Vivendi's French pay-TV business Canal Plus needs fixing. Sky Plc can show it how.
The unit is Vivendi's biggest driver of sales and cash flow, but operating profit and organic growth have been shrinking since 2012. It lost 380,000 French pay-TV subscribers in the past year to reach 5.93 million at the end of the third quarter.
The diagnosis is harsh: not only did Canal Plus lose its grip on exclusive sports content with the arrival of Al Jazeera's BeIN Sports, it has simply not innovated enough on technology or products to ensure customers are still willing to pay 39.99 ($44.50) euros a month.
Tycoon Vincent Bollore, Vivendi's chairman and biggest shareholder, has fired top managers and called for an end to the unit's imperious vibe. He's also vowed to plow 2 billion euros into Canal Plus, including 600 million euros on set-top boxes, to get back to growth; a considerable sum considering annual capex is usually around 200 million.
As Bollore overhauls Canal Plus, he should follow the Sky recipe:
- Sky has segmented pay-TV into ever-thinner slices at both high and low ends, with live video streaming service Now TV starting at 6.99 pounds a month ($10), against 20 to 45 pounds for traditional annual packages. It injected more flexibility and attracted new customers by offering daily, weekly, and monthly passes for sports or movie channels.
- Content, content, content. Sky raised spending by 70 percent to defend its soccer rights from a BT Group bid last year. It hoards its best stuff, such as Sky Atlantic with its prized Game of Thrones series.
- Invest in technology to improve customer experience and keep big spenders happy. Sky just unveiled a new set-top box, dubbed Sky Q, costing up to 100 pounds a month for all the bells and whistles like HD content and sports. Cool feature: you can pick up shows you left off at home on your mobile devices.
While Vivendi has warned of heavy investments in the next two years, so far Canal Plus has done very few of these things. Its core product in France remains the 39.99 per month pay-TV subscription with an inflexible 12-month contract. While it did launch a Netflix clone called Canal Play that has about 770,000 users paying 6.99 euros a month, the service is stocked with a dull back-catalogue of movies and TV shows. It doesn't offer live television.
The sports problem may yet be fixed. Bollore's working on a potentially expensive truce with BeIN Sports, possibly involving exclusive distribution or an outright purchase. Analysts estimate a takeover would cost 500 million euros, practically all Canal Plus's 2014 cash flow, and initially would be dilutive to earnings since the channel loses about 200 million euros a year.
Fortunately, Bollore's got the cash to back his vision. He's already shrunk Vivendi by selling four businesses to focus on just music and pay-TV, putting its net cash position at 8 billion euros at the end of the third quarter.
The Canal Plus turnaround will not be easy: Sky's managers have been investing for years, making streaming products and day packages possible without cannibalizing its high-end offerings. Vivendi will be playing catch up with a less experienced team, and now the company is shorn of four of its six businesses lines, there is nowhere to hide underperformance.
Investors are already losing patience. Shares are down 18 percent in the past year, worse than the 11 percent drop in the European media index. Vivendi holders have so far been placated with the promise of a special dividend from the asset sales. If Canal Plus continues to underperform, shareholders may rue the special voting rights that give Bollore, whose stake is only about 14.4 percent, effective control over the company.
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