STRATEGIC REVIEW OF THE TELEVISION BROADCASTING SECTOR IN THE MIDDLE EAST Dubai, United Arab Emirates November 24, 2005 Revised in March 2006 This Report has been prepared by Booz Allen Hamilton at the request of Gulf DTH LDC (trading as “Showtime”) and reflects the opinions of Booz Allen Hamilton. No third party may rely on this report. Disclaimer This published Report has been prepared by Booz Allen Hamilton Inc. (“Booz Allen”) at the request of Gulf DTH LDC (trading as “Showtime”). It is based upon information obtained from sources deemed to be reliable. Analyses and projections represent Booz Allen’s judgment, based upon data sources cited, and are subject to the validity of the assumptions noted herein. For purposes of the analyses presented in this Report, Booz Allen has relied upon, and considered accurate and complete data obtained from the sources cited, but has not independently verified the completeness or accuracy of that data. No representation or claim is made that the results projected will actually be achieved. All estimates and projections contained in this Report are based on data obtained from the sources cited and involve significant elements of subjective judgment and analysis, which may or may not be correct. No third party may rely on this Report or any excerpt or summary thereof and any third party receiving this Report shall make its own independent investigation of the facts and risks in connection with any proposed transaction. Booz Allen and its affiliates, officers, directors and employees expressly disclaim any and all liability to any third party based, in whole or part, on anything contained in this Report or in any excerpt or summary or on any information contained in any written or oral communications by them or Showtime relating to the subject matter of the Report. Table of Contents 1. Introduction 6 2. Executive Summary 7 3. Attractive Yet Challenging 8 Consumer TV Demand 4. Free-To-Air-TV Sector Prospects and 16 Vulnerabilities 5. Emerging Pay-TV Sector 24 6. Pay-TV Sector Growth Perspectives 34 and Scenarios 7. Implications for the Pay-TV Sector 38 8. About Booz Allen and the Authors 41 9. Sources of Information 42 Table of Exhibits 1 Socio-Economic Growth 8 22 TV Advertising Inventory and Rate 21 Cards 2 Estimates of Population Structures 9 23 Simulated Economics for the FTV 22 3 Population Breakdown by Origin 9 Industry in the Middle East 4 Household Leisure and Recreation 10 24 PTV Industry Structure 24 Expenditures 25 PTV Operator Market Shares by 24 5 Selected Electronic Equipment 10 Country and Segment Penetration per Household 26 PTV Operator Market Shares in 25 6 TV Consumption 11 Revenues vs. Subscribers 7 TV Viewership 12 27 Comparison of PTV Operators’ Value 26 Proposition for Selected Formats 8 Films, Series and News Are the 12 Preferred Type of Programs 28 Estimated PTV Subscriber Base 27 Growth 9 There Are Significant Differences in 13 Preferred Type of Programs by Age 29 Comparison of PTV Penetration and 28 and Gender Cost by Country 10 Traditional Versus Liberal Viewership 13 30 Estimated PTV Subscriber Base 29 Preferences 31 PTV Market Share Development 30 11 Differences in TV Preferences by 14 Inhibitors Country 32 PTV SWOT Analysis 30 12 Segmentation of TV Users 14 33 Movie Channels Programming Grid 31 13 Evolution of the Number of FTV 16 Comparison Channels in the Middle East 34 Comparison of Sports Content PTV 31 14 Channel Portfolio Extensions for 17 vs. FTV Selected FTV Networks 35 Comparison of PTV Operators’ 32 15 Illustrative Comparison of FTV 18 Bouquets Programming, Middle East vs. Selected Western European 36 Benchmarks of ARPU Breakdown 33 Countries and Growth 16 FTV Market Shares by Channel 19 37 PTV Market Evolution Scenarios 34 17 Market Positioning of Selected 19 38 Growth Scenarios Results 35 Middle East FTV Channels 39 PTV Revenues – Base Case Scenario 35 18 Market Shares by Media Group 20 40 Opportunities to Drive Profitable PTV 38 19 Pan Arab Satellite TV Advertising 20 Growth Spend 41 Ancillary Revenues Potential and 39 20 TV Advertising Market Development 20 Priorities Level 21 TV Versus Newspaper Advertising 21 Comparison Page 6 1. Introduction What are the five global brands with the In this strategic review, Booz Allen Hamilton most significant impact? Most of us would provides its perspective on the current probably name well-established brands structure and growth outlook of the FTV and such as Coca-Cola and McDonald’s. PTV sectors in the Middle East — with a Broadchannel Readers’ Choice December specific emphasis on the latter. This review is 2004 Interbrand Survey listed the pan-Arab focused on the pan-Arab region, specifically news network Al Jazeera as the fifth most on its core markets, here defined as Egypt, influential global brand, just after Apple, the Kingdom of Saudi Arabia (KSA), Kuwait, Google, IKEA, and Starbucks. and the United Arab Emirates (UAE). Al Jazeera exemplifies the growing The insights from this document draw on international attention the Middle East TV Booz Allen’s extensive consulting experience industry is receiving