Televisa’s Profit-Draining Cable Impasse Unlikely to Be Resolved

  • Megacable stopped transmitting 12 Televisa channels last week
  • Peso depreciation made channels too expensive, company said

Grupo Televisa SAB lost 3 million viewers for its cable networks overnight, and investors are learning to cope with the idea that they’re not coming back.

Megacable Holdings SAB, one of the last independent cable operators in Mexico, announced this month it would stop transmitting 12 of Televisa’s pay-TV channels, which include soap-opera network TLnovelas and music channel Bandamax. The cable provider said Televisa bases its fees in dollars, making the channels more expensive as the peso has declined against the greenback.

The decision is probably permanent -- a “done deal,” according to Signum Research analyst Martin Lara -- because it lets Megacable save as much as 20 million to 30 million pesos ($1 million to $1.6 million) a month. “It represents anywhere between 3.5 and 5 percent of Megacable’s Ebitda, so for them, it’s a huge deal,” he said in a phone interview, referring to earnings before interest, tax, depreciation and amortization.

For Televisa, the loss of Megacable’s subscribers could translate into declines of about 2.5 percent in its content revenue for TV and 5 percent in content earnings before interest, taxes, depreciation and amortization, JPMorgan Chase & Co. analyst Andre Baggio said in a note to clients Sept. 6. Content represents more than one-third of Televisa’s sales and more than 40 percent of profit.

Shares of Televisa, controlled by billionaire Emilio Azcarraga, have fallen 7.1 percent to 95.42 pesos since the Sept. 5 announcement, while shares of Megacable, controlled by the Mazon family, have fallen 1.3 percent. That compares with a 4.3 percent drop for Mexico’s benchmark IPC index during the same time frame.

“The content of those channels isn’t relevant for our viewers -- it’s mostly reruns,” Megacable Chief Executive Officer Enrique Yamuni said in a phone interview. “Televisa’s policies are all or nothing.”

Televisa took legal action against Megacable starting last year in Mexico City court, and judges have ordered Megacable to live up to the terms of its contractual agreements, Televisa said in a statement. Yamuni said his company’s actions are legal, and isn’t worried about a probe by Mexico’s consumer protection agency on whether Megacable announced the changes to subscribers early enough.

Yamuni is betting that getting rid of Televisa’s channels is a better option than passing along higher costs to subscribers. “Their consumers could have handled it, but now subscribers will have the final say over whether this was a good move on Megacable’s part,” Intercam Casa de Bolsa analyst Alik Garcia said in an interview.

Viewers are the ones hurt by Megacable’s move, Televisa said. “In fact, we’ve seen stories in the press where it’s reported that Megacable subscribers are protesting strongly on social networks because they now have channels with much lower ratings,” Televisa said.

The most-watched of the networks Megacable cut, Distrito Comedia, averages 90,000 viewers an hour with a lineup mostly of old comedy shows. The least, music channel Ritmoson, gets 17,000, according to Nielsen Ibope Mexico figures. That’s still higher than the most-watched new addition for Megacable, movie channel Cinelatino, at 11,000 viewers an hour.

Most subscribers welcomed the change, Yamuni said. If unhappy, customers can always switch to Sky -- a satellite-TV provider majority-owned by Televisa.

Too Expensive

The problem, according to Baggio, is that Televisa’s channels may not be as valuable now because of the currency’s decline. “The main reason which led Megacable to drop the channels was that payments were not linked to the audience, and instead pre-determined based on a USD amount per subscriber,” he said.

A 2013 overhaul of telecommunications regulations in Mexico helped put Megacable in position to make such a decision, Lara said. Pay-TV providers are now allowed to carry Televisa’s most popular channels for free, such as broadcast network Estrellas, and forgo the pay-TV ones that have lower ratings.

The likelihood of more companies dropping Televisa’s channels is low, according to Itau BBA analyst Gregorio Tomassi. The company controls nearly 70 percent of Mexico’s pay-TV market through its cable subsidiaries and satellite provider Sky, he wrote in a note to clients. The rest is mostly split between Megacable and Dish Mexico, which doesn’t carry any of Televisa’s paid signals.

Televisa’s problem comes down to the company choosing to sell all of its pay-TV channels as a bundle instead of letting operators choose which are profitable enough to buy based on individual ratings, Lara said. “Megacable might have bought more channels if Televisa offered them individually,” he said.

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