Is MultiChoice taking the Mickey?

Five hours and over one hundred slides later, MultiChoice was done explaining why the company disagrees with the draft findings of the Independent Communications Authority of South Africa (ICASA) that were released in 2019.

ICASA believes that limited broadband access, the high cost of data and low average internet speeds will limit the growth of over-the-top (OTT) media services like Netflix and Amazon Prime. MultiChoice accuses ICASA of “being out of touch with market realities” among other things.

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Whose market is it anyway?

Competition law and regulation is a complex area that is founded upon the definition of a “market” that a specific company operates in. When talking to regulators, companies try to talk down their dominance and define the market widely. When talking to investors, companies claim to have a leading position in a particular niche which enjoys significant barriers to entry.

For example, Amazon wants regulators to see it as the underdog that only has 4% of the US retail market, not as the juggernaut that has cornered 35% of the US ecommerce market. It can often result in something resembling a back-and-forth between a teacher and student arguing over what the definition of “homework” truly is.

ICASA views the broadband vs. satellite models of Netflix and MultiChoice respectively as distinct but inter-related markets that are part of the same competition assessment. MultiChoice sees the market as including all platforms with audio-visual content, including the likes of Facebook and Instagram.

They argue that they are competing for screen time, not just TV time. ICASA didn’t agree, stating that it would use pay-TV services as the starting point and may amend its view of the market based on evidence.

Everything is made up and the sports don’t matter

The major barrier to entry for new market participants is content. This is the area most likely to be regulated, due to the scarcity and cost of content. MultiChoice has multi-year deals in sport (English Premier League, the local Premier Soccer League, WWE and numerous others) as well as contracts with four of the six major Hollywood studios for movies.

So, MultiChoice took the unusual route of trying to argue that “premium” content doesn’t exist and that viewers see films and live sport in the same light as non-premium content on the SABC or YouTube.

One must question why MultiChoice bothers with the expensive exclusivity deals then. They argue that all content is equal, but their actions (like tiered premium pricing based on unlocking new channels) suggest that some content is more equal than others.

ICASA gave some recognition that “premium” is a fluid concept (subject to consumer preferences) but wasn’t buying the argument that MultiChoice branding M-Net as the “Home of HBO” is simply a marketing gimmick. Consumers clearly prefer new movies and live sports. “Express from the US” doesn’t help their case either.

These contracts are barriers for new OTTs entering the market, which allows MultiChoice to remain dominant in the most valuable content segments.

Existential threat?

As at 30 September 2020, MultiChoice decoders could be found in around 60% of South African households with televisions. With subscriber growth of 7% per year, this market penetration rate is growing.

Lockdown helped MultiChoice as South Africans were all stuck at home. To be fair, lockdown also helped Netflix, which only has an estimated 349,000 South African subscribers. That’s not exactly the “existential competitive threat” that MultiChoice claims it to be.

Netflix’s growth is constrained by low levels of broadband internet access and affordability in South Africa. Penetration of television sets and DSTV dishes far exceeds fast internet access.

This doesn’t help MultiChoice’s argument that it competes against not just OTT products, but social media platforms as well. That’s only true when the glorious day arrives that sees widespread broadband access in South Africa. Nobody will be happier than the SABC, who will no doubt try to charge more TV licences to smartphone owners.

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Will things change?

ICASA proposed the following remedies as corrective action:

  • Reducing long-term contracts and prohibiting automatic renewals
  • Introducing rights unbundling, which would involve the rights to certain content being offered to more than one buyer
  • Imposing rights splitting, requiring the owner of the rights to split the content rights and sell them to more than one broadcaster
  • Imposing a ‘wholesale-must-offer’, which would require MultiChoice to make SuperSport and M-Net available to other distributors at regulated prices

This wouldn’t be good news for MultiChoice, hence the thick slide pack.

Taking the Mickey

Here at The Finance Ghost, we are big fans of Disney. The Finance Ghost is a shareholder, with an investment thesis based on the expansive content catalogue and the strength of the brand, along with its relative valuation vs. Netflix.

The big story at Disney is around streaming. Disney+ has reached 94.9 million subscribers, just under half the number of Netflix subscribers. The difference is that Disney already has terrific content, while Netflix has to keep producing it.

Disney+ launched in India in April 2020 through Hotstar, a popular Indian on-demand video streaming service. By December, it accounted for nearly a third of Disney’s subscriber base.

It’s a much larger BRICS market than South Africa, but could this demonstrate the potential of such a product here?

Critically, Disney+ Hotstar launched with a live sports package, including Indian Premier League cricket. Far from just a Mickey Mouse operation, this was critical to its success. BCG estimates that although sports account for only 15% of all viewing, the segment brings as much as 65% of the revenue of content creators.

We all know that SuperSport is critical to the ongoing success of DSTV. But if MultiChoice is forced to licence it to Disney+, what could that mean for South African consumers?

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