and underscores its in the TV industry in the Middle East and, particularly buoyant state. With already more generally speaking, globally. Booz Allen more than 150 free-to-air-TV (FTV) channels has also conducted a series of interviews available to most households via direct- with selected executives of the TV industry to-the-home (DTH) technology, industry in the region. Quantitative and qualitative leaders such as MBC, LBC, Rotana, Al analyses also relied on information from a Jazeera, and Saudi TV are committing TNS PTV market sizing primary research, Arab substantial investments to create a strong Advisor Group research papers, PARC/MAC portfolio of channels and secure attractive ratings, and advertising spending surveys, to programming rights. name a few. At the same time, the Middle East pay-TV This report is based on fieldwork completed (PTV) industry has harnessed lower attention in August 2005. despite its vibrant growth during the past 4 years. Showtime, ART, and Orbit, the region’s three PTV operators, have made considerable investments to improve the quality of their value proposition and to strengthen their marketing and sales efforts. High-profile initial public offering (IPO) plans for Al Jazeera, Rotana, and Showtime will also continue to fuel interest and change in this dynamic industry. From our perspective, the FTV and PTV sectors are coming to a crossroad, with potentially drastic changes ahead. The combination of massive investments, oversupply of FTV channels, greater financial transparency and objectivity imposed by shareholders and capital market authorities post-IPO, and discontinuities in technology and regulations will most likely drive fundamental changes in the industry’s landscape and economics. Page 7 2. Executive Summary The Middle East audio-visual market, relatively fragmented with three operators with over 190 million inhabitants, is — ART, Showtime and Orbit. Addressing particularly large and attractive for specific customer segments, each of these broadcasters and advertisers. Strong operators has adopted distinct market population increase coupled with continued positioning. ART, for example, is strong on economic development provides robust Arabic movies and sports content, whilst growth perspectives. In addition, demand Showtime is the uncontested leader in for and consumption of TV broadcasting Western movies and fiction. is significantly stronger than in most developed countries. PTV’s longer-term growth perspectives will be driven by attractive fundamentals — Despite attractive fundamentals, demand for strong socio-economic growth coupled with audio-visual content is however increasingly a young population coming to adulthood, challenging to address for broadcasters and with increasingly discerning requirements advertisers. First, demand is significantly for audio-visual content. In addition, PTV less homogeneous than a common operators have strong growth potential in language, culture and religion may suggest. relatively untapped countries such as KSA TV consumption behaviors and preferences or middle to low socio-economic segments actually present significant differences (C and D) — which are typically the heart of across traditional demographic segments, PTV subscribers in developed markets. countries and ethnic origins. Second, TV preferences are increasingly discerning and Despite this strong growth potential, rapidly evolving — driven by the young and PTV’s development presents significant affluent now reaching adulthood. uncertainties, shaped by the evolution of the FTV sector. Specifically, PTV’s To address this attractive yet challenging growth depends directly on the uncertain consumer TV demand, the Middle East rationalization of the FTV sector in the FTV sector has been literally burgeoning. short-term and on PTV operators’ ability to DTH households, which constitute the bulk further strengthen their premium content of the population, now benefit from an programming. Whilst risks of increased overwhelming line-up of over 150 channels. FTV exuberance remain, we believe that Recently, FTV broadcasters have committed rationalization will prevail. Emerging signs, significant investments to reinforce and such as transfers of FTV premium content modernize the quality of TV programming. to PTV (e.g., Al Jazeera’s premium sports) From our perspective, the FTV sector’s and a growing emphasis on economic buoyancy is however unsustainable over the performance by FTV broadcasters, in part longer term. Irrational ad sales practices driven by planned IPOs, are encouraging. and an evident over-supply of TV channels are resulting in most TV channels being subsidized by their owners. In this context, PTV has attracted lower attention, despite its strong subscriber growth over the last four years — reaching an average of 40% per annum. PTV penetration however still stands at a modest 5%, but with marked differences between countries such as Egypt (3%) or the UAE (29%). Against this relatively small market of around 1,020 K subscribers, the sector is, by international standards, Page 8 3.