Satellite Tv Comes Down To Earth
It was a pretty picture: more than 10 million Latin American households ready to spend hundreds of dollars each on satellite-TV service. The image was enticing enough to attract Rupert Murdoch's News Corp. and Hughes Electronics Corp. By the end of 1996, the two global heavyweights had local partners in Latin America's major markets, Mexico and Brazil, and were set to beam programs across the region. The rivals invested $2 billion between them--and braced for big profits.
The picture is dimmer now. Murdoch's Sky Latin America and Hughes's Galaxy Latin America have fewer than 1.2 million subscribers. Economic growth is anemic in most Latin nations, and Brazil is in recession. New cable-TV concessions present another threat. Profits? Neither Sky nor Galaxy even has a forecast. "They thought it would take two or three years to break even," says Jimena Urquijo, an analyst at Kagan World Media, a consultancy in Carmel, Calif. Now, she adds, they are unlikely to make money before 2002.
RICH AND WIRED. For all their global experience and their partners' local expertise, Sky and Galaxy misjudged the market. Middle-class incomes are either stagnant or falling. Although only 12% of Latin households receive cable TV, many wealthy urban neighborhoods--a natural market for satellite TV--are already well wired. In Brazil, the two companies overestimated demand by as much as five times, observers say. In Mexico, they are competing with programs from the U.S.--most of them picked up from Hughes's DirecTV Inc.
Sky and Galaxy still think they can sign up a total of 7 million to 12 million subscribers over the next decade. "Two years ago, this industry didn't exist," says Galaxy Chief Executive Jose Antonio Rios. "Satellite TV will become a much more formidable force than anybody anticipated." But few in the industry are so ebullient. When Turner Broadcasting International looked at the market several years ago, it projected medium-term growth at a quarter the pace Sky and Galaxy anticipated.
For now, the two groups are running an expensive race for subscribers. Sky has halved installation fees in Mexico, to $200. Christopher Recouso, Latin media analyst for Bear Stearns & Co. in New York, estimates that Sky is spending $500 to $600 per subscriber in Mexico--and making $30 a month on each. Galaxy's installation charge is down to $100, from $400 when service began. Both companies face more investment in distribution and advertising. "People just don't know the product," admits Alberto Ennis, who heads Galaxy's operations in Mexico.
Although they dispute each other's tallies, Sky says it has just over 600,000 subscribers, compared with Galaxy's claim of half a million accounts. That's principally due to Sky's strong local partners, Grupo Televisa in Mexico and Organizac centses Globo in Brazil, which hold majority stakes. Both companies offer exclusive programming, including their own broadcast channels. This has given Sky more than two-thirds of Mexico's market, and it is gaining on Galaxy in Brazil.
HARD TIMES. The question is how long the two companies can sustain their rivalry. Sky lost $150 million in the first nine months of 1998. It sells in just four countries, compared with Galaxy's 20. But Galaxy has begun to look shaky. It lost $126 million last year and says it needs 1.5 million customers--triple what it has--to break even. MVS Multivision, Galaxy's Mexican participant, sold its 10% stake to Hughes last October. Brazilian partner Televisao Abril says it wants out, too.
Competition from the cable industry, fueled by new concessions across the region, promises more hard times. Unless Latin America recovers quickly, analysts say, the two companies would be better off merging than battling. But neither side seems fazed. "Once the fall in consumer confidence levels off," says Mark Goldman, Sky Latin America's president and chief operating officer, "people will see that this is the most cost-effective form of entertainment they can purchase." Maybe. If he's wrong, both Sky and Galaxy will have to wait a lot longer than they had hoped for Latin Americans to tune in.