as a valuable addition to Showtime's portfolio of markets. However, the first flood of TV-based enthusiasm has been for free-to-air dishes and receivers, and the market is seen as needing to go through this stage. Nevertheless, Showtime has appointed its own dealers in the main cities and Iraqi subscriptions are starting to come in. One spin-off from the Iraq has been with valuable contracts with the US armed forces, which have set up Showtime systems to serve troops. Showtime intends establishing its own wholly-owned Iraqi dealer/installation operation once normality and a secure environment exists for staff.

Sumner Redstone, Peter Einstein, and Faisal al-Ayyar in Dubai

Showtime is also in the middle of a transition whereby it is relocating its London managerial staff and playout/operational staff to a new, purpose-built facility at Dubai's futuristic Media City, situated a few miles up the coast near Jebel Ali, and directly across from the entrance to the massive much publicised 'Palm' housing and hotel project now being built in the Arabian Gulf. The new building will be occupied in April and May, and officially opened on May 26 by Sheikh Mohammed al Maktoum, Dubai's Crown Prince and the power behind Dubai plc. Showtime's belief is that the new building brings together for the first time the whole company, and this will help boost growth, possibly at the expense of their rivals, and consequently represent an attractive investment opportunity to investors world-wide.

The platform is now claiming the Number One position in Pay-TV. It is also admitted that what have been described as "friendly talks" with rivals have taken place recently. "There is no TV company, pay or free, that makes as much money as we do," one insider told us, "And that's the way we intend to stay." It is expected that while Showtime's investors might want to realise some cash from a floatation, the bulk of any monies raised in an IPO would go into a war-chest for planned future developments. It is known that Showtime/Kipco is looking at other opportunities outside its current operating region in media, and this includes potential mergers, partnerships, or green-field developments and senior staff firmly believe Showtime can become a global media player.

But competition still exists. There are two major rival operations: Orbit (headquartered in Rome, but with operations in Cyprus and Bahrain), and Arab Radio & Television (ART) which now trades under the ADD (Arab Digital Distribution) banner. Orbit is backed by the wealthy Mawared group of companies owned by Prince Khalid bin Abdullah of Saudi Arabia. Saudi millionaire Sheikh Saleh Kamel backs ART/ADD. Neither is profitable, nor has either ever released hard data on their progress so far. Both have recently deeply discounted their subscription prices in an effort to win viewers. Orbit's current top-tier offer in Dubai is Dirhams 120 a month (about $32) covering their own 28 channels and potentially another 400 free-to-air channels. ART's introductory offers have been as low as $5 a month, which has led to impressive take-up for the three-month 'trial' periods during last autumn but equally massive churn at the end of the day. One source said the net result was a "fractional" increase in ART's core subscriber numbers but administering the various in and out surges created a back-office nightmare. Within the ART 'family' of channels is Star Select (best considered as a mini-tier) having considerable appeal to Gulf audiences thanks to its exclusive cricket coverage, but this attraction tends to diminish in non-Gulf countries. ART's full-price bouquet (Al Awael World) is priced in the UAE at around $64, but has few takers. In countries like Egypt all platforms price their offerings lower. The market sees Orbit as a well-run operation but quite definitely in the Number 2 position. ART/1st Net lags the field, and unless it achieves sustainable and long-term growth is seen as a basket case, with little prospect of breaking through.

The tough competition created much confusion in an already fragile marketplace. First, some expatriates left because of the war. They are now returning. Second, the subscription price-wars left some viewers re-examining their loyalty, and inevitably some churn between platforms. However, Showtime says Q3 and Q4 saw that drift reversed. Local insiders now ask "Where can the competition go?" They suggest that once a rival's introductory prices hit rock-bottom, and still cannot hold onto viewer loyalty, then the gap in Showtime's favour is bound to grow. ART/1st Net has invested huge sums into product (including paying more than $80m for exclusive coverage of the last FIFA soccer World Cup competition), its own studios, and exclusive entertainment but has seen no commensurate benefit in subscriber growth.

Showtime's advertising pushes celebrity endorsements and emphasises the quality aspect of some of the world's best-known entertainment brands like Nickelodeon, MTV, Paramount, and The Movie Channel. 2004 will see extra channels emerge, but also makes more of the marriage between box and 'smart' card. This is needed to avoid so-called grey-market imports of legitimate cards sourced in low-value countries like Egypt flooding into higher-value markets like Saudi Arabia, Kuwait, and the Emirates. Showtime intends re-introducing its 'Smart TV' interactive elements, with long-form EPG and games as part of the package. They also intend blocking reception of free-to-air signals for viewers who continue to use Showtime-provided boxes once their subscription has lapsed. This is seen as a major churn-buster.

Back in the autumn of 2003 there was again local talk of consolidation between platforms. In many respects the working relationship between ART and Showtime is better than it has been for some years. They both use the same box, smart card (Irdeto) and satellite (NileSat). Subscribers to Showtime can add ART channels to their bouquet for a modest fee, and vice-versa. It's known that there have been frequent discussions between Showtime and ART at the most senior levels, and also between Showtime and Orbit. An investor in ART is Prince Waleed bin Talal, who is also a major investor in News Corp and was seen as a key player in winning the Murdoch-backed Star Select bundle away from Orbit and onto ART/1st Net. At the time there was increasing talk of greater co-operation between the various rivals, and even a high-level meeting at the exclusive Sharm el-Sheikh holiday resort on the Red Sea. But those discussions came to nothing. Perhaps it is time for another high-level chat, because operators, dealers, and probably even viewers would welcome a single platform and faster progress might well be made if customer confusion were eliminated.

One challenge to overcome is the huge legacy of Irdeto boxes in the marketplace. While Orbit made much of its "1m unit box order" they have not percolated into the market (other than for subscribers, of course). And Orbit is very much committed to its box. They also favour Arabsat as a platform, although now also use NileSat for their premium channels. Showtime's view is that whether via consolidation of a simple form of co-operation, a single combined platform would benefit all parties, allowing dual illumination to both sets of boxes for a period but migrating towards Irdeto within a short period. The obvious benefits to all 3 players from lowered staff levels, call centres, and perhaps most importantly, the elimination of competition in rights negotiations, would be impressive. But media egos are perhaps the most difficult obstacle in any negotiations.

There is, of course, another level of competition: there are more than 100 free-to-air channels available to viewers - and more joining every month. The pay-platforms argue that their first-run offerings, exclusive programming, and usual cluster of thematic channels have worked for Pay-TV almost everywhere else on the planet, and why should the Mid-East be any different? TBS

Copyright 2004 Transnational Broadcasting Studies
